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

                                   FORM 10-KSB

(X)    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
       OF 1934 (Fee Required)

       For the fiscal year ended May 31, 1997.

( )    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 (No Fee Required)

                         Commission File Number: 1-4676

                            The Bethlehem Corporation
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

                  Pennsylvania                                  24-0525900
         -------------------------------                    ----------------
         (State or other jurisdiction of                    (I.R.S. Employer
         incorporation or organization)                     Identification No.)

         25th And Lennox Streets, Easton, Pennsylvania         18044-0348
         ---------------------------------------------         ----------
         (Address of principal executive offices)              (Zip Code)

Issuer's telephone number including Area Code:  (610) 258-7111.

Securities registered under Section 12(b) of the Act:

                                                 Name of each exchange
         Title of each Class                      on Which Registered
         -------------------                      -------------------

         Common Stock, no par value               American Stock Exchange, Inc.

Securities registered under Section 12(g) of the Exchange Act:  None.

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

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will 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-KSB or any  amendment to
this Form 10-KSB.

State issuer's revenues for its most recent fiscal year:  $17,916,000.

As of August 22, 1997,  1,938,520 shares of the  registrant's  common stock were
outstanding  and the  aggregate  market  value  of  such  common  stock  held by
non-affiliates was approximately  $2,027,074 based on the average of the bid and
asked prices on that date of $2.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions  of the Proxy  Statement  for 1997 Annual  Meeting of  Stockholders
incorporated by reference in Part III, Items 9, 10, 11 and 12.
<PAGE>
                                TABLE OF CONTENTS

                        FORM 10-KSB ANNUAL REPORT - 1997

                            THE BETHLEHEM CORPORATION


PART I.........................................................................1
         Item 1.   Description of Business.....................................1
         Item 2.   Description of Property.....................................5
         Item 3.   Legal Proceedings...........................................6
         Item 4.   Submission of Matters to a Vote of Security Holders.........6

PART II........................................................................7
         Item 5.   Market for the Company's Common Equity and Related 
                   Stockholder Matters.........................................7
         Item 6.   Management's Discussion and Analysis or Plan of Operation...7
         Item 7.   Financial Statements.......................................12
         Item 8.   Changes In and Disagreements With Accountants on 
                   Accounting and Financial Disclosure........................12

PART III......................................................................13
         Item 9.   Directors, Executive Officers, Promotors 
                   and Control Persons; Compliance
                   with Section 16(a) of the Exchange Act.....................13
         Item 10.  Executive Compensation.....................................13
         Item 11.  Security Ownership of Certain 
                   Beneficial Owners and Management...........................13
         Item 12.  Certain Relationships and Related Transactions.............13

PART IV.......................................................................14
         Item 13.  Exhibits, List and Reports On Form 8-K.....................14

SIGNATURES....................................................................17
<PAGE>
                                     PART I

Item 1.   DESCRIPTION OF BUSINESS

GENERAL

          The Bethlehem  Corporation  (the  "Company")  was founded in 1856 as a
foundry  and  machine  shop and  incorporated  in  1888.  The  Company  designs,
manufactures,  markets  and  services a product  line of capital  equipment  and
systems used to process materials for a variety of industrial applications.  Its
proprietary  products  include the Porcupine  Processor(R),  the Thermal Disc(R)
Processor,  the Bethlehem Tower Filter Press,  drum dryers and flakers,  tubular
dryers, and calciners.  In addition,  the Company operates a production facility
that fabricates,  machines and assembles equipment to customers' specifications.
The Company has developed  expertise in the areas of thermal processing systems,
environmental  systems,  filtration,  specialty  machining,  fabrication and the
rebuilding and remanufacture of specialty process  equipment.  In addition,  the
Company,   through  Bethlehem   Advanced   Materials   Corporation   ("BAM"),  a
wholly-owned  subsidiary  formed in September 1995 to acquire  certain assets of
the American Furnace Division of Third Millennium  Products,  Inc.,  designs and
manufactures  high-temperature  furnaces  for  sale  and for its own use for the
processing  of advanced  materials  for customer  orders.  The furnaces  process
specialty  carbon,   graphite  and  ceramic  materials  for  semiconductors  and
aerospace industries.

CAPITAL EQUIPMENT, MACHINING AND FABRICATION

          The Company's customers for its capital equipment, sales and machining
and fabrication  services  include the primary  ferrous and  non-ferrous  metals
industries,  refineries, chemical, food, pharmaceutical and petrochemical firms.
Its products include the Porcupine Processor(R),  the Thermal Disc(R) Processor,
the Bethlehem  Tower Filter Press,  drum dryers and flakers,  tubular dryers and
calciners.  The Porcupine  Processor(R) dries, heats or cools various chemicals,
solids, or slurries.  It reduces operating and installation costs and provides a
free-flowing end product.  The Bethlehem Tower Filter Press filters a wide range
of slurries,  operating  automatically  and uses a  programmable  logic  control
system. The Company operates a production  facility that includes a full service
laboratory  equipped  to test a broad  range  of  materials  and  processes  for
filtration  and thermal  processing  applications.  The Company also has thermal
processing  and filtration  pilot units  available for use at customer sites for
test processing. In conjunction with sales of capital equipment and systems, the
Company  provides  engineering  and design  services and conducts an aftermarket
business  consisting  primarily  of  remanufacture,  repair,  refurbishment  and
equipment  upgrade  services  and spare parts  sales.  The  Company  markets its
products  through an  international  sales network covering markets in North and
South America, Asia and Europe.

          The Company serves these markets through five main business units:

          o    The Thermal  Process  Equipment  unit markets core heat  transfer
               equipment,  which includes dryers,  coolers, rotary calciners and
               flakers. The Porcupine  Processor(R),  an indirectly heated dryer
               developed  by  the  Company,  is  the  flagship  of  this  unit's
               products.  Some of the  markets  for these  products  include the
               chemical,  plastics,  food,  pharmaceuticals,  refineries,  waste
               treatment and mining industries.

          o    The Environmental Systems unit markets Thermal Desorption Systems
               for sale and  rental.  These  systems,  which  usually  include a
               Porcupine Processor(R),  are used for treating both hazardous and
               non-hazardous   sludges,   contaminated  soils  and  other  waste
               streams.  The market for these  systems  is  currently  driven by
               environmental regulations and is expected to grow.

          o    The Filtration  Process Equipment unit designs,  manufactures and
               markets coarse to fine  filtration  systems used in  solid/liquid
               separation.  The target markets are fine and specialty chemicals,
               mining,  food,  precious metal recovery and  pharmaceutical.  The
               Bethlehem Tower Filter Press is the unit's principal product.

          o    The  Specialty  Heavy  Machining  and  Fabrication  Services unit
               provides high quality fabrication machining and assembly services
               to a wide variety of industries including power, chemical,  petro


<PAGE>
               chemical,  ship building,  steel and non-ferrous metal producers.
               This  Company has  recently  formed a joint  venture with another
               fabrication company to expand its services.

          o    The Rebuild/Remanufacture  Equipment unit upgrades used equipment
               and remanufactures a broad range of process equipment.  This unit
               markets these products based on two primary  advantages:  reduced
               capital  expenditure  and  shorter  lead time on  delivery to the
               pharmaceutical,    chemical   and    environmental    remediation
               industries.

BETHLEHEM ADVANCED MATERIALS CORPORATION (BAM)

          BAM designs and manufactures specialty  high-temperature furnaces that
are used for the  processing  and  manufacturing  of a wide  variety of advanced
materials, such as carbon and graphite fiber, carbon graphite composites, carbon
and graphite  structures,  ceramic powders and ceramic composites.  In addition,
BAM  processes  specialty  carbon,   graphite  and  ceramic  materials  for  the
semiconductor  and  aerospace  industries.  BAM is also  involved in  commercial
process and product development of advanced materials.

          BAM is engaged  in three  primary  lines of  business  involving  high
temperature furnaces and the processing of advanced specialty materials:

          o    Furnace   Manufacturing--design/engineering,   manufacturing  and
               installation of specialty high temperature furnace systems.

          o    Toll Processing--contract heat treating and thermal processing of
               specialty materials.

          o    Commercial  Product and Process  Development--utilization  of the
               Company's own furnaces, technology and expertise to commercialize
               new  applications and products for its own use and in conjunction
               with   customers  in  order  to  enhance   their   processes  and
               applications.


          In  addition  to  selling  furnaces,  BAM  owns and  operates  several
furnaces to provide toll firing  services for its  customers.  Customers of BAM,
whether a furnace  purchaser or on a tolling basis, are typically  manufacturers
of carbon  graphite  structures,  composites,  powders  and  fibers,  as well as
manufacturers of non-oxide ceramics,  such as silicon carbide or silicon nitride
or other advanced ceramic structures.


STRATEGY

          The  Company's  business  strategy  is to continue  the  technological
development   and  marketing  of  its  core  capital   equipment   products  and
environmental systems.  Additionally, the Company will focus on the expansion of
specialty high  temperature  furnace systems,  toll processing  services for the
advanced  materials  markets  and  the  commercialization  of new  products  and
processes in advanced materials by BAM.

          The Company's  strategy is also to continue to strengthen its position
in  markets  inside and  outside  the  United  States,  to expand its world wide
manufacturing sourcing and to pursue new sales opportunities as they develop, in
new,  rebuilt and used equipment.  In addition,  the Company intends to identify
and evaluate  opportunities to extend current market applications,  identify new
potential  applications and establish plans for developing such applications for
high temperature furnaces.

          As  part  of its  efforts  to  expand  its  current  range  of  market
applications,  the Company is engaged in exploring  strategic  partnerships with
specific  customers  to use Company  technology  and  expertise  in the areas of
semiconductor  purification  and the  carbonization  of PAN for use in  aircraft
brakes and lithium ion batteries.


                                      -2-
<PAGE>
CUSTOMERS; EXISTENCE OF SHORT-TERM CONTRACTS

          The  Company's  principal  customers  for its  capital  equipment  are
domestic  and  foreign  manufacturers  of  chemicals,  pharmaceuticals,   foods,
plastics and  petrochemicals  and environmental  firms. The Company's  principal
customers for its high  temperature  furnaces and related  tolling  services are
domestic and foreign manufacturers of carbon and graphite structures,  and other
advanced ceramic composite structures.

          Currently,  the major  portion of the  Company's  sales are made under
short-term  or  one-time  contracts  for  the  Company's  capital  equipment  or
high-temperature  furnaces, which contracts are not subject to renewal. Although
this may afford  the  Company  flexibility  in  responding  to  changing  market
conditions,  a  market  for the  Company's  products  and  services  under  such
contracts  is not  assured.  As a result,  one or more  short-term  or  one-time
contracts may constitute a high  percentage of the Company's total net sales for
any  particular  quarter or fiscal year.  The inability of the Company to obtain
such  contracts  in the  future  could  have a  material  adverse  effect on the
Company's business.

          The Company's  largest customer Eastman Chemical Company accounted for
35% of the  Company's  net sales for the year ended May 31, 1997 and 30% for the
year ended May 31, 1996.

          The Company's active customers for capital  equipment  include Eastman
Chemical Company,  Foster Wheeler,  Olin Corp.,  Hampshire  Chemical Company and
Aluminum Company of America. Sales to Universal Process Equipment, Inc. ("UPE"),
a significant shareholder of the Company accounted for approximately 1% of total
sales in fiscal 1997 and  approximately  6% of total sales in fiscal  1996.  The
Company's active  customers for high  temperature  furnaces and tolling services
are Allied  Signal,  UCAR Carbon and Graphite  Products,  Inc.  Purchases by any
single  customer  vary  significantly  from  year  to  year  according  to  such
customer's  capital equipment needs. The composition of the Company's  customers
may also vary from year to year.

SALES AND MARKETING

          The Company  markets  its  products  to  customers  in North and South
America, Asia and Europe, primarily by a direct sales and support staff based at
its headquarters in Easton,  Pennsylvania for its capital equipment products and
services and in Knoxville,  Tennessee for its high temperature  furnace products
and tolling services.  The Company also relies on product sales  representatives
in some regions of North  America and in certain  geographic  areas  outside the
United States. The Company's commission program with respect to such independent
representatives  varies  depending on the type of product sold and the volume of
sales over the course of a year.  The  percentage of sales  generated  from such
independents equaled approximately 18% of total sales for the year ended May 31,
1997 and approximately 20% of total sales for the year ended May 31, 1996 and it
is  anticipated  that the  percentage  of sales for the year ending May 31, 1998
will be approximately 20%.

BACKLOG

          As of August 22,  1997,  the Company had a backlog of orders  equaling
$9.5  million  compared to $9.8  million  for the same period last year.  Orders
comprising  current  backlog are  expected  to be filled  during the fiscal year
ending May 31, 1998.

RAW MATERIALS

          The basic  raw  materials  used in the  Company's  products  are steel
plate,  bars and  castings  and in  addition,  in the high  temperature  furnace
business,  graphite and copper.  Raw materials  are  available  from a number of
sources on comparable  terms.  The Company is not dependent on any supplier that
cannot be replaced in the normal course of business.  Principal suppliers to the
Company at May 31, 1997 for raw materials were, Bush Miller, G.O. Carlson, Inc.,
Thypin Steel,  and, in connection with the high  temperature  furnace  business,
Hajoca Corporation and Graybar Electric Co.

                                      -3-
<PAGE>
DEVELOPMENT OF LITHIUM-ION RECHARGEABLE BATTERIES

          BAM executed a License  Agreement  on December 20, 1995 (the  "License
Agreement")  with Sandia  Corporation  ("Sandia"),  a  multi-program  laboratory
operated by a subsidiary  of Lockheed  Martin Corp.  for the U.S.  Department of
Energy.  With  main  facilities  in  Albuquerque,   New  Mexico  and  Livermore,
California,  Sandia  has major  research  and  development  responsibilities  in
national   defense,    energy,    environmental    technologies   and   economic
competitiveness.  Under the  License  Agreement,  the  Company  has  acquired  a
exclusive license to make, use and sell a formula developed by Sandia for carbon
powder  impregnated  with  lithium  ions to be used  to make  anodes  for use in
lithium ion  rechargeable  batteries.  The Company is currently  endeavoring  to
produce  along with  Sandia  scientists  the first  scale-up  of the  product to
commercial  quantities.  Sandia  developed the product at its facilities and has
been  able to  produce  only  laboratory  quantities  to date.  There  can be no
assurance that this process will prove commercially feasible or that the Company
will  derive  any  revenue  from the  License  Agreement.  In the event that the
process  described  herein does prove to be commercially  feasible,  the License
Agreement provides for certain royalty fee payments to be made to Sandia.

PATENTS AND TRADEMARKS

          The Company depends upon its proprietary technology and expertise. The
Company  relies  principally  upon trade secret and copyright law to protect its
proprietary  technology  and owns no patents which are material to its business.
The Company regularly enters into confidentiality agreements with its employees,
consultants,  customers  and  potential  customers  and  limits  access  to  and
distribution of its trade secrets and other proprietary  information.  There can
be no assurance that these measures will be adequate to prevent misappropriation
of its  technology  or that  the  Company's  competitors  have  not and will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.

COMPETITION

          The  Company's  products  are  sold in  highly  competitive  worldwide
markets.  A  number  of  companies  compete  directly  with the  Company  in the
chemical, pharmaceutical, food, plastic and petrochemical processing markets and
the  Company  competes  with  various  other  furnace   manufacturers  and  toll
processors.  Numerous  competitors  of varying sizes compete with the Company in
one or  more  of its  product  lines  and  its  Specialty  Heavy  Machining  and
Fabrication  Services unit. A number of the Company's  competitors are divisions
or  subsidiaries  of larger  companies  with  significantly  greater  financial,
marketing, managerial and other resources than those of the Company. The Company
believes that the principal  competitive  factors affecting its core proprietary
equipment business are price,  performance,  delivery,  breadth of product line,
product availability, experience and customer support. The Company believes that
the  principal  areas of  competition  for its high  temperature  furnace  sales
segment  are  price,  quality,  delivery,  skill and  experience  in  developing
specialized equipment aimed at a customer's specific materials requirement.  The
Company believes that the principal areas of competition for its toll processing
operations are the ability to reliably meet the customer's quality specification
and program requirements, including volume and price considerations.

          The Company's  direct  competitors  that  manufacture high temperature
furnaces include Consarc,  Seco/Warwick,  Ipsen GMBH, AVS, Inc., Abar Ipsen, and
Harper   International  Corp.  The  Company's   competitors  in  providing  toll
processing services include Zoltek Companies, Inc.

          There can be no  assurance  that  developments  by  existing or future
competitors   will  not   render  the   Company's   products   or   technologies
noncompetitive  or  that  the  Company  will  be able  to  keep  pace  with  new
technological developments. In addition, the Company's customers could decide to
vertically  integrate their operations and perform for themselves some or all of
the functions performed by the Company.

EMPLOYEES

          As of August  22,  1997,  the  Company  had 116  full-time  employees,
including  16 employees of BAM. Of these,  77 are engaged in  manufacturing  and
technical  services,  11  in  marketing  and  sales  and  12  in  administrative
functions.



                                      -4-
<PAGE>
          The  production  employees  at the Easton,  Pennsylvania  facility (54
persons)  are  represented  by their own  bargaining  unit called The  Bethlehem
Corporation Employees Association. A three-year labor contract was ratified with
this  Association  on July 23,  1994 and  expired on July 22,  1997.  A one year
extension to the existing  labor  contract was ratified with the  Association on
July 21, 1997.  This contract will expire on July 31, 1998. The employees at the
Knoxville,  Tennessee facility are not represented by any collective  bargaining
organization.  The Company  believes that its  relations  with its employees are
good.

ENVIRONMENTAL IMPACT AND REGULATION

          The  operations at the Company's  Knoxville,  Tennessee  plant utilize
fume  destruction and scrubbing of various exhaust  streams,  designed to comply
with applicable laws and regulations.  The plant produces air emissions that are
regulated and permitted by Knox County,  Tennessee,  Department of Air Pollution
Control  (the  "DOAPC").  Management  believes  that the plant is  currently  in
compliance with its permit and the conditions set forth therein. The Company has
also  received  from the  DOAPC  additional  permits  necessary  to  expand  its
operations to allow increased carbon processing,  chlorine  purification and the
operation of a second afterburner.

          The Company believes that compliance by its operations with applicable
environmental  regulations  will not have a material  effect upon the  Company's
future capital  expenditure  requirements,  results of operations or competitive
position. There can be no assurance, however, as to the effect of future changes
in federal,  state and county environmental laws or regulations on the Company's
results of operations or financial condition.


GOVERNMENT REGULATION

          The  Company  is not aware of a need for  government  approval  of any
principal products.  Existing governmental regulations do not have a significant
effect on the business of the Company. In addition,  government regulations that
are probable of enactment are not anticipated to have any material effect.

Item 2.   DESCRIPTION OF PROPERTY

          The Company operates from two properties, one in Easton,  Pennsylvania
and one in Knoxville, Tennessee.

          The Company owns a complex on 29 acres  consisting of four major heavy
manufacturing   buildings,   a   laboratory,   a  two-story   office   building,
miscellaneous  storage and service  buildings  and a one-story  office  building
located  near  the  City of  Easton  in  Palmer  Township,  Northampton  County,
Pennsylvania.   The  facility  is  a  totally  integrated  production  facility,
conducting  engineering,   fabrication,   forming,  machining,   assembly,  heat
treating,  finishing and testing. The machine and assembly floor area is 100,000
square  feet  and is  serviced  by a 70 ton  lifting  capacity  crane.  Complete
shipping  facilities are available by truck with easy access to major interstate
systems.  The Company's  current  commitment for capital  expenditures  includes
approximately  $300,000 for energy efficiency  upgrades,  as well as upgrades to
existing plant equipment. Once that renovation is complete,  management believes
that its Easton  facilities will be in  satisfactory  condition and adequate for
its present operations.  See "Management's  Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

          As of August 22, 1997, the Company's Easton facilities were subject to
a first mortgage loan, a second lien created as a result of a legal  settlement,
and a third lien securing a line of credit and term loan facility.

          BAM leases a 33,600 square foot  manufacturing  and office building in
Knoxville,  Tennessee for capital equipment  manufacturing,  toll processing and
related  administrative  services and  marketing.  The facility is equipped with
several furnace systems with  capabilities of firing in excess of 3000(Degree)C.
It is located in an industrial  park with excellent  access to major  interstate
highways and a modern airport.  The lease expires September 30, 2000, unless two
options,  each for an  additional  three-year  term,  are  exercised by BAM. The
Knoxville  lease has a monthly base rent of  approximately  $8,500.  The Company
believes  this  facility is suitable  and  adequate  for its 


                                      -5-
<PAGE>
present operations there. The Company is a guarantor of payment on this lease.



Item 3.   LEGAL PROCEEDINGS

          None


Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          Matters  submitted to a vote of security  holders at Annual Meeting of
Shareholders held on April 10, 1997:

          o    The  election of five  directors  each to serve for a term of one
               year and until the next Annual Meeting of Shareholders  and until
               their successors are duly elected and qualify.
          o    Approval of the Company's 1997 Stock Option Plan.
          o    Ratification   of  the   appointment  of  BDO  Seidman,   LLP  as
               independent auditors of the Company.





                                      -6-
<PAGE>
                                     PART II

Item 5.   MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          The Company's  Common  Stock,  no par value,  (the "Common  Stock") is
traded under the symbol "BET." The  following  table sets forth the high and low
sales prices for the Common Stock, for the periods indicated, as reported by the
AMEX.
                                       LOW ($)                   HIGH ($)
                                       -------                   --------
1996 FISCAL YEAR
First Quarter                           1.88                        3.73
Second Quarter                          2.50                        3.94
Third Quarter                           2.00                        3.00
Fourth Quarter                          1.75                        3.31

1997 FISCAL YEAR
First Quarter                           1.88                        2.75
Second Quarter                          1.94                        3.00
Third Quarter                           1.88                        2.75
Fourth Quarter                          1.88                        2.38


          As of August 22, 1997, there were  approximately 914 holders of record
of the Company's Common Stock.

          The Company did not declare  any cash  dividends  on its Common  Stock
during fiscal 1997 or fiscal 1996. A $1.5 million five year first  mortgage loan
from  Sterling  Commercial  Capital,  Inc.,  First Wall Street SBIC,  L.P.,  and
Interequity Capital Partners,  L.P.  (collectively,  "Sterling") imposes certain
limitations  on the Company  with respect to the payment of cash  dividends.  In
addition,  a three year $5 million maximum line of credit and term loan facility
from the CIT Group/Credit Finance,  Inc. ("CIT"),  contains certain restrictions
on the payment of cash  dividends.  The Company does not anticipate that it will
pay cash dividends in the  foreseeable  future.  The payment of dividends by the
Company  will depend upon its earnings and  financial  condition  and such other
factors as the Board of Directors may consider  relevant.  The Company currently
plans to retain any  earnings to provide for the  development  and growth of the
Company.

Item 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

COMPANY OVERVIEW

          The Company  was  founded in 1856 as a foundry  and  machine  shop and
incorporated in 1888. The Company designs, manufactures,  markets and services a
product line of capital  equipment  and systems used to process  materials for a
variety  of  industrial  applications.  Its  proprietary  products  include  the
Porcupine Processor(R),  the Thermal Disc(R) Processor,  the Tower Filter Press,
drum dryers and flakers, tubular dryers, and calciners. In addition, the Company
operates a production facility that fabricates, machines and assembles equipment
to customers'  specifications.  The Company has developed expertise in the areas
of thermal processing  systems,  environmental  systems,  filtration,  specialty
machining and  fabrication  and the  rebuilding and  remanufacture  of specialty
process  equipment.   In  addition,  the  Company,   through  BAM,  designs  and
manufactures  high-temperature  furnaces  for  sale  and  for  its  own  use and
processes  specialty carbon,  graphite and ceramic materials for  semiconductors
and aerospace applications.

          Four of the  Company's  five main business  units,  namely the Thermal
Process Equipment Unit, the Environmental  Systems Unit, the Filtration  Process
Equipment Unit and the Specialty Heavy  Machining and Fabrication  Services Unit
each serve several  billion dollar  worldwide  markets.  The Company expects the
future size of each of these  markets to remain in the billions of dollars.  The
market  size  serviced  by  the  Company's   fifth  



                                      -7-
<PAGE>
main business unit, the  Rebuild/Remanufacture   Equipment Unit, is considerably
more  limited.  The  Company  expects  the future size of this market to vary in
relation  to  factors  influencing  cost  of  capital  such as  interest  rates,
export/import duties, manufacturing capacity and utilization.

          The Company  would  characterize  the markets for each of its business
units as follows:

          (1)     THERMAL PROCESS AND FILTRATION UNITS

                    o    Markets   are   relatively   concentrated   in   mature
                         industries   such  as   chemicals,   plastics,   foods,
                         pharmaceuticals, refineries, waste treatment and mining
                         and minerals.

                    o    Technology barrier is medium.

                    o    Competition is worldwide,  except certain  prohibitions
                         against foreign companies in Japan.

          (2)     ENVIRONMENTAL SYSTEMS UNIT

                    o    Markets are concentrated.

                    o    Technology barrier is low.

                    o    Competition  is domestic  in North  America and Western
                         Europe.

          (3)     SPECIALTY HEAVY MACHINING AND FABRICATION SERVICES UNIT

                    o    Market is highly concentrated.

                    o    Technology barrier is low.

                    o    Competition is domestic and often regional.

          (4)     REBUILD/REMANUFACTURE UNIT

                    o    Market is diffuse.

                    o    Technology Barrier is low.

                    o    Competition is domestic.

          The Company's customer  concentration has historically been limited to
segments such as military,  chemical  process,  power  generating or ferrous and
nonferrous  producers.  More  recently,  the  Company  has sought to broaden its
customer base to include  customers in such markets as environmental  and mining
and  precious  metals.  The  Company  has also added new  products  such as high
temperature furnaces through BAM which services newer growth markets such as the
semiconductor  industry.  To  the  degree  the  Company  is  able  to add to and
diversify  its  products and the markets it serves,  the Company  will  insulate
itself from potential volatility due to declines in any particular market served
by the Company's products.

          Historically,  the sale of the Company's  products has primarily  been
limited to North  America  and Europe.  The  Company has sought to increase  its
international  sales because it believes demand and opportunity for its products
are increasing in direct  proportion to the  development  of process  industries
such as chemical,  food and  pharmaceutical  in  countries  outside of the North
American and Western  European  markets.  The Company enjoys access to customers
through the worldwide  customer  base of UPE, and  occasionally  utilizes  UPE's
network of company owned offices and personnel  around the world.  The only cost
incurred for the  utilization of UPE's offices and personnel is the payment of a
commission on actual sales  originated.  The Company believes this  relationship


                                      -8-
<PAGE>
will help the Company increase its sales. The Company does not believe, however,
that the termination of this relationship,  which is not anticipated, would have
a significant material adverse effect on the Company's results of operations.

          The  Company's  capital  equipment   products  and  technologies  were
developed throughout the 20th century. Historically, the Company's products life
cycles have been relatively long term. There can be no assurance,  however, that
such products will continue to be viable in the future. The Company continues to
evaluate  other products and companies that have the potential to complement the
Company's existing products and business.  More recently,  the Company has begun
to purchase and sell used process and  environmental  equipment as an adjunct to
its new equipment  capabilities  and its rebuild  capabilities.  The Company has
been able to enter this market in the last year through financing  obtained from
CIT.  The  Company has also  utilized  UPE's  expertise  to advise it on certain
purchases  and UPE and the Company  have  jointly  purchased  certain  pieces of
equipment.  The Company  believes  this  venture  could  improve  its  financial
condition and results of operations. The Company believes this business activity
complements  its other  activities and permits it to serve  customers who either
cannot afford the cost or lead time for new equipment.

          In the  future,  the Company  intends to continue to enhance  existing
products  and  continue  to explore new  opportunities  and the  possibility  of
additional strategic  partnerships with existing and new customers.  The Company
will also seek to develop joint ventures with several of its customers and other
firms to develop new processes and broaden its manufacturing services. There can
be no  assurance,  however,  that  the  Company  will be  able  to  successfully
implement any of these strategies or that, if implemented, these strategies will
improve the Company's financial position or results of operations.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED MAY, 31 1997 ("1997") COMPARED TO FISCAL YEAR 
ENDED MAY 31, 1996 ("1996")

          The Company's  total  revenues were  $17,916,000  for 1997 compared to
$18,078,000  for 1996,  a decrease of  $162,000  or 1%.  Revenues in 1997 in the
Thermal   Process   and   Filtration    Units,    Environmental    Systems   and
Rebuild/Remanufacture  Unit were higher than recorded in 1996.  Revenues in 1997
in the  Company's  Specialty  Heavy  Machining  and  Fabrication  Services  Unit
decreased over the 1996 level. Revenues for Bethlehem Advanced Materials totaled
$1,297,000 in 1997 as compared to $539,000 reported in 1996.  Bethlehem Advanced
Materials  was acquired on November 28, 1995,  thus,  revenues  reported in 1996
were for six months.  The increased  revenues  were  primarily  attributable  to
increased sales in Environmental Systems.

          The Company's  largest  customer in the Thermal Process Unit accounted
for 35% of the  Company's  revenues  in 1997 and 30% in 1996.  The  Company  was
awarded a contract  from this  customer in the second  quarter of fiscal 1996 in
the amount of approximately  $10,500,000.  The balance outstanding on this order
will be  shipped  during  the first and  second  quarters  of fiscal  1998.  The
Company's  future revenues will not be materially  impacted by the completion of
this contract.  The Company's backlog at August 22, 1997 was $9,500,000 compared
to $9,800,000 for the same period last year.

          Export sales for 1997  equaled  approximately  $7,165,000  compared to
approximately  $953,000 for 1996. In 1997, export sales grew to thirteen foreign
countries from six foreign  countries in 1996. This growth in export sales is in
accordance with the Company's sales and marketing  strategy  implemented in 1996
to expand  the  Company's  presence  in  foreign  markets.  All sales were in US
Dollars, therefore currency fluctuations did not affect the transactions.

          Gross profit was  $5,062,000  or 28% of revenues for 1997  compared to
gross profit of  $4,867,000  or 27% of revenues for 1996.  The  increased  gross
profit  margins were due to the increase in revenues  recorded in the  Company's
Thermal  Process  and  Filtration  Equipment  Units  as  well  as the  Company's
Environmental  Systems Unit. These units produced  slightly higher gross margins
than  historically  experienced  in these  product  lines.  With  respect to the
Company's Rebuild Unit, the Company, over the last eighteen months, has begun to
purchase and sell used process  equipment as an adjunct to its new equipment and
rebuild capabilities.  Several of the orders received by the Company in 1997 for
the purchase of used equipment also called for the  utilization of the 



                                      -9-

<PAGE>
Company's  rebuild and  remanufacturing  capabilities.  The gross profit margins
recorded in this business unit were higher than gross profit margins  recognized
by the Company in prior periods in other business units.  The Company  continues
to focus on  decreasing  manufacturing  overhead  expenses as well as increasing
production efficiency.

          Selling,  general and administrative expenses for 1997 were $3,849,000
or 21% of revenues compared to $3,845,000 or 21% of revenues for 1996.

          Other  expenses  equaled  $600,000  for 1997  compared to $583,000 for
1996.  Interest expense  increased  $91,000 from $576,000 in 1996 to $667,000 in
1997.  Interest  expense to UPE (a related party) increased from $18,000 in 1996
to $59,000 in 1997 due to increased advances from UPE in the amount of $630,000.
Interest  expense to CIT increased in 1997 for additional used and new equipment
borrowings.  Additionally, the Company wrote off approximately $103,000 of Stock
Rights Offering costs  previously  capitalized in 1996 and 1997. In May of 1997,
the  Board of  Directors  of the  Company  withdrew  the Stock  Rights  Offering
initiated in May of 1996.  In May 1997,  the Company  negotiated a final payment
for previously  accrued  liabilities with a third party service  provider.  As a
result of such  negotiations,  the Company recognized a gain of $98,000 in 1997.
The  Company  also  recognized  a gain of  $49,000  in  January  of 1997 for the
settlement  of an  insurance  claim for  property  damage  that  occurred at its
Knoxville,  Tennessee  facility in April of 1996.  Income  before  income  taxes
equaled $613,000 for 1997 compared to $439,000 for 1996.

          The  Company's  benefit for income  taxes  equaled  $100,000  for 1997
compared to a provision for income taxes for 1996 of $36,000. As a result of the
Company's historical trend of losses and uncertainties  concerning the Company's
ability to obtain new  contracts,  at May 31,  1996 a  valuation  allowance  was
provided  against net deferred tax assets.  Based on 1997 results and  estimated
1998  earnings,  which  include  earnings  on  existing  contracts,   management
considers realization of the unreserved deferred tax asset more likely than not.
Additional  reductions to the valuation  allowance  will be recorded when in the
opinion of  management,  the  Company's  ability to generate  taxable  income is
considered  more likely than not. Net income for 1997 was $ 713,000  compared to
$403,000 for 1996.

LIQUIDITY AND CAPITAL RESOURCES

          Working  capital  equaled $55,000 at May 31, 1997 compared to $177,000
at May 31,  1996.  During  1997,  $97,000  of cash  was  provided  by  operating
activities compared to $1,889,000 of cash used in operating activities for 1996.

          Net income and depreciation and amortization  expenses were $1,257,000
for 1997 as compared to $789,000 for 1996.  Accounts  receivable  and  inventory
increased by approximately  $635,000 in 1997,  while accounts payable  decreased
$1,335,000.  The increase in accounts receivable (including amounts with related
parties) is due to the  reclassification  of funds advanced by UPE classified as
accounts  receivable  to a note in  1997.  The  decrease in accounts  payable is
attributable to payments made to suppliers and third party providers. Currently,
the  Company is  delinquent  with  respect to certain  trade  payables.  In some
instances,  the Company has negotiated new payment terms.  Billings in excess of
costs and estimated  earnings increased by $1,079,000 due to advance billings on
major contracts.

          Cash  provided  by  financing  activities  equaled  $287,000  in  1997
compared to $2,416,000 in 1996. On July 14, 1995,  the Company  prepaid its note
payable to G.E.  Capital and paid  relevant  closing  costs with  proceeds  from
advances against a $6.5 million total credit facility  available from a group of
lenders as follows:

          (1) A $1.5 million five year first  mortgage loan from  Sterling.  The
          loan is  collateralized  by a first mortgage lien on real estate owned
          by the Company and a second lien on all other  Company  owned  assets.
          The loan bears interest at 14.25% per annum. The outstanding principal
          and  interest  is payable in 59  consecutive  equal  monthly  payments
          calculated  to  fully  amortize  over a 15  year  period  with a final
          payment of all then outstanding  principal and interest.  As of August
          22, 1997, the amount  outstanding  under the loan was $1,433,000.  The
          loan agreement contains a number of covenants which among other things
          will require the Company to maintain specified levels of




                                      -10-
<PAGE>
          net worth and working  capital and will impose certain  limitations on
          the  Company  with  respect  to  (I)  the   incurrence  of  additional
          indebtedness;  (II) the  incurrence  of  additional  liens;  (III) the
          payment of cash dividends and (IV) mergers and investments. UPE agreed
          to provide a limited  guarantee  for up to  $350,000  of the  mortgage
          payable and subordinate  all of its  outstanding  receivables or other
          extensions of credit due from the Company to the mortgage. The Company
          granted  warrants to the  three-party  lending group to purchase up to
          40,000 shares of the Company's  Common Stock. The purpose of this loan
          was to pay off the existing mortgage loan.

          (2) A  three-year  $5  million  maximum  line of credit  and term loan
          facility from CIT,  secured by a third lien position (behind the three
          party lending group referenced above and the Harrisburg  Authority) on
          Company owned real estate and a first lien on substantially  all other
          owned assets of the Company.  This credit  facility  includes:  (a) an
          $800,000 term loan requiring $13,333 monthly  principal  payments plus
          interest  at prime  rate  (Chemical  Bank,  New York)  plus 3% and (b)
          advances  against a  percentage  of eligible  inventory  not to exceed
          $4,000,000 in the aggregate.  Initial proceeds of this credit facility
          were used to fund working capital. The amount outstanding as of August
          22, 1997 was $467,000 on the term loan and  $1,230,000  on the secured
          credit line. As of August 22, 1997, the interest rate on both the term
          loan and the secured credit line was 11.50%.  Additional advances will
          be for the purpose of acquiring eligible inventory. The loan agreement
          contains  certain  restrictions  among  other  things on the making of
          investments,  loans and capital  expenditures,  on borrowings,  on the
          sale of assets and on the  payment of  dividends.  The loan  agreement
          contains    customary   events   of   default    including    material
          misrepresentations, payment defaults and default in the performance of
          other covenants. An additional condition of the loan agreement is that
          UPE will  purchase all of the Company's  used resale  inventory in the
          event of  default.  The term of the  agreement  is for three years and
          automatically  renewable for successive  terms of two years thereafter
          unless  terminated  by either  party at the end of the  initial or any
          renewal term.  Notwithstanding  the  foregoing,  the  agreement  shall
          terminate  automatically  upon  termination  or  non-renewal  of CIT's
          financing  agreements with UPE. The Company granted warrants to CIT to
          purchase 50,000 shares of the Company's Common Stock.

          By securing this funding,  the Company expanded working capital,  made
available additional capital for inventory acquisition and increased liquidity.

          From  time to time  in the  ordinary  course  of  business,  Universal
Process Equipment ("UPE") advances funds to the Company to enable the Company to
meet  certain  temporary  cash  requirements.  These  advances  are repaid  from
operations.  An advance of  $250,000  was made to the  Company in August 1996 by
UPE. In addition,  another advance of $250,000 was made to the Company by UPE in
October 1996. As of August 22, 1997, these two advances remain outstanding.  The
interest rate on the advances is prime plus 1%.

          On  February  28,  1997,  the Company  purchased a complete  two stage
environmental thermal process system in Alberta,  Canada. In order to effect the
acquisition  of the  equipment,  the Company  borrowed  $225,000  from UPE at an
interest rate of prime rate (Chase Bank, New York) plus 2.5%.  This loan will be
repaid from the proceeds of the sale of the specific  equipment  purchased.  The
Company  also  secured  a loan with the  Royal  Bank of Canada in the  amount of
$320,000  to assist with the buy-out of these  assets at the  borrowing  rate of
Canadian prime rate plus 1.5% per annum. The loan is to be paid in full by March
1, 1999. The loan is paid down as each piece of equipment is sold.

          Capital expenditures were $367,000 during 1997 as compared to $659,000
in 1996. In 1997, capital  expenditures  included renovations to its facility as
well as the  purchase,  refurbishment  and  installation  of plant  assets.  The
Company's current  commitment for capital  expenditures  includes  approximately
$300,000 for energy efficiency  upgrades,  as well as upgrades to existing plant
equipment.

          The Company believes that cash generated from existing  business,  new
orders  and  sales  of used  equipment,  will be  sufficient  to meet  operating
requirements  through the year  ending May 31,  1998.  The Company is  presently
working with its current lender, The CIT Group/Credit  Finance,  to increase its
credit  facility  so the  Company  can  expand  working  capital as well as make
available additional capital for inventory acquisition.



                                      -11-
<PAGE>
EFFECTS OF INFLATION

          Management  believes that any  inflationary  increase arising from the
Company's raw material costs and certain  overhead  expenses have generally been
reflected in pricing to its customers.

NET OPERATING LOSS CARRY FORWARD

          At May 31, 1997 the Company had  approximately  $4.5 million of unused
federal net  operating  losses and  $119,000 of unused  federal  investment  and
research tax credit carry forwards,  as well as $1.9 million of unused state net
operating losses.

FORWARD LOOKING STATEMENTS

          This Form 10-KSB contains certain  forward-looking  statements  within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities  Exchange Act of 1934, as amended which are intended to be
covered by the safe harbors created thereby.  Although the Company believes that
the assumptions  underlying the forward-looking  statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-KSB
will prove to be accurate.  Factors  that could cause  actual  results to differ
from the results discussed in the forward-looking  statements  include,  but not
limited to, the Company's proprietary rights,  environmental  considerations and
its  ability to obtain  contracts  in the  future.  In light of the  significant
uncertainties  inherent in the  forward-looking  statements included herein, the
inclusion of such information  should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.

Item 7.   FINANCIAL STATEMENTS

          Provided following the signature page.

Item 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
          AND FINANCIAL DISCLOSURE

          On March 6, 1997, the Board of Directors of the Company terminated the
engagement of Sobel and Company,  LLC Certified Public Accountants  ("Sobel") as
the  independent  auditors of the Company and appointed BDO Seidman,  LLP as the
independent  auditors of the  Company  for the fiscal year ending May 31,  1997.
Sobel's report on the financial statements of the Registrant for the fiscal year
ended May 31, 1996 did not contain any adverse  opinion or disclaimer of opinion
and was not qualified or modified as to  uncertainty,  audit scope or accounting
principles.  There  were no  disagreements  with Sobel  during the  Registrant's
fiscal year ended May 31, 1996 or the subsequent interim period on any matter of
accounting principles or practices,  financial statement disclosures or auditing
scope  or   procedure,   which   disagreements,   if  not  resolved  to  Sobel's
satisfaction,  would have caused the Registrant to make reference to the subject
matter of the disagreement(s) in connection with its report.



                                      -12-
<PAGE>
                                    PART III

Item 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

          The  response  to  this  Item  is  incorporated  by  reference  to the
Company's  Proxy  Statement for its 1997 Annual Meeting of  Stockholders,  which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 10.  EXECUTIVE COMPENSATION

          The  response  to  this  Item  is  incorporated  by  reference  to the
Company's  Proxy  Statement for its 1997 Annual Meeting of  Stockholders,  which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The  response  to  this  Item  is  incorporated  by  reference  to the
Company's  Proxy  Statement for its 1997 Annual Meeting of  Stockholders,  which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The  response  to  this  Item  is  incorporated  by  reference  to the
Company's  Proxy  Statement for its 1997 Annual Meeting of  Stockholders,  which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.





                                      -13-
<PAGE>
                                     PART IV

Item 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

          (a)     EXHIBITS

          The  following  exhibits  are  being  filed  or  are  incorporated  by
reference in this Form 10-KSB Report:

          3(i)      Amended And Restated  Articles of Incorporation  approved at
                    the  December  12,  1995  Annual   Meeting  of  the  Company
                    (incorporated  by reference to Exhibit 3(i) to the Company's
                    Registration  Statement on Form SB-2 filed May 15, 1996 (the
                    "Form SB-2"))

          3(ii)     Amended and  Restated  Bylaws  approved at the  December 12,
                    1995  Annual  Meeting  of  the  Company   (incorporated   by
                    reference to Exhibit 3(ii) to the  Company's  10-QSB for the
                    quarterly period ended November 30, 1995 (the "November 1995
                    10-QSB"))

          10(a)     The Company's 1989 Equity  Incentive  Plan.  Incorporated by
                    reference  to the  Company's  Report  on Form  10-K  for the
                    fiscal year ended December 31, 1992.

          10(b)     Description   of   the   Company's   deferred   compensation
                    arrangements with certain employees, including its officers.
                    Incorporated  by reference to the Company's  Amendment No. 1
                    to Report on Form 10-Q for the quarter  ended  September 30,
                    1993.

          10(c)     The  Company's   Equity   Incentive   Plan  for   Directors.
                    Incorporated  by reference to the  Company's  Report on Form
                    10-K for the fiscal year ended December 31, 1991.

          10(d)     Stock Purchase Agreement dated as of July 27, 1990 among the
                    Company, James L. Leuthe, Universal Process Equipment, Inc.,
                    Ronald Gale and Jan Gale.  Incorporated  by reference to the
                    Company's  Report on Form  10-K for the  fiscal  year  ended
                    December 31, 1991.

          10(e)     Registration  Rights  Agreement  dated as of July  27,  1990
                    among the Company, Universal Process Equipment, Inc., Ronald
                    Gale  and  Jan  Gale.   Incorporated  by  reference  to  the
                    Company's  Report on Form  10-K for the  fiscal  year  ended
                    December 31, 1991.

          10(f)     Form of  Agreement  dated  March 31, 1993 by and between the
                    Company and Universal Process Equipment,  Inc.  Incorporated
                    by  reference to the  Company's  Report on Form 10-K for the
                    fiscal year ended December 31, 1992.

          10(g)     Conformed  copy  of  Settlement  Agreement,   including  the
                    following exhibits thereto. Incorporated by reference to the
                    Company's  Amendment  No.  1  Report  on Form  10-Q  for the
                    quarter ended September 30, 1993.

          10(g)1.1  Exhibit A: UPE Agreement.  Incorporated  by reference to the
                    Company's  Amendment  No.  1  Report  on Form  10-Q  for the
                    quarter ended September 30, 1993.

          10(g)1.2  Exhibit B:  Security  Promissory  Note,  dated  November 22,
                    1993, by The Bethlehem  Corporation to The Harrisburg Sewage
                    Authority.   Incorporated  by  reference  to  the  Company's
                    Amendment  No. 1 Report on Form 10-Q for the  quarter  ended
                    September 30, 1993.

          10(g)1.3  Exhibit C: Guaranty and  Suretyship  Agreement,  dated as of
                    November 22, 1993, by Universal Process  Equipment,  Inc. to
                    The Harrisburg Sewage  Authority.  Incorporated by reference
                    to the Company's Amendment No. 1 Report on Form 10-Q for the
                    quarter ended September 30, 1993.

          10(g)1.4  Exhibit  D:  Equipment   Security   Agreement   (Schedule  1
                    Equipment),  dated as of November 22,  1993,  by and between
                    Universal Process Equipment,  Inc. and The Harrisburg Sewage



                                      -14-
<PAGE>
                    Authority.   Incorporated  by  reference  to  the  Company's
                    Amendment  No. 1 Report on Form 10-Q for the  quarter  ended
                    September 30, 1993.

          10(g)1.5  Exhibit  E:  Equipment   Security   Agreement   (Schedule  2
                    Equipment),  dated as of November 22,  1993,  by and between
                    Universal Process Equipment,  Inc. and The Harrisburg Sewage
                    Authority.   Incorporated  by  reference  to  the  Company's
                    Amendment  No. 1 Report on Form 10-Q for the  quarter  ended
                    September 30, 1993.

          10(g)1.6  Exhibit F: Collateral  Assignment of Judgement,  dated as of
                    November  22,  1993,  by  and  between   Universal   Process
                    Equipment,   Inc.  and  The  Harrisburg   Sewage  Authority.
                    Incorporated  by reference to the Company's  Amendment No. 1
                    Report  on Form 10-Q for the  quarter  ended  September  30,
                    1993.

          10(g)1.7  Exhibit G: Consent to Entry of  Judgement.  Incorporated  by
                    reference to the  Company's  Amendment  No. 1 Report on Form
                    10-Q for the quarter ended September 30, 1993.

          10(g)2    Conformed copy of UPE Agreement.  Incorporated  by reference
                    to the Company's Amendment No. 1 Report on Form 10-Q for the
                    quarter ended September 30, 1993.

          10(h)     Loan and  Security  Agreement  dated  July  14,  1995 by the
                    Company to The CIT Group/Credit  Finance,  Inc. Incorporated
                    by reference to the Company's Report on Form 10-K-SB for the
                    fiscal year ended May 31, 1995.

          10(i)     Term  Promissory  Note dated July 14, 1995 by the Company to
                    The CIT Group/Credit Finance, Inc. Incorporated by reference
                    to the Company's  Report on Form 10-K-SB for the fiscal year
                    ended May 31, 1995.

          10(j)     Open-End Mortgage and Security Agreement dated July 14, 1995
                    by  the  Company  to  The  CIT  Group/Credit  Finance,  Inc.
                    Incorporated  by reference to the  Company's  Report on Form
                    10-K-SB for the fiscal year ended May 31, 1995.

          10(k)     Inventory   Purchase   Agreement  dated  July  14,  1995  by
                    Universal  Process  Equipment,  Inc. to The CIT Group/Credit
                    Finance,  Inc.  Incorporated  by reference to the  Company's
                    Report on Form  10-K-SB  for the  fiscal  year ended May 31,
                    1995.

          10(l)     Mortgage Note dated July 13, 1995 by the Company to Sterling
                    Commercial  Capital Inc.,  First Wall Street SBIC,  L.P. and
                    Interequity Capital Partners, L.P. Incorporated by reference
                    to the Company's  Report on Form 10-K-SB for the fiscal year
                    ended May 31, 1995.

          10(m)     Loan  Agreement  dated  July  13,  1995  by the  Company  to
                    Sterling  Commercial  Capital Inc.,  First Wall Street SBIC,
                    L.P. and Interequity Capital Partners,  L.P. Incorporated by
                    reference  to the  Company's  Report on Form 10-K-SB for the
                    fiscal year ended May 31, 1995.

          10(n)     Security  Agreement  dated July 13,  1995 by the  Company to
                    Sterling  Commercial  Capital Inc.,  First Wall Street SBIC,
                    L.P. and Interequity Capital Partners,  L.P. Incorporated by
                    reference  to the  Company's  Report on Form 10-K-SB for the
                    fiscal year ended May 31, 1995.

          10(o)     Limited Corporate  Guaranty dated July __, 1995 by Universal
                    Process Equipment, Inc. to Sterling Commercial Capital Inc.,
                    First  Wall  Street  SBIC,  L.P.  and  Interequity   Capital
                    Partners,  L.P.  Incorporated  by reference to the Company's
                    Report on Form  10-K-SB  for the  fiscal  year ended May 31,
                    1995.

          10(p)     1994   Stock   Option   Plan  of  the   Company  as  amended
                    (incorporated by reference to Exhibit 10(a) to the Company's
                    November 1995 10-QSB)


                                      -15-
<PAGE>


          10(q)     Equity  Incentive  Plan  for  Directors  of the  Company  as
                    amended  (incorporated  by reference to Exhibit 10(b) to the
                    Company's November 1995 10-QSB)

          10(r)     Agreement,  dated July 23, 1994, between the Company and The
                    Bethlehem Corporation Employees Association (incorporated by
                    reference to Exhibit 10(c) to the Form SB-2)

          10(s)     Net Commercial  Lease  Contract,  dated January 30, 1996, by
                    and between  Knoxville  Industrial  Group,  Ltd.,  Bethlehem
                    Advanced Materials  Corporation,  The Stanfield York Company
                    and the Company  (incorporated by reference to Exhibit 10(d)
                    to the Form SB-2)

          10(t)     Agreement,  dated July 21, 1997, between the Company and The
                    Bethlehem Corporation Employees Association.

          (b)       REPORTS ON FORM 8-K

          A form 8-K was  filed on March  11,  1997 and a form 8-KA was filed on
March 25, 1997 to report a change in the  Company's  Independent  Accountant  on
March 6, 1997.  On that date,  the Board of Directors of the Company  terminated
the  engagement of Sobel and Company LLC  Certified  Public  Accountants  as the
independent  auditors  of the  Company  and  appointed  BDO  Seidman  LLP as the
independent auditors of the Company for the fiscal year ending May 31, 1997.



                                      -16-
<PAGE>
                                   SIGNATURES

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

                              THE BETHLEHEM CORPORATION

Dated:    August 27, 1997     By:  /S/  ALAN H. SILVERSTEIN
                                   ------------------------
                                       Alan H. Silverstein, President, Director
                                         and Chief Executive Officer

          In accordance  with the Securities  Exchange Act of 1934,  this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures                                        Title                                          Date
----------                                        -----                                          ----

<S>                                               <C>                                            <C>

 /S/   ALAN H. SILVERSTEIN                        President, Director and                        August 27, 1997
-----------------------------------------         Chief Executive Officer
Alan H. Silverstein                               (Principal Executive Officer)
                                                  

 /S/   ANTOINETTE L. MARTIN                       Chief Financial Officer (Principal             August 27, 1997
----------------------------------------          Financial Officer and Principal
Antoinette L. Martin                              Accounting Officer)

 /S/   SALVATORE J. ZIZZA                         Chairman of the Board                          August 27, 1997
----------------------------------------
Salvatore J. Zizza


 /S/   RONALD H. GALE                             Director                                       August 27, 1997
----------------------------------------
Ronald H. Gale


 /S/   JAN P. GALE                                Director                                       August 27, 1997
----------------------------------------
Jan P. Gale


 /S/                                              Director
----------------------------------------
James L. Leuthe


 /S/   HAROLD BOGATZ                              Director                                       August 27, 1997
----------------------------------------
Harold Bogatz


 /S/                                              Director
----------------------------------------
B. Ord Houston


 /S/                                              Director
----------------------------------------
O. Karl Dieckman
</TABLE>

                                      -17-
<PAGE>

                   THE BETHLEHEM CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                    FOR THE YEARS ENDED MAY 31, 1997 AND 1996

                              INCLUDING REPORTS OF

                     INDEPENDENT CERTIFIED PUBLIC ACCOUTANTS




================================================================================
                                                                             F-1
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES


CONTENTS


                                                                        Page

Reports of Independent Certified Public Accountants..................F-3 - F-4

Consolidated Financial Statements:

    Balance Sheet
      May 31, 1997...................................................F-5 - F-6

    Statements of Income
      for the Years Ended May 31, 1997 and 1996 (as restated)........F-7

    Statements of Stockholders' Equity (Deficit)
      for the Years Ended May 31, 1997 and 1996 (as restated)........F-8

    Statements of Cash Flows
      for the Years Ended May 31, 1997 and 1996 (as restated)........F-9

    Notes to Financial Statements....................................F-10 - F-30


================================================================================
                                                                             F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





To the Board of Directors and Stockholders
The Bethlehem Corporation
Easton, Pennsylvania


We have audited the  accompanying  consolidated  balance  sheet of The Bethlehem
Corporation  and  subsidiaries  as of May 31, 1997 and the related  consolidated
statements of income,  stockholders'  equity  (deficit),  and cash flows for the
year then  ended.  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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of The  Bethlehem
Corporation  and  subsidiaries  as of May 31,  1997,  and the  results  of their
operations  and their  cash  flows for the year then  ended in  conformity  with
generally accepted accounting principles.



/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Woodbridge, New Jersey
August 22, 1997




================================================================================
                                                                             F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT




To The Board of Directors and Stockholders
The Bethlehem Corporation


We have audited the accompanying consolidated statement of income, stockholders'
equity   (deficiency),   and  cash  flows  of  The  Bethlehem   Corporation  and
Subsidiaries for the year ended May 31, 1996. 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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the consolidated  results of operations and
cash flows of The Bethlehem  Corporation and Subsidiaries for the year ended May
31, 1996, in conformity with generally accepted accounting principles.

As discussed in Note 17 to the financial statements, the Company determined that
reimbursements  from a  related  party  for bad  debt  losses  were  incorrectly
recorded as a reduction of general and  administrative  expenses and should have
been  accounted  for as a  contribution  to the  Company's  additional  paid  in
capital.  Accordingly,  the financial statements for the year ended May 31, 1996
have been restated to reflect the correction of this error.



                                              SOBEL & CO., LLC
                                              Certified Public Accountants
Livingston, New Jersey
September 4, 1996 (except for Note
17 which is dated August 15, 1997)



================================================================================
                                                                             F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 (amounts in thousands, except share data)
================================================================================

ASSETS


CURRENT ASSETS:
   Cash                                                                $     36
   Accounts receivable (net of allowance for doubtful
     accounts of $108)                                                    2,667
   Accounts receivable - related parties                                  2,061
   Costs and estimated earnings in excess of billings
     on long-term contracts                                               1,305
   Inventories                                                            2,729
   Prepaid expenses and other current assets                                 94
   Deferred tax asset                                                       100
                                                                       --------

        Total Current Assets                                              8,992
                                                                       --------


PROPERTY, PLANT AND EQUIPMENT, at cost                                   10,134
   Less: accumulated depreciation and amortization                       (7,397)
                                                                       --------

        Property, Plant and Equipment, Net                                2,737
                                                                       --------


OTHER ASSETS:
   Intangibles (net of $58 of accumulated amortization)                     340
   Inventories, non current                                               2,300
   Intangible pension and deferred compensation plan assets                 204
   Other                                                                    246
                                                                       --------

        Total Other Assets                                                3,090
                                                                       --------



                                                                       $ 14,819
                                                                       ========
================================================================================
                                                                             F-5
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 1997  (amounts in thousands, except share data)
================================================================================


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

  CURRENT LIABILITIES:
     Current maturities of long-term debt                              $    632
     Accounts payable                                                     2,776
     Accounts payable - related parties                                   2,297
     Accrued liabilities                                                    700
     Billings in excess of costs and estimated earnings
       on long-term contracts                                             1,389
     Commissions payable                                                    213
     Note payable - related party                                           930
                                                                       --------
          Total Current Liabilities                                       8,937
                                                                       --------

  OTHER LIABILITIES:
     Accounts payable - long-term                                         1,410
     Long-term debt, net of current maturities                            3,951
     Deferred compensation and other pension liabilities                  1,132
                                                                       --------
          Total Long-Term Liabilities                                     6,493
                                                                       --------

COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)

STOCKHOLDERS' EQUITY (DEFICIT):
     Preferred stock - authorized, 5,000,000 shares
       without par value, none issued or outstanding
     Common stock - authorized, 20,000,000 shares
       without par value, stated value of $.50 per share;
       1,938,532 shares issued; 1,938,520 shares outstanding                969
     Additional paid-in capital                                           4,995
     Accumulated deficit as restated (See Note 17)                       (6,575)
                                                                       --------
                                                                           (611)
     Less - treasury stock, at cost, 12 shares                             --
                                                                       --------
          Total Stockholders' Equity (Deficit)                             (611)
                                                                       --------

                                                                       $ 14,819
                                                                       ========



================================================================================
See notes to consolidated financial statements.                             F-6
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
================================================================================

                                                           Year Ended May 31,
                                                          1997          1996
                                                                     as Restated
                                                                   (See Note 17)
                                                        --------       --------

NET SALES                                               $ 17,916       $ 18,078

COST OF GOODS SOLD                                        12,854         13,211
                                                        --------       --------

GROSS PROFIT                                               5,062          4,867
                                                        --------       --------

OPERATING EXPENSES:
     Selling                                               1,131          1,270
     General and administrative                            2,718          2,575
                                                        --------       --------
                                                           3,849          3,845
                                                        --------       --------

          Operating income                                 1,213          1,022
                                                        --------       --------

OTHER INCOME (EXPENSE):
     Interest expense                                       (667)          (576)
     Write off of Stock Rights Offering costs               (103)          --
     Gain on settlement of accrued liabilities                98           --
     Interest income                                           5              9
     Other                                                    67            (16)
                                                        --------       --------
                                                            (600)          (583)
                                                        --------       --------

          Income before income taxes                         613            439

BENEFIT (PROVISION) FOR INCOME TAXES                         100            (36)
                                                        --------       --------

NET INCOME                                              $    713       $    403
                                                        ========       ========

EARNINGS PER SHARE DATA:
     Primary                                            $    .21       $    .13
                                                        ========       ========

     Fully diluted                                      $    .21       $    .12
                                                        ========       ========

WEIGHTED AVERAGE COMMON
  AND COMMON EQUIVALENT SHARES OUTSTANDING
     Primary                                               3,377          3,220
                                                        ========       ========

     Fully diluted                                         3,377          3,260
                                                        ========       ========


================================================================================
See notes to consolidated financial statements.                              F-7

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
================================================================================
<TABLE>
<CAPTION>


                                                                          
                                                      Common Stock       Additional                     Treasury Shares
                                                ---------------------      Paid-In     Accumulated      ---------------
                                                 Shares        Amount      Capital     Deficit as       Shares    Amount    Total
                                                                                       Restated
                                                                                      (See Note 17)
                                                ------------------------------------------------------------------------------------

<S>                                             <C>          <C>          <C>          <C>                <C>     <C>     <C>
Balance at May 31, 1995                         1,888,532    $     944    $   4,595    $  (7,691)           12     --     $  (2,152)

Net Income for the Year Ended
  May 31, 1996 (as Restated)                         --           --           --            403          --       --           403

Issuance of Common Stock                           50,000           25          129         --            --       --           154

Receipt of Used Equipment
  Inventory from Related Party                       --           --            209         --            --       --           209

Funding of Cost Sharing
  Arrangement by Related Party                       --           --             62         --            --       --            62
                                                ------------------------------------------------------------------------------------

Balance at May 31, 1996                         1,938,532          969        4,995       (7,288)           12     --        (1,324)

Net Income for the Year Ended
  May 31, 1997                                       --           --           --            713          --       --           713
                                                ------------------------------------------------------------------------------------

Balance at May 31, 1997                         1,938,532    $     969    $   4,995    $  (6,575)           12    $--     $    (611)
                                                ===================================================================================
</TABLE>


================================================================================
See notes to consolidated financial statements.                              F-8

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(amounts in thousands)
================================================================================

<TABLE>
<CAPTION>

                                                                                            Year Ended May 31,
                                                                                          1997              1996
                                                                                                         as Restated
                                                                                                        (See Note 17)
                                                                                       ---------------------------
<S>                                                                                    <C>                 <C>    
CASH FLOWS PROVIDED BY (USED IN):
  OPERATING ACTIVITIES:
    Net income                                                                         $   713             $   403
    Adjustments to reconcile net income to net
     cash provided by (used in) operating activities:
         Depreciation and amortization                                                     544                 386
         Write off of stock rights offering costs                                          103                --
         Accrued loss on contracts and obsolete inventory write-offs                       105                 130
         Deferred taxes                                                                   (100)               --
         Gain on settlement of accrued liabilities                                         (98)               --
     Changes in operating assets and liabilities:
         Accounts receivable                                                               (16)             (1,119)
         Accounts receivable - related parties                                            (366)               (729)
         Inventories                                                                      (253)             (3,509)
         Prepaid expenses and other current assets                                          30                  34
         Costs and estimated earnings in excess of billings                                (35)               (531)
         Other assets                                                                     (130)                (69)
         Accounts payable                                                               (1,438)              2,856
         Accounts payable - related parties                                                103                 813
         Accrued liabilities                                                               (74)               (643)
         Billings in excess of costs and estimated earnings                              1,079                 (38)
         Advances on contracts                                                            (238)                 98
         Commissions payable                                                                36                 (63)
         Deferred compensation and other pension liabilities                               132                  92
                                                                                       ---------------------------
            Net Cash Provided by (Used in)Operating Activities                              97              (1,889)
                                                                                       ---------------------------

  INVESTING ACTIVITIES:
     Purchase and construction of property, plant and equipment                           (367)               (659)
                                                                                       ---------------------------
      Net Cash Used in Investing Activities                                               (367)               (659)
                                                                                       ---------------------------

  FINANCING ACTIVITIES:
     Net (repayments) borrowings on line of credit                                        (344)              1,760
     Proceeds from issuance of long-term debt                                              312                 860
     Payments on long-term debt                                                           (311)               (301)
     Proceeds from notes payable - related party                                           630                 310
     Financing Costs                                                                       -0-                (213)
                                                                                       ---------------------------
      Net Cash Provided by Financing Activities                                            287               2,416
                                                                                       ---------------------------

NET INCREASE (DECREASE) IN CASH                                                             17                (132)

CASH
  BEGINNING OF PERIOD                                                                       19                 151
                                                                                       ---------------------------

CASH
  END OF PERIOD                                                                        $    36             $    19
                                                                                       ===========================
</TABLE>

================================================================================
See notes to consolidated financial statements.                              F-9

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
NOTE 1  -  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------------------

Nature of Business:
The Bethlehem  Corporation was founded in 1856 as a foundry and machine shop and
incorporated in 1888. The Company  designs,  manufactures,  sells and services a
product line of capital  equipment  used to process  materials  for a variety of
industrial applications and fabricates, machines and also assembles equipment to
customers' specifications.  In addition, the Company, through Bethlehem Advanced
Materials  Corporation  ("BAM"),  a wholly-owned  subsidiary formed in September
1995,  designs and manufactures  high-temperature  furnaces for sale and for its
own use and  processes  specialty  carbon,  graphite and ceramic  materials  for
semiconductors and aerospace applications.

The following is a summary of the significant accounting policies applied in the
preparation of the accompanying  consolidated financial statements as of and for
the year  ended  May 31,  1997  ("1997")  and for the year  ended  May 31,  1996
("1996").

Principles of Consolidation:
The  consolidated  financial  statements  include the accounts of The  Bethlehem
Corporation and its wholly-owned subsidiaries (collectively, the "Company"). All
inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition:
Sales   and   profit   on   long-term    contracts   are   recognized   on   the
percentage-of-completion  method of  accounting.  Under this  method,  sales and
profits are recorded  throughout  the contract term based upon the percentage of
costs incurred to date to total estimated costs of the contract.

Sales and profit on all other contracts are recognized on the completed contract
method of accounting. Under this method, sales and profits are recognized when a
contract  is  substantially  complete.  Generally,  a  contract  is deemed to be
substantially  complete  when the product is shipped to a customer or when it is
ready for  shipment  to a customer  and the  product  has been  accepted  by the
customer.

Losses on long-term and  short-term  construction  contracts are recorded at the
time the losses are determined to be probable and can be reasonably estimated.

Changes in job  performance,  job conditions,  and estimated  profitability  may
result in revisions to profits and costs,  which are recognized in the period in
which the revisions are  determined.  For long-term  contracts,  the accumulated
gross profit, changes in estimated job profitability resulting from material and
labor costs,  job  performance  and  conditions,  contract  penalty  provisions,
claims, change orders, and settlements are accounted for as changes in estimates
in the current period.

Revenues  from sales of new or used  equipment  are recorded when the product is
shipped.


Inventories:
Inventories are stated at the lower of cost (principally first-in, first-out) or
market.  Inventoried  costs  relating to any  contracts  accounted for under the
completed  contract method are stated at the actual  production cost,  including
factory overhead incurred to date. The Company periodically performs a review of
inventories  to evaluate  whether such goods are obsolete or off standard.  When
identified,  provisions  to  reduce  inventories  to  net  realizable value  are
recorded.

================================================================================
                                                                            F-10
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 1  -  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 
             (continued)
--------------------------------------------------------------------------------

Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. The cost of self-constructed
assets include  material,  direct labor and overhead  expenses.  Betterments and
extraordinary  repairs that extend the useful life or  functionality of an asset
are capitalized; other repairs and maintenance charges are expensed as incurred.

Depreciation and amortization  expense is recognized over the assets'  estimated
useful lives on a straight-line basis.

The useful lives of the principle classes of assets are as follows:

                     Buildings and  improvements  10 to 40 years 
                     Machinery and equipment 3 to 20 years 
                     Equipment under capital leases 3 to 5 years

Long-Lived Assets:
Long-lived assets, such as property,  plant and equipment, and intangible assets
are evaluated for impairment  when events or changes in  circumstances  indicate
that the  carrying  amount of the  assets  may not be  recoverable  through  the
estimated  undiscounted  future cash flows from the use of these assets.  If and
when any such impairment exists, the related assets will be written down to fair
value.  This policy is in  accordance  with  Statement of  Financial  Accounting
Standards ("SFAS") No. 121,  "Accounting for the Impairment of Long-Lived Assets
and  Long-Lived  Assets to be  Disposed  of,"  which  the  Company  has  adopted
effective for 1997. No write-downs have been necessary through May 31, 1997 as a
result of the adoption of SFAS No. 121.

Intangibles:
The excess of the purchase  price over  tangible net assets  acquired by BAM has
been  allocated  to  intangible  assets  acquired on the basis of ascribed  fair
values. The intangible assets are being amortized on a straight-line  basis over
their estimated useful lives as follows:

                        Designs, blue prints and plans        20  Years
                        Technology                            20  Years
                        Customer list                         10  Years
                        Covenants not to compete               5  Years
                        Fixed price contract                   1  Year

Amortization  was $48  and  $10 for the  years  ended  May 31,  1997  and  1996,
respectively.

Deferred Financing Costs:
Direct costs incurred in obtaining financing have been capitalized and are being
amortized  over the term of the  related  debt using the  interest  method.  The
amortization of the deferred  financing costs was $74 and $46 for 1997 and 1996,
respectively  and  is  included  in  "Interest   Expense"  in  the  accompanying
Statements of Income.

Income Taxes:
The Company utilizes the liability method of accounting for income taxes,  which
requires the  recognition  of deferred tax assets and  liabilities  for both the
expected  future tax impact of differences  between the financial  statement and
tax basis of assets and liabilities,  and for the expected future tax benefit to
be  derived  from net  operating  losses and tax  credit  carryforwards  and the
establishment  of a  valuation  allowance  to  reflect  whether  realization  of
deferred tax assets is considered more likely than not.


================================================================================
                                                                            F-11
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 1  -  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 
            (continued)
--------------------------------------------------------------------------------

Earnings per Share:
Earnings per share is computed by dividing  net income by the  weighted  average
number of common and common  equivalent  shares  outstanding  during the period.
Common  equivalent  shares consist of the dilutive  effect,  if any, of unissued
shares under  options and  warrants,  computed  using the treasury  stock method
(using the average  stock prices for primary  basis and the higher of average or
period-end stock prices for fully diluted basis).

Use of Estimates:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
effect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of financial  statements and the
reported amounts of revenues and expenses during the reporting period.  The more
significant  estimates used by management in preparing the financial  statements
include the  following:  measurement  of costs and  profitability  on  long-term
contracts;  valuation  of  inventory  (current  and  non-current);  useful lives
assigned to fixed and tangible  assets;  and  valuation  allowances  established
against deferred tax assets and accounts receivable. Actual results could differ
from those estimates.

Stock-Based Compensation:
The  Company  has  adopted  the  disclosure  only  provisions  of SFAS No.  123,
"Accounting for Stock-Based Compensation" but applies Accounting Principle Board
Opinion No. 25 in  accounting  and  measuring  compensation  expense  related to
employee  stock option plans.  Accordingly,  there was no  compensation  expense
related to the  issuance of stock  options  for 1997 and 1996.  (see Note 11 for
pro-forma disclosure required by SFAS No. 123)

Fair Value of Financial Instruments:
The  carrying  amounts  reported  in the  consolidated  balance  sheet for cash,
accounts  receivable,  accounts payable,  accrued  liabilities and related party
balances  approximate fair value because of the immediate or short-term maturity
of these financial instruments.  Based on an assessment of the terms, conditions
and rates of the Company's  various debt agreements,  management  estimates that
the fair  values  of long  term and  short  term  debt  instruments  approximate
carrying values.

Reclassifications:
Certain  prior period  amounts have been  reclassified  to conform with the 1997
presentation.

Effect of Prospective Accounting Change:
In February  1997,  the Financial  Accounting  Standards  Board issued SFAS 128,
"Earnings  per Share".  This  statement  is  effective  for the  Company's  1998
financial   statements  and   establishes   criteria  for  the  calculation  and
presentation  of  "Basic"  and  "Diluted"  earnings  per  share.


================================================================================
                                                                            F-12

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE:
--------------------------------------------------------------------------------
Accounts receivable are comprised of the following at May 31, 1997:

                  Billed (net of allowance
                    for doubtful accounts of $108  )            $ 2,327
                  Retention on contracts                            340
                                                                -------

                                                                $ 2,667
                                                                ========


The Company  generally  invoices  customers in accordance  with  pre-established
milestones,  the Company's agreement with the respective  customer,  or when the
job or equipment is shipped.

The  accounts  receivable  retention  balances  are  pursuant  to the  retention
provisions  in long-term  contracts  and are due and payable to the Company upon
contract  completion  and/or  customer  acceptance  of  merchandise.  All of the
retentions are expected to be collected within the next fiscal year.

In 1996,  a customer  that owed the  Company  $575 sought  protection  under the
Canadian  Bankruptcy & Insolvency  Act. At May 31, 1996 the Company had provided
an allowance for its estimated loss on this secured  receivable.  In 1997,  upon
receipt of the  equipment,  the  estimate  was  adjusted  and,  accordingly,  an
additional loss of $50 was  recognized.  In connection with the settlement of
this transaction, a related party agreed to fund one-half of the total loss. The
amount  reimbursed  ($63) has been recorded as an increase to the Company's paid
in capital during 1996 (see Note 17).


================================================================================
NOTE 3 - LONG TERM CONTRACTS:
================================================================================

At May 31, 1997, costs,  estimated profit, and billings on uncompleted long-term
contracts accounted for by the percentage of completion method are summarized as
follows:


Costs incurred on long term  contracts                             $  8,827
Estimated profit                                                      6,244
                                                                   --------
                                                                     15,071
Less billings to date                                               (15,155)
                                                                   --------
                                                                   $    (84)
                                                                   ========


These amounts are included in the accompanying balance sheet under the following
captions:
     Costs and estimated earnings in
       excess of billings on long-term
       contracts                                                   $ 1,305
     Billings in excess of costs and
       estimated earnings on
       long term contracts                                          (1,389)
                                                                   -------

                                                                   $   (84)
                                                                   =======

================================================================================
                                                                            F-13
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 4  -  INVENTORIES:
--------------------------------------------------------------------------------

The components of inventories are comprised of the following at May 31, 1997:

        Raw materials and components                            $   261
        Work in process                                           1,375
        Finished goods                                            3,624
        Less: reserve for obsolete inventory                       (231)
                                                                -------
                                                                  5,029
        Less: non-current inventory                              (2,300)
                                                                -------
                                                                $ 2,729
                                                                =======

At May 31, 1997,  the Company's  finished goods  inventories  consist of new and
used processing  equipment for resale.  The processing  equipment is specialized
and is sold to a limited customer base. Based upon management's experience,  46%
of net inventory  will not be sold within one year and has been  classified as a
non-current asset. The Company is actively marketing these items and believes no
loss will be incurred upon the ultimate sale of this inventory.

The Company  provided for the  write-down  of specific raw material and finished
goods inventory to net realizable  value in the amount of $40 for 1996. In 1997,
the Company  increased  its reserve for  inventory in the amount of $105.  While
management believes the Company is carrying inventories at net realizable value,
it is reasonably  possible  that  additional  losses may be required  should the
Company be unable to sell the inventories or if market  conditions change in the
future.

Work in process consists principally of costs (including materials, direct labor
and  overhead)  incurred on equipment in the process of being  manufactured  for
resale or incurred on short-term contracts that are in process and accounted for
on the completed contract method.


================================================================================
NOTE 5  -  PROPERTY, PLANT AND EQUIPMENT:
================================================================================
At May 31, 1997, property, plant and equipment consists of the following:

     Land                                                         $    348
     Buildings and improvements                                      1,372
     Machinery and equipment                                         8,255
     Equipment under capital leases                                      7
     Construction in progress                                          152
                                                                  --------
                                                                    10,134
       Less accumulated depreciation and amortization               (7,397)
          Property, plant and equipment,
           net of accumulated depreciation                        --------
                                                                  $  2,737
                                                                  ========


Depreciation and amortization expense on property,  plant and equipment was $422
and $334 in 1997 and 1996, respectively.  In connection with the construction of
certain assets, the Company capitalized $23 of interest costs in 1997.

================================================================================
                                                                            F-14

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 6  -  ACCRUED LIABILITIES:
--------------------------------------------------------------------------------
At May 31, 1997, accrued liabilities consist of the following:

        Salaries and wages                                          $391
        Current portion of deferred compensation                     101
        Postretirement obligation (health insurance)                  24
        Other                                                        184
                                                                    ----
                                                                    $700
                                                                    ====


In May 1997,  the Company  negotiated  a final  payment for  previously  accrued
liabilities  with  a  third  party  service  provider.   As  a  result  of  such
negotiations, the Company recognized a gain of $98, which is reflected in "Other
Income (Expense)" in the accompanying 1997 Statement of Operations.



================================================================================
NOTE 7  -  LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
================================================================================


At May 31, 1997,  long-term debt and capital lease  obligations  consist of the
following:

Note payable - Sterling Commercial Capital                              $ 1,443
Note payable - Harrisburg Authority                                         794

Line of credit - CIT                                                      1,416
Term Loan payable - CIT                                                     507

Note payable - Royal Bank of Canada                                         283

Capital lease obligations                                                    86

Other notes payable                                                          54
                                                                        -------
                                                                          4,583
Less: current maturities                                                   (632)
                                                                        -------
Total                                                                   $ 3,951
                                                                        =======


Universal Process Equipment ("U.P.E."),  a corporation which is a stockholder of
the  Company,  is a party to certain  financing  transactions  that the  Company
enters into (see Note 13).

Note Payable - Sterling Commercial Capital,  Inc., First Wall Street SBIC, L.P.,
and InterEquity Capital Partners,  L.P.: In July 1995, the Company signed a $1.5
million,   five  year,  first  mortgage  loan  ("the  Mortgage")  with  Sterling
Commercial Capital,  Inc., First Wall Street SBIC, L.P., and InterEquity Capital
Partners,  L.P. The  Mortgage is payable in equal  monthly  installments  of $20
including interest at 14.25% commencing September 1, 1995 with a final principal
balloon  payment of $1,290 due  August 1,  2000.  Interest  expense on this debt
totaled $208 and $188 in 1997 and 1996, respectively.

================================================================================
                                                                            F-15
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 7  -  LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (Continued)
--------------------------------------------------------------------------------

The loan is  collateralized by a first mortgage lien on real estate owned by the
Company and  substantially  all other Company  owned  assets,  subject only to a
first lien on the assets  (excluding  real estate) in favor of CIT  Group/Credit
Finance,  Inc.  The Mortgage  contains a number of  covenants  which among other
things will  require the Company to maintain  specified  levels of net worth and
working capital and will impose certain  limitations on the Company with respect
to (I) the  incurrence  of  additional  indebtedness;  (II)  the  incurrence  of
additional  liens;  (III) the  payment of cash  dividends  and (IV)  mergers and
investments.  All debts  owed by the  Company  to the  directors  and  executive
officers are  subordinated  to the repayment of the loan. In connection with the
Mortgage, U.P.E. agreed to:

     1)  Provide a limited guarantee for up to $350 of the Mortgage.
     2)  Subordinate  all  of its outstanding receivables or other extensions of
         the credit due from the Company to the Mortgage.

In July 1995, the Company granted  warrants to the three-party  lending group to
purchase up to 40 thousand shares of the Company's stock at $1.87 per share, the
fair market value of the stock on the date the warrants were granted.

Note Payable - Harrisburg Authority:
On July 12, 1985, the Harrisburg  Authority filed suit against the Company.  The
complaint   alleged   liability  on  grounds  that  certain   Porcupine   dryers
manufactured   and   furnished   by  the  Company   failed  to  satisfy   design
specifications. In June 1993, a judgement was entered against the Company in the
amount of $2,127.

In November 1993, as part of a settlement  agreement between the Company and the
Harrisburg  Authority  for this  lawsuit,  the  Company  executed a $1,200  note
payable to the Harrisburg Authority.  The Harrisburg Authority has a second lien
on the Company's  owned real estate.  Interest  expense on this debt totaled $24
and $30 in 1997 and 1996,  respectively.  The note's remaining principal payment
provisions at May 31, 1997 are as follows:

     1)   Payable  in  equal  monthly  installments  of $7,  including  interest
          discounted at 10.5% due the first day of each month  through  November
          1, 1999.
     2)   The  remaining  balance of $603 will be paid from 50% of the  proceeds
          from the sale of certain  machinery or equipment  included in U.P.E.'s
          inventory and certain equipment co-owned by U.P.E. and the Company.
     3)   The settlement  agreement requires principal balances  referenced in 1
          and 2 above  which  are  unpaid  on March 1,  1998 to accrue 3% simple
          interest  compounded  annually  through  February 28, 1999.  Principal
          balances  unpaid on March 1, 1999  through  November 1, 1999 accrue 6%
          simple interest compounded  annually.  On November 1, 1999, all unpaid
          balances of principal and accrued interest referenced in 1 and 2 above
          are due and payable to the Harrisburg Authority.

Note Payable - CIT Group/Credit Finance, Inc.
In July 1995, the Company signed a three year $5 million maximum credit facility
including an $800 term loan from CIT  Group/Credit  Finance,  Inc.  secured by a
third lien position (behind the Mortgage and the Harrisburg Authority Judgement)
on Company owned real estate and a first lien on  substantially  all other owned
assets of the Company. In addition, U.P.E. has agreed to purchase certain of the
Company's used equipment inventory in the event the Company defaults on the loan
or certain other specified  events occur. The credit facility is for three years
and is  automatically  renewed for an additional  two years so long as it is not
terminated by either party. The credit facility includes:

     1)   A $507 term loan (original  balance of $800)  requiring  $13.3 monthly
          principal  plus  interest at prime plus 3% from August 1, 1995 through
          July 1, 1998.

================================================================================
                                                                            F-16
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 7  -  LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (Continued)
--------------------------------------------------------------------------------

     2)  A line of credit  against a  percentage  of eligible  inventory  not to
         exceed $4,000 in the aggregate.  The line of credit is payable interest
         only at prime  plus 3% until  the line of credit is due in full in July
         1998.  At May 31, 1997,  $1,416 is  outstanding  under the line,  which
         represents the maximum credit available to the Company at that date.
     3)  Advances  against other  eligible  collateral  not to exceed the unused
         balance  of the  line of  credit.  Interest  expense  (net  of  amounts
         capitalized)  on this  debt  totaled  $322 and  $234 in 1997 and  1996,
         respectively.

The Company granted warrants in July 1995 to the CIT Group/Credit  Finance, Inc.
to purchase 50 thousand  shares of the Company's  stock at $1.87 per share,  the
fair market value of the stock on the date the warrants were granted.


Note Payable - Royal Bank of Canada:
On February  1997, the Company also secured a loan with the Royal Bank of Canada
in the amount of $320 for the  purchase  of a complete  two stage  environmental
thermal process system; interest is based on the bank's prime rate plus 1.5% per
annum. The loan is to be paid in full by March 1, 1999. Interest expense on this
debt was $3 in 1997.

Debt Maturities:
At May 31, 1997, long-term debt maturities for the next five fiscal years are as
follows:

                      Year Ended May 31,
                      ------------------
                           1998                      $     601
                           1999                          1,891
                           2000                            700
                           2001                          1,305
                           2002                              -


Capital Lease Obligations:
Certain leased equipment have been capitalized for financial statement purposes.
The following is a schedule, by years, of future minimum lease payments together
with the present value of the net minimum lease payments as of May 31, 1997.

       Year Ending May 31,
------------------------------
             1998                                 $  33
             1999                                    30
             2000                                    26
             2001                                     9
             2002                                     -
                                            ==============
     Minimum lease payments                          98
     Less:  imputed interest                        (12)
                                            ==============
     Present value of minimum
       lease payments                             $  86
                                            ==============

================================================================================
                                                                            F-17
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 8  -  INCOME TAXES:
--------------------------------------------------------------------------------

The components of the benefit (provision) for income taxes are as follows:

                      December 31,                    1997        1996     
               ------------------------------------------------------------
               Current:
                  Federal                         $      -    $       -
                  State                                  -          (36)
               ------------------------------------------------------------
                                                         -          (36)
               ------------------------------------------------------------
               Deferred:
                  Federal                              (10)         166
                  State                                 (3)          66
               ------------------------------------------------------------
                                                       (13)         232
               ------------------------------------------------------------
               Net change in valuation
                 allowance                             113         (232)
               ------------------------------------------------------------
               Benefit (provision) for
               income taxes                       $     100     $   (36)
               ============================================================


The following  table presents the principal  reasons for the difference  between
the actual  income tax benefit  (provision)  and the tax  provision  computed by
applying the U.S.  Federal  statutory  income tax rate to income  before  income
taxes.

               December 31,                             1997        1996
               ------------------------------------------------------------
               U.S. Federal Income tax
                  provision at statutory rates       $  (205)       $(149)
               State income taxes, net of
                  Federal benefit                        (40)         (36)
               Utilization of net operating
               loss carryforwards                         245         149
               Changes in deferred tax assets,
               net                                        100           -
               ------------------------------------------------------------
               Benefit (provision) for income
               tax                                     $  100       $ (36)
               =============================================================





================================================================================
                                                                            F-18
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 8  -  INCOME TAXES: (Continued)
--------------------------------------------------------------------------------


The  components  of the  Company's  deferred  tax  assets and  liability  are as
follows:

                                                        May 31,
                                                 1997           1996
                                             ---------------------------
               Deferred Tax Assets:
                 Receivables                   $      44      $      76
                 Inventory                           116             31
                 Net operating loss
                   carryforwards                   1,606          1,670
                 Tax credits                         119            138
                 Lawsuit settlement                  219            221
                 Deferred compensation
                   and retirement benefit            443            386
                 Other                                20             81
                                             ---------------------------
                   Total Gross Deferred
                     Tax Asset                     2,567          2,603
                 Valuation allowance              (2,220)        (2,333)
                                             ---------------------------
                 Total Deferred Tax
                 Assets                              347            270
               Deferred Tax Liability:
                 Property, plant and
                   equipment                        (247)          (270)
                                             ---------------------------
               Net Deferred Tax Asset            $   100     $        -
                                             ===========================





================================================================================
                                                                            F-19
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 8  -  INCOME TAXES: (Continued)
--------------------------------------------------------------------------------

As a result  of the  Company's  historical  trend of  losses  and  uncertainties
concerning  the  Company's  ability to obtain new  contracts,  at May 31, 1996 a
valuation allowance was provided against net deferred tax assets.  Based on 1997
results  and  estimated  1998  earnings,   which  include  earnings  on  certain
contracts, management considers realization of the unreserved deferred tax asset
($100 at May 31,  1997)  more  likely  than not.  Additional  reductions  to the
valuation  allowance will be recorded  when, in the opinion of  management,  the
Company's ability to generate taxable income is considered more likely than not.

At May 31, 1997,  the Company has  approximately  $4.5 million of unused federal
net operating loss  carryforwards and federal investment and research tax credit
carryforwards.  If the net operating loss carryforwards remain unused, they will
expire during the years 2004 through 2010.  If the  investment  and research tax
credit  carryforwards  remain unused,  they have or will expire during the years
1997 through  2002. In addition,  at May 31, 1997,  the Company has unused state
net operating loss  carryforwards of  approximately  $1.9 million that expire in
1998 and beyond.


--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION AND RETIREMENT PLANS:
--------------------------------------------------------------------------------

The Company has an unfunded  nonqualified deferred compensation plan for certain
employees  which  provide for ten to fifteen year  payouts of annual  retirement
benefits equal to 20% of the  pre-retirement  salary of employees.  The benefits
become fully vested upon the employees'  retirement  from the Company.  The plan
provides  for benefits to be paid to  beneficiaries  of retirees who have passed
away and had unpaid  vested  benefits  at the time of their  death.  The Company
funds the  plans'  annual  benefit  payments  through  operating  cash  flow.  A
description of the plan follows:


         The   Retirement   Income   Security   Plan  ("RISP")  is  an  unfunded
         noncontributory  plan and covers  eligible plan  participants  and, for
         purposes  of  determining  net pension  expense  and plan  liabilities,
         includes one participant from a predecessor plan. During the year ended
         May 31, 1995, the Company notified all active employees covered by this
         plan that they will no longer be eligible  for the plan.  Instead,  the
         Company  has agreed to fund a portion of the active  employees  accrued
         benefit obligation to a qualified 401(k) plan.

The Company  maintains two  noncontributory  defined  benefit  retirement  plans
("Pension  Plans")  covering  substantially  all hourly  employees  subject to a
collective  bargaining  agreement.  The  plans  require  benefits  to be paid to
eligible employees at retirement based primarily on years of service and a fixed
compensation  formula. For the plan year beginning January 1, 1995, the plan was
amended to no longer require the Company to accrue future service benefits.  The
remaining  transition  obligations  are being amortized over a six year term for
one plan and a twelve year term for the other plan. The Company funds the plans,
at a minimum, based upon the statutory amounts required under ERISA.

The following  tables set forth the components of net periodic  pension  expense
and the funded status and amounts  recognized in the Company's  consolidated May
31, 1997 balance sheet for deferred compensation and defined benefit plans. Plan
assets are stated at fair value and are comprised  primarily of common stock and
corporate bonds.

================================================================================
                                                                            F-20

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION AND RETIREMENT PLANS: (Continued)
--------------------------------------------------------------------------------

Net Periodic Pension Expense:
                                              RISP              PENSION
                                                                 PLANS
                                         1997      1996      1997     1996

Service cost                             $  --     $  --     $  --    $  --
Interest cost on projected benefit
   obligation                               46        55       208     223

Actual return on plan assets                --        --      (553)   (502)
Amortization of transition
   obligation                               33        33        55      55

Prior service cost and gain
   amortization                             (9)       (9)       --      --
Net amortization and deferral               --        --       347     341
                                         ---------------------------------
                                         $  70     $  79     $  57    $117
                                         =================================

Actuarial present value of                                RISP          PENSION
benefit obligations at                                                   PLANS
May 31, 1997:
    Vested benefit obligation                            $  --          $ 1,778
                                                         =======        =======
    Accumulated benefit
       obligation                                        $   561        $ 2,651
                                                         =======        =======
    Projected benefit obligation                         $   561        $ 2,651
    Plan assets at fair value                               --            2,775
                                                         -------        -------
    Deficit (excess) of plan assets
        over projected benefit
        obligation                                           561           (124)
    Unrecognized net gain and
        prior service cost                                   149            950
    Unamortized net obligation
        at adoption                                         (219)          (350)
                                                         -------        -------
    Accrued pension expense                              $   491        $   476
                                                         =======        =======

The expected  long-term  return on plan assets and the weighted average discount
rate assumed in determining the actuarial present value of the projected benefit
obligation for all plans was 8% in 1997 and 1996.

401(k) Plan:
During  1995,  the  Company  adopted a 401(k) plan for all  eligible  employees.
Employees can  contribute at their  discretion  up to 15% of  compensation.  The
Company  matches 25%  of the employees contribution to a maximum contribution of
1 1/2% of  compensation.  The plan is funded at the end of the calendar year. At
May 31, 1997 the Company's  liability to the plan approximated $6. The Company's
expense related to the plan was $91 and $64 for 1997 and 1996, respectively.


================================================================================
                                                                            F-21

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 10 - POSTRETIREMENT BENEFIT PLANS:
--------------------------------------------------------------------------------

The Company provides certain employees with postretirement  health care and life
insurance benefits.  Postretirement  health care and life insurance benefits are
provided to salaried  employees who retired prior to August 1, 1992. The Company
provides  postretirement health care benefits upon retirement to eligible hourly
employees in accordance  with the  Company's  collective  bargaining  agreement.
Postretirement  life insurance  benefits are also  available to eligible  hourly
employees.  Employees  are eligible for  postretirement  benefits  upon reaching
certain ages or completing  certain years of service.  The Company does not fund
its future obligations for postretirement benefits in advance.

Medical Benefits:
The Company  accrues the expected future cost of providing these benefits during
the years the employees  render the necessary  service.  The Company  elected to
recognize the transition  obligation  associated with unfunded health  insurance
benefits over a 20-year period and prior service cost over a 15-year period. The
following table presents the Company's postretirement medical benefit expense:

                                        Year Ended May 31,
                                           1997     1996

                       Service cost       $   5    $   6
                       Interest cost         68       91
                       Amortization
                         of transition
                         obligation          58       58
                       Amortization of
                          prior service
                          costs             (26)    (--)
                       Expected
                          contributions
                          from retirees     (48)    (131)
                                          -----    -----

                                          $  57    $  24
                                          =====    =====


                       Discount rate         7%       7%
                                          --------------

                 Medical trend rate       13.5%    13.5%
                                          ==============


The Company's accumulated  postretirement  medical benefit obligation at May 31,
1997 is as follows:

                      Active plan participants                         $  112
                      Retirees                                            855
                                                                       ------
                                                                          967

                      Plan assets                                          -0-
                      Accumulated postretirement benefit
                        obligation in excess of plan assets               967
                      Unrecognized transition obligation
                        and net gain                                     (910)
                                                                       ------

                      Accrued medical postretirement liability        $    57
                                                                       ======

The effect of raising health care cost trend rates 1% for each future year would
increase the accumulated  benefit  obligation by approximately  $92 and increase
the   aggregate   service  and  interest   cost   components   of  net  periodic
postretirement health care benefit costs by approximately $7.

================================================================================
                                                                            F-22

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 10 - POSTRETIREMENT BENEFIT PLANS:  (Continued)
--------------------------------------------------------------------------------

Life Insurance:
Term life  insurance in the face amount of $3 is provided to salaried  retirees.
Term life insurance in the face amount of $10 is provided to salaried  executive
retirees.  Salaried  employees and executives  who retired  subsequent to August
1992 are not eligible for these  postretirement  life insurance  benefits.  Term
life  insurance  in face  amounts  ranging  from $1 to $3 is provided to retired
hourly  employees.  The related  expense for both 1997 and 1996  totaled $2. The
actuarially determined liability was $13 at May 31, 1997.



--------------------------------------------------------------------------------
NOTE 11  -  STOCKHOLDERS' EQUITY:
--------------------------------------------------------------------------------

Rights Offering Costs:
The Company had  capitalized  professional  fees incurred in  connection  with a
contemplated  Stock Rights Offering.  In May of 1997, the Company decided not to
pursue  the  Stock  Rights  Offering  and,  accordingly,  a non  operating  loss
provision of $103 was recorded to reflect this impairment.

STOCK OPTIONS
Plan 1:
On June 2, 1989,  the Board of  Directors of the Company  adopted The  Bethlehem
Corporation  "1989 Equity Incentive Plan" which was approved by the stockholders
on May 11,  1990.  The plan  provides  that the  Board of  Directors  may  grant
incentive  or  nonqualified   common  stock  options  to  officers,   directors,
consultants  and  employees  of the  Company  for the  purchase of up to 150,000
shares of the  Company's  common stock.  Incentive  stock options may be granted
only to  employees  pursuant  to the  plan  and  Board  established  performance
criteria.  Options expire one month after employees terminate  employment but in
no case later than ten years  after the date of grant.  The  Company's  Board of
Directors  granted  options to officers and key employees with an exercise price
of $2.50 per share.  There were no options  granted  under this plan in 1997 and
1996.

Plan 2:
During 1991,  the Equity  Incentive  Plan ("EIP") for Directors was approved and
provides that each of the Company's directors receive nonqualified stock options
to purchase 10,000 shares of common stock of the Company.

The  Company's  common  shares  subject to options  under the EIP may not exceed
130,000 shares in the aggregate and 10,000 shares for any one director. The Plan
provided  the  following:  (i) each  director  of the  Company on March 21, 1991
receive common stock options for 10,000 shares,  and (ii) each director  elected
after March 21, 1991 be granted common stock options for 10,000 shares under the
EIP.  The  exercise  price of each  option  granted  under  the EIP shall be the
greater  of $3.15 per share or 100% of the fair  market  value of a share of the
Company's common stock on the date the option is granted. The EIP is not limited
in duration. There were no options granted under this plan in 1997 and 1996.

Plan 3:
During  1995,  the  stockholders  approved the 1994 Stock Option Plan (the "1994
Plan").  The 1994 Plan provides for the granting of non-qualified  and incentive
stock  options  and stock  appreciation  rights  equal to the greater of 400,000
shares or 8% of common  stock  issued  and  outstanding,  to  certain  officers,
non-employee  directors and key  employees of the Company and its  subsidiaries.
The  Board  of  Directors  may at its  discretion  determine  the key  employees
eligible  to  participate  in the 1994 Plan.  The Board has  granted  options to
twenty-one  employees.  The maximum  number of shares that may be granted to one
person pursuant to the 1994 Plan is 250,000  shares.  There were 290,000 options
granted under this plan in 1996.


================================================================================
                                                                            F-23
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 11  -  STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------

The 1994 Plan provides that options are to be granted at an exercise price of at
least fair market  value at the date of the grant.  Options  covered by the 1994
Plan vest  ratably over a three year  period,  however,  if there is a change in
control,  the options become fully vested.  The 1994 Plan provides for Directors
of the Company, elected after December 1, 1994 to receive 10,000 options if they
do not receive options under the EIP. Also,  continuing directors of the Company
are entitled to options to acquire 500 shares annually. Also, the aggregate fair
market value (determined as of the date an option is granted) of the shares with
respect to which  incentive stock options are exercisable by any single employee
during any calendar year cannot exceed $100. The options are nontransferable and
the 1994 Plan expires December 23, 2004.

Plan 4:
During 1997, the stockholders approved the 1997 Stock Option Plan ("1997 Plan").
The 1997 Plan provides for the granting of  non-qualified  and  incentive  stock
options. The 1997 Plan currently authorizes the issuance of a maximum of 200,000
shares of common  stock.  The  maximum  number of shares  that may be subject to
options  granted under the 1997 Plan to any  individual in any calendar year may
not exceed 50,000. No options have been issued under this plan in 1997.


Other Options:
During  1996,  the Board of Directors  approved  the  issuance of an  additional
683,000 of stock options outside of any existing plan to the Company's Chairman,
a former Company Chairman,  a Director of the Company,  a former Director of the
Company and U.P.E.  These  options are subject to  stockholders'  approval.  The
options  were  granted at $1.825 per share (the fair market value at the date of
the grant)  and will be valued  based  upon the  market  price of the  Company's
common  stock at the date the  stockholders  approve the grant.  If and when the
stockholders'  approval is  obtained,  the  Company  will  recognize  an expense
related to the issuance of these options.

Disclosure On Options:
The Company applies APB Opinion 25,  "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for the 1994 Stock Option Plan and the
Other Options. Under APB Opinion 25, because the exercise price of the Company's
stock  options  issued to employees  equals the market  price of the  underlying
stock on the date of grant, no compensation is recognized.

SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro-forma  information regarding net income and earnings per share as if
compensation  cost for the Company had been  determined in  accordance  with the
fair value based method  prescribed  in SFAS No. 123. The Company  estimates the
fair  value of each stock  option at the grant  date by using the  Black-Scholes
option-price  model with the following  weighted  average  assumptions  used for
grants  in 1997  and  1996,  no  dividend  yield;  expected  volatility  of 35%;
risk-free  interest  rates  of 5.73%  and  expected  lives  of 10 years  for the
options.

Under the  accounting  provisions  of SFAS No. 123,  the  Company's  net income,
primary  earnings per share and fully diluted earnings per share would have been
reduced to the pro-forma amounts indicated below.

                                                      1997             1996
Net Income:
   As reported                                   $     713          $    403
   Pro-forma                                     $     645          $    383

Primary earnings per share:
   As reported                                   $     .21          $   .13
   Pro-forma                                     $     .19          $   .12

Fully diluted earnings per share:
   As reported                                   $     .21          $   .12
   Pro-forma                                     $     .19          $   .12

The pro forma  effect on net income and earnings per share for 1997 and 1996 may
not be  representative  of the pro  forma  effect  in future  years  because  it
includes  compensation cost on a straight-line basis over the vesting periods of
the grants and does not take into consideration the pro forma compensation costs
for grants made prior to 1996.



================================================================================
                                                                            F-24
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 11  -  STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------

A summary of the status of the Company's  outstanding options as of May 31, 1997
and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                                                          May 31, 1997                        May 31, 1996

                                                                Weighted Average                     Weighted Average
                                                                 Exercise Price                       Exercise Price
                                                   Shares                              Shares

<S>                                               <C>                 <C>              <C>                  <C>  
Outstanding-beginning of year                     2,065,000           $0.98            1,792,500            $0.84

Granted                                                   -                              290,000            $1.90
Exercised                                                 -                                    -            
Forfeited                                           (70,000)          $3.15              (17,500)           $2.50
                                             -----------------                   ------------------

Outstanding-end of year                           1,995,000           $0.90            2,065,000            $0.98
                                             =================                   ==================


Options exercisable -year-end                       429,174                              465,000
                                             =================                   ==================

Weighted-average fair value 
of options granted
during the year                                           -                                $1.03
                                             =================                   ==================
</TABLE>


The options issued in 1996 expire  between 2000 and 2006 and are  exercisable as
to 60% of the optioned  shares after the first year,  77% after the second year,
92% after the third year, and 100% after the fourth year.

The following table summarizes  information  about stock options  outstanding at
May 31, 1997.

<TABLE>
<CAPTION>
                 OPTIONS OUTSTANDING                                            OPTIONS EXERCISABLE
                 -------------------                                            -------------------
                                                                   Weighted-                        Weighted-
Range of                                                           Average                          Average
Exercise         Number Outstanding       Weighted-Average         Exercise     Number Exercisable  Exercise
Prices           at May 31, 1997          Remaining Contractual    Price        at May 31, 1997     Price
                                          Life
-----------------------------------------------------------------------------------------------------------------
<S>              <C>                      <C>                      <C>          <C>                 <C> 

$0.33 to 0.94       1,700,000             3.1 years                $0.67             250,000         $0.94
$1.87 to 2.88         240,000             6.8                      $2.10             124,174         $2.05
$2.50                  25,000             2.5                      $2.50              25,000         $2.50
$3.15                  30,000             1.8                      $3.15              30,000         $3.15
                    ---------                                                        -------


$0.33 to 3.15       1,995,000             3.5                      $0.90             429,174         $1.51
                    =========                                                        =======

</TABLE>

--------------------------------------------------------------------------------
NOTE 12  -  COMMITMENTS AND CONTINGENCIES:
--------------------------------------------------------------------------------

Legal Matters
In May  1996,  a  complaint  was filed  alleging  that the  plaintiff  sustained
injuries  in the  course  of  providing  maintenance  on a  piece  of  equipment
manufactured  by the  Company in 1980.  The matter was  recently  settled in the
amount of $20. The Company accrued this amount at May 31, 1997.


================================================================================
                                                                            F-25

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 12  -  COMMITMENTS AND CONTINGENCIES: (Continued)
--------------------------------------------------------------------------------

The Company is not aware of any other material pending or threatened  litigation
or other environmental claims which have not been remedied, disclosed or accrued
at May 31, 1997.

Operating Lease Commitments
The Company leases a  manufacturing  facility in Knoxville,  Tennessee  which is
accounted for as an operating lease. The lease is due to expire on September 30,
2000 with two consecutive  three year renewal  options.  In addition to the base
annual rent,  the Company is  responsible  for the payment of property taxes and
other  operating  expenses.  The  Company  also  leases  certain  equipment  and
automobiles.  Rent expense under all operating lease  arrangements  was $151 and
$81 in 1997 and 1996,  respectively.  At May 31, 1997,  the future minimum lease
payments on these operating leases are as follows:

                          Year Ended May 31,
                                 1998                         $  135
                                 1999                            127
                                 2000                            119
                                 2001                             38
                                 2002                              -

Employment Agreement
The Company  entered into an employment  contract  with an officer  resulting in
future commitments for payments as follows:

Year Ended May 31,
       1998                              $   141
       1999                                  156
                                          ------

                                         $   297
                                         =======


--------------------------------------------------------------------------------
NOTE 13  -  RELATED PARTY TRANSACTIONS:
--------------------------------------------------------------------------------

Ronald Gale and Jan Gale are directors and  stockholders  of the Company and are
officers,  directors and principal  stockholders of Universal  Process Equipment
("U.P.E."),  a corporation  which is a stockholder  of the Company.  U.P.E.  and
Ronald and Jan Gale are also majority  stockholders or otherwise affiliated with
other companies that engage in transactions with the Company.

On September 9, 1992,  the Company and U.P.E.  entered into an agreement for the
foreign production of the Company's dryer equipment. This agreement provides for
payment to the Company of fees for design  drawings  and a license fee for sales
of equipment  manufactured in Eastern Europe. The Company earned no royalties in
1997 and 1996.

On November 28, 1995, the Company and U.P.E.  entered into a sales and marketing
agreement  whereby  U.P.E.  will  market  certain  used  equipment  owned by the
Company. As consideration for its services, U.P.E. will receive from the Company
50% of the net  selling  price  (defined as the sales price less the cost of the
equipment) plus 1/2 of the sales  commission paid by U.P.E. to its sales people.
The agreement  provides that U.P.E. will pay the Company any interest it will be
required to pay on the original  acquisition of the inventory from its supplier.
The  amounts  paid to and  earned by U.P.E.  were $378 and $94 in 1997 and 1996,
respectively.

From time to time,  U.P.E.  advances  funds to the Company  for working  capital
purposes.  At May 31, 1997, advances  outstanding totaled $685. Related interest
expense on such advances  totaled $53 in 1997 and $18 in 1996. The interest rate
on the advances is prime rate plus 1%.


================================================================================
                                                                            F-26
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 13  -  RELATED PARTY TRANSACTIONS: (Continued)
--------------------------------------------------------------------------------


On February 28, 1997, the Company  purchased a two stage  environmental  thermal
process  system for $545. In order to effect the  acquisition  of the equipment,
the Company  borrowed  $225 from U.P.E.  at an interest rate of prime plus 2.5%.
Interest  expense  accrued in fiscal  1997  totaled $6. This loan will be repaid
from the  proceeds of the sale of the  equipment  purchased.  The  Company  also
secured  a loan with the  Royal  Bank of Canada in the  amount of $320 to assist
with the purchase of these assets at the borrowing  rate of Canadian  prime rate
plus 1.5% per annum.

The related party accounts  receivable and accounts payable are derived from the
normal  course of  business  activities  and are  included  in the  accompanying
balance sheet as follows:


                                                     May 31, 1997
                                              --------------- ---------------
                                                 Accounts        Accounts
                                                Receivable       Payable
                                                 (Related        (Related
                                                 Parties)        Parties)
                                              --------------- ---------------
        a.   U.P.E. (Owned by  Ronald
                & Jan Gale through
               Universal Baling &
               Processing, Inc.
                  U.P.E'.s parent)               $ 1,936         $ 2,126
        b.   Universal Envirogenics, Inc.
               (U.E.I.) (80% owned by
                  U.P.E.)                              -               1
        c.   Universal Industrial
               Refrigeration, Inc. (U.I.R.)
               (80% owned by Ronald &
                  Jan Gale)                           10              99
        d.   R. Simon Dryers, Ltd.
               (Directors are Ronald &
                 Jan Gale)                           115              25
              Employees, Directors and
                 Other Affiliates                      -              46
                                              -------------------------------
                                                 $ 2,061         $ 2,297
                                              ===============================

Since the amounts arise in the ordinary course of business,  management  expects
to collect and pay the amounts within one year (see Note 17).


Related party sales were as follows:

                          Year Ended May 31,

                          1997           1996
                      ----------------------------
U.P.E.                     $  54        $   977
U.E.I.                        22            132
                      ----------------------------
                           $  76         $1,109
                      ============================


The Company  purchases  equipment and services from U.P.E.  and its  affiliates.
These  purchases total  approximately  7% and 8% of the total cost of goods sold
for 1997 and 1996, respectively.


================================================================================
                                                                            F-27

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 13  -  RELATED PARTY TRANSACTIONS: (Continued)
--------------------------------------------------------------------------------

In November  1993, the Company and  Harrisburg  Authority  settled a lawsuit for
$1,300 based upon  negotiations  between the Company,  U.P.E. and the Harrisburg
Authority.  Under the terms of the settlement agreement,  U.P.E. agreed to serve
as a guarantor and surety for the obligation.  In addition, U.P.E. agreed to pay
up to $650  from  the  proceeds  of the sale of  certain  of its  machinery  and
equipment  inventory  and certain  equipment  co-owned by the Company and U.P.E.
Pursuant to the  settlement  agreement,  the Company  granted  stock  options to
U.P.E. These options provide that at U.P.E.'s discretion, the Company will issue
additional  shares of common stock to U.P.E.  in exchange  for payments  made by
U.P.E.  on behalf of the Company to Harrisburg  under the  settlement  agreement
instead of reimbursing  U.P.E. in cash.  U.P.E. may make payments (without prior
approval  of the  Company) on the  outstanding  amounts  due to  Harrisburg  and
thereby be entitled to exercise its options or accept reimbursement for payments
it advanced on behalf of the  Company.  Provided  however,  for any such payment
made by U.P.E.,  the Company will not be obligated to issue more than  1,450,000
shares to U.P.E.  for such payments.  The ratio of exchange shall be as follows:
three (3) shares issued for each dollar in payment made by U.P.E., up to a total
of 450,000  shares in exchange for a total of $150 in  payments,  and after such
total of  450,000  shares  has been  reached,  two (2)  shares  issued  for each
additional $1.50 in payment made by U.P.E. up to a total of 1,000,000 additional
shares in exchange for a total of $750 in additional payments.  As of August 22,
1997, no options have been exercised by U.P.E. under this plan.

In July 1995, U.P.E. exchanged used equipment inventories to the Company for one
dollar of consideration.  The Company recorded the transaction as a contribution
to paid in capital in an amount  equal to U.P.E.'s  cost  ($209),  which is less
than the inventories' net realizable value.

In  addition,  the Board of Directors  approved  the  issuance of 350,000  stock
options to U.P.E. in March, 1996 for consideration of U.P.E.'s guarantees on the
CIT debt. These options are subject to stockholders'  approval. The options were
granted at an exercise  price of $1.825,  the fair market  value of the stock on
the date of the grant.

In March 1996,  the Board of Directors  authorized  the Company to issue 350,000
shares of common stock to U.P.E. in exchange for used equipment inventory. These
shares are  subject  to  stockholders'  approval.  As of August  22,  1997,  the
inventory has not been exchanged and the stock has not been issued.

In connection  with U.P.E.'s  assistance in the acquisition of the assets of the
American  Furnace  Division and the introduction of the Tower Filter Press line,
the Company  entered into a three year profit  sharing  arrangement  with U.P.E.
expiring May 1999. Under this  arrangement  U.P.E. is entitled to receive 25% of
net  pre-tax  profits  from these  business  units.  Expenses  relating  to this
agreement were $43 in 1997.



--------------------------------------------------------------------------------
NOTE 14  -  CONCENTRATION OF CREDIT RISK:
--------------------------------------------------------------------------------

Trade accounts receivable:
The Company designs, manufacturers, sells and services a product line of capital
equipment  used to process  materials for a variety of  industrial  applications
primarily in the United States.  In addition,  the Company operates a production
facility  that  fabricates   machines  and  assembles   equipment  to  customers
specifications.  In connection with these activities,  the Company grants credit
to its customers.  At May 31, 1997, the Company's accounts receivable (excluding
related  parties)  include a  concentration  of three  customer  balances  which
represent 25% of the accounts receivable outstanding.


================================================================================
                                                                            F-28
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 15  -  MAJOR CUSTOMERS AND EXPORT SALES:
--------------------------------------------------------------------------------
For 1997 and 1996, one customer  accounted for 35% and 30%,  respectively of the
Company's sales.


For the years ended May 31, 1997 and 1996, export sales were as follows:

                                                   Year Ended May 31,
         Customer                            1997                   1996
-------------------------------------------------------------------------------
         Netherlands                      $   2,723               $      -
         Brazil                               1,149                      -
         Taiwan                               1,566                      -
         Indonesia                              620                    211
         Mexico                                 534                      -
         Japan                                  352                    204
         Chile                                  138                      -
         Estonia                                 38                      -
         Israel                                  33                    236
         Canada                                   6                     35
         Poland                                   3                      -
         Switzerland                              2                      -
         United Kingdom                           1                     71
         Finland                                  -                    196

                                 -----------------------------------------------
                                           $  7,165               $    953
                                 ===============================================

--------------------------------------------------------------------------------
NOTE 16  -  SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                     Year Ended May 31,
                                                                                   1997              1996
                                                                            -----------------------------------

<S>                                                                              <C>               <C>   
     A.  Cash paid for interest                                                  $   591           $  593
                                                                            ===================================


     B.  Cash paid for income taxes                                                 --             $  104
                                                                            ===================================

     C.  Non Cash Investing and Financing Activities:
           1.  Purchase of accounts receivable, machinery and
                  equipment and intangibles from the American Furnace
                  Division of the Third Millennium Corporation
                  via issuance of common stock and assumption
                  of accounts payable                                               --             $  447
                                                                            ===================================

           2.  Equipment capitalized with corresponding
                  increase to long-term debt and capital leases                     --             $  102
                                                                            ===================================
           3.  Balance of G.E. Capital Financing paid directly
                  by Sterling Commercial Capital, Inc.                              --             $1,440
                                                                            ===================================
          4.  Receipt of used  equipment  inventory  form U.P.E with a
             corresponding increase in additional paid in capital                   --             $  209
                                                                            ===================================
          5.  Funding of cost  sharing  arrangement  by related  party
             increasing additional paid in capital                                  --             $   62
                                                                            ===================================
</TABLE>


================================================================================
                                                                            F-29

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 17  - RESTATEMENT:
--------------------------------------------------------------------------------

During the year ended May 31, 1997, the Company  determined that  reimbursements
from U.P.E.  for bad debt losses  (previously  accounted  for as a reduction  of
general and administrative expense) should be accounted for as a contribution to
the Company's  additional  paid in capital.  Accordingly,  the 1996 statement of
income has been restated from  previously  published  amounts to recognize  this
expense of $63 (or $ .01 per share).


--------------------------------------------------------------------------------
NOTE 18  -  ACQUISITION:
--------------------------------------------------------------------------------

On November  28,  1995,  the Company  acquired  certain  assets of the  American
Furnace Division of Third Millennium Products,  Inc. pursuant to the terms of an
Asset Purchase  Agreement.  The acquisition is being accounted for utilizing the
purchase  method of  accounting  and,  accordingly,  results of  operations  are
reflected in the accompanying 1996 statement of income from November 28, 1995.

The purchase  price of $447,  was  comprised of 50,000  shares of the  Company's
common stock valued at approximately  $3.08 per share on the date of closing and
the assumption of certain  liabilities.  The allocation of the purchase price to
the acquired assets are as follows:

    Accounts receivable             $  29
    Machinery and equipment            20
    Designs, blue prints and plans    179
    Technology....                     99
    Customer List.                     42
    Management team and
      covenant not to compete          68
    Fixed Price Contract               10
                                     ----
                                     $447
                                     ====



================================================================================
                                                                            F-30