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, 1999.

/   /    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. [X]

State issuer's revenues for its most recent fiscal year:  $13,710,000

As of August 20, 1999,  2,378,520 shares of the  registrant's  common stock were
outstanding  and the  aggregate  market  value  of  such  common  stock  held by
non-affiliates was approximately  $2,158,197 based on the average of the bid and
asked prices on that date of $1.6875.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions of the Proxy Statement for 1999 Annual Meeting of Stockholders
incorporated by reference in Part III, Items 9, 10, 11 and 12.


<PAGE>

                                TABLE OF CONTENTS

                       ANNUAL REPORT ON FORM 10-KSB - 1999

                            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........................................................................6
      Item 5.  Market for the Company's Common Equity and Related
               Stockholder Matters.............................................6
      Item 6.  Management's Discussion and Analysis or Plan of Operation.......6
      Item 7.  Financial Statements...........................................11
      Item 8.  Changes In and Disagreements With Accountants
               on Accounting and Financial Disclosure.........................11

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

PART IV.......................................................................11
      Item 13. Exhibits, List and Reports on Form 8-K.........................11

SIGNATURES....................................................................14


<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 provides thermal
and  filtration  process  solutions,  equipment,  systems and  technology  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.  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.  The Company,  through Bethlehem Advanced Materials
Corporation  ("BAM"),  a  wholly-owned  subsidiary,   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.  In
addition,  the Company,  through Bethlehem  Thermal,  LLC ("Bethlehem  Thermal")
provides  metallized  thermal coatings for a variety of industries using totally
automated  thermal spray  systems.  Bethlehem  Thermal also  provides  automated
systems  technology and  inspection  services to provide long term solutions for
corrosion and erosion problems.

Thermal and Filtration Process Solutions, Equipment, Systems and Technology

         The   Company's   customers   include   refineries,   chemical,   food,
pharmaceutical,  petrochemical and environmental 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 thermal and filtration  process
solutions,  equipment systems and technology,  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 three 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  hazardous  and
               non-hazardous  sludges,  contaminated  soils,  drill cuttings 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.


<PAGE>
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     Toll Processing--contract heat treating and thermal processing of
               specialty materials.

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

         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.

Bethlehem Thermal, LLC (Bethlehem Thermal)

         Bethlehem Thermal provides  metallized  thermal solutions for a variety
of industries using totally automated thermal spray systems. Bethlehem Thermal's
sprayed  metal  coatings are designed to combat  corrosion and erosion in severe
environments, as found in the pulp & paper, chemical,  petrochemical,  power and
marine  industries.  Using  electric arc spray and high velocity oxy fuel "HVOF"
processes  enables  Bethlehem  Thermal to provide  coatings in a wide variety of
materials  and alloys.  Bethlehem  Thermal's  fully  automated CNC Thermal Spray
Systems result in coatings extending  equipment service life. As a complement to
Bethlehem Thermal's in-house capability, it provides on-site coating services at
its customer's  plants and offers  automated  systems  technology and inspection
services.

Strategy

         The  Company's  business  strategy  is to  continue  the  technological
development and marketing of its core thermal and filtration  process solutions,
equipment, systems and technology.  Additionally,  the Company will focus on the
expansion of specialty  high  temperature  furnace  systems and toll  processing
services for select advanced materials markets.

         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.

                                      -2-
<PAGE>

Customers; Existence of Short-Term Contracts

         The Company's  principal  customers for thermal and filtration  process
solutions,   equipment,   systems  and   technology  are  domestic  and  foreign
manufacturers of chemicals, pharmaceuticals, foods, plastics, petrochemicals and
environmental firms. BAM's principal customers for its tolling services and high
temperature  furnaces  are  domestic  and  foreign  manufacturers  of carbon and
graphite structures, and other advanced ceramic composite structures.  Bethlehem
Thermal's  principal  customers for its metallized thermal coatings are domestic
and foreign manufacturers of chemicals, petrochemicals, pulp and paper.

         Currently,  a major portion of the Company's  sales for its thermal and
filtration process solutions,  equipment and systems,  and as metallized thermal
coatings,  are made under short term or one time contracts,  which contracts are
not  subject  to  renewal.  Although  such  contracts  may  afford  the  Company
flexibility  in  responding  to  changing  market  conditions,  a market for the
Company's  products and  services 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.

         In November of 1998,  BAM entered  into an  agreement  with an existing
customer  (AlliedSignal,  Inc.) to continue toll processing  their materials for
five years commencing  January 1, 1999. The Company  estimates that the value of
this  contract  will be  approximately  $20 million  dollars over the five years
commencing January 1, 1999.

         The  Company's   active  customers  for  thermal   filtration   process
solutions,  equipment,  systems and technology  include  Oiltools  International
Limited,  SK Chemicals,  Dow Belgium N.V., Ford, Bacon & Davis, LLC, Mexicana De
Cobra, S.A. de C.V., PPG Industries,  Inc., Chem Eng Contracts Pty Ltd, Kemwater
Brasil  S.A.,  Daesang  Corporation,  Greenway  Environmental,  Inc. and Celotex
Corporation.  Sales to Universal Process Equipment,  Inc. ("UPE"), a significant
shareholder of the Company accounted for less than 1% of total sales in 1999 and
approximately 8% of total sales in 1998. The Company's active customers for high
temperature  furnaces and tolling  services are Allied  Signal Inc. 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 thermal and filtration process
solutions,  equipment and technologies  products,  metallizing coating solutions
and services,  and in  Knoxville,  Tennessee  for its high  temperature  furnace
products  and  tolling  services.  In June 1999,  the  Company  entered  into an
agreement with Oiltools International Group ("Oiltools"),  whereby Oiltools will
serve  as the  exclusive  representative  of the  Company's  thermal  desorption
systems for the  treatment  of oil and gas  drilling  wastes in all areas of the
world except for North and South America.

         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 2% of total sales for the year ended May 31,
1999 and approximately 10% of total sales for the year ended May 31, 1998 and it
is  anticipated  that the  percentage  of sales for the year ending May 31, 2000
will be approximately 5%.

Backlog

         As of August 20,  1999,  the Company  had a backlog of orders  equaling
$22.5 million  compared to $4.7 million for the same period last year. The $22.5
million includes $19.5 million from the toll processing customer described under
"Description  of  Business --  Customers;  Existence  of Short Term  Contracts."
Orders  comprising  current  backlog are expected to be filled during the fiscal
years ending May 31, 2000 to May 31, 2004.

                                      -3-

<PAGE>
Raw Materials

         The basic raw  materials  used in the  Company's  products are pipe and
forgings,  steel  plate,  bars  and  castings  and  in  addition,  in  the  high
temperature  furnace  business,  graphite  and copper.  For  metallized  thermal
coatings,  the basic raw materials are alloy wire and powders. 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, 1999 were, Bush Miller,
MG Industries  Inc.,  Penn Stainless  Products Inc. and, in connection  with the
high temperature  furnace business,  Graybar Electric Co., M.G.P. Inc., and UCAR
Carbon Company, Inc.

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 filed a patent  application for a new generation of its tower filter
product  line  in  1998.  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.  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.

         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.

Dependence on Significant Customers

         For the year ending May 31, 1999,  the Company's two largest  customers
individually  accounted  for  12%  and 20% of the  Company's  sales  (32% in the
aggregate). The customers are Dow Belgium, N.V. and Allied Signal, Inc.

Employees

         As of  August  20,  1999,  the  Company  had 105  full-time  employees,
including  29 employees of BAM. Of these,  82 are engaged in  manufacturing  and
technical  services,  11  in  marketing  and  sales  and  12  in  administrative
functions.

         The  production  employees  at the Easton,  Pennsylvania  facility  (36
persons)  are  represented  by their own


                                      -4-
<PAGE>

bargaining  unit  called The  Bethlehem  Corporation  Employees  Association.  A
three-year  labor  contract was ratified with this  Association on July 31, 1998
and is due to expire on July 31, 2001. 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 of various exhaust streams,  designed to comply with applicable laws
and  regulations.  The plant  produces  air  emissions  that are  regulated  and
permitted  by  the  Knox  County  Department  of  Air  Quality  Management  (the
"KCDAQM").  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 KCDAQM  additional  permits necessary to expand its operations to allow
increased carbon processing and the operation of two additional afterburners.

         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  Northampton  County,  Pennsylvania.  The
facility  is  an  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 access to major interstate systems. See "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital Resources."

         As of August 20, 1999, the Company's Easton  facilities were subject to
a first  mortgage  loan and a second  lien.  See  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital Resources."

         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 access to major interstate highways and
an airport.  The lease expires  September 30, 2000, but provisions for the lease
provide for two additional  three year rental terms.  The Knoxville  lease has a
monthly base rent of approximately $9,000. The Company is a guarantor of payment
on this  lease.  In  March  1999,  the  Company  purchased  a  tract  of land of
approximately  1.08 acres  adjacent to the  facility  and entered into an option
agreement to purchase the facility. The option expires December 12, 1999. In May
1999,  BAM leased  1,530  square feet of office  space and 2,470  square feet of
warehouse  space.  The  lease  is for one year and has a  monthly  base  rate of
$2,350.  This lease has the option to renew for an additional period of one year
at $2,450 per month. In addition,  BAM leased an additional 5,000 square feet of
unimproved  warehouse  space.  The lease is for one year and has a monthly  base
rate of $1,500.  This lease has the option to renew for an additional  period of
one year at $1,550 per month.
                                      -5-

<PAGE>

Item 3.  Legal Proceedings.
         None

Item 4.  Submission of Matters to a Vote of Security Holders.
         Not Applicable


                                     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" on the  American  Stock  Exchange  ("AMEX").  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 ($)              High ($)
                                           -------              --------
         1998 Fiscal Year
         First Quarter                        1.88                  2.50
         Second Quarter                       2.06                  3.81
         Third Quarter                        2.56                  3.25
         Fourth Quarter                       2.50                  3.88

         1999 Fiscal Year
         First Quarter                        1.63                  2.75
         Second Quarter                       1.19                  2.00
         Third Quarter                        1.25                  3.50
         Fourth Quarter                       1.63                  3.00


         As of August 20, 1999, there were  approximately  819 holders of record
of the Company's Common Stock.

         On May 6, 1999, 90,000 shares of the Company's common stock were issued
to  a  former  Vice  President  of  the  Company.  These  shares  were  in  full
consideration  for the balance  owed to him pursuant to the  Company's  unfunded
nonqualified deferred compensation plan. Such shares were issued pursuant to the
exemption continued in section 4(d) of the Securities Act of 1933, as mentioned.

         The  Company did not declare  any cash  dividends  on its Common  Stock
during Fiscal 1999 or Fiscal 1998.  The Company's  financing  agreement with PNC
Bank,  N.A.,  imposes  certain  limitations  with  respect  to  payment  of cash
dividends   (See   "Management's    Discussion   and   Analysis   of   Plan   of
Operation--Liquidity  and Capital  Resources").  The Company 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  provides  thermal and  filtration  process
solutions,  equipment,  systems  and  technology  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  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.  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 industries.  In addition, the Company,  through Bethlehem Thermal,
provides  metallized  thermal coatings for a variety of industries using totally
automated thermal spray systems.

         All three of the Company's  business  units 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.

                                      -6-
<PAGE>

         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.

         (2)   Environmental Systems Unit

               o     Markets are concentrated.

               o     Technology barrier is medium.

               o     Competition is worldwide.

         The Company's  customer  concentration has historically been limited to
markets 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  can  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 Western  Europe.  The Company has sought to further
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  has and will continue to 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 product 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.

         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 results of operations, or cash flows.


                                      -7-
<PAGE>
Results of Operations

Fiscal  Year Ended May 31, 1999  ("1999")  Compared to Fiscal Year Ended May 31,
1998 ("1998")

         The Company's total sales were $13,710,000 for 1999,  compared to sales
of  $16,271,000  for 1998,  a decrease of  $2,561,000  or 16%.  Gross profit was
$4,539,000  or 33% of sales for 1999  compared to gross profit of  $5,119,000 or
31% of  sales  for  1998.  Decreased  sales  in the  Company's  Thermal  Process
Equipment  Unit was a factor for the lower sales.  Both sales activity and sales
in the Company's core Thermal Process Equipment Unit decreased through the third
quarter of 1999 due to a worldwide decline of the purchasing of capital goods in
the chemical  industry and other  process  industries  that the Company  serves.
During the fourth  quarter of Fiscal 1999 and the first  quarter of Fiscal 2000,
the Company  increased  its  advertising  and  marketing  activities  to try and
capture more sales in the Thermal  Process  Equipment  Unit.  Additionally,  the
Company elected to focus on its core business and not on contract  machining and
fabrication as in prior years.  The Company is also focusing on the expansion of
specialty high  temperature  furnace  systems and toll  processing  services for
select advanced materials markets.

         The Company's largest customers  individually accounted for 12% and 20%
of the Company's sales for 1999. The Company's  export sales equaled  $5,674,000
for 1999  compared to  $5,436,000  for 1998.  All sales were  denominated  in US
Dollars, therefore, currency fluctuations did not affect the transactions.

         Operating  expenses for 1999 were $3,655,000 or 27% of sales,  compared
to  $3,631,000  or 22% of  sales,  for 1998.  In 1999,  the  Company  recognized
approximately $116,000 of compensation expense for the issuance of stock options
in late 1998 to James L. Leuthe (a Director) and Salvatore J. Zizza (Chairman of
the Board)  compared to $32,000 in 1998. The balance of the options' fair values
of  approximately  $219,000  will be expensed as services are rendered  over the
next  two-year  vesting  period.  In 1998,  the Company  recorded  approximately
$126,000 of non cash  compensation  expense  related to the  issuance of 350,000
shares of the  Company's  common  stock to UPE for a 50%  ownership  in  certain
resale  inventory,  which  consists  primarily of tower  presses,  rotary vacuum
dryers,  double cone dryers and vacuum freeze dryers.  Operating  income equaled
$884,000 for 1999 or 6% of sales  compared to operating  income of $1,488,000 or
9% of sales for 1998.

         Other expense  totaled  $495,000 for 1999  compared to  $1,067,000  for
1998.  Interest  expense was $693,000 in 1999 compared to $822,000 for 1998. The
decrease relates to lower interest rates on refinanced outstanding debt with PNC
Bank, N.A., the agreement for which was executed in July 1998. In addition,  the
amortization  of  deferred  financing  fees  decreased  to $78,000  compared  to
$159,000 in 1998.  Financing charges related to the issuance and amortization of
options to UPE  decreased to $100,000  from $296,000 in 1998. A grant of 350,000
options to UPE was approved by the Company's  stockholders in April of 1998, and
the values  ascribed to such options were allocated  between  existing and prior
guarantees in 1998.  The Company  amortizes the remaining  capitalized  costs of
this grant and a grant of 175,000  options to UPE in 1999 (totaling  $200,000 at
May 31, 1999) over the estimated term of the guarantees.  The Company recognized
$298,000 in 1999 in other  income  compared to other  income of $46,000 in 1998.
The increase is  principally  composed of a gain on the sale of equipment in the
amount of $170,000 and increased rental income of $16,000.  Income before income
taxes totaled $389,000 for 1999 compared to $421,000 for 1998.

         The  Company's  benefit  for  income  taxes  totaled  $20,000  for 1999
compared to $110,000  for 1998.  The 1999  benefit  was  comprised  of a Federal
benefit of $64,000 and a net state provision of $44,000. Net income for 1999 was
$409,000 compared to $531,000 for 1998.

Liquidity and Capital Resources

         During  1999,  $1,740,000  of cash  was  used in  operating  activities
compared to  $363,000 of cash  provided by  operating  activities  in 1998.  The
company's accounts receivable increased $855,000, costs and estimated profits in
excess of billings increased $785,000,  and inventories increased $880,000.  The
increase was due to increased  billings and  increased  percentage of completion
contract projects in place at May 31, 1999 compared to May 31, 1998. The Company
recorded non cash  compensation  expense and a financing charge for issuance and
amortization of options totaling $216,000 in 1999 compared to $454,000 in 1998.

         Cash  flow  used  for   investing   activities,   principally   capital
expenditures,  was  $3,421,000 in 1999 compared to $385,000 in 1998. The Company
has been building and upgrading the high temperature  furnaces needed to support
the long term contract  secured by Bethlehem  Advanced  Materials  ("BAM").  The
capital  expenditures  also included  energy


                                      -8-
<PAGE>

efficiency upgrades,  upgrades to existing plant equipment, office buildings and
new plant equipment.

         Cash flow  provided by financing  activities  was  $5,233,000  for 1999
compared to $27,000 in 1998.  Proceeds  from the PNC Bank  National  Association
("PNC") and NationsBank  agreements signed in 1999 provided  approximately  $7.1
million of funds, which were offset by payments against  outstanding  borrowings
of $1.8 million.  The loan from Ocwen Federal Bank is  collateralized by a first
mortgage lien on all real estate owned by the Company.  The loan bears  interest
at 11.25% per annum.  The  outstanding  principal  and interest is payable in 59
consecutive  equal monthly payments  calculated to fully amortize over a 20 year
period with a final payment of all then outstanding principal and interest.  The
balance of the loan  proceeds  was used for  capital  improvements  and  working
capital purposes.  As of August 20, 1999, the amount  outstanding under the loan
was $1,959,000.

         On June 3, 1998, the Company entered into a loan agreement with PNC for
a $4  million  line of credit  and term  loan,  secured  by a first  lien on the
Company's  (excluding  BAM)  inventory,   accounts  receivable,   machinery  and
equipment  and other  assets.  The  proceeds of the line of credit and term loan
were used to prepay the  outstanding  term loan and line of credit  with The CIT
Group/Credit  Finance  ("CIT") (of which  $1,502,000 was  outstanding at May 31,
1998) and for general  working  capital  needs.  On July 31, 1999, the agreement
with PNC was amended.  The amended credit facility includes (a) an $800,000 term
loan  requiring  $13,000  monthly  principal  payments  plus  interest at 9.70%,
maturing on June 1, 2003,  and (b) a  $3,450,000  line of credit  with  advances
against eligible inventory and accounts receivable at the interest rate of prime
plus one and one-half  percent,  maturing on July 31,  2000.  The line of credit
will be reduced to an amount equal to $3,200,000  after  November 1, 1999. As of
August 20, 1999, the amount  outstanding under the facility  (including the term
loan) was $3,994,000.  The loan agreement contains certain covenants which among
other  criteria,  will require the Company to maintain  specified  levels of net
worth.  UPE  agreed to  provide  a  guarantee  for this  credit  facility.  This
guarantee consists of an equipment  repurchase agreement wherein UPE is required
to either  liquidate  or otherwise  purchase  for its own account the  Company's
eligible  inventory upon the occurrence of a payment default.  In addition,  UPE
agreed to subordinate  $800,000 of indebtedness  due from the Company to PNC. By
securing  this  funding,  the Company  expanded  working  capital and  increased
liquidity.

         In September  1998,  the Company  entered into a $250,000 non revolving
and committed  equipment line of credit with PNC. The purpose of the facility is
to provide  funding for acquisition of equipment from time to time, in aggregate
amounts not  exceeding the sum of $250,000.  The maximum  amount of each advance
made under the  facility  shall be equal to the lesser of; (1) the then  current
unadvanced  portion of the  facility or, (2) ninety  percent  (90%) of the price
paid by the  Company to acquire  the  equipment.  The rate bears  interest  of a
maximum rate of 9.40% and a minimum rate of 9.15%. Borrowings under the facility
are secured by a lien on all of the collateral  advanced.  Borrowings under this
facility  are fully  amortized  with fixed equal  payments of $5 not to exceed a
term of 60  months.  The  amount  outstanding  as of August  20,  1999 under the
facility was $216,000.

         On January 21, 1999,  the Company  entered into a loan  agreement  with
NationsBank  for a $3 million  line of credit and term loan,  secured by a first
lien on the Company's inventory,  accounts  receivable,  machinery and equipment
and other assets. The proceeds of this credit facility are being used to finance
capital expenditures at the BAM facility to support the contract received during
the third quarter of 1999. On July 31, 1999,  the credit line was converted to a
seven-year term loan requiring $36,000 principal payments plus interest at prime
plus one half of one percent.  The loan agreement  contains  certain  covenants,
which  among  other  criteria  will  require the Company to maintain a specified
level of net worth.  As of August 20,  1999,  the amount  outstanding  under the
facility is $3,000,000.

         From time to time in the  ordinary  course of  business,  UPE  advances
funds to the  Company  to enable  the  Company to meet  certain  temporary  cash
requirements.  These advances are repaid from operating cash flow. As of May 31,
1999, $787,000 of these advances remains outstanding.

         The Company  believes  that cash  available  from the PNC National Bank
credit agreement and cash generated from existing business and new orders,  will
be sufficient to meet  operating  and  investing  requirements  through the year
ending May 31, 2000, and principal repayments on debt obligations (See Note 7 to
the Consolidated Financial Statements) as they become due.

                                       -9-

<PAGE>

         Backlog of  $22,500,000  at August  20,  1999,  compares  to backlog of
$4,700,000 for the same period last year.  This increase is primarily due to the
Company's five-year contract with AlliedSignal,  Inc. See "Business -- Customers
Existence of Short Term Contracts".

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, 1999 the Company had  approximately  $3.2  million of unused
federal net operating loss carryforwards and $.3 million of federal  alternative
minimum tax ("AMT") and 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 2000 through 2002.

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.

Year 2000

         The  Company is aware of the  uncertainty  surrounding  the  ability of
computer  systems  to  function  properly  with the  coming of the year 2000 and
related issues.  The Company replaced its existing computer software during 1998
with  software  that is Year 2000  compliant,  and is  currently  assessing  the
functionality  of the systems of its  customers  and  suppliers in an attempt to
identify  and avoid  potential  problems.  The  Company  formed a  committee  to
identify Year 2000 target areas. All target areas were completely  identified in
May of 1999 and have been evaluated and assessed for any potential problems. The
Company  is  presently  addressing  any  potential  financial  disruptions.  The
Company's  current  plan is to have  all  Year  2000-related  issues  adequately
handled by the end of the Company's fiscal quarter ending November 30, 1999.

         Year to date,  the Company has not incurred  any  material  expenses in
connection with evaluating Year 2000 compliance issues.  Presently,  the Company
cannot assess the financial impact of the Year 2000 compliance issues.  Although
the Company  considers a material  adverse impact on its financial  condition or
results of operations  or liquidity  unlikely,  the Company  cannot at this time
state with a high degree of certainty that the Year 2000 compliance  issues will
not have a material  impact due to the fact that the Company is in the beginning
stages of evaluating Year 2000 exposure.


Effects of Recently Issued Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting  Standards 133,  "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for  derivative  instruments  and hedging  activities.  The Company is
currently  reviewing  the effects of SFAS 133.  This standard will be adopted by
the Company no later than its year ending May 31, 2001.

                                      -10-

<PAGE>
Item 7.  Financial Statements.

         Provided following the signature page.

Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         None

                                    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 1999 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 1999 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 1999 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 1999 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.


                                     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,

                                      -11-
<PAGE>

                 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(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   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(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)

         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)

                                      -12-
<PAGE>

         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(u)   Agreement  dated July 31,  1998  between  the  Company  and The
                 Bethlehem Corporation  Employees  Association  (Incorporated by
                 reference to Exhibit 10(u) to the Company's 1998 form 10-KSB.

         10(v)   Mortgage  agreement  dated  December 12, 1997 by the Company to
                 Ocwen Federal Bank  (Incorporated by reference to Exhibit 10(v)
                 to the Company's 1998 Form 10-KSB).

         10(w)   Amended and  Restated  Loan  agreement  dated  January 21, 1999
                 between the Company and PNC Bank, N.A.

         10(x)   Second Amended and Restated loan agreement  dated July 31, 1999
                 between the Company and PNC Bank, N.A.

         10(y)   Amended and Restated  Committed  Line of Credit Note dated July
                 31, 1999 between the Company and PNC Bank, N.A.

         10(z)   Loan  agreement  dated January 21, 1999 between the Company and
                 Nations Bank, N.A.

         11(a)   Amended loan agreement  dated July 31, 1999 between the Company
                 and Nations Bank, N.A.

         27      Financial Data Schedule Year ended May 31, 1999
                                      -13-

<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 26, 1999      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.

Signatures                          Title                           Date
----------                          -----                           -----


 /s/ Alan H. Silverstein       President, Director and           August 26, 1999
---------------------------    Chief Executive Officer
Alan H. Silverstein            (Principal Executive Officer)

 /s/ Antoinette L. Martin      Chief Financial Officer           August 26, 1999
---------------------------    (Principal Financial Officer)
Antoinette L. Martin


 /s/ Salvatore J. Zizza        Chairman of the Board             August 26, 1999
---------------------------
Salvatore J. Zizza


 /s/ Ronald H. Gale            Director                          August 26, 1999
---------------------------
Ronald H. Gale


 /s/ Jan P. Gale               Director                          August 26, 1999
---------------------------
Jan P. Gale


 /s/  James L . Leuthe         Director                          August 26, 1999
---------------------------
James L. Leuthe


 /s/   Harold Bogatz           Director                          August 26, 1999
---------------------------
Harold Bogatz


 /s/    B. Ord Houston         Director                          August 26, 1999
---------------------------
B. Ord Houston


 /s/    James F. Lomma         Director                          August 26, 1999
---------------------------
James F. Lomma
<PAGE>













                   THE BETHLEHEM CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                    FOR THE YEARS ENDED MAY 31, 1999 AND 1998

                               INCLUDING REPORT OF

                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS






                                      F- 1


<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES


CONTENTS


                                                                            Page
                                                                            ----

Report of Independent Certified Public Accountants..........................F-3

Consolidated Financial Statements:

    Balance Sheet
      May 31, 1999....................................................F-4 - F-5

    Statements of Income
      for the Years Ended May 31, 1999 and 1998 ............................F-6

    Statements of Stockholders' Equity  (Deficit)
      for the Years Ended May 31, 1999 and 1998 ............................F-7

    Statements of Cash Flows
      for the Years Ended May 31, 1999 and 1998 ............................F-8

    Notes to Financial Statements...........................................F-9


                                      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, 1999 and the related  consolidated
statements  of income,  stockholders'  equity and cash flows for the years ended
May 31, 1998 and 1999. 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 audits 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  financial  position of The  Bethlehem
Corporation  and  subsidiaries  as of May 31,  1999,  and the  results  of their
operations  and their  cash flows for the years  ended May 31,  1998 and 1999 in
conformity with generally accepted accounting principles.



/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Woodbridge, New Jersey
August 26, 1999


                                      F-3
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1999 (amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

ASSETS


       CURRENT ASSETS:
<S>                                                                              <C>
              Cash                                                               $   113
              Accounts receivable (net of allowance for doubtful
                accounts of $47)                                                   2,342
              Costs and estimated profit in excess of billings
                on long-term contracts                                             1,618
              Inventories                                                          5,092
              Prepaid expenses and other current assets                              113
              Deferred tax asset                                                     375
                                                                                 -------

                          Total Current Assets                                     9,653
                                                                                 -------


       PROPERTY, PLANT AND EQUIPMENT, at cost less
              accumulated depreciation and amortization                            5,917


     OTHER ASSETS:
            Inventories, non current                                                 750
              Intangibles (net of $122 of accumulated amortization)                  275
              Intangible pension and deferred compensation plan assets               145
              Deferred financing costs                                               382
              Other                                                                  115
                                                                                 -------

                          Total Other Assets                                       1,667
                                                                                 -------



                          Total Assets                                           $17,237
                                                                                 =======
</TABLE>



                                      F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 1999 (amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY

       CURRENT LIABILITIES:
<S>                                                                             <C>
              Current maturities of long-term debt and capital leases           $  1,209
              Note payable - related party                                           787
              Accounts payable                                                     3,545
              Accounts payable (net) - related party                                  24
              Accrued liabilities                                                    565
              Billings in excess of costs and estimated profit
                on long-term contracts                                               239
                                                                                --------

                          Total Current Liabilities                                6,369
                                                                                --------

       LONG TERM LIABILITIES:
              Long-term debt and capital leases, net of current maturities         8,266
              Deferred compensation and other pension liabilities                    491
                                                                                --------

                          Total Long-Term Liabilities                              8,757
                                                                                --------

     COMMITMENTS AND CONTINGENCIES (Notes 5, 11 and 12)

     STOCKHOLDERS' EQUITY:
              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;
                2,378,532 shares issued and 2,378,520 shares outstanding           1,189
              Additional paid-in capital                                           6,557
              Accumulated deficit                                                 (5,635)
                                                                                --------

              Less - treasury stock, at cost, 12 shares                             --

                          Total Stockholders' Equity                               2,111
                                                                                --------

     Total Liabilities and Stockholders' Equity                                 $ 17,237
                                                                                ========
</TABLE>

See notes to consolidated financial statements

                                      F-5

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                         Year Ended May 31,
                                                                                                    -------------------------------
                                                                                                        1999               1998

<S>                                                                                                 <C>               <C>
     NET SALES                                                                                      $ 13,710          $ 16,271

     COST OF GOODS SOLD                                                                                9,171            11,152
                                                                                                    --------          --------

     GROSS PROFIT                                                                                      4,539             5,119
                                                                                                    --------          --------

     OPERATING EXPENSES:
              Selling                                                                                  1,250             1,078
              General and administrative                                                               2,289             2,395
              Stock Compensation Expense                                                                 -0-               126
              Non-Employee Stock Option Expense                                                          116                32
                                                                                                    --------          --------
                                                                                                       3,655             3,631
                                                                                                    --------          --------

                          Operating income                                                               884             1,488
                                                                                                    --------          --------

     OTHER INCOME (EXPENSE):
              Interest expense                                                                          (693)             (822)
              Financing charge - issuance and amortization of stock options                             (100)             (296)
              Interest income                                                                           --                   5
              Other income                                                                               298                46
                                                                                                    --------          --------
                                                                                                        (495)           (1,067)
                                                                                                    --------          --------

                          Income before income taxes                                                     389               421

     INCOME TAX BENEFIT                                                                                   20               110
                                                                                                    --------          --------

     NET INCOME                                                                                     $    409          $    531
                                                                                                    ========          ========

     EARNINGS PER SHARE DATA:
              Basic                                                                                 $    .18          $    .27
                                                                                                    ========          ========

              Diluted                                                                               $    .12          $    .15
                                                                                                    ========          ========

     WEIGHTED AVERAGE COMMON
       AND COMMON EQUIVALENT SHARES OUTSTANDING:
              Basic                                                                                    2,295             1,975
                                                                                                    ========          ========

              Diluted                                                                                  3,304             3,435
                                                                                                    ========          ========
</TABLE>
_____________
See Notes to consolidated financial statements

                                       F-6
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                           Additional
                                          Common Stock       Paid-In     Accumulated     Treasury Shares
                                     Shares       Amount     Capital       Deficit      Shares     Amount               Total
                                 ----------------------------------------------------------------------------------------------

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

Issuance of Common Stock
  In Exchange for Inventory         350,000        175         672               -         -           -                  847

Value of  Stock Option Grants
  to Non-Employees                        -          -         456                -        -           -                  456

Net Income for the Year Ended
  May 31, 1998                            -          -           -              531        -           -                  531
                                 ----------------------------------------------------------------------------------------------
Balance at May 31, 1998           2,288,532      1,144       6,123          (6,044)       12           -                1,223

Issuance of Common Stock in          90,000         45         146               -         -           -                  191
  settlement of liability

Value of Stock Option Grants
  To Non-Employees                        -          -         288               -         -           -                  288

Net Income for the Year
  Ended May 31, 1999                      -          -           -             409                     -                  409
                                 ----------------------------------------------------------------------------------------------

                                  2,378,532   $  1,189    $  6,557        $ (5,635)       12           -             $  2,111

                                ===============================================================================================
</TABLE>

See notes to consolidated financial statements

                                      F-7

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(amounts in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                           Year Ended May 31,
                                                                                                          1999           1998
                                                                                                       -----------------------------

CASH FLOWS PROVIDED BY (USED IN):
  OPERATING ACTIVITIES:
<S>                                                                                                    <C>             <C>
         Net income                                                                                    $   409         $   531
            Adjustments to reconcile net income to net
              cash provided by  operating activities:
                  Depreciation and amortization                                                            467             543
                  Gain on sale of fixed assets                                                            (169)           --
                  Accrued loss on contracts and obsolete inventory                                         126              56
                  Deferred tax benefit                                                                     (75)           (200)
                  Non cash compensation expense                                                            116             158
                  Financing charge - issuance and amortization of options                                  100             296
              Changes in operating assets and liabilities:
                  Accounts receivable                                                                     (855)          1,302
                  Inventories                                                                             (780)            (27)
                  Prepaid expenses and other current assets                                                114            (133)
                  Costs and estimated profits in excess of billings                                       (785)            472
                  Other assets                                                                            (160)           (139)
                  Accounts payable                                                                         (25)           (616)
                  Accounts payable (net)- related party                                                   (289)             77
                  Accrued liabilities                                                                       (5)           (444)
                  Billings in excess of costs and estimated profits                                         79          (1,229)
                  Deferred compensation and other pension liabilities                                       (8)           (284)
                                                                                                       -------         -------
                  Net Cash Provided by (Used in) Operating Activities                                   (1,740)            363
                                                                                                       -------         -------

       INVESTING ACTIVITIES:
              Purchase and construction of property, plant and equipment                                (3,468)           (385)
              Proceeds from sales of fixed assets                                                           47            --
                                                                                                       -------         -------
                  Net Cash Used in Investing Activities                                                 (3,421)           (385)
                                                                                                       -------         -------

       FINANCING ACTIVITIES:
              Net proceeds from (repayments on) line of credit                                           6,007            (262)
              Proceeds from debt borrowings                                                              1,049           2,000
              Repayments on  debt borrowings and capital leases                                         (1,828)         (1,563)
              Proceeds from notes payable - related party                                                                   75
              Repayment of notes payable - related party                                                     5            (223)
                                                                                                       -------         -------
                  Net Cash Provided by  Financing Activities                                             5,233              27
                                                                                                       -------         -------

     NET INCREASE IN CASH                                                                                   72               5

     CASH
       BEGINNING OF PERIOD                                                                                  41              36
                                                                                                       -------         -------

     CASH
       END OF PERIOD                                                                                   $   113         $    41
                                                                                                       =======         =======
</TABLE>
_____________
See Notes to consolidated financial statements

                                      F-8
<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  provides  thermal and  filtration  process
solutions,  equipment,  systems  and  technology  for a  variety  of  industrial
applications.  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.  In addition, Bethlehem Thermal, LLC, a wholly owned
subsidiary,  formed in March 1999,  provides  metallized  thermal  coating using
automated thermal spray systems.

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,  1999  ("1999")  and for the year  ended  May 31,  1998
("1998").

Principles of Consolidation:
The  consolidated  financial  statements  include the accounts of The  Bethlehem
Corporation and its wholly owned subsidiaries  (collectively the "Company"). All
intercompany 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 in relation 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.  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.


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.

Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. The cost of self-constructed
assets includes 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.

                                      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: (Continued)
--------------------------------------------------------------------------------

The useful lives of the principal 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. There were no such impairments recognized in 1999 and 1998.

Intangibles:
The  excess of the  purchase  price of BAM over  tangible  net  assets  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

Amortization  was $30  and  $34 for the  years  ended  May 31,  1999  and  1998,
respectively.

Deferred Financing Costs:
Direct costs incurred in obtaining financing have been capitalized and are being
amortized  over the term of the  related  debt.  The  amortization  of  deferred
financing  costs  was $78 and  $159  for 1999  and  1998,  respectively,  and is
included in "Interest  Expense" in the  accompanying  Statements of Income.  The
Company amortizes the value ascribed to stock options, issued in connection with
debt  guarantees  provided by a related party,  over the terms of the underlying
guarantees (see Notes 7, 10 and 12).

Income Taxes:
The Company utilizes the liability method of accounting for income taxes,  which
requires the recognition of deferred tax assets and liabilities for 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.

Earnings per Share:
Basic earnings per share are calculated based on the weighted-average  number of
common shares  outstanding.  Diluted  earnings per share are calculated based on
the  weighted-average  number  of  common  shares  outstanding,   plus  dilutive
potential common shares.  Dilutive  potential common shares,  principally  stock
options,  are computed under the treasury stock method. The Company has reserved
2,978,000 of common shares for various  stock option plans and awards.  Issuance
of such common shares will dilute basic earnings per share in the future.


                                      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)
--------------------------------------------------------------------------------

Use of Estimates:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  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;  accrued  liabilities;  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 Statement of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123") 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
employee  stock options for 1999 and 1998 (See Note 10 for pro-forma  disclosure
required by SFAS 123). With respect to stock option grants to non-employees, the
Company recognizes a charge to operations for the ascribed value of such options
over the underlying vesting periods or the expected terms of debt guarantees.

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 to the 1999
presentation.

Effect of Recently Issued Accounting Standard:
The Company  adopted  SFAS No. 130  "Reporting  Comprehensive  Income",  No. 131
"Disclosures  About Segments of an Enterprise and Related  Information"  and No.
132 "Employers  Disclosures About Pensions and Other Post Retirement  Benefits".
Adoption of these statements had no material effects on the Company's  financial
position,  results of  operations or cash flows or the related  disclosures  are
presented in Notes to the Consolidated Financial Statements.

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133 ("SFAS 133"),  Accounting for Derivative
Instruments and Hedging Activities,  which establishes  accounting and reporting
standards for  derivative  instruments  and hedging  activities.  The Company is
currently  reviewing  the effects of SFAS 133.  This standard will be adopted by
the Company no later than its year ending May 31, 2001.



                                      F-11
<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, 1999:


        Billed (net of allowance for doubtful accounts of $47)    $  2,226
        Retention on contracts                                         116
                                                                  --------

                                                                  $  2,342
                                                                  ========

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 year ending May 31, 1999.

During  1999,  the Company  recognized  bad debt  expense of $68 and charged off
uncollectible accounts receivable of $171.

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

At May 31, 1999, 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                  $  3,101
     Estimated profit                                           1,568
                                                             --------
                                                                4,669
     Less:  billings to date                                   (3,290)
                                                             ---------
                                                             $  1,379
                                                             ========

     These amounts are included in the accompanying
     consolidated balance sheet under
     the following captions:
      Costs and estimated profit in excess of
      billings on long-term contracts                        $  1,618
      Billings in excess of costs and  estimated
      profit on long term contracts                              (239)
                                                             --------
                                                             $  1,379
                                                             ========

                                      F-12
<PAGE>


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

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

The components of inventories are comprised of the following at May 31, 1999:

              Raw materials and components                   $    274
              Work in process                                   2,954
              Finished goods                                    2,769
              Less: reserve for obsolete inventory               (155)
                                                             --------
                                                                5,842
              Less:  Non-Current Inventory                       (750)
                                                             ---------
                                                             $  5,092
                                                             =========

At May 31, 1999,  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 assessment,  13%
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 impairments of specific raw material and finished goods
inventory  to net  realizable  value in the amounts of $126 and $175 in 1999 and
1998, respectively,  and charged off $146 and $105 of such inventory in 1999 and
1998,   respectively.   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 (See Note 7):
--------------------------------------------------------------------------------

At May 31, 1999, property, plant and equipment consists of the following:

                   Land                                      $     448
                   Buildings and improvements                    1,510
                   Machinery and equipment                       8,592
                   Equipment under capital leases                  140
                   Construction in progress                      2,879
                                                             ---------
                                                                13,569
                   Less:  accumulated depreciation
                          and amortization                      (7,652)
                                                             ---------

                   Property, plant and equipment,
                   net of accumulated depreciation           $   5,917
                                                             =========


Depreciation and amortization expense on property,  plant and equipment was $348
and $350 in 1999 and 1998,  respectively,  which included $30 and $26 of expense
related to equipment subject to capital leases.  The Company also has the option
to purchase the building that is currently  leased by BAM  (accounted  for as an
operating lease). The option expires on December 12, 1999.

Included in "Other  Income" in the 1999  Statements of Operations are gains from
the sale of fixed assets totaling $169.

                                      F-13
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 6  -  ACCRUED LIABILITIES:
--------------------------------------------------------------------------------

At May 31, 1999, accrued liabilities consist of the following:

               Salaries and benefits                        $   284
               Current portion of deferred compensation          86
               Purchases                                        125
               Other                                             70
                                                            -------
                                                            $   565
                                                            =======


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

At May 31, 1999,  long-term debt and capital lease  obligations  consists of the
following:

               Note payable - Ocwen Federal Bank             $   1,959
               Line of Credit - PNC Bank, N.A.                   3,017
               Term Loan - PNC Bank, N.A.                          653
               Note Payable - PNC Bank, N.A.                       226
               Note Payable - Nations Bank, N.A.                 2,994
               Note payable - Harrisburg Authority                 570
               Capital lease obligations                            56
                                                             ---------
                                                                 9,475
               Less: current maturities                         (1,209)
                                                             ---------
               Total                                         $   8,266
                                                             =========

Universal Process Equipment ("UPE"), a corporation which is a stockholder of the
Company,  is a party to certain  financing  transactions that the Company enters
into (see Notes 10 and 12).

Note Payable - Ocwen Federal Bank

In December 1997, the Company entered into a $2,000 mortgage loan agreement with
Ocwen Federal Bank ("Ocwen"). Proceeds from the loan were used to repay existing
indebtedness of approximately $1,481 with the balance used for general corporate
purposes.  Terms of the loan agreement provide for minimum monthly principal and
interest  payments of  approximately  $21 with all unpaid principal and interest
due by January 2003 and interest  accruing at the rate of 11.25% per annum.  The
Company is  subject  to  prepayment  penalties  (ranging  from 3% to .50% of the
outstanding  balance)  if the  balance is repaid  prior to  December  2001.  The
Company has  granted  Ocwen a first lien and  security  interest on all land and
related improvements owned by the Company at its Pennsylvania  facility.  During
1999  and  1998,  the  Company   recorded  $222  and  $94  in  interest  expense
respectively, related to this loan agreement.


                                      F-14
<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)
--------------------------------------------------------------------------------

PNC Bank, N.A. - Credit Facility
In June 1998, the Company entered into a financing agreement with PNC Bank, N.A.
("PNC") which provides for a term loan of $800 and a revolving  credit  facility
of $3,200. On July 31, 1999 the agreement with PNC was amended. Borrowings under
the  revolving  credit  facility are subject to an advance  formula  principally
based on defined  accounts  receivable  and  inventory  balances and require the
Company to maintain  certain  financial and operational  covenants.  Such assets
serve as collateral for  outstanding  balances  under the agreement.  Borrowings
under the term loan accrue  interest  at 9.7%.  Borrowings  under the  revolving
credit facility accrue interest at PNC's prime rate of interest plus one and one
half percent (9.25% at May 31, 1999.) The proceeds from this financing agreement
were  used to pay a  predecessor  institution's  term loan and  credit  facility
balances outstanding at June 3, 1998. The amended PNC agreement provides for the
following:  1) The term loan requires monthly principal  payments of $13 through
May 2002. 2) The revolving  credit facility  matures on July 31, 2000.  Interest
expense related to the agreement totaled $321 in 1999. As part of the agreement,
UPE was required to provide  certain  guarantees  on the  Company's  behalf.  In
August 1998, the Company  granted UPE 175,000 stock options for providing  these
guarantees.  The  Company is  recognizing  a charge for the fair values of these
options over the estimated three-year term of these guarantees.

PNC Bank, N.A. - Non Revolving and Committed Equipment Line of Credit
In September 1998, the Company entered into a $250  non-revolving  and committed
equipment  line of credit with PNC.  The  purpose of the  facility is to provide
funding for acquisition of equipment from time to time, in aggregate amounts not
exceeding  the sum of $250.  The maximum  amount of each  advance made under the
facility  shall be an amount equal to the lesser of the then current  unadvanced
portion of the facility or an amount equal to ninety  percent (90%) of the price
paid by the  Company to acquire  the  equipment.  The rate bears  interest  of a
maximum  rate of 9.40% and a minimum  rate of 9.15%.  During  1999,  the Company
recorded $16 in interest expense. Borrowings under the facility are secured by a
lien on all of the collateral advanced. Borrowings under this facility are fully
amortized with fixed equal payments of $5 not to exceed a term of 60 months. The
balance outstanding at May 31, 1999 is $226.

Nations Bank, N.A. - Note Payable


On January 21, 1999, the Company entered into a loan agreement with NationsBank,
N.A.  ("NationsBank")  for a $3,000  line of credit and term loan,  secured by a
first lien on BAM's inventory, accounts receivable,  machinery and equipment and
other  assets.  The  proceeds of this credit  facility are being used to finance
capital  expenditures  at the BAM facility.  The balance  outstanding at May 31,
1999 is $2,994.  On July 31,  1999,  the credit line  outstanding  of $3,000 was
converted to a seven-year  term loan  requiring $36 monthly  principal  payments
plus interest at prime plus one half of one percent. The loan agreement contains
certain  covenants,  which among other criteria,  require the Company and BAM to
maintain a specified level of net worth.  During 1999, the Company  recorded $48
in interest expense related to this loan agreement.

Harrisburg Authority - Note Payable
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.


                                      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)
--------------------------------------------------------------------------------

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,  secured by a second lien on the Company's
owned real estate.  Interest expense on this debt totaled $8 and $17 in 1999 and
1998, respectively. The note's remaining principal payment provisions at May 31,
1999 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 $528 will be paid from 50% of the proceeds
           from the sale of certain  machinery  or  equipment  included in UPE's
           inventory and certain equipment co-owned by UPE 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.

Debt Maturities:
Long-term  debt  maturities  for the  next  five  fiscal  years  and  thereafter
(reflecting the effects of the July 31, 1999 PNC and NationsBank amendments) are
as follows:


                  Year Ending May 31,
                ------------------------
                          2000                          $   1,177
                          2001                              3,704
                          2002                                687
                          2003                              2,475
                          2004                                441
                  2005 and thereafter                         936
                                                       -----------
                                                         $  9,420
                                                       ===========
Capital Lease Obligations:
Certain leased equipment has been capitalized for financial  statement purposes.
The following summarizes, by year, future minimum lease payments and the present
value of the minimum lease payments as of May 31, 1999:

                     Year Ending May 31,
                                2000                     $     37
                                2001                           18
                                2002                            3
                                2003                            2
                                                        --------------
                Minimum lease payments                         60
                Less:  imputed interest                        (5)
                                                        --------------
                Present value of minimum
                  lease payments                               55
                Less:  current portion                        (32)
                                                        --------------
                Long term portion                       $      23
                                                        ==============

                                      F-16

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

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

The components of the benefit (provision) for income taxes are as follows:
<TABLE>
<CAPTION>

                                                                     1999              1998
                   -------------------------------------------------------------------------
                   Current:
<S>                                                                 <C>             <C>
                     Federal                                       $(153)           $  (280)
                     State                                           (55)              (117)
                     Recognition of net operating losses              153               307
                   --------------------------------------------------------------------------
                                                                     (55)               (90)
                   --------------------------------------------------------------------------
                   Deferred:
                     Federal                                           64               170
                     State                                             11                30
                   --------------------------------------------------------------------------
                                                                       75               200
                   --------------------------------------------------------------------------
                    Income tax benefit                             $   20           $   110
                   ==========================================================================
</TABLE>

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


                                                    1999           1998
           U.S. Federal income tax               $ (132)       $  (143)
             provision at statutory rates
           State income taxes, net of               (29)           (33)
             Federal benefit
           Utilization of net operating loss        153            178
             carryforwards
           Decrease in beginning of the              75            134
             period valuation allowance
           Other, net                               (47)           (26)
                                                 -----------------------

           Income tax benefit                     $   20       $    110
                                                 =======================



                                      F-17
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

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

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

                                                           May 31,
                                              1999                       1998
                                        -----------  -------------------------
Deferred Tax Assets:
  Receivables                             $    19                 $       60
  Inventory                                   130                        100
  Net operating loss
    carryforwards                           1,077                      1,252
  AMT and tax credits                         119                        119
  Lawsuit settlement                          216                        216
  Deferred compensation
    and retirement benefit                    216                        203
  Stock  option compensation                  268                        183
  Other                                        20                         20
                                        ------------------------------------
    Total Gross Deferred Tax Assets         2,065                      2,153
  Valuation allowance                      (1,480)                    (1,663)
                                        --------------------------------------
  Total Deferred Tax  Assets                  585                        490
Deferred Tax Liability:
  Property, plant and equipment              (210)                      (190)
                                        --------------------------------------
Net Deferred Tax Asset                  $     375                 $      300
                                        ======================================

Based on an assessment of all available  evidence,  including  historical trends
and expected  earnings on existing  contracts  and job orders and the  Company's
related  ability  to  generate  taxable  income  in future  periods,  management
considers  realization  of the net deferred tax asset at May 31, 1999 to be more
likely than not.  Realization of the gross deferred tax assets relates  directly
to the Company's  ability to generate  taxable income over an extended period of
time which may be  significantly  affected by various factors and  uncertainties
including,  but not  limited  to, the  expiration  dates in which to utilize net
operating   losses,   future  domestic  and  foreign  market   conditions,   the
concentration  of sales in a limited  number of  customers  and the  effects  of
technological  advances in the marketplace.  Further reductions to the valuation
allowance  established against deferred tax assets could be recognized in future
periods if the Company  concludes that further  realization of such deferred tax
assets is considered more likely than not.

At May 31, 1999,  the Company has  approximately  $3.2 million of unused federal
net operating loss carryforwards and $.3 million of federal  alternative minimum
tax ("AMT") and  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 will expire  during the years 2000 through  2002.


--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION, PENSION AND OTHER POSTRETIREMENT PLANS:
--------------------------------------------------------------------------------

PLAN DESCRIPTIONS

Deferred Compensation Plan
The Company has an unfunded  nonqualified deferred compensation plan for certain
employees  which  provides 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  plan's  annual  benefit  payments  through  operating  cash  flow.  A
description of the plan follows:

                                      F-18

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION, PENSION AND OTHER POST RETIREMENT PLANS:
         (Continued)
--------------------------------------------------------------------------------

                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 funded a portion of the active  employees  accrued
                benefit obligation to a qualified 401(k) plan.

During 1999, the Company settled a retirement plan obligation at an individual's
request through the issuance of 90,000 shares of common stock. The number of the
shares was based on the fair market value of the common stock at the  settlement
date and approximated the present value of the retirement obligation.


Pension Plans
The Company  maintains two  noncontributory  defined  benefit  retirement  plans
(collectively,  the "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.

Other Postretirement 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.

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 effect of raising health care cost trend rates 1% for each future year would
increase the accumulated  benefit  obligation by approximately  $85 and increase
the   aggregate   service  and  interest   cost   components   of  net  periodic
postretirement health care benefit costs by approximately $7.

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 following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans described above:




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

--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION, PENSION AND OTHER POST RETIREMENT PLANS:
          (Continued)
--------------------------------------------------------------------------------

Change in benefit obligations
<TABLE>
<CAPTION>

                                                               Pension                          Other
                                                                Plans              RISP        Benefits
                                                                -----              ----        --------
<S>                                                        <C>                 <C>             C>
Benefit obligation at May 31, 1998                         $  (2,742)          $   (463)          (1,135)
Service Cost                                                       -                  -               (6)
Interest Cost                                                   (208)               (33)             (83)
Plan participants' contributions                                                                      87
Actuarial Loss                                                  (616)              (117)             (33)
Benefits paid                                                    287                106
Settlement                                                         -                170
                                                          -----------------------------------------------
Benefit obligation at May 31, 1999                         $  (3,279)          $   (337)        $ (1,170)
                                                          -----------------------------------------------
Change in plan assets

Fair value of plan assets at May 31, 1998                  $    3,209                           $      -
Actual return on plan assets                                      504
Contributions                                                                  $     303
Benefits paid                                                    (287)              (297)
                                                          ------------------------------------------------
Fair value of plan assets at May 31, 1999                  $    3,426          $       6        $      -
                                                          ================================================
</TABLE>

Plan assets are stated at fair value and are comprised primarily of common stock
and corporate bonds.

<TABLE>
<CAPTION>

Funded Status

<S>                                                        <C>                 <C>
Unrecognized actuarial (gain) loss                         $    701            $    (109)
Unrecognized prior service cost                                  (8)                 (67)       $   (332)
                                                           ----------------------------------------------
Net amount recognized                                      $    693            $    (176)       $   (332)
                                                           ==============================================
</TABLE>

Amounts recognized in the
May 31, 1999 consolidated balance sheet
consist of:
<TABLE>
<CAPTION>

<S>                                                          <C>               <C>              <C>
Accrued benefit liability                                  $ (200)             $  (330)         $   (47)
Intangible asset                                               34                  111                -
                                                         ----------------------------------------------
Net amount recognized at May 31, 1999                      $ (166)             $  (219)         $   (47)
                                                         ==============================================
</TABLE>

At May 31, 1999, plans with  accumulated  benefits in excess of plan assets have
accumulated  benefit obligations and projected benefit obligations of $2,747 and
plan assets of $2,228.

Weighted-average assumptions as of May 31, 1999
<TABLE>
<CAPTION>
                                        Pension                   Other
                                        Plans         RISP      Benefits
                                        -----         ----      --------
<S>                                       <C>          <C>         <C>
Discount Rate                             8%           8%          8%
Expected return on plan assets            8%           8%          N/A
</TABLE>

                                      F-20
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 9 -  DEFERRED COMPENSATION, PENSION AND OTHER POSTRETIREMENT PLANS:
         (Continued)
--------------------------------------------------------------------------------


For measurement purposes, a 13.5% annual rate of increase in the per capita cost
of covered  health care  benefits was assumed for 1999.  The rate was assumed to
decrease gradually to 6% for 2009 and remain at that level thereafter.


                                            For the year ended May 31, 1999
                                        Pension                          Other
                                        Plans             RISP         Benefits
                                        -----             ----         --------
Service cost                            $   -            $   -         $  6
Interest cost                             208               33           83
Expected return on plan assets           (245)              (1)
Amortization or prior service costs         7              (10)         (26)
Recognized net actuarial loss             (18)              32           59
Expected contributions from retirees        -                -          (87)
                                    ----------------------------------------
 Net periodic benefit cost (benefit)   $  (48)          $   54         $ 35
                                    ========================================


                         For the year ended May 31, 1998

                                        Pension                          Other
                                        Plans           RISP            Benefits
Service cost                                                            $     5
Interest cost                          $  207         $   38                 68
Expected return on plan assets           (530)            33                  -
Amortization of prior service costs                       (9)               (26)
Recognized net actuarial loss                                                58
Net amortization and deferral             328              -                  -
Expected contributions from retirees                                        (49)
                                      ------------------------------------------
  Net periodic benefit cost            $    5         $   62            $    56
                                      ==========================================



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 employee's  contribution to a maximum contribution of
6% of an employee's  contribution.  At May 31, 1999, the Company's  liability to
the plan approximated $32. The Company's expense related to the plan was $21 and
$70 for 1999 and 1998, respectively.



                                      F-21
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 10  -  STOCKHOLDERS' EQUITY:
--------------------------------------------------------------------------------

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.  In 1990,  the  Company's
Board of Directors  granted 25,000 options to officers and key employees with an
exercise price of $2.50 per share. There were no options granted under this plan
in 1999 and 1998.

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 1999 and 1998.

Plan 3:
During 1995, the stockholders approved the 1994 Stock Option Plan ("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 eleven employees.
The maximum  number of shares that may be granted to one person  pursuant to the
1994 Plan is 250,000  shares.  There were no options  granted under this plan in
1999 and 1998.

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 calendar year may not exceed 50,000.
Options  totaling  117,500 and 85,000 shares have been issued under this plan in
fiscal 1999 and 1998, respectively.



                                      F-22
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
NOTE 10  -  STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------

Other Options:
In April 1998, the Company's stockholders approved the issuance of an additional
653,000 stock options outside of any existing plan to the Company's Chairman,  a
Director of the Company and UPE. The options were granted with an exercise price
of $1.825 per share (the fair market value at the date the grants were  approved
by the Board of  Directors).  Since the recipients of the options are considered
non-employees,  the Company  recognizes  a cost for the related  services.  With
respect to the options  granted to the  Company's  Chairman  and  Director,  the
values  ascribed to these  options  ($367) will be  recognized  as services  are
rendered  over the three  year  vesting  period.  The  charge  for 1999 and 1998
totaled $116 and $32  respectively.  With respect to the values  ascribed to the
options granted to UPE ($424),  the Company has and will recognize a charge over
the  expected  terms of the various  guarantees  provided  by UPE The  financing
charges totaled $43 and $296 for 1999 and 1998, respectively.

In  connection  with  the  PNC  credit  facility  and  UPE's  guarantee  of such
indebtedness,  the  Company's  Board of  Directors  approved  the issuance of an
additional 175,000 stock options at an exercise price of $1.63 which represented
the fair  market  value of the stock at the date of the grant in August of 1998.
The value  ascribed to such options  ($172) will be amortized over the estimated
three-year term of the guarantee. The financing charges totaled $57 in 1999.

The Company  estimated  the fair values of such stock  options using the Black -
Scholes  option price model with the following  assumptions at the initial grant
date, no dividend yield;  expected  volatility of 46.5% (1999) and 31.4% (1998);
risk free  interest  rates of 5.4% (1999) and 6.1% (1998) and expected  lives of
ten years.  Such fair  values  also  encompassed  the excess of the fair  market
values of the stock,  as adjusted for liquidity and dilution  factors,  less the
exercise price of the options issued to the Company's Chairman, Director and UPE
in April 1998. The options vest over a three year period.

Disclosure On Options:
The Company applies APB Opinion 25,  "Accounting for Stock Issued to Employees",
and related  Interpretations  in accounting for the 1994 Plan and the 1997 Plan.
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 123 requires the Company to provide  pro-forma  information  regarding  net
income  and  earnings  per  share  as if  compensation  cost  for the  Company's
employees had been  determined  in  accordance  with the fair value based method
prescribed  in SFAS 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 employee grants,  no dividend
yield; expected volatility of 46.5% risk-free interest rates of 5.32% (1999) and
6.42% (1998) and expected lives of 10 years for the options.

Under the accounting  provisions of SFAS 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.

                                   1999           1998
                                  ---------------------
Net Income:
   As reported                     $409          $ 531
   Pro-forma                       $331          $ 450

Basic earnings per share:
   As reported                     $.18          $ .27
   Pro-forma                       $.14          $ .23

Diluted earnings per share:
   As reported                     $.12          $ .15
   Pro-forma                       $.10          $ .13



                                      F-23
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 10  -  STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------

The pro forma  effect on net income and earnings per share for 1999 and 1998 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.

A summary of the status of the Company's  outstanding options and warrants as of
May 31,  1999 and 1998 and  changes  during the years  then  ended is  presented
below:
<TABLE>
<CAPTION>

                                                    May 31, 1999                      May 31, 1998
                                         ----------------------------------------------------------------------

                                                           Weighted Average                    Weighted Average
                                               Shares       Exercise Price       Shares         Exercise Price
                                         ---------------------------------------------------  -----------------

<S>                                           <C>              <C>             <C>                <C>
Outstanding-beginning of year                 2,685,500        1.12            1,995,000          $    .90

Granted                                         292,500        1.68              738,000              1.82
Exercised                                             -           -                    -                 -
Forfeited                                             -                          (47,500)         $   2.56
                                         --------------                  -------------------
Outstanding-end of year                       2,978,000           .            2,685,500
                                         ==============                  ===================
Options exercisable -year-end                 1,286,076                          532,493
                                         ==============                  ===================
Weighted-average fair value of
options granted during the year          $         1.08                  $          1.22
                                         ==============                  ===================
</TABLE>

Options  issued  to  employees  in  1998  and  1999  expire  in 2007  and  2008,
respectively,  and are exercisable immediately. At May 31, 1999, the Company has
47,500 shares of common stock available for grant under various option plans.

The  following  table  summarizes  information  about stock options and warrants
outstanding at May 31, 1999:
<TABLE>
<CAPTION>

                                    OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE

-----------------------------------------------------------------------------------  -------------------------------------------
Range of                                    Weighted-Average        Weighted-                                     Weighted-
Exercise              Number Outstanding    Remaining Contractual   Average             Number Exercisable        Average
Prices                at May 31, 1999       Life                    Exercise Price      at May 31, 1999           Exercise Price
-----------------------------------------------------------------------------------  -------------------------------------------

<S>                      <C>                <C>                       <C>               <C>                  <C>
$0.33 to 0.94            1,700,000           .5 years                 $0.67               250,000                  $0.94
$1.78                      100,000          9.5                       $1.78               192,500                  $1.63
$1.63                      192,500          9.2                       $1.63               100,000                  $1.78
$1.81                      653,000          9                         $1.81               459,417                  $1.81
$1.87 to 2.88              272,500          5                         $1.99               175,000                  $1.88
$2.50                       50,000          4                         $2.50                76,659                  $2.27
$3.15                       10,000          8                         $3.15                32,500            $2.88-$3.15
                        ----------                                                      ---------
$0.33 to 3.15            2,978,000          3.7                       $2.02             1,286,076                  $1.68
                        ==========                                                      =========
</TABLE>

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

--------------------------------------------------------------------------------
NOTE 10  -  STOCKHOLDERS' EQUITY: (Continued)
--------------------------------------------------------------------------------

Warrants:
In July 1995,  the  Company  granted  warrants  to a  financial  institution  to
purchase  50,000  shares of the Company's  common stock at $1.87 per share,  the
fair market value of the stock on the date the warrants were granted.


--------------------------------------------------------------------------------
NOTE 11  -  COMMITMENTS AND CONTINGENCIES:
--------------------------------------------------------------------------------

Legal Matters

The Company is party to  litigation,  claims and  assessments  that arise in the
normal  course of  operations.  Management  does not believe  that the  ultimate
disposition of such matters will have a material adverse effect on the Company's
financial position, results of operations or liquidity.

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.  BAM also leases 1,530 square feet of office space and
2,470  square  beet of  warehouse  space.  The  lease  is for one year and has a
monthly  base rate of $2.  This lease has the option to renew for an  additional
period of one year at $2 per month. In addition,  BAM leased an additional 5,000
square feet of unimproved  warehouse  space. The lease is for one year and has a
monthly  base rate of $2.  This lease has the option to renew for an  additional
period of one year at $2 per month.  The Company also leases  certain  equipment
and  automobiles.  Rent  expense  under all  operating  lease  arrangements  was
approximately $168 and $130 in 1999 and 1998, respectively. At May 31, 1999, the
future minimum lease payments on these operating leases are as follows:

               Year Ended May 31,
          -----------------------
                     2000                   $   197
                     2001                       136
                     2002                        12
                                            -------
                                            $   345
                                            =======

Employment Agreement
The Company  has an  employment  contract  with an officer  resulting  in future
commitments  for  payments  of  approximately  $185 in each of the fiscal  years
ending May 31, 2000 and 2001.

--------------------------------------------------------------------------------
NOTE 12  -  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
("UPE"),  a corporation,  which is a stockholder of the Company.  UPE 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 UPE 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
1999 and 1998.


                                      F-25
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 12  -  RELATED PARTY TRANSACTIONS:  (Continued)
--------------------------------------------------------------------------------

On November  28, 1995,  the Company and UPE entered  into a sales and  marketing
agreement  whereby UPE will market certain used equipment  owned by the Company.
As consideration for its services, UPE would 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 UPE to its sales people.  The agreement
provides  that UPE 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 UPE  totaled  $256 in 1998.  In May 1998 this  agreement  was
terminated when all equipment under this agreement was transferred to UPE.

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:

<TABLE>
<CAPTION>

                                                                            May 31, 1999
                                                    -------------------------------------------------------
                                                           Accounts
                                                          Receivable                       Accounts Payable
                                                      (Related Parties)                   (Related Parties)
                                                    -------------------------------------------------------
<S>                                                     <C>                                   <C>
  UPE (Owned by  Ronald & Jan
         Gale through Universal Baling &
         Processing, Inc. UPE's parent)                 $       74                            $     258
  Universal Industrial Gases, Inc.
         (U.I.G.) (100% owned by UPE)                           99                                    3
  Universal Industrial  Refrigeration, Inc.
         (U.I.R.) (80% owned by UPE)                            11                                  119
  Universal Glastell Equipment
          (U.G.E.) (50% owned by Gale Glass)                    39                                    -
  R. Simon Dryers, Ltd. (Directors are
          Ronald & Jan Gale)                                   120                                 (13)
                                                    -------------------------------------------------------
                                                        $      343                            $     367
                                                    =======================================================
</TABLE>

Since the right of offset exists between the Company, UPE and related parties, a
net amount payable to related parties is presented in the  accompanying  May 31,
1999 balance sheet.

Related party sales were as follows:

                                     Year Ended May 31,
                             1999                          1998
                        --------------------------------------------
         UPE              $   12                         $  1,318
         U.I.G.               28                                -
                        --------------------------------------------
                          $   40                         $  1,318
                        ============================================

Rental  income  from  related  parties  totaled  $55 and $39 in 1999  and  1998,
respectively.

The Company purchases equipment and services from UPE and its affiliates.  These
purchases  total  approximately  11% and 10% of the total cost of goods sold for
1999 and 1998, respectively.



                                      F-26
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 12  -  RELATED PARTY TRANSACTIONS:  (Continued)
--------------------------------------------------------------------------------

In November  1993, the Company and  Harrisburg  Authority  settled a lawsuit for
$1,300  based upon  negotiations  between the  Company,  UPE and the  Harrisburg
Authority. Under the terms of the settlement agreement, UPE agreed to serve as a
guarantor and surety for the  obligation.  In addition,  UPE 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 UPE. Pursuant to the
settlement agreement and for services rendered at that time, the Company granted
stock  options to UPE.  These  options  provide  that at UPE's  discretion,  the
Company  will issue  additional  shares of common  stock to UPE in exchange  for
payments,  if any, made by UPE on behalf of the Company to Harrisburg  under the
settlement  agreement  instead of reimbursing UPE in cash. UPE 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 UPE, the Company will not be obligated to
issue more than 1,450,000 shares to UPE for such payments. The ratio of exchange
shall be as follows:  three (3) shares issued for each dollar in payment made by
UPE,  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 UPE up to a total of
1,000,000  additional  shares  in  exchange  for a total  of $750 in  additional
payments.

As discussed  in Note 10, in March 1996 and August 1998,  the Board of Directors
approved the issuance of an aggregate  525,000  stock options to UPE in exchange
for  consideration  for  guarantees  provided  on  the  Company's  various  debt
obligations.  The ascribed fair values to these options  approximated $596. Such
costs were  allocated to current and future  periods based on existing and prior
guarantees.  Of this amount, $100 and $296 was expensed as a financing charge in
the 1999 and 1998 statements of income, and $200 remains  capitalized at May 31,
1999.

In March of 1996, the Board of Directors authorized the Company to enter into an
agreement  with UPE to purchase a 50%  interest  in  inventory  in exchange  for
350,000 shares of the Company's  common stock.  In April 1998,  the  transaction
received stockholder approval. At the date of stockholder approval,  the 350,000
shares of common stock had an ascribed fair market value of approximately  $847,
while  the  appraised  fair  market  value  of the  Company's  50%  share of the
inventory amounted to $721. The excess of the common stock's fair value over the
inventory fair value amounted to  approximately  $126,  which was recorded as an
operating expense in the 1998 statement of income.

In May  1998  the  Company  transferred  its  inventory  with a  book  value  of
approximately $1,924 to UPE As part of the transaction,  UPE assumed obligations
of $1,390 and $534 of related bank debt.  This  transaction  did not result in a
gain or loss in the 1998 statement of income.

--------------------------------------------------------------------------------
NOTE 13  -  CONCENTRATION OF CREDIT RISKS:
--------------------------------------------------------------------------------

Trade accounts receivable:
The Company designs, manufactures,  sells and services a product line of capital
equipment used to process  materials to a variety of domestic and  international
customers. The Company's accounts receivable (excluding related parties) include
a  concentration  of two customer  balances  which  represent 18% and 28% of the
accounts  receivable balance at May 31, 1999.  Accounts receivable are primarily
composed of unsecured  balances.  The Company does not require  collateral  as a
condition of sale.


                                      F-27
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 14  -  MAJOR CUSTOMERS AND EXPORT SALES:
--------------------------------------------------------------------------------

In 1999,  two customers  individually  represented  12% and 20% of  consolidated
sales. In 1998, five customers represented 11% to 17% of consolidated sales and,
in the aggregate, accounted for 68% of consolidated sales.

For 1999 and 1998, export sales were as follows:

                                                   Year Ended May 31,
                Customer                         1999             1998
                ----------------------------------------------------------------
                Australia                     $     142        $         -
                Belgium                           1,681                  -
                Brazil                              388                  -
                Canada                               37                 53
                Estonia                               -                195
                Hong Kong                           420                  -
                Japan                                 -                  8
                Korea                               687                  -
                Mexico                              711                620
                Netherlands                          27                 72
                Russia                                -                145
                Scotland                             63              2,096
                Singapore                         1,110                  -
                South Africa                         63                127
                Spain                               264                  -
                Taiwan                                -              1,781
                United Kingdom                       46                  -
                       All Others                    35                339
                                             ------------------------------
                                               $  5,674        $     5,436
                                             ==============================

--------------------------------------------------------------------------------
NOTE 15  -  SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES:
--------------------------------------------------------------------------------

                                                    Year Ended May 31,
                                                    1999        1998
                                               -----------------------
                Cash paid for interest         $     662      $    660
                                               =======================
                Cash paid for income taxes     $      51      $     90
                                               =======================

Noncash investing and financing activities:
During 1999, the Company settled a retirement obligation through the issuance of
90,000 shares of common stock.

In April  1998,  the Company  issued  350,000  shares of common  stock to UPE in
exchange for a 50% interest in used inventory (see Note 12).

In  connection  with a transfer of  inventory in 1998 (see Note 12), UPE assumed
$534 of the Company's bank debt.
                                      F-28

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
NOTE 15  -  SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES: (Continued)
--------------------------------------------------------------------------------

In 1999,  the Company  acquired  $24 of fixed  assets  subject to capital  lease
obligations.

--------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE:
--------------------------------------------------------------------------------

Basic and  Diluted  earnings  per share for 1999 and 1998 have been  computed as
follows:

                                                              1999
                                             Net Income      Shares    Per Share
                                            (Numerator)  (Denominator)  Amount
       -------------------------------------------------------------------------
       Basic Earnings Per Share              $    409       2,295      $     .18
       Effect of dilutive securities
         Warrants and options                       -       1,009              -
       Diluted Earnings Per Share            $    409       3,304      $     .12

                                                              1998
                                             Net Income      Shares    Per Share
                                            (Numerator)  (Denominator)  Amount
       -------------------------------------------------------------------------
       Basic Earnings Per Share              $    531       1,975      $   .27
       Effect of dilutive securities
         Warrants and options                       -       1,460            -
       Diluted Earnings Per Share            $    531       3,435      $   .15



Options to purchase  122,500  shares of common  stock,  (exercisable  at between
$2.00  and  $3.15  per  share)  in  1999  and  80,000  shares  of  common  stock
(exercisable at between $2.87 and $3.15) in 1998, were  outstanding but were not
included in the  computation of diluted  earnings per share because the options'
exercise  prices were greater than the average  market price of the common stock
underlying the options.



                                      F-29

<PAGE>

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

--------------------------------------------------------------------------------
NOTE 17 -  FOURTH QUARTER ADJUSTMENTS:
--------------------------------------------------------------------------------

In the fourth  quarter of 1998,  the Company  recognized  a deferred tax benefit
related to a reduction in the deferred tax asset valuation  allowance of $96. As
discussed  in Notes 10 and 12, in the  fourth  quarter  of 1998,  the  Company's
stockholders  approved the issuance of common stock and stock options to UPE and
certain  directors.  As a  result,  the  Company  recognized  an  operating  and
financing charge of $158 and $296, respectively in 1998.





                                      F-30