<PAGE>
 
Chairman's Letter 


To Our Stockholders

We made further progress during 1998 toward our Vision to Be the Premier Steel
Company. During the first half of the year, our financial performance was
strong. However, during the second half, we were adversely affected by
unprecedented levels of unfairly traded steel imports. As a result, we ended the
year with a sense of both disappointment and concern over the serious injury to
Bethlehem and the American steel industry caused by these imports. Nevertheless,
we are proud of the many accomplishments we achieved during 1998, including the
following:

 . We reported net income for the year of $120 million, including an after-tax 
  charge of $29 million related to the closing of the 160-inch plate mill at
  Sparrows Point.

 . Our safety and environmental performance was the best ever recorded in the 
  history of the Company.

 . We completed our acquisition of Lukens Inc. and established the Bethlehem
  Lukens Plate Division.

 . We started construction of Sparrows Point's new continuous Cold Rolling Mill
  complex.

 . We received the General Motors "Supplier of the Year" award for the third 
  consecutive year, and won similar awards from other customers.

 . We established our Premier Supplier Recognition Program.

 . We increased the size of our revolving credit arrangement and extended its
  term.

 . Our credit ratings improved one level.

 . We completed a number of asset sales, generating cash proceeds of about $310
  million.

  To realize our Vision to Be the Premier Steel Company, we must achieve our
overall Objective of increasing stockholder value. We will accomplish this by
achieving and sustaining superior rates of return on the capital we have
invested in each of our businesses, by effectively serving our customers, by
having partnerships among our employees, and by being a good corporate citizen.
Our Strategy for achieving this Vision is to concentrate on steel, focusing on
being a low-cost, high-quality producer, to rebuild our financial strength, and
to improve continuously in everything that we do.

  In order to successfully implement this Strategy, we will continue to practice
our Core Values of integrity, safety and personal accountability; continuous
learning; total quality; customer satisfaction; and maximizing stockholder
value. They are the permanent foundation to guide us in achieving our Vision.

Concentrating on Steel

We believe that our four core steel businesses -- the Burns Harbor Division, the
Sparrows Point Division, Pennsylvania Steel Technologies, Inc. and our newest
division, Bethlehem Lukens Plate -- are well positioned in their markets.
However, each is facing intense competition from other steel companies --
domestic and foreign -- and from producers of competitive materials. We will
best meet these challenges by following our Strategy and concentrating on
producing the highest quality products at competitive costs.

  During 1998, we continued to strengthen the competitive position of our four
core steel businesses.

Bethlehem's Core
Steel Products
(Sheets, Plates and Rail)
percentage of our total sales

[GRAPH GOES HERE]

2
<PAGE>
 
Burns Harbor

Our Burns Harbor Division represents about 40% of our sales, and it ships about
four million tons per year of flat rolled sheet products, primarily to the
automotive and service center markets. It has a number of competitive strengths,
including its location relative to its markets and low-cost raw materials, its
efficient facility layout and its modern facilities.

  Currently, we are taking steps to further enhance Burns Harbor's
competitiveness by making a series of improvements to its hot strip mill, and we
approved a $70 million capital appropriation to modernize one of its two
continuous casters to improve slab quality, increase productivity and reduce
costs. These and other actions will help Burns Harbor achieve and sustain a
superior rate of return on its assets.

Sparrows Point

Our Sparrows Point Division represents about 30% of our sales, and it ships
about three million tons per year of sheets and tin mill products, primarily to
the construction, service center and container markets. It also has a number of
competitive strengths including its tidewater location and a number of highly
competitive facilities, such as its primary ironmaking and steelmaking
operations.

  During 1998, we started construction of a new continuous Cold Rolling Mill
complex, which we expect will begin production early in 2000. This $300 million
investment in Sparrows Point's future is part of the Division's comprehensive
plan to achieve and sustain a superior rate of return on its assets. This
investment will be combined with Division-wide cost competitiveness initiatives
including a reduction in the workforce; reduced energy, material and service
costs; and improved yield.

  During 1999, several additional significant projects will be completed --
including the reline of "L" blast furnace and the construction of a new roll
grinding facility -- and construction will begin on a pulverized coal injection
facility at "L" blast furnace, which will be completed in 2000.

Pennsylvania Steel Technologies, Inc. (PST)

PST represents about 10% of our sales, and it ships about 750,000 tons per year
of railroad rails, specialty blooms, flat bars and large-diameter pipe. It sells
to a wide variety of markets including transportation, forging, machinery, gas
cylinder and energy.

  PST is the largest rail producer in the United States and it is benefiting
from the growth in the domestic rail market. During 1998, PST set a number of
production records, especially in rail making, improved its safety performance,
and started up a new scrap handling and sorting facility. PST returned to
profitability in 1998 and is focusing on achieving and sustaining a superior
rate of return on its assets.

Bethlehem Lukens Plate

On May 29, 1998, we completed the acquisition of Lukens Inc. and established our
newest Division, Bethlehem Lukens Plate. As a result of this combination, we
believe that we have established the premier plate business. We have expanded
our product offerings and strengthened our position as the leading producer and
supplier of carbon and alloy steel plate products. This combination has
produced, and will produce, significant operating and administrative synergies.

  Bethlehem Lukens Plate represents about 20% of our sales, and it will ship
about two million tons of carbon and alloy plate per year. Several important
initiatives will benefit its business in the future, including a 20-year
conversion agreement with Allegheny Teledyne, capital projects such as
improvements to its Steckel mill at Conshohocken, reallocating the order book
among its plate mills, and integrating business processes and systems.

Domestic Steel
Industry Shipments
millions of tons

[GRAPH GOES HERE]

3
<PAGE>
 
Improving Continuously

We are committed to continuously improve every aspect of our business, and
during this past year we did improve in many important areas, as discussed
below.

Customers

In 1998, we launched a Customer Success Process initiative to better integrate
our selling and supply functions with our customers' requirements and to help us
to be their supplier of choice. We also continued to strengthen our Total
Quality initiative in which we intensely focus on performance excellence in
every aspect of our business. This enables us to reliably provide what our
customers need, when they need it. It involves all of our employees and all of
our processes -- purchasing, order entry, steel production, product delivery,
billing and other services. The success of Total Quality is evidenced by the
fact that we received the General Motors "Supplier of the Year" award for the
third consecutive year. We have also been recognized by many of our other
customers with awards for outstanding quality and service.

Employees

We continue to educate and train our employees at all locations so that we can
develop the skilled and knowledgeable workforce required to compete in an
increasingly competitive, global business environment. During 1998, our
education and training programs provided over 500,000 employee training hours,
an average of about 39 hours per employee. We are in the process of having all
of our employees complete a financial management program designed to help them
focus their efforts on increasing our return on net assets and stockholder
value. More than half of all of our employees have completed this training. We
also have trained more than 10,000 employees in our Employee Safety Process.

  Our labor agreements with the United Steelworkers of America, covering our
represented employees at Burns Harbor, Sparrows Point and PST, expire on August
1 of this year. We are prepared to commence early negotiations and hope to reach
a mutually satisfactory new competitive long-term labor agreement.

Suppliers

In early 1998, we began a Premier Supplier Recognition Program and recognized
nine suppliers as the "Best of the Best" for their outstanding performance
during 1997 in the areas of quality, service and cost. For 1998, 17 suppliers
earned this recognition.

  Overall costs and performance from suppliers during 1998 further improved
through the ongoing implementation of our Strategic Sourcing process. Cross-
functional sourcing teams were able to smoothly integrate the former Lukens
activities. These cross-functional and cross-location efforts are continuing to
help advance "strategic change" throughout our Company.

  We are especially proud that during 1998 we were formally recognized by
Purchasing Magazine as one of the purchasing profession's "Best Places to Work."
Only five other companies in the United States were so honored.

Safety, Environment and Good Citizenship

Our safety and environmental performance for 1998 was the best ever recorded by 
our Company. Compared with 1997, our lost workday case incidence rate declined 
by 23%, our all-injury rate declined by 20%, and our recordable case rate 
declined by 15%. Since 1994, when we began a joint safety performance effort 
with the United Steelworkers of America, our lost workday case incidence rate

Bethlehem's Lost
Workday Case
Incidence Rate
per 200,000 hours worked

[GRAPH GOES HERE]

4
<PAGE>
 
Bethlehem's
Environmental
Compliance Index
Average number of
incidents per month

[GRAPH GOES HERE]
 
declined by 58%, and our all-injury and recordable case rates both declined by
49%. A major corporate objective is to have zero lost workdays.

     We continue to focus our efforts on improving our environmental performance
to reach the ultimate goal of zero environmental incidents. During 1998, we
reduced our Environmental Compliance Index, our corporate method of measuring
environmental compliance, by 73% over 1997. Also during 1998, we became the
first integrated steel producer to join EPA's Climate Wise Program which focuses
on voluntary actions to improve energy efficiency and environmental performance.
We were also recognized as a Program Champion for our participation and
achievements in EPA's Wastewise Program, and we continued our environmental
stewardship activities with local community groups, key customers and the
Coalition for Environmentally Responsible Economies (CERES).

     We practice good citizenship with an emphasis on charitable contributions,
volunteerism and economic development. Giving to the United Way at all of our
facilities and individual volunteerism at educational, health services and other
nonprofit organizations are regular practices of our employees. Among our
industry-leading examples of the public-private partnerships that can help
revitalize entire communities are the Brownfields economic development
initiatives involving almost 3,000 acres at former steel operating sites in
Bethlehem and Johnstown, Pennsylvania and in Lackawanna, New York. We are also
working closely with public officials in Cambria and Somerset counties in
Pennsylvania and with the state's Department of Conservation and Natural
Resources to sell to the counties The Manufacturers Water Company, including
over 5,000 acres and five dams, to assure future generations added resources for
personal recreation and economic development.

Technology

     Six years ago, we entered into a strategic partnership with EDS, a leader
in the information technology area. This partnership has allowed us to leverage
its very significant technology capabilities. As a result, we believe we stand
at the forefront of information technology in the steel industry.

     Every technology officer's immediate objective is to develop a timely and
cost-effective solution to the Year 2000 (Y2K) computer issue. Because of early
planning, we have already completed about 95% of our overall resolution efforts,
at a very low cost. We have also received two independent audits of our Y2K
efforts with highly satisfactory results. We will continue with the remaining
remediation and testing throughout the first half of 1999. We have also begun
contingency planning in all areas of our business, and we will focus on this
issue during 1999. The objective of all these activities is to continue to serve
our customers with no adverse Y2K impact on our business.

     We continue to maintain a strong research and development effort in the
firm belief that this ultimately translates into added value for our customers
and stockholders. The research effort is directed primarily at achieving quality
improvements and cost reductions in operations and also providing new or
improved products and technical

5
<PAGE>
 
Bethlehems's
Pension Liability
millions of dollars

[GRAPH GOES HERE]
 
support for customers. Examples of new value-added products include high-
strength weathering plate grades for use in bridges; patented dent-resistant,
formable hot dip galvanized sheet grades for light-weight automotive body
applications; and a new acrylic coated sheet product for the metal building
industry.

Rebuilding Our Financial Strength

We made further progress during 1998 in improving our financial condition,
especially in reducing our unfunded pension obligation. Over the past five
years, we have reduced our pension liability by over $1.2 billion, from just
over $1.6 billion at the end of 1993 to $415 million at the end of 1998.
Additionally, we had a net unrecognized gain that is not reflected in the
pension liability shown on our balance sheet. This unrecognized gain reflects,
among other factors, investment performance that is better than the performance
we had assumed would occur in our actuarial and accounting assumptions. While
accounting rules do not permit immediate recognition of these investment gains,
the current market value of our pension trust assets of about $6 billion is
essentially equal to our current pension obligation.

  Our liquidity totaled about $480 million at the end of last year. This
consisted of about $140 million in cash and $340 million of available borrowings
under our revolving credit arrangement. During 1998, we increased the size of
our revolving credit arrangement by $75 million to $600 million and extended its
term to June 2003.

  As to our capital structure, at the end of last year, our debt as a percent of
invested capital was 31%, down from 50% at the end of 1992. In recognition of
the progress we have made in improving our operating performance and
strengthening our financial condition, both Standard & Poor's and Moody's
Investor Services raised our credit ratings early last year by one level. Our
objective is to achieve a capital structure that will earn us an investment-
grade credit rating.

Profitable Growth

During the last several years, we have transformed Bethlehem by eliminating
underperforming operations, strengthening our core businesses and improving our
financial condition. As we approach the 21st century, we are positioned to take
advantage of future opportunities and to grow our profitability.

  Our program for profitable growth focuses on three areas. First, we will
continue to grow our existing core steel businesses. Our goal is for each
business to achieve and sustain superior rates of return on its net assets.
Second, we will acquire companies or enter into joint ventures in businesses
similar to our core steel businesses. The acquisition of Lukens was a major step
in this direction. We have also benefited by entering into joint ventures such
as Double G Coatings, Chicago Cold Rolling, Indiana Pickling and Processing,
Walbridge Coatings and TWB. Third, we will acquire or establish new businesses
that are related to our core steel businesses. Our recent joint venture with
Steel Construction Systems is an example of progress in this area.

6
<PAGE>
 
Total Steel Imports
millions of tons

[GRAPH GOES HERE]
 
International Steel Trade

The unprecedented level of unfairly traded steel imports being dumped into the
United States continues to cause serious injury to Bethlehem and the American
steel industry. The high levels of imports have adversely affected production,
shipment levels and prices, and workforce schedules have been reduced at all of
our operations.

  On January 7, 1999, the Clinton Administration submitted a "Comprehensive Plan
for Responding to the Increased Steel Imports" to the United States Congress.
While the Plan reviews certain helpful actions that have been taken and others
that may be taken, it falls short of what is required and is not yet
sufficiently comprehensive, timely or effective, given the significant increase
in imports, the precipitous decline in prices due to the dumping of foreign
steel and the financial losses by the American steel industry.

  Under these circumstances, we are taking three actions:

 . Legal -- We have filed, and will continue to file, all appropriate legal
  actions.

 . Public Affairs -- We have joined with the United Steelworkers of America,
  leading steel companies and other concerned parties in an educational campaign
  called "Stand Up For Steel -- Stand Up for America."

 . Governmental -- We are continuing our review of the Plan submitted by the
  Clinton Administration, and we will continue to work with the Administration
  and Congress in an effort to restore fair trade in steel.

  We believe that the actions that we are taking, along with those to be taken
by Congress and the Administration, will help to resolve this very serious issue
that threatens our Company, stockholders, employees, customers and the
communities in which we operate.

Business Outlook

We believe that the U.S. economy will continue on a course of moderate and
sustainable growth and low inflation, although growth will be somewhat slower
compared with the past several years. We also believe that domestic shipments in
1999 will be about 100 million tons, slightly lower than the estimated 102
million tons shipped in 1998.

  Competition will be intense in 1999 due to excess global steel capacity and
new domestic supply. Additionally, we continue to be very concerned about the
high levels of unfairly traded steel imports, which we expect will adversely
affect our 1999 results. While our current business conditions remain difficult,
we will continue our Strategy of concentrating on steel and rebuilding our
financial strength, and we will take all necessary actions to reduce costs and
improve our overall competitiveness.

  For Bethlehem, 1998 was a year of contrast. Despite significant adverse
effects from unfair international steel trade, we still made important progress
toward our Vision to Be the Premier Steel Company.


/s/ Hank Barnette
Curtis H. Barnette, Chairman
January 27, 1999

7
<PAGE>
 
Financial Review and Operating Analysis

 
Net income for 1998 was $120 million, or $.64 per common share - basic,
including an after-tax charge of $29 million related to closing our Sparrows
Point plate mill. Net income for 1997 was $281 million, or $2.13 per common
share - basic, including an after-tax gain of $113 million related to the sale
of our equity interest in Iron Ore Company of Canada (IOC). Our net loss for
1996 was $309 million, or $3.15 per common share - basic, including after-tax
charges of $382 million in connection with our exiting six underperforming
businesses. See Note B, Estimated (Loss) Gain on Exiting Businesses, to the
Consolidated Financial Statements. Excluding the effects of these charges and
gain, net income for 1998 was $149 million ($.88 per common share - basic)
compared with $168 million ($1.12 per common share - basic) for 1997 and $73
million ($.28 per common share - basic) for 1996. Sales in 1998 were $4.48
billion compared with $4.63 billion in 1997 and $4.68 billion in 1996.

Lukens Acquisition

During 1998, we acquired Lukens Inc., strengthening our position as the leading
producer and supplier of carbon and alloy steel plate products. We acquired all
of the outstanding stock of Lukens for an aggregate purchase price of about $560
million on May 29, 1998. See Note C, Acquisition of Lukens Inc., to the
Consolidated Financial Statements.

  We have exited or intend to exit all of the former Lukens' stainless and
distribution businesses. During 1998, we completed the sale of certain stainless
assets to Allegheny Teledyne Incorporated (Allegheny) for $175 million. We also
entered into agreements to provide Allegheny with conversion services to produce
stainless steel slabs and coiled plate. We received $105 million in cash and a
non-interest bearing note for the remaining $70 million. The note will become
payable upon the completion of certain agreed upon improvements that will
enhance the performance of the facilities that will be used to provide
conversion services to Allegheny. We expect to complete the improvements and
receive payment of the $70 million note during the fourth quarter of 1999.
Bethlehem and Allegheny will share in the cost of these improvements, which is
expected to be about $25 million. In January 1999, we signed an agreement with
Ryerson Tull, Inc. for the sale of the stainless distribution business,
Washington Specialty Metals Corporation, for about $70 million. We expect to
complete this transaction in early first quarter 1999. At the same time, we
announced that we would permanently close the stainless sheet operations in
Massillon, Ohio and Washington, Pennsylvania. We expect the facilities to close
in the first quarter of 1999, and we will continue our efforts to sell these
assets.

  During the fourth quarter of 1998, we closed the Sparrows Point 160" plate
mill and increased output at existing underutilized plate facilities at Burns
Harbor, Coatesville and Conshohocken to take advantage of the merged facilities'
capabilities. We recorded a charge of $35 million ($29 million after-tax) during
1998 to write-off the net book value of equipment to be dismantled and to
recognize employee benefit related costs.

Operating Results

Excluding the charges and gain from exiting businesses, income from operations
was $225 million in 1998 compared with $239 million in 1997 and $137 million in
1996. Income from operations for 1998 declined from 1997 primarily due to lower
shipments and lower realized prices resulting from high levels of unfairly
traded steel imports. The negative impact of imports was partially offset by
increased shipments resulting from our acquisition of Lukens and by lower costs.
Costs improved principally from exiting underperforming businesses, reduced
pension expense and improved operating performance at Pennsylvania Steel
Technologies, Inc. (PST). Results improved in 1997 over 1996 primarily due to
lower costs from improved operations at Sparrows Point and PST, exiting
Bethlehem Structural Products and lower pension expense. The 1997 results were
also affected by higher employment and raw material costs at Burns Harbor.

  The effects of changes in average realized steel prices, shipments and product
mix on sales during the last two years were as follows:

<TABLE>
<CAPTION>
                    Increase (decrease) from prior year
                                1998               1997
-------------------------------------------------------
<S>                             <C>                <C>
Realized Prices                  (2)%                --%
Shipments                        (1)                 (1)
Product Mix                      --                   1
-------------------------------------------------------
                                 (3)%                --
=======================================================
</TABLE>

  Raw steel production was 10.2 million tons in 1998, 9.6 million tons in 1997,
and 9.4 million tons in 1996. The increase in 1998 was due to the acquisition of
Lukens, while the increase in 1997 was due to improved operations at Sparrows
Point.

  The Burns Harbor Division shipped 3.6 million tons of sheet and strip products
in 1998 compared with 3.9 million tons in both 1997 and 1996. Burns Harbor's
1998 operating results declined principally from lower realized prices and
decreased shipments. Shipments and prices for 1998 were reduced primarily
because of the unprecedented level of unfairly traded imports, and also because
of the 1998 work stoppages at certain General Motors' plants.

  The Sparrows Point Division shipped 2.6 million tons of sheet and tin mill
products in 1998

10
<PAGE>
 
compared with 2.8 million tons in 1997 and 2.7 million tons in 1996. Sparrows
Point's 1998 operating results declined principally from lower realized prices
and decreased shipments caused primarily by unfairly traded imports.

  Results improved at PST in 1998 primarily due to lower costs resulting from
improved operating performance and lower raw material prices. Shipments and
realized prices also increased at PST during 1998 and offset the effects of a
less favorable product mix.

  Bethlehem shipped 1.7 million tons of plate products in 1998, including
425,000 tons from the Coatesville and Conshohocken facilities acquired in the
Lukens acquisition, compared with 1.4 million tons in 1997 and 1996.

Percentage Of Bethlehem's Net Sales
By Major Product
<TABLE>
<CAPTION>
                                               1998       1997       1996
-------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>
Steel mill products:                                             
 Hot rolled sheets                             13.3%      14.9%      14.3%
 Cold rolled sheets                            16.8       17.2       16.2
 Coated sheets                                 28.6       31.5       32.3
 Tin mill products                              6.7        7.4        6.9
 Plates                                        22.3       15.2       15.3
 Rail products                                  4.4        4.3        3.5
 Structural shapes and                                           
 pilings                                         --        1.3        3.8
 Other steel mill products                      4.5        3.2        1.6
Other products and                                               
 services (including raw                                         
 materials)                                     3.4        5.0        6.1
-------------------------------------------------------------------------
                                              100.0%     100.0%     100.0%
=========================================================================
</TABLE> 

Percentage Of Steel Mill Product Shipments
By Principal Market
<TABLE> 
<CAPTION> 
(Based on tons shipped)                        1998       1997       1996
-------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>  
Service Centers, Processors
 and Converters
 (including semifinished)                      46.9%      46.9%      45.2%
Transportation
 (including automotive)                        23.0       24.9       26.0
Construction                                   12.1       11.0       12.6
Containers                                      5.2        5.8        5.2
Machinery                                       4.9        4.7        5.1
Other                                           7.9        6.7        5.9
-------------------------------------------------------------------------
                                              100.0%     100.0%     100.0%
=========================================================================
</TABLE>

Liquidity And Capital Structure

At December 31, 1998, total liquidity, comprising cash, cash equivalents and
funds available under our bank credit arrangement, totaled $479 million compared
with $612 million at December 31, 1997. At December 31, 1998, funds available
under our credit arrangement totaled $341 million.

  Cash provided from operations before pension activities in 1998 decreased to
$487 million from $551 million in 1997 due to changes in working capital,
principally inventory, and lower earnings. Cash provided from operations before
pension activities in 1997 increased to $551 million from $341 million in 1996
due to higher earnings and changes in working capital, principally inventory.
Cash from asset sales of $309 million in 1998 included $105 million from the
sale of certain stainless assets acquired in the Lukens acquisition and the sale
of the No.1 Coke Oven Battery at Burns Harbor for about $190 million. See Note
F, Commitments and Contingent Liabilities, to the Consolidated Financial
Statements.

  Principal uses of cash during 1998 included the Lukens acquisition, capital
expenditures, debt repayments and pension funding. We repaid $290 million of
debt including a $200 million short-term borrowing used to complete the Lukens
acquisition and $48 million of the debt assumed in the Lukens acquisition. We
contributed $150 million to our pension fund in 1998 compared with $425 million
in 1997 and $170 million in 1996. As a result of these contributions, our
pension liability decreased to $415 million at December 31, 1998 from $440
million at December 31, 1997, despite assuming a net obligation of $35 million
in our acquisition of Lukens. Over the past five years, our pension liability
has been reduced by about $1.2 billion, or about 75%, from $1.6 billion at
December 31, 1993.

  We have contributed amounts to our pension fund substantially in excess of
amounts required under current laws and regulations. Because of these
contributions and better than expected earnings performance on our pension fund
assets, we currently have a funding standard credit balance that would allow us
to defer pension funding for several years, although we presently have no plans
to do so.

  Major uses of cash for 1999 are expected to be capital expenditures of about
$450 million, pension funding, and debt payments of about $40 million. We expect
to maintain an adequate level of liquidity throughout 1999 with cash flow from
operations, reductions in working capital, available funds under our credit
arrangement and proceeds from the sale of assets, including the remaining
Lukens' stainless assets.

Derivative Financial Instruments
And Related Market Risk

Bethlehem is exposed to certain risks associated with the change in foreign
currency rates, interest rates and commodity prices. We seek to minimize the
potential adverse impact of those market risks through the use of appropriate
management techniques including derivative financial instruments. Although
Bethlehem occasionally purchases goods and services denominated in a foreign
currency and

11
<PAGE>
 
has investments in other countries, the amounts involved are not material. Also,
most export sales are denominated in U.S. dollars. Therefore, foreign currency
exposure is not typically a material risk to Bethlehem.

  We are exposed to interest rate risk arising from having certain variable rate
financing arrangements. Under our bank credit arrangement, we sold $142 million
of receivables to banks at a discount based on variable interest rates, as
described in Note E, Long-term Debt, to the Consolidated Financial Statements.
We have interest rate swaps maturing in 2000 and 2001 with notional amounts
totaling $62 million that effectively fix a portion of the interest rates on
these financings, leaving about $80 million exposed to changes in interest
rates. The fair value of these swaps at December 31, 1998 was a liability of
$4.6 million.

  We also have exposure to changes in interest rates because long-term interest
rates are used to determine our obligations for employee postretirement plans
for pensions and healthcare and affect the performance of our pension fund
assets.

  In our manufacturing process, we use certain metals to coat our products or as
additives in our steelmaking process. For a portion of our energy needs, we
consume natural gas. We use derivative financial instruments to manage the price
risk for a portion of our annual requirements for natural gas, zinc and other
metals. At December 31, 1998, we had outstanding futures contracts for natural
gas, zinc, aluminum, nickel and tin. The fair value of these contracts at
December 31, 1998 was a liability of $9.7 million. These contracts mature at
various times in 1999 and 2000 and coincide with expected purchases of the
commodities and effectively establish the price we will pay at the time we
entered into the futures contracts. To the extent we have not entered into
contracts, the price Bethlehem will pay will increase or decrease as the market
price for the commodities rises or falls. Changes in market prices for most of
these commodities are typically affected by the same factors affecting changes
in steel prices over time.

Common Stock Market And Dividend Information
<TABLE>
<CAPTION>
                      1998 Prices*     1997 Prices*
Period               High      Low     High     Low
---------------------------------------------------
<S>               <C>      <C>      <C>      <C>
First Quarter     $15.500  $ 8.063  $ 9.375  $7.625
Second Quarter     17.125   11.063   10.750   7.750
Third Quarter      13.438    7.000   12.938   9.813
Fourth Quarter     10.750    7.313   11.563   7.750
---------------------------------------------------
</TABLE>

* 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.

Exit Of Businesses

As previously explained under Lukens Acquisition, we recorded a $35 million ($29
million after-tax) charge in connection with closing the Sparrows Point 160"
plate mill during 1998.

  During 1997, we recorded a $135 million ($113 million after-tax) gain related
to the sale of our equity interest in IOC. We also sold our High Power Mountain
coal assets during 1997.

  In 1996, we recorded a $465 million ($382 million after-tax) charge to exit
six underperforming businesses: Bethlehem Structural, BethForge, CENTEC,
BethShip's Sparrows Point Yard, Bethlehem Coke and our Eagle Nest coal mine.
Subsequently, we sold or closed all of these businesses eliminating the
significant losses they were incurring. Future charges relating to any of these
former businesses are not expected to be material. Certain of these businesses
operated facilities on about 1,800 acres of contiguous property in Bethlehem,
Pennsylvania. Bethlehem is redeveloping the land where the facilities were
located. Future proceeds are expected to at least equal any future costs
incurred to maintain and develop the property.

Capital Expenditures

Capital expenditures (excluding the acquisition of Lukens Inc.) were $328
million in 1998 compared with $228 million in 1997 and $259 million in 1996.

  In October 1997, we announced a plan to build a new continuous 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, 1998, the estimated cost of completing all authorized capital
expenditures was about $640 million, compared with $750 million at December 31,
1997. Authorized capital expenditures at December 31, 1998 included the planned
1999 reline of our "L" Blast Furnace at Sparrows Point. During the reline, that
will take place mid-year, Sparrows Point will incur higher costs because of
lower raw steel production. We expect such authorized capital expenditures to be
com-pleted during the 1999-2001 period.

Employees And Employment Costs

At the end of 1998, we had about 17,000 employees (including stainless) compared
with about 15,600 employees at the end of 1997 and 17,500 employees at the end
of 1996. About three-quarters of our employees are covered by our labor
agreements with the United Steelworkers of America (USWA). The agreements with
the USWA, covering USWA represented employees at Burns Harbor,

12
<PAGE>
 
Sparrows Point and PST, expire on August 1, 1999. Bethlehem is prepared to
commence early negotiations with the USWA to reach a new mutually satisfactory
competitive long-term agreement.

  Under the terms of our 1993 labor agreement with the USWA, most represented
employees at Burns Harbor and Sparrows Point 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. Profit sharing is also paid to salaried employees
based on specific Corporate and Business Unit plans and performance.

  Under other provisions of the labor agreement, 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 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 18,000 shares of Series B Preference Stock in 1998 and
approximately 37,000 shares in 1997 to a trustee for the benefit of employees
for 1997 and 1996, respectively, and expect to issue about 1,500 shares in early
1999 for the 1998 plan year.

  We paid about $58 million in 1998 for income-related bonus, profit sharing and
shortfall amounts, and expect to pay about $36 million in early 1999.

Employment Cost Summary*
<TABLE>
<CAPTION>

(Dollars in millions)          1998    1997    1996
---------------------------------------------------
<S>                          <C>     <C>     <C>
Salaries and Wages           $  899  $  914  $  966
---------------------------------------------------
Employee Benefits:           
 Pension Plans:              
  Actives                        80      95     111
  Retirees                        5      60      81
 Medical and Insurance:      
  Actives                       122     135     148
  Retirees                      140     122     115
 Payroll Taxes                   74      74      85
 Workers' Compensation           27      21      28
 Savings Plan and Other          20      18      21
---------------------------------------------------
Total Benefit Costs             468     525     589
---------------------------------------------------
Total Employment             
 Costs                       $1,367  $1,439  $1,555
===================================================
</TABLE>

*Excluding Discontinued Stainless Operations.

Environmental Matters

We are subject to various federal, state and local environmental laws and
regulations concerning, among other things, air emissions, waste water
discharges and solid and hazardous waste disposal. During the five years ended
December 31, 1998, we spent approximately $136 million for environmental control
equipment. Expenditures for new environmental control equipment totaled
approximately $13 million in 1998, $15 million in 1997 and $29 million in 1996.
The costs incurred in 1998 to operate and maintain existing environmental
control equipment were approximately $114 million (excluding interest costs but
including depreciation charges of $14 million) compared with $110 million in
1997 and $115 million in 1996.

  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
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 $10
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 which are subject to the same environmental requirements.

13
<PAGE>
 
Consolidated Statements of Income

<TABLE> 
<CAPTION>  
                                                                               Year Ended December 31
(Dollars in millions, except per share data)                           1998        1997          1996
-----------------------------------------------------------------------------------------------------
<S>                                                                <C>         <C>           <C> 
Net Sales                                                          $4,477.8    $4,631.2      $4,679.0
-----------------------------------------------------------------------------------------------------
Costs and Expenses:                                            
 Cost of sales                                                      3,883.2     4,053.3       4,168.2
 Depreciation and amortization (Note A)                               246.5       231.0         268.7
 Selling, administration and general expense                          123.6       107.9         105.5
 Estimated loss (gain) on exiting businesses (Note B)                  35.0      (135.0)        465.0
-----------------------------------------------------------------------------------------------------
Total Costs and Expenses                                            4,288.3     4,257.2       5,007.4
-----------------------------------------------------------------------------------------------------

Income (Loss) from Operations                                         189.5       374.0        (328.4)

Financing Income (Expense):                                    
 Interest and other financing costs (Note A)                          (55.4)      (47.5)        (53.3)
 Interest income                                                       10.0         9.2           5.9
-----------------------------------------------------------------------------------------------------

Income (Loss) Before Income Taxes                                     144.1       335.7        (375.8)

Benefit (Provision) for Income Taxes (Note D)                         (24.0)      (55.0)         67.0
-----------------------------------------------------------------------------------------------------

Net Income (Loss)                                                     120.1       280.7        (308.8)

Dividends on Preferred and Preference Stock                            41.7        41.6          41.9
-----------------------------------------------------------------------------------------------------

Net Income (Loss) Applicable to Common Stock                       $   78.4    $  239.1      $ (350.7)
=====================================================================================================

Net Income (Loss) per Common Share (Note J):                   
  Basic                                                            $    .64    $   2.13      $  (3.15)
  Diluted                                                          $    .64    $   2.03      $  (3.15)
=====================================================================================================
</TABLE> 

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

14
<PAGE>
 
Consolidated Balance Sheets

<TABLE> 
<CAPTION>  
                                                                                           December 31
(Dollars in millions, except per share data)                                        1998          1997
------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C> 
Assets                                                                          
Current Assets:                                                                 
Cash and cash equivalents (Note A)                                              $  137.8      $  252.4
Receivables (Notes C and E)                                                        307.2         306.0
Inventories (Notes A and E)                                                     
  Raw materials and supplies                                                       319.9         324.5
  Finished and semifinished products                                               720.7         569.3
------------------------------------------------------------------------------------------------------
     Total Inventories                                                           1,040.6         893.8
Other current assets                                                                 9.2          11.8
------------------------------------------------------------------------------------------------------
Total Current Assets                                                             1,494.8       1,464.0
Investments and Miscellaneous Assets                                                98.0         100.9
Property, Plant and Equipment, less accumulated                                 
  depreciation of $4,119.4 and $4,095.5 (Note A)                                 2,655.7       2,357.7
Deferred Income Tax Asset--net (Note D)                                            920.0         880.0
Net Assets of Discontinued Stainless Operations (Note C)                           100.0            --
Goodwill, less accumulated amortization of $7.0 (Notes A and C)                    353.0            --
------------------------------------------------------------------------------------------------------
Total Assets                                                                    $5,621.5      $4,802.6
======================================================================================================

Liabilities and Stockholders' Equity                                            
Current Liabilities:                                                            
Accounts payable                                                                $  417.9      $  371.2
Accrued employment costs                                                           147.7         173.9
Postretirement benefits other than pensions (Note G)                               160.0         150.0
Accrued taxes (Note D)                                                              53.4          60.0
Debt (Note E)                                                                       44.4          41.8
Other current liabilities                                                          161.8         113.9
------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                          985.2         910.8
Pension Liability (Notes B and G)                                                  415.0         440.0
Postretirement Benefits Other Than Pensions (Notes B and G)                      1,630.0       1,445.0
Long-term Debt (Note E)                                                            627.7         451.6
Deferred Gain on Sales (Note F)                                                    136.0           4.1
Other Long-term Liabilities                                                        338.1         336.1
Stockholders' Equity (Notes H, I and J):                                        
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                                 2.2           2.3
Common Stock--at $1 per share par value;                                        
  Authorized 250,000,000                                                        
  Issued 132,227,787 and 115,047,810 shares                                        132.2         115.0
Common Stock--Held in treasury, 2,080,799 and 2,056,571 shares at cost             (60.3)        (60.0)
Additional Paid-in Capital                                                       1,991.6       1,854.0
Accumulated Deficit                                                               (587.8)       (707.9)
------------------------------------------------------------------------------------------------------
Total Stockholders' Equity                                                       1,489.5       1,215.0
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                                      $5,621.5      $4,802.6
======================================================================================================
</TABLE> 

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

15
<PAGE>
 
Consolidated Statements of Cash Flows 
 
<TABLE> 
<CAPTION> 
                                                                                         Year Ended December 31
(Dollars in millions, except per share data)                                     1998        1997          1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>         <C>           <C> 
Operating Activities:                                                       
Net Income (Loss)                                                            $  120.1    $  280.7      $ (308.8)
Adjustments for items not affecting cash from operating activities:         
  Depreciation and amortization (Note A)                                        246.5       231.0         268.7
  Estimated loss (gain) on exiting businesses (Note B)                           35.0      (135.0)        465.0
  Deferred income taxes (Note D)                                                 18.0        53.0         (67.0)
  Other--net                                                                     16.1        28.2           9.1
Working capital (excluding investing and financing activities):             
  Receivables - operating                                                        99.4        11.6           9.1
  Receivables - sold (Note E)                                                    64.0        (6.0)         54.0
  Inventories                                                                   (59.0)      115.6         (58.8)
  Accounts payable                                                              (13.1)      (24.5)         28.9
  Employment costs and other                                                    (40.5)       (3.7)        (59.4)
---------------------------------------------------------------------------------------------------------------
Cash Provided from Operations Before Pension Activities                         486.5       550.9         340.8
---------------------------------------------------------------------------------------------------------------
Pension Activities (Note G):                                                
Pension expense                                                                  85.0       155.0         192.0
Pension funding                                                                (150.0)     (425.0)       (170.0)
---------------------------------------------------------------------------------------------------------------
Cash Provided from Continuing Operating Activities                              421.5       280.9         362.8
---------------------------------------------------------------------------------------------------------------
Cash Provided from Operating Activities of                                  
  Discontinued Stainless Operations (Note C)                                     22.2          --            --
---------------------------------------------------------------------------------------------------------------
Investing Activities:                                                       
Capital expenditures                                                           (328.0)     (228.2)       (259.0)
Purchase of Lukens (Note C):                                                
  Paid to Lukens stockholders, net of cash acquired                            (327.8)         --            --
  Transaction and other related payments                                        (41.4)         --            --
Cash proceeds from asset sales and other                                        308.8       191.8           7.7
---------------------------------------------------------------------------------------------------------------
Cash Used for Investing Activities                                             (388.4)      (36.4)       (251.3)
---------------------------------------------------------------------------------------------------------------
Financing Activities:                                                       
Borrowings (Note E)                                                             201.6         1.9           3.1
Debt and capital lease payments (Note E)                                       (290.4)      (53.4)        (91.8)
Cash dividends paid (Note J)                                                    (40.4)      (40.4)        (40.4)
Other payments                                                                  (40.7)      (36.8)        (25.8)
---------------------------------------------------------------------------------------------------------------
Cash Used for Financing Activities                                             (169.9)     (128.7)       (154.9)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                           (114.6)      115.8         (43.4)
Cash and Cash Equivalents - Beginning of Period                                 252.4       136.6         180.0
---------------------------------------------------------------------------------------------------------------
                          - End of Period                                    $  137.8    $  252.4      $  136.6
===============================================================================================================
Supplemental Information:                                                   
Interest paid, net of amount capitalized                                     $   50.2    $   52.6      $   52.8
Income taxes paid (received) - net (Note D)                                  $  (14.2)   $    7.6      $    3.7
---------------------------------------------------------------------------------------------------------------
</TABLE> 

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

16
<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 in each of the last three years. Our
   property, plant and equipment by major classification is:

   <TABLE>                                                                   
   <CAPTION>                                                                 
                                         December 31                         
        (Dollars in millions)       1998        1997                         
   -------------------------------------------------                         
   <S>                         <C>         <C>                               
   Land (net of depletion)     $    33.2   $    25.4                         
   Buildings                       649.2       637.4                         
   Machinery and equipment       5,720.7     5,553.5                         
   Accumulated depreciation     (4,119.4)   (4,095.5)                        
   -------------------------------------------------                         
                                 2,283.7     2,120.8                         
   Construction-in-progress        372.0       236.9                         
   -------------------------------------------------                         
   Total                       $ 2,655.7   $ 2,357.7                         
   =================================================                         
   </TABLE>                                                                  
                                                                             
   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 producing assets, other than blast furnace linings, 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 $1 million less than straight-line in
   1998 and $5 million and $13 million more than straight-line in 1997 and 1996.
   Through December 31, 1998, $9 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.

   Amortization - Goodwill, resulting primarily from the acquisition of Lukens,
   is being amortized over a 30-year life using the straight-line method.
   Amortization was about $8 million in 1998. See Note C, Acquisition of Lukens
   Inc.

   Asset Impairment - We periodically evaluate the carrying value of property,
   plant and equipment and goodwill when events and circumstances warrant such a
   review. Property, plant and equipment is considered impaired when the
   anticipated undiscounted future cash flows from a logical grouping of assets
   is less than its carrying value. In that event, we recognize a loss equal to
   the amount by which the carrying value exceeds the fair market value of
   assets (less estimated costs to dispose, for assets to be disposed of). See
   Note B, Estimated (Loss) Gain on Exiting Businesses.    

   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 financings. 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.

17
<PAGE>
 
      In June 1998, the Financial Accounting Standards Board issued Statement
    No. 133, Accounting for Derivative Instruments and Hedging Activities. We
    must adopt the statement by January 1, 2000. Adoption will require us to
    recognize all derivative instruments as either assets or liabilities on the
    balance sheet and measure those instruments at fair value. At December 31,
    1998, the fair value of all derivative instruments was a liability of $14.3
    million. Gains or losses on these contracts, to the extent they have been
    effective as hedges, would continue to be recognized as they are now. Gains
    or losses on interest rate swaps settled or terminated would no longer be
    deferred but recognized in income immediately. Adoption of Statement No. 133
    is not expected to have a material impact on our operating results or
    financial position.    

    Environmental Expenditures - Environmental expenditures that increase the
    life or efficiency of property, plant and equipment, or that will reduce or
    prevent future environmental contamination are capitalized. Expenditures
    that relate to existing conditions caused by past operations and that have
    no significant future economic benefit are expensed. Environmental expenses
    are accrued at the time the expenditure becomes probable and the cost can be
    reasonably estimated. We do not discount any recorded obligations for future
    remediation expenditures to their present value nor do we record recoveries
    of environmental remediation costs from insurance carriers and other third
    parties, if any, as assets until their receipt is deemed probable.    

    Revenue Recognition - We recognize substantially all revenues when products
    are shipped to customers and risks of ownership change.    

    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 D, Taxes; Note F, Commitments and
    Contingent Liabilities; and Note G, Pension and Other Postretirement
    Benefits. In the future, actual amounts received or paid could differ from
    those estimates.    

    Segment Information - In prior years, we reported the results of operations
    and other information for two segments, Basic Steel and Steel Related, in
    accordance with FASB Statement No. 14, Financial Reporting for Segments of a
    Business Enterprise. The Steel Related segment was composed of BethForge,
    CENTEC, and BethShip, all of which were sold in 1997. The FASB issued
    Statement No. 131, Disclosures about Segments of an Enterprise and Related
    Information, which became effective in 1998 and replaces disclosures
    previously required by Statement No. 14. Under this new standard, all of our
    remaining businesses can be aggregated into a single segment.

B.  Estimated (Loss) Gain
    On Exiting Businesses

    In 1998, we recorded a $35 million ($29 million after-tax, or $.24 per
    common share - basic) charge in connection with closing the Sparrows Point
    160" plate mill. This loss included $25 million for the net book value of
    the equipment to be dismantled and $10 million for employee benefit related
    costs ($5 million for pensions, $2 million for postretirement benefits other
    than pensions, and $3 million for severance and other employee benefits). We
    expect to reduce our workforce by about 150 employees as a result of this
    decision. In 1997, we sold our 37.57 percent interest in the Iron Ore
    Company of Canada for about $145 million. This sale resulted in a gain of
    $135 million ($113 million after-tax, or $1.01 per common share - basic).
    During 1996, we announced a plan to improve financial performance and
    stockholder value by exiting our Bethlehem Structural, BethForge, CENTEC,
    and BethShip businesses. These businesses were subsequently either sold or
    closed in 1997. 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. Accordingly, we recorded losses in 1996 totaling $465 million
    ($382 million after-tax or $3.43 per common share - basic). These losses
    included $250 million for the related property and equipment, $180 million
    for employee benefit related costs ($120 million for pensions, $30 million
    for postretirement benefits other than pensions, and $30 million for
    severance and other employee benefits) and $35 million for future
    contractual and other costs.
  
18
<PAGE>
 
         In December 1997, we announced a decision to cease operations at our   
    Bethlehem Coke Division and it was closed during the first quarter of 1998. 
    Because of an arbitration decision, we could offer employment to certain    
    affected potential early retirees at other Bethlehem locations. Charges     
    recognized in 1996 were therefore sufficient to cover employment and other  
    related charges related to the closing of Bethlehem Coke. Accordingly, no   
    additional charges were recorded. 

          These businesses had trade sales of about $205 million in 1997 and
    about $340 million in 1996 and operating losses of about $60 million in 1997
    and about $130 million in 1996. This is not necessarily indicative of the
    impact on consolidated results because Bethlehem Structural consumed steel
    produced by Bethlehem's Pennsylvania Steel Technologies, Inc. and Bethlehem
    Coke supplied a portion of the coke consumed by Bethlehem's Sparrows Point
    Division. We reduced our workforce by about 3,000 employees as a result of
    exiting these businesses.

          The amounts charged to the liability for these closed or sold
    businesses, other than employment related costs, were about $27 million in
    1998 and $8 million in 1997. Future amounts to be charged to this liability
    are not expected to be material.

C.  Acquisition Of Lukens Inc.
 
    On May 29, 1998, Bethlehem acquired all of the outstanding capital stock of
    Lukens Inc. The aggregate purchase price of $560.6 million comprised cash of
    $327.8 million, the issuance of 15.1 million shares of Bethlehem Common
    Stock valued at $184.8 million, and transaction related costs of $48.0
    million. The acquisition was accounted for as a purchase. Accordingly,
    Lukens' results are included in the Consolidated Financial Statements from
    the date of acquisition.

          The fair value (in millions) of the assets acquired and liabilities
    assumed is as follows:

    <TABLE>                                         
    <CAPTION>                                       
    <S>                                 <C>         
    Current assets                      $ 184.7     
    Property, plant and equipment         277.3     
    Net assets of discontinued                      
     stainless operations                 310.0     
    Deferred tax asset, other              70.5     
    Goodwill                              360.0     
    Current liabilities                  (113.5)    
    Pension and other postretirement                
     benefit liabilities                 (220.0)    
    Debt                                 (268.5)    
    Other long-term liabilities           (39.9)    
    -------------------------------------------     
    Total                               $ 560.6     
    ===========================================     
    </TABLE>                                        
                                                     
          We expect to finalize all purchase accountimillion in 1997. Future
    amounts to be charged to this liability are not expectedng adjustments,
    e.g., ultimate net proceeds on disposal of the stainless operatto be
    material. ions, within one year of the acquisition. Any difference between
    the amounts reflected above and the final amounts could result in an
    adjustment to goodwill.

          Bethlehem has sold or intends to sell the former Luken stainless and
    distribution businesses. Accordingly, we are accounting for the stainless
    and distribution businesses as discontinued operations. Income or losses
    from these operations are not included in our operating results. Since the
    date of acquisition, these operations have incurred operating losses of
    about $26 million. The net assets of the remaining operations are shown
    separately on the balance sheet and consist primarily of property, plant and
    equipment and working capital.

          During the fourth quarter of 1998, we completed the sale of certain
    stainless assets to Allegheny Teledyne Inc. Bethlehem received $105 million
    in cash and a non-interest bearing note for $70 million. Upon completion of
    the sale, a 20-year agreement to provide Allegheny with conversion services
    to produce stainless steel and coiled plate became effective. The note will
    become payable upon the completion of certain agreed upon improvements to
    the facilities used to provide conversion services to Allegheny. Bethlehem
    and Allegheny will share in the cost of these improvements that are expected
    to cost about $25 million and be completed in the fourth quarter of 1999.

          In January 1999, we signed a purchase and sale agreement with Ryerson
    Tull, Inc. to sell the stainless distribution business, Washington Specialty
    Metals Corporation, for about $70 million. We expect to complete this
    transaction in early 1999. We also announced that we would permanently close
    the stainless sheet and strip operations in Massillon, Ohio and Washington,
    Pennsylvania. We will continue with our efforts to sell these assets.

          The unaudited pro forma combined historical results (excluding
    stainless and distribution businesses) as if Lukens had been acquired at the
    beginning of 1997 are estimated to be:

    <TABLE>                                                           
    <CAPTION>                                                         
                                                      December 31     
    (Dollars in millions, except per share)      1998        1997     
    -------------------------------------------------------------     
    <S>                                      <C>         <C>          
    Net Sales                                $4,717.5    $5,147.7     
    Income from Operations                      200.1       404.3     
    Net Income                                  121.4       286.2     
    Net Income per Share:                                             
     Basic                                    $    .62    $   1.92    
     Diluted                                       .62        1.86    
    --------------------------------------------------------------    
    </TABLE>                                                           

19
<PAGE>
 
D. Taxes

   <TABLE>                                                                    
   <CAPTION>                                                                  
   Our benefit (provision) for income taxes consisted of:                     
   <S>                                         <C>     <C>     <C>            
                                                                              
   (Dollars in millions)                        1998    1997    1996          
   -----------------------------------------------------------------          
   Federal--deferred                          $  (18)  $ (53)  $  67          
   Federal, state and                                                         
    foreign--current                              (6)     (2)     --          
   -----------------------------------------------------------------          
   Total benefit (provision)                  $  (24)  $ (55)  $  67          
   =================================================================          
   </TABLE>                                                                   
                                                                              
     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:   

   <TABLE>                                                          
   <CAPTION>                                                           
   (Dollars in millions)                          1998    1997    1996 
   ------------------------------------------------------------------- 
   Pre-tax income (loss):                                              
   <S>                                           <C>     <C>    <C>    
   United States                                 $ 142   $ 333  $ (392)
   Foreign                                           2       3      16 
   ------------------------------------------------------------------- 
   Total                                         $ 144   $ 336  $ (376)
   =================================================================== 
   Computed amounts                              $ (50)  $(118) $  132 
   Change in valuation allowance                    25      55     (67)
   Percentage depletion                              6       5       5 
   Dividend received deduction                      --       3       2 
   Other differences -- net                         (5)     --      (5)
   ----------------------------------------------------------------------   
   Total benefit (provision)                     $ (24)  $ (55)  $  67      
   ======================================================================   
   </TABLE>                                                                 

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

   <TABLE>                                                                     
   <CAPTION>                                                 December 31       
   (Dollars in millions)                             1998           1997       
   ---------------------------------------------------------------------       
   <S>                                             <C>            <C>          
   Temporary differences:                                                      
   Employee benefits                               $  910         $  765       
   Depreciable assets                                (350)          (300)      
   Other                                              210            140       
   ---------------------------------------------------------------------       
   Total                                              770            605       
   Operating loss carryforward                        470            625       
   ---------------------------------------------------------------------       
   Deferred income tax asset                        1,240          1,230       
   Valuation allowance                               (320)          (350)      
   ---------------------------------------------------------------------       
   Deferred income tax                                                         
    asset--net                                     $  920         $  880       
   =====================================================================       
   </TABLE>                                                                     

   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,
   1998, we had regular tax net operating loss carryforwards of $1.3 billion and
   alternative minimum tax loss carryforwards of $350 million. Regular federal
   tax net operating loss carryforwards of $70 million expire in 1999, with the
   balance expiring in varying amounts from 2000 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. Excluding
   estimated (losses) gains on exiting businesses, Bethlehem has reported net
   income for five consecutive years, and has undergone substantial
   restructuring and made strategic capital expenditures during the last several
   years. Also, we have tax planning opportunities that could affect 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 20-year carryforward 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.

20
<PAGE>
 
     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:

   <TABLE>                                                   
   <CAPTION>                                                 
   (Dollars in millions)          1998    1997     1996      
   ----------------------------------------------------      
   <S>                           <C>     <C>      <C>        
   Employment taxes              $ 73.8  $ 74.0   $ 85.1     
   Property taxes                  34.4    26.5     25.1     
   State taxes and other           12.2    11.9     13.0     
   -----------------------------------------------------     
   Total other taxes             $120.4  $112.4   $123.2     
   =====================================================     
   </TABLE>                                                   

E. Long-Term Debt

   <TABLE>                                                               
   <CAPTION>                                                             
                                             December 31                 
   (Dollars in millions)                   1998     1997                 
   -----------------------------------------------------                 
   <S>                                   <C>       <C>                   
   5.69%--5.99% Galvanizing                                              
   lines financing                   $ 74.9      $ 112.3                 
                                                                         
   Notes and loans:                                                      
   10-3/8%, Due 2003                   105.0       105.0                 
   7-5/8%, Due 2004                    150.0          --                 
   6-1/2%, Due 2006                     75.0          --                 
   2% - 9.64%, Due 1999-2009             7.5        10.5                 
                                                                         
   Debentures:                                                           
   6-7/8%, Due 1999                      4.0         5.4                 
   8-3/8%, Due 2001                     41.6        41.6                 
   8.45%, Due 2005                      90.8        90.8                 
                                                                         
   Pollution control and                                                 
    industrial revenue bonds:                                            
   7-1/2% - 8%, Due 2015-2024          128.9       128.9                 
   Unamortized debt discount            (5.6)       (1.1)                
   -----------------------------------------------------                 
   Total                               672.1       493.4                 
   Amounts due within one year         (44.4)      (41.8)                
   -----------------------------------------------------                 
   Long-term                         $ 627.7     $ 451.6                 
   =====================================================                 
   </TABLE>                                                               

     Maturities and sinking fund requirements for the next five years are $44
   million in 1999, $48 million in 2000, $50 million in 2001, $11 million in
   2002 and $116 million in 2003.

     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% 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 J, Stockholders' Equity.

     We have a credit arrangement, through June 2003, with a group of 13
   domestic and international banks for $600 million, $150 million of which can
   be used for letters of credit. The arrangement consists of a $340 million
   receivables sale/purchase agreement through a wholly-owned special purpose
   subsidiary and a $260 million secured credit inventory agreement.

     As of December 31, 1998, we had sold to the banks an ownership interest in
  trade receivables of $210 million in exchange for $142 million in cash, $32
  million in letters of credit and required reserves of $36 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 .15% per annum fee on the daily available
  commitment.

     Receivables from banks are for cash and required reserves that will be
   returned to us upon expiration of the letters of credit and liquidation of
   receivable ownership. Supplemental information on the receivable balances at
   December 31, 1998 and 1997 follows:

   <TABLE>                                                        
   <CAPTION>                                                      
                                               December 31        
   (Dollars in millions)             1998             1997        
   -------------------------------------------------------        
   <S>                            <C>          <C>            
   Trade and other                $ 258.9          $ 227.6        
   Banks                             68.3             97.2        
   Allowances                       (20.0)           (18.8)       
   -------------------------------------------------------        
   Total receivables-net          $ 307.2          $ 306.0         
   =======================================================        
   </TABLE>                                                        

     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, 1998. We pay a .375% per annum fee on the daily
   available commitment.
    
21
<PAGE>
 
     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, 1998, our adjusted
   tangible net worth as defined by these agreements exceeded the more
   restrictive of these requirements by about $500 million.
     At December 31, 1998, outstanding interest rate swap agreements with
   notional amounts totaling $62 million effectively fix a portion of 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, 1998 and 1997, the estimated fair value of our debt was not
   materially different from the recorded amounts.


F. Commitments And Contingent Liabilities

   In July 1998, we sold the No. 1 Coke Oven Battery at Burns Harbor to a third
   party. We will continue to operate the facility for the new owner and also
   entered into a nine-year agreement to purchase about 800,000 tons of coke per
   year through year 2008. During 1998, we purchased 370,000 tons of coke at a
   cost of $44 million. The gain on the sale of about $160 million is being
   deferred and recognized over the life of the operating and purchase
   agreements.
     In April 1997, we sold our interest in Iron Ore Company of Canada (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 1998, we purchased 1.9 million net tons from IOC at a cost
   of $62 million.
     At December 31, 1998, we had outstanding approximately $240 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 compared with
   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. We believe that any ultimate liability arising
   from these actions will not have a material adverse effect on our
   consolidated financial position.
     Future minimum payments under noncancellable operating leases at December
   31, 1998 were $17 million in 1999, $13 million in 2000, $8 million in 2001,
   $6 million in 2002, $6 million in 2003 and $11 million thereafter. Total
   rental expense under operating leases was $41 million, $40 million and $40
   million in 1998, 1997 and 1996.


G. Pension And Other Postretirement 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. 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 the plans' actuarial assumptions used and funded
   status at our valuation date, together with the amounts recognized in our
   consolidated balance sheets and income statements:
   
22
<PAGE>
 
<TABLE>
<CAPTION>


                                                                             Pension Benefits               Other Benefits
(Dollars in millions)                                                       1998         1997              1998       1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>               <C>        <C>
Change in benefit obligation:
Projected benefit obligation -- beginning of year                         $ 5,495     $ 5,325           $ 2,055   $ 2,000
Current service cost                                                           55          48                 9         7
Interest cost                                                                 407         395               153       148
Actuarial adjustments                                                          25          85                72         8
Discount rate change                                                          354         165               119        70
Lukens acquisition                                                            460          --               195        --
Other                                                                           4          --                 2        --
Benefits/administration fees paid                                            (545)       (523)             (175)     (178)
----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation --  November 30                                6,255       5,495             2,430     2,055
----------------------------------------------------------------------------------------------------------------------------

Change in plan assets:
Fair value of plan assets -- beginning of year                              4,930       4,215               120       130
Actual return on plan assets                                                  959         833                 9        10
Lukens acquisition                                                            425          --                10        --
Employer contribution                                                         153         429                --        --
Benefits/administration fees paid                                            (552)       (547)              (19)      (20)
----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets -- November 30                                    5,915       4,930               120       120
----------------------------------------------------------------------------------------------------------------------------

Unfunded projected benefit obligation                                         340         565             2,310     1,935
Unrecognized:
 Net gain (loss)                                                              315         176              (520)     (340)
 Initial net obligation                                                      (105)       (139)               --        --
 Prior service from plan amendments                                          (142)       (172)               --        --
December accruals/contributions -- net                                          7          10                --        --
---------------------------------------------------------------------------------------------------------------------------
Total recognized obligation at December 31                                    415         440             1,790     1,595
Current                                                                        --          --              (160)     (150)
----------------------------------------------------------------------------------------------------------------------------
Long-term                                                                 $   415     $   440           $ 1,630   $ 1,445
============================================================================================================================

Unfunded pension obligation at November 30:
Accumulated benefit obligation                                            $ 5,970     $ 5,185
Fair value of plan assets                                                   5,915       4,930
---------------------------------------------------------------------------------------------
Unfunded pension obligation                                               $    55     $   255
=============================================================================================

Discount rate                                                               6.750%      7.375%            6.750%    7.375%
</TABLE>


23

<PAGE>
 
   <TABLE>       
   <CAPTION>     
                 
                                                                Pension Benefits               Other Benefits                
   (Dollars in millions)                                1998      1997      1996       1998     1997     1996                
   ----------------------------------------------------------------------------------------------------------                
   <S>                                                <C>       <C>        <C>       <C>      <C>      <C>                   
   Components of net expense:                                                                                                
   Current service cost                               $   55    $   48     $  59     $    9   $    7   $   10                
   Interest cost                                         407       395       372        153      148      140                
   Expected return on plan assets                       (447)     (375)     (329)        (9)     (11)     (12)               
   Amortizations:                                                                                                            
     Initial net obligation                               34        34        36         --       --       --                
     Plan amendments                                      29        29        32         --       --       --                
     Unrecognized loss                                    --        --        --         12        6        8                
   Administration fees, PBGC premiums, other               7        24        22         --       --       --                
   ----------------------------------------------------------------------------------------------------------                
   Net expense                                        $   85    $  155     $ 192     $  165   $  150   $  146                
   ==========================================================================================================                
   Assumptions:                                                                                                              
   Expected return on plan assets                       9.00%     9.00%     8.75%     7.375%    9.00%    8.75%               
   Discount rate                                       7.375%     7.75%     7.25%     7.375%    7.75%    7.25%               
   Rate of compensation increase                        3.10%     3.10%     3.10%      3.10%    3.10%    3.10%               
                                                                                                                             
   Trend rate                                                                                                                
   -- beginning next year                                n/a       n/a       n/a       5.00%    6.00%    7.00%               
   -- ending year 2000                                   n/a       n/a       n/a       4.60%    4.60%    4.60%               
   </TABLE>    



   A one percentage point change in assumed health care cost trend rates would
   have an effect of $15 million on total service and interest cost components
   and a $190 million effect on the accumulated postretirement benefit
   obligation.

H. Stockholder Rights Agreement

   In July 1998, we replaced our 1988 Stockholder Rights Agreement with a new
   agreement under which holders of Common Stock have rights to purchase a
   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 $60 per unit. The rights will become
   exercisable if a person or group acquires 15% or more of Bethlehem 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
   acquirer worth twice the right's exercise price. Bethlehem may redeem the new
   rights under certain circumstances at one cent per right. If the rights are
   not redeemed or extended, they will expire in October 2008.

I. Stock Options

   At December 31, 1998, we had options outstanding under Plans approved by our
   stockholders in 1988, 1994 and 1998. New options can be granted only under
   the 1998 Plan, which reserved 5,000,000 shares of Common Stock for such use.
   At December 31, 1998, options on 3,837,250 shares of Common Stock were
   available for granting. Under the Bethlehem plans, the option price is the
   fair market value of our Common Stock on the date the option is granted.
   Options issued under the 1998 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 1998, 1997 and 1996 were not material.

        At the time of our acquisition of Lukens, all outstanding and
   unexercised stock options of Lukens converted into options to purchase
   Bethlehem Common Stock and immediately vested.

24
<PAGE>
 
Changes in options outstanding during 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
                                                                       Weighted
                                                          Number of     Average
                                                            Options       Price
-------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Balance December 31, 1995                                 3,017,075    $     18
 Granted                                                    620,600          14
 Terminated or canceled                                    (144,025)         19
 Surrendered or exercised                                    (2,000)          8
-------------------------------------------------------------------
Balance December 31, 1996                                 3,491,650          17
 Granted                                                    656,200           8
 Terminated or canceled                                    (377,100)         17
-------------------------------------------------------------------
Balance December 31, 1997                                 3,770,750          15
 Granted                                                    736,250          15
 Assumed in Lukens acquisition                            3,834,539           9
 Terminated or canceled                                    (240,576)         20
 Surrendered or exercised                                (2,880,665)          9
-------------------------------------------------------------------
Balance December 31, 1998                                 5,220,298          14
===============================================================================
</TABLE>


Options exercisable at the end of 1998, 1997 and 1996 were 3,379,823;
2,083,250; and 1,976,300.


<TABLE>
<CAPTION>

Information on our stock options at December 31, 1998 follows:

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>
$  6.41 --  8.61           927,579        $  8        8 Years        440,904        $  7
   9.23 -- 11.12           484,390          10        6 Years        484,390          10
  12.38 -- 14.53         1,678,247          14        6 Years      1,060,197          14
  15.25 -- 16.47           797,622          15        9 Years         61,872          16
 17.625 -- 21.75         1,332,460          20        6 Years      1,332,460          20
                         ---------                                 ---------
Total                    5,220,298          14        6 Years      3,379,823          15
========================================================================================
</TABLE>

25

<PAGE>
 
<TABLE>
<CAPTI0N>

J. Stockholders' Equity
                                       Preferred Stock   Preference Stock   Common Stock       Common Stock   Additional 
   (Shares in thousands and dollars   $1.00 Par Value    $1.00 Par Value   $1.00 Par Value   Held in Treasury  Paid-In   Accumulated
     in millions, except per share data) Shares   Amount   Shares    Amount  Shares    Amount  Shares    Amount  Capital    Deficit
   ---------------------------------------------------------------------------------------------------------------------------------
   <S>                                <C>       <C>       <C>       <C>     <C>        <C>      <C>      <C>    <C>      <C>        
   Balance December 31, 1995          11,623    $11.6     2,588     $ 2.6   112,700  $112.7   1,992    $59.4  $1,850.6  $(679.8)    
   Net loss for year                                                                                                     (308.8)    
   Minimum pension liability                                                                                                        
    adjustment                                                                                                    67.0              
   Dividends on Preferred Stock                                                                                  (40.4)             
   Preference Stock:                                                                                                                
    Stock dividend                                          129       0.1                                         (0.1)             
    Issued                                                   62       0.1                                          0.8              
    Converted                                              (261)     (0.3)      261     0.3                                         
   Common Stock:                                                                                                                    
    Acquired                                                                                     26      0.3                        
    Issued                                                                      890     0.9                        8.4              
   ---------------------------------------------------------------------------------------------------------------------------------
   Balance December 31, 1996          11,623     11.6     2,518       2.5   113,851   113.9   2,018     59.7   1,886.3   (988.6)    
   Net income for year                                                                                                    280.7     
   Dividends on Preferred Stock                                                                                  (40.4)             
   Preference Stock:                                                                                                                
    Stock dividend                                          124       0.1                                         (0.1)             
    Issued                                                   35                                                    0.3              
    Converted                                              (331)     (0.3)      331     0.3                                         
   Common Stock:                                                                                                                    
    Acquired                                                                                     39      0.3                        
    Issued                                                                      866     0.8                        7.9              
   ---------------------------------------------------------------------------------------------------------------------------------
   Balance December 31, 1997          11,623     11.6     2,346      2.3    115,048   115.0   2,057     60.0   1,854.0    (707.9)   
   Net income for year                                                                                                     120.1    
   Dividends on Preferred Stock                                                                                  (40.4)             
   Preference Stock:                                                                                                                
    Stock dividend                                          116      0.1                                          (0.1)             
    Issued                                                   18      0.1                                           0.1              
    Converted                                              (305)    (0.3)       305     0.3                                         
   Common Stock:                                                                                                                    
    Acquired                                                                                     24      0.3                        
    Issued                                                                   16,875    16.9                      178.0              
   ---------------------------------------------------------------------------------------------------------------------------------
   Balance December 31, 1998          11,623    $11.6     2,175    $ 2.2    132,228  $132.2   2,081    $60.3  $1,991.6   $(587.8)   
   ---------------------------------------------------------------------------------------------------------------------------------
   </TABLE>  
             
   With the adoption of FASB Statement No. 130, Reporting Comprehensive Income,
   we must report total non-owner changes in equity. As shown above, it was an
   increase of $120.1 million in 1998, an increase of $280.7 million in 1997,
   and a decrease of $241.8 million (loss of $308.8 million and minimum pension
   adjustment of $67.0 million) in 1996.
26
<PAGE>
 
 Preferred and Preference Stock issued and outstanding:
<TABLE>
<CAPTION>
                                              December 31
(Shares in thousands)                         1998   1997
---------------------------------------------------------
<S>                                          <C>    <C>
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                1,514  1,655
Series "B" 5% Cumulative
 Convertible Preference Stock                  661    691
=========================================================
</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.

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

<TABLE>
<CAPTION>
(Shares in thousands and dollars in millions, except per share data)        1998       1997       1996
------------------------------------------------------------------------------------------------------
<S>                                                                     <C>        <C>        <C>
Basic Earnings Per Share
Net income (loss)                                                       $  120.1   $  280.7   $ (308.8)
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                                             (1.3)      (1.2)      (1.5)
------------------------------------------------------------------------------------------------------
     Total preferred and preference dividends                              (41.7)     (41.6)     (41.9)
------------------------------------------------------------------------------------------------------
Net income (loss) applicable to Common Stock                            $   78.4   $  239.1   $ (350.7)
------------------------------------------------------------------------------------------------------
Average shares of Common Stock outstanding                               122,585    112,439    111,286
------------------------------------------------------------------------------------------------------
Basic Earnings Per Share                                                $    .64   $   2.13   $  (3.15)
======================================================================================================
</TABLE>

27
<PAGE>
 
   <TABLE>    
   <CAPTION>  
   (Shares in thousands and dollars in millions, except per share data)        1998       1997       1996           
   ------------------------------------------------------------------------------------------------------           
   <S>                                                                     <C>        <C>        <C>                
   Diluted Earnings Per Share                                                                                       
   Net income (loss)                                                       $  120.1   $  280.7   $ (308.8)          
   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                            $   79.7   $  258.2   $ (350.7)          
   ======================================================================================================           
   Average shares of Common Stock and equivalents                                                                   
   and other potentially dilutive securities outstanding:                                                           
     Common Stock                                                           122,585    112,439    111,286           
     Stock options                                                              429         --          2           
     $2.50 Preferred Stock                                                        *          *          *           
     $5.00 Preferred Stock                                                        *          *          *           
     $3.50 Preferred Stock                                                        *     12,255          *           
     5% Preference Stock                                                      2,175      2,346          *           
   ------------------------------------------------------------------------------------------------------           
   Total                                                                    125,189    127,040    111,288           
   ======================================================================================================           
   Diluted Earnings Per Share                                              $    .64   $   2.03   $  (3.15)          
   ------------------------------------------------------------------------------------------------------           
   </TABLE>    
               
   * Antidilutive           

     Under the covenants of our 10-3/8% 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, 1998 under this covenant was about $500 million.

K. Quarterly Financial Data (Unaudited)

   <TABLE>       
   <CAPTION>     
   (Dollars in millions,   
   except per share data)                  1998                                     1997                                
   -----------------------------------------------------------------------------------------------------                
                               1Q        2Q        3Q        4Q        1Q         2Q        3Q        4Q                
   -----------------------------------------------------------------------------------------------------                
   <S>                   <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>                     
   Net sales             $1,132.5  $1,189.7  $1,143.1  $1,012.5   $1,192.5  $1,206.9  $1,113.4  $1,118.4                
   Cost of sales            957.0   1,008.8     988.4     929.0    1,052.5   1,053.4     971.8     975.6                
   Net income (loss)         68.6      37.6      37.1     (23.2)      38.4     160.0      40.6      41.7                
   Net income (loss)                                                                                                    
    per Common Share                                                                                                    
     -- basic            $    .51  $    .23  $    .21  $   (.26)  $    .25  $   1.33  $    .27  $    .28                
     -- diluted          $    .49  $    .23  $    .21  $   (.26)  $    .25  $   1.19  $    .26  $    .27                
   -----------------------------------------------------------------------------------------------------                
   </TABLE>    

28
<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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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/ PricewaterhouseCoopers LLP


1177 Avenue of the Americas
New York, NY 10036
January 27, 1999

29
<PAGE>
 
Five-Year Financial and Operating Summaries 

<TABLE>
<CAPTION>  
(Dollars in millions, except per share data)           1998       1997       1996        1995        1994
---------------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>        <C>         <C>
Earnings Statistics
Net sales                                          $4,477.8   $4,631.2   $4,679.0   $ 4,867.5   $ 4,819.4
---------------------------------------------------------------------------------------------------------
 
Costs and Expenses:
 Employment costs                                   1,367.0    1,439.0    1,555.0     1,683.5     1,633.0
 Materials and services                             2,593.2    2,683.8    2,680.6     2,592.7     2,754.8
 Depreciation and amortization                        246.5      231.0      268.7       284.0       261.1
 Taxes (other than employment and
   income taxes)                                       46.6       38.4       38.1        38.4        36.9
 Estimated loss (gain) on exiting
   businesses                                          35.0     (135.0)     465.0          --          --
---------------------------------------------------------------------------------------------------------
Total Costs and Expenses                            4,288.3    4,257.2    5,007.4     4,598.6     4,685.8
---------------------------------------------------------------------------------------------------------
Income (loss) from operations                         189.5      374.0     (328.4)      268.9       133.6
Financing income (expense):
 Interest and other financing costs                   (55.4)     (47.5)     (53.3)      (60.0)      (46.2)
 Interest income                                       10.0        9.2        5.9         7.7         7.1
Benefit (provision) for income taxes                  (24.0)     (55.0)      67.0       (37.0)      (14.0)
---------------------------------------------------------------------------------------------------------
Net income (loss)                                     120.1      280.7     (308.8)      179.6        80.5
Dividends on Preferred and Preference Stock            41.7       41.6       41.9        42.4        43.1
---------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
 Common Stock                                      $   78.4   $  239.1   $ (350.7)  $   137.2   $    37.4
=========================================================================================================
Net income (loss) per Common share
   -- basic                                        $    .64   $   2.13   $  (3.15)  $    1.24   $    0.35
   -- diluted                                      $    .64   $   2.03   $  (3.15)  $    1.23   $    0.35
---------------------------------------------------------------------------------------------------------
Balance Sheet Statistics
Cash and cash equivalents                          $  137.8   $  252.4   $  136.6   $   180.0   $   159.5
Receivables, inventories and other
 current assets                                     1,357.0    1,211.6    1,351.8     1,345.8     1,409.6
Current liabilities                                  (985.2)    (910.8)    (957.4)   (1,049.6)   (1,011.2)
---------------------------------------------------------------------------------------------------------
Working capital                                    $  509.6   $  553.2   $  531.0   $   476.2   $   557.9
Current ratio                                           1.5        1.6        1.6         1.5         1.6
Property, plant and equipment - net                $2,655.7   $2,357.7   $2,419.8   $ 2,714.2   $ 2,759.3
Total assets                                        5,621.5    4,802.6    5,109.9     5,700.3     5,782.4
Total debt and capital lease obligations              672.1      493.4      546.7       638.3       757.3
Stockholders' equity                                1,489.5    1,215.0      966.0     1,238.3     1,155.8
Total debt as a percent of invested capital              31%        29%        36%         34%         40%
---------------------------------------------------------------------------------------------------------
Other Statistics
Capital expenditures                               $  328.0   $  228.2   $  259.0   $   266.8   $   444.6
Raw steel production capability at
  year end (net tons in thousands)                   11,300     10,500     10,500      11,500      11,500
Raw steel production (net tons in thousands)         10,191      9,599      9,447      10,449       9,817
Steel products shipped (net tons in thousands)        8,683      8,802      8,782       8,986       9,262
Pensioners receiving benefits at year end            74,300     70,400     70,100      71,000      71,700
Average number of employees
  receiving pay (excluding stainless employees)      15,900     16,400     17,800      19,500      19,900
Common Stock outstanding
  at year end (shares in thousands)                 129,490    112,991    111,834     110,708     109,886
Common stockholders at year end                      35,000     35,000     37,000      39,000      41,000
---------------------------------------------------------------------------------------------------------
</TABLE>

31