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, 2000.

( )             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    . No X
                                                             --      --

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:  $11,661,000

As of September 12, 2000, 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  $715,331 based on the average of the bid and
asked prices on that date of $.625.


<PAGE>
                                TABLE OF CONTENTS

                       ANNUAL REPORT ON FORM 10-KSB - 2000

                            THE BETHLEHEM CORPORATION


PART I.........................................................................1
        Item 1.   Description of Business......................................2
        Item 2.   Description of Property......................................5
        Item 3.   Legal Proceedings............................................6


PART II........................................................................7
        Item 4.   Market for the Company's Common Equity and
                    Related Stockholder Matters................................7
        Item 5.   Management's Discussion and Analysis or
                    Plan of Operation..........................................7
        Item 6.   Changes In and Disagreements With Accountants on
                    Accounting and Financial Disclosure.......................12
        Item 7.   Financial Statements........................................12


PART III......................................................................13
        Item 8.   Directors, Executive Officers, Promotors and Control
                    Persons; Compliance with Section 16(a) of the
                    Exchange Act..............................................13
        Item 9.   Executive Compensation......................................14
        Item 10. Security Ownership of Certain Beneficial Owners
                    and Management............................................15
        Item 11. Certain Relationships and Related Transactions...............16
        Item 12. Exhibits, List and Reports on Form 8-K.......................18

SIGNATURES....................................................................19


<PAGE>
                                     PART I
                                     ------

Recent Developments

                    As of  March  31,  2000,  The  Bethlehem  Corporation,  (the
"Company") no longer  manufactured its products at its facilities in Easton, PA.
Orders  for  customers  in North  and South  America  are  manufactured  through
arrangements  with  subcontractors.  Orders for Europe and Asia are manufactured
either  in  Germany  or Poland  where the  Company  has  previously  established
manufacturing and licensing relationships. For financial reporting purposes, the
Company  considers its  operations to be one segment.  The Company plans to sell
all or some of its 29 acre site and  manufacturing  facilities  in  Easton,  PA.
However, the Company will continue to direct its sales,  marketing,  engineering
and field services from its Easton, PA location.

                    On  July  20,  2000  in   conjunction   with   discontinuing
manufacturing of the Company's  products in Easton, PA, an agreement was reached
with The  Bethlehem  Employees  Association  to provide  closure to the existing
collective  bargaining  agreement and the Company  terminated certain employees.
The charge related to this plan of action was not considered material.

                  On November 29, 2000, the Company closed on the sale of all of
the  issued  and  outstanding  shares of stock in its  wholly  owned  subsidiary
Bethlehem Advanced Materials  Corporation  ("BAM") to a private company,  Bergen
Cove Realty Inc. The purchase price was $3,923,000 which included the assumption
of BAM's  existing  term  debt  with  Bank of  America,  N.A.  ("BA")  which was
$2,423,000  at November  29, 2000.  In  conjunction  with the sale,  the Company
received a fairness opinion from Seidman & Company, Inc. Investment Banking that
the  transaction  was fair to the  Company  and its  Stockholders.  The  Company
expects to recognize a loss on the sale of BAM. In 2000, the Company  recognized
an impairment  charge of $1,600,000 in connection  with a  re-evaluation  of the
carrying value of BAM intangible assets and property, plant and equipment.

                  The  report  of the  Company's  Independent  Certified  Public
Accountants  contains  an  explanatory  paragraph  on the  Company's  ability to
continue as a going concern. The Company's continued existence is dependent upon
its ability to resolve its liquidity problems,  principally by extending certain
bank financing  arrangements,  the sale of assets, business units, inventory and
real estate. While pursuing the sale of real estate and other assets and working
with PNC Bank, N.A. ("PNC") on additional agreements,  the Company must continue
to operate on cash flow generated  internally.  The Company plans to improve its
working capital  requirements by selling portions of its existing  inventory and
other business units. In addition,  the Company will continue to reduce expenses
as the sale of business units take place. Other than the recently completed sale
of BAM,  the Company  has no  agreements,  understandings  or  commitments  with
respect to the sale of  business  units and there can be no  assurance  that any
such sales will take place.  Working capital limitations  continue to impinge on
day-to-day  operations,  thus contributing to additional  operating losses.  The
continued support and forbearance of its lenders will be required, although this
cannot be assured.

                  While  the  Company  believes  the  proceeds  from the sale of
certain assets and an extension on its borrowing  facilities will be adequate to
fund its on-going obligations, there can be no assurance that the disposition of
assets and the Company's other strategies will occur in a timely manner in order
to fund its on-going obligations.

                  The Company  received  notice from the American Stock Exchange
("Exchange")  Staff  indicating  that the  Company no longer  complies  with the
Exchange's continued listing guidelines due to the non filing of its Form 10-KSB
("10-KSB") for the fiscal year ended May 31, 2000 and Form 10-QSB ("10-QSB") for
the  quarterly  period  ended August 31, 2000 with the  Securities  and Exchange
Commission as set forth in Sections 132(c),  1002(d) (e) and 1101 of the Company
Guide.  In view of this,  the  Exchange  is unable to  determine  if the Company
satisfies the Exchange numerical  guidelines for listing and that its securities
are,  therefore  subject to being  delisted from the  Exchange.  The Company has
appealed  this  determination  and a hearing is scheduled  for January 23, 2001.
There can be no assurance  the Company's  request for continued  listing will be
granted.

                                      -1-
<PAGE>

Item 1.             Description of Business.
                    -----------------------

General

                    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 has developed expertise in
the  areas  of  thermal  processing  systems,  filtration  process  systems  and
environmental  systems.  The  Company,  through  BAM,  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 has 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.


Bethlehem Advanced Materials Corporation (BAM)(See Recent Developments page 1)

                    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

                                      -2-
<PAGE>

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 metallizing 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 machine  industries.  Using both  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  customers'   plants  and  offers  automated  systems
technology and inspection services.


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  metallizing  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  equipment  and  environmental   systems,  and
metallizing coating solutions,  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.

                    The Company's  active  customers for thermal and  filtration
process   solutions,   equipment,   systems  and  technology   include  Oiltools
International  Group,  Mexicana  De Cobre,  S.A. DE C.V.,  Daesang  Corporation,
EtiHolding, 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 both the  years  2000 and 1999.  UPE filed for  bankruptcy
under  Chapter 11 of the United  States  Bankruptcy  Code in October  2000.  The
Company's active  customers for high  temperature  furnaces and tolling services
are Honeywell  International  Inc., Hitco,  Inc. and BP Amoco.  Purchases by any
single  customer  vary  significantly  from  year  to  year  according  to  such
customer's  capital



                                      -3-
<PAGE>

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.

Backlog

                    As of November 28, 2000, the Company had a backlog of orders
equaling  $16.8  million  ($15.4  million of this amount  related to BAM orders)
compared  to $22.5  million for the same  period  last year.  Orders  comprising
current backlog are expected to be filled during the fiscal years ending May 31,
2001 to May 31, 2004.

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,  2000  were  Motion
Industries and G. J. Oliver,  Inc. and in connection  with the high  temperature
furnace business,  Air Products and Chemicals,  Inc., Fiber Materials,  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 one patent which is material to its
business.  The Company  received this patent for the new generation of its tower
filter  product  line in August  of 2000.  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 and 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.

                                      -4-
<PAGE>

                    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 ended May 31, 2000,  the  Company's two largest
customers  individually  accounted for 15% and 33% of the Company's  sales.  The
customers are Oiltools and Honeywell International Inc., respectively.

Employees

                    As of  November  28,  2000,  the  Company  had 55  full-time
employees,  including  22  employees  of  BAM.  Of  these,  37  are  engaged  in
manufacturing  and  technical  services,  6 in  marketing  and  sales  and 12 in
administrative functions.


Environmental Impact and Regulation

                    The operations at BAM'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 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, financial condition or cash flows.

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.  On May 2,
2000 the Company  submitted plans to the Zoning Board of Palmer Township seeking
permission  to  subdivide  its real  estate.  On October 10,  2000,  the Company
received  conditional  approval from the Palmer Township Planning  Commission to
proceed with the Subdivision Plan. That approval was unanimously ratified by the
Palmer Township Board of Supervisors on October 23, 2000. The Company expects to
submit final plans and permits that address all of the township's  conditions in
time for final plan  approval by the end of  February  2001.  See  "Management's
Discussion   and  Analysis  or  Plan  of  Operation  --  Liquidity  and  Capital
Resources."

                    As of November 30, 2000,  the  Company's  Easton  facilities
were subject to a first and second mortgage loan. See  "Management's  Discussion
and Analysis or Plan of Operation -- Liquidity and Capital Resources."



                                      -5-
<PAGE>

                    BAM leases a 33,600  square  foot  manufacturing  and office
building in  Knoxville,  Tennessee  for capital  equipment  manufacturing,  toll
processing and related  administrative  services and marketing.  The facility is
equipped with several furnace  systems with  capabilities of firing in excess of
3000(Degree)C.  It is located in an  industrial  park with  excellent  access to
major interstate highways and a modern airport.  The lease expires September 30,
2003, but provisions for the lease provide for one additional  three year rental
term. The Knoxville lease has a monthly base rent of approximately  $10,000.  In
March 1999, the Company  purchased a tract of land of  approximately  1.08 acres
adjacent to the facility. In May of 2000, BAM renewed its lease for 1,530 square
feet of office space and approximately 2,470 square feet of warehouse space. The
lease is for one year and has a monthly base rate of $2,450.  See  "Management's
Discussion and Analysis or Plan of Operation - Recent Developments."

Item 3.             Legal Proceedings
                    -----------------

                    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.


                                      -6-
<PAGE>
                                    PART II
                                    -------


Item 4.             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 ($)         High ($)
                                                   -------         --------
                     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

                     2000 Fiscal Year
                     First Quarter                  1.56            2.38
                     Second Quarter                 0.63            1.81
                     Third Quarter                  0.63            1.31
                     Fourth Quarter                 0.81            1.88


                    As of August 31, 2000, there were  approximately 796 holders
of record of the Company's Common Stock.

                    The Company did not declare any cash dividends on its Common
Stock during Fiscal 2000 or Fiscal 1999. 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   or   Plan   of
Operation--Liquidity and Capital Resources").

Item 5.             Management's Discussion and Analysis or Plan of Operation.
                    ----------------------------------------------------------

Recent Developments

                    As of March 31, 2000, the Company no longer manufactured its
products at its  facilities  in Easton,  PA.  Orders for  customers in North and
South America are manufactured through arrangements with subcontractors.  Orders
for Europe  and Asia are  manufactured  either in  Germany  or Poland  where the
Company has previously  established  manufacturing and licensing  relationships.
For financial reporting purposes, the Company considers its operations to be one
segment.  The  Company  plans  to  sell  all or some  of its 29  acre  site  and
manufacturing  facilities in Easton,  PA. However,  the Company will continue to
direct its sales, marketing,  engineering and field services from its Easton, PA
location.

                    On  July  20,  2000,  in  conjunction   with   discontinuing
manufacturing of the Company's  products in Easton, PA, an agreement was reached
with The  Bethlehem  Employees  Association  to provide  closure to the existing
collective  bargaining  agreement and the Company  terminated certain employees.
The  charge  related  to this plan of action  was not  considered  material.  In
accordance  with this  agreement,  the Company agreed to pay the balance of 1999
vacation and 2000 vacation  earned and accrued  through March 31, 2000 by August
11, 2000. On December 11, 2000, this obligation was paid in full.

                  On November 29, 2000, the Company closed on the sale of all of
the issued and outstanding shares of Bethlehem  Advanced  Materials  Corporation
("BAM"), a wholly-owned subsidiary to a private company, Bergen Cove Realty Inc.
The  purchase  price was  $3,923,000  which  includes  the  assumption  of BAM's
existing  term debt with Bank of America,  N.A.  ("BA") which was  $2,423,000 at
November 29, 2000. In conjunction with the sale, the Company received a fairness
opinion from Seidman & Company, Inc. Investment Banking that the transaction was
fair to the Company and its  Stockholders.  The Company  expects to  recognize a
loss on the sale of BAM. In



                                      -7-
<PAGE>

2000,  the Company  recognized an impairment  charge of $1,600,000 in connection
with a  re-evaluation  of  the  carrying  value  of BAM  intangible  assets  and
property, plant and equipment.

                    The report of the  Company's  Independent  Certified  Public
Accountants  contains  an  explanatory  paragraph  on the  Company's  ability to
continue as a going  concern.  The Company has not  complied  with  certain bank
covenants in effect at May 31, 2000. The Company received a temporary  extension
on its borrowing  facilities  from PNC on July 31, 2000 to November 30, 2000 and
is currently  working on additional  agreements with PNC. Due to  non-compliance
with such covenants, such amounts have been classified as current liabilities in
the accompanying  financial  statements.  The accompanying  financial statements
have been prepared  assuming that the Company will continue as a going  concern.
Management's  plans with respect to this matter are  addressed in the  following
paragraphs.  The financial  statements do not include any adjustments that might
result from the outcome of this uncertainty.

                  The  Company's  continued  existence  is  dependent  upon  its
ability to resolve its liquidity problems, principally by extending certain bank
financing  arrangements,  the sale of assets, business units, inventory and real
estate. While pursuing the sale of real estate and other assets and working with
PNC on additional agreements,  the Company must continue to operate on cash flow
generated  internally.   The  Company  plans  to  improve  its  working  capital
requirements  by selling  portions of its existing  inventory and other business
units. In addition,  the Company will continue to reduce expenses as the sale of
business  units take place.  Other than the recently  completed sale of BAM, the
Company has no agreements,  understandings  or  commitments  with respect to the
sale of business  units and there can be no  assurance  that any such sales will
take  place.  Working  capital  limitations  continue  to impinge on  day-to-day
operations,  thus  contributing to additional  operating  losses.  The continued
support and forbearance of its lenders will be required, although this cannot be
assured.

                  While  the  Company  believes  the  proceeds  from the sale of
certain assets and an extension on its borrowing  facilities will be adequate to
fund its on-going obligations, there can be no assurance that the disposition of
assets and the Company's other strategies will occur in a timely manner in order
to fund its on-going obligations.

                  The Company  received  notice from the American Stock Exchange
("Exchange")  Staff  indicating  that the  Company no longer  complies  with the
Exchange's continued listing guidelines due to the non filing of its Form 10-KSB
("10-KSB") for the fiscal year ended May 31, 2000 and Form 10-QSB ("10-QSB") for
the  quarterly  period  ended August 31, 2000 with the  Securities  and Exchange
Commission as set forth in Sections 132(c),  1002(d) (e) and 1101 of the Company
Guide.  In view of this,  the  Exchange  is unable to  determine  if the Company
satisfies the Exchange numerical  guidelines for listing and that its securities
are,  therefore  subject to being  delisted from the  Exchange.  The Company has
appealed  this  determination  and a hearing is scheduled  for January 23, 2001.
There can be no assurance  the Company's  request for continued  listing will be
granted.

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.  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 metallizing coating solutions 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.

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

                    (1)             Thermal Process and Filtration Units
                                    ------------------------------------



                                      -8-
<PAGE>

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

                                    .     Technology barrier is medium.

                                    .     Competition is worldwide.

                    (2)             Environmental Systems Unit
                                    --------------------------

                                    .     Markets are concentrated.

                                    .     Technology barrier is medium.

                                    .     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.

Results of Operations

Fiscal  Year Ended May 31, 2000  ("2000")  Compared to Fiscal Year Ended May 31,
1999 ("1999")

                    The  Company's  total  sales  were   $11,661,000  for  2000,
compared to sales of  $13,710,000  for 1999,  a decrease of  $2,049,000  or 15%.
Gross profit was $2,045,000 or 18% of sales for 2000 compared to gross profit of
$4,539,000 or 33% of sales for 1999.  Decreased  sales in the Company's  Thermal
Products Unit was the primary  factor for the lower sales.  Both sales  activity
and sales in the Company's  core Thermal  Products Unit  decreased in the fourth
quarter of 2000 due to a worldwide decline of the purchasing of capital goods in
the chemical industry and other process  industries that the Company serves. The
decreased  gross  profit  for the year  2000 was due to two  main  factors.  The
Company  increased its inventory  reserve in 2000 by the amount of $845,000.  In
addition,  manufacturing  absorption  decreased due to lower sales volume,  thus
increasing cost of goods sold.

                    The Company's two largest customers  individually  accounted
for 15% and 33% of the  Company's  sales for 2000.  The  Company's  export sales
equaled  $4,362,000  for 2000  compared to $5,674,000  for 1999.  All sales were
denominated in US Dollars,  therefore,  currency fluctuations did not affect the
transactions.

                    Operating expenses for 2000 were $5,693,000 or 49% of sales,
compared to $3,655,000 or 27% of sales for 2000. The long-lived asset impairment
was recorded in accordance with SFAS No. 121,  "Accounting for the Impairment of
Long-Lived  Assets to be disposed of" ("SFAS 121"). As a result of debt covenant
violations, the need to generate working capital and the subsequent sale of BAM,
the Company re-evaluated the carrying values of BAM intangible and fixed assets.
Based  upon the  ultimate  sales  price of BAM  (considered  to be fair  value),
management  determined  there was an impairment and recognized a non cash charge
of $1,600,000 in 2000,  comprised of write offs of $244,000 and  $1,356,000  for
intangible  and fixed  assets,  respectively.  The  increase  in  administrative
expenses  was due  primarily to increased  legal  expense and bad debt  expense.
During  the fourth  quarter  of 2000,  a  customer  cancelled  a contract  which
resulted in bad debt  expense of $238,000.  In years 2000 and 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 (then the Chairman of the Board).  The balance of the options' fair values
of  approximately  $119,000  will be expensed  in the year ending May 31,  2001.
Operating loss equaled $3,648,000 for 2000 or 31% of sales compared to operating
income of $884,000 or 7% of sales for 1999.

                    Other expense totaled $563,000 for 2000 compared to $495,000
for 1999.  Interest  expense was $993,000 in 2000  compared to $693,000 for 1999
due to increased  debt levels  during the year and interest  rates.  The Company
recognized   approximately  $325,000  in  financing  charges  for  the  existing
amortization  and  modification  of certain  option  grants to UPE  compared  to
$100,000 in 1999. The Company recognized a gain of $789,000 in the third quarter
of 2000 for the sale of machinery and equipment. In 1999, the Company recognized
a gain on the sale of machinery and equipment assets in the amount of $170,000.



                                      -9-
<PAGE>

                    The Company's  provision  for income taxes totaled  $435,000
for 2000  compared  to a benefit  of  $20,000  for 1999.  The 2000  expense  was
comprised  of a  valuation  allowance  established  on  deferred  tax  assets of
$375,000 and a $60,000 net state tax  provision.  In the fourth  quarter of 2000
management,  based  on an  assessment  of  its  prospective  business  plan  and
strategies,  results of operations and other various  criterion,  concluded that
realization of such deferred tax assets could not be considered more likely than
not.  Net loss for 2000 was  $4,646,000  compared to net income of $409,000  for
1999.

Liquidity and Capital Resources (Also See Recent Developments - page 7)

                    During  2000,  $992,000 of cash was  provided  by  operating
activities compared to $1,740,000 of cash used in operating  activities in 1999.
The Company's  accounts  receivable  decreased  $846,000 and costs and estimated
profits in excess of billings  decreased  $1,211,000.  The  decrease  was due to
decreased billings and decreased  percentage of completion  contract projects at
May 31, 2000 compared to May 31, 1999.

                    Cash  used in  investing  activities  totaled  $368,000  and
$3,421,000  in  2000  and  1999,  respectively.   Capital  expenditures  totaled
$1,571,000 in 2000  compared to $3,468,000 in Fiscal 1999.  The Company had been
building and upgrading the high temperature  furnaces needed to support the long
term contract secured by Bethlehem Advanced Materials ("BAM").  During the third
quarter of 2000,  the Company sold certain  machinery  and equipment for cash of
$1,203,000.

                  Cash  used in  financing  activities  was  $725,000  for  2000
compared to cash flow provided by financing activities of $5,233,000 in 1999. On
May 19, 2000,  the Company  entered into a $600,000 loan  agreement  with Fundex
Capital  Corporation  ("Fundex") secured by a second mortgage on real estate and
personal  property.  Proceeds  from the loan were  used to repay the  Harrisburg
Authority obligation in the amount of $445,000 with the balance used for general
corporate  purposes.  Terms of the Fundex  agreement  provide for twelve monthly
interest  payments of $7,000 each commencing and due and payable on July 1, 2000
up to and including June 1, 2001. Thereafter, principal and interest at the rate
of  14%  per  annum  shall  be  paid  in  one  hundred  eight  constant  monthly
installments  of  approximately  $10,000  commencing  and due and payable on the
first day of July, 2001 and on the first day of each month  thereafter up to and
including June 1, 2010.  During 2000, the Company  recorded  interest expense of
$3,000 related to this loan agreement.

                    On May 19,  2000,  the  Company  entered  into a  $1,500,000
committed  line of credit  note with Exim Bank  ("Exim")  through  PNC Bank N.A.
("PNC").  The purpose of the facility is to provide  working  capital for export
contracts.  Borrowing's under this agreement accrue interest at PNC's prime rate
of interest.  At May 31, 2000,  the rate of interest was 9.5%.  During 2000, the
Company recorded $1,000 in interest  expense. Borrowing's under the facility are
secured in defined accounts receivable and inventory. The balance outstanding at
May 31, 2000 was $194,000 and at November 30, 2000 was $1,081,000.

                    On  June 3,  1998,  the  Company  entered  into a  financing
agreement with PNC Bank, N.A. ("PNC") which provided for a term loan of $800,000
and a revolving  credit  facility  of  $3,200,000.  During the third  quarter of
fiscal 2000,  the Company  prepaid the term loan in the amount of $536,000  from
proceeds raised in the sale of the machinery and equipment  assets.  On July 31,
2000, PNC temporarily  extended the line until November 30, 2000. The Company is
in default on various  covenants with PNC. The Company is presently working with
PNC on further  agreements.  The amount outstanding at May 31, 2000 and November
30, 2000 was approximately $3,193,000. On December 1, 2000, the Company paid PNC
$900,000 from the proceeds  from the sale of BAM.  Interest  expense  related to
this  agreement  totaled  $333,000 in 2000 and  $321,000 in 1999.  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.   As   discussed   under
Business--Customers; Existence of Short-Term Contracts, UPE filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code in October 2000.

                    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



                                      -10-
<PAGE>

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 $5,000 not to exceed a
term of 60 months.  The amount  outstanding  as of May 31, 2000 and November 30,
2000 was $131,000 and $136,000, respectively.

                    On  January  21,  1999,  the  Company  entered  into  a loan
agreement  with Bank of America  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
were used to finance the 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 a 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.  The  Company is in
violation  of certain  covenants  with Bank of America.  Effective  November 29,
2000,  all  outstanding  loans to the Bank of  America  were  assumed by the new
owners of BAM in accordance with the sale and purchase agreement.  As of May 31,
2000 and  November  28,  2000 the amounts  outstanding  under the  facility  are
$2,654,000 and $2,423,000 respectively.

                    Backlog of $16,807,000  ($15,378,000  of this amount related
to BAM orders) at November 28, 2000,  compares to backlog of $19,804,432 for the
same period last year.

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 Losses and Tax Credits Carry Forward

                    At May 31, 2000 the Company has  approximately  $6.7 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 2011.  If the  investment  and research tax
credit  carryforwards  remain  unused,  they will  expire  during the years 2001
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.

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 the first  quarter of its
year ending May 31, 2002.

                    In December 1999,  the  Securities  and Exchange  Commission
issued Staff Accounting Bulletin No. 101,



                                      -11-
<PAGE>

Revenue  Recognition  ("SAB 101") which broadly  addresses how companies  report
revenues  in their  financial  statements.  The  Company  is in the  process  of
evaluating the accounting  requirements of SAB 101 and does not expect that this
standard will have a material effect, if any, on its financial statements.

                    In May 19, 2000, the Financial  Accounting  Standards  Board
released Interpretation 44, "Accounting for Certain Transactions involving Stock
Compensation",  which addresses - in question and answer form - certain practice
issues related to APB 25, Accounting for Stock Issued to Employees.  The Company
is  currently  in the  process of  evaluating  the  accounting  requirements  of
Interpretation  44 and does not expect that this  standard  will have a material
effect, if any, on its financial statements.

Item 6.             Changes In and Disagreements With Accountants on Accounting
                    -----------------------------------------------------------
                    and Financial Disclosure
                    ------------------------

                    None

Item 7.             Financial Statements.
                    --------------------

                    Provided following the signature page.



                                      -12-
<PAGE>

                                    PART III
                                    --------

Item 8.             Directors,   Executive  Officers,  Promoters  and  Control
                    -----------------------------------------------------------
                    Persons; compliance with Section 16(a) of the Exchange Act.
                    -----------------------------------------------------------

                    The  directors  are  elected  at the  Annual  Meeting of the
Stockholders  of the Company and each  director  elected  holds office until his
successor  is elected  and  qualified.  The Board  currently  consists  of seven
members.  The  stockholders  vote at the  Annual  Meeting  for the  election  of
directors.  There are no family  relationships  among any directors or executive
officers of the Company,  except that  directors  Jan P. Gale and Ronald H. Gale
are brothers.  The names of the  directors,  together  with certain  information
regarding them, are as follows:

                                                            Year First Became a
         Name            Age      Principal Occupation            Director
---------------------   -----   ------------------------    --------------------

Alan H. Silverstein      51     Chairman of the Board of           1994
                                Directors since December
                                1999; President and Chief
                                Executive Officer of the
                                Company since December
                                1995; President and Chief
                                Operating Officer of the
                                Company from February
                                1994 to November 1995;
                                from July 1992 to
                                February 1994, President
                                of Universal Industrial
                                Gas, Inc., a rebuilder of
                                industrial gas plants

James L. Leuthe          58     President, Midland Farms,          1976
                                Inc., since August 1998;
                                Chairman of the Board of
                                First Lehigh Corporation,
                                a bank holding company,
                                from 1982 to 1998; from
                                1977 until 1995 held
                                various positions with
                                the Company, including
                                most recently President
                                and Chief Executive
                                Officer

Jan P. Gale              46     Executive Vice President           1991
                                of UPE since 1978, an
                                international supplier of
                                complete process plants
                                and equipment and
                                manufacturer of new
                                equipment in the United
                                States and Europe. UPE
                                filed for bankruptcy
                                under Chapter 11 of the
                                United States Bankruptcy
                                Code in October 2000.

Ronald H. Gale           49     President and Chief Executive      1990
                                Officer of UPE since 1978

Harold Bogatz            62     Vice President and General         1995
                                Counsel of UPE since 1987;
                                Secretary of the Company
                                since 1996

James F. Lomma           54     President, J.F. Lomma              1998
                                Inc. since 1975, a
                                trucking, rigging and
                                export packaging firm
                                located in South Kearney,
                                N.J. Mr. Lomma also
                                serves as the Chairman of
                                the Special Carrier &
                                Rigging Association

B. Ord Houston           87     Secretary of the Company           1976
                                from June 1983 to
                                December 1995, otherwise
                                retired for at least the
                                last five years; held
                                various positions with
                                the Company from 1966
                                until 1984, most recently
                                as Executive Vice
                                President

Antoinette L. Martin     42     Vice President and Chief             -
                                Financial Officer since
                                September 1994,
                                Controller from 1992 to
                                1994, Accounting Manager
                                from 1984 to 1989

Robert P. Allwein        49     Vice President of                    -
                                Technology and
                                Development since 1996,
                                held various positions in
                                sales and technologies
                                since 1980.

                          -13-
<PAGE>

Item 9.             Executive Compensation
                    ----------------------

                    The following table summarizes compensation  information for
the Company's President whose compensation exceeded $100,000 for the Fiscal Year
ended May 31, 2000. No other executive  officer of the Company has  compensation
in excess of $100,000 for the Fiscal year ended May 31, 2000. The table presents
information  with  respect to  compensation  paid or accrued by the  Company for
services rendered during the Fiscal Years ended May 31, 1998, 1999 and 2000.

<TABLE>
<CAPTION>
                           Summary Compensation Table

                                               Fiscal Year Compensation               Long Term Compensation
                                               ------------------------               ----------------------
Name and Principal
Position                                                                            Stock
                                                                  Other Annual      Option         All Other
                              Year         Salary     Bonus     Compensation (1)    Awards     Compensation (2)
-----------------------      ------       -------    --------   ----------------  -----------  ----------------
<S>                           <C>         <C>        <C>          <C>              <C>            <C>
Alan H. Silverstein           2000        $165,000   $102,316     $  6,154            --          $ 15,004
   President and Chief        1999         154,789     88,243        6,154         100,000          12,134
   Executive Officer          1998         140,441     83,570        7,295          50,000          11,865

</TABLE>


(1)               Represents  lease and  insurance  payments by the Company with
                  respect to use of an automobile

(2)               Represents life insurance premiums paid by the Company.

Option Grants in Last Fiscal Year

                  There were no options granted during the Fiscal Year Ended May
31, 2000.

Aggregated Fiscal Year-End Options

                  The following table sets forth certain  information  regarding
unexercised  stock  options  held by the Named  Executive  Officer as of May 31,
2000. No stock options were exercised by any Named Executive  Officer during the
2000 Fiscal Year.

                    AGGREGATED FISCAL YEAR-END OPTION VALUES


                              Number of              Value of Unexercised
                         Unexercised Options         in-the-Money Options
                           at May 31, 2000           at May 31, 2000 ($)(1)
                      -------------------------      ----------------------

                                                         Exercisable/
                                                         ------------
Name                  Exercisable/Unexercisable         Unexercisable
----                  -------------------------         -------------

Alan H. Silverstein           400,000/0                      0/0



(1)               On May 31,  2000 the last  reported  sale  price of the Common
                  Stock, as reported by the American Stock Exchange, was $0.8125
                  per share.



                                      -14-
<PAGE>
Compensation of Directors

                  Directors are not compensated in general for their services as
a director but are entitled to reimbursement of expenses  incurred in connection
with their  attendance at meetings.  In the past the Company has granted options
to certain directors.

Employment Agreements

                  Alan H. Silverstein, President and Chief Executive Officer, is
employed by the Company  pursuant to an agreement (the  "Employment  Agreement")
dated February 1, 1994. The Employment  Agreement provides for a five year term,
with automatic  renewal for successive  terms of two years,  subject to a mutual
right,  exercisable  within 120 days prior to the expiration of any term, not to
renew the Employment Agreement. The salary paid to Mr. Silverstein for the first
year under the Employment Agreement was $110,000,  increasing to $165,000 in the
fifth year. The Employment  Agreement was renewed for an additional two years on
February  1,  1999.  The salary  paid to Mr.  Silverstein  under the  Employment
Agreement is $165,000.

Item 10.            Security Ownership of Certain Beneficial Owners
                    -----------------------------------------------
                    and Management
                    --------------

                    The  following  table sets  forth,  as of  December 4, 2000,
information  regarding  ownership of the outstanding Common Stock of the Company
by (i) all persons who are known to the  Company to be the  beneficial  owner of
more than 5% of the Common Stock; (ii) each director and Named Executive Officer
(as such term is  hereinafter  defined);  and (iii) all  directors and executive
officers of the Company as a group:

<TABLE>
<CAPTION>
                                                                                        Percentage of
Name and Address of Beneficial Owner*            Shares Owned Beneficially (1)         Outstanding Shares
--------------------------------------------     ------------------------------       -------------------

<S>                                                    <C>                                   <C>
Universal Process Equipment, Inc.                      2,706,600(2)(3)                       62.2%
PO Box 338
Roosevelt, NJ  08555

Ronald H. Gale                                         2,779,100(4)(5)                       63.8%

Jan P. Gale                                            2,777,100(4)(5)                       61.2%

James L. Leuthe                                          339,124(4)(6)                       13.5%

Alan H. Silverstein                                         400,000(7)                       14.4%

Salvatore J. Zizza                                          188,000(8)                        7.3%

B. Ord Houston                                                6,365(4)                        (9)

Harold Bogatz                                               10,000(10)                        (9)

James F. Lomma                                                       -                        (9)

Antoinette L. Martin                                       35,000 (11)                        (9)

Robert P. Allwein                                           15,000(12)                        (9)

All directors and executive officers as a               3,579,921 (13)                        76%
group (9 persons)
</TABLE>


*                 Unless  otherwise noted the address of the Beneficial Owner is
                  c/o the Company, 25th & Lennox Streets,  Easton,  Pennsylvania
                  18044.



                                      -15-
<PAGE>

(1)                 All persons  identified as holding  options are deemed to be
                    beneficial  owners of shares of Common Stock subject to such
                    options  by reason of their  right to  acquire  such  shares
                    within 60 days after December 4, 2000.

(2)                 Includes  1,975,000 shares subject to options.  See "Certain
                    Relationships and Transactions."

(3)                 Does not include  shares  owned by Ronald H. Gale and Jan P.
                    Gale.

(4)                 Includes 500 shares subject to options.

(5)                 Includes  2,706,600  shares  beneficially  owned by UPE,  of
                    which the  individual is an officer,  director and principal
                    stockholder.

(6)                 Of this total,  52,281  shares are owned by Nikki,  Inc.,  a
                    corporation  of which Mr.  Leuthe is an officer and director
                    and the sole  stockholder,  161,343  shares are owned by Mr.
                    Leuthe and 125,500 shares are subject to options. This total
                    does not  include  640 shares  owned by Mr.  Leuthe's  adult
                    children as to which he disclaims beneficial ownership.

(7)                 Consists of 400,000 shares subject to options.

(8)                 Consists of 188,000 shares subject to options.

(9)                 Less than 1.0%.

(10)                Consists of 10,000 shares subject to options.

(11)                Consists of 35,000 shares subject to options.

(12)                Consists of 15,000 shares subject to options.

(13)                Includes 2,750,000 shares subject to options

Item 11.            Certain Relationships and Transactions
                    --------------------------------------

                    Ronald  H.  Gale  and  Jan  P.   Gale  are   Directors   and
Stockholders   of  the  Company  and  are  officers,   directors  and  principal
stockholders  of UPE, a  principal  stockholder  of the  Company.  UPE filed for
bankruptcy  under  Chapter 11 of the United  States  Bankruptcy  Code in October
2000.  UPE  and/or  Ronald  H.  Gale  and/or  Jan  P.  Gale  are  also  majority
stockholders  or  otherwise  affiliated  with  other  companies  that  engage in
transactions  with the Company.  UPE and related entities have purchased process
equipment   manufactured   by  the  Company  and  have  utilized  the  Company's
remanufacturing  services.  The approximate total revenues derived from sales to
UPE and related parties was approximately  $41,000 for the Fiscal year ended May
31,  2000  ("Fiscal  2000") and  $40,000  for the Fiscal year ended May 31, 1999
("Fiscal 1999").

                    On March 26,  1996,  the Board of  Directors of the Company,
subject to the approval of the Company's stockholders,  granted an option to UPE
to purchase  350,000  shares of the Common Stock at an exercise price of $1.8125
per share.  Such option was issued in  consideration  for debt guarantees by UPE
for various  borrowings  by the Company.  This  transaction  was approved by the
Company's  Stockholders at the Annual Meeting of the Stockholders  held on April
23, 1998. A financing  charge of $43,000 related to these options was recognized
in both Fiscal 2000 and Fiscal  1999.  The value  ascribed to these  options was
approximately  $424,000,  and the  balance of  $42,000  at May 31,  2000 will be
amortized over the terms of the outstanding guarantees.

                    On August 21,  1998,  the Board of  Directors of the Company
authorized  the issuance to UPE of 175,000 shares of Common Stock at an exercise
price of $1.63, which represented the fair market value of the stock at the date
of the grant.  Such option was issued in consideration  for guarantees by UPE of
borrowings  by the Company from PNC Bank  National  Association.  The fair value
ascribed to the options was $172,000. During Fiscal 2000



                                      -16-
<PAGE>

and 1999, the Company recorded  approximately  $57,000 in financing charges. The
balance of $58,000 will be amortized over the next year.

                    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.  The interest on the advances is prime rate (Chase Bank, New
York)  plus 1%. In August  1996,  UPE  advanced  $250,000  to the  Company.  UPE
advanced an  additional  $250,000 to the Company in October 1996. As of November
30, 2000, $787,000 of these advances remains outstanding.

                    In November 1993,  the Company and the Harrisburg  Authority
settled a lawsuit for $1,300,000  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 $650,000 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  $150,000 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 $750,000 in  additional
payments.  On May 19, 2000 the Company paid this  obligation in full for cash of
$445,000.

                    In November 1999, the Company  extended the contractual life
of 1,450,000  options that were issued to UPE in 1993 for a debt guarantee.  The
options expire in May 2001 and no other  modifications were made to the original
grant.  The Company  recognized a non cash charge of $225,000 for the effects of
the change in the options' fair values arising from the modification.



                                      -17-
<PAGE>

Item 12.            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(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).

                    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() to the Form SB-2).

                    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.
                              (incorporated by reference to Exhibit 10(w) to the
                              Company's 1999 Form 10-KSB).

                    10(x)     Second Amended and Restated loan  agreement  dated
                              July 31,  1999  between  the Company and PNC Bank,
                              N.A.  (incorporated  by reference to Exhibit 10(x)
                              to the Company's 2000 Form 10-KSB).

                    10(y)     Amended and Restated Committed Line of Credit Note
                              dated July 31,  1999  between  the Company and PNC
                              Bank, N.A.  (incorporated  by reference to Exhibit
                              10(y) to the Company's 2000 Form 10-KSB).

                    10(z)     Loan agreement  dated January 21, 1999 between the
                              Company  and  Bank of  America.  (incorporated  by
                              reference to Exhibit 10(z) to the  Company's  2000
                              Form 10-KSB).

                    10(aa)    Amended loan agreement dated July 31, 1999 between
                              the Company and Bank of America.  (incorporated by
                              reference to Exhibit  10(aa) to the Company's 2000
                              Form 10-KSB).

                    10(bb)    Agreement  dated July 20, 2000 between The Company
                              and   the    Bethlehem    Corporation    Employees
                              Association.

                    10(cc)    Loan  agreement  dated May 19,  2000  between  the
                              Company and Fundex Capital Corporation.

                    10(dd)    Loan  agreement  dated May 19,  2000  between  the
                              Company  and Exim Bank  through  PNC Bank.

                    10(ee)    Purchase agreement dated November 29, 2000 between
                              the  Company  and  Bergen  Cove  Realty  Inc.  for
                              Bethlehem Advanced Materials Corporation.

                    27        Financial Data Schedule Year ended May 31, 2000.



                                      -18-
<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:  December 28, 2000        By: /s/ Alan H. Silverstein
                                    --------------------------------------------
                                      Alan H. Silverstein, Chairman of the Board
                                        and Chief Executive Officer

                    In accordance with the Securities Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures                                        Title                                         Date
----------                                        -----                                         ----

<S>                                               <C>                                      <C>
/s/   Alan H. Silverstein                         Chairman of the Board and                December 28, 2000
------------------------------------------        Chief Executive Officer
Alan H. Silverstein                               (Principal Executive Officer)


/s/ Antoinette L. Martin                          Chief Financial Officer (Principal       December 28, 2000
------------------------------------------        Financial Officer)
Antoinette L. Martin

/s/ Ronald H. Gale                                Director                                 December 28, 2000
------------------------------------------
Ronald H. Gale

 /s/ Jan P. Gale                                  Director                                 December 28, 2000
------------------------------------------
Jan P. Gale

/s/ James L. Leuthe                               Director                                 December 28, 2000
------------------------------------------
James L. Leuthe

/s/ Harold Bogatz                                 Director                                 December 28, 2000
------------------------------------------
Harold Bogatz

/s/ B. Ord Houston                                Director                                 December 28, 2000
------------------------------------------
B. Ord Houston

/s/ James F. Lomma                                Director                                 December 28, 2000
------------------------------------------
James F. Lomma
</TABLE>


                                      -19-
<PAGE>
                   THE BETHLEHEM CORPORATION AND SUBSIDIARIES
                   ------------------------------------------

                        CONSOLIDATED FINANCIAL STATEMENTS
                        ---------------------------------

                    FOR THE YEARS ENDED MAY 31, 2000 AND 1999
                    -----------------------------------------

                               INCLUDING REPORT OF
                               -------------------

                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                    ----------------------------------------


<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
------------------------------------------

CONTENTS
--------

                                                                       Page
                                                                       ----

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

Consolidated Financial Statements:

    Balance Sheet

      May 31, 2000..................................................   F-4 - F-5

    Statements of Operations

      for the Years Ended May 31, 2000 and 1999 ....................   F-6

    Statements of Stockholders' Equity  (Deficit)
      for the Years Ended May 31, 2000 and 1999 ....................   F-7

    Statements of Cash Flows

      for the Years Ended May 31, 2000 and 1999 ....................   F-8

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


================================================================================
See notes to the consolidated financial statements                           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  as of May 31,  2000,  and the related  consolidated  statements  of
operations,  stockholders'  equity  (deficit) and cash flows for the years ended
May  31,  2000  and  1999.  These  consolidated  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated 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  consolidated  financial  statements are
free of material  misstatement.  An audit  includes  examining  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  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  as of May 31, 2000,  and the results of its operations and its cash
flows for the years ended May 31,  2000 and 1999 in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements for the year ended May 31, 2000, the Company has suffered a
significant  operating loss and has both a working capital  deficiency and a net
capital  deficiency.  In  addition,  the Company has not  complied  with certain
covenants  with bank  agreements.  The  Company  and the banks  are  working  on
additional  agreements.  If  the  banks  demand  payment  on  these  obligations
(totaling $5,847,000 at May 31, 2000), the Company may be unable to pay off such
amounts. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.  Management's  plans in regard to these matters are
described in Note 1. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of these uncertainties.

/s/ BDO Seidman, LLP
--------------------

BDO Seidman, LLP
Woodbridge, New Jersey

November 3, 2000 (November 29, 2000 As to Note 18)


================================================================================
See notes to the consolidated financial statements                           F-3
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 2000 (amounts in thousands, except share and per share data)
================================================================================


ASSETS

  CURRENT ASSETS:
         Cash                                                            $    12
         Accounts receivable (net of allowance for doubtful                1,495
           accounts of $21)
         Due from - related party                                             77
         Costs and estimated profit in excess of billings                    407
         Inventories                                                       3,490
         Prepaid expenses and other current assets                           119
                                                                         -------

                     Total Current Assets                                  5,600
                                                                         -------


  PROPERTY, PLANT AND EQUIPMENT, at cost less                              5,042
         accumulated depreciation and amortization


OTHER ASSETS:
       Inventories, non current                                            1,952
         Intangible pension and deferred compensation plan assets             85
         Deferred financing costs                                            270
         Other                                                                96
                                                                         -------

                     Total Other Assets                                    2,403
                                                                         -------



                     Total Assets                                        $13,045
                                                                         =======

================================================================================
See notes to the consolidated financial statements                           F-4
<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 2000 (amounts in thousands, except share and per share data)
================================================================================



LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
  CURRENT LIABILITIES:

         Accounts payable                                              $  3,939
         Accrued liabilities                                                648
         Billings in excess of costs and estimated profit                   595
         Taxes payable                                                        5
         Current maturities of long-term debt and capital leases          6,153
         Note payable - related party                                       787
                                                                       --------

                     Total Current Liabilities                           12,127
                                                                       --------

  LONG TERM LIABILITIES:
         Long-term debt and capital leases, net of current maturities     2,597
         Deferred compensation and other pension liabilities                515
                                                                       --------

                     Total Long-Term Liabilities                          3,112
                                                                       --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIENCY):
         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                                       6,898
         Accumulated deficit                                            (10,281)
                                                                       --------
                                                                         (2,194)

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

                                                                       --------
                     Total Stockholders' Equity (Deficiency)             (2,194)
                                                                       --------

Total Liabilities and Stockholders' Equity (Deficiency)                $ 13,045
                                                                       ========

================================================================================
See notes to the consolidated financial statements                           F-5



<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATION
(amounts in thousands, except per share data)
================================================================================

<TABLE>
<CAPTION>

                                                                           Year Ended May 31,
                                                                         --------------------
                                                                            2000         1999

<S>                                                                      <C>         <C>
NET SALES                                                                $ 11,661    $ 13,710

COST OF GOODS SOLD                                                          9,616       9,171
                                                                         --------------------

GROSS PROFIT                                                                2,045       4,539
                                                                         --------------------

OPERATING EXPENSES:
         Selling                                                            1,061       1,250
         General and administrative                                         2,916       2,289
          Long-lived asset impairment                                       1,600        --
          Non-employee stock option expense                                   116         116
                                                                         --------------------
                                                                            5,693       3,655
                                                                         --------------------


                     Operating income (loss)                               (3,648)        884
                                                                         --------------------

OTHER INCOME (EXPENSE):
         Interest expense                                                    (993)       (693)
         Financing charge - issuance and amortization of stock options       (325)       (100)
         Gain on sale of fixed assets                                         789         170
         Other income (expense)                                               (34)        128
                                                                         --------------------
                                                                             (563)       (495)
                                                                         --------------------

                     Income (loss) before income taxes                     (4,211)        389

INCOME TAX (EXPENSE) BENEFIT                                                 (435)         20
                                                                         --------------------

NET INCOME (LOSS)                                                        $ (4,646)   $    409
                                                                         ====================

EARNINGS (LOSS) PER SHARE DATA:
         Basic                                                           $  (1.95)   $    .18
                                                                         ====================

         Diluted                                                         $  (1.95)   $    .12
                                                                         ====================

WEIGHTED AVERAGE COMMON
  AND COMMON EQUIVALENT SHARES OUTSTANDING:
         Basic                                                              2,379       2,295
                                                                         ====================

         Diluted                                                            2,379       3,304
                                                                         ====================

</TABLE>

================================================================================
See notes to the 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          Share     Amount        Total
                                      -------------------------------------------------------------------------------------------

<S>                                    <C>         <C>          <C>           <C>                   <C>                <C>
Balance at May 31, 1998                2,288,532   $    1,144   $    6,123    $   (6,044)           12         --      $    1,223

Issuance of Common Stock
 in Exchange for Inventory                90,000           45          146          --            --           --             191

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

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

                                      -------------------------------------------------------------------------------------------
Balance at May 31, 1999                2,378,532        1,189        6,557        (5,635)           12         --           2,111

Value of Stock Option
Grants  to Non-Employees                    --           --            341          --            --           --             341

Net Loss for the Year                       --           --           --          (4,646)         --           --          (4,646)
  Ended May 31, 2000
                                      -------------------------------------------------------------------------------------------

                                       2,378,532   $    1,189   $    6,898    ($  10,281)           12         --      $   (2,194)
                                      ===========================================================================================

</TABLE>
================================================================================
See notes to the consolidated financial statements                           F-7

<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
================================================================================
<TABLE>
<CAPTION>

                                                                       Year Ended May 31,
                                                                       2000         1999
                                                                      -------------------

<S>                                                                   <C>        <C>
CASH FLOWS PROVIDED BY (USED IN):
  OPERATING ACTIVITIES:
    Net Income (Loss)                                                 $(4,646)   $   409
       Adjustments to reconcile net income (loss) to net
         cash provided by (used in) operating activities:
             Depreciation and amortization                                710        567
             Gain on sale of fixed assets                                (789)      (169)
             Inventory provisions                                         845        126
             Deferred tax expense (benefit)                               375        (75)
             Long-lived asset impairment                                1,600       --
             Non cash compensation and interest expense                   441        216
         Changes in operating assets and liabilities:

             Accounts receivable                                          846       (855)
             Due from - related party                                     (77)      --
             Costs and estimated profit in excess of billings           1,211       (785)
             Inventories                                                 (257)      (780)
             Prepaid expenses and other current assets                     (7)       114
             Other assets                                                 (98)      (260)
             Accounts payable                                             423        (25)
             Accounts payable (net) - related party                       (24)      (289)
             Accrued liabilities                                           59         (5)
             Billings in excess of costs and estimated profit             356         79
             Deferred compensation and other pension liabilities           24         (8)
                                                                      -------------------
               Net Cash Provided By (Used In) Operating Activities        992     (1,740)
                                                                      -------------------

  INVESTING ACTIVITIES:
         Purchase and construction of property, plant and equipment    (1,571)    (3,468)
          Proceeds from sales of fixed assets                           1,203         47
                                                                      -------------------

             Net Cash Used In Investing Activities                       (368)    (3,421)
                                                                      -------------------

  FINANCING ACTIVITIES:
         Net proceeds from line of credit                                 370      6,007
         Proceeds from long-term debt                                     600      1,049
         Repayments on long-term debt and capital leases               (1,695)    (1,828)
         Repayment of note payable - related party                       --            5
                                                                      -------------------

             Net Cash (Used In) Provided By Financing Activities         (725)     5,233
                                                                      -------------------

NET (DECREASE) INCREASE IN CASH                                          (101)        72

CASH

  BEGINNING OF PERIOD                                                     113         41
                                                                      -------------------

CASH

  END OF PERIOD                                                       $    12    $   113
                                                                      ===================
</TABLE>
================================================================================
See notes to the 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 (See Note 18). In addition, Bethlehem Thermal, LLC, a
wholly  owned  subsidiary,  formed in March 1999,  provides  metallized  thermal
coating using automated thermal spray systems. The Company does not segregate or
manage its operations by business segments.

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,  2000  ("2000")  and for the year  ended  May 31,  1999
("1999").

Going Concern:

The  Company's  consolidated  financial  statements  are  presented on the going
concern basis, which contemplates the realization of assets and the satisfaction
of  liabilities  in the normal  course of  business.  The Company has suffered a
significant  operating loss for the year ended May 31, 2000,  which has resulted
in both a working  capital  deficiency  and a net capital  deficiency at May 31,
2000. In addition, the Company has not complied with certain financial covenants
with  its two  bank  agreements.  The  Company  and the  banks  are  working  on
additional  agreements.  If  the  banks  demand  payment  on  these  obligations
(approximately  $5,847 at May 31,  2000),  the Company may be unable to generate
sufficient cash in a timely fashion and pay off such amounts.  In addition,  the
Company  has  incurred a net loss of $4,646 for the year ended May 31,  2000 and
also has a working capital deficiency of $6,527 and has a stockholder deficiency
of $2,194 at May 31, 2000. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern.

The Company's continued existence is dependent upon its ability to resolve these
liquidity  matters,  principally by obtaining  alternative  or replacement  debt
financing,  proceeds  from the  sale of BAM (see  Note  18)  equity  capital  or
proceeds  from the sale of assets.  While  pursuing  additional  debt and equity
funding,  the Company must  continue to operate on limited  cash flow  generated
through  operations and the continued  support and forbearance of the banks will
be required, although this is not assured.

The financial  statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.

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.


================================================================================
                                                                             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)
--------------------------------------------------------------------------------

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.  At May 31, 2000, the Company reported an inventory provision of $845,
related to materials and goods that were identified as obsolete or slow moving.

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. In connection with the
Company's debt covenant violations, the need to generate working capital and the
subsequent sale of BAM, the Company  determined that certain  long-lived  assets
were impaired in 2000. As a result,  intangible  assets and property,  plant and
equipment with carrying  values of $244 and $1,356,  respectively,  were written
off.

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.
On March 31, 2000, the Company sold certain  machinery and  equipment,  and as a
result no longer  manufactures  product at its facility in Easton,  Pennsylvania
(see Note 5).

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

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. In
1999  and  through  May of  2000  the  intangible  assets  were  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 $32  and  $30 for the  years  ended  May 31,  2000  and  1999,
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 $89 and $78 for 2000 and 1999, respectively, and is included
in "Interest Expense" in the accompanying  Statements of Operation.  The Company
also 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.

Valuation   allowances  are  established   against   deferred  tax  assets  when
realization cannot be considered more likely than not.

Earnings (Loss) per Share:

Basic  earnings  (loss) 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. For 2000 such shares were
anti dilutive.  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.

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.  Actual
amounts could differ from the estimates made. Management  periodically evaluates
estimates  used in the  preparation  of the financial  statements  for continued
reasonabliness.  Appropriate adjustments, if any, to the estimates used are made
prospectively  based  upon  such  periodic  evaluation.   The  more  significant
estimates used by management in
================================================================================
                                                                            F-11

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

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

preparing the financial  statements include the following:  measurement of costs
and profitability on long-term  contracts;  valuation of inventory  (current and
non-current);  impairment  losses;  useful lives  assigned to fixed and tangible
assets;  accrued  liabilities;  and  valuation  allowances  established  against
deferred tax assets and accounts receivable.

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 2000 and 1999 (See Note 10 for pro-forma  disclosure
required by SFAS 123). With respect to stock option grants to non-employees  and
grant  modifications,  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.

Effect of Recently Issued Accounting Standard:

In  June  1998,  the  FASB  issued  SFAS  No.  133  "Accounting  for  Derivative
Instruments and Hedging  Activities,"  which must be adopted for fiscal quarters
of fiscal years  beginning  after June 15, 2000.  SFAS No. 133 is effective  for
fiscal  years  beginning  after  June  15,  2000.  SFAS  No.  133  requires  the
recognition of all  derivatives as either assets or liabilities in the Company's
balance sheet and  measurement of those  instruments at fair value. To date, the
Company has not entered into any derivative or hedging activities,  and, as such
does not expect that the  adoption  of SFAS No.  133,  as  amended,  will have a
material effect on the Company's financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulleting No. 101, Revenue  Recognition  ("SAB 101") which broadly addresses how
companies report revenues in their financial  statements.  The Company is in the
process of evaluating the accounting  requirements  of SAB 101 and  subsequently
issued  guidance,  and does not expect that this  standard  will have a material
effect, if any, on its financial statements.

In  May  19,  2000,   the  Financial   Accounting   Standards   Board   released
Interpretation  44,  "Accounting  for  Certain   Transactions   involving  Stock
Compensation",  which addresses - in question and answer form - certain practice
issues related to APB 25, Accounting for Stock Issued to Employees.  The Company
is  currently  in the  process of  evaluating  the  accounting  requirements  of
Interpretation  44 and does not expect that this  standard  will have a material
effect, if any, on its financial statements.

--------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE:
--------------------------------------------------------------------------------

 Accounts receivable are comprised of the following at May 31, 2000:

              Billed (net of allowance for doubtful accounts of $21)    $1,427
              Retention on contracts                                        68
                                                                       -------
                                                                        $1,495


<PAGE>

================================================================================
                                                                            F-12
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================

--------------------------------------------------------------------------------
NOTE 2  -  ACCOUNTS RECEIVABLE: (Continued)
--------------------------------------------------------------------------------

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, 2001.

The  Company  recognized  bad debt  expense  of $261  and $68 in 2000 and  1999,
respectively, and charged off uncollectible accounts receivable of $286 and $171
in 2000 and 1999, respectively.

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

At May 31, 2000, 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            $ 1,056
               Estimated profit                                      168
                                                                 -------
                                                                   1,224

               Less:  billings to date                            (1,412)
                                                                 -------
                                                                 $  (188)
                                                                 =======



               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             $   407
                     Billings in excess of costs and estimated
                     profit on long term contracts                  (595)
                                                                 -------
                                                                 $  (188)
                                                                 =======


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

The components of inventories are comprised of the following at May 31, 2000:

                    Raw materials and components                    $ 497
                    Work in process                                 2,080
                    Finished goods                                  3,866
                    Less: reserve for obsolete inventory            (1,001)
                                                                 ---------
                                                                    5,442

                    Less:  Non-Current Inventory                  (1,952)
                                                                 ---------
                                                                   $3,490
                                                                 =========
================================================================================
                                                                            F-13
<PAGE>

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

--------------------------------------------------------------------------------
NOTE 4  - INVENTORIES: (Continued)
--------------------------------------------------------------------------------

At May 31, 2000, the Company's  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,  36% 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  recognized  provisions for specific raw material and finished goods
inventory in the amount of $845 and $126 in 2000 and 1999,  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, 2000, property, plant and equipment consists of the following:

      Land                                                                $ 448
      Buildings and improvements                                          1,695
      Machinery and equipment                                             4,764
      Equipment under capital leases                                        118
      Construction in progress                                            1,441
                                                                         -------
                                                                          8,466

      Less:  accumulated depreciation and amortization                   (3,424)
                                                                         -------

       Property, plant and equipment, net of accumulated depreciation    $5,042
                                                                         =======


Depreciation and amortization expense on property,  plant and equipment was $487
and $348 in 2000 and 1999,  respectively,  which included $22 and $30 of expense
related to equipment subject to capital leases.

Included in "Other  Income  (Expense)" in the 2000  Statement of Operations  are
gains from the sale of machinery and equipment assets totaling $789.

The long-lived  asset  impairment was recorded in accordance  with SFAS No. 121,
"Accounting  for the  Impairment of  Long-Lived  Assets" to be disposed of (SFAS
121).  As a result of debt  covenant  violations,  the need to generate  working
capital and the subsequent  sale of BAM, the Company  re-evaluated  the carrying
values of BAM intangible  and fixed assets.  Based upon the ultimate sales price
of BAM  (considered  to be  fair  value),  management  determined  there  was an
impairment  and  recognized  a non cash charge of $1,600 in 2000,  comprised  of
write offs of $244 and $1,356 for intangible and fixed assets, respectively.

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

<PAGE>

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

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

At May 31, 2000, accrued liabilities consist of the following:

                Salaries and benefits                             $258
                Current portion of deferred compensation            78
                Purchases                                          189
                Other                                              123
                                                                -------
                                                                  $648
                                                                =======

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


At May 31, 2000,  long-term debt and capital lease  obligations  consists of the
following:

        Note payable - Ocwen Federal Bank                      $1,926
        Line of Credit - PNC Bank, N.A.                         3,193
        Note Payable - Exim Bank/PNC Bank N.A.                    194
        Note Payable - PNC Bank, N.A.                             163
        Note Payable - Bank of America                          2,654
        Fundex Capital Corporation                                600
        Capital lease obligations                                  20
                                                             ---------
                                                                8,750

        Less: current maturities                               (6,153)
                                                             ---------
        Total                                                  $2,597
                                                             =========

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 .50% to 3% 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
2000  and  1999,  the  Company  recorded  $219  and  $222 in  interest  expense,
respectively, related to this loan agreement.

PNC Bank, N.A. - Credit Facility

In June 1998, the Company entered into a financing agreement with PNC Bank, N.A.
("PNC") which provided for a term loan of $800 and a revolving  credit  facility
of $3,200. During the third quarter of fiscal 2000, the Company prepaid the term
loan in the amount of $536 from proceeds raised in the sale of the machinery and
equipment.  The Company is in default on various  conventants  with PNC. On July
31, 2000, PNC  temporarily  extended the line to November 30, 2000. As discussed
in Note 1, the Company and PNC are currently  working on additional  agreements.
Interest  expense  related to this  agreement  totaled  $333 in 2000 and $321 in
1999. UPE was required to provide certain guarantees on the Company's behalf. In
August 1998, the Company  granted UPE 115,000 stock options for providing  these
guarantees.

================================================================================
                                                                            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)
--------------------------------------------------------------------------------

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  at a
maximum rate of 9.40% and a minimum rate of 9.15%.  The Company  recorded $19 in
interest  expense in 2000 and $16 in 1999.  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, 2000 is $163.

Bank of America - Note Payable

On January 21,  1999,  the Company  entered into a loan  agreement  with Bank of
America  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 were used to finance  capital  expenditures
at the BAM facility.  The balance outstanding at May 31, 2000 is $2,654. 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.  Effective November 29, 2000, all outstanding loans to the Bank of
America  were assumed by the new owners of BAM in  accordance  with the sale and
purchase  of BAM.  During  the year  ended May 31,  2000 and May 31,  1999,  the
Company recorded $259 and $48 respectively,  in interest expense related to this
loan agreement.

Harrisburg Authority - Note Payable

On May 19, 2000,  the Company paid off the  Harrisburg  Authority  obligation (a
multi-year settlement) for cash of $445.

Note Payable - Fundex

On May 19,  2000,  the Company  entered into a $600 loan  agreement  with Fundex
Capital  Corporation  ("Fundex")  secured by a second lien on the Company's real
estate.  Proceeds from the loan were used to repay the  Harrisburg  Authority in
the amount of $445 and the  balance  was used for  general  corporate  purposes.
Terms of the agreement  provide for twelve monthly interest  payments of $7 each
commencing and due and payable on July 1, 2000 up to and including June 1, 2001.
Thereafter  principal and interest at the rate of 14% per annum shall be paid in
one hundred eight constant monthly  installments of approximately $10 commencing
and due and payable on the first day of July,  2001 and on the first day of each
month  thereafter up to and including June 1, 2010. The Company is subject to no
prepayment  penalties  if the note is paid at any time  during the first  twelve
months,  the  sum of 3% of the  amount  being  repaid,  (if  repaid  during  the
thirteenth  to sixtieth  month) and no  prepayment  penalty from then on. During
2000,  the  Company  recorded  interest  expense  of $3  related  to  this  loan
agreement.

Exim Bank - Committed Line of Credit Note

On May 19, 2000, the Company entered into a $1,500 committed line of credit note
with Exim Bank  ("Exim")  through  PNC Bank N.A.  ("PNC").  The  purpose  of the
facility is to provide working capital for export  contracts.  Borrowing's under
this agreement accrue interest at PNC's prime rate of interest. At May 31, 2000,
the rate of interest was 9.5%.  During 2000, the Company recorded $1 in interest
expense.  Borrowings  under the facility are secured by accounts  receivable and
inventory. The balance outstanding at May 31, 2000 is $194.

================================================================================
                                                                            F-16

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 7  - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (Continued)
--------------------------------------------------------------------------------


Debt Maturities:

Long-term  debt  maturities  for the  next  five  fiscal  years  and  thereafter
(reflecting the effects of various covenant defaults) are as follows:

                  Year Ending May 31,
                -------------------------
                         2001                  $ 6,153
                         2002                      145
                         2003                    1,924
                         2004                       47
                         2005                       54
                  2006 and thereafter              427
                                         --------------
                                                $8,750
                                         ==============
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, 2000:

                          Year Ending May 31,

                                     2001                   $ 14
                                     2002                      4
                                     2003                      4
                     Minimum lease payments                   22
                     Less:  imputed interest                  (2)
                                                       ---------------
                     Present value of minimum
                       lease payments                         20
                     Less: current portion                   (14)
                                                       ---------------
                     Long term portion                      $  6
                                                       ===============

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

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

                                                       2000      1999
          -------------------------------------------------------------
          Current:
            Federal                                     $  -   $ (153)
            State                                       (60)      (55)
            Recognition of net operating losses            -       153
          -------------------------------------------------------------
                                                        (60)      (55)
          -------------------------------------------------------------
          Deferred:
            Federal                                    (319)        64
            State                                       (56)        11
          -------------------------------------------------------------
                                                       (375)        75
          -------------------------------------------------------------
           Income tax benefit (provision)             $(435)      $ 20
          =============================================================

================================================================================
                                                                            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 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.

                                                        2000        1999
                                                        ----        ----

                  U.S. Federal income tax             $ 1,432    $  (132)
                    provision at statutory rates
                  State income taxes, net of
                    Federal benefit                       (77)       (29)
                  Utilization of net operating loss
                    carryforwards                        --          153
                  Change in  valuation allowance       (1,740)        75
                  Other, net                              (50)       (47)
                                                      ------------------

                  Income tax (benefit) provision      $  (435)   $    20
                                                      ==================

At May 31,  2000,  the  components  of the  Company's  deferred  tax  assets and
liability are as follows:

        Deferred Tax Assets:
          Receivables                                              $     9
          Inventory                                                    454
          Net operating loss carryforwards                           1,796
          AMT and tax credits                                          119
          Deferred compensation and retirement benefit                 237
          Stock  option compensation                                   355
          Property, plant and equipment                                282
          Long-lived asset impairment                                  640
          Other                                                         20
                                                                   -------
             Gross Deferred Tax Assets                               3,912
          Valuation allowance                                       (3,912)
                                                                   -------
          Net Deferred Tax  Assets                                 $  --
                                                                   =======

Based on the  assessment of all available  evidence,  including  2000  operating
results,  uncertainties on its financing arrangements with banks, and the status
of the  Company's  business and the  Company's  potential  inability to generate
taxable  income  in future  periods,  management  has  established  a  valuation
allowance  on the  total  deferred  tax  assets.  Reductions  in  the  valuation
allowance  will be recorded  when, in the opinion of  management,  the Company's
ability to generate  taxable income in the future is considered more likely than
not.

At May 31, 2000,  the Company has  approximately  $6.7 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  2011.  If the  investment  and  research tax credit  carryforwards
remain unused, they will expire during the years 2001 through 2002.

================================================================================
                                                                            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
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:

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,  "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 to
July 31, 2001.  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.


================================================================================
                                                                            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
POSTRETIREMENT PLANS:  (Continued)
--------------------------------------------------------------------------------

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:

Change in benefit obligations

                                                  Pension               Other
                                                   Plans      RISP     Benefits
                                                   -----      ----     --------

Benefit obligation at May 31, 1999                $(3,279)   $  (337)   $(1,170)
Service Cost                                         --         --           (6)
Interest Cost                                        (255)       (24)       (86)
Plan participants' contributions                     --           10         90
Actuarial Gain                                       --         --         --
Benefits paid                                         276         78       --
                                                  -----------------------------
Benefit obligation at May 31, 2000                $(3,258)   $  (273)   $(1,172)
                                                  =============================
Change in plan assets

Fair value of plan assets at May 31, 1999         $ 3,426    $     6    $  --
Actual return on plan assets                          489          1       --
Contributions                                          78       --
Benefits paid                                        (276)       (78)      --
                                                  -----------------------------
Fair value of plan assets at May 31, 2000         $ 3,639    $     7    $  --
                                                  =============================
Plan assets are stated at fair value and are comprised primarily of common stock
and corporate bonds

Funded Status

Unrecognized actuarial (gain) loss                $   743    $  (111)   $  --
Unrecognized prior service cost                        (3)       (57)      (307)
                                                  -----------------------------
Net amount recognized                             $   740    $  (168)   $  (307)
                                                  =============================

Amounts recognized in the May 31, 2000
consolidated balance sheet consist of:

Accrued benefit liability                         $  (177)   $  (266)   $  (150)
Intangible asset                                     --           85       --
                                                  -----------------------------
Net amount recognized at May 31, 2000             $  (177)   $  (181)   $  (150)
                                                  =============================

At May 31, 2000, plans with  accumulated  benefits in excess of plan assets have
accumulated  benefit obligations and projected benefit obligations of $2,624 and
plan assets of $2,358.

================================================================================
                                                                            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
POSTRETIREMENT PLANS:  (Continued)
--------------------------------------------------------------------------------

Weighted-average assumptions as of May 31, 2000

                                         Pension                     Other
                                          Plans        RISP         Benefits
                                          -----        ----         --------

Discount Rate                             8.5%          8%             8%
Expected return on plan assets            8.5%          8%             N/A

For measurement purposes, a 13.5% annual rate of increase in the per capita cost
of covered  health care  benefits was assumed for 2000.  The rate was assumed to
decrease gradually to 6% for 2009 and remain at that level thereafter.

                                              For the year ended May 31, 2000
                                              -------------------------------
                                            Pension                     Other
                                             Plans        RISP         Benefits
                                             -----        ----         --------

Service cost                                  $--         $--         $   6
Interest cost                                   255          24          86
Expected return on plan assets                 (262)         (1)       --
Amortization of prior service costs               5         (10)        (26)
Recognized net actuarial loss                    13          26          64
Expected contributions from retirees           --          --          --
                                              -----       -----       -----

   Net periodic benefit cost                  $  11       $  39       $ 130
                                              =====       =====       =====


                                              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 of prior service costs               7         (10)        (26)
Recognized net actuarial loss                   (18)         32          59
Net amortization and deferral
Expected contributions from retirees           --          --           (87)
                                              -----       -----       -----

  Net periodic (benefit) cost                 $ (48)      $  54       $  35
                                              =====       =====       =====


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

<PAGE>

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

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

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, 2000, the Company's  liability to
the plan approximated $30. The Company's expense related to the plan was $29 and
$21 for 2000 and 1999, respectively.

--------------------------------------------------------------------------------
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 2000 and 1999. The plan expired in 2000.

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 2000 and 1999.

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 nine  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
2000 and 1999.

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.



================================================================================
                                                                            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)
--------------------------------------------------------------------------------


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  -0- and 117,500  shares  have been issued  under this plan in
fiscal 2000 and 1999, respectively.

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 2000 and 1999
totaled  $116 each year.  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 $268 for 2000 and $43 for 1999.

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 both in 2000
and 1999.

The Company  estimated  the fair values of such stock  options  granted in 1999,
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)
risk free interest  rates of 5.4% (1999) 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.  There were no stock  options  granted in
2000.

In November 1999, the Company extended the contractual life of 1,450,000 options
that were issued to UPE in 1993 for a debt guarantee.  The options expire in May
2001 and no other  modifications  were made to the original  grant.  The Company
recognized a non cash charge of $225 (over the  remaining  term of the debt) for
the  effects  of the  change  in the  options'  fair  values  arising  from  the
modification.

Disclosure On Options:

The Company applies APB Opinion 25,  "Accounting for Stock Issued to Employees",
and related  Interpretations  in accounting for its options issued to employees.
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.  The Company did not issue any options
to employees in fiscal 2000.

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.

================================================================================
                                                                            F-23

<PAGE>

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

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

Under the accounting  provisions of SFAS 123, the Company's net income,  primary
earnings  per share and fully  diluted  earnings per share per Fiscal 1999 would
have been reduced


                                                          2000       1999

                                                        --------  ----------
            Net Income (loss):
               As reported                              $(4,646)     $409
               Pro-forma                                $(4,724)     $331

            Basic earnings (loss) per share:
               As reported                              $ (1.95)    $ .18
               Pro-forma                                $ (1.99)    $ .14

            Diluted earnings (loss) per share:
               As reported                              $ (1.95)    $ .12
               Pro-forma                                $ (1.99)    $ .10

The pro forma  effect on net income and  earnings  per share for 1999 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,  2000 and 1999 and  changes  during the years  then  ended is  presented
below:

<TABLE>
<CAPTION>
                                         May 31, 2000                    May 31, 1999
                                 -------------------------------------------------------------

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

<S>                                 <C>             <C>           <C>             <C>
Outstanding-beginning of year       2,978,000       $1.20         2,685,500       $1.12

Granted                                  --                         292,500        1.68
Exercised                                --                             --          --
Forfeited                            (112,500)       1.21               --          --
                                  --------------                 -------------

Outstanding-end of year             2,865,500                     2,978,000
                                  ==============                 =============

Options exercisable -year-end       2,863,833                     1,286,076
                                  ==============                 =============

Weighted-average fair value of
options granted during the year   $      --                           $1.08
                                  ==============                 =============
</TABLE>

Options issued to employees in 1999 expire in 2006 and 2007,  respectively,  and
are exercisable  immediately.  At May 31, 2000, the Company has 52,500 shares of
common stock available for grant under various option plans.


================================================================================
                                                                            F-24

<PAGE>

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

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

The  following  table  summarizes  information  about stock options and warrants
outstanding at May 31, 2000:
<TABLE>
<CAPTION>

                      OPTIONS OUTSTANDING                                                 OPTIONS EXERCISABLE

---------------------------------------------------------------------------------    -----------------------------------------------
Range of                                   Weighted-Average        Weighted-                                      Weighted-
Exercise            Number Outstanding     Remaining Contractual   Average           Number Exercisable at        Average
Prices              at May 31, 2000        Life                    Exercise Price    May 31, 2000                 Exercise Price
---------------------------------------------------------------------------------    -----------------------------------------------

<S>                        <C>                <C>                      <C>                   <C>                    <C>
$0.33 to 0.94              1,700,000          .5                       $.67                  1,700,000              $.67
$1.78                        100,000          8.5                      $1.78                   100,000              $1.78
$1.63                        187,500          8.2                      $1.63                   187,500              $1.63
$1.81                        653,000          8                        $1.81                   653,000              $1.81
$1.87 to 2.88                205,000          4                        $1.99                   203,333              $1.99
$2.50                         20,000          3                        $2.50                    20,000              $2.50
                    -------------------                                               -----------------------
$0.33 to 2.88              2,865,500                                                         2,863,833
                    ===================                                               =======================
</TABLE>

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.  The
warrants expired in August of 2000.

--------------------------------------------------------------------------------
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,
2003 with one 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. 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 in 2000 and $130 in 1999,
respectively.  At May 31,  2000,  the future  minimum  lease  payments  on these
operating leases are as follows:

                          Year Ended May 31,

                          --------------------

                                 2001                           $183
                                 2002                            159
                                 2003                            143
                                              -----------------------
                                                                $485

                                              =======================

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

<PAGE>

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

--------------------------------------------------------------------------------
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
2000 and 1999.

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, 2000
                                                        ---------------------------------------
                                                           Accounts
                                                          Receivable        Accounts Payable
                                                        (Related Parties)   (Related Parties)
                                                        ---------------------------------------
<S>                                                            <C>                 <C>
     UPE (Owned by  Ronald & Jan                               $250                $237
            Gale through Universal Baling &
            Processing, Inc. UPE's parent)
     Universal Industrial Gases, Inc.                             4                   3
            (U.I.G.) (100% owned by UPE)
     Universal Industrial  Refrigeration, Inc.                   11                 119
            (U.I.R.) (80% owned by UPE)
     Universal Glastell Equipment                                46                   -
             (U.G.E.) (50% owned by Gale Glass)
     R. Simon Dryers, Ltd. (Directors are                       133                   -
             Ronald & Jan Gale)
     Ayton Equipment                                              -                   8
                                                        ---------------------------------------
                                                               $444                $367
                                                        =======================================
</TABLE>


Since the right of offset exists between the Company, UPE and related parties, a
net amount  receivable to related parties is presented in the  accompanying  May
31, 2000 balance sheet.

Related party sales were as follows:

                                                Year Ended May 31,

                                        2000         1999
                                    --------------------------
                   UPE                   $41         $12
                   U.I.G.                  -          28
                                    --------------------------
                                         $41         $40
                                    ==========================

Rental income from related parties totaled $55 in both 2000 and 1999.

The Company purchases equipment and services from UPE and its affiliates.  These
purchases  total  approximately  2% and 11% of the total  cost of goods sold for
2000 and 1999, 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 was expensed as a financing charge in both the
2000 and 1999  statements  of income,  and $100 remains  capitalized  at May 31,
2000.

As  discussed in Note 10, the Company  recognized  a non-cash  charge of $225 in
2000 for the effects of the changes in fair value related to the modification of
an option grant.

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.  The
interest on the advances is prime rate (Chase Bank, New York) plus 1%. In August
1996, UPE advanced $250,000 to the Company.  UPE advanced an additional $250,000
to the Company in October 1996. As of May 31, 2000,  $787,000 of these  advances
remains outstanding.

UPE filed for bankruptcy  under Chapter 11 of the United States  Bankruptcy Code
in October 2000.

--------------------------------------------------------------------------------
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 35% of the
accounts  receivable  balance at May 31, 2000 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 2000,  two customers  individually  represented  15% and 33% of  consolidated
sales.  In  1999,  two  customers  individually   represented  12%  and  20%  of
consolidated sales.

For 2000 and 1999, export sales were as follows:

                                                Year Ended May 31,

                 Customer                    2000               1999
                -----------------------------------------------------
                 Australia                   $536              $ 142
                 Belgium                        4              1,681
                 Brazil                       229                388
                 Canada                        54                 37
                 Hong Kong                    119                420
                 Korea                        590                687
                 Mexico                       105                711
                 Netherlands                   32                 27
                 Scotland                       -                 63
                 Singapore                  1,548              1,110
                 South Africa                  44                 63
                 Spain                          -                264
                 Turkey                       407                  -
                 United Kingdom               687                 46
                 All Others                     7                 35
                                     --------------------------------
                                           $4,362             $5,674
                                     ================================

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

                                             Year Ended May 31,

                                             2000        1999
            Cash paid for interest          $ 952       $ 662
                                         =====================
            Cash paid for income taxes      $  71       $  51
                                         =====================

Noncash investing and financing activities:

During  2000,  the Company  transferred  property,  plant and  equipment  with a
carrying value of $190 to inventory.

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

During 1999, the Company settled a retirement obligation through the issuance of
90,000 shares of common stock.

================================================================================
                                                                            F-28

<PAGE>

THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
================================================================================
--------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE:
--------------------------------------------------------------------------------

Basic and  Diluted  earnings  per share for 2000 and 1999 have been  computed as
follows:
<TABLE>
<CAPTION>

                                                                           2000
                                                    Net Loss              Shares          Per Share
                                                  (Numerator)         (Denominator)        Amount
           -------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>            <C>
             Basic Loss Per Share                    $(4,646)              2,379          $(1.95)
             Effect of dilutive securities
               Warrants and options                         -                  -                -
             Diluted Loss Per Share                  $(4,646)              2,379          $(1.95)


                                                                           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

</TABLE>

Options and warrants to purchase approximately  2,900,000 shares of common stock
were outstanding during the year ended May 31, 2000 but were not included in the
computation  of  diluted  loss per  share  because  their  effect  would be anti
dilutive.

Options to purchase  122,500  shares of common  stock,  (exercisable  at between
$2.00 and $3.15 per share) in 1999,  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.

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

During the fourth quarter of 2000, the Company recorded adjustments of: (a) $225
related to a  modification  of an existing  option grant (see Note 10); (b) as a
result of a completed sales and business plan forecast,  an inventory  provision
of $763 related to obsolete and slow moving  inventory;  (c) bad debt expense of
$238; (d) a reduction in gross profit of $255 for a customer  cancellation  of a
project  and  (e) a  tax  expense  of  $375  related  to a  valuation  allowance
established  against  deferred tax assets and (f) a long-lived  asset impairment
charge of $1,600 related to the sale of BAM.

--------------------------------------------------------------------------------
NOTE 18 -  SUBSEQUENT EVENT:
--------------------------------------------------------------------------------

On November  29,  2000,  the Company  closed on the sale of BAM. The Company was
sold to a  private  company,  Bergen  Cove  Realty  Inc.  Under the terms of the
agreement,  the  Company  sold the issued and  outstanding  shares of the common
stock of BAM. The selling price was $3,923,000  which included the assumption of
BAM's existing term debt on November 29, 2000 of  $2,423,000.  BAM's total sales
for fiscal 2000 were $3,891,000 with a net operating loss of $1,263,000.


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