<PAGE>
 
CHAIRMAN'S LETTER

To Our Stockholders

For Bethlehem, 1997 was a year of considerable achievement and significant
progress toward our Vision to be the Premier Steel Company.

     Our objective is to maximize stockholder value by achieving and sustaining
superior rates of return on the capital we have invested in each of our
businesses and by effectively serving our customers, having partnerships among
our employees and being a good corporate citizen.  Our strategy for achieving
this Vision is to:  concentrate on steel, with a focus on being a low-cost,
high-quality producer; rebuild our financial strength; and improve continuously
in everything that we do.

     Some of the highlights for 1997 include:

 .  Our financial performance improved substantially over last year, with net
   income of $281 million, including an after-tax gain of $113 million on the
   sale of our equity interest in Iron Ore Company of Canada.

 .  Our 1996 Comprehensive Restructuring Plan was completed, which included
   exiting five underperforming businesses, and we announced a decision to
   discontinue our Bethlehem Coke Division by the end of the first quarter 1998.
   These actions will eliminate the significant losses that were incurred at
   these Divisions.

 .  Substantial progress was made in rebuilding our financial strength,
   especially by reducing our debt and unfunded pension liability and by
   increasing our stockholders' equity and liquidity.

 .  We announced a $300 million investment for a new cold rolling mill complex at
   Sparrows Point that, when combined with Division-wide competitiveness and
   cost-reduction initiatives, should enable Sparrows Point to achieve and
   sustain a superior rate of return on its assets.

 .  We entered into a definitive merger agreement to acquire Lukens Inc., a
   leading North American plate producer.

 .  Our bank credit facility was extended by two years to September 2002, and its
   size was increased by $25 million to $525 million.

CONCENTRATING ON STEEL

During 1997, we strengthened the competitive position of our three core steel
businesses -- the Burns Harbor Division, the Sparrows Point Division and
Pennsylvania Steel Technologies, Inc. -- by continuing our focus on improving
customer service, productivity, quality and costs.

BURNS HARBOR

Our Burns Harbor Division represents about 55% of our total revenues and ships
about five million tons per year of sheet and plate products, primarily to the
automotive, service center and machinery markets.  Burns Harbor is one of the
best, if not the best, steel businesses in the world.  Its costs are fully
competitive with minimills, and we believe that the quality of its products is
superior.

  We are currently enhancing Burns Harbor's competitiveness by making a series
of improvements to its hot strip mill and to its 160-inch plate mill.  Also, we
have recently approved a $70 million capital appropriation to modernize one of
its two continuous casters

                                      -1-
<PAGE>
 
to improve slab quality, increase productivity and
reduce costs. We intend to keep Burns Harbor one of the most modern and
competitive steel mills in the world.

SPARROWS POINT

Our Sparrows Point Division represents about 35% of our total revenues and ships
over three million tons per year of sheets, plates and tin mill products,
primarily to the construction, service center and container markets.  Over the
past few years, Sparrows Point has made significant improvements in its
competitiveness and profitability.  It has an excellent tidewater location and a
number of highly competitive facilities, such as its primary ironmaking and
steelmaking operations, a modern hot strip mill and two new coating lines.
During 1997, Sparrows Point achieved outstanding levels of production in its
ironmaking, steelmaking, hot mill, cold mill and tin mill operations.  Also,
breakthrough performance was achieved in reducing its costs.

  In October of last year, our Board of Directors authorized a capital
appropriation of about $300 million to construct a new cold rolling mill complex
at Sparrows Point.  This major investment is part of the Division's
comprehensive plan to achieve and sustain a superior rate of return on its
assets.  The new complex, which is scheduled to begin production early in 2000,
is expected to help Sparrows Point lower its costs, improve its quality and
further enhance its capabilities to meet customers' expectations.

  The decision to locate the new mill at Sparrows Point was made after months of
consideration of alternative sites in other states.  Significant factors in the
decision were the cumulative benefits to the entire Division and the strategic
initiatives and the cost-reduction plan developed by Sparrows Point management,
which included significant participation by the United Steelworkers of America.
We believe that our stockholders will be well served by this value-adding
facility.  It represents another significant step toward Bethlehem's Vision of
being the Premier Steel Company.

PENNSYLVANIA STEEL TECHNOLOGIES (PST)

PST is the largest rail producer in the United States.  It has many excellent
facilities, including a modern steelmaking complex with a DC electric furnace, a
vacuum degasser, ladle treatment facilities and state-of-the-art technology for
producing premium head-hardened railroad rail.

  In 1997, PST increased its sales to the trade of higher value, higher margin
products, such as rails and specialty blooms for forging applications.  PST's
capabilities to produce ultra-clean, high-quality steel make its specialty bloom
product very desirable to such customers as gas cylinder manufacturers and
producers of sophisticated bar products for the automotive industry.  With the
recent strength and growth in the domestic rail market, PST achieved a record
level of rail shipments in 1997.

  We believe that PST will continue to improve the utilization of its assets,
its product mix and its profitability over the next few years.  Once it achieves
these improvements, we believe that it can earn a superior rate of return on the
capital that we have invested in this business and can be a significant
contributor to improving our overall profitability.

                                      -2-
<PAGE>
 
REBUILDING OUR FINANCIAL STRENGTH

We made further progress during 1997 in improving our financial condition,
especially by reducing our unfunded pension obligation. Over the past four
years, we have reduced our pension liability by about $1.2 billion, from just
over $1.6 billion at the end of 1993 to $440 million at the end of 1997.  We
contributed $425 million to our Pension Trust in 1997, and our plan is now about
95% funded.  Eliminating our unfunded pension liability is one of our highest
priorities because it will significantly reduce our pension expense and further
strengthen our financial position.

  Total liquidity for 1997 improved to $612 million from $446 million at
December 31, 1996, and cash from operating activities increased to $551 million
from $341 million in 1996.

  Our objective is to have a capital structure that will earn us an investment-
grade credit rating.  Our debt-to-invested-capital ratio was 29% at the end of
1997, compared with 36% a year earlier, and our debt level and maturities over
the next few years are relatively modest.


RESTRUCTURING ACTIONS

During this past year, we completed our 1996 Comprehensive Restructuring Plan.
We closed our Bethlehem Structural operation in March, and we are currently in
the process of selling the individual assets of the mill.  In September, we
completed the sale of our BethForge and CENTEC businesses.  We will purchase a
portion of our roll supply from Lehigh Heavy Forge, the new operator, and we
will also supply ingots from PST to Lehigh Heavy Forge's forging operation.  In
October, we sold our Sparrows Point Shipyard to the Veritas Capital Fund, a New
York-based merchant banking and investment firm.  In October, we also sold our
High Power Mountain coal assets in West Virginia to Power Mountain Coal Company,
a subsidiary of  A.T. Massey Coal Co., and in December, we announced our
intention to discontinue our Bethlehem Coke operations by March 31, 1998.


PROFITABLE GROWTH

We intend to profitably grow our business to add value for our stockholders and
to provide new opportunities for our employees.

RECENT INVESTMENTS

In recent years, we have invested in three new sheet coating lines -- one at
Burns Harbor, one at Sparrows Point and another in a joint venture in Jackson,
Mississippi.  We have also made several other investments to grow our company
through joint ventures, such as Chicago Cold Rolling, Indiana Pickling and
Processing, and Walbridge Coatings.

  In 1997, we made an investment in TWB, a joint venture that produces laser-
welded blanks for the automotive industry and operates the largest blank welding
plant in North America.  We also made an investment in Steel Construction
Systems, a joint venture located in Orlando, Florida, which supplies residential
and commercial construction products.  These investments are helping us to
upgrade our product mix into higher value products to supply the fastest growing
markets for steel.

                                      -3-
<PAGE>
 
LUKENS INC.

As previously announced, Bethlehem will acquire Lukens Inc. in a transaction
valued at about $740 million, including the assumption of about $250 million of
debt.  The equity value of the transaction is about $490 million.  Of the total
consideration to be paid by Bethlehem, 68% will be in the form of cash, with the
remaining 32% in the form of Bethlehem Common Stock.  The acquisition should
increase Bethlehem's earnings per share after an initial period required to
integrate the operations of the two companies and to sell Lukens' stainless
business.  The transaction is expected to close by early second quarter 1998,
subject to approval by Lukens' stockholders and regulatory authorities.

  The combination will create a more globally competitive and customer-focused
plate business, with the broadest range of plate products in the industry.  It
will result in significant synergies, improved customer satisfaction and overall
lower costs, which we believe will enhance value for our stockholders.

  We have also announced that Bethlehem has entered into agreements with
Allegheny Teledyne Incorporated that will become effective immediately after
Bethlehem closes its merger with Lukens.  Under these agreements, Bethlehem will
provide Allegheny with conversion services for stainless steel hot bands and
coiled plate wider than Allegheny can currently produce; Allegheny will purchase
certain assets that Lukens uses in the manufacture of stainless steel products;
and Allegheny will supply hot rolled bands to Bethlehem for further processing
on the stainless steel coil finishing facilities that Lukens currently owns.  We
believe that this arrangement provides an excellent way for both Bethlehem and
Allegheny to achieve important goals that will enhance distinctive businesses.


IMPROVING CONTINUOUSLY

We recognize that we must continue to improve our performance in all areas, and
we made important progress during this past year.

CUSTOMERS

In 1997, for the second consecutive year, Bethlehem was selected to receive
General Motors' prestigious "Supplier of the Year" award.  Bethlehem is the only
domestic supplier of flat rolled steel ever selected by General Motors to
receive this award and is one of only two such steel suppliers in the world.
Also, Burns Harbor received the Aegis Shipbuilding Award from Ingalls
Shipbuilding and the Exemplary Performance Award from Avondale Shipyards for its
plate products.

  During 1997, all of our core steel businesses continued to improve their
reliability in delivery performance and their product quality, which are
becoming more important as our customers search for ways to improve efficiency,
reduce costs and increase competitiveness in their markets.  We are especially
proud that independent surveys have shown that Sparrows Point is the industry
leader in customer satisfaction in several key markets.

                                      -4-
<PAGE>
 
SUPPLIERS

We achieved new milestones during 1997 in our Strategic Sourcing initiative to
achieve significant cost reductions in the $3 billion of goods and services that
we purchase annually.  In addition, our improved relationships with world-class
suppliers are contributing to our ability to deliver superior value and quality
to our customers.  Strategic Sourcing has also contributed to the corporate-wide
effort to achieve strategic change through process innovations, challenging the
status quo, driving to meet stretch targets and utilizing multidisciplinary
teamwork.

INFORMATION TECHNOLOGY

Developing a timely and cost-effective solution to the Year 2000 computer
problem is every information technology officer's immediate objective.  Because
of early planning, we have already completed about 65% of our resolution efforts
and expect to complete this important project by the end of 1998.  The objective
of all these activities is to continue to serve our customers with no adverse
Year 2000 impact on our business and manufacturing systems.  Also, of great
importance, the costs associated with this effort will not be material and will
be charged to normal operating expenses.

SAFETY AND GOOD CITIZENSHIP

There can be no greater way to emphasize the value of our employees and our
communities than having as our goal zero lost-time accidents and zero
environmental incidents.  We have made encouraging progress toward that goal
through our Employee Safety Process (ESP), a joint initiative with the United
Steelworkers of America (USWA).  ESP promotes a value-based "actively caring"
philosophy that gives each employee the opportunity to participate in keeping
the workplace safe.  Since 1994, when we initiated a comprehensive joint safety
improvement effort with the USWA, the lost workday case incidence rate has
declined by 43%, the all-injury incidence rate is down 34% and OSHA total
recordable injuries have decreased 39%.  In 1997, we experienced our best
corporate safety performance ever.

  Good citizenship and stewardship are also strong, vital components of our
approach to the environment.  We are proud of the improvements we have made in
environmental performance, as measured by the Corporate Environmental Compliance
Index (ECI), which is the monthly sum of all agency-reportable incidents
relative to air, water and land.  Since 1994, Bethlehem has reduced its monthly
ECI by 45%.  Bethlehem was named one of the Environmental Protection Agency's 20
"environmental champions" for achieving and exceeding the agency's voluntary
33/50 program goals.  We also earned inclusion in EPA's 1997 "Success Stories"
by surpassing timeline and emission targets for reduction of emissions from our
coke operations.  Both Burns Harbor and Sparrows Point have active community
outreach programs, with broad representation, which provide a forum to discuss
environmental issues with their neighbors.

  Bethlehem continues to provide community leadership through various
charitable, civic and economic development organizations.  For example, for the
second consecutive year, our United Way giving was highlighted with Sparrows
Point and Burns Harbor contributing more than $1 million to their local
campaigns, mostly through employee giving.

                                      -5-
<PAGE>
 
EMPLOYEES

We are proud of our capable and loyal employees and the impact they have had on
our improved performance.  Our ongoing effort to continuously improve the skills
and leadership capabilities of our employees is an investment in Bethlehem's
future success.  In 1997, our employee education and training programs provided
over 645,000 employee training hours, an average of 42 hours per employee.  Our
efforts are focused on ensuring that employees understand our customers' needs,
on safely and efficiently fulfilling those needs and on increasing our return on
net assets and stockholder value.  Our employees will be our sustainable
competitive advantage for the future, and our ongoing partnership with employees
remains one of our most important objectives.


BUSINESS OUTLOOK

We believe the domestic economy will continue on a course of moderate and
sustainable growth and low inflation even though there continues to be
considerable uncertainty about the impact of the Asian financial crisis.  We
also believe that steel markets will continue to be relatively good in the
United States and that domestic industry shipments in 1998 will be about 101
million tons, compared with the 105.5 million tons shipped in 1997 - the highest
level of shipments in 23 years.

  Competition in 1998 is expected to be intense.  We are very concerned about
the high levels of unfairly traded imports and have appropriate remedies under
active consideration.  We also expect that new steel capacity will enter the
marketplace during 1998.  While there will be pressure on steel prices, we will
continue to take actions to improve our competitiveness.  We will enhance our
customer service and reliability, increase the utilization of our facilities and
aggressively reduce costs.

  For Bethlehem 1997 was a year of considerable achievement and significant
progress, and we believe that Bethlehem is entering 1998 well positioned to take
advantage of the opportunities of the future and to further improve stockholder
value.


/s/ Hank Barnette

Curtis H. Barnette, Chairman
January 28, 1998

                                      -6-
<PAGE>
 
FINANCIAL REVIEW AND OPERATING ANALYSIS
---------------------------------------

  Net income for 1997 was $281 million, or $2.13 per common share, compared with
a net loss of $309 million, or $3.15 per common share, for 1996 and net income
of $180 million, or $1.24 per common share, for 1995.  Results for 1997 include
an after-tax gain of $113 million related to the sale of our equity interest in
Iron Ore Company of Canada (IOC), and results for 1996 include after-tax
restructuring charges of $382 million.  We recorded the restructuring charges in
connection with our decision to exit five businesses and to recognize the
Bethlehem Coke Division as an impaired asset.  The existed businesses were:
Bethlehem Structural, BethForge, CENTEC, BethShip's Sparrows Point Yard and our
Eagle Nest coal mine.  See Note C, Estimated Gain (Loss) on Exiting Businesses
and Impairment of Long-lived Assets, to the Consolidated Financial Statements.
Excluding the effects of these items, net income for 1997 was $168 million
($1.12 per common share), compared with net income for 1996 of $73 million ($.28
per common share).  Sales in 1997 declined to $4.63 billion from $4.68 billion
in 1996 and $4.87 billion in 1995 principally as the result of exiting the
underperforming businesses.

  The improvement in 1997 over 1996 was due primarily to lower costs from
improved operations at our Sparrows Point Division and Pennsylvania Steel
Technologies, Inc. (PST) and exiting Bethlehem Structural.  The 1997 results
were also affected by higher employment and raw material costs at Burns Harbor.
Results for 1996 declined from 1995 principally from lower average realized
prices and shipments, which were partially offset by a higher valued product
mix.

                                 LUKENS INC.

  As discussed elsewhere in this report, Bethlehem will acquire Lukens in a
transaction valued at about $740 million, including the assumption of about $250
million of debt.  The equity value of the transaction is about $490 million.  Of
the total consideration to be paid by Bethlehem, 68% will be in the form of
cash, with the remaining 32% in the form of Bethlehem Common Stock.  The
transaction is expected to close by early second quarter 1998, subject to
approval by Lukens' stockholders and regulatory authorities.  Bethlehem also
entered into agreements with Allegheny Teledyne Corporation under which
Bethlehem will provide Allegheny with conversion services for stainless steel
hot bands and coiled plate wider than Allegheny can currently produce; Allegheny
will purchase certain assets that Lukens uses in the manufacture of stainless
steel products; and Allegheny will supply hot rolled bands to Bethlehem for
further processing on the stainless steel coil finishing facilities that Lukens
currently owns.

                                      -7-
<PAGE>
 
                                 SEGMENT RESULTS

  Basic Steel Operations.  Our Basic Steel Operations segment had income from
operations of $264 million in 1997, compared with income from operations of $168
million in 1996, excluding 1997's gain on the sale of IOC and 1996's
restructuring charges.  Income from operations was $311 million in 1995.

  The improvement in this segment's results in 1997 over 1996 was due primarily
to lower costs from improved operations at Sparrows Point and PST and exiting
Bethlehem Structural.  The results were also affected by higher employment and
raw material costs at Burns Harbor.  Shipments were 8.8 million tons for both
1997 and 1996.

  Results for 1996 compared with 1995 declined due to lower realized steel
prices and lower structural product shipments, partially offset by an improved
product mix from a higher percentage of coated and cold rolled sheet product
shipments.  Average realized prices were 3% lower in 1996 than they were in 1995
and shipments were 8.8 million tons in 1996, compared with 9.0 million tons in
1995.

  The effects of changes in average realized steel prices, shipments (including
coal and ore) and product mix on this segment's sales during the last two years
were as follows:
 
 
                   INCREASE (DECREASE) FROM PRIOR YEAR
                         1997              1996
                       ---------         ---------    
 
Realized prices            -%              (3)%
Shipments                 (1)              (3)
Product mix                1                2
                          --               --
Total sales                -%              (4)%
                          ==               ==
 
  Raw steel production increased to 9.6 million tons in 1997 from 9.4 million
tons in 1996 due to improved operations at Sparrows Point.  Raw steel production
declined from 10.4 million tons in 1995 as a result of closing Bethlehem
Structural's steelmaking facilities.

                                      -8-
<PAGE>
 
  The Burns Harbor Division shipped 4.8 million tons of steel products in both
1997 and 1996, compared with 4.6 million tons in 1995.  Despite improvements in
product mix and a slight increase in shipments, Burns Harbor's 1997 operating
results declined principally because of higher employment costs and raw material
prices and lower average realized prices.

  The Sparrows Point Division shipped 3.2 million tons of steel products in both
1997 and 1996, compared with 3.0 million tons in 1995.  Sparrows Point's 1997
operating results improved due to higher productivity; lower energy, repair and
maintenance costs; higher average realized prices; and a higher valued product
mix.

  Results improved at PST in 1997 due to higher semifinished, rail and large-
diameter pipe shipments.  Lower steelmaking costs were recognized during 1997 as
a result of our modernization program.
 
PERCENTAGE OF BETHLEHEM'S NET SALES
BY SEGMENT AND MAJOR PRODUCT
 
                                        1997    1996    1995
                                       -----   -----   -----
 
Basic Steel Operations
Steel mill products:
  Hot rolled sheets                     14.9%   14.3%   15.9%
  Cold rolled sheets                    17.2    16.2    14.4
  Coated sheets                         31.5    32.3    29.7
  Tin mill products                      7.4     6.9     6.1
  Plates                                15.2    15.3    15.1
  Structural shapes and piling           1.3     3.8     6.7
  Rail products                          4.3     3.5     3.2
  Other steel mill products              3.2     1.6     2.7
Other products and services
  (including raw materials)              3.9     3.6     4.2
                                       -----   -----   -----
                                        98.9    97.5    98.0
Steel Related Operations                 1.1     2.5     2.0
                                       -----   -----   -----
                                       100.0%  100.0%  100.0%
                                       =====   =====   =====
 
PERCENTAGE OF STEEL MILL PRODUCT SHIPMENTS
BY PRINCIPAL MARKET
(Based on tons shipped)                        1997    1996    1995
                                              -----   -----   -----
 
Service Centers, Processors and Converters
  (including semifinished)                     46.9%   45.2%   41.0%
Transportation (including automotive)          24.9    26.0    24.8
Construction                                   11.0    12.6    14.2
Containers                                      5.8     5.2     5.2
Machinery                                       4.7     5.1     5.2
Other                                           6.7     5.9     9.6
                                              -----   -----   -----
                                              100.0%  100.0%  100.0%
                                              =====   =====   =====
 

  Steel Related Operations.  Our Steel Related Operations segment (BethForge,
CENTEC and BethShip) was sold by early fourth-quarter 1997.  It reported a loss
from operations of $25 million in 1997, compared with a loss from operations of
$31 million in 1996, excluding the 1996 restructuring charge, and a loss of $42
million in 1995.

                        LIQUIDITY AND CAPITAL STRUCTURE

  At December 31, 1997, total liquidity, comprising cash, cash equivalents and
funds available under our bank credit arrangement, totaled $612 million,
compared with $446 million at December 31, 1996.

  Cash provided from operating activities in 1997 increased to $551 million from
$341 million in 1996 due to changes in working capital, principally inventory,
and higher earnings.  Cash provided from operating activities in 1996 declined
to $341 million from $586 million in 1995 from lower earnings and changes in
working capital, principally receivables.  Other sources of cash in 1997
included about $190 million of proceeds from the sales of IOC, our Steel Related
Operations and High Power Mountain.

  Principal uses of cash during 1997 included pension funding and capital
expenditures.  We contributed $425 million to our pension fund in 1997, compared
with $170 million in 1996 and $330 million in 1995.  As a result of our
contributions and better than expected earnings on our pension fund assets in
1997, our pension liability decreased to $440 million at December 31, 1997, from
$870 million at December 31, 1996.  Over the past four years, our pension
liability has been reduced by about $1.2 billion from $1.6 billion at December
31, 1993, and our plan is now about 95% funded.

                                      -9-
<PAGE>
 
  We have contributed amounts to our pension fund substantially in excess of
amounts required under current law and regulations.  As a result, we currently
have a funding standard credit balance that would allow us to defer pension
funding for more than two years, although we presently have no plans to do so.

  Major uses of funds for 1998, excluding the potential merger with Lukens Inc.,
are pension funding, capital expenditures of about $300 million and debt
payments of about $40 million.  Cash required in connection with the Lukens
acquisition is expected to total about $350 million and will be funded with
available cash and proceeds from the sale of assets, including Lukens' stainless
business.  We expect to maintain an adequate level of liquidity throughout 1998
from cash flow from operations, reductions in working capital and available
funds under our credit arrangement.

  We have made good progress in improving our capital structure by reducing our
debt and increasing our stockholders' equity.  Our ratio of debt to invested
capital was 29% at December 31, 1997, compared with 36% a year earlier.

COMMON STOCK MARKET AND DIVIDEND INFORMATION
 
                            1997                1996
                           Prices*             Prices*
                         ------------      -------------
 
PERIOD                   HIGH     LOW      HIGH      LOW
------                   ----     ---      ----      ---
 
First Quarter         $ 9.375  $7.625   $15.875  $13.125
Second Quarter         10.750   7.750    14.500   11.500
Third Quarter          12.875   9.813    12.000    9.250
Fourth Quarter         11.563   7.750    10.313    7.625

* The principal market for Bethlehem Common Stock is the New York Stock
Exchange.  Bethlehem Common Stock is also listed on the Chicago Stock Exchange.
The high and low sales prices of Bethlehem's Common Stock as reported in the
consolidated transaction system are shown.  The trading symbol for Bethlehem
Common Stock is BS.  Bethlehem has not paid a dividend on its Common Stock since
the fourth quarter of 1991.

                         STATUS OF RESTRUCTURING PLAN

  In 1997, we completed the 1996 Comprehensive Restructuring Plan by exiting
five underperforming businesses and eliminating the significant losses they were
incurring.  We sold BethForge, CENTEC and BethShip's Sparrows Point Yard.
Bethlehem Structural ended operations in March, and we are attempting to sell
its individual assets.  We also sold our Eagle Nest coal operation in 1996, and
although it was not part of the Plan, in 1997, we sold our High Power Mountain
coal assets and our equity interest in IOC.

  We also announced in 1997 that we intend to discontinue our Bethlehem Coke
Division in Bethlehem, Pennsylvania, by March 31, 1998.  In 1996, as part of the
Comprehensive Restructuring Plan, we wrote off the property, plant and equipment
of this Division as an impaired asset.


                                 CAPITAL EXPENDITURES

  Capital expenditures were $228 million in 1997, compared with $259 million in
1996 and $267 million in 1995.

  In October 1997, we announced a plan to build a new cold rolling mill complex
at Sparrows Point.  The $300 million complex, which is scheduled to begin
production early in 2000, is expected to lower costs, improve quality and
enhance capabilities.

  At December 31, 1997, the estimated cost of completing authorized capital
expenditures was about $751 million, compared with $386 million at December 31,
1996.  Such authorized capital expenditures are expected to be completed during
the 1998-2000 period.

                                 EMPLOYMENT

  At the end of 1997, we had about 15,600 employees, compared with about 17,500
employees at the end of 1996 and 18,300 employees at the end of 1995.  About
three-quarters of our employees are covered by our labor agreements with the
United Steelworkers of America (USWA).

  Under the terms of our 1993 labor agreements with the USWA, most employees at
our steel operations receive profit sharing of 8% of adjusted consolidated
annual income before taxes, unusual items and expenses applicable to the plan
plus 2% of adjusted profits of certain operations, payable in the following
year.  Most workers received a $.25 per hour wage increase on August 1, 1997,
and will receive a $.25 per hour wage increase on August 1, 1998.  Profit
sharing is also paid to non-represented employees based on specific Corporate
and Business Unit plans and performance.  We paid about $40 million in 1997 and
expect to pay about $55 million for income-related bonus, profit sharing and
shortfall amounts in early 1998.

  Under other provisions of the labor agreements, we are required to pay
"shortfall amounts" each year up to 10% of the first $100 million and 20% in
excess of $100 million of consolidated income before taxes, unusual items and
expenses applicable to the shortfall plan.  Shortfall amounts arise when
employees terminate employment

                                      -10-
<PAGE>
 
and ESOP Preference Stock, held in trust for employees in reimbursement for wage
and benefit reductions in prior years, is converted into Common Stock and sold
for amounts less than the stated value of the Preference Stock ($32 for Series A
and $40 for Series B).  We issued approximately 37,000 shares of Series B
Preference Stock in 1997 and approximately 61,000 shares in 1996 to a trustee
for the benefit of employees for 1996 and 1995, respectively, and expect to
issue about 18,000 shares in early 1998 for the 1997 plan year.

EMPLOYMENT COST SUMMARY--ALL EMPLOYEES
 
 
(Dollars in millions)        1997    1996    1995
                            ------  ------  -------
Salaries and Wages          $  914  $  966   $1,058
                            ------  ------   ------
 
Employee Benefits:
  Pension Plans:
     Actives                    95     111      105
     Retirees                   60      81      105
  Medical and Insurance:
     Actives                   135     148      151
     Retirees                  122     115      116
  Payroll Taxes                 74      85       95
  Workers' Compensation         21      28       33
  Savings Plan and Other        18      21       21
                            ------  ------   ------
Total Benefit Costs            525     589      626
                            ------  ------   ------
Total Employment Costs      $1,439  $1,555   $1,684
                            ======  ======   ======
 
Employment Costs as a
 Percent of Net Sales           31%      33%     35%
                            =======  =======  ======


                                 ENVIRONMENTAL

  We are subject to various federal, state and local environmental laws and
regulations concerning approximately $160 million for environmental control
equipment.  Expenditures for new environmental control equipment totaled
approximately $15 million in 1997, $29 million in 1996 and $36 million in 1995.
The costs incurred in 1997 to operate and maintain existing environmental
control equipment were approximately $110 million (excluding interest costs but
including depreciation charges of $14 million), compared with $115 million in
1996 and $120 million in 1995.

  Bethlehem and federal and state regulatory agencies conduct negotiations to
resolve differences in interpretation of certain environmental control
requirements.  In some instances, those negotiations are being held in
connection with the resolution of pending environmental proceedings.  We believe
that there will not be any significant curtailment or interruptions of any of
our important operations as a result of these proceedings and negotiations.  We
cannot predict the specific environmental control requirements that we will face
in the future.  Based on existing and anticipated regulations promulgated under
presently enacted legislation, we currently estimate that capital expenditures
for installation of new environmental control equipment will average about $20
million per year over the next two years.  However, estimates of future capital
expenditures and operating costs required for environmental compliance are
subject to numerous uncertainties, including the evolving nature of regulations,
possible imposition of more stringent requirements, availability of new
technologies and the timing of expenditures.

  Although it is possible that our future results of operations, in particular
quarterly or annual periods, could be materially affected by the future costs of
environmental compliance, we believe that the future costs of environmental
compliance will not have a material adverse effect on our consolidated financial
position or on our competitive position with respect to other integrated
domestic steelmakers that are subject to the same environmental requirements.

                                      -11-
<PAGE>
 
Consolidated Statements of Income
<TABLE>
<CAPTION>
 
 
Year Ended December 31
--------------------------------------------------------------------------------
(Dollars in millions, except per share data)        1997       1996      1995
--------------------------------------------      --------   --------  ---------
<S>                                               <C>       <C>       <C>
 
Net Sales                                          $4,631.2  $4,679.0  $4,867.5
 
Costs and Expenses:
Cost of sales                                       4,053.3   4,168.2   4,202.8
Depreciation (Note A)                                 231.0     268.7     284.0
Selling, administration and general expense           107.9     105.5     111.8
Estimated (gain) loss on exiting businesses
   (Note C)                                          (135.0)    465.0       --
                                                  ---------   -------  --------
Total Costs and Expenses                            4,257.2   5,007.4   4,598.6
                                                  ---------   -------  -------- 

Income (Loss) from Operations                         374.0    (328.4)    268.9
 
Financing Income (Expense):
Interest and other financing costs (Note A)           (47.5)    (53.3)    (60.0)
Interest income                                         9.2       5.9       7.7
                                                  ---------   -------  -------- 
Income (Loss) Before Income Taxes                     335.7    (375.8)    216.6
 
Benefit (Provision) for Income Taxes (Note E)         (55.0)     67.0     (37.0)
                                                  ---------   -------  --------

Net Income (Loss)                                     280.7    (308.8)    179.6
 
Dividends on Preferred and Preference Stock            41.6      41.9      42.4
                                                  ---------   -------  -------- 

Net Income (Loss) Applicable to Common Stock      $   239.1   $(350.7) $  137.2
                                                  =========   =======  ========
Net Income (Loss) per Common Share (Note L):
  Basic                                           $    2.13   $ (3.15) $   1.24
                                                  =========   =======  ========
  Diluted                                         $    2.03   $ (3.15) $   1.23
                                                  =========   =======  ========
</TABLE> 

The accompanying Notes are an integral part of the Consolidated Financial
Statements.
--------------------------------------------------------------------------------

                                      -12-
<PAGE>
 
Consolidated Balance Sheets

<TABLE> 
<CAPTION> 
 
 
                                                                                          December 31
--------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)                                            1997      1996
--------------------------------------------                                         ---------  --------
<S>                                                                                  <C>        <C>
Assets
------
Current Assets:
Cash and cash equivalents (Note A)                                                    $   252.4  $   136.6
Receivables (Note F)                                                                      306.0      311.6
Inventories (Notes A and F)
  Raw materials and supplies                                                              324.5      332.0
  Finished and semifinished products                                                      569.3      685.3
                                                                                       --------   --------
       Total Inventories                                                                  893.8    1,017.3
Other current assets                                                                       11.8       22.9
                                                                                       --------   --------
Total Current Assets                                                                    1,464.0    1,488.4
Investments and Miscellaneous Assets                                                      100.9      106.7
Property, Plant and Equipmentless accumulated
  depreciation of $4,095.5 and $3,924.2 (Note A)                                        2,357.7    2,419.8
Deferred Income Tax Asset - net (Note E)                                                  880.0      935.0
Intangible Asset - Pensions (Note H)                                                         --      160.0
                                                                                       --------   --------
Total Assets                                                                          $ 4,802.6  $ 5,109.9
                                                                                      =========   ======== 
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable                                                                        $ 371.2    $ 410.4
Accrued employment costs                                                                  173.9      163.3
Postretirement benefits other than pensions (Note I)                                      150.0      150.0
Accrued taxes (Note E)                                                                     60.0       67.9
Debt and capital lease obligations (Note F)                                                41.8       49.3
Other current liabilities                                                                 113.9      116.5
                                                                                       --------   --------
Total Current Liabilities                                                                 910.8      957.4
Pension Liability (Notes C and H)                                                         440.0      870.0
Postretirement Benefits Other Than Pensions (Notes C and I)                              1445.0    1,445.0
Long-term Debt and Capital Lease Obligations (Note F)                                     451.6      497.4
Other Long-term Liabilities                                                               340.2      374.1
Stockholders' Equity (Notes J, K and L):
Preferred Stock -- at $1 per share par value (aggregate liquidation
    preference of $481.2); Authorized 20,000,000 shares                                    11.6       11.6
Preference Stock -- at $1 per share par value (aggregate liquidation
    preference of $80.6); Authorized 20,000,000 shares                                      2.3        2.5
Common Stock -- at $1 per share par value;
    Authorized 250,000,000 shares;
    Issued 115,047,810 and 113,851,199 shares                                             115.0      113.9
Common Stock -- Held in treasury, 2,056,571 and 2,017,662 shares at cost                  (60.0)     (59.7)
Additional Paid-in Capital                                                              1,854.0    1,886.3
Accumulated Deficit                                                                      (707.9)    (988.6)
                                                                                       --------   --------
Total Stockholders' Equity                                                              1,215.0      966.0
                                                                                       --------   --------
Total Liabilities and Stockholders' Equity                                            $ 4,802.6  $ 5,109.9
                                                                                       ========   ========
</TABLE>

The accompanying Notes are an integral part of the Consolidated Financial
Statements.
--------------------------------------------------------------------------------

                                      -13-
<PAGE>
 
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
 
 
                                                 Year Ended December 31
------------------------------------------------------------------------------
(Dollars in millions)                            1997      1996       1995
---------------------                          --------  --------   -------
<S>                                            <C>       <C>        <C>
 
Operating Activities:
Net Income (Loss)                               $ 280.7   $(308.8)  $ 179.6
Adjustments for items not affecting cash
  from operating activities:
  Depreciation                                    231.0     268.7     284.0
  Estimated (gain) loss on exiting businesses
     (Note C)                                    (135.0)    465.0        --
  Deferred income taxes (Note E)                   53.0     (67.0)     35.0
  Other - net                                      28.2       9.1       2.1
Working capital (excluding investing and
  financing activities):
  Receivables - operating                          11.6       9.1     114.9
  Receivables - sold (Note F)                      (6.0)     54.0      30.0
  Inventories                                     115.6     (58.8)    (79.0)
  Accounts payable                                (24.5)     28.9      (5.6)
  Employment costs and other                       (3.7)    (59.4)     25.3
Pension financing (funding) (Note H):
  Pension expense                                 155.0     192.0     210.0
  Pension funding                                (425.0)   (170.0)   (330.0)
                                                 ------    ------    ------
Cash Provided from Operating Activities           280.9     362.8     466.3
                                                 ------    ------    ------
                                     
Investing Activities:
Capital expenditures                             (228.2)   (259.0)   (266.8)
Cash proceeds from asset sales and other          191.8       7.7      17.6
                                                 ------    ------    ------
Cash Used for Investing Activities                (36.4)   (251.3)   (249.2)
                                                 ------    ------    ------
Financing Activities:
  Long-term debt borrowings (Note F)                1.9       3.1       3.6
  Long-term debt and capital lease payments
     (Note F)                                     (53.4)    (91.8)   (120.7)
  Cash dividends paid (Note L)                    (40.4)    (40.4)    (40.4)
  Other payments                                  (36.8)    (25.8)    (39.1)
                                                 ------    ------    ------
Cash Used for Financing Activities               (128.7)   (154.9)   (196.6)
 
Net Increase (Decrease) in Cash and Cash
 Equivalents                                      115.8     (43.4)     20.5
Cash and Cash Equivalents- Beginning of Period    136.6     180.0     159.5
                                                 ------    ------    ------
                     - End of Period            $ 252.4   $ 136.6    $180.0
                                                 ======    ======    ======
Supplemental Cash Payment Information:
Interest, net of amount capitalized             $  52.6   $  52.8    $ 61.1
Income taxes (Note E)                           $   7.6   $   3.7    $   --
                                                 ------    ------    ------
</TABLE> 


The accompanying Notes are an integral part of the Consolidated Financial
Statements.
--------------------------------------------------------------------------------

                                      -14-
<PAGE>
 
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------

A.  ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements include the
accounts of Bethlehem Steel Corporation and all majority-owned subsidiaries and
joint ventures.

Cash and Cash Equivalents - Cash equivalents consist primarily of overnight
investments, certificates of deposit and other short-term, highly liquid
instruments generally with original maturities at the time of acquisition of
three months or less. Cash equivalents are stated at cost plus accrued interest,
which approximates market.

Inventories - Inventories are valued at the lower of cost (principally FIFO) or
market.

Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Maintenance, repairs and renewals that neither materially add to the value of
the property nor appreciably prolong its life are charged to expense. Gains or
losses on dispositions of property, plant and equipment are recognized in
income. Interest is capitalized on significant construction projects and totaled
$7 million, $7 million and $5 million in 1997, 1996 and 1995.

         Our property, plant and equipment by major classification is:

--------------------------------------------------------------------------------
(Dollars in millions) 
---------------------
                                          December 31
                                    ---------------------
                                       1997       1996
                                       ----       ----

Land (net of depletion)             $   25.4    $   26.9
Buildings                              637.4       633.1
Machinery and equipment:
  Steel manufacturing                5,186.4     5,095.1
  Other                                367.1       407.4
                                    --------    -------
                                     6,216.3     6,162.5
Accumulated depreciation            (4,095.5)   (3,924.2)
                                    ---------   --------
                                     2,120.8     2,238.3
Construction-in-progress               236.9       181.5
                                    ---------   --------
   Total                           $ 2,357.7    $2,419.8
                                    =========   ========
--------------------------------------------------------------------------------

Depreciation - Depreciation is based upon the estimated useful lives of each
asset group. The estimated useful life is 18 years for most steel producing
assets. Steel assets, other than blast furnace linings, and most raw material
producing assets are depreciated on a straight-line basis adjusted by an
activity factor. This factor is based on the ratio of production and shipments
for the current year to the average production and shipments for the current and
preceding four years at each operating location. Annual depreciation after
adjustment for this activity factor is not less than 75% nor more than 125% of
straight-line depreciation. Depreciation after adjustment for this activity
factor was $5 million, $13 million and $16 million more than straight-line in
1997, 1996 and 1995. Through December 31, 1997, $10 million more accumulated
depreciation has been recorded under this method than would have been recorded
under straight-line depreciation. The cost of blast furnace linings is
depreciated on a unit-of-production basis.

Foreign Currency, Interest Rate and Commodity Price Risk Management -
Periodically, we enter into financial contracts to manage risks. We use foreign
currency exchange contracts to manage the cost of firm purchase commitments for
capital equipment or other purchased goods and services denominated in a foreign
currency. We use interest rate swap agreements to fix the interest rate on
certain floating rate debt. We use commodity contracts to fix the cost of a
portion of our annual requirements for natural gas, zinc and other metals.
Generally, foreign currency and commodity contracts are for periods of less than
a year. The gains or losses on these contracts are reflected in the cost of
goods or services purchased. Net payments or receipts on interest rate swaps are
reflected in interest expense. Gains or losses on swaps settled or terminated
are deferred and amortized to interest expense over the life of the related
debt. Currency and commodity contracts outstanding during the years and at year
end were not material. Also, see Note F, Long-term Debt and Capital Lease
Obligations.

Use of Estimates - In preparing these financial statements, we make estimates
and use assumptions that affect some of the reported amounts and disclosures.
See, for example, Note E, Taxes; Note G, Commitments and Contingent Liabilities;
Note H Postretirement Pension Benefits; and Note I, Postretirement Benefits
Other Than Pensions. In the future, actual amounts received or paid could differ
from those estimates.

                                       15
<PAGE>
 
B.  INDUSTRY SEGMENT INFORMATION
--------------------------------------------------------------------------------

(Dollars in millions)                      1997        1996       1995
---------------------                      ----        ----       ----

Sales:
Trade:
Basic Steel Operations                   $4,579.9    $4,561.9   $4,768.6
Steel Related Operations                     51.3       117.1       98.9
Intersegment:
Basic Steel Operations                        7.8        18.9        8.2
Steel Related Operations                     17.5        23.3       19.4
Eliminations                                (25.3)      (42.2)     (27.6)
                                         --------    --------   --------
     Total                               $4,631.2    $4,679.0   $4,867.5
                                         ========    ========   ========

Estimated Gain (Loss) on Exiting
 Businesses:
Basic Steel Operations                   $  135.0    $ (255.0)  $    -
Steel Related Operations                      -        (210.0)       -
                                         --------    --------   --------
     Total                               $  135.0    $ (465.0)  $    -
                                         ========    ========   ========

Income (Loss) from Operations:
Basic Steel Operations                   $  399.1    $  (87.3)  $  310.7
Steel Related Operations                    (25.1)     (241.1)     (41.8)
                                         --------    --------   --------
     Total                               $  374.0    $ (328.4)  $  268.9
                                         ========    ========   ========

Shipments (tons in thousands):
Basic Steel Operations                      8,790       8,764      8,970
                                         ========    ========   ========

Identifiable Assets:
Basic Steel Operations                   $3,633.2    $3,790.8   $3,973.1
Steel Related Operations                      8.7        57.8      115.5
Corporate                                 1,160.7     1,261.3    1,611.7
                                         --------     -------   --------
     Total                               $4,802.6    $5,109.9   $5,700.3
                                         ========    ========   ========

Depreciation:
Basic Steel Operations                   $  231.0    $  263.2   $  277.3
Steel Related Operations                      -           5.5        6.7
                                         --------    --------   --------
     Total                               $  231.0    $  268.7   $  284.0
                                         ========    ========   ========

Capital Expenditures:
Basic Steel Operations                   $  228.2    $  251.7   $  253.4
Steel Related Operations                      -           7.3       13.4
                                         --------    --------   --------
     Total                               $  228.2    $  259.0   $  266.8
                                         ========    ========   ========

--------------------------------------------------------------------------------
         A general description of our segments and their products and services
is contained under the heading "Bethlehem's Segments" on page 7 of this Report.

         Intersegment sales are generally at market prices. Corporate assets
consist primarily of cash and cash equivalents, investments, deferred income tax
asset and intangible asset - pensions.

C.  ESTIMATED GAIN (LOSS) ON EXITING
    BUSINESSES AND IMPAIRMENT OF
    LONG-LIVED ASSETS

In the second quarter of 1997, we sold our 37.57 percent interest in the Iron
Ore Company of Canada (IOC) for about $145 million. This sale resulted in
recognizing a gain of $135 million ($113 million after-tax, or $1.01 per common
share).

         During 1996, we announced a restructuring plan to improve financial
performance and stockholder value. Our plan included exiting our Bethlehem
Structural, BethForge, CENTEC, and BethShip businesses. Accordingly, we recorded
restructuring losses in 1996 totalling $465 million ($382 million after-tax or
$3.43 per share). These losses included $250 million for the net book value of
certain assets, $180 million for employee benefit related costs ($120 million
for pensions, $30 million of postretirement benefits other than pensions, and
$30 million for severance and other benefits) and $35 million for future
contractual and other costs. In 1996, we also sold and leased assets of our
Eagle Nest coal mine and wrote down as an impaired asset our Coke Division in
Bethlehem, Pennsylvania.

         Bethlehem Structural ended operations in March 1997. We have sold all
of Bethlehem Structural's inventory and are in the process of selling individual
assets. BethForge, CENTEC and BethShip were sold during 1997.

         In December 1997, we announced plans to discontinue our Bethlehem Coke
Division operations by March 31, 1998. The 1996 restructuring charge assumed
that our BethForge, CENTEC and BethShip businesses would be shut down and
liquidated. Fortunately, we were able to sell those businesses. Also, because of
a recent arbitration decision, we can offer employment at our Sparrows Point
Division and our Lackawanna Coke operation to certain potential early retirees
from the Bethlehem Structural operations. Accordingly, the restructuring charges
recognized in prior years are expected to be sufficient to cover the employment
and other related charges for closing the Bethlehem Coke Division. We expect to
reduce our workforce by about 800 employees as a result of this decision.

         The amounts charged to the restructuring liability in 1997, 1996 and
1995, other than employment-related costs, were not material.

                                      -16-
<PAGE>
 
D.  ACQUISITION OF LUKENS INC.

In January 1998, Bethlehem signed an amended merger agreement to acquire Lukens
Inc. in a transaction valued at about $740 million, including the assumption of
about $250 million of debt. The equity value of the transaction is about $490
million. Of the total consideration to be paid by Bethlehem, 68% will be in the
form of cash, with the remaining 32% to be in the form of Bethlehem Common
Stock. The amount of Bethlehem Common Stock to be issued for each Lukens' share
exchanged for Bethlehem Common Stock will be based on the 15-day average closing
price of Bethlehem Common Stock prior to the closing of the transaction. Under
the agreement, Bethlehem will issue no more than 22.5 million shares, nor less
than 15.1 million shares, of its Common Stock. We expect to complete the
transaction in the second quarter of 1998.


E.  TAXES

         Our benefit (provision) for income taxes consisted of:
--------------------------------------------------------------------------------

(Dollars in millions)                               1997     1996     1995
---------------------                               ----     ----     ----

Federal - deferred                                $  (53)   $  67   $  (35)
Federal, state and foreign - current                  (2)       -       (2)
                                                  ------    -----   ------
   Total benefit (provision)                      $  (55)   $  67   $  (37)
                                                  ======    =====   ======
--------------------------------------------------------------------------------

         The benefit (provision) for income taxes differs from the amount
computed by applying the federal statutory rate to pre-tax income (loss). The
computed amounts and the items comprising the total differences follow:

--------------------------------------------------------------------------------

(Dollars in millions)                              1997      1996     1995
---------------------                              ----      ----     ----

Pre-tax income (loss):
United States                                     $ 333     $(392)   $ 203
Foreign                                               3        16       14

     Total                                        -----     -----    -----
                                                  $ 336     $(376)   $ 217
                                                  =====     =====    =====

Computed amounts                                  $(118)    $ 132    $ (76)
Valuation allowance                                  55       (67)      37
Percentage depletion                                  5         5        5
Dividend received deduction                           3         2        3
Other differences - net                               -        (5)      (6)
                                                  -----     -----    -----
   Total benefit (provision)                      $ (55)    $  67    $ (37)
                                                  =====     =====    =====

--------------------------------------------------------------------------------

         The components of our net deferred income tax asset are as follows:
--------------------------------------------------------------------------------

(Dollars in millions)                                     December 31
---------------------                                 -----------------
                                                        1997     1996
                                                        ----     ----
Temporary differences:
Employee benefits                                     $  765   $  835
Depreciable assets                                      (300)    (255)
Other                                                    140      115
                                                      ------   ------
     Total                                               605      695
Operating loss carryforward                              625      650
                                                      ------   ------
     Deferred income tax asset                         1,230    1,345
Valuation allowance                                     (350)    (410)
                                                      ------   ------
     Deferred income tax asset - net                  $  880   $  935
                                                      ======   ======
--------------------------------------------------------------------------------

         Temporary differences represent the cumulative taxable or deductible
amounts recorded in our financial statements in different years than recognized
in our tax returns. Our employee benefits temporary difference includes amounts
expensed in our financial statements for pensions, health care, life insurance
and other postretirement benefits that become deductible in our tax return upon
payment or funding in qualified trusts. The depreciable assets temporary
difference represents principally tax depreciation in excess of financial
statement depreciation. Other temporary differences represent principally
various expenses accrued for financial reporting purposes that are not
deductible for tax reporting purposes until paid. At December 31, 1997, we had
regular tax net operating loss carryforwards of $1.8 billion and alternative
minimum tax loss carryforwards of $800 million. Regular federal tax net
operating loss carryforwards of $261 million expire in 1998, with the balance
expiring in varying amounts from 1999 through 2011.

         FASB Statement No. 109, Accounting for Income Taxes, requires that we
record a valuation allowance when it is "more likely than not that some portion
or all of the deferred tax assets will not be realized." It further states,
"forming a conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years." The
ultimate realization of this deferred tax asset depends on our ability to
generate sufficient taxable income in the future.

                                      -17-
<PAGE>
 
         Bethlehem reported income before income taxes, restructuring charges
and accounting changes in eight of the past ten years. Bethlehem has undergone
substantial restructuring and made substantial strategic capital expenditures
during the last several years. Also, we have significant tax-planning
opportunities to manage taxable income including selection of depreciation
methods and timing of contributions to our pension trust fund.

         We believe that our deferred tax asset will be realized by future
operating results together with tax-planning opportunities. However, our
significant net operating loss carryforwards and future tax deductions from
temporary differences make it appropriate to record a valuation allowance.
Accordingly, we have provided a valuation allowance equal to 50% of the total
deferred tax asset related to our operating loss carryforward and our temporary
differences exclusive of postretirement benefits other than pensions. If we have
a tax loss in any year in which our tax deduction for postretirement benefits
other than pensions exceeds our financial statement expense, the tax law
currently provides for a 15-year carryforward (20 years beginning in 1998) of
that loss against future taxable income. We, therefore, have sufficient time to
realize these future tax benefits. We believe, therefore, a valuation allowance
is not appropriate for the deferred tax asset related to our temporary
difference for postretirement benefits other than pensions.

         If we are unable to generate sufficient taxable income in the future
through operating results or tax-planning opportunities, we will be required to
increase our valuation allowance through a charge to expense (reducing our
stockholders' equity). On the other hand, if we achieve sufficient profitability
to use all of our deferred income tax asset, we will reduce the valuation
allowance through a decrease to expense (increasing our stockholders' equity).

         In addition to income taxes, we incurred costs for certain other taxes
as follows:

--------------------------------------------------------------------------------
(Dollars in millions)                         1997     1996     1995
---------------------                         ----     ----     ----

Employment taxes                            $ 74.0   $ 85.1   $ 95.2
Property taxes                                26.5     25.1     24.6
State and foreign taxes                       11.6     11.0     11.2
Federal excise tax on coal                      .3      2.0      2.6
                                            ------   ------   ------ 
   Total other taxes                        $112.4   $123.2   $133.6
                                            ======   ======   ======
--------------------------------------------------------------------------------


F.  LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------------------------------------------

(Dollars in millions)                                 December 31
                                                  ------------------
                                                    1997       1996
                                                    ----       ----

5.69% - 5.99% Galvanizing lines financing         $112.3     $149.7
Notes and loans:
10-3/8% Senior Notes, Due 2003                     105.0      105.0
2% - 9.64%, Due 1998-2009                           10.5       14.6
Debentures:
6-7/8%, Due 1999                                     5.4       11.8
8-3/8%, Due 2001                                    41.6       41.6
8.45%, Due 2005                                     90.8       90.7
Pollution control and industrial revenue bonds
7-1/2% - 8%, Due 2015-2024                         128.9      128.9
Capital lease obligations                            -          5.6
Unamortized debt discount                           (1.1)      (1.2)
                                                   -----      -----
   Total                                           493.4      546.7
Amounts due within one year                        (41.8)     (49.3)
                                                   -----      -----
   Long-term                                      $451.6     $497.4
                                                   =====      =====
--------------------------------------------------------------------------------

         Maturities and sinking fund requirements for the next five years are
$42 million in 1998, $44 million in 1999, $48 million in 2000, $50 million in
2001 and $11 million in 2002.

         The galvanizing lines financing is collateralized by such equipment at
our Sparrows Point and Burns Harbor Divisions and will be repaid in equal
semiannual installments through 2000.

         The 10-3/8% Senior Notes are senior in right of payment to all existing
and future subordinated indebtedness of Bethlehem. As unsecured senior
obligations, the Notes will effectively be subordinate to secured senior
indebtedness of Bethlehem. These Notes contain covenants that impose certain
limitations on our ability to incur or repay debt, to pay dividends and make
other distributions on or redeem capital stock, or to sell, merge, transfer or
encumber assets. See Note L, Stockholders' Equity.

         We have a credit arrangement with a group of 13 domestic and
international banks for $525 million, $150 million of which can be used for
letters of credit. The arrangement consists of a $300 million receivables
sale/purchase agreement through a wholly owned special purpose subsidiary and a
$225 million secured credit agreement. During the second quarter of 1997, we
amended this agreement by extending its term by about two years, through
September 12, 2002, and

                                      -18-
<PAGE>
 
increasing the facility's inventory credit arrangement from $200 million to $225
million.

         As of December 31, 1997, we had sold to the banks an ownership interest
in trade receivables of $175 million in exchange for $78 million in cash, $67
million in letters of credit and required reserves of $30 million. The
receivables were sold at a discount, based on defined short-term,
investment-grade interest rates and a fixed fee per annum for the letters of
credit. The banks are required to pay us cash for the face amount of the letters
of credit upon expiration. We pay a .1875% per annum fee on the daily available
commitment.

         Receivables from banks relate to letters of credit and required
reserves that will be collected upon expiration of the letters of credit and
liquidation of the banks' receivable ownership. Supplemental information on the
receivable balances at December 31, 1997 and 1996 follows:

--------------------------------------------------------------------------------
(Dollars in millions)                             December 31
                                             --------------------
                                               1997         1996
                                               ----         ----

Trade                                        $227.6       $226.6
Banks                                          97.2        105.8
Allowances                                    (18.8)       (20.8)
                                             ------       ------
    Total receivables - net                  $306.0       $311.6
                                             ======       ======
--------------------------------------------------------------------------------

         Under the secured credit agreement, inventories are pledged as
collateral for any borrowings and letters of credit. Borrowings under the
agreement are subject to collateral coverage requirements and incur interest
based on defined short-term interest rates. No borrowings were outstanding under
this agreement at December 31, 1997. We pay a .5% per annum fee on the daily
available commitment.

         Our secured credit agreement and galvanizing lines financing agreements
contain restrictive covenants that require Bethlehem to maintain a minimum
adjusted consolidated tangible net worth. At December 31, 1997, our adjusted
tangible net worth as defined by these agreements exceeded the more restrictive
of these requirements by about $600 million.

         At December 31, 1997, outstanding interest rate swap agreements with
notional amounts totaling $68 million effectively fix the interest rate on our
floating rate financings at 5.75% to 8.70%. These interest rate swap agreements
expire in 2000 and 2001. At December 31, 1997 and 1996, the estimated fair value
of our debt and interest rate swap agreements was not materially different from
the recorded amounts.

         Future minimum payments under noncancellable operating leases at
December 31, 1997 were $18 million in 1998, $14 million in 1999, $10 million in
2000, $7 million in 2001, $6 million in 2002 and $15 million thereafter. Total
rental expense under operating leases was $40 million, $40 million and $42
million in 1997, 1996 and 1995.

G.  COMMITMENTS AND
    CONTINGENT LIABILITIES

On April 1, 1997, we sold our interest in IOC and entered into a 14 year
agreement to purchase up to 1.8 million tons of iron ore per year through the
year 2004 and about 500,000 tons in the years 2005 through 2011. In 1997, we
purchased 1.7 million net tons from IOC at a net cost of $53 million.

         At December 31, 1997, we had outstanding approximately $57 million of
purchase orders for additions and improvements to our properties.

         We, as well as other steel companies, are subject to various
environmental laws and regulations imposed by federal, state and local
governments. Because of the continuing evolution of the specific regulatory
requirements and available technology to comply with the requirements, we cannot
reasonably estimate the future capital expenditures and operating costs required
to comply with these laws and regulations. Although it is possible that our
future operating results in a particular quarterly or annual period could be
materially affected by the future costs of environmental compliance, we believe
that such costs will not have a material adverse effect on our consolidated
financial position or on our competitive position with respect to other
integrated domestic steelmakers subject to the same environmental requirements.

         In the ordinary course of our business, we are involved in various
pending or threatened legal actions. In our opinion, adequate reserves have been
recorded for losses that are likely to result from these proceedings. If such
reserves prove to be inadequate, however, we would incur a charge to earnings
that could be material to the results of operations in a particular future
quarterly or annual period. Based on the advice of legal counsel, we believe
that any ultimate liability arising from these actions will not have a material
adverse effect on our consolidated financial position.

                                      -19-
<PAGE>
 
H.  POSTRETIREMENT PENSION BENEFITS

We have noncontributory defined benefit pension plans that provide benefits for
substantially all our employees. Defined benefits are based on years of service
and the five highest consecutive years of pensionable earnings during the last
ten years prior to retirement or a minimum amount based on years of service. We
fund annually the amount required under ERISA minimum funding standards plus
additional amounts as appropriate.

         The following sets forth the plans' actuarial assumptions used and
funded status at our valuation date of November 30, together with amounts
recognized in our consolidated balance sheets:

--------------------------------------------------------------------------------
(Dollars in millions)                                        1997        1996
---------------------                                        ----        ----
Assumptions:
Discount rate                                               7.375%       7.75%
Average rate of compensation increase                        3.10%       3.10%
Actuarial present value of benefit obligations:
Vested benefit obligation                                 $ 5,030     $ 4,910
Accumulated benefit obligation                              5,185       5,075
Projected benefit obligation                                5,495       5,325
Plan assets at fair value:
Fixed income securities                                     1,552       1,656
Equity securities                                           3,102       2,381
Cash and marketable securities                                276         178
                                                          -------     -------
    Total plan assets                                     $ 4,930     $ 4,215
                                                          -------     -------

Projected benefit obligation in excess of plan assets         565       1,110
Unrecognized net gain (loss)                                  176         (36)
Remaining unrecognized net obligation resulting
   from adoption of Statement No. 87                         (139)       (173)
Unrecognized prior service cost from plan amendments         (172)       (201)
Adjustment required to recognize minimum liability
      - Intangible asset                                        -         160
December accruals/contributions - net                          10          10
                                                          -------     -------
  Pension liability at December 31                        $   440     $   870
                                                          =======     =======
--------------------------------------------------------------------------------

         The assumptions used in each year and the components of our annual
pension cost follow:
--------------------------------------------------------------------------------

(Dollars in millions)                         1997     1996      1995
---------------------                         ----     ----      ----

Assumptions:
Return on plan assets                         9.00%    8.75%    10.00%
Discount rate                                 7.75%    7.25%     9.00%
Pension cost:
Service cost - benefits
   earned during the period                  $  48    $  59     $  45
Interest on projected
   benefit obligation                          395      372       402
Return on plan assets
      - actual                                (833)    (616)     (849)
      - deferred                               458      287       532
Amortization of initial
   net obligation                               34       36        36
Amortization of unrecognized prior
   service cost from plan amendments            29       32        32
                                             -----    -----     -----
   Total                                       131      170       198
PBGC premiums, administration fees, etc.        24       22        12
                                             -----    -----     -----
   Total cost                                $ 155    $ 192     $ 210
                                             =====    =====     =====
--------------------------------------------------------------------------------

                                      -20-
<PAGE>
 
I.  POSTRETIREMENT BENEFITS
    OTHER THAN PENSIONS

In addition to providing pension benefits, we currently provide health care and
life insurance benefits for most retirees and their dependents.

         The following sets forth our plans' actuarial assumptions used and
funded status at our valuation date of November 30, together with the amounts
recognized in our consolidated balance sheets:

--------------------------------------------------------------------------------

(Dollars in millions)                              1997          1996
---------------------                              ----          ----

Assumptions:
Discount rate                                     7.375%         7.75%
Trend rate
      -  beginning next year                       6.00%         7.00%
      -  ending year 2000                          4.60%         4.60%
Accumulated postretirement benefit obligation:
Retirees                                        $ 1,760       $ 1,705
Fully eligible active plan participants             155           145
Other active plan participants                      140           150
                                                -------       -------
      Total                                       2,055         2,000
Plan assets at fair value:
      Fixed income securities                       120           130
                                                -------       -------
Accumulated postretirement benefit
      obligation in excess of plan assets         1,935         1,870
Unrecognized net loss, etc.                        (340)         (275)
                                                -------       -------
      Total obligation at December 31             1,595         1,595
Current portion                                    (150)         (150)
                                                -------       -------
      Long-term obligation                      $ 1,445       $ 1,445
                                                =======       ======= 

--------------------------------------------------------------------------------

         The assumptions used in each year and the components of our
postretirement benefit cost follow:

--------------------------------------------------------------------------------

(Dollars in millions)                        1997       1996      1995
---------------------                        ----       ----      ----

Assumptions:
Return on plan assets                        9.00%      8.75%    10.00%
Discount rate                                7.75%      7.25%     9.00%
Trend rate
      - beginning current year               7.00%      8.00%     9.00%
      - ending year 2000                     4.60%      4.60%     4.60%
Postretirement benefit cost:
Service cost                                $   7      $  10     $   7
Interest on accumulated postretirement
      benefit obligation                      148        140       148
Amortization of unrecognized net loss           6          8        -
Return on plan assets
      - actual                                (10)        (7)      (24)
      - deferred                               (1)        (5)       12
                                            -----      -----     -----
      Total cost                            $ 150      $ 146     $ 143
                                            =====      =====     =====
--------------------------------------------------------------------------------

         A one percentage point increase or decrease in the assumed health care
trend rate would increase or decrease the accumulated postretirement benefit
obligation by about $150 million and 1997 expense by about $10 million.

J.  STOCKHOLDER RIGHTS PLAN

We have a Stockholder Rights Plan under which holders of Common Stock have
rights to purchase a new series of Preference Stock. When exercisable, each
right entitles the holder to purchase one one-hundredth of a share of Series A
Junior Participating Preference Stock at an exercise price of $80 per unit. The
rights will become exercisable only if a person or group acquires 15% or more of
Common Stock or begins a tender offer or exchange offer that would result in
that person or group beneficially owning 20% or more of Common Stock.
Subsequently, upon the occurrence of certain events, holders of rights will be
entitled to purchase Common Stock of Bethlehem or a third-party acquiror worth
twice the right's exercise price. Until the rights become exercisable, we will
be able to redeem them at one cent per right. The rights expire on October 18,
1998.

                                      -21-
<PAGE>
 
K.  STOCK OPTIONS

At December 31, 1997, we had options outstanding under Plans approved by our
stockholders in 1988 and 1994. New options can be granted only under the 1994
Plan, which reserved 4,000,000 shares of Common Stock for such use. At December
31, 1997, options on 826,300 shares of Common Stock were available for granting.
The option price is the fair market value of our Common Stock on the date the
option is granted. Options issued under the 1994 Plan become exercisable one to
four years after the date granted and expire ten years from the date granted.
Exercisable options may be surrendered for the difference between the option
price and the quoted market price of the Common Stock on the date of surrender.
Depending on the circumstances, option holders receive either Common Stock, cash
or a combination of Common Stock and cash. Because of the surrender component in
our options, related expense is recognized periodically based on the difference
between the option price and current quoted market prices. Compensation expense
recognized and weighted average fair value for the options granted in 1997, 1996
and 1995 were not material.

         Changes in options outstanding during 1997, 1996 and 1995 under the
Plans were as follows:

                                               Number of             Weighted
                                                Options           Average Price
                                             -------------        -------------
Balance December 31, 1994                      2,500,248               $ 19
       Granted                                   635,100                 15
       Terminated or cancelled                  (111,373)                18
       Surrendered or exercised                   (6,900)                14
                                               ---------    
Balance December 31, 1995                      3,017,075                 18
       Granted                                   620,600                 14
       Terminated or cancelled                  (144,025)                19
       Surrendered or exercised                   (2,000)                 8
                                               ---------
Balance December 31, 1996                      3,491,650                 17
       Granted                                   656,200                  8
       Terminated or cancelled                  (377,100)                17
                                               ---------
Balance December 31, 1997                      3,770,750                 15
                                               =========

         Options exercisable at the end of 1997, 1996 and 1995 were 2,083,250,
1,976,300 and 1,848,375.

       Information on our stock options at December 31, 1997 follows:

<TABLE> 
<CAPTION> 


Range of                   Number of          Average           Average         Number of          Average
Exercise                     Options         Exercise       Contractual           Options         Exercise
Prices                   Outstanding            Price              Life       Exercisable            Price
------------------         ---------         --------       -----------         ---------         --------
<S>                        <C>               <C>            <C>                 <C>              <C> 
8-3/8                        650,200            $   8          9 Years               --             $ --
13-3/4 - 14-1/2            1,582,800               14          7 Years            810,450               14
17-5/8 - 19                  621,650               19          5 Years            621,650               19
20-3/8 - 21-3/4              916,100               21          4 Years            651,150               21
                          ----------                                              -------
       Total               3,770,750               15          6 Years          2,083,250               18
                           =========                                            =========
</TABLE> 

                                      -22-
<PAGE>
 
L.  STOCKHOLDERS' EQUITY

<TABLE> 
<CAPTION> 

-----------------------------------------------------------------------------------------------------------------------
                                            Preferred Stock      Preference Stock     Common Stock       Common Stock    
(Shares in thousands  and dollars           $1.00 Par Value      $1.00 Par Value     $1.00 Par Value   Held in Treasury 
in millions, except per share data)         Shares   Amount      Shares   Amount     Shares   Amount   Shares    Amount  
-----------------------------------------------------------------------------------------------------------------------
<S>                                        <C>      <C>        <C>      <C>         <C>     <C>        <C>      <C> 
Balance December 31, 1994                  11,623    $11.6      2,619    $2.6        111,882  $111.9     1,997    $59.5  
Net income for year                      
Minimum pension liability
 adjustment (Note H)                     
Dividends on Preferred Stock             
Preference Stock:
 Stock dividend                                                   133     0.1     
 Issued                                                            41     0.1
 Converted                                                       (205)   (0.2)           205     0.2
Common Stock Issued                                                                      613     0.6        (5)   (0.1)
-----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995                  11,623     11.6      2,588     2.6        112,700   112.7     1,992    59.4
Net loss for year                       
Minimum pension liability
 adjustment (Note H)                    
Dividends on Preferred Stock            
Preference Stock:
 Stock dividend                                                   129     0.1  
 Issued                                                            62     0.1  
 Converted                                                       (261)   (0.3)           261     0.3                  
Common Stock:
 Acquired                                                                                                   26     0.3
 Issued                                                                                  890     0.9   
-----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996                  11,623     11.6      2,518     2.5        113,851   113.9     2,018    59.7
Net income for year                    
Dividends on Preferred Stock           
Preference Stock:
 Stock dividend                                                   124     0.1    
 Issued                                                            35     
 Converted                                                       (331)   (0.3)           331     0.3
Common Stock:
 Acquired                                                                                                   39     0.3
 Issued                                                                                  866     0.8   
-----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997                  11,623    $11.6     2,346     $2.3        115,048  $115.0     2,057   $60.0
-----------------------------------------------------------------------------------------------------------------------
</TABLE> 

<TABLE> 
                                            
(Shares in thousands  and dollars                       Additional    Accum-
in millions, except per share data)                      Paid-In      ulated                              
                                                         Capital     Deficit
--------------------------------------------------------------------------------
<S>                                                     <C>          <C>      
Balance December 31, 1994                               $1,948.6      $(859.4)
Net income for year                                                     179.6
Minimum pension liability
 adjustment (Note H)                                       (67.0)
Dividends on Preferred Stock                               (40.4)
Preference Stock:
 Stock dividend                                             (0.1)
 Issued                                                      0.7
 Converted                                
Common Stock Issued                                          8.8
--------------------------------------------------------------------------------
Balance December 31, 1995                                 1850.6       (679.8)
Net loss for year                                                      (308.8)
Minimum pension liability
 adjustment (Note H)                                        67.0
Dividends on Preferred Stock                               (40.4)
Preference Stock:
 Stock dividend                                             (0.1)
 Issued                                                      0.8
 Converted                                
Common Stock:
 Acquired                                                              
 Issued                                                      8.4
--------------------------------------------------------------------------------
Balance December 31, 1996                                1,886.3       (988.6)
Net income for year                                                     280.7
Dividends on Preferred Stock                               (40.4)
Preference Stock:
 Stock dividend                                             (0.1)
 Issued                                                      0.3
 Converted                                
Common Stock:
 Acquired                                                  
 Issued                                                      7.9
--------------------------------------------------------------------------------
Balance December 31, 1997                               $1,854.0      $(707.9) 
--------------------------------------------------------------------------------
</TABLE> 

         Each share of $3.50 Cumulative Convertible Preferred Stock issued in
1993 is convertible into 2.39 shares of Common Stock, subject to certain events.
Each share of the $5.00 Cumulative Convertible Preferred Stock and the $2.50
Cumulative Convertible Preferred Stock issued in 1983 is convertible into 1.77
and .84 shares of Common Stock, subject to certain events.

         In accordance with our labor agreements, we issue Preference Stock to a
trustee under the Employee Investment Program. Series "A" and Series "B" of
Preference Stock have a cumulative dividend of 5% per annum payable at our
option in cash, Common Stock or additional shares of Preference Stock. Each
share of Preference Stock is entitled to vote with Common Stock on all matters
and is convertible into one share of Common Stock.

                                      -23-
<PAGE>
 
Preferred and Preference Stock issued and outstanding:
--------------------------------------------------------------------------------

(Shares in thousands)                                       December 31
                                                      ----------------------
                                                        1997          1996
                                                        ----          ----

Preferred Stock - Authorized 20,000 shares
$5.00 Cumulative Convertible Preferred Stock           2,500         2,500
$2.50 Cumulative Convertible Preferred Stock           4,000         4,000
$3.50 Cumulative Convertible Preferred Stock           5,123         5,123

Preference Stock - Authorized 20,000 shares
Series "A" 5% Cumulative Convertible Preference
 Stock                                                 1,655         1,818
Series "B" 5% Cumulative Convertible Preference
 Stock                                                   691           700
--------------------------------------------------------------------------------

    The following presents the details of our earnings per share calculations:
--------------------------------------------------------------------------------

(Shares in thousands and dollars in
 millions except per share data)
                                                 1997        1996        1995
                                                 ----        ----        ----
Basic Earnings Per Share

Net income (loss)                             $ 280.7     $(308.8)    $ 179.6
Less dividend requirements:
     $2.50 Preferred dividend-cash              (10.0)      (10.0)      (10.0)
     $5.00 Preferred dividend-cash              (12.5)      (12.5)      (12.5)
     $3.50 Preferred dividend-cash              (17.9)      (17.9)      (17.9)
     5% Preference dividend-stock                (1.2)       (1.5)       (2.0)
                                              -------     -------     -------
          Total Preferred and Preference
            dividends                           (41.6)      (41.9)      (42.4)
                                              -------     -------     -------
Net income (loss) applicable to Common Stock $  239.1    $ (350.7)    $ 137.2
                                              =======     =======     =======

Average shares of Common Stock outstanding    112,439     111,286     110,311
                                              =======     =======     =======

Basic Earnings Per Share                     $   2.13    $  (3.15)   $   1.24
                                              =======     =======     =======



(Shares in thousands and dollars in
millions, except per share data)               1997         1996        1995
--------------------------------               ----         ----        ----

Diluted Earnings Per Share

Net income (loss)                            $  280.7    $ (308.8)   $  179.6
Less dividend requirements:
     $2.50 Preferred dividend                   (10.0)      (10.0)      (10.0)
     $5.00 Preferred dividend                   (12.5)      (12.5)      (12.5)
    $3.50 Preferred dividend                     --         (17.9)      (17.9)
     5% Preference dividend                      --          (1.5)       --
                                             --------    --------    --------
Net income (loss) applicable to Common
 Stock                                       $  258.2    $ (350.7)   $  139.2
                                             ========    ========    ========

Average shares of Common Stock and
 equivalents and other potentially
 dilutive securities outstanding:
     Common Stock                           112,439     111,286     110,311
     Stock options                              --            2          13
     $2.50 Preferred Stock                       *           *           *
     $5.00 Preferred Stock                       *           *           *
     $3.50 Preferred Stock                   12,255          *           *
     5% Preference Stock                      2,346          *        2,588
                                            -------     -------     -------
          Total                             127,040     111,288     112,912
                                            =======     =======     =======

Diluted Earnings Per Share                 $   2.03    $  (3.15)   $   1.23
                                            =======     =======     =======

*     Antidilutive
--------------------------------------------------------------------------------

         Under the covenants of our 10-3/8% Senior Notes, we can pay future
dividends on our Common Stock, among certain other restrictions, only if such
cumulative dividends do not exceed the aggregate net cash proceeds from the sale
of capital stock plus 50% of our consolidated net income and minus 100% of our
consolidated net loss since the second quarter of 1993, excluding certain
restructuring charges and other adjustments. The amount available at December
31, 1997 under this covenant was about $485 million.

M.  QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE> 
<CAPTION> 


(Dollars in millions, except per share data)                                 1997                                     1996
------------------------------------------------------------------------------------------------------------------------------
                                                1Q        2Q         3Q        4Q         1Q         2Q        3Q       4Q
------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>        <C>       <C>        <C>        <C>       <C>      <C> 
Net sales                                    $1,192.5   $1,206.9  $1,113.4  $1,118.4    $1,118.5  $1,236.9  $1,174.6  $1,149.0
Cost of sales                                 1,052.5    1,053.4     971.8     975.6     1,009.9   1,092.9   1,043.3   1,022.1
Net income (loss)                                38.4      160.0      40.6      41.7         0.1      26.6      11.0    (346.5)
Net income (loss) per
     Common share
        - basic                              $   0.25   $   1.33  $   0.27  $   0.28    $  (0.09) $   0.14  $   --   $   (3.19)
        - diluted                            $   0.25   $   1.19  $   0.26  $   0.27    $  (0.09) $   0.14  $   --   $   (3.19)
</TABLE> 

                                     -24-

<PAGE>
 
REPORT OF INDEPENDENT AUDITORS
------------------------------------------------------------------------------



To the Board of Directors
and Stockholders of
Bethlehem Steel Corporation


  In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and of cash flows present fairly, in all
material respects, the financial position of Bethlehem Steel Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.  These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits.  We conducted our audits in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ Price Waterhouse LLP

1177 Avenue of the Americas
New York, NY 10036
January 28, 1998

                                      -25-

<PAGE>
 
<TABLE>
<CAPTION>
 
Five-Year Financial and Operating Summaries
-------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)                                   1997       1996     1995       1994     1993
-------------------------------------------                                  --------   -------   -------   -------- --------
<S>                                                                           <C>       <C>       <C>       <C>      <C>
Earnings Statistics

Net sales                                                                     $4,631.2  $ 4,679.0  $4,867.5  $4,819.4  $4,323.4
                                                                              --------   --------  --------  --------  --------   
Costs and expenses:
 Employment costs                                                              1,439.0    1,555.0   1,683.5   1,633.0   1,547.1
 Materials and services                                                        2,683.8    2,680.6   2,592.7   2,754.8   2,404.2
 Depreciation                                                                    231.0      268.7     284.0     261.1     277.5
 Taxes (other than employment and income taxes)                                   38.4       38.1      38.4      36.9      39.8
 Estimated (gain) loss on exiting business                                      (135.0)     465.0         -         -     350.0
                                                                              --------   --------  --------  --------  -------- 
Total costs and expenses                                                       4,257.2    5,007.4   4,598.6   4,685.8   4,618.6
                                                                              --------   --------  --------  --------  --------   
Income (loss) from operations                                                    374.0     (328.4)    268.9     133.6    (295.2)
Financing income (expense):
 Interest and other financing costs                                              (47.5)     (53.3)    (60.0)    (46.2)    (63.2)
 Interest income                                                                   9.2        5.9       7.7       7.1       7.1
Benefit (provision) for income taxes                                             (55.0)      67.0     (37.0)    (14.0)     85.0
                                                                              --------   --------  --------  --------  --------  
Net income (loss)                                                                280.7     (308.8)    179.6      80.5    (266.3)
Dividends on Preferred and Preference Stock                                       41.6       41.9      42.4      43.1      39.8
                                                                              --------   --------  --------  --------  --------  
Net income (loss) applicable to Common Stock                                  $  239.1   $ (350.7) $  137.2  $   37.4 $  (306.1)
                                                                              --------   --------  --------  --------  --------   
Net income (loss) per Common share- basic                                     $   2.13   $  (3.15) $   1.24  $   0.35 $   (3.37)
                                  - diluted                                   $   2.03   $  (3.15) $   1.23  $   0.35 $   (3.37)
-------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Statistics

Cash and cash equivalents                                                     $  252.4  $  136.6   $  180.0  $  159.5 $   228.9
Receivables, inventories and other current assets                              1,211.6   1,351.8    1,345.8   1,409.6    1362.2
Current liabilities                                                             (910.8)   (957.4)  (1,049.6) (1,011.2)   (914.2)
                                                                              --------   --------  --------  --------  --------  
Working capital                                                               $  553.2  $  531.0   $  476.2  $  557.9 $   676.9
Current ratio                                                                      1.6       1.6        1.5       1.6       1.7
Property, plant and equipment - net                                           $2,357.7  $2,419.8   $2,714.2  $2,759.3 $ 2,634.3
Total assets                                                                   4,802.6   5,109.9    5,700.3   5,782.4   5,876.7
Total debt and capital lease obligations                                         493.4     546.7      638.3     757.3     813.8
Stockholders' equity                                                           1,215.0     966.0    1,238.3   1,155.8     696.6
Total debt as a percent of invested capital                                        29%       36%        34%       40%       54%
-------------------------------------------------------------------------------------------------------------------------------
Other Statistics

Capital expenditures                                                          $ 228.2   $ 259.0    $ 266.8   $ 444.6   $ 327.1
Raw steel production capability (net tons in thousands)                        10,500    10,500     11,500    11,500    11,500
Raw steel production (net tons in thousands)                                    9,599     9,447     10,449     9,817    10,303
Steel products shipped (net tons in thousands)                                  8,802     8,782      8,986     9,262     9,016
Pensioners receiving benefits at year end                                      70,400    70,100     71,000    71,700    70,900
Average number of employees receiving pay                                      16,400    17,800     19,500    19,900    20,700
Common Stock outstanding at year end (shares in thousands)                    112,991   111,834    110,708   109,886    91,409
Common stockholders at year end                                                35,000    37,000     39,000    41,000    43,000
</TABLE>

                                      -26-