Chairman's Letter

1994 was a year of profitability and significant progress. We returned to profitability for the first year since 1989. For 1995 and the years ahead, our primary objective is to achieve sustained profitability and rates of return that will increase stockholder value. A few of the highlights for 1994 include:

• We earned $81 million.
• Revenues grew by about 12 percent and our operating cash flow increased about 90 percent.
• Partnership activities among employees were expanded.
• Progress was made toward rebuilding our financial strength.
• Business Divisions became firmly established as separate business centers.
• Total Quality and cost reduction efforts were intensified.
• Burns Harbor and Pennsylvania Steel Technologies successfully completed major modernization projects.
• Sparrows Point returned to profitability and the Double G Coatings joint venture in Mississippi came on-line to provide additional coated sheet capacity.
• Bethlehem Structural began to implement plans for improving its competitiveness in the light and medium structural business and transitioning from integrated steelmaking.
• Long-term contracts were established with our major automotive, construction and machinery customers.
• Corporate overhead was reduced.

We are making steady progress toward achieving Bethlehem's Vision and Objectives by implementing our Strategy. Our Vision is clear to be the premier steel Company.

Our Objectives are well defined to increase stockholder value, to serve our customers, to have partnerships among our employees, and to be good citizens.

Our Strategy for achieving our Vision and Objectives is straightforward to concentrate on steel, to rebuild our financial strength, and to continuously improve our performance in all aspects of our business through total quality, with a special focus on safety.

We believe our Strategy is sound, with the following areas of particular strategic focus.

Concentrating on Steel
Our Business Divisions are separate businesses, and during 1995 our sales organization will be directly aligned with the Business Divisions. We continue our focus on improving productivity and quality while reducing our costs.

Currently, we have two highly competitive Divisions at Burns Harbor and Sparrows Point that account for over 80 percent of our steel segment sales. These Divisions produce flat rolled steel products for markets that we expect to remain strong.

Our basic objective is to be the low-cost producer in our markets and to move toward the higher value added products. Our shipments of sheets, including high value added products such as coated sheets and tin plate, accounted for 68 percent of our steel segment sales in 1994, an improvement from 61 percent in 1992. We are the country's largest producer of steel plate, which accounted for 14 percent of steel segment sales last year.

In 1994, the Burns Harbor Division shipped a record 5.1 million tons of sheet and plate products to serve very strong customer demand. Even with the consequences of completing three major modernization projects, the Division achieved this record and continued to improve its quality performance.

The projects, which totaled more than $435 million, included rebuilding a coke oven battery, relining a blast furnace, and installing a facility to inject granulated coal into the Division's two blast furnaces. These three projects will strengthen Burns Harbor's position as one of the world's most efficient producers of high quality steel products well into the 21st Century.

The Sparrows Point Division was profitable in 1994 and improved its performance in many areas including productivity, quality and customer service. Its blast furnace produced a record 3.3 million tons of iron last year, while its two-strand continuous caster set a North American monthly record of 327,924 tons and a Division annual record of 3.6 million tons.

In addition to operating four coating lines at the Division, Sparrows Point is now shipping cold rolled sheet to our new Double G Coatings joint venture near Jackson, Mississippi. This coating facility, which went into production in 1994, produces high valued galvanized and Galvalume(tm) sheet products for the growing light construction market in the South-Central states.

Among our other Divisions, Pennsylvania Steel Technologies (PST) is this country's largest rail producer. It recently completed an $80 million modernization program including new steelmaking and rail head-hardening facilities to establish it as the low cost North American producer of high quality railroad rails, flat bars and specialty blooms. These new facilities went into production in 1994, and PST is now shipping premium head-hardened rails and high quality blooms to its customers.

As we previously announced, we will be discontinuing integrated iron and steel production and heavy beam production at our Bethlehem Structural Products Corporation (BSPC) in Bethlehem, Pennsylvania in 1995. BSPC is now implementing plans for improving its combination mill that will allow it to continue to produce a wide variety of light and medium structural products, including structural shapes, sheet piling and special sections. A significant amount of the semifinished blooms that will be rolled on BSPC's combination mill will come from PST.

While 1994 was a year of considerable progress, we also had some disappointments. The severe winter weather early in the year impaired our results. Some of our Divisions did not perform as well as others, and we have developed and are implementing plans for improving their performance.

Rebuilding Our Financial Strength
We made significant progress in 1994 toward rebuilding our financial strength. We increased our operating cash flow by about 90 percent to $384 million. We also increased our revolving credit agreement by $100 million to a total of $500 million.

With respect to our capital structure, one of our highest priorities is to fund our pension obligation as quickly as possible. In 1994, we contributed over $470 million to our pension fund, largely as a result of a $355 million Common Stock offering. This contribution, and the rise in interest rates, resulted in improving the funding status of our pension obligation to about 75 percent of our total pension obligation.

As a result of our net income, the issuance of common stock and the reduction in our long-term obligations, principally pension, our total debt and other long-term obligations to invested capital ratio improved significantly, from 86 to 76 percent.

These actions are directed toward increasing Bethlehem's stockholder value over the longer term.

Continuously Improving
Our employees know that we must continuously improve our performance every day in everything that we do. This is especially important in the areas of serving our customers, dealing with suppliers, increasing the productivity of our facilities, having partnerships among our employees, and improving quality and safety.

Customers
We know that customers are at the very core of our business and our success depends upon their success. That's why we are working very hard at establishing partnerships with them. We recognize that their problems are our problems and that we can often help them in developing solutions. One of the ways we are able to do this is through extensive research, technical and operating support services.

When our customers buy steel from us, they are buying a customized product from a customer-driven corporation dedicated to quality and service. For example, with our automotive customers, it means our early involvement with them to help specify optimum grades of steel for new models. We have also recently established a joint venture to produce tailored welded blanks for complex auto body stampings to achieve more efficient design.

Suppliers
Bethlehem has strengthened its procurement activities by aligning Corporate and Business Divisions along their respective core competencies. Additionally, in the past year, a Procurement Council has been formed to provide strategic direction to our sourcing of materials, supplies, services and capital equipment, and to aggressively initiate and coordinate process changes to increase our competitiveness throughout the corporation.

We are systematically reviewing each area of procurement for opportunities to increase value and reduce costs through a combination of expanding global sourcing, increasing and benefiting from our purchasing leverage, improving joint processes with suppliers, partnering with selected suppliers, aligning our sourcing and transportation, and improving our information base to support discussions with suppliers.

Our overall objectives are to increase value and reduce the costs associated with purchased materials, supplies, capital equipment and services. We intend to strengthen our relationships with selected suppliers who demonstrate a willingness and ability to work with us to achieve mutual objectives.

Production and Finishing Capability
As part of our objective to continuously improve, Bethlehem has operated its Burns Harbor and Sparrows Point steelmaking facilities over much of the last two years at a rate higher than their rated capability. This has been accomplished primarily through process improvements that have required no capital investments. We have plans under study to further enhance our existing steelmaking capability at these locations with several selective low-capital investments. Our finishing capability has also been expanded with the addition of new coating lines that have enhanced our value added product mix.

Employee Partnerships
Partnership activities among our employees are essential. We know that in order for us to be successful, our employees must work constructively together. For example, at Sparrows Point, 24 Area Partnership Committees were formed and trained. In addition, departmental committees began to implement productivity initiatives, and 30 problem-solving teams have been formed. We are also making progress with partnership activities at Burns Harbor. It now has 17 area and 16 safety partnership coordinators and 18 problem-solving teams. Employees there have developed more than 9,000 suggestions for improvements, half of which have been implemented.

An important part of the partnership effort with the United Steelworkers of America (USWA) was the election of Lewis B. Kaden to our Board of Directors. In 1994, he was designated by the USWA for consideration as a director under the terms of the 1993 labor agreement between Bethlehem and the USWA.

Another significant initiative was the development of a Financial Management course for our employees. We believe that every employee should know why we must achieve sufficient earnings to justify our stockholders' investment and how their performance relates directly to the achievement of our plans. The course was started in 1994, and we plan for all employees to complete it over the next few years.

Quality
Our Burns Harbor Division is a major supplier of the high quality sheet steel required for the automotive industry's most demanding applications. Burns Harbor supplies steel for 80 models of 1995 cars, vans and pickups produced in the United States. Burns Harbor has won the top quality awards from the "Big Three" automakers and foreign automakers with operations in the United States.

A very important step for our future, particularly in an increasingly global market, is ISO Certification. The International Organization for Standardization was founded to develop common standards for trade, manufacturing and communications. Most steel customers are now, or soon will be, specifying that products be manufactured under rigorous ISO quality standards. Four of our operations have now achieved ISO-9002 quality certification - Sparrows Point, Burns Harbor, Lackawanna Galvanized Products, and BethShip, Sparrows Point Yard. Other Bethlehem Business Divisions are also well on their way to achieving ISO Certification.

Safety
In 1994, we advanced our commitment throughout the corporation to improving workplace safety and environmental compliance. We also formed a Corporate Council on Safety, Health and Environment and established a new and separate Department for Safety, Health and Environment headed by a principal corporate officer.

Outlook
The economy and steel markets showed considerable strength in 1994, resulting in improved steel prices and shipments. However, imports of steel products entered our market at record levels during 1994 resulting in high year-end inventories. As we enter 1995, demand continues to be strong in nearly all of our markets despite higher interest rates. We expect domestic steel consumption this year to be about the same as in 1994. Our markets will be supported by an expanding world economy that should increase export demand for our customers' products in foreign markets and reduce imported steel into the United States.

We currently estimate that industry shipments in 1995 may decline somewhat from the 95 million tons in 1994, primarily as a result of a reduction in customer inventories early in the year.

On international trade, Bethlehem has supported both NAFTA and GATT because we believe those measures are good for our country, our customers and our corporation. We are a customer-driven corporation, and our customers in the automotive, machinery, construction, equipment and other industries export large amounts of products containing steel. What helps our customers increase their exports will help our steel businesses, our employees and our stockholders. We continue to be concerned about the high level of unfairly traded steel imports, and have under continuous review appropriate actions to deal with them.

There are opportunities for the domestic low cost producers of high quality steel. These include new uses of steel such as in residential housing, shipments into the export market, and displacing imports into this market. As previously described, Bethlehem is pursuing these opportunities by increasing our steelmaking and finishing capabilities within certain of our existing Business Divisions. We expect to realize higher steel prices during the year, and we believe our costs will improve as our newly modernized facilities at Burns Harbor and PST become fully operational. We are well positioned for the future and are committed to achieving our Vision and Objectives by effectively implementing our Strategy.

Bethlehem's success ultimately depends on the skill, dedication and support of our employees. On behalf of the Board of Directors, I especially want to thank them for their outstanding efforts in 1994.

Curtis H. Barnette, Chairman
January 25, 1995