Lukens Inc · 10-K405/A · For 12/27/97

Filed On 4/24/98   ·   SEC File 1-03258   ·   Accession Number 950159-98-104

Amendment to Annual Report — [X] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405/A   Amendment to Annual Report -- [X] Reg. S-K Item       37    196K 
                          405                                                    

Document Table of Contents

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K/A

 /X/Annual Report Pursuant to Section 13 or 15(d) of the
 Securities Exchange Act of 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
OR
 / /Transition Report Pursuant to Section 13 or 15(d) of the
 Securities Exchange Act of 1934

Commission File Number 1-3258       
LUKENS INC. 
 50 South First Avenue, Coatesville, PA 19320-0911
(610) 383-2000
Incorporated in Delaware                                      
I.R.S. Employer Identification Number 23-2451900              

Securities registered pursuant to Section 12(b) of the Act:                     
Title of Each Class                    Exchange on Which Registered             
Common Stock, $.01 Par Value           New York Stock Exchange                  
7.625% Notes Due 2004                  Not Listed                               
6.5% Medium-Term Notes,                                                         
Series A, Due 2006                   Not Listed                             

Securities registered pursuant to Section 12(g) of the Act:  NONE               

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes /X/ No / /                               

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/                                                                  

Based on the  closing  price of March 2, 1998,  the  aggregate  market  value of
common stock held by nonaffiliates of the registrant was $329.6 million.        

The number of common shares  outstanding  of the registrant was 14,977,090 as of
March 2, 1998.                                                                  

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PART I

ITEM 1. BUSINESS.                                                               

General                                                                         

Headquartered  in  Coatesville,  Pennsylvania,  Lukens Inc. is a holding company
incorporated in Delaware.  The largest  subsidiary of the company,  Lukens Steel
Company,  manufactures  carbon, alloy and clad steel plates, and stainless steel
sheet, strip, plate, hot band and slabs.  Production  facilities and markets are
located primarily in the United States.                                         

On December 15, 1997,  Lukens  entered into a merger  agreement  with  Bethlehem
Steel Corporation. The agreement was subsequently amended as of January 4, 1998.
Under the merger  agreement,  Bethlehem Steel  Corporation  would acquire Lukens
outstanding  common and preferred stock (converted to common) for $30 per share.
Consideration  is a combination of cash and Bethlehem  stock.  At year-end 1997,
the  number  of common  shares  outstanding,  combined  with the  conversion  of
outstanding  preferred  stock,  would  total  16,352,127  shares  and  result in
proceeds of $490.6 million in cash and Bethlehem stock. The merger is contingent
on shareholder  approval.  A special  meeting of  stockholders is expected to be
held during the second quarter of 1998.                                         

Forward-Looking Information                                                     

Sections of this Form 10-K include  disclosures about future economic conditions
and  Lukens'  future  financial  performance,   capital  structure,   goals  and
objectives.  Except to the extent  that  these  discussions  contain  historical
facts, these  forward-looking  statements are subject to risks and uncertainties
that could cause actual events to materially differ from those projected.  These
risks and  uncertainties  include,  but are not limited to,  materially  adverse
changes  in general  economic  conditions,  domestic  and  foreign  competition,
weather,  raw material  price  fluctuations,  possible labor  interruptions  and
regulatory or legislative changes.                                              

Business Groups                                                                 

Lukens  has two  business  groups,  the Carbon & Alloy  Group and the  Stainless
Group. Financial information for these business groups is incorporated herein by
reference to Note 2 to the financial  statements  included in Part II, Item 8 of
this Form 10-K.  The charts below  outline the  business  group  composition  of
consolidated net sales and shipped tons for each of the last three years.       

 Composition of Consolidated Net Sales by Business Group

                                        1997          1996          1995
                                       ---------     ---------     ---------
        Carbon & Alloy                %     51.9          49.6          41.9
        Stainless                           48.1          50.4          58.1
                                       ---------     ---------     ---------
        Total                         %    100.0         100.0         100.0
                                       =========     =========     =========

Shipped Tons by Business Group

                                            1997          1996          1995
                                       ---------     ---------     ---------
        Carbon & Alloy                   753,900       652,600       589,100

        Stainless                        257,700       262,100       267,200

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Carbon & Alloy Group                                                            

The Carbon & Alloy Group specializes in the production of carbon, alloy and clad
steel plate.  Primary production  locations are in Coatesville and Conshohocken,
Pennsylvania.  Both plants have hot rolling and  finishing  facilities,  and the
Coatesville  plant operates a melt shop.  Production from these facilities ranks
the group as one of the largest  domestic plate steel  producers and the largest
domestic  producer of alloy plate steel.  There are several domestic and foreign
competitors.  Major  competitors  are U.S.  Steel Group, a subsidiary of the USX
Corporation, and Bethlehem Steel Corporation.                                   

The group's competitive  position is enhanced by a concentration on plate with a
product line that includes a wide range of sizes and grades.  Price  competition
has been and is expected to remain intense as new capacity enters the market. In
addition to price and quality,  customer satisfaction,  measured by factors like
shipped-on- time performance and production lead times, has become  increasingly
important in the  competitive  environment.  Customer  satisfaction  is also the
focus  of  our  customer   business  teams  that  integrate  sales,   technical,
manufacturing, financial and purchasing expertise.                              

The Steckel Mill Advanced  Rolling  Technology  (SMART)  system,  located at the
Conshohocken plant, expanded the group's production capabilities and products to
include wide, light-gauge plate, including plate coils. During 1997, integration
of the SMART  system  and the wide  anneal  and pickle  line,  discussed  in the
Stainless Group section, was initiated.                                         

Products are sold  primarily by an in-house sales force.  Steel service  centers
are the largest market for the group. The market accounted for  approximately 48
percent of annual sales in 1997 and averaged  approximately 38 percent of annual
sales in 1996 and  1995.  The  Carbon & Alloy  Group  supplies  a wide  range of
markets in the capital goods sector of the economy, including markets for:      
o         Machinery and Industrial Equipment
o         Infrastructure                    
o         Environmental and Energy          
o         Transportation.                   

Some sales involve  government  contracts which may be subject to termination or
renegotiation.  Terminations for convenience of the government generally provide
for  payments to a contractor  for its costs and a portion of its profit.  We do
not  expect  any  material   portion  of  our  business  to  be   terminated  or
renegotiated.                                                                   

Raw  materials  used in the  production  of carbon and alloy steel plate include
carbon scrap,  alloy scrap and alloy additives.  Generally,  these materials are
purchased in the open market and are available from several sources.  Prices and
availability  are also  affected by the  operating  level of the domestic  steel
industry,  the quantity of scrap exported,  currency  exchange rates,  and world
political and economic  conditions.  Scrap remains readily available,  but scrap
prices remain at relatively high levels.                                        

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Principal energy sources used in production include electricity and natural gas.

Stainless Group                                                                 

The Stainless Group specializes in manufacturing  and marketing  stainless steel
sheet,  strip,  plate, hot band and slabs. The group's  competitive  position is
built on the ability to serve niche markets by providing a wide range of quality
products.  Manufacturing  facilities  are  located in  Washington  and  Houston,
Pennsylvania,    and    Massillon,    Ohio.    Primary    competitors    include
Allegheny-Teledyne  Incorporated,  J&L Specialty  Steel,  Inc.,  North  American
Stainless Corporation and Avesta Sheffield Pipe Inc.                            

Washington  Specialty Metals  Corporation is a service and  distribution  center
that specializes in marketing stainless steel. There are numerous competitors on
both a national and a regional scale.  Washington  Specialty Metals is a leading
distributor of flat-rolled stainless steel.                                     

Similar to the  competitive  environment  in the Carbon & Alloy Group,  customer
satisfaction,   measured  by  factors  like   shipped-on-time   performance  and
production lead times, has become increasingly important.  Customer satisfaction
is also the focus of our customer  business teams.  The teams  integrate  sales,
technical,  manufacturing,  financial  and  purchasing  expertise  to solve  our
customers'  problems.  Price  and  quality  remain  significant  factors  in the
competitive environment.                                                        

As evidenced by the  Stainless  Group  results in 1997 and 1996,  high levels of
stainless steel imports  accentuated  pricing pressures.  We continue to support
the  imposition of trade  sanctions on stainless  steel  imports.  Without these
sanctions,  we do not expect that prices will  rebound  significantly  from 1997
levels and the  introduction  of new  production  capacity by  competitors  will
continue to exert pressure on selling prices over the next two or three years.  

The  installation  of the wide anneal and pickle line at the Massillon plant was
completed in 1996.  Commercialization of products from the line continued during
1997.  Although product shipments  increased  consistently  throughout the year,
utilization of the facility was low in 1997 and is expected to remain relatively
low in 1998.                                                                    

Stainless  products  processed  on the Carbon & Alloy  Group's  SMART system and
finished on the wide anneal and pickle line are  anticipated to create  quality,
size and cost advantages in the long term.                                      

Products  are sold  primarily  by the group's own sales  organizations.  Service
centers are the largest market for the group and they averaged  approximately 37
percent of annual sales in the last three years.  The Stainless Group ultimately
supplies diverse markets, including:                                            

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o         Process Industries                
o         Food Service Equipment            
o         Architecture and Construction     
o         International                     
o         Consumer Durables.                

Raw materials used in production  include  stainless scrap,  chrome,  nickel and
molybdenum.  Generally, these materials are purchased in the open market and are
available from several sources.  Some of these raw materials sources are located
in  countries  subject to  potential  interruptions  of supply  that could cause
shortages and affect the  availability  and price.  Prices and  availability are
also affected by the operating level of the worldwide  stainless steel industry,
the quantity of scrap exported, currency exchange rates, and world political and
economic  conditions.  Nickel costs remain highly volatile.  Forward exchange or
hedge  contracts  for nickel are used to manage the  group's  exposure to market
price   volatility.   Principal  energy  sources  used  in  production   include
electricity and natural gas.                                                    

Sales Order Backlog                                                             
(Dollars in thousands)                                                          

Listed below is the backlog at the end of 1997 and 1996. The backlog at year-end
1997 is anticipated to be shipped in 1998.                                      

12/27/97     12/28/96 
--------     -------- 
Carbon & Alloy     $118,553       68,134                    

Stainless            48,461       59,396                    
--------     -------- 
Total              $167,014      127,530                    
========     ======== 

Environment                                                                     

Lukens  is  subject  to  Federal,   state,  and  local  environmental  laws  and
regulations.  An environmental committee meets quarterly to review environmental
and remediation issues.  Also, outside consultants are used on certain technical
issues. The trend for tighter  environmental  standards is expected to result in
higher waste disposal and monitoring costs, and additional capital  expenditures
in the long term. The  Environmental  Protection  Agency's air quality standards
for particulate matter were enacted in July 1997. Implementation is dependent on
the results of  environmental  studies  being  conducted  over the next  several
years.  Although  it is  difficult  to  estimate,  the  cost of  installing  new
environmental  control  systems  across our  manufacturing  facilities  could be
significant in the long term.                                                   

In 1997, capital  expenditures for environmental  compliance  projects were $4.7
million.  In  1998  and  1999,  capital   expenditures  are  anticipated  to  be
approximately $4.3 million and $3.8 million, respectively.                      

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Lukens has been designated a potentially  responsible  party under Superfund law
at  certain  waste  disposal  sites and  continually  monitors  a range of other
environmental issues.  Superfund  designations are made regardless of the extent
of the  company's  direct or indirect  involvement.  These claims are in various
stages of  administrative  or  judicial  proceedings  and  include  demands  for
recovery of incurred costs and for future investigation or remedial actions.    

Lukens  accrues costs  associated  with  environmental  matters when they become
probable and can be reasonably estimated. In assessing environmental  liability,
the company considers the extent and type of hazardous substances at a site, the
range  of  technologies  that  can be used for  remediation,  evolving  laws and
regulations,  the allocation of costs among potentially responsible parties, and
the number and financial strength of those parties.                             

During the second  quarter of 1997,  a  tentative  settlement  was  reached in a
Superfund remediation case where Lukens was designated a potentially responsible
party.  The obligation  for the Superfund site was previously  recognized in the
fourth quarter of 1996.                                                         

The information contained in the section entitled "Environmental  Compliance" in
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations., of this Form 10-K is incorporated herein by reference.          

Based  on  information   currently   available,   the  liability   recorded  for
environmental remediation costs was approximately $17.0 million at year-end 1997
and $16.8  million at year-end  1996.  Due to their  uncertain  nature,  amounts
accrued could differ, perhaps significantly,  from the actual costs that will be
incurred.   No  potential  insurance  recoveries  were  taken  into  account  in
determining  the  company's  cost  estimates  or reserves.  Management  does not
anticipate that its financial position will be materially affected by additional
environmental  remediation costs, although quarterly or annual operating results
could be materially affected by future developments.                            

Employees                                                                       

The average  number of employees  during 1997 was 3,300.  The labor contract for
the Coatesville  facility of the Carbon & Alloy Group  terminates in 2000. Labor
contracts for the manufacturing facilities of the Stainless Group expire in 1999
and 2000.                                                                       

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ITEM 3. LEGAL PROCEEDINGS.                                                      

On December 23, 1997, a purported stockholder of Lukens, Carrie Anne Polonetsky,
filed a  purported  class  action  (the  "Polonetsky  Action")  in the  Court of
Chancery of the State of Delaware (the "Court of  Chancery")  against the Lukens
Board  alleging,  among other  things,  that the Lukens  Board had  breached its
fiduciary duties by failing to obtain the highest value reasonably  available in
a sale of Lukens.  Two other  purported  stockholders  of Lukens,  Wretha Evelyn
Walker and Michael Abramsky,  filed purported class actions  (collectively  with
the  Polonetsky  Action,  the  "Delaware  Actions")  in the Court of Chancery on
December  29,  1997 and  January 6,  1998,  respectively,  making  substantially
similar allegations. The Delaware Actions have been consolidated by order of the
Court of Chancery dated March 11, 1998. On March 27, 1998, the plaintiffs in the
Delaware Actions filed a consolidated amended complaint against the Lukens Board
alleging,  among other things,  that the Lukens Board had breached its fiduciary
duties by failing to obtain the highest value reasonably  available in a sale of
Lukens. The defendants intend to defend the Delaware Actions vigorously.        

Lukens is involved in litigation and  administrative  proceedings which seek the
recovery of response costs with respect to certain waste disposal sites and is a
potentially  responsible  party  under  Superfund  law at some of  these  sites.
Lukens' potential exposure in these actions will vary according to the amount of
responsibility attributed to Lukens, the allocation of responsibility among, and
financial viability of, other responsible  parties,  and the method and duration
of remedial action.  Management does not anticipate that its long-term financial
position will be materially  affected by  additional  environmental  remediation
costs,  although  quarterly  or annual  operating  results  could be  materially
affected by future developments.                                                

The information contained in the section entitled "Environmental  Compliance" in
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations., of this Form 10-K is incorporated herein by reference.          

The  company is party to  various  claims,  disputes,  legal  actions  and other
proceedings  involving  negligence,  contracts,  equal  employment  opportunity,
occupational safety and various other matters. In the opinion of management, the
outcome  of these  matters  should  not have a  material  adverse  effect on the
consolidated financial condition or results of operations of the company.       

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 PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED                       
STOCKHOLDER MATTERS.                                                            

The information contained in the section entitled "Dividends" in Part II, Item 7
of this Form 10-K and the section  entitled  "Quarterly  Financial Data" in Part
II, Item 8 of this Form 10-K is incorporated  herein by reference in response to
this item.                                                                      

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS.                                                                  

     On December 15, 1997, Lukens entered into a merger agreement with Bethlehem
Steel Corporation. The agreement was subsequently amended as of January 4, 1998.
Under the merger agreement, Bethlehem Steel Corporation would acquire Lukens    
outstanding common and preferred stock (converted to common) for $30 per share. 
Consideration is a combination of cash and Bethlehem stock. At year-end 1997,   
the number of common shares outstanding combined with the conversion of         
outstanding preferred stock, would total 16,352,127 shares and result in        
proceeds of $490,564 in cash and Bethlehem stock. The merger is contingent on   
shareholder approval. A special meeting of stockholders to vote on the merger is
expected to be held during the second quarter of 1998.                          

The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and the discussion below were prepared assuming a going-concern basis
and did not recognize the impact of the merger. For a discussion of the         
contingent liabilities associated with the merger, see Note 10.                 

  The following discussion focuses on the results of operations and on the
financial condition of Lukens Inc. In addition to the consolidated results      
analysis, the results of Lukens' two business groups are discussed.             

    This section should be read in conjunction with the consolidated financial
statements and notes.                                                           

Consolidated Results of Operations                                              
Net Sales.                                                                      

A graph of net sales appears in this section.                                   
1995           $1,049,158                   
1996           $  970,320                   
1997           $  994,380                   

  Sales were up 2 percent in 1997. The increase was attributable to strong
Carbon & Alloy Group sales that were largely offset by depressed market         
conditions in the Stainless Group.                                              

    1996 sales were down 8 percent compared to 1995. During the second half of
1996, stainless steel market conditions began to deteriorate and contributed to 
lower Stainless Group sales. The decrease was partially offset by higher        
shipments in the Carbon & Alloy Group.                                          

Operating Earnings (Loss).                                                      
A graph of operating earnings (loss) appears in this section.                   

1995                  $ 67,980    
1996                  $(26,053)   
1997                  $ 13,404    

   Operating earnings in 1997 were attributable to the Carbon & Alloy Group,
which benefited from market conditions, cost reduction initiatives and increased
utilization of new facilities. Depressed selling prices experienced by the      
Stainless Group resulted in a loss for the group in 1997.                       

  Included in 1996 results were unusual charges totaling $20,182. A second
quarter provision of $10,782 was recognized for a work force reduction. In the  
fourth quarter, $9,400 was recognized for environmental remediation. Excluding  
the 1996 unusual items for comparison purposes, operating earnings were up      
$19,275 in 1997.                                                                

  The 1996 loss represented a dramatic reversal from strong 1995 earnings.
Excluding the unusual items discussed above for comparison purposes, the        
operating loss was $5,871 in 1996. The reversal in results tracks the change in 
stainless steel market conditions that resulted in significant selling price    
declines. Results in 1996 were also limited by a $5,933 provision for fixed     
asset write-downs, higher utility costs caused by severe winter weather and by  
signing bonuses associated with a new labor contract.                           

Summary of Results                   1997             1996           1995       
Net sales                        $  994,380         970,320       1,049,158     
Operating earnings (loss)        $   13,404         (26,053)         67,980     
Interest expense                 $   19,073          16,735          13,471     
Income tax expense (benefit)     $   (1,049)        (14,377)         20,495     
Effective income tax rate        %    (18.5)          (33.6)           37.6     
Net earnings (loss)              $   (4,620)        (28,411)         34,014     

Dollars in thousands except per share amounts                                   

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Interest Expense.                                                               
A graph of interest expense appears in this section.                            
1995                  $ 13,471    
1996                  $ 16,735    
1997                  $ 19,073    

Interest expense in 1997 was up 14 percent with the increase primarily
related to higher amounts of capitalized interest recorded in 1996. Interest    
expense in 1996 was up 24 percent compared to 1995. Higher debt levels in 1996  
were the primary reason for the increase.                                       

Income Tax Expense (Benefit).                                                   
A graph of effective income tax rate appears in this section.                   
1995                     37.6%    
1996                    (33.6%)   
1997                    (18.5%)   

    The effective tax rate applied against losses was 18.5 percent in 1997 and
33.6 percent in 1996. The difference between the 1997 and 1996 rates reflected  
the impact of non-deductible expenses, state taxes and other items that have a  
greater percentage impact on the effective rate at lower results levels. The tax
benefits recognized in the past two years primarily resulted in a build in      
deferred tax assets that reflected the availability of tax credit carryforwards.
In 1995, the effective tax rate applied to earnings was 37.6 percent.           

    Deferred tax assets recognized represent future tax benefits. Recog-nition
of deferred tax assets is based on the combination of the historical earnings   
trend, future reversals of existing taxable temporary differences, carryback and
carryforward availability, tax planning strategies and future taxable income.   

Net Earnings (Loss).                                                            
A graph of net earnings (loss) appears in this section.                         
1995                 $ 34,014     
1996                 $(28,411)    
1997                 $  4,620     

   A net loss was recorded both in 1997 and 1996. On an after-tax basis, the
unusual items recorded in 1996 reduced results by $12,837. Excluding the unusual
items for comparison purposes, the 1996 net loss was $15,574. Net earnings in   
1995 reflected strong Stainless Group results.                                  

Business Groups                                                                 

Carbon & Alloy.                                                                 
Business group graphs appear in this section.                                   
Carbon & Alloy net sales:                                                       
1995           $439,330           
1996           $481,237           
1997           $516,499           

Carbon & Alloy operating earnings (loss):                                       
1995           $ 11,946           
1996           $ (2,554)          
1997           $ 50,410           

    Net sales were up 7 percent in 1997. Shipped tons were 753,900 compared to
652,600 tons in 1996. The 16 percent increase reflected higher utilization of   
the Steckel Mill Advanced Rolling Technology (SMART(R)) system, evidenced by a  
more than 80,000 ton increase in carbon shipments. With the growth in carbon    
shipments in 1997, sales reflected a lower-value shipment mix.                  

The 10 percent sales increase in 1996 compared to 1995 was largely    
attributable to an increase in shipments, particularly in carbon products.      
Shipments in 1996 were up 11 percent compared to 589,100 tons in 1995.          

  The group recorded strong operating earnings in 1997. Earnings benefited
from a continued focus on cost reduction initiatives and increased utilization  
of the SMART system. The operating loss in 1996 was due to unusual charges of   
$15,578. A work force reduction charge reduced results by $6,178 and an         
environmental remediation provision was $9,400. Excluding the provisions for    
comparison purposes, 1997 operating earnings were up $37,386 from 1996. Also    
impacting 1996 results was a $3,756 charge for signing bonuses associated with  
the new labor agreement at the Coatesville, Pennsylvania, facility, severe      
winter weather and disruptions associated with the commissioning of the SMART   
system.                                                                         

     The operating loss in 1996 compared to operating earnings in 1995. The 1996
loss was the result of the charges discussed previously. Excluding the charges, 
operating earnings of $13,024 were up 9 percent from 1995. Although to a lesser 
extent than 1995, results in 1996 continued to be impacted by production        
disruptions and expenses associated with the commissioning of the SMART system. 

Dollars in thousands except per share amounts                                   

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Stainless.                                                                      
Business group graphs appear in this section.                                   
Stainless net sales:                                                            
1995           $609,828           
1996           $489,083           
1997           $477,881           

Stainless operating earnings (loss):                                            
1995           $ 75,148           
1996           $ (7,058)          
1997           $(20,488)          

   Selling price erosion that began in 1996 continued in 1997. Higher levels
of low-priced imports continued to exert pressure on selling prices across      
product lines. Shipments for 1997 were 257,700 tons, down 2 percent compared to 
262,100 tons in 1996.                                                           

     Weak stainless steel market conditions in 1996 led to a 20 percent decrease
in sales compared to 1995. The sales decline reflected customer inventory       
corrections during the first half of the year that reduced cold rolled          
shipments. For the balance of 1996, the selling prices fell across all product  
lines. A lower-value shipment mix also contributed to the decrease. Shipments   
for 1996 were down slightly from 1995 shipments of 267,200 tons. Excluding      
lower-value conversion tonnage, shipments were down 12 percent from 1995,       
primarily due to decreases in hot rolled and hot band stainless product         
shipments.                                                                      

    The operating loss recorded in 1997 was significantly larger than the 1996
loss. Results in 1996 included an unusual charge of $3,695 for a work force     
reduction. Excluding the unusual charges for comparison purposes, operating     
results fell by $17,125 in 1997, largely due to depressed selling prices        
discussed previously.                                                           

   Excluding the 1996 unusual charges for comparison purposes, the operating
loss of $3,363 compared to earnings of $75,148 in 1995. The decline primarily   
reflected a significant deterioration in stainless steel market conditions as   
previously discussed. In 1996, a $5,933 provision to write-down idle assets and 
other equipment replaced as a result of capital improvements was recorded. In   
addition, 1996 earnings from the service center operations did not match their  
excellent 1995 results.                                                         

Business Outlook                                                                

Similar to 1997, strong market conditions should translate to solid   
earnings for the Carbon & Alloy Group. Selling prices will be the key to        
Stain-less Group profitability. A continued focus on cost reduction initiatives 
and increased utilization of facilities aimed at the stainless plate market     
should also contribute to earnings.                                             

     We continue to support the imposition of trade sanctions on stainless steel
imports. Without these sanctions, we do not expect that prices will rebound     
significantly from 1997 levels. The introduction of new production capacity by  
competitors will continue to exert pressure on selling prices over the next two 
or three years.                                                                 

     Stainless Group results should benefit from increased stainless plate sales
fueled by the continued integration of the SMART system with the wide anneal and
pickle line (WAPL). However, utilization of the WAPL facility is still expected 
to be relatively low in 1998. Weak results are expected to continue if there is 
no improvement in the current market conditions.                                

Financial Condition                                                             
Capital Structure.                                                              

A graph of current assets and working capital appears in this section.

Current assets:                                                                 
1995           $314,891           
1996           $266,656           
1997           $285,700           

Working capital:                                                                
1995           $106,221           
1996           $ 99,158           
1997           $114,509           

     At the end of 1997, cash and cash equivalents totaled $6,629, a decrease of
$3,653 from the end of 1996. Working capital of $114,509 was up $15,351 from    
year-end 1996. The increase primarily reflected a higher accounts receivable    
balance. At year-end 1997, the current ratio was 1.7 compared to 1.6 at year-end
1996.                                                                           

    Included in other accrued expenses at the end of 1997 was an environmental
reserve that was reclassified during the second quarter of 1997 from other      
liabilities in the long-term section of the Consolidated Balance Sheets. The    
reclassification reflected a tentative settlement agreement negotiated for a    
Superfund site where we were designated a potentially responsible party.        

Debt at the end of 1997 was $250,947, a slight decrease of $2,626 from
year-end 1996. Included in year-end debt was $10,619 of ESOP debt, which is     
guaranteed by Lukens.                                                           

     The ratio of long-term debt to total capital was 50.3 percent at the end of
1997 and 51.7 percent at year-end 1996. The 1996 ratio included 2.6 percent from
the reclassification                                                            

Dollars in thousands except per share amounts                                   

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of preferred stock and deferred ESOP compensation as redeemable stock, discussed
below. Based on conditions at the end of 1997, additional borrowings of         
approximately $65,400 were available under the committed line of credit         
covenant.                                                                       

   During the second quarter of 1997, Standard & Poor's lowered their rating
on Lukens notes from BBB+ to BBB. During the third quarter of 1997, Moody's     
lowered their rating from Baa2 to Baa3.                                         

     In 1997, the Board of Directors approved the issuance of performance vested
restricted stock to certain officers and other executives as part of an         
incentive compensation program. During the first quarter of 1997, 134,000       
restricted shares were awarded. The shares carry voting and dividend rights and 
were recorded at fair market value on the grant date. A corresponding charge to 
deferred compensation was recorded in the stockholders' investment section of   
the Consolidated Balance Sheets. The deferred compensation balance was          
subsequently adjusted for changes in the market price of Lukens common stock and
for compensation expense recognized. The awards vest at the end of three years, 
contingent on continued employment and the achievement of performance goals that
are tied to Lukens' total shareholder return relative to other steel companies. 

    Lukens Series B Convertible Preferred Stock is redeemable in common stock,
cash or a combination at the option of Lukens when the price of Lukens common   
stock is $20 per share or greater. If the price is below $20 per share,         
participants in a company-sponsored 401(k) employee savings plan have the option
to redeem preferred stock in the combination above. At year-end 1996, preferred 
stock and the related ESOP deferred compensation were classified as redeemable  
stock because the price of Lukens common stock was below $20 per share on       
December 28, 1996, the fiscal year-end. The reclassification from stockholders' 
investment reflected the ability of 401(k) participants to elect a cash payout  
option at redemption. The classification was not made in 1997 or years prior to 
1996 because the company had the ability and intention to redeem preferred stock
with Lukens common stock.                                                       

Lukens enters into forward exchange contracts (derivatives) with the  
objective to manage or hedge exposure to market price changes of certain        
commodities used in manufacturing. The company does not speculate or trade in   
these agreements for profit. These contracts generally provide for the exchange 
of a market price for a fixed price based on a notional quantity. Contracts are 
executed under the guidelines of a corporate policy. The policy specifies       
members of management with the authority to execute agreements and establishes  
limits on the amount of contracts outstanding. As of year-end 1997, Lukens was  
party to several agreements maturing in 1998, which are discussed in Note 8.    

Liquidity -- Short Term.                                                        
Graphs of cash flow from operations and capital expenditures appear in this     
section.                                                                        
Cash flow from operations:                                                      
1995           $85,491            
1996           $43,667            
1997           $29,396            

Capital expenditures:                                                           
1995           $104,120           
1996           $ 57,092           
1997           $ 19,369           

 Cash flow from operating activity was relatively low at $29,396 in 1997
compared to $43,667 in 1996. The decrease was primarily due to higher working   
capital requirements.                                                           

     Financing activity required $15,066 with net borrowings of $2,018 partially
offset by dividend payments of $17,084. Investing activity required $17,983,    
primarily for capital expenditures of $19,369.                                  

Improving cash flows from operating activity in 1998 is dependent on  
reduced working capital requirements coupled with the earnings factors          
identified in the Business Outlook section. Capital expenditures for 1998 are   
expected to be relatively low at approximately $36,000. The anticipated cash    
flow from operating activity and low capital expenditure requirements should    
result in an improved capital structure compared to year-end 1997.              

Dollars in thousands except per share amounts                                   

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    Consolidated backlog at year-end 1997 was $167,000, up 31 percent from the
beginning of the year. The increase was primarily attributable to the Carbon &  
Alloy Group.                                                                    

Liquidity -- Long Term. In the long term, Lukens relies on the ability to       
generate sufficient cash flows from operating activity to fund investing and    
financing requirements. Our target long-term debt-to-capital ratio is 35        
percent. A key to reach our target will be the ability to increase utilization  
of facilities added during our recent capital improvement program. Lukens has   
generated cash from operations totaling $158,554 over the past three years.     

Environmental Compliance. Capital expenditures for environmental compliance are 
projected to be approximately $4,279 in 1998 and $3,838 in 1999. The trend for  
tighter environmental standards is expected to result in higher waste disposal  
and monitoring costs and additional capital expenditures in the long term.      

Lukens has been designated a potentially responsible party (PRP) under
Superfund law at certain waste disposal sites and continually monitors a range  
of environmental issues including the following:                                

Helen Kramer                                                                    

        This Superfund site, a municipal and industrial waste landfill located
in New Jersey, was placed on the National Priorities List in 1983. The remedial 
investigation and feasibility study was completed in September of 1985. The     
Record of Decision was executed on September 27, 1985. The EPA completed        
construction of the remedial action and turned over responsibility for operation
and maintenance of the site to the State of New Jersey in May 1994. In October  
of 1989, the EPA sued numerous parties, including generators and transporters as
direct defendants, to recover its remediation costs. Lukens became a third party
defendant in the Superfund case when it was sued by the direct defendants in    
September 1991. The direct defendants alleged that Lukens generated hazardous   
substances that were transported to and disposed at the Helen Kramer landfill.  
Through discovery, Lukens learned that its transporters allegedly transported   
pickle liquor, a waste acid generated in the steel manufacturing process, to the
Helen Kramer landfill from approximately May 1971 to December 1974.             

      During this period of time, Lukens believed that its transporter was
hauling pickle liquor generated by Lukens to the transporter's facility in      
Western Pennsylvania. Lukens believed that its pickle liquor was neutralized at 
such facility by the transporter. The transporter was also required to suitably 
dispose of our pickle liquor after it completed the neutralization process.     
Contrary to our beliefs concerning the neutralization and suitable disposal of  
our pickle liquor, our transporter claimed that our pickle liquor was taken     
directly from our plant to the Helen Kramer landfill and was not neutralized.   

       A preliminary waste-in report, performed by an independent consultant
hired by the PRP's, was circulated in the third quarter of 1995. This report was
the consultant's initial attempt to address nexus and volume issues at the site.
Other allocation issues such as toxicity, generator/transporter liability,      
ability to pay and de minimis issues were to be addressed in subsequent reports.
The preliminary waste-in report was subject to change as all participating      
parties were given an opportunity to provide comments on the report and submit  
to the consultant additional evidence regarding the issues of nexus and volume. 
Lukens strongly objected to the nexus and volume determinations, which were     
based on what Lukens considered to be unreliable evidence. In addition, Lukens  
believed that the consultant considered unsubstantiated evidence in making its  
volume calculations. We disputed the reliability of the evidence upon which the 
consultant's volume and nexus conclusions were based for several reasons,       
including the following:                                                        

   *   The nexus time period was contradicted by a letter from the
      transporter to Lukens in May 1971 in which the transporter
           specifically stated that Lukens' pickle liquor was going to the
              transporter's Western Pennsylvania neutralization facility and not
to the Helen Kramer landfill.                       

  *   Statements by the former President of the transporter were
              unreliable because they were obtained approximately 25 years after

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    the disposal of the pickle liquor and at a time when the
              transporter arguably had a motive to maximize its exposure at this
  site in order to minimize its exposure at other sites.

         *   There was testimony in this case that the transporter disposed of
            pickle liquor at landfills other than the Helen Kramer landfill.

     *   Although our transporter purportedly disposed of more than 10
        million gallons of its customers' pickle liquor at the Helen
             Kramer landfill, the only contemporaneous record that it was able
            to produce was one customer list. This list did not refer to the
           types of services provided, the frequency of such services, the
   volume of waste transported or the nature of the waste.

       *   In our opinion, the volume calculations were flawed because the
           consultant did not appropriately account for events such as bad
              weather and operational difficulties that could have disrupted the
transportation of waste to the site.                

   Many of the PRP's expressed significant concerns regarding this
waste-in report and objected to its preliminary findings. Additionally, a       
substantial part of the total site costs incurred by the Federal government were
the subject of a pending criminal investigation against one of the contractors  
that performed the remediation for the government. Recoverable cleanup costs    
ranged from $50,000 to $150,000 depending on the outcome of the investigation.  

        In the fourth quarter of 1995, Lukens received a draft allocation plan
from the consultant. Our percentage allocation was approximately 3% based on    
this plan. The purpose of this allocation plan was to further assist the PRP's  
in understanding the allocation approach contemplated in the case. This plan was
subject to change as all participating parties were given an opportunity to     
provide comments and submit additional evidence regarding the determinations    
made in the plan. Lukens objected to this plan based on the following:          

    *   The issues and concerns we had with the preliminary waste-in
              report were not adequately addressed in the preliminary allocation
plan.                                               

     *   The pickle liquor generated at Lukens had a very low toxicity
             level and did not drive the remedy at the site. Our pickle liquor
was approximately 95% water and 5% acid.            

    *   The PRP's included many municipalities and numerous chemical
             companies whose waste material had toxicity levels believed by us
        to be significantly higher than pickle liquor. Consequently,
           Lukens felt strongly that the preliminary allocation report did
              not provide an adequate discount for the low toxicity level of its
pickle liquor.                                      

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   *   Our transporter had advised us that it would neutralize and
              suitably dispose of all of our pickle liquor. We believed that our
      pickle liquor was being transported to an approved site in
             Pittsburgh, Pennsylvania. If our transporter failed to neutralize
           and suitably dispose of our pickle liquor, Lukens believed that
          the transporter should bear virtually all of the costs arising
from such failure.                                  

         *   Our transporter held itself out as an expert on pickle liquor and
             knew the composition of our pickle liquor, the available disposal
       facilities and, most importantly, selected the Helen Kramer
        landfill without our knowledge. The transporter, not Lukens,
             benefited financially from its failure to neutralize and suitably
          dispose of our pickle liquor. In addition, the transporter was
             financially viable. Based on the preceding facts and certain case
        law which supported a higher share for transporters than the
       allocation determined in the plan, Lukens believed that the
              transporter should bear virtually all of the costs attributable to
     the alleged disposal of pickle liquor at the Helen Kramer
landfill.                                           

    The PRP's continued to express significant concerns regarding this
allocation plan and objected to its draft findings. Additionally, the issues    
surrounding the recoverable costs of remediation still had not been resolved.   

        Based on the above facts and the significant uncertainties surrounding
this matter, Lukens concluded, at the end of 1995, it was not probable that a   
liability had been incurred and no provision was recorded. Lukens also concluded
that, while it was reasonably possible that a liability could result from this  
matter, management was unable to reasonably estimate the amount, if any, of such
liability.                                                                      

         In the second quarter of 1996, a final, non-binding allocation plan was
received from the consultant. Our percentage allocation was approximately 4%    
based on this plan. We continued to have major concerns with this allocation    
plan and believed that we could significantly reduce our allocated percentage   
based on our arguments related to nexus, volume, toxicity, transporter          
liability, neutralization and the other allocation issues discussed above. The  
uncertainty of the eventual allocation was also supported by our own outside    
environmental consultant who advised us that (i) our pickle liquor had a low    
toxicity and did not drive the remedy at the site, (ii) the acid in our pickle  
liquor would have dissipated before the site was remediated, (iii) our pickle   
liquor contained only low levels of metal contaminants and (iv) the pickle      
liquor from Lukens and all other parties combined contributed only 0.84% to     
1.15% to the total site costs.                                                  

     Additionally, other PRP's continued to express significant concerns
with the plan. Subsequently, in the third quarter of 1996, a majority of PRP's  
voted to reject using the plan as a basis for further negotiations. Upon such   
rejection, we were faced with the distinct possibility of beginning a new       
allocation process or litigating the entire case, in which case Lukens believed 
it had substantial defenses based on the considerations discussed above.        

Based on this second report and the continuing uncertainties  
surrounding this matter, Lukens again concluded it was not probable that a      
liability had been incurred and no provision was recorded. Lukens also concluded
that, while it was reasonably possible that a liability could result from this  
matter, management was unable to reasonably estimate the amount, if any, of such
liability.                                                                      

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  On July 31, 1996, the EPA made a settlement demand on the direct
defendants. On September 24, 1996, the direct defendants made an offer to the   
EPA. As a result of these events, in the fourth quarter of 1996, circumstances  
surrounding this matter changed significantly. Although the PRP's had voted to  
reject using the plan as a basis for further negotiations, the EPA and the      
direct defendants made significant progress towards reaching an agreement on the
total cleanup costs to be reimbursed based on the offer submitted by the direct 
defendants. The EPA also strongly encouraged mediation and settlement           
discussions, a settlement agreement by year-end 1996 and a commitment by the    
third party defendants to contribute their allocated shares and to participate  
in the settlement process. These discussions between the EPA and the direct     
defendants generated significant momentum toward settlement and increased the   
level of pressure on the third party defendants, such as Lukens. It quickly     
became clear that, despite the third quarter rejection vote by the PRP's, the   
EPA and the direct defendants were focused on the allocations identified in the 
last allocation report and there appeared little probability that further       
allocation reports would be commissioned.                                       

         Based on these new developments, the total cost of the settlement was
now able to be reasonably estimated as was our estimated portion of such cost.  
Accordingly, we concluded late in the fourth quarter of 1996 that a liability,  
based on the allocation report issued in the second quarter of 1996, was        
probable and should be recognized. At that time, we recognized a liability of   
$6,000.                                                                         

       During the second quarter of 1997, a tentative settlement was reached
in the Helen Kramer Superfund matter for which we agreed to pay $5,600.         

       We are currently negotiating with our insurance carriers for recovery
of the tentative settlement amount and we are optimistic that a substantial     
recovery will be available. However, no receivable has been recorded for any    
estimated recovery, given the uncertainty surrounding such claims.              

Electric Arc Furnace Flue Dust                                                  

       Electric Arc Furnace flue dust is generated by Lukens and other steel
companies from the melting of scrap steel in electric arc furnaces. We began to 
dispose of flue dust at a site on our premises in approximately 1961. This      
practice ceased in 1980 prior to the enactment of the Resource Conservation and 
Recovery Act ("RCRA"). The EPA defines electric arc furnace flue dust generated 
after the enactment of RCRA as a listed hazardous waste. This site was          
originally visited by the EPA in 1989, at a time when many steel mills were     
being reviewed, but the EPA required no further action regarding the site.      

     Lukens was not aware of any other EPA activity related to this site
until late in the first quarter of 1996, at which time the EPA conducted another
inspection of the site. The results of the EPA's inspection were received in May
1996. The EPA's inspection and sampling resulted in a hazard ranking score that 
was greater than the threshold required for inclusion of the site on the        
National Priority List ("NPL"). We reviewed the EPA's sampling results and      
identified discrepancies between the EPA's results and our split sample results.

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The EPA concluded that the site did not require remedial action at that time. No
administrative orders or consent decrees were received or entered into. However,
the EPA concluded that the site warranted further investigation and indicated   
that it would initiate a sampling process at the site within six to nine months.
This was the first step in an approximate two year process for evaluation as a  
potential NPL site.                                                             

      As part of this investigation, in the second quarter of 1996 the EPA
suggested that Lukens pursue voluntary remediation under Pennsylvania Act 2.    
Voluntary cleanup programs such as Pennsylvania Act 2 allow site owners to      
identify and clean up sites, to use less extensive administrative procedures and
to obtain some relief from future state liability for past contamination. We    
began considering this alternative and efforts to further assess the site and   
evaluate potential remedial alternatives and costs.                             

          On October 14, 1996, Lukens received a report, dated October 11, 1996,
from an independent consulting firm hired by Lukens. The report outlined        
remedial alternatives and costs. The report provided four scenarios with costs  
ranging from $456 to $4,850, depending on the extent of the remediation.        
Additionally, during the quarter, we met with the Pennsylvania Department of    
Environmental Protection ("DEP") to initiate discussions in accordance with the 
EPA's recommendations to avoid the NPL process. The DEP agreed to consider      
whether the site was qualified for the Act 2 program. We believed that the site 
qualified for the Act 2 program because all disposal activities at the site     
occurred prior to the enactment of RCRA.                                        

   Based on our decision to approach the DEP for voluntary cleanup
coupled with the results of the preliminary remediation report, we concluded in 
the 1996 fourth quarter that a liability was probable and could be reasonably   
estimated. The $3,000 liability recognized was based on our best estimate from  
the remediation alternatives presented in the consultant's report, along with   
certain estimated future consulting costs and expenses.                         

    In the first quarter of 1997, we received approval from the DEP to
include the site in the Act 2 program. There has been no further significant    
activity regarding this matter.                                                 

Douglassville                                                                   

   Lukens is a PRP at this Superfund site located in Berks County,
Pennsylvania. We allegedly sent approximately 80,000 gallons of waste oil/sludge
to the site for treatment and disposal. Lukens is a de minimis party with less  
than 1% of the total waste-in allocation at the site. Lukens agreed to pay      
approximately $368 pursuant to a de minimis Consent Decree in the second quarter
of 1996.                                                                        

  The Consent Decree has not yet been entered by the Court because
certain PRP's are attempting to convince the EPA to reissue the Record of       
Decision for the site to substitute an on-site soil stabilization remedy for the
current incineration remedy. Since on-site stabilization is more cost effective 
than incineration, we would expect our liability to decrease if the Record of   
Decision is reissued.                                                           

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   We have accrued $375 for the Douglassville site based on the terms of our
settlement. The possibility of payments in excess of the amount accrued is      
considered remote.                                                              

  Based on information currently available, management does not anticipate
that its financial position will be materially affected by additional           
environmental remediation costs, although quarterly or annual operating results 
could be materially affected by future developments.                            

Debt Financing. Lukens' notes outstanding of $150,000 are due in 2004. The      
Medium-Term Notes, Series A, outstanding of $75,000 are due in 2006. Supporting 
both short- and long-term liquidity needs are agreements for a committed line of
credit.                                                                         

Other Commitments. A contract for the supply of oxygen and related products to a
Carbon & Alloy Group manufacturing facility runs until 2007 and includes        
take-or-pay provisions totaling $24,087 over the remaining term.                

A software modification program is in process to address programming  
requirements related to the year 2000.                                          

Inflation.  On  average,  inflation  rates for the  domestic  economy  have been
relatively low over the past few years.  Although long-term  inflation rates are
difficult to predict,  Lukens  believes it has the flexibility in operations and
capital structure to maintain a competitive position.                           

Dividends.                                                                      
A graph of net earnings per common share and dividends per common share appears 
in this section.                                                                
Net earnings (loss) per common share:                                           
1995          $ 2.18              
1996          $(2.06)             
1997          $( .45)             

Dividends per common share:                                                     
1995           $1.00              
1996           $1.00              
1997           $1.00              

    Lukens paid $1.00 per share in common stock dividends in 1997. A quarterly
common dividend of $.25 per share was paid on February 20, 1998. It is the      
company's objective to pay common dividends approximating 35 percent of net     
earnings over the long term. The merger agreement with Bethlehem Steel          
Corporation discussed in Note 1, limits the quarterly dividend to $.25 per      
share. As of February 6, 1998, there were approximately 4,600 common            
stockholders of record.                                                         

The Series B Convertible Preferred Stock held by the ESOP carries a   
cumulative annual dividend of $4.80 per share.                                  

  Lukens common stock is listed and traded on the New York Stock Exchange,
symbol LUC. Dividends and stock market price ranges for the last two years are  
included in the table on page 21.                                               

Dollars in thousands except per share amounts                                   

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                            

Consolidated Statements of Earnings                                             
for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30,   
1995                                                                            

                                                        [Enlarge/Download Table]

                                                            1997      1996        1995   
                                                                                         
Net Sales                                               $  994,380   970,320   1,049,158 
Operating Costs and Expenses (Notes 1, 4, 6, 8 and 10)                                   
  Cost of products sold                                    925,984   921,046     922,667 
  Selling and administrative expenses                       54,992    55,145      58,511 
  Unusual items (Note 3)                                                                 
    Work force reduction provision                              --    10,782          -- 
    Environmental remediation provision                         --     9,400          -- 
                                                        ----------   -------   --------- 
  Total operating costs and expenses                       980,976   996,373     981,178 
Operating Earnings (Loss)                                   13,404   (26,053)     67,980 
  Interest expense (Note 8)                                 19,073    16,735      13,471 
                                                        ----------   -------   --------- 
Earnings (Loss) Before Income Taxes                         (5,669)  (42,788)     54,509 
  Income tax expense (benefit) (Note 5)                     (1,049)  (14,377)     20,495 
                                                        ----------   -------   --------- 
Net Earnings (Loss)                                     $   (4,620)  (28,411)     34,014 
                                                        ----------   -------   --------- 
  Dividend requirements for preferred stock (Note 9)        (2,015)   (1,994)     (1,962)
Net Earnings (Loss) Applicable to Common Stock          $   (6,635)  (30,405)     32,052 
                                                        ----------   -------   --------- 

Earnings (Loss) Per Common Share (Note 1)                                                
  Basic                                                 $     (.45)    (2.06)       2.18 
  Diluted                                               $     (.45)    (2.06)       2.05 
Common Shares and Equivalents Outstanding (Note 1)                                       
  Basic                                                     14,806    14,784      14,696 
  Diluted                                                   16,244    16,278      16,334 
Cash Dividends on Common Stock-- Per Share              $     1.00      1.00        1.00 
                                                        ----------   -------   --------- 

The notes are an integral part of these statements.                             

Dollars and shares in thousands except per share amounts                        

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Consolidated Balance Sheets                                                     
as of December 27, 1997, and December 28, 1996                                  

                                                        [Enlarge/Download Table]

Assets                                                                  1997      1996  
Current Assets                                                                          
                                                                                        
  Cash and cash equivalents (Note 1)                                $   6,629    10,282 
  Receivables, less allowance of $6,716 in 1997 and $7,750 in 1996    118,026    92,356 
  Inventories (Notes 1 and 7)                                         145,587   148,925 
  Deferred income taxes (Note 5)                                       13,725    13,129 
  Prepaid expenses and other                                            1,733     1,964 
                                                                    ---------   ------- 
  Total current assets                                                285,700   266,656 
Plant and Equipment (Notes 1 and 10)                                                    
  Land                                                                 12,237    11,880 
  Buildings                                                            88,918    87,875 
  Machinery and equipment                                             850,419   842,334 
  Construction in progress                                              9,249    11,664 
                                                                    ---------   ------- 
                                                                      960,823   953,753 
  Less accumulated depreciation                                       463,264   420,427 
                                                                    ---------   ------- 
  Net plant and equipment                                             497,559   533,326 
Intangible Assets, net of accumulated amortization                                      
  of $11,352 in 1997 and $9,114 in 1996 (Notes 1 and 4)                58,139    57,158 
Deferred Income Taxes (Note 5)                                         34,599    29,937 
Other Assets                                                            1,433     1,674 
                                                                    ---------   ------- 
Total Assets                                                        $ 877,430   888,751 
                                                                    ---------   ------- 

Liabilities & Stockholders' Investment                                                  
Current Liabilities                                                                     
  Accounts payable                                                  $  87,618    92,252 
  Accrued employment costs (Notes 3, 4 and 6)                          43,787    46,603 
  Other accrued expenses (Note 10)                                     33,510    23,765 
  Current maturities of long-term debt (Note 8)                         6,276     4,878 
                                                                    ---------   ------- 
  Total current liabilities                                           171,191   167,498 
Long-Term Debt (Note 8)                                               244,671   248,695 
Retirement Benefits (Notes 3 and 4)                                                     
  Pensions                                                             53,690    43,995 
  Medical and life insurance                                          151,307   148,479 
Other Liabilities (Notes 3 and 10)                                     14,821    22,015 
                                                                    ---------   ------- 
  Total liabilities                                                   635,680   630,682 
Commitments and Contingencies (Note 10)                                                 
Redeemable Stock (Note 9)                                                               
  Series preferred stock                                                   --    28,801 
  Deferred compensation-- ESOP                                             --   (15,374)
                                                                    ---------   ------- 
  Total redeemable stock                                                   --    13,427 
Stockholders' Investment                                                                
  Series preferred stock (Note 9)                                      28,218        -- 
  Common stock (Note 9)                                                   158       158 
  Capital in excess of par value                                       88,444    86,002 
  Earnings invested                                                   150,140   171,730 
  Foreign currency translation adjustments                             (1,739)   (1,332)
  Deferred compensation-- ESOP (Notes 6 and 9)                        (10,619)       -- 
  Deferred compensation-- restricted stock (Note 6)                    (2,574)       -- 
  Repurchased stock, at cost                                          (10,278)  (11,916)
                                                                    ---------   ------- 
  Total stockholders' investment                                      241,750   244,642 
                                                                    ---------   ------- 
Total Liabilities & Stockholders' Investment                        $ 877,430   888,751 
                                                                    ---------   ------- 

The notes are an integral part of these statements.                             

Dollars in thousands                                                            

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Consolidated Statements of Stockholders' Investment                             
for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30,   
1995                                                                            

                                                        [Enlarge/Download Table]

                                                          1997                          1996                       1995          
                                                   Shares      Dollars          Shares         Dollars      Shares      Dollars  
                                                                                                                                 
Series Preferred Stock (Note 9)                                                                                                  
(1,000,000 shares authorized)                                                                                                    
 Series B                                                                                                                        
   Balance at beginning of year                         --      $   --         494,413       $  29,665     510,592      $ 30,635 
   Reversal of redeemable stock                                                                                                  
    classification (Note 9)                        480,018      28,801              --              --          --            -- 
   Conversion                                       (9,718)       (583)        (14,395)           (864)    (16,179)         (970)
   Redeemable stock classification                                                                                               
   (Note 9)                                             --          --        (480,018)        (28,801)         --            -- 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                          470,300      28,218              --              --     494,413        29,665 
Common Stock (Note 9)                                                                                                            
(40,000,000 shares authorized)                  15,813,259         158      15,813,259             158  15,813,259           158 

Capital in Excess of Par Value                                                                                                   
   Balance at beginning of year                                 86,002                          85,204                    84,088 
   Stock option activity (Note 6)                                  124                             565                       716 
   Conversion of Series B                                                                                                        
    preferred stock                                                 37                             233                       400 
   Restricted stock activity (Note 6)                            2,281                              --                        -- 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                                       88,444                          86,002                    85,204 

Earnings Invested                                                                                                                
   Balance at beginning of year                                171,730                         216,934                   199,586 
   Net earnings (loss)                                          (4,620)                        (28,411)                   34,014 
   Dividends declared                                                                                                            
     Preferred ($4.80 per share)                                (2,266)                         (2,339)                   (2,405)
     Common ($1.00 per share)                                  (14,805)                        (14,781)                  (14,696)
     Restricted stock ($1.00 per share)                           (134)                             --                        -- 
     Tax benefit on ESOP preferred                                                                                               
      stock dividends                                              235                             327                       435 
-------------------------------------------------------------------------------------------------------------------------------- 
     Balance at end of year                                    150,140                         171,730                   216,934 

Foreign Currency Translation                                                                                                     
 Adjustments                                                                                                                     
   Balance at beginning of year                                 (1,332)                         (1,141)                   (1,303)
   Effect of rate changes                                         (407)                           (191)                      162 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                                       (1,739)                         (1,332)                   (1,141)

Deferred Compensation -- ESOP (Note 6)                                                                                           
   Balance at beginning of year                                     --                         (19,404)                  (22,767)
   Reversal of redeemable stock                                                                                                  
    classification (Note 9)                                    (15,374)                             --                        -- 
   Allocations to employees                                      4,755                           4,030                     3,363 
   Redeemable stock classification (Note 9)                         --                          15,374                        -- 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                                      (10,619)                             --                   (19,404)

Deferred Compensation --                                                                                                         
 Restricted Stock (Note 6)                                                                                                       
   Balance at beginning of year                                     --                              --                        -- 
   Restricted stock activity                                    (3,861)                             --                        -- 
   Amortization of deferred compensation                         1,287                              --                        -- 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                                       (2,574)                             --                        -- 

Repurchased Stock, at cost                                                                                                       
   Balance at beginning of year                  1,010,988     (11,916)      1,077,305         (12,697)  1,161,460       (13,340)
   Stock option activity (Note 6)                       --          --         (36,750)            433     (35,675)           74 
   Conversion of Series B                                                                                                        
    preferred stock                                 (4,956)         59         (29,567)            348     (48,480)          569 
   Issuance of restricted stock (Note 6)          (134,000)      1,579              --              --          --            -- 
-------------------------------------------------------------------------------------------------------------------------------- 
   Balance at end of year                          872,032     (10,278)      1,010,988         (11,916)  1,077,305       (12,697)

Stockholders' Investment                                     $ 241,750                       $ 244,642                 $ 298,719 
-------------------------------------------------------------------------------------------------------------------------------- 

The notes are an integral part of these statements.                             

Dollars in thousands except per share amounts                                   

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Consolidated Statements of Cash Flows                                           
for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30,   
1995                                                                            

                                                                [Download Table]

                                                       1997      1996       1995  
                                                                                  
Operating Activity                                                                
Net earnings (loss)                                 $ (4,620)  (28,411)    34,014 
Adjustments to Reconcile Net Earnings (Loss)                                      
to Cash Flow from Operating Activity                                              
   Depreciation and amortization                      51,831    48,949     41,304 
   Income taxes deferred                              (2,393)  (18,323)     9,270 
   Provision for uncollectible accounts                5,130    11,348     10,044 
   Retirement benefit funding less than expense        9,208    12,078      4,859 
   Environmental remediation provision                    --     9,400         -- 
   Fixed asset write-downs                                --     5,933         -- 
   Changes in working capital affecting operations                                
      Accounts receivable                            (27,178)   26,897    (25,102)
      Inventories                                      3,338    14,200    (29,746)
      Prepaid expenses and other                         231      (297)       144 
      Accounts payable                                (4,622)  (29,654)    36,585 
      Accrued expenses                                (3,527)  (11,901)     1,894 
   Other, net                                          1,998     3,448      2,225 
                                                    --------    ------     ------ 
Cash flow from operating activity                     29,396    43,667     85,491 

Financing Activity                                                                
Long-term debt                                                                    
   Proceeds from issuance of notes                        --    74,538         -- 
   Other borrowed                                     27,800        --     70,350 
   Other repaid                                      (25,782)  (45,230)   (47,346)
Dividends paid                                       (17,084)  (17,137)   (17,121)
Proceeds from stock options exercised                     --       802        408 
Other, net                                                --      (537)       (12)
                                                    --------    ------     ------ 
Net from (for) financing activity                    (15,066)   12,436      6,279 

Investing Activity                                                                
   Capital expenditures                              (19,369)  (57,092)  (104,120)
   Proceeds from sale of assets/subsidiaries             987       466     17,106 
   Other, net                                            399      (251)    (3,506)
                                                    --------    ------     ------ 
   Net for investing activity                        (17,983)  (56,877)   (90,520)

Cash and Cash Equivalents                                                         
   Increase (decrease)                                (3,653)     (774)     1,250 
   Start of year                                      10,282    11,056      9,806 
                                                    --------    ------     ------ 
   End of year                                      $  6,629    10,282     11,056 
                                                    --------    ------     ------ 

The notes are an integral part of these statements.                             

Dollars in thousands                                                            

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

1. Accounting Policies                                                          

Merger Agreement and Change in Control. On December 15, 1997, Lukens entered    
into a merger agreement with Bethlehem Steel Corporation. The agreement was     
subsequently amended as of January 4, 1998. Under the merger agreement,         
Bethlehem Steel Corporation would acquire Lukens outstanding common and         
preferred stock (converted to common) for $30 per share. Consideration is a     
combination of cash and Bethlehem stock. At year-end 1997, the number of common 
shares outstanding, combined with the conversion of outstanding preferred stock,
would total 16,352,127 shares and result in proceeds of $490,564 in cash and    
Bethlehem stock. The merger is contingent on shareholder approval. A special    
meeting of stockholders is expected to be held during the second quarter of     
1998.                                                                           

The Consolidated Financial Statements and the Notes to Consolidated Financial   
Statements were prepared assuming a going-concern basis and did not recognize   
the impact of the merger. For a discussion of the contingent liabilities        
associated with the merger, see Note 10.                                        

Basis of Presentation. The consolidated financial statements include the        
accounts of Lukens Inc. and all majority-owned subsidiaries. Our fiscal year is 
the 52- or 53-week period that ends on the last Saturday of December. Certain   
subsidiaries are consolidated on a calendar year basis. The preparation of      
financial statements in conformity with generally accepted accounting principles
requires estimates and assumptions that affect the reported amounts and         
contingency disclosures.                                                        

Cash and Cash Equivalents. Highly liquid investments with maturities of three   
months or less when purchased are recognized as cash equivalents.               

Inventories. Inventories are recorded at the lower of cost or market. Cost is   
determined by the last-in, first-out (LIFO) method for most product and raw     
material inventories. The service center operations of the Stainless Group      
determine cost by the first-in, first-out (FIFO) method. Supplies are valued at 
the lower of average cost or market. Additional disclosures are included in Note
7.                                                                              

Plant and Equipment. Plant and equipment are stated at cost and are depreciated 
using the straight-line method over the estimated useful life. The useful life  
ranges from 30 to 40 years for buildings and from 10 to 18 years for most       
production machinery and equipment. The cost of plant and equipment retired in  
the normal course of business is generally charged against accumulated          
depreciation. Gains and losses on other retirements are reflected in earnings.  

Intangible Assets. Intangible assets consist primarily of goodwill resulting    
from the Washington Steel Corporation acquisition in 1992. Goodwill from the    
acquisition is amortized on a straight-line basis over 25 years. Also included  
in intangible assets are pension related assets, discussed in Note 4.           

Derivative Financial Instruments. Derivative financial instruments, such as     
forward exchange contracts, are used to manage or hedge exposure to changes in  
market conditions for certain raw material purchases. Gains or losses on these  
contracts are deferred and recognized as a component of the raw material cost   
based on the maturities of the contracts. Any gains or losses from the early    
termination of these derivative financial instruments are deferred and          
recognized over the original term of the contract. Additional disclosures are   
included in Note 8.                                                             

Environmental Remediation. Environmental liabilities recognized represent our   
best estimate of remediation expenditures, including legal, consulting and other
professional fees, that are probable and that can be reasonably estimated.      
Environmental costs are expensed unless they increase the value of the related  
asset and/or prevent or mitigate future contamination. In November 1996, the    
American Institute of Certified Public Accountants issued guidance on accounting
for environmental liabilities. The adoption of this guidance in 1997 did not    
have a material effect on the company's consolidated financial condition or     
results of operations. Additional disclosures are included in Notes 3 and 10.   

Start-Up Costs. Costs incurred in the start-up of a facility, including training
and production testing, are expensed as incurred.                               

Software Modification Costs for Year 2000 Compliance. Costs incurred to modify  
software packages to operate in the year 2000 and beyond are expensed as        
incurred.                                                                       

Dollars in thousands except per share amounts                                   

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Stock-Based Compensation. In 1996, Lukens adopted Statement of Financial        
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." 
This statement provided for an implementation option, reflecting the controversy
surrounding the measurement of compensation expense for stock options and other 
stock-based compensation. One option was to recognize compensation expense in   
the consolidated financial statements using a fair-value based method, applied  
to virtually all stock-based compensation. The alternative did not change the   
current intrinsic-value approach of expense recognition, but required pro forma 
disclosure in the notes to consolidated financial statements using the          
fair-value method. We elected to continue the intrinsic-value method of expense 
recognition and to provide the pro forma disclosures required under SFAS No.    
123. Additional disclosures are included in Note 6.                             

Earnings Per Share. In 1997, Lukens adopted SFAS No. 128, "Earnings per Share." 
This statement specified the computation, presentation and disclosure           
requirements for earnings per share (EPS). The main objectives of the statement 
were to simplify the EPS calculation and to make EPS comparable on an           
international basis. Effective in 1997, primary and fully diluted EPS were      
replaced by basic and diluted EPS. Prior period results were restated for       
comparative purposes. A significant difference compared to the prior method is  
that basic EPS does not assume potentially dilutive securities in the           
computation.                                                                    

Basic earnings per common share are calculated by dividing net earnings         
applicable to common stock by the average number of common shares outstanding.  
On a diluted basis, both net earnings and shares outstanding are adjusted to    
reflect the conversion of convertible preferred stock. Shares outstanding in the
diluted calculation also assume common stock equivalents, such as stock options.
Diluted common shares and equivalents outstanding disclosed in the Consolidated 
Statements of Earnings reflect the maximum dilution possible. Adjustments that  
would be antidilutive or reduce a loss per share are not recognized.            

Also in 1997, Lukens adopted SFAS No. 129, "Disclosure of Information about     
Capital Structure." This statement was issued in conjunction with the earnings  
per share statement discussed above and was intended to centralize capital      
structure disclosure requirements and to expand the number of companies subject 
to the requirements. Since we were in compliance with the existing capital      
structure disclosure requirements, we did not materially change our disclosures 
under the new standard.                                                         

Future Accounting Changes -- Comprehensive Income. In June 1997, SFAS No. 130,  
"Reporting Comprehensive Income," was released. Comprehensive income is a       
concept that includes the total of net earnings (loss) reported in the          
Consolidated Statements of Earnings, plus revenues, expenses, gains and losses  
that are recognized directly in the stockholders' investment section of the     
Consolidated Balance Sheets. The purpose of the statement was to more           
prominently highlight comprehensive income items and to report a total amount   
for a reporting period. Effective in 1998, Lukens will be required to disclose  
comprehensive income and its components within our financial statements. Prior  
period financial statements will be restated for comparative purposes.          

Future Accounting Changes -- Business Segments. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was also issued in June of  
1997. Beginning in 1998, disclosures will be based on the way management        
organizes business segments to make decisions about resource allocation and to  
measure performance. Disclosures will include interim reporting requirements.   
Previously reported information will be restated for comparative purposes. We do
not expect to materially change our segment disclosures under the new standard. 

2. Business Groups                                                              

Listed below is a description of our business groups, which operate primarily in
the United States. Sales to foreign countries are not significant.              

Carbon & Alloy Group -- specializes in the production of carbon, alloy and clad 
plate steels. The group operates in a wide range of markets in the capital goods
sector of the economy. Steel service centers, the largest market for the group, 
accounted for approximately 48 percent of annual sales in 1997 and averaged     
approximately 38 percent of sales in 1996 and 1995. The primary facilities are  
located in Coatesville and Conshohocken, Pennsylvania. The labor contract for   
the Coatesville plant expires in 2000.                                          

Stainless Group -- specializes in the production of stainless steel sheet,      
strip, plate, hot band and slabs. Manufacturing facilities located in Houston   
and Washington, Pennsylvania, and Massillon, Ohio, primarily serve the capital  
goods and consumer durables sectors of the economy. Labor contracts for these   
facilities expire in 1999 and 2000. The group also operates stainless steel     
service centers in the United States and Canada. The primary market for the     
group is service centers, which averaged approximately 37 percent of annual     
sales in the last three years.                                                  

Dollars in thousands except per share amounts                                   

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Summary business group information is included in the following chart.          
                              1997           1996         1995
Net sales                                                                       
 Carbon & Alloy              $ 516,499       481,237       439,330
 Stainless                     477,881       489,083       609,828
                             ---------       -------     ---------
                             $ 994,380       970,320     1,049,158
Operating earnings (loss)                                                       
 Carbon & Alloy(a)           $  50,410        (2,554)       11,946
 Stainless(b)                  (20,488)       (7,058)       75,148
  Corporate(c)                  (16,518)      (16,441)      (19,114)
                             ---------       -------     ---------
                             $  13,404       (26,053)       67,980
Assets                                                                          
 Carbon & Alloy              $ 426,405       421,034       420,665
 Stainless                     418,830       440,711       468,515
 Corporate(d)                   32,195        27,006        30,483
                             ---------       -------     ---------
                             $ 877,430       888,751       919,663
Depreciation and                                                                
amortization                                                                  
 Carbon & Alloy              $  24,061        23,453        18,696
 Stainless                      27,007        24,505        21,994
 Corporate                         763           991           376
 Discontinued Operations            --            --           238
                             ---------       -------     ---------
                             $  51,831        48,949        41,304
Capital expenditures                                                            
 Carbon & Alloy              $   6,213        13,747        36,940
 Stainless                       6,049        40,298        63,803
 Corporate                       7,107         3,047         3,236
 Discontinued Operations            --            --           141
                             ---------       -------     ---------
                             $  19,369        57,092       104,120
                             ---------       -------     ---------

a. Carbon & Alloy Group Operating Results: 1996 -- Results included a $3,756    
charge for signing bonuses associated with the bargaining unit contract. Unusual
items discussed in Note 3 included a $6,178 work force reduction charge and a   
provision for environmental remediation of $9,400.                              
b. Stainless Group Operating Results: 1996 -- As discussed in Note 3, results   
included a provision of $3,695 for a work force reduction. Fixed assets         
write-downs also reduced results by $5,933.                                     
c. Corporate Expenses: 1997 -- Merger related expenses (Note 1) totaled $2,215. 
1996 -- Expenses included a $909 work force reduction charge                    
(Note 3) and environmental expenses, offset by reduced professional fees and    
incentive compensation expense. 1995 -- Results included higher incentive       
compensation expense and environmental expenses. Corporate environmental        
expenses are associated with properties retained from divested subsidiaries.    
d. Corporate Assets: Corporate assets consist primarily of cash and cash        
equivalents, properties held for sale, office facilities and deferred income    
taxes.                                                                          

3. Unusual Items                                                                

Work Force Reduction. During the second quarter of 1996, Lukens announced a work
force reduction program of approximately 150 salaried positions. The program was
primarily aimed at reducing costs by integrating administrative functions.      
Termination benefits accrued and charged to expense in the second quarter       
totaled $10,782. On an after-tax basis, the provision reduced results by $6,859,
or $.46 per share.                                                              

The charge included severance related benefits of $6,784. Termination benefits  
paid and charged against the liability were essentially completed during 1997.  
Pension related benefits included $3,998 from the combination of pension plan   
benefits that are triggered at termination and from the recognition of a        
curtailment loss. Pension benefits were measured at a 7.75 percent discount     
rate.                                                                           

Environmental Remediation. During the fourth quarter of 1996, $9,400 of expenses
for environmental remediation were recognized. The provision represented our    
best estimate of costs for a Superfund site and other waste disposal sites. On  
an after-tax basis, the charge reduced results by $5,978, or $.40 per share. As 
discussed in Note 10, during the second quarter of 1997, a tentative settlement 
was reached at a Superfund site where Lukens was designated a potentially       
responsible party.                                                              

4. Retiree Benefits                                                             

Pensions. Lukens has defined benefit plans that provide pension and survivor    
benefits for most employees. Benefits are primarily based on the combination of 
years of service and compensation. Plans are funded in accordance with          
applicable regulations.                                                         

Pension benefits triggered by a change in control (Note 1) are discussed in Note
10.                                                                             

Dollars in thousands except per share amounts                                   

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The components of pension expense are listed below.                             

                                            1997        1996        1995
Service cost for                                                                
     benefits earned(a)                    $ 8,642       8,246       6,829
Interest cost on projected                                                      
     benefit obligation                     31,674      30,298      29,279
Actual return on assets                       (64,200)    (44,870)    (67,841)  
Amortization and deferrals                                                      
             Deferred return on assets      31,092      13,894      41,770
             Prior service cost(a)           4,195       4,263       2,900
             Other, net                         35         100          25
                                           -------      ------      ------
Net pension expense(a)                        $11,438      11,931      12,962   
                                           =======      ======      ======

a. The increase in service cost and amortization of prior service cost,         
beginning in 1996, reflected plan improvements to the bargaining unit plan in   
the Carbon & Alloy Group and improvements to the Lukens Inc. salary plan.       

The following table reconciles the net funded status of our plans to amounts    
recognized in the Consolidated Balance Sheets.                                  

                             1997           1996
Actuarial present value of                                                      
Vested benefit obligation(a)        $(403,807)      (365,780)         
Nonvested benefit obligation(a)       (43,968)       (33,013)         
                          ---------       --------
Accumulated benefit obligation(a)    (447,775)      (398,793)         
Effect of projected future                                            
compensation(a)                     (33,703)       (24,765)       
                          ---------       --------
Projected benefit obligation(a)      (481,478)      (423,558)         
Plan assets at fair value(b)               403,802        365,083               
                          ---------       --------
Plan assets less than projected                                                 
benefit obligation                  (77,676)       (58,475)       
                          ---------       --------
Unrecognized net loss (gain)                 1,652        (15,735)              
Unrecognized prior service cost(a)          37,108         41,642               
Unrecognized net obligation                                                     
at transition                           144            178        
Adjustment to recognize                                                         
minimum liability(c)                (20,421)       (14,503)       
                          ---------       --------
Net pension liability                    $ (59,193)       (46,893)              
                          ---------       --------

a. The increase in the 1997 benefit obligations primarily reflected a lower     
discount rate and another actuarial assumption change.                          

b. Plan assets primarily consist of stocks, bonds and short-term investments.   
Contributions to defined benefit plans were $4,029 in 1997 and $7,563 in 1996.  

c. The minimum liability was recognized in intangible assets in the Consolidated
Balance Sheets.                                                                 

The net pension liability was recognized in the following accounts in the       
Consolidated Balance Sheets.                                                    

                1997          1996
Accrued employment costs            $ (7,908)       (7,753)                     
Retirement benefits -- pensions      (53,690)      (43,995)                     
Intangible assets                      2,405         4,855                      
              --------       -------
Net pension liability               $(59,193)      (46,893)                     
              --------       -------

Significant assumptions used in the calculation of expense and obligations are  
listed below.                                                                   

            1997    1996    1995
Discount rate                %       6.8     7.5     7.0                        
Rate of compensation                                                            
increase             %       3-7     3-7     3-7                
Long-term rate of return                                                        
on plan assets       %       9.5     9.5     9.5                

Retiree Medical and Life Insurance Benefits. Lukens provides retiree medical and
life insurance benefits for most employees if they continue to work for the     
company until they reach retirement age.                                        

As required under the 1996 contract for bargaining unit employees at            
Coatesville, Pennsylvania, a Voluntary Employees' Beneficiary Association (VEBA)
Trust was established to provide funding for retiree medical and life insurance 
programs. The trust agreement requires an annual contribution of $2,500 during  
the four-year term of the contract. At the end of 1997, two contributions are   
remaining.                                                                      

Benefit payments from the trust are restricted until required funding levels are
achieved. Based on current conditions, benefit payments from the trust are not  
anticipated in the short term. In addition to the VEBA requirement, benefits are
funded as claims are submitted.                                                 

The components of retiree medical and life insurance expense are listed below.  

                        1997          1996        1995
Service cost for                                                                
benefits earned             $2,405        2,794        2,074    
Interest cost on accu-                                                          
mulated postretirement                                          
benefit obligation          10,192       10,939       10,433    
Actual return on assets               (214)         (67)          --            
Net amortization                                                                
and deferrals                 (339)         (49)        (500)   
                       -------       ------       ------
Net postretirement                                                              
benefit expense            $12,044       13,617       12,007    
                       -------       ------       ------

Dollars in thousands except per share amounts                                   

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The following table reconciles the net funded status of our obligations to the  
liability recognized in the Consolidated Balance Sheets.                        

                           1997           1996
Accumulated postretirement                                                      
benefit obligation                                                          
Retirees(a)                             $ (92,629)       (83,179)               
Fully eligible active participants(a)     (24,035)       (21,398)               
Other active participants(a)              (41,392)       (37,888)               
                        ---------       --------
Total accumulated postretirement                                                
benefit obligation(a)(b)               (158,056)      (142,465)             
Plan assets at fair value(c)                5,281          2,567                
                        ---------       --------
Plan assets less than accumulated                                               
postretirement benefit obligation      (152,775)      (139,898)             
Unrecognized gain                          (1,032)       (11,081)               
                        ---------       --------
Net postretirement                                                              
benefit liability(d)                  $(153,807)      (150,979)             
                        ---------       --------

a. The increase in 1997 benefit obligations primarily reflected a lower discount
rate.                                                                           

b. Obligations include life insurance benefits of $16,495 in 1997 and $15,109 in
1996.                                                                           

c. Plan assets consist of short-term investments.                               

d. At year-end 1997 and 1996, $2,500 was included in current liabilities --     
accrued employment costs for the VEBA contribution.                             

Significant assumptions used in the calculation of expense and obligations are  
listed below.                                                                   

                        1997         1996       1995
Discount rate                  %       6.8          7.5       7.0               
Health-care cost increase(a)   %     6.5-7.6      6.7-8.1   6.9-8.6             
Long-term rate of return                                                        
on plan assets              %       5.0          5.0        --            

a. Health-care cost increase assumptions are reduced to a rate of 5% beginning  
in 2003.                                                                        

A one-percentage point increase in the medical cost trend rate for each year    
would increase the accumulated postretirement benefit obligation by             
approximately $19,265 and would increase net postretirement benefit expense by  
approximately $2,087.                                                           

5. Income Taxes                                                                 

The effective tax rate that determined the income tax expense (benefit)         
recognized is listed below. Essentially all earnings and losses are from United 
States sources.                                                                 

                            1997      1996      1995
Federal statutory rate                 % (35.0)    (35.0)     35.0              
State income taxes net of                                                       
federal tax benefit                      8.3        .1       2.4            
State income tax changes                    --        --        .2              
Non-deductible expenses                   16.0       1.9       1.5              
ESOP dividends                            (9.6)     (1.2)      (.8)             
Other                                      1.8        .6       (.7)             
                         -------     -----      ----
Effective income tax rate              % (18.5)    (33.6)     37.6              
                         -------     -----      ----

The components of the deferred income tax assets (liabilities) are listed below.

                               1997           1996
Deferred tax assets                                                             
Retirement benefits                     $  81,926         75,330            
Tax credit carryforwards                   28,613         17,500            
Other deductible temporary                                                  
differences                              23,965         24,210          
Valuation allowance                        (2,770)        (2,705)           
                              -------        -------
                              131,734        114,335
Deferred tax liabilities                                                        
Plant and equipment                       (73,758)       (61,612)           
Other taxable temporary differences        (9,652)        (9,657)           
                              -------        -------
                               (83,410)       (71,269)
                              -------        -------
Net deferred tax assets                   $  48,324         43,066              
                              -------        -------

The current and deferred components of the income tax expense (benefit) are     
listed below.                                                                   
                1997          1996          1995
Current                                                                         
U.S. Federal                 $4,542         3,272        11,439             
State and other                 551           865         1,609             
              --------       -------        ------
                 5,093         4,137        13,048
Deferred to future years                                                        
U.S. Federal                 (7,299)      (18,720)        4,870             
State and other               1,092            76         2,494             
              --------       -------        ------
                (6,207)      (18,644)        7,364
Change in tax rate                 --            --            83               
Change in valuation                                                             
allowance                      65           130            --           
              --------       -------        ------
Income tax expense                                                              
(benefit)                 $ (1,049)      (14,377)       20,495            
              --------       -------        ------

On a cash basis, the following amounts of income taxes were paid.               

1997            1996             1995         

$5,315          $4,938          $13,018           

At year-end 1997, $28,613 of alternative minimum tax credit carryforwards were  
available.                                                                      

During 1997, settlements were reached in the Internal Revenue Service audits of 
1993, 1994 and 1995. Management believes that the outcome of the outstanding    
audits will not have a material adverse effect on the financial condition,      
liquidity or results of operations of the company.                              

Dollars in thousands except per share amounts                                   

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During the third quarter of 1997, the 1997 Taxpayer Relief Act (1997 TRA) was   
enacted. Changes to the Federal tax structure included a restructuring of the   
depreciable lives used in the alternative minimum tax calculation. Additionally,
the net operating loss carryback period was reduced to two years and the        
carryforward period was increased to 20 years. These changes will become        
effective in the coming years and will likely have a favorable impact on the tax
position of Lukens. The enactment of the 1997 TRA did not require any           
recognition in the 1997 tax provision for the remeasurement of our deferred tax 
balances or for changes to the estimated amount of 1997 Federal taxes payable.  

6. Compensation Plans                                                           

Stock Options. The 1985 Stock Option and Appreciation Plan provides for the     
issuance of non-qualified stock options and incentive stock options (ISOs) to   
officers and other executives. At the Annual Meeting of Stockholders on April   
24, 1996, stockholders approved an amendment to the plan that increased the     
number of shares of common stock available for issuance by 900,000 to a total of
2,737,500. These options to purchase Lukens common stock were available for     
grant until February 26, 1998, at an exercise price not less than the fair      
market value on the grant date. Options were also issued as part of an executive
incentive compensation program. These options vest after three years and expire 
in seven years. All other options vest after one year and expire in 10 years.   

The Lukens Inc. Stock Option Plan for Non-Employee Directors provides for the   
issuance of up to 75,000 non-qualified options to purchase Lukens common stock  
at an exercise price based on the fair market value on the grant date. These    
options vest after one year and expire in 10 years.                             

During 1991, 330,000 non-qualified stock options were granted to Mr. Van Sant as
part of his employment agreement. These options become exercisable ratably over 
11 years. The options carry an exercise price of $23.38 per share, which was 85 
percent of the fair market value on the grant date. Compensation expense from   
this discount from fair market value is being recognized on a straight-line     
basis over the term of his employment agreement.                                

During 1996, Lukens adopted a new stock-based compensation accounting standard, 
discussed in Note 1. As provided for in the statement, the company elected to   
continue the intrinsic-value method of expense recognition. If compensation cost
for these plans had been determined using the fair-value method prescribed by   
SFAS No. 123, the company's results would have been reduced to the pro forma    
amounts indicated below.                                                        

                 1997          1996           1995
Net earnings (loss)     $     (5,717)       (29,703)        33,028              
Earnings (loss) per                                                             
share-- basic         $       (.52)         (2.14)          2.11            
Earnings (loss) per                                                             
share-- diluted       $       (.52)         (2.14)          1.99            

The pro forma effect on results may not be representative of the impact in      
future years because the fair-value method was not applied to options granted   
before 1995.                                                                    

The fair value of each option was estimated on the grant date using the         
Black-Scholes option pricing model. Based on the assumptions presented below,   
the weighted average fair value of options granted was $4.33 per option in 1997,
$7.26 per option in 1996 and $8.76 per option in 1995.                          

                       1997     1996      1995
Expected life in years                   8.0      7.0      7.0                  
Risk-free interest rate       %          6.6      5.6      7.7                  
Volatility                    %         30.6     27.4     28.5                  
Dividend yield                %          5.4      3.6      3.6                  

Dollars in thousands except per share amounts                                   

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A summary of stock option activity is presented below.                          

                                                  Weighted
                                                   Average
                               Shares       Exercise Price
1995                                                                            
Outstanding, beginning of year          767,818         $       27.99           
Granted                                 246,347         $       28.19           
Exercised                               (50,525)        $       18.23           
Forfeited/canceled                      (28,445)        $       35.02           
                           ---------         -------------
Outstanding, end of year                935,195         $       28.35           
                           ---------         -------------
Exercisable, end of year                487,643         $       30.58           
                           ---------         -------------
Available for grant, end of year        436,873                                 
     ---------

1996                                                                            
Outstanding, beginning of year          935,195         $       28.35           
Granted                                 308,942         $       27.81           
Exercised                               (36,750)        $       21.82           
Forfeited/canceled                      (33,800)        $       32.26           
                           ---------         -------------
Outstanding, end of year              1,173,587         $       28.30           
                           ---------         -------------
Exercisable, end of year                618,893         $       29.93           
                           ---------         -------------
Available for grant, end of year      1,061,731                                 
     ---------

1997                                                                            
Outstanding, beginning of year        1,173,587         $       28.30           
Granted                                 326,110         $       18.45           
Exercised                                    --         $          --           
Forfeited/canceled                     (121,450)        $       29.61           
                           ---------         -------------
Outstanding, end of year              1,378,247         $       25.86           
                           ---------         -------------
Exercisable, end of year                746,043         $       28.88           
                           ---------         -------------
Available for grant, end of year        857,071                                 
     ---------

For options outstanding at the end of 1997, exercise prices ranged from $16.625 
to $47.25 and the weighted average remaining life was approximately 6.5 years.  

Restricted Stock. In 1997, the Board of Directors approved the issuance of      
performance vested restricted stock to officers as part of an incentive         
compensation program. During the first quarter of 1997, 134,000 restricted      
shares were awarded. The shares carry voting and dividend rights and were       
recorded at fair market value on the grant date. A corresponding charge to      
deferred compensation was recorded in the stockholders' investment section of   
the Consolidated Balance Sheets. The deferred compensation balance was          
subsequently adjusted for changes in the market price of Lukens common stock and
for compensation expense recognized. The awards vest at the end of three years, 
contingent on continued employment and the achievement of performance goals that
are tied to Lukens' total shareholder return relative to other steel companies. 
Compensation expense recognized for these awards totaled $1,287 in 1997.        

Incentive Compensation. Most Lukens employees participate in incentive          
compensation plans. These plans are based on the consolidated results of Lukens 
Inc., and on the results and performance measures of various subsidiaries.      
Compensation expense under these plans is listed below.                         

1997             1996             1995                      
$12,754           $9,944          $24,875                       

Employee Stock Ownership Plan (ESOP). The Lukens ESOP was designed to provide   
401(k) employer matching benefits to most salaried employees in the form of     
convertible preferred stock. The stock was acquired with the proceeds from a    
$33,075 term loan (Note 8). The stock is released for allocation to             
participants' accounts based on the relationship of debt and interest payments  
to the total of all scheduled debt and interest payments. Dividends on allocated
stock are paid, in-kind, with preferred stock. As discussed in Note 8, the      
quarterly payments of the ESOP debt were restructured in 1996. The projected    
maturities of the ESOP loan over the remaining term are listed below.           

1998                1999          
$5,828              $4,791          

The loan is guaranteed by Lukens, and the outstanding balance is recognized as  
debt in the Consolidated Balance Sheets. An offsetting amount, representing     
deferred compensation measured by the stated value of convertible preferred     
stock, was recognized in the stockholders' investment section in 1997. In 1996, 
this account was classified as redeemable stock, discussed in Note 9. Debt      
service requirements of the ESOP are met by the combination of Lukens' cash     
contributions to the ESOP and dividends on the preferred stock.                 

Regarding expense recognition, cash contributions to the ESOP are recorded as   
compensation expense, and preferred stock dividends reduce retained earnings.   
This recognition results in interest expense incurred on the ESOP debt not being
recognized as interest expense on Lukens' financial statements. Cash            
contributions are listed below.                                                 

1997           1996            1995         
$3,563          $3,187         $2,784           

Change in Control. Compensation liabilities triggered by a change in control    
(Note 1) are discussed in Note 10.                                              

Dollars in thousands except per share amounts                                   

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7. Inventories                                                                  

The components of inventory are listed below.                                   

               1997         1996
Products finished and in process     $117,455      116,477                      
Raw materials                          23,326       27,762                      
Supplies                                4,806        4,686                      
               --------      -------
Inventories(a)                       $145,587      148,925                      
               --------      -------

a. The percent of inventories accounted for under the LIFO inventory valuation  
method was approximately 80% in 1997 and 1996.                                  

The estimated cost to replace inventories at year-end was $185,000 in 1997 and  
$192,000 in 1996.                                                               

8. Financial Instruments                                                        

Long-Term Debt.  Listed below is a summary of long-term debt outstanding.       
                            Years Due         1997            1996
Notes payable, face amount              2004      $ 150,000        150,000      
Unamortized discount                                   (422)          (486)     
Coupon interest at 7.625%                                                   
Effective interest at 7.691%                                                

Medium-term notes,                                                              
face amount                         2006         75,000         75,000  
Unamortized discount                                   (373)          (419)     
Coupon interest at 6.5%                                                     
Effective interest at 6.585%                                                

Short-term notes(a)                     2002          9,300         10,700      
Industrial revenue bonds           1998-2009          6,823          3,404      
ESOP debt guarantee(b)             1998-1999         10,619         15,374      
Total debt(c)                                       250,947        253,573      
--------------------------------------------------------------------------      
Less current portion                                  6,276          4,878      
--------------------------------------------------------------------------      
Long-term debt                                    $ 244,671        248,695      
--------------------------------------------------------------------------      

a. The weighted-average interest rate was 5.8% at year-end 1997 and 5.7% at     
year-end 1996. Short-term notes are classified as long term because they are    
supported by the revolving credit agreement discussed below.                    

b. The ESOP debt, guaranteed by Lukens, carries an 8.26% interest rate on $6,691
as of December 27, 1997. The remaining ESOP debt carries a variable rate of     
80.5% of the Prime Rate. For a discussion on ESOP accounting, see Note 6.       

During 1996, the quarterly payments of the ESOP debt were restructured to align 
anticipated benefits with the release of preferred stock (Note 9). The terms of 
the variable-interest rate portion of the ESOP debt were not changed.           

c. Annual maturities of long-term debt, excluding the ESOP debt guarantee, over 
the next five years are listed below.                                           

1998    1999    2000     2001    2002                 
$448    $418    $350     $361   $9,672                

Notes Payable. There are $150,000 of notes due in 2004 and $75,000 of           
Medium-Term Notes, Series A, due in 2006. Interest is payable semi-annually.    
During the second quarter of 1997, Standard & Poor's lowered their rating from  
BBB+ to BBB on these notes and during the third quarter of 1997, Moody's lowered
their rating from Baa2 to Baa3.                                                 

Lukens also has $25,000 of notes available for issuance under a shelf           
registration. The notes were structured to provide Lukens with flexibility in   
maturities, from nine months to 30 years, and flexibility in interest rate      
structures.                                                                     

Revolving Credit Agreement. Lukens' revolving credit agreement provides for a   
$150,000 committed line of credit. Interest is based on one of the following    
rates:                                                                          

*    the higher of the Prime Rate or the Federal Funds Rate plus .5%            

*    London Inter-Bank Offered Rate (LIBOR) adjusted for applicable reserves    
   plus .225% to .5% depending on the Standard & Poor's or Moody's rating of
the long-term notes of Lukens                                         

*    competitively bid rates from lenders.                                      

A facility fee is required on the total line of credit and ranges from .125% to 
.3% based on the lower of Standard & Poor's or Moody's rating of Lukens       
long-term notes.                                                                

The agreement includes covenants that require a maximum leverage ratio (defined 
in the agreement) of 55% and restrictions on additional debt and asset          
dispositions. At year-end 1997, additional borrowings of approximately $65,400  
were available under these covenants.                                           

Interest Expense. Interest costs include interest on obligations and            
amortization of debt set-up costs. For a discussion of ESOP debt accounting, see
Note 6. Interest components are listed below.                                   

   1997        1996         1995

Costs incurred           $19,073      19,005       16,395                       
Interest capitalized          --      (2,270)      (2,924)                      
  -------      ------       ------
Interest expense         $19,073      16,735       13,471                       
  -------      ------       ------
Interest paid            $18,796      17,436       16,107                       
  -------      ------       ------

Derivative Financial Instruments --                                             

Commodity Hedges. As of year-end 1997, Lukens was party to several commodity    
hedge agreements maturing in 1998. Based on year-end market conditions, the     
value of Lukens' contractual obligations for these commodity hedges was $15,020 
and the obligation of the counterparties to the agreements was $12,645. Gains   
and losses on these contracts are recognized as a component of cost of products 
sold. Lukens is exposed to credit risk from nonperformance by the counterparties
to these agreements.                                                            

Dollars in thousands except per share amounts                                   

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Fair Value of Financial Instruments. The following table presents the fair value
of certain financial instruments as of year-end 1997 and 1996.                  

Asset (Liability)       
Book Value      Fair Value        
1997                                                                            
Debt(a)                 $(250,947)      (257,376)                               
Commodity hedges(b)     $      --         (2,168)                               

1996                                                                            
Debt(a)                 $(253,573)      (254,201)                               
Commodity hedges(b)     $      --         (1,956)                               

a. Fair value was determined by discounting cash flows using comparable year-end
market interest rates.                                                          

b. Fair value was estimated by using quotes from brokers.                       

9. Stockholders' Investment                                                     
and Redeemable Stock                                                            

Common Stock. There are 40,000,000 common shares authorized with a par value of 
$.01 per share. Under the stock option plans discussed in Note 6, 3,142,500     
shares of common stock have been reserved.                                      

Preferred Stock. There are 1,000,000 shares of series preferred stock, par value
$.01 per share, authorized. An ESOP was established in 1989 with the issuance of
551,250 shares of Series B Convertible Preferred Stock. The preferred stock is  
stated at its liquidation preference of $60 per share and carries an annual     
cumulative dividend of $4.80 per share. Each share may be converted into three  
shares of common stock within the guidelines of an employee 401(k) savings plan 
(Note 6). Holders of the Series B preferred stock are entitled to vote upon all 
matters submitted to the holders of common stock for a vote. The number of votes
is equal to the number of common shares into which the preferred shares are     
convertible. Lukens' redemption price of $61.80 per share declines gradually    
each year to $60 per share on or after July 2, 2000.                            

Under the terms of the 401(k) plan, when the price of Lukens common stock is $20
per share or greater, the preferred stock is redeemable in common stock, cash or
a combination at the option of Lukens. If the price is below $20 per share, the 
401(k) participants have the option to redeem preferred stock in the combination
above.                                                                          

Redeemable Stock. At year-end 1996, Series B Convertible Preferred Stock and the
related ESOP deferred compensation (Note 6) were classified as redeemable stock 
because the price of Lukens common stock was below $20 per share at the fiscal  
year-end, December 28, 1996. The reclassification from stockholders' investment 
reflected the ability of 401(k) participants to elect a cash payout option at   
redemption. The classification was not made in 1997 or in years prior to 1996   
because the company had the ability and intention to redeem preferred stock with
Lukens common stock.                                                            

Shareholder Rights Plan. Lukens has a Shareholder Rights Plan designed to deter 
coercive or unfair takeover tactics and to prevent a buyer from gaining control 
of Lukens without offering a fair price to stockholders. The plan entitles each 
outstanding share of common stock to one right. Each right entitles stockholders
to buy one one-hundredth of a share of Series A Junior Participating Preferred  
Stock at an exercise price of $80. The rights become exercisable if a person or 
group acquires or makes a tender or exchange offer for 15 percent or more of    
common stock outstanding. The rights can also become exercisable if the Board of
Directors determines, with the concurrence of outside directors, that a person  
has certain interests adverse to Lukens and has acquired at least 10 percent of 
common stock outstanding.                                                       

If the company is then acquired in a merger or other business combination       
transaction, each right will entitle the holder to receive, upon exercise,      
common stock of either Lukens or the acquiring company having a value equal to  
two times the exercise price of a right.                                        

Lukens will generally be entitled to redeem the rights at $.01 per right at any 
time until the tenth day following public announcement that a 15 percent        
position has been acquired. The purchase rights will expire on September 25,    
2006. Of the 1,000,000 shares of series preferred stock authorized, 75,000 have 
been reserved for the Series A preferred stock discussed above. As of December  
27, 1997, there were 6,580,990 rights outstanding.                              

In connection with the Bethlehem merger agreement discussed in Note 1, the      
Shareholder Rights Plan was amended to make the provisions of the plan not      
applicable to the proposed merger.                                              

10. Commitments and Contingencies                                               

Change in Control. As discussed in Note 1, Lukens entered into a merger         
agreement with Bethlehem Steel Corporation. In the event that the merger is     
approved by stockholders, a change in control liability totaling approximately  
$56,000, subject to fluctuations in the market value of Bethlehem common stock, 
would be triggered. Components of the liability include obligations for         
severance, pension, stock options and performance vested restricted stock.      

Dollars in thousands except per share amounts                                   

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Leases. Lukens has various operating leases primarily for real estate and       
production equipment. At year-end 1997, minimum rental payments under           
noncancelable leases totaled $21,292. Listed below are the scheduled payments   
over the next five years for these leases.                                      
1998    1999    2000    2001    2002        
$5,576  $5,074  $2,755  $1,905  $1,715          

Rent expense for all operating leases is listed below.                          
1997    1996    1995              
$7,961  $8,091  $7,177                

Environmental Remediation. Lukens has been designated a potentially responsible 
party (PRP) under Superfund law at certain waste disposal sites and continually 
monitors a range of other environmental issues. Superfund designations are made 
regardless of the extent of the company's direct or indirect involvement. These 
claims are in various stages of administrative or judicial proceedings, and     
include demands for recovery of incurred costs and for future investigation or  
remedial actions. The company accrues costs associated with environmental       
matters when they become probable and can be reasonably estimated. In assessing 
environmental liability, the company considers the extent and type of hazardous 
substances at a site, the range of technologies that can be used for            
remediation, evolving laws and regulations, the allocation of costs among       
potentially responsible parties, and the number and financial strength of those 
parties.                                                                        

The Helen Kramer Superfund Site is a municipal and industrial waste landfill for
which remediation was performed over several years by the EPA. This remediation 
process was completed in 1994. Lukens became a third party defendant in 1991 as 
the direct defendants associated with this site alleged that Lukens generated   
hazardous substances that were transported to and disposed at this landfill.    

A preliminary waste-in report was circulated among the PRP's in the third       
quarter of 1995. Many of the PRP's expressed significant concerns regarding this
report and objected to its preliminary findings. Additionally, a substantial    
part of the total site costs incurred by the Federal government were the subject
of a pending criminal investigation, and recoverable clean-up cost estimates    
ranged from $50,000 to $150,000, depending on the outcome of the investigation. 
In the fourth quarter of 1995, Lukens received a draft allocation plan. The     
draft allocation plan attributed a percentage allocation of approximately 3% to 
Lukens. This plan was subject to change as all participating parties were given 
an opportunity to provide comments and submit additional information regarding  
the determinations made. Lukens objected strongly to this plan based on issues  
related to nexus, volume, toxicity, transporter liability, neutralization and   
other allocation issues.                                                        

At the end of 1995, based on the significant uncertainties surrounding this     
matter, Lukens concluded that it was not probable that a liability had been     
incurred and no provision was recorded. Lukens also concluded that, while it was
reasonably possible that a liability could result from this matter, management  
was unable to reasonably estimate the amount, if any, of such liability.        

In the second quarter of 1996 a final non-binding allocation plan was received. 
Lukens' percentage allocation was approximately 4% based on this plan. We       
continued to have major concerns with this allocation plan and believed we could
significantly reduce our allocation percentage based on the issues described    
above. In the third quarter of 1996, a majority of PRP's voted to reject using  
the final allocation plan as a basis for further negotiation.                   

In the fourth quarter of 1996, circumstances surrounding this matter changed    
significantly. The EPA and the direct defendants made significant progress      
towards reaching an agreement on the total cleanup costs to be reimbursed based 
on a proposal submitted by the direct defendants. The EPA strongly encouraged a 
settlement agreement by year-end 1996 including a commitment by the third party 
defendants to contribute their allocated shares and to participate in the       
settlement process. These discussions between the EPA and the direct defendants 
generated significant momentum toward settlement and increased the level of     
pressure on the third party defendants, such as Lukens. It quickly became clear 
that, despite the third quarter rejection vote by the PRP's, the EPA and the    
direct defendants were focused on the allocations identified in the last        
allocation report and there appeared little probability that further allocation 
reports would be commissioned.                                                  

Based on these new developments, the total cost of the settlement was now able  
to be reasonably estimated, as was our estimated portion of such cost.          
Accordingly, we concluded late in the fourth quarter of 1996 that a liability,  
based on the allocation report issued in the second quarter of 1996, was        
probable and should be recognized. At that time, we recognized a liability of   
$6,000.                                                                         

During the second quarter of 1997, a tentative settlement was reached in the    
Helen Kramer Superfund matter for which we agreed to pay $5,600.                

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We are currently negotiating with our insurance carriers for recovery of the    
tentative settlement amount and we are optimistic that a substantial recovery   
will be available. However, no receivable has been recorded for any estimated   
recovery, given the uncertainty surrounding such claims.                        

Lukens disposed of Electric Arc Furnace flue dust at a site on our premises from
approximately 1961 to 1980. Flue dust is listed by the EPA as a hazardous waste.
This site was originally visited by the EPA in 1989, but the EPA required no    
further action at that time.                                                    

Lukens was not aware of any other EPA activity related to this site until late  
in the first quarter of 1996, at which time the EPA conducted another inspection
of the site. The EPA's inspection results, received in May 1996, resulted in a  
hazard ranking score that was greater than the threshold required for inclusion 
of the site on the National Priority List ("NPL"). We reviewed the EPA's        
sampling results and identified discrepancies between the EPA's results and our 
sample results. The EPA concluded that the site did not require remedial action 
at that time. Additionally, no administrative orders or consent decrees were    
received or entered into. However, the EPA concluded that the site warranted    
further investigation and indicated that it would initiate a sampling process at
the site within six to nine months.                                             

During the fourth quarter of 1996, a preliminary report outlining remedial      
alternatives and costs was issued by an independent consulting firm, hired by   
Lukens. The report provided four scenarios with costs ranging from $456 to      
$4,850, depending on the extent of the remediation. Additionally, during the    
fourth quarter, we met with the Pennsylvania Department of Environmental        
Protection ("DEP") to initiate discussions, in accordance with a recommendation 
from the EPA in the second quarter of 1996, to pursue voluntary remediation     
under Pennsylvania Act 2. This would, among other items, avoid the NPL process. 
The DEP agreed to consider whether the site was qualified for the Act 2 program.

Based on our decision to approach the DEP for voluntary cleanup coupled with the
results of the preliminary remediation report, we concluded in the 1996 fourth  
quarter that a liability was probable and could be reasonably estimated. The $3 
million liability recognized was based on our best estimate from the remediation
alternatives presented in the consultant's report, along with certain estimated 
future consulting costs and expenses.                                           

In the first quarter of 1997, we received approval from the DEP to include the  
site in the Act 2 program. There has been no further significant activity       
regarding this matter.                                                          

Based on information currently available, the liability recorded for            
environmental remediation costs was approximately $16,950 at year-end 1997 and  
$16,800 at year-end 1996 (Note 3). Due to their uncertain nature, amounts       
accrued could differ, perhaps significantly, from the actual costs that will be 
incurred. No potential insurance recoveries were taken into account in          
determining the company's cost estimates or reserves. Management does not       
anticipate that its financial position will be materially affected by additional
environmental remediation costs, although quarterly or annual operating results 
could be materially affected by future developments.                            

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Litigation. The company is party to various claims, disputes, legal actions and 
other proceedings involving negligence, contracts, equal employment opportunity,
occupational safety and various other matters. In the opinion of management, the
outcome of these matters should not have a material adverse effect on the       
consolidated financial condition or results of operations of the company.       

Commitments. At year-end 1997, purchase commitments for capital expenditures    
were approximately $5,000. Capital expenditures projected for 1998 are          
approximately $36,000.                                                          

Lukens Steel Company has a long-term contract for the supply of oxygen and      
related products to its facility in Coatesville, Pennsylvania. The contract runs
until 2007 and has take-or-pay provisions totaling $24,087 for the remaining    
term. Annual minimum commitments of $2,604 can be adjusted for inflation and are
representative of amounts expensed in the prior three years.                    

Report of Independent Public Accountants                                        

To the Stockholders and Board of Directors, Lukens Inc.:                        

We have audited the accompanying consolidated balance sheets of Lukens Inc. (a  
Delaware Corporation) and subsidiaries as of December 27, 1997 and December 28, 
1996 and the related consolidated statements of earnings, stockholders'         
investment and cash flows for each of the three fiscal years in the period ended
December 27, 1997. 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. Those standards 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. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the financial position of Lukens Inc. and subsidiaries as
of December 27, 1997 and December 28, 1996, and the results of their operations 
and their cash flows for each of the three fiscal years in the period ended     
December 27, 1997 in conformity with generally accepted accounting principles.  

/s/ Arthur Andersen LLP                                                         
Arthur Andersen LLP                                                             
Philadelphia, Pennsylvania                                                      
January 19, 1998                                                                

Dollars in thousands except per share amounts                                   

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Quarterly Financial Data (Unaudited)                                            

                                                        [Enlarge/Download Table]

                                        First    Second      Third    Fourth     Fiscal  
                                       Quarter   Quarter    Quarter   Quarter      Year  
                                                                                         
Results of Operations                                                                    
1997                                                                                     
        Net sales                   $  248,118   258,247    243,371   244,644    994,380 
        Cost of products sold       $  233,837   238,253    225,583   228,311    925,984 
        Net earnings (loss)         $   (1,978)    1,181        133    (3,956)    (4,620)
                                    ----------   -------    -------   -------    ------- 
1996                                                                                     
        Net sales                   $  264,172   255,955    234,421   215,772    970,320 
        Cost of products sold       $  252,464   236,343    223,192   209,047    921,046 
        Net earnings (loss)         $   (4,375)   (5,733)c   (4,087)  (14,216)d  (28,411)
                                    ----------   -------    -------   -------    ------- 
Per Common Share                                                                         
1997                                                                                     
        Basic earnings (loss)(a)    $     (.17)      .05      (.03)      (.30)      (.45)
        Diluted earnings (loss)(a)  $     (.17)      .05      (.03)      (.30)      (.45)
        Dividends                   $      .25       .25       .50 b       --       1.00 
                                    ----------   -------    -------   -------    ------- 
1996                                                                                     
        Basic earnings (loss)(a)    $     (.33)     (.42)c    (.31)      (.99)d    (2.06)
        Diluted earnings (loss)(a)  $     (.33)     (.42)c    (.31)      (.99)d    (2.06)
        Dividends                   $      .25       .25       .50 b       --       1.00 
                                    ----------   -------    -------   -------    ------- 
Market Prices of Common Stock                                                            
1997                                                                                     
        High                        $   21 7/8    20 3/8    21 13/16  29          29     
        Low                         $   17 3/8    16 7/8    18        15          15     
        Close                       $   17 3/8    19 1/8    19  9/16  28 13/16           
                                    ----------   -------    -------   -------    ------- 
1996                                                                                     
        High                        $   30 1/4    27 3/8    24  1/8   19  1/4     30 1/4 
        Low                         $   24 1/4    23 3/4    18  1/8   13  1/2     13 1/2 
        Close                       $   24 7/8    23 7/8    18  1/8   19  1/8            
                                    ----------   -------    -------   -------    ------- 

a. Earnings (loss) per share calculations were based on the weighted-average    
shares and equivalents (diluted) outstanding during the period reported. No     
adjustments were made that would be antidilutive or reduce the loss per share.  
Consequently, the sum of the quarterly earnings per share amounts may not equal 
the annual per share amounts. See Note 1 for a discussion regarding the impact  
of a new accounting statement issued that addressed the earnings per share      
calculations. Quarterly amounts have been restated under the new standard.      

b. Due to the timing of the Board of Directors meetings, two quarterly common   
stock dividends were declared in the third quarter, totaling $.50 per share.    

c. A $10,782 work force reduction charge reduced results by $6,859, or $.46 per 
share (Note 3).                                                                 

d. Results include unusual charges of $15,333 for an environmental remediation  
provision (Note 3) and fixed asset write-downs (Note 3). On an after-tax basis, 
the provisions reduced results by $9,814, or $.66 per share.                    

Dollars in thousands except per share amounts and market prices of common stock 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange  
Act of 1934, the registrant has duly caused this amended report to be signed on 
its behalf by the undersigned, thereunto duly authorized.                       

                     LUKENS INC.
                      (Registrant)

Date:  April 16, 1998                     By /s/ R. W. Van Sant                 
                            ------------------
                        R. W. Van Sant
                      Chairman and
                                 Chief Executive Officer

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 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES

We have audited, in accordance with generally accepted auditing  standards,  the
consolidated  financial  statements  included in this Form 10-K, and have issued
our report  thereon dated January 19, 1998. Our audits were made for the purpose
of  forming  an  opinion on those  statements  taken as a whole.  The  financial
statement schedule referred to in Item 14 is the responsibility of the Company's
management  and is presented for purposes of complying  with the  Securities and
Exchange  Commission's rules and is not part of the basic financial  statements.
The financial  statement schedule has been subjected to the auditing  procedures
applied in the audits of the basic  financial  statements  and, in our  opinion,
fairly  states in all material  respects the  financial  data required to be set
forth therein in relation to the basic financial statements taken as a whole.   

                                 /s/ Arthur Andersen LLP

                             Arthur Andersen LLP
                                    Philadelphia, Pennsylvania
                          January 19, 1998

 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
reports  dated January 19, 1998  included or  incorporated  by reference in this
annual report on Form 10-K, as amended,  into the  Company's  previously  filed:
Form S-8  Registration  Statements  File Numbers  33-6673,  33-23405,  33-29105,
33-54269,  33-54271, 33-54371, 33-69780 and 333-09451, and Form S-3 Registration
Statement File Number 33-53681.                                                 

                                 /s/ Arthur Andersen LLP

                             Arthur Andersen LLP
                                    Philadelphia, Pennsylvania
                        April 23, 1998

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K405/A Filing		Date		First		Last			Other Filings
		12/30/95		19		22			10-K405
		4/24/96		28					DEF 14A
		7/31/96		16
		9/24/96		16
		10/11/96		17
		10/14/96		17
		12/28/96		12		34			10-K
		12/15/97		2		23			8-K
		12/23/97		7
For The Period Ended		12/27/97		1		34			10-K405, NT 10-K
		12/29/97		7
		1/4/98		2		23			8-K
		1/6/98		7
		1/19/98		34		37
		2/6/98		18
		2/20/98		18					SC 13D
		2/26/98		28
		3/2/98		1
		3/11/98		7
		3/27/98		7
		4/16/98		36
		4/23/98		37
Filed On / Filed As Of		4/24/98
		7/2/00		31
		9/25/06		31
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