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, 1998.

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

                         Commission File Number: 1-4676

                            THE BETHLEHEM CORPORATION
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

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

25TH AND LENNOX STREETS, EASTON, PENNSYLVANIA                  18044-0348
---------------------------------------------                  ----------
(Address of principal executive offices)                       (Zip Code)

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

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

                                                      Name of each exchange
       Title of each class                             on which registered
       -------------------                             -------------------

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

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

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

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.

State issuer's revenues for its most recent fiscal year:  $16,271,000

As of August 18, 1998,  2,288,520 shares of the  registrant's  common stock were
outstanding  and the  aggregate  market  value  of  such  common  stock  held by
non-affiliates was approximately  $1,802,210 based on the average of the bid and
asked prices on that date of $1.75.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions of the Proxy Statement for 1998 Annual Meeting of Stockholders
         incorporated by reference in Part III, Items 9, 10, 11 and 12.


<PAGE>

                                TABLE OF CONTENTS

                        FORM 10-KSB ANNUAL REPORT - 1998

                            THE BETHLEHEM CORPORATION


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

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

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

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

SIGNATURES...................................................................16


<PAGE>
                                     PART I
                                     ------

Item 1.             DESCRIPTION OF BUSINESS

GENERAL

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

CAPITAL EQUIPMENT, MACHINING AND FABRICATION

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

                    The Company serves these markets through three main business
units:

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

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

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

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

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

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

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

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

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

STRATEGY

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

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

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

CUSTOMERS; EXISTENCE OF SHORT-TERM CONTRACTS

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

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

                    The Company's active customers for capital equipment include
Dow Belgium  N.V.,  Mobile  Chemical  Company,  Shetland  Leasing  and  Property
Development Corporation, Eastman Chemical Company, Olin Corporation 

                                      -2-
<PAGE>
and Mexicana de Cobre, S.A. de C.V. Sales to Universal Process  Equipment,  Inc.
("UPE"), a significant shareholder of the Company accounted for approximately 8%
of total  sales  in 1998  and  approximately  1% of  total  sales  in 1997.  The
Company's active  customers for high  temperature  furnaces and tolling services
are Allied Signal Inc.,  Graphite  Products,  Inc., Hexcel Corporation and Amoco
Performance  Products,  Inc. Purchases by any single customer vary significantly
from year to year according to such  customer's  capital  equipment  needs.  The
composition of the Company's customers may also vary from year to year.

SALES AND MARKETING

                    The Company  markets its  products to customers in North and
South  America,  Asia and Europe,  primarily by a direct sales and support staff
based at its  headquarters  in Easton,  Pennsylvania  for its capital  equipment
products and  services  and in  Knoxville,  Tennessee  for its high  temperature
furnace products and tolling services.  The Company also relies on product sales
representatives in some regions of North America and in certain geographic areas
outside the United States. The Company's commission program with respect to such
independent representatives varies depending on the type of product sold and the
volume of sales over the course of a year.  The  percentage  of sales  generated
from such  independents  equaled  approximately  10% of total sales for the year
ended May 31, 1998 and  approximately  18% of total sales for the year ended May
31, 1997 and it is anticipated  that the percentage of sales for the year ending
May 31, 1999 will be approximately 15%.

BACKLOG

                    As of August 18,  1998,  the Company had a backlog of orders
equaling  $4.7  million  compared to $9.5 million for the same period last year.
Orders  comprising  current  backlog are expected to be filled during the fiscal
year ending May 31, 1999.

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. 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, 1998 were, Bush Miller, Citisteel USA, Inc.,
MG  Industries  Inc.,  and,  in  connection  with the high  temperature  furnace
business,  Graphite  Products Corp., Air Products and Chemicals Inc. and Graybar
Electric Co.

DEVELOPMENT OF LITHIUM-ION RECHARGEABLE BATTERIES

                    BAM  executed a License  Agreement on December 20, 1995 with
Sandia  Corporation  ("Sandia"),   a  multi-program  laboratory  operated  by  a
subsidiary of Lockheed Martin Corp. for the U.S.  Department of Energy.  On July
13, 1998, BAM elected to abandon its license agreement with Sandia.  The primary
reason for the abandonment  was a strategic  decision on the part of the Company
to focus on the growth of its core business.

PATENTS AND TRADEMARKS

                    The Company  depends  upon its  proprietary  technology  and
expertise. The Company relies principally upon trade secret and copyright law to
protect its proprietary technology and owns no patents which are material to its
business.  The Company recently filed a patent  application for a new generation
of  its  tower  filter   product  line.  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 

                                      -3-
<PAGE>
sizes compete with the Company in one or more of its product  lines. A number of
the Company's competitors are divisions or subsidiaries of larger companies with
significantly greater financial,  marketing, managerial and other resources than
those of the  Company.  The  Company  believes  that the  principal  competitive
factors   affecting  its  core   proprietary   equipment   business  are  price,
performance, delivery, breadth of product line, product availability, experience
and  customer  support.  The  Company  believes  that  the  principal  areas  of
competition for its high temperature  furnace sales segment are price,  quality,
delivery,  skill and experience in developing  specialized  equipment aimed at a
customer's  specific  materials  requirement.  The  Company  believes  that  the
principal  areas of  competition  for its  toll  processing  operations  are the
ability to  reliably  meet the  customer's  quality  specification  and  program
requirements, including volume and price considerations.

                    The  Company's  direct  competitors  that  manufacture  high
temperature furnaces include Consarc, Seco/Warwick,  Ipsen GMBH, AVS, Inc., Abar
Ipsen, and Harper International Corp.

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

DEPENDENCE ON SIGNIFICANT CUSTOMERS

                    For the year ending May 31, 1998, the Company's five largest
customers  individually  accounted for 11% to 17% of the Company's sales (68% in
the  aggregate).  The  customers are Shetland  Leasing and Property  Development
Corporation,  Eastman Chemical  Company,  Great Hope  International  Investment,
Ltd., Foster Wheeler Corporation and Allied Signal, Inc.

EMPLOYEES

                    As of  August  18,  1998,  the  Company  had  111  full-time
employees,  including  23  employees  of  BAM.  Of  these,  86  are  engaged  in
manufacturing  and  technical  services,  11 in  marketing  and  sales and 14 in
administrative functions.

                    The  production   employees  at  the  Easton,   Pennsylvania
facility (44 persons) are  represented by their own  bargaining  unit called The
Bethlehem  Corporation  Employees  Association.  A three-year labor contract was
ratified with this Association on July 31, 1998 and is due to expire on July 31,
2001. The employees at the Knoxville,  Tennessee facility are not represented by
any collective bargaining organization.  The Company believes that its relations
with its employees are good.

ENVIRONMENTAL IMPACT AND REGULATION

                    The operations at the Company's  Knoxville,  Tennessee plant
utilize fume destruction and scrubbing of various exhaust  streams,  designed to
comply with  applicable laws and  regulations.  The plant produces air emissions
that are regulated and  permitted by Knox County,  Tennessee,  Department of Air
Pollution  Control  (the  "KCDOAPC").  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 KCDOAPC  additional  permits necessary to
expand  its  operations  to  allow   increased   carbon   processing,   chlorine
purification and the operation of a second afterburner.

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

GOVERNMENT REGULATION

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

                                      -4-
<PAGE>
Item 2.             DESCRIPTION OF PROPERTY

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

                    The Company  owns a complex on 29 acres  consisting  of four
major heavy manufacturing  buildings, a laboratory, a two-story office building,
miscellaneous  storage and service  buildings  and a one-story  office  building
located  near  the City of  Easton  in  Northampton  County,  Pennsylvania.  The
facility  is  an  integrated   production  facility,   conducting   engineering,
fabrication, forming, machining, assembly, heat treating, finishing and testing.
The machine and assembly  floor area is 100,000 square feet and is serviced by a
70 ton lifting  capacity crane.  Complete  shipping  facilities are available by
truck with access to major interstate systems. See "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital Resources."

                    As of August 18, 1998, the Company's Easton  facilities were
subject to a first mortgage loan and a second lien. See "Management's Discussion
and Analysis of Financial  Condition  and Results of Operations -- Liquidity and
Capital Resources."

                    BAM leases a 33,600  square  foot  manufacturing  and office
building in  Knoxville,  Tennessee  for capital  equipment  manufacturing,  toll
processing and related  administrative  services and marketing.  The facility is
equipped with several furnace  systems with  capabilities of firing in excess of
3000(Degree)C.  It is located in an  industrial  park with  excellent  access to
major interstate highways and a modern airport.  The lease expires September 30,
2000, but provisions for the lease provide for two additional  three year rental
terms. The Knoxville lease has a monthly base rent of approximately  $8,800. The
Company  believes  this  facility  is  suitable  and  adequate  for its  present
operations there. The Company is a guarantor of payment on this lease.

Item 3.             LEGAL PROCEEDINGS

                    None

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

                    Matters  submitted  to a vote of security  holders at Annual
                    Meeting of Stockholders held on April 23, 1998:

                    o         Election of eight  directors,  each to serve for a
                              term of one year and until the next annual meeting
                              of  Stockholders  and until their  successors  are
                              duly elected and qualify; 


                    o         Approval of the grant of stock  options to each of
                              UPE,  James L.  Leuthe and  Salvatore  J. Zizza in
                              exchange for debt  guarantees  and services to the
                              Company.


                    o         Approval of the issuance of 350,000  shares of the
                              Company's common stock, no par value, to UPE.

                    o         Approval  of  an   amendment   to  the   Company's
                              Certificate of Incorporation confirming cumulative
                              voting in the election of directors.  

                    o         Ratification  of the  appointment  of BDO Seidman,
                              LLP as independent auditors of the Company for the
                              fiscal year ending May 31, 1998.

                    VOTING RESULTS

                    o         Election of eight directors:

                           Number of Shares of      Number of Shares of Common 
                           Common Stock - For:      Stock - Withheld Authority:
 -------------------------------------------------------------------------------
 Harold Bogatz                  1,687,516                      0
 B. Ord Houston                 1,687,889                      0
 Jan P. Gale                    1,687,908                      0
 Ronald H. Gale                 1,687,894                      0
 Salvatore J. Zizza             1,687,889                      0
 Alan H. Silverstein            1,687,904                      0
 James L. Leuthe                1,687,913                      0
 James F. Lomma                 1,687,669                      0

                                      -5-
<PAGE>

    o     Grant of Stock Options to UPE, James L. Leuthe and Salvatore J. Zizza:

                        NUMBER OF SHARES OF COMMON STOCK

              FOR     1,094,494               AGAINST             35,672
              ABSTAIN    16,108               BROKER NON-VOTES   542,019

    o     Issuance of 350,000  shares of the Company's  Common Stock, to UPE:

                        NUMBER OF SHARES OF COMMON STOCK

              FOR     1,112,072               AGAINST            28,407
              ABSTAIN     5,795               BROKER NON-VOTES  542,019

    o     Amendment to the Company's  Certificate  of  Incorporation  confirming
          cumulative voting in the election of directors:

                        NUMBER OF SHARES OF COMMON STOCK

              FOR     1,106,405               AGAINST            26,453
              ABSTAIN    13,416               BROKER NON-VOTES  542,019

    o     Ratification  of BDO  Seidman,  LLP  as  independent  auditors  of the
          Company for the Fiscal Year ending May 31, 1998:

                        NUMBER OF SHARES OF COMMON STOCK

              FOR     1,184,391               AGAINST               969
              ABSTAIN     2,933               BROKER NON-VOTES        0


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

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

                    The  Company's  Common  Stock,  no par value,  (the  "Common
Stock")  is  traded  under  the  symbol  "BET" 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 ($)        HIGH ($)
                                                       -------        --------
                           1997 FISCAL YEAR
                           First Quarter                1.88           2.75
                           Second Quarter               1.94           3.00
                           Third Quarter                1.88           2.75
                           Fourth Quarter               1.88           2.38

                           1998 FISCAL YEAR
                           First Quarter                1.88           2.50
                           Second Quarter               2.06           3.81
                           Third Quarter                2.56           3.25
                           Fourth Quarter               2.50           3.88


                    As of August 18, 1998, there were  approximately 854 holders
of record of the Company's Common Stock.

                    On May 31,  1998,  350,000  shares of the  Company's  common
stock  were  issued to UPE in  consideration  for a 50%  ownership  interest  in
certain  resale  inventory,  which consists  primarily of tower presses,  rotary
vacuum  dryers,  double cone dryers and vacuum  freeze  dryers owned by UPE. See
"Management's  Discussion  and  Analysis  of  Financial  Condition  of  Plan  of
Operation  - fiscal year ended May 31,  1998,  compared to fiscal year ended May
31, 1997."

                    The Company did not declare any cash dividends on its Common
Stock during Fiscal 1998 or Fiscal 1997.  The  Company's new financing  with PNC
Bank, N.A., in the amount of $4 million imposes certain limitations with respect
to payment of cash dividends (See "Management's  Discussion and Analysis of Plan
of Operation--Liquidity and Capital Resources"). The Company plans to retain any
earnings to provide for the development and growth of the Company.

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

                    The  Company  was  founded in 1856 as a foundry  and machine
shop and  incorporated in 1888. The Company designs,  manufactures,  markets and
services  a product  line of  capital  equipment  and  systems  used to  process
materials for a variety of industrial  applications.  Its  proprietary  products
include the Porcupine Processor(R), the Thermal Disc(R) Processor, the Bethlehem
Tower Filter Press, drum dryers and flakers,  tubular dryers, and calciners.  In
addition, the Company fabricates, machines and assembles equipment to customers'
specifications.  The Company  has  developed  expertise  in the areas of thermal
processing systems,  environmental  systems,  filtration,  specialty  machining,
fabrication and the rebuilding and remanufacture of specialty process equipment.
In addition, the Company, through 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.

                    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.

                                      -7-
<PAGE>
                    The Company would  characterize  the markets for each of its
business units as follows:

                    (1)             THERMAL PROCESS AND FILTRATION UNITS

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

                                    o             Technology barrier is medium.

                                    o             Competition is worldwide.

                    (2)             ENVIRONMENTAL SYSTEMS UNIT

                                    o             Markets are concentrated.

                                    o             Technology barrier is medium.

                                    o             Competition is worldwide.

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

                    Historically,   the  sale  of  the  Company's  products  has
primarily  been  limited to North  America and Western  Europe.  The Company has
sought to further  increase its  international  sales because it believes demand
and  opportunity  for its products are  increasing  in direct  proportion to the
development of process  industries such as chemical,  food and pharmaceutical in
countries  outside of the North  American  and  Western  European  markets.  The
Company enjoys access to customers  through the worldwide  customer base of UPE,
and  occasionally  utilizes UPE's network of company owned offices and personnel
around the world.  The only cost incurred for the  utilization  of UPE's offices
and  personnel is the payment of a commission  on actual sales  originated.  The
Company  believes  this  relationship  has and will continue to help the Company
increase its sales. The Company does not believe,  however, that the termination
of  this  relationship,  which  is not  anticipated,  would  have a  significant
material adverse effect on the Company's results of operations.

                    The Company's  capital  equipment  products and technologies
were developed throughout the 20th century.  Historically, the Company's product
life cycles have been relatively long term. There can be no assurance,  however,
that  such  products  will  continue  to be viable in the  future.  The  Company
continues to evaluate  other  products and companies  that have the potential to
complement the Company's existing products and business.

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


                                      -8-

<PAGE>
RESULTS OF OPERATIONS

FISCAL  YEAR ENDED MAY 31, 1998  ("1998")  COMPARED TO FISCAL YEAR ENDED MAY 31,
1997 ("1997")

                    The  Company's  total  sales  were   $16,271,000  for  1998,
compared to sales of $17,916,000 for 1997, a decrease of $1,645,000 or 9%. Gross
profit  was  $5,119,000  or 31% of sales for 1998  compared  to gross  profit of
$5,062,000 or 28% of sales for 1998. Decreased sales in the Company's Filtration
and Thermal  Process Units were the primary  reason for the lower sales recorded
over  1997  levels.  A  thermal  process  equipment  contract  in the  amount of
$1,611,000  was  cancelled  during the third  quarter of 1998.  In  addition,  a
contract  with an  Asian  customer  for  thermal  process  equipment  originally
scheduled for  completion  in 1998 was delayed into the second  quarter of 1999.
The Company's wholly owned  subsidiary,  BAM,  recorded  stronger sales in 1998.
Higher  gross profit  margins were  attributable  to BAM  contracts  and Thermal
Process  contracts.  The  Company  continues  to  focus on the  development  and
marketing  of its core capital  equipment  products  and  environmental  systems
inside and outside of North America. Additionally, the Company will focus on the
expansion of specialty  high  temperature  furnace  systems and toll  processing
services for select advanced materials  markets.  The Company continues to focus
on increasing production efficiency as well as decreasing manufacturing expenses
in the production of its core products.

                    The Company's five largest customers  individually accounted
for 11% to 17% of the Company's sales for 1998. In 1997, one customer  accounted
for approximately 35% of the Company's sales. The Company's export sales equaled
$5,436,000 for 1998 compared to $7,165,000 for 1997. All sales were  denominated
in US Dollars, therefore, currency fluctuations did not affect the transactions.

                    Operating expenses for 1998 were $3,631,000 or 22% of sales,
compared  to  $3,849,000  or 21% of  sales,  for  1997.  In  1998,  general  and
administrative expense decreased $323,000 due, in part, to reduced benefit costs
of  $157,000  and lower bad debt  provisions  of $43,000.  In 1998,  the Company
recorded  approximately $126,000 of non cash compensation expense related to the
issuance  of  350,000  shares  of the  Company's  common  stock to UPE for a 50%
ownership  in  certain  resale  inventory,  which  consists  primarily  of tower
presses, rotary vacuum dryers, double cone dryers and vacuum freeze dryers. This
transaction was approved by the Company's  stockholders at the Annual Meeting of
Stockholder's  held on  April  23,  1998.  In  addition,  the  Company  recorded
approximately  $32,000 in  compensation  expense for the  issuance of options to
James L. Leuthe (a Director) and Salvatore J. Zizza (Chairman of the Board). The
issuance of 125,000  options to Mr. Leuthe and 178,000 options to Mr. Zizza were
also  approved at the April 23, 1998  meeting.  The balance of the options' fair
values of approximately  $335,000 will be expensed as services are rendered over
the  three  year  vesting  period  of  the  options.  Operating  income  equaled
$1,488,000 for 1998 or 9% of sales compared to operating income of $1,213,000 or
7% of sales for 1997.

                    Other  expense  totaled  $1,067,000  for  1998  compared  to
$600,000 for 1997.  Interest  expense was $822,000 in 1998  compared to $667,000
for 1997 due largely to an increase in outstanding borrowings.  In addition, the
Company expensed $48,000 in financing  expenses related to the prepayment of the
mortgage  loan in  December  1997.  A financing  charge of  $296,000  related to
options issued to UPE in return for debt guarantees was also recognized in 1998.
The value ascribed to these options is $424,000 and the balance of $128,000 will
be amortized over the life of the outstanding  guarantees.  In 1997, the Company
wrote off  approximately  $103,000  of costs  associated  with an aborted  Stock
Rights Offering.  Such costs had been previously  capitalized.  In May 1997, the
Company  negotiated a final payment for previously  accrued  liabilities  with a
third party  service  provider.  As a result of such  negotiations,  the Company
recognized  income of  $98,000  in 1997.  Income  before  income  taxes  totaled
$421,000 for 1998 compared to $613,000 for 1997.

                    The Company's  benefit for income taxes totaled $110,000 for
1998 compared to $100,000 for 1997.  The 1998 benefit was comprised of a Federal
benefit of $170,000 and a net state  provision of $60,000.  Based on  historical
results,  estimated 1999 earnings, which include earnings on existing contracts,
and the  Company's  ability to generate  taxable  income,  management  considers
realization  of  the  unreserved  deferred  tax  asset  more  likely  than  not.
Additional  reductions to the valuation  allowance will be recorded when, in the
opinion of  management,  the  Company's  ability to generate  taxable  income is
considered  more likely than not. Net income for 1998 was  $531,000  compared to
$713,000 for 1997.

                                      -9-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

                    During  1998,  $363,000 of cash was  provided  by  operating
activities compared to $97,000 of cash provided by operating activities in 1997.
The Company's accounts receivable  decreased $1,302,000 due to timely collection
of milestone and progress billings,  offset by a decrease in accounts payable of
$616,000. Billings in excess of costs and estimated profits decreased $1,229,000
due to reduced  advance  billings.  The Company  recorded non cash  compensation
expense in the amount of $158,000 and a financing  charge of $296,000 during the
fourth quarter of 1998.

                    Cash  flow used for  investing  activities,  solely  capital
expenditures,  was  $385,000 in 1998 as  compared to $367,000 in 1997.  In 1998,
capital  expenditures  included  renovations  of  facilities  and the  purchase,
refurbishment and installation of plant assets.  The Company's  estimated budget
for capital  expenditures for 1999  approximates  $300,000 for energy efficiency
upgrades,  new plant equipment,  upgrades to existing plant equipment and office
buildings.  The Company is in the process of evaluating all capital expenditures
for Fiscal 1999 and,  accordingly,  there can be no assurance as to the ultimate
amount of capital expenditures.

                  Cash flow  provided by  financing  activities  was $27,000 for
1998 compared to $287,000 provided by financing  activities in 1997. On December
12,  1997,  the Company  prepaid its mortgage  loan and accrued  interest in the
amount of $1,481,000 to Sterling  Commercial  Capital,  Inc.,  First Wall Street
SBIC, L.P., and Interequity Capital Partners, L.P. with proceeds received from a
$2,000,000  five year mortgage loan from Ocwen Federal Bank. The loan from Ocwen
Federal Bank is collateralized by a first mortgage lien on all real estate owned
by the Company.  The loan bears  interest at 11.25% per annum.  The  outstanding
principal  and  interest is payable in 59  consecutive  equal  monthly  payments
calculated  to fully  amortize over a 20 year period with a final payment of all
then outstanding  principal and interest.  The balance of the loan proceeds will
be used for capital  improvements  and working capital  purposes.  As of May 31,
1998, the amount outstanding under the loan was $1,990,000.

                    On June 3, 1998,  the Company  entered into a loan agreement
with PNC Bank  National  Association  for a $4  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 the line of credit and
term loan were used to prepay the outstanding  term loan and line of credit with
The CIT Group/Credit Finance ("CIT") (of which $1,502,000 was outstanding at May
31, 1998) and for general working capital needs.  This credit facility  includes
(a) an $800,000 term loan  requiring  $13,000  monthly  principal  payments plus
interest at 9.70%, maturing on June 1, 2003, and (b) a $3,200,000 line of credit
with advances against eligible inventory and accounts receivable at the interest
rate of prime plus one and one-half percent,  maturing on June 1, 1999. The loan
agreement contains certain covenants which among other things,  will require the
Company  to  maintain  specified  levels of net  worth.  UPE agreed to provide a
guarantee  for this credit  facility.  This  guarantee  consists of an equipment
repurchase  agreement  wherein UPE is required to either  liquidate or otherwise
purchase  for  its  own  account  the  Company's  eligible  inventory  upon  the
occurrence of a payment default. In addition, UPE agreed to subordinate $800,000
of  indebtedness  due from the  Company to PNC. By securing  this  funding,  the
Company  expanded working capital and increased  liquidity.  In August 1998, the
Company issued options to purchase  175,000 shares to UPE as  consideration  for
providing guarantees on this agreement.

                  On  February  28,  1997,  the  Company  purchased  a two stage
environmental  system in  Alberta,  Canada.  To effect  the  acquisition  of the
equipment,  the Company borrowed $225,000 from UPE, at an interest rate of prime
plus 2.5%.  This loan was repaid in full during the third and fourth quarters of
1998. In addition,  the Company  secured a loan from Royal Bank of Canada in the
amount of $320,000 to assist  with the buyout of these  assets at the  borrowing
rate equal to Canadian  prime rate plus 1.5% per annum.  This loan was repaid in
full in September 1997.

                    From time to time in the ordinary  course of  business,  UPE
advances  funds to the Company to enable the Company to meet  certain  temporary
cash  requirements.  These  advances  are repaid from  operating  cash flow.  An
advance  of  $250,000  was made to the  Company in August  1996 by UPE.  Another
advance of $250,000 was made to the Company by UPE in October 1996. In addition,
an advance was made to the  Company in May 1997 in the amount of $75,000.  As of
May 31, 1998, $782,000 of these advances remains outstanding.  The interest rate
on the advances is prime plus 1%.

                    The  Company  believes  that  cash  available  from  the PNC
National Bank credit agreement and cash generated from existing business and new
orders, will be sufficient to meet operating and investing  requirements through
the year ending May 31, 1999,  and principal  repayments on debt  obligations as
they become due.

                                      -10-
<PAGE>

                    Backlog  of  $4,700,000  at August  18,  1998,  compares  to
backlog of  $9,500,000  for the same period last year.  The decrease  reflects a
cancellation of a 1997 order.

EFFECTS OF INFLATION

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

NET OPERATING LOSS CARRY FORWARD

                    At May 31, 1998 the Company had  approximately  $3.5 million
of unused federal net operating loss  carryforwards  and federal  investment and
research  tax credit  carryforwards.  If the net  operating  loss  carryforwards
remain  unused,  they will expire  during the years 2004  through  2010.  If the
investment and research tax credit  carryforwards  remain  unused,  they have or
will expire during the years 1998 through  2002.  In addition,  at May 31, 1998,
the Company has unused state net operating loss  carryforwards  of approximately
$1.4 million, of which $1.2 million expires in 1998.

FORWARD LOOKING STATEMENTS

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

YEAR 2000

                  The  Company  is  aware  of the  uncertainty  surrounding  the
ability of  computer  systems to function  properly  with the coming of the year
2000 and related issues.  The Company  replaced its existing  computer  software
during  1998  with  software  that  is Year  2000  compliant,  and is  currently
assessing the  functionality of the systems of its customers and suppliers in an
attempt to identify and avoid potential problems.


EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

                  In June 1997, the Financial  Accounting Standards Board issued
two new disclosure standards.

                  SFAS No. 130,  REPORTING  COMPREHENSIVE  INCOME  ("SFAS 130"),
establishes  standards for reporting and display of  comprehensive  income,  its
components and accumulated balances.  Comprehensive income is defined to include
all changes in equity  except those  resulting  from  investments  by owners and
distributions  to owners.  Among other  disclosures,  SFAS 130 requires that all
items that are required to be recognized under current  accounting  standards as
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements.

                  SFAS No. 131,  DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED  INFORMATION,  ("SFAS  131")  which  supersedes  SFAS No. 14,  FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,  establishes  standards for the
way that public companies report  information about operating segments in annual
financial  statements  and  requires  reporting  of selected  information  about
operating segments in interim financial statements issued to the public. It also
establishes   standards  for  disclosures   regarding   products  and  services,
geographic areas and major  customers.  SFAS 131 defines  operating  segments as
components of a company about which separate financial  information is available
that is evaluated  regularly by management in deciding how to allocate resources
in assessing performance.

                                      -11-
<PAGE>

                    SFAS  130 and  131 are  effective  for  the  Company's  1999
financial statements and require comparative information for earlier years to be
restated.  Results  of  operations  and  financial  position,  however,  will be
unaffected by implementation of these standards.  The Company,  however, has not
determined  whether either of these two standards will have a material impact on
its financial statement disclosures.

                    In February 1998, the Financial  Accounting  Standards Board
issued  Statement  of  Financial  Accounting  Standards  No. 132  ("SFAS  132"),
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT  BENEFITS,  which
standardizes the disclosure  requirements for pensions and other  postretirement
benefits.  The adoption of SFAS 132 in 1999 is not expected to materially impact
the Company's current disclosures.

                    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.  Due to its recent issuance,  the Company is currently reviewing the
effects of SFAS 133.  This standard will be adopted by the Company no later than
its year ending May 31, 2001.

Item 7.             FINANCIAL STATEMENTS

                    Provided following the signature page.

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

                    None

                                      -12-
<PAGE>
                                    PART III
                                    --------

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


                   The response to this Item is incorporated by reference to the
Company's  Proxy  Statement for its 1998 Annual Meeting of  Stockholders,  which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 10.            EXECUTIVE COMPENSATION

                    The  response to this Item is  incorporated  by reference to
the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 11.            SECURITY   OWNERSHIP  OF  CERTAIN   BENEFICIAL   OWNERS  AND
                    MANAGEMENT

                    The  response to this Item is  incorporated  by reference to
the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

Item 12.            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                    The  response to this Item is  incorporated  by reference to
the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.

                                      -13-
<PAGE>
                                     PART IV
                                     -------

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

                    (a)             EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

                    10(g)1.4        Exhibit  D:  Equipment   Security  Agreement
                                    (Schedule 1 Equipment), dated as of November
                                    22, 1993, by and between  Universal  Process
                                    Equipment,  Inc. and The  Harrisburg  Sewage
                                    Authority.  Incorporated by reference to the
                                    Company's  Amendment  No. 1  Report  on Form
                                    10-Q for the  quarter  ended  September  30,
                                    1993.

                                      -14-
<PAGE>

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

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

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

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

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

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

                    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 .

                    10(v)           Mortgage  agreement  dated December 19, 1997
                                    by the Company to Ocwen Federal Bank.

                    10(w)           Loan  agreement  dated June 2, 1998  between
                                    the  Company  and  PNC  Bank,   N.A.   (also
                                    includes Subordinated Note)

                    27              Financial Data Schedules.

                    27(a)           Quarterly period ended August 31, 1996.

                    27(b)           Quarterly period ended November 30, 1996.

                    27(c)           Quarterly period ended February 28, 1997.

                    27(d)           Quarterly period ended August 31, 1997.

                    27(e)           Quarterly period ended November 30, 1997.

                    27(f)           Quarterly period ended February 28, 1998.

                    27(g)           Year ended May 31, 1998.


                                      -15-


<PAGE>
                                   SIGNATURES
                                   ----------

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

                               THE BETHLEHEM CORPORATION

Dated: August 21, 1998         By:  /S/ Alan H. Silverstein
                                    -----------------------------------------
                                        Alan H. Silverstein, President, Director
                                        and Chief Executive Officer

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

SIGNATURES                       TITLE                           DATE
----------                       -----                           ----


 /s/   Alan H. Silverstein                                       August 21, 1998
----------------------------     President, Director and
Alan H. Silverstein              Chief Executive Officer
                                 (Principal Executive Officer)

 /s/   Antoinette L. Martin                                      August 21, 1998
----------------------------     Chief Financial Officer 
Antoinette L. Martin             (Principal Financial Officer)


 /s/   Salvatore J. Zizza        Chairman of the Board           August 21, 1998
----------------------------
Salvatore J. Zizza


 /s/   Ronald H. Gale            Director                        August 21, 1998
----------------------------
Ronald H. Gale


 /s/   Jan P. Gale               Director                        August 21, 1998
----------------------------
Jan P. Gale


 /s/  James L. Leuthe            Director                        August 21, 1998
----------------------------
James L. Leuthe


 /s/   Harold Bogatz             Director                        August 21, 1998
----------------------------
Harold Bogatz


 /s/    B. Ord Houston           Director                        August 21, 1998
----------------------------
B. Ord Houston


 /s/    James F. Lomma           Director                        August 21, 1998
----------------------------
James F. Lomma

                                      -16-
<PAGE>














                   THE BETHLEHEM CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                    FOR THE YEARS ENDED MAY 31, 1998 AND 1997

                               INCLUDING REPORT OF

                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



                                                                             F-1
<PAGE>



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





THE BETHLEHEM CORPORATION AND SUBSIDIARIES


CONTENTS


                                                                      PAGE
                                                                      ----

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

CONSOLIDATED FINANCIAL STATEMENTS:

    Balance Sheet
      May 31, 1998............................................        F-4 - F-5

    Statements of Income
      for the Years Ended May 31, 1998 and 1997 ..............        F-6

    Statements of Stockholders' Equity  (Deficit)
      for the Years Ended May 31, 1998 and 1997 ..............        F-7

    Statements of Cash Flows
      for the Years Ended May 31, 1998 and 1997 ..............        F-8

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

================================================================================
                                                                             F-2

<PAGE>


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------





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


We have audited the  accompanying  consolidated  balance  sheet of The Bethlehem
Corporation  and  subsidiaries  as of May 31, 1998 and the related  consolidated
statements  of income,  stockholders'  equity and cash flows for the years ended
May 31, 1997 and 1998. These financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of The  Bethlehem
Corporation  and  subsidiaries  as of May 31,  1998,  and the  results  of their
operations  and their  cash flows for the years  ended May 31,  1997 and 1998 in
conformity with generally accepted accounting principles.



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

BDO Seidman, LLP
Woodbridge, New Jersey
August 14, 1998

================================================================================
                                                                             F-3

<PAGE>



THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1998 (amounts in thousands, except share data)
================================================================================


ASSETS


CURRENT ASSETS:
            Cash                                                       $    41
            Accounts receivable (net of allowance for doubtful
              accounts of $150)                                          1,365
            Costs and estimated profit in excess of billings
              on long-term contracts                                       833
            Inventories                                                  4,687
            Prepaid expenses and other current assets                      227
            Deferred tax asset                                             300
                                                                       -------

                        Total Current Assets                             7,453
                                                                       -------


     PROPERTY, PLANT AND EQUIPMENT, at cost less
            accumulated depreciation and amortization                    2,772


   OTHER ASSETS:
          Inventories, non current                                         500
            Intangibles (net of $92 of accumulated amortization)           349
            Intangible pension and deferred compensation plan assets       180
            Other                                                          311
                                                                       -------

                        Total Other Assets                               1,340
                                                                       -------



                        Total Assets                                   $11,565
                                                                       =======

================================================================================
                                                                             F-4
<PAGE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE  BETHLEHEM   CORPORATION  AND   SUBSIDIARIES   CONSOLIDATED   BALANCE  SHEET
(Continued) MAY 31, 1998 (amounts in thousands, except share data)
================================================================================



<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY

  CURRENT LIABILITIES:
<S>                                                                          <C>     
              Current maturities of long-term debt and capital leases        $    312
              Note payable - related party                                        782
              Accounts payable                                                  3,570
              Accounts payable - related parties                                  313
              Accrued liabilities                                                 569
              Billings in excess of costs and estimated profit
                on long-term contracts                                            160
                                                                             --------

                          Total Current Liabilities                             5,706
                                                                             --------

       OTHER LIABILITIES:
              Long-term debt and capital leases, net of current maturities      3,912
              Deferred compensation and other pension liabilities                 724
                                                                             --------

                          Total Long-Term Liabilities                           4,636
                                                                             --------

     COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)

     STOCKHOLDERS' EQUITY:
              Preferred stock - authorized, 5,000,000 shares
                without par value, none issued or outstanding                    --
              Common stock - authorized, 20,000,000 shares
                without par value, stated value of $.50 per share;
                2,288,532 shares issued and 2,288,520 shares outstanding        1,144
              Additional paid-in capital                                        6,123
              Accumulated deficit                                              (6,044)
                                                                             --------
                                                                                1,223
              Less - treasury stock, at cost, 12 shares                          --

                          Total Stockholders' Equity                            1,223
                                                                             --------

     Total Liabilities and Stockholders' Equity                              $ 11,565
                                                                             ========
</TABLE>

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

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


<TABLE>
<CAPTION>
                                                                                                      YEAR ENDED MAY 31,
                                                                                                  1998                  1997
                                                                                                --------              --------

<S>                                                                                             <C>                   <C>     
     NET SALES                                                                                  $ 16,271              $ 17,916

     COST OF GOODS SOLD                                                                           11,152                12,854
                                                                                                --------              --------

     GROSS PROFIT                                                                                  5,119                 5,062
                                                                                                --------              --------

     OPERATING EXPENSES:
              Selling                                                                              1,078                 1,131
              General and administrative                                                           2,395                 2,718
               Stock Compensation Expense                                                            126                  --
               Non-Employee Stock Option Expense                                                      32                  --
                                                                                                --------              --------
                                                                                                   3,631                 3,849
                                                                                                --------              --------

                          Operating income                                                         1,488                 1,213
                                                                                                --------              --------

     OTHER INCOME (EXPENSE):
              Interest expense                                                                      (822)                 (667)
              Financing charge - issuance of stock options                                          (296)                 --
              Write off of Stock Rights Offering costs                                              --                    (103)
              Gain on settlement of accrued liabilities                                             --                      98
              Interest income                                                                          5                     5
              Other income                                                                            46                    67
                                                                                                --------              --------
                                                                                                  (1,067)                 (600)
                                                                                                --------              --------

                          Income before income taxes                                                 421                   613

     INCOME TAX BENEFIT                                                                              110                   100
                                                                                                --------              --------

     NET INCOME                                                                                 $    531              $    713
                                                                                                ========              ========

     EARNINGS PER SHARE DATA:
              Basic                                                                             $    .27              $    .37
                                                                                                ========              ========

              Diluted                                                                           $    .15              $    .22
                                                                                                ========              ========

     WEIGHTED AVERAGE COMMON
       AND COMMON EQUIVALENT SHARES OUTSTANDING:
              Basic                                                                                1,975                 1,939
                                                                                                ========              ========

              Diluted                                                                              3,435                 3,261
                                                                                                ========              ========
</TABLE>

================================================================================
See notes to consolidated financial statements                               F-6

<PAGE>



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


<TABLE>
<CAPTION>
                                                  COMMON STOCK     ADDITIONAL                        TREASURY SHARES
                                            ----------------------  PAID-IN     ACCUMULATED   ------------------------------
                                              SHARES      AMOUNT    CAPITAL       DEFICIT     SHARES     AMOUNT      TOTAL
                                            --------------------------------------------------------------------------------
<S>                                         <C>         <C>         <C>         <C>                 <C>      <C>       
     Balance at May 31, 1996                1,938,532   $     969   $   4,995   $  (7,288)          12        -   $  (1,324)
                                                                                                             
     Net Income for the Year Ended               --          --          --           713         --          -         713
       May 31, 1997                                                                                          
                                                                                                             
                                            ---------   ---------   ---------   ---------    ---------        -   ---------
     Balance at May 31, 1997                1,938,532         969       4,995      (6,575)          12        -        (611)
                                                                                                             
     Issuance of Common Stock                 350,000         175         672        --           --          -         847
       In Exchange for Inventory                                                                             
                                                                                                             
     Value of  Stock Option Grants               --          --           456        --           --          -         456
       to Non-Employees                                                                                      
                                                                                                             
     Net Income for the Year Ended                                                                           
       May 31, 1998                              --          --          --           531         --          -         531
                                            ---------   ---------   ---------   ---------    ---------        -   ---------
                                                                                                             
     Balance at May 31, 1998                2,288,532   $   1,144   $   6,123   $  (6,044)          12        -   $   1,223
                                            =========   =========   =========   =========    =========   ======== =========
</TABLE>

================================================================================
See notes to consolidated financial statements                               F-7
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(amounts in thousands)
================================================================================

<TABLE>
<CAPTION>
                                                                                                          YEAR ENDED MAY 31,
                                                                                                         1998             1997
                                                                                                      --------         ---------

<S>                                                                                                   <C>              <C>    
CASH FLOWS PROVIDED BY (USED IN):
  OPERATING ACTIVITIES:
         Net income                                                                                   $   531          $   713
            Adjustments to reconcile net income to net
              cash provided by  operating activities:
                  Depreciation and amortization                                                           543              544
                  Write off of stock rights offering costs                                               --                103
                  Accrued loss on contracts and obsolete inventory write-offs                              56              105
                  Deferred tax benefit                                                                   (200)            (100)
                  Gain on settlement of accrued liabilities                                              --                (98)
                  Non cash compensation expense                                                           158             --
                  Financing charge - issuance of options                                                  296             --
              Changes in operating assets and liabilities:
                  Accounts receivable                                                                   1,302              (16)
                  Inventories                                                                             (27)            (253)
                  Prepaid expenses and other current assets                                              (133)              30
                  Costs and estimated profits in excess of billings                                       472              (35)
                  Other assets                                                                           (139)            (130)
                  Accounts payable                                                                       (616)          (1,438)
                  Accounts payable - related parties                                                       77             (263)
                  Accrued liabilities                                                                    (231)             (74)
                  Billings in excess of costs and estimated profits                                    (1,229)           1,079
                  Advances on contracts                                                                  --               (238)
                  Commissions payable                                                                    (213)              36
                  Deferred compensation and other pension liabilities                                    (284)             132
                                                                                                      ------------------------
                            Net Cash Provided by Operating Activities                                     363               97
                                                                                                      ------------------------

       INVESTING ACTIVITIES:
              Purchase and construction of property, plant and equipment                                 (385)            (367)
                                                                                                      ------------------------
                  Net Cash Used in Investing Activities                                                  (385)            (367)
                                                                                                      ------------------------

       FINANCING ACTIVITIES:
              Net repayments on line of credit                                                           (262)            (344)
              Proceeds from debt borrowings                                                             2,000              312
              Repayments on  debt borrowings and capital leases                                        (1,563)            (311)
              Proceeds from notes payable - related party                                                  75              630
              Repayment of notes payable - related party                                                 (223)            --
                                                                                                      ------------------------
                  Net Cash Provided by  Financing Activities                                               27              287
                                                                                                      ------------------------

     NET INCREASE IN CASH                                                                                   5               17

     CASH
       BEGINNING OF PERIOD                                                                                 36               19
                                                                                                      ------------------------

     CASH
       END OF PERIOD                                                                                  $    41          $    36
                                                                                                      ========================

</TABLE>



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


<PAGE>

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

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

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

The following is a summary of the significant accounting policies applied in the
preparation of the accompanying  consolidated financial statements as of and for
the year  ended  May 31,  1998  ("1998")  and for the year  ended  May 31,  1997
("1997").

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

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

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

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

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


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

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

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

================================================================================
                                                                             F-9
<PAGE>

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

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

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

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

LONG-LIVED ASSETS:
Long-lived assets, such as property,  plant and equipment, and intangible assets
are evaluated for impairment  when events or changes in  circumstances  indicate
that the  carrying  amount of the  assets  may not be  recoverable  through  the
estimated  undiscounted  future cash flows from the use of these assets.  If and
when any such impairment exists, the related assets will be written down to fair
value. There were no such impairments recognized in 1998 and 1997.

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

              Designs, blue prints and plans                    20  Years
              Technology                                        20  Years
              Customer list                                     10  Years
              Covenants not to compete                           5  Years

Amortization  was $34  and  $48 for the  years  ended  May 31,  1998  and  1997,
respectively.

DEFERRED FINANCING COSTS:
Direct costs incurred in obtaining financing have been capitalized and are being
amortized  over the term of the  related  debt using the  interest  method.  The
amortization of the deferred financing costs was $159 and $74 for 1998 and 1997,
respectively,  and  is  included  in  "Interest  Expense"  in  the  accompanying
Statements of Income. The Company amortizes the value ascribed to stock options,
issued in connection with debt guarantees  provided by a related party, over the
terms of the underlying guarantees (see Notes 7, 11 and 13).

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

EARNINGS PER SHARE:
Earnings  per  Share  are  computed  in  accordance  with  Financial  Accounting
Standards  Board  Standard No. 128 ("SFAS  128"),  EARNINGS PER SHARE.  SFAS 128
replaced the  calculation  of primary and fully diluted  earnings per share with
basic and diluted  earnings per share.  Basic  earnings per share are calculated
based on the  weighted-average  number of  common  shares  outstanding.  Diluted
earnings per share are calculated based on the weighted-average number of common
shares  outstanding,  plus dilutive potential common shares.  Dilutive potential
common shares,  principally stock options, are computed under the treasury stock
method.  As required,  earnings per share for all periods  presented reflect the
adoption of SFAS 128.

================================================================================
                                                                            F-10


<PAGE>

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

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

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

STOCK-BASED COMPENSATION:
The Company has adopted the disclosure only provisions of 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 1998 and 1997 (See Note 11 for pro-forma  disclosure
required by SFAS 123). With respect to stock option grants to non-employees, the
Company recognizes a charge to operations for the ascribed value of such options
over the underlying vesting periods or the expected terms of debt guarantees.

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

RECLASSIFICATIONS:
Certain  prior  period  amounts  have been  reclassified  to conform to the 1998
presentation.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:

                  In June 1997, the Financial  Accounting Standards Board issued
two new disclosure standards.

                  SFAS No. 130,  REPORTING  COMPREHENSIVE  INCOME  ("SFAS 130"),
establishes  standards for reporting and display of  comprehensive  income,  its
components and accumulated balances.  Comprehensive income is defined to include
all changes in equity  except those  resulting  from  investments  by owners and
distributions  to owners.  Among other  disclosures,  SFAS 130 requires that all
items that are required to be recognized under current  accounting  standards as
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements.

                  SFAS No. 131,  DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED  INFORMATION,  ("SFAS  131")  which  supersedes  SFAS No. 14,  FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,  establishes  standards for the
way that public companies report  information about operating segments in annual
financial  statements  and  requires  reporting  of selected  information  about
operating segments in interim financial statements issued to the public. It also
establishes   standards  for  disclosures   regarding   products  and  services,
geographic areas and major  customers.  SFAS 131 defines  operating  segments as
components of a company about which separate financial  information is available
that is evaluated  regularly by management in deciding how to allocate resources
in assessing performance.

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

                  SFAS  130  and  131  are  effective  for  the  Company's  1999
financial statements and require comparative information for earlier years to be
restated.  Results  of  operations  and  financial  position,  however,  will be
unaffected by implementation of these standards.  The Company,  however, has not
determined  whether either of these two standards will have a material impact on
its financial statement disclosures.

                  In February 1998,  the Financial  Accounting  Standards  Board
issued  Statement  of  Financial  Accounting  Standards  No. 132  ("SFAS  132"),
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT  BENEFITS,  which
standardizes the disclosure  requirements for pensions and other  postretirement
benefits.  The adoption of SFAS 132 in 1999 is not expected to materially impact
the Company's current disclosures.

                  In June 1998, the Financial  Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,  which establishes accounting and
reporting standards for derivative  instruments and hedging  activities.  Due to
its recent issuance, the Company is currently reviewing the effects of SFAS 133.
This  standard  will be adopted by the Company no later than its year ending May
31, 2001.

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

 Accounts receivable are comprised of the following at May 31, 1998:

              Billed (net of allowance for                 $   1,154
              doubtful accounts of $150)                
              Retention on contracts                             211
                                                        --------------

                                                           $   1,365
                                                        ==============


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

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

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

At May 31, 1998, costs,  estimated profit, and billings on uncompleted long-term
contracts accounted for by the percentage of completion method are summarized as
follows:



================================================================================
                                                                            F-12
<PAGE>

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

--------------------------------------------------------------------------------
NOTE 3 - LONG TERM CONTRACTS: (CONTINUED)
--------------------------------------------------------------------------------

Costs incurred on long term  contracts               $     1,197
Estimated profit                                           1,764
                                                  -------------------
                                                           2,961
Less:  billings to date                                   (2,288)
                                                  -------------------
                                                     $       673
                                                  ===================

These amounts are included in the accompanying
consolidated balance sheet under the following 
captions:
      Costs and estimated earnings in excess of
      billings on long-term contracts                          $      833
      Billings in excess of costs and  estimated
      earnings on long term contracts                                (160)
                                                          --------------------

                                                               $      673
                                                          ====================

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

The components of inventories are comprised of the following at May 31, 1998:

              Raw materials and components                    $      343
              Work in process                                      1,561
              Finished goods                                       3,458
              Less: reserve for obsolete inventory                  (175)
                                                           --------------
                                                                   5,187
              Less:  Non-Current Inventory                          (500)
                                                           --------------
                                                                  $4,687
                                                           ==============

At May 31, 1998,  the Company's  finished goods  inventories  consist of new and
used processing  equipment for resale.  The processing  equipment is specialized
and is sold to a limited customer base. Based upon management's assessment,  10%
of net inventory  will not be sold within one year and has been  classified as a
non-current asset. The Company is actively marketing these items and believes no
loss will be incurred upon the ultimate sale of this inventory.

The Company  provided for the  write-down  of specific raw material and finished
goods  inventory to net realizable  value in the amount of $56 and $105 for 1998
and 1997,  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.



================================================================================
                                                                            F-13



<PAGE>

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

--------------------------------------------------------------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT (SEE NOTE 7):
--------------------------------------------------------------------------------

At May 31, 1998, property, plant and equipment consists of the following:

<TABLE>
<CAPTION>

<S>                                                                        <C>      
     Land                                                                  $     348
     Buildings and improvements                                                1,464
     Machinery and equipment                                                   8,366
     Equipment under capital leases                                              136
     Construction in progress                                                    205
                                                                          -----------
                                                                              10,519
     Less:  accumulated depreciation and amortization                         (7,747)
                                                                          -----------

      Property, plant and equipment, net of accumulated depreciation       $   2,772
                                                                          ===========
</TABLE>



Depreciation and amortization expense on property,  plant and equipment was $350
and $422 in 1998 and 1997, respectively.

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


At May 31, 1998, accrued liabilities consist of the following:

                  Salaries and wages                                     $ 361
                  Current portion of deferred compensation                 100
                  Postretirement obligation (401-K)                         54
                  Other                                                     54
                                                                ===============
                                                                          $569
                                                                ===============


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

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


At May 31, 1998,  long-term debt and capital lease  obligations  consists of the
following:

     Note payable - Ocwen Federal Bank                             $ 1,990
     Note payable - Harrisburg Authority                               650
     Line of credit - CIT                                            1,155
     Term Loan payable - CIT                                           347
     Capital lease obligations                                          58
     Other notes payable                                                24
                                                                   -------
                                                                     4,224
     Less: current maturities                                         (312)
                                                                   -------
     Total                                                         $ 3,912
                                                                   =======


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

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 11 and 13).

NOTE PAYABLE - OCWEN FEDERAL BANK

In December 1997, the Company entered into a $2,000 mortgage loan agreement with
Ocwen Federal Bank ("Ocwen"). Proceeds from the loan were used to repay existing
indebtedness of approximately $1,481 with the balance used for general corporate
purposes.  Terms of the loan agreement provide for minimum monthly principal and
interest  payments of  approximately  $21 with all unpaid principal and interest
due by January 2003 and interest  accruing at the rate of 11.25% per annum.  The
Company is  subject  to  prepayment  penalties  (ranging  from 3% to .50% of the
outstanding balance) if the balance is repaid prior to December 2001. During the
first year of the loan period the Company has no rights to make  prepayments  on
the outstanding  principal  balance.  The Company has granted Ocwen a first lien
and security interest on all land and related improvements owned by the Company.

During the year ended May 31, 1998, the Company recorded $94 in interest expense
related to this loan agreement.

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

In November 1993, as part of a settlement  agreement between the Company and the
Harrisburg  Authority  for this  lawsuit,  the  Company  executed a $1,200  note
payable to the Harrisburg Authority.  The Harrisburg Authority has a second lien
on the Company's  owned real estate.  Interest  expense on this debt totaled $17
and $24 in 1998 and 1997,  respectively.  The note's remaining principal payment
provisions at May 31, 1998 are as follows:

     1)       Payable in equal monthly  installments of $7,  including  interest
              discounted  at  10.5%  due the  first  day of each  month  through
              November 1, 1999.
     2)       The  remaining  balance  of  $528  will be  paid  from  50% of the
              proceeds from the sale of certain machinery or equipment  included
              in UPE's inventory and certain  equipment  co-owned by UPE and the
              Company.
     3)       The settlement agreement requires principal balances referenced in
              1 and 2 above,  which  are  unpaid  on March 1,  1998 to accrue 3%
              simple interest  compounded  annually  through  February 28, 1999.
              Principal  balances  unpaid on March 1, 1999  through  November 1,
              1999 accrue 6% simple interest compounded annually. On November 1,
              1999,  all unpaid  balances  of  principal  and  accrued  interest
              referenced in 1 and 2 above are due and payable to the  Harrisburg
              Authority.

NOTE PAYABLE - CIT GROUP/CREDIT FINANCE, INC.
On July 1995, the Company signed a three year $5 million maximum credit facility
including an $800 term loan from CIT  Group/Credit  Finance,  Inc.  secured by a
third lien position (behind the Ocwen Note Payable and the Harrisburg  Authority
Note Payable) on Company owned real estate and a first lien on substantially all
other  owned  assets of the  Company.  In  addition,  UPE has agreed to purchase
certain of the  Company's  used  equipment  inventory  in the event the  Company
defaults on the loan or certain other specified  events occur.  The Company paid
off all outstanding  balances with proceeds from a new credit facility issued in
June 1998. At May 31, 1998, the credit facility included:

     1)       A $347  term  loan  (original  balance  of $800)  requiring  $13.3
              monthly  principal  plus  interest at prime plus 3% from August 1,
              1995 through July 1, 1998.
     2)       A line of credit against a percentage of eligible inventory not to
              exceed  $4,000 in the  aggregate.  The line of  credit is  payable
              interest  only at prime  plus 3% until the line of credit was paid
              in full in July 1998.  At May 31,  1998,  $1,155  was  outstanding
              under the line,  which  represents the maximum credit available to
              the Company at that date.
     3)       Advances  against  other  eligible  collateral  not to exceed  the
              unused  balance of the line of credit.  Interest  expense  (net of
              amounts  capitalized)  on this debt  totaled $338 and $322 in 1998
              and 1997, respectively.

================================================================================
                                                                            F-15
<PAGE>

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

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

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

PNC BANK, N.A. - CREDIT FACILITY
In June 1998, the Company entered into a financing agreement with PNC Bank, N.A.
("PNC") which provides for a term loan of $800 and a revolving  credit  facility
of $3,200.  Borrowings  under the  revolving  credit  facility are subject to an
advance formula  principally based on defined accounts  receivable and inventory
balances and require the Company to maintain  certain  financial and operational
covenants.  Borrowings  under the term loan accrue interest at 9.7%.  Borrowings
under the  revolving  credit  facility  accrue  interest  at PNC's prime rate of
interest  plus  one and one half  percent.  The  proceeds  from  this  financing
agreement  were used to pre-pay the CIT term loan and credit  facility  balances
outstanding  at June 3, 1998.  As part of loan  agreement,  UPE was  required to
provide certain  guarantees on the Company's behalf. In August 1998, the Company
granted UPE 175,000 stock options for providing  these  guarantees.  The Company
will  recognize a charge for the fair values of these  options  over the term of
these guarantees.

DEBT MATURITIES:
At May 31, 1998, long-term debt maturities for the next five fiscal years are as
follows:

                      YEAR ENDING MAY 31,
                              1999                                 $    293
                              2000                                      765
                              2001                                    1,219
                              2002                                       42
                              2003                                    1,847
                                                            ----------------
                                                                   $  4,166
                                                            ================

With the  proceeds  from the PNC  facility,  the Company  paid off all  existing
indebtedness  outstanding under the CIT Group/Credit  Finance,  Inc.  agreement.
Based on the Company's  ability to refinance  short term  obligations  with long
term debt, a portion of the liabilities have been classified as long term in the
accompanying consolidated balance sheet as of May 31, 1998.

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, 1998.

                         YEAR ENDING MAY 31,
                                    1999                       $     32
                                    2000                             26
                                    2001                              9
                                                             ----------------
                    Minimum lease payments                           67
                    Less:  imputed interest                          (9)
                                                             ----------------
                    Present value of minimum
                      lease payments                                 58
                    Less:  current portion                          (19)
                                                             ----------------
                    Long term portion                          $     39
                                                             ================


================================================================================
                                                                            F-16
<PAGE>

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

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

The components of the benefit (provision) for income taxes are as follows:
                                                           1998        1997
     -------------------------------------------------------------------------
     Current:
       Federal                                           $(280)      $(150)

       State                                              (117)        (95)
       Recognition of net operating losses                 307         245
     -------------------------------------------------------------------------
                                                           (90)       --
     -------------------------------------------------------------------------
     Deferred:
       Federal                                             170          85
       State                                                30          15
     -------------------------------------------------------------------------
                                                           200         100
     -------------------------------------------------------------------------

      Income tax benefit                                 $ 110       $ 100
     =========================================================================

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.

            May 31,                                        1998        1997
     ------------------------------------------------------------------------
     U.S. Federal income tax
        provision at statutory rates                    $(143)       $(205)
     State income taxes, net of
        Federal benefit                                   (33)         (40)
     Utilization of net operating loss
        carryforwards                                     178          245
     Decrease in beginning of the
        period valuation allowance                        134          100
     Other, net                                           (26)        --

     ------------------------------------------------------------------------
     Income tax benefit                                 $ 110        $ 100
     ========================================================================








================================================================================
                                                                            F-17

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

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

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


<TABLE>
<CAPTION>
                                                              MAY 31,
                                                       1998          1997
                                                    ----------    -----------
<S>                                                 <C>            <C>    
     Deferred Tax Assets:
       Receivables                                  $    60        $    44
       Inventory                                        100            116
       Net operating loss
         carryforwards                                1,252          1,531
       Tax credits                                      119            119
       Lawsuit settlement                               216            219
       Deferred compensation
         and retirement benefit                         203            307
       Stock Option Compensation
                                                        183            -0-
       Other                                             20             20
                                                    -------------------------

         Total Gross Deferred
           Tax Assets                                 2,153          2,356
       Valuation allowance                           (1,663)        (2,009)
                                                    -------------------------
       Total Deferred Tax
       Assets                                           490            347
     Deferred Tax Liability:
       Property, plant and
         equipment                                     (190)          (247)
                                                    -------------------------
     Net Deferred Tax Asset                         $   300        $   100
                                                    =========================
</TABLE>

At May 31, 1998,  the Company has  approximately  $3.5 million of unused federal
net operating loss  carryforwards and federal investment and research tax credit
carryforwards.  If the net operating loss carryforwards remain unused, they will
expire during the years 2004 through 2010.  If the  investment  and research tax
credit  carryforwards  remain unused,  they have or will expire during the years
1998 through  2002. In addition,  at May 31, 1998,  the Company has unused state
net operating loss  carryforwards of  approximately  $1.4, of which $1.2 million
expires in 1998.


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

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


================================================================================
                                                                            F-18

<PAGE>


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

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

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

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

The following  tables set forth the components of net periodic  pension  expense
and the funded status and amounts  recognized in the Company's  consolidated May
31, 1998 balance sheet for deferred compensation and defined benefit plans. Plan
assets are stated at fair value and are comprised  primarily of common stock and
corporate bonds.


NET PERIODIC PENSION EXPENSE:
                                                                 PENSION
                                              RISP               PLANS
                                          1998    1997      1998      1997
     Service cost                         $--      $--      $--      $--
     Interest cost on projected benefit
        obligation                           38       46      207      208
     Actual return on plan assets          --       --       (530)    (553)
     Amortization of transition
        obligation                           33       33       55       55
     Prior service cost and gain
        amortization                         (9)      (9)    --       --
     Net amortization and deferral         --       --        273      347
                                          --------------------------------

                                          $  62    $  70    $   5    $  57
                                          ================================





================================================================================
                                                                            F-19

<PAGE>

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

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

ACTUARIAL PRESENT VALUE OF                            RISP          PENSION
BENEFIT OBLIGATIONS AT                                              PLANS
MAY 31, 1998:
     Vested benefit obligation                       $  --         $ 2,744
                                                     =======       =======
     Accumulated benefit
        obligation                                   $   463       $ 2,742
                                                     =======       =======
     Projected benefit obligation                    $   463       $ 2,742
     Plan assets at fair value                          --           3,209
                                                     -------       -------
     Deficit (excess) of plan assets
         over projected benefit
         obligation                                      463          (467)
     Unrecognized net gain and
         prior service cost                              140         1,116
     Unamortized net obligation
         at adoption                                    (152)         (435)
                                                     -------       -------
     Accrued pension expense                         $   451       $   214
                                                     =======       =======

The expected  long-term  return on plan assets and the weighted average discount
rate assumed in determining the actuarial present value of the projected benefit
obligation for all plans was 8% in 1998 and 1997.

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, 1998, the Company's  liability to
the plan approximated $54. The Company's expense related to the plan was $70 and
$91 for 1998 and 1997, respectively.

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

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

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




================================================================================
                                                                            F-20
<PAGE>

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

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


                                                         YEAR ENDED MAY 31,
                                                        1998         1997
     Service cost                                      $  5          $  5
     Interest cost                                       68            68
     Amortization of
            transition obligation                        58            58
     Amortization of prior
            service costs                               (26)          (26)
     Expected contributions
            from retirees                               (49)          (48)
                                                       ==================

                                                       $ 56          $ 57
                                                       ==================

     Discount rate                                        7%            7%
                                                       ==================

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

The Company's accumulated  postretirement  medical benefit obligation at May 31,
1998 is as follows:

     Active plan participants                                    $       117
     Retirees                                                            879
                                                           ------------------
                                                                         996
     Plan assets                                                           0
                                                           ------------------
     Accumulated postretirement benefit obligation in
     excess of plan assets
                                                                         996
     Unrecognized transition obligation and net gain                    (940)
                                                           ------------------

     Accrued medical postretirement liability                   $         56
                                                           ==================



The effect of raising health care cost trend rates 1% for each future year would
increase the accumulated  benefit  obligation by approximately  $88 and increase
the   aggregate   service  and  interest   cost   components   of  net  periodic
postretirement health care benefit costs by approximately $9.

LIFE INSURANCE:
Term life  insurance in the face amount of $3 is provided to salaried  retirees.
Term life insurance in the face amount of $10 is provided to salaried  executive
retirees.  Salaried  employees and executives  who retired  subsequent to August
1992 are not eligible for these  postretirement  life insurance  benefits.  Term
life  insurance  in face  amounts  ranging  from $1 to $3 is provided to retired
hourly  employees.  The  related  expense  in  1998  and  1997  was  $17 and $2,
respectively. The actuarially determined liability was $15 at May 31, 1998.





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

<PAGE>




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

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

RIGHTS OFFERING COSTS:

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

STOCK OPTIONS
PLAN 1:
On June 2, 1989,  the Board of  Directors of the Company  adopted The  Bethlehem
Corporation  "1989 Equity Incentive Plan" which was approved by the stockholders
on May 11,  1990.  The plan  provides  that the  Board of  Directors  may  grant
incentive  or  nonqualified   common  stock  options  to  officers,   directors,
consultants  and  employees  of the  Company  for the  purchase of up to 150,000
shares of the  Company's  common stock.  Incentive  stock options may be granted
only to  employees  pursuant  to the  plan  and  Board  established  performance
criteria.  Options expire one month after employees terminate  employment but in
no case later than ten years  after the date of grant.  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 1998 and 1997.

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 1998 and 1997.

PLAN 3:
During 1995, the stockholders approved the 1994 Stock Option Plan ("1994 Plan").
The 1994 Plan provides for the granting of  non-qualified  and  incentive  stock
options and stock appreciation  rights equal to the greater of 400,000 shares or
8% of common stock issued and  outstanding,  to certain  officers,  non-employee
directors  and key employees of the Company and its  subsidiaries.  The Board of
Directors  may at  its  discretion  determine  the  key  employees  eligible  to
participate in the 1994 Plan. The Board has granted options to eleven employees.
The maximum  number of shares that may be granted to one person  pursuant to the
1994 Plan is 250,000  shares.  There were no options  granted under this plan in
1998 and 1997.

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

PLAN 4:
During 1997, the stockholders approved the 1997 Stock Option Plan ("1997 Plan").
The 1997 Plan provides for the granting of  non-qualified  and  incentive  stock
options. The 1997 plan currently authorizes the issuance of a maximum of 200,000
shares of common  stock.  The  maximum  number of shares  that may be subject to
options  granted under the 1997 Plan to any calendar year may not exceed 50,000.
Options  totaling 85,000 shares have been issued under this plan in fiscal 1998.
There were no options granted under this plan in 1997.


================================================================================
                                                                            F-22
<PAGE>

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

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

OTHER OPTIONS:
In April 1998, the Company's stockholders approved the issuance of an additional
653,000 stock options outside of any existing plan to the Company's Chairman,  a
Director of the Company and UPE The options were granted with an exercise  price
of $1.825 per share (the fair market value at the date the grants were  approved
by the Board of  Directors).  Since the recipients of the options are considered
non-employees,  the Company  recognizes  a charge.  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 the year ended May 31, 1998 totaled  $32.  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 1998 financing charge totaled $296.

The Company  estimated  the fair value of such stock  options  using the Black -
Scholes  option price model with the following  assumptions at the initial grant
date, no dividend yield;  expected volatility of 31.4%; risk free interest rates
of 6.1% and expected lives of ten years.  Such fair value also  encompassed  the
excess of the fair market  value of the stock,  as adjusted  for  liquidity  and
dilution factors, less the exercise price of the option. The options vest over a
three year period.

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 will be amortized over the estimated term of
the guarantee.

DISCLOSURE ON OPTIONS:
The Company applies APB Opinion 25,  "Accounting for Stock Issued to Employees",
and related  Interpretations  in accounting for the 1994 Plan and the 1997 Plan.
Under APB Opinion 25, because the exercise price of the Company's  stock options
issued to employees  equals the market price of the underlying stock on the date
of grant, no compensation is recognized.

SFAS 123 requires the Company to provide  pro-forma  information  regarding  net
income  and  earnings  per  share  as if  compensation  cost  for the  Company's
employees had been  determined  in  accordance  with the fair value based method
prescribed  in SFAS 123.  The  Company  estimates  the fair  value of each stock
option at the grant date by using the Black-Scholes  option price model with the
following  weighted  average  assumptions  used for employee  grants in 1998, no
dividend yield; expected  volatility of 46.5%; risk-free interest rates of 6.42%
and expected lives of 10 years for the options.

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

                                                1998                   1997
Net Income:
   As reported                             $          531          $       713
   Pro-forma                               $          450          $       645

Basic earnings per share:
   As reported                             $          .27          $       .37
   Pro-forma                               $          .23          $       .33

Diluted earnings per share:
   As reported                             $          .15          $       .22
   Pro-forma                               $          .13          $       .20



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


<PAGE>

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

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

The pro forma  effect on net income and earnings per share for 1998 and 1997 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 as of May 31, 1998
and 1997 and changes during the years then ended is presented below:


<TABLE>
<CAPTION>
                                                                  May 31, 1998                         May 31, 1997

                                                                              Weighted                                  Weighted
                                                                               Average                                    Average
                                                            Shares         Exercise Price      Shares                 Exercise Price

<S>                                                         <C>                    <C>         <C>                    <C>    
Outstanding-beginning of year                               1,995,000              .90         2,065,000              $   .98

Granted                                                       738,000             1.82                 -                    -
Exercised                                                           -                                  -                    -
Forfeited                                                     (47,500)            2.56           (70,000)             $  3.15
                                                       ------------------                 -------------------

Outstanding-end of year                                     2,685,500                 .        1,995,000
                                                       ==================                 ===================

Options exercisable -year-end                                 532,493                            429,174
                                                       ==================                 ===================

Weighted-average fair value of
options granted during the year                         $        1.22                       $         -
                                                       ==================                 ===================
</TABLE>

Options  issued  to  employees  in  1998  expire  in 2007  and  are  exercisable
immediately.

The following table summarizes  information  about stock options  outstanding at
May 31, 1998.


<TABLE>
<CAPTION>
                 OPTIONS OUTSTANDING                                                  OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------------------------------------
Range of         Number Outstanding   Weighted-Average         Weighted-Average       Number Exercisable     Weighted-Average
Exercise         at May 31, 1998      Remaining Contractual      Exercise Price       at May 31, 1998        Exercise Price
Prices                                Life
---------------------------------------------------------------------------------------------------------------------------------

<S>      <C>        <C>                   <C>                      <C>                     <C>                <C>     
$0.33 to 0.94       1,700,000             1.5 years                $0.67                   250,000            $   0.94
$1.81                 653,000             10                       $1.81                      -               $   1.81
$1.87 to 2.88         272,500             6                        $1.99                   230,828            $   1.99
$ 2.50                 50,000             5                        $2.50                    41,665            $   2.50
$ 3.15                 10,000             1.8                      $3.15                    10,000            $   3.15
                ----------------                                                     ----------------
$0.33 to 3.15       2,685,500             3.5                      $2.02                   532,493            $   2.11
                ================                                                     ================
</TABLE>


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

<PAGE>

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

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

LEGAL MATTERS

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

OPERATING LEASE COMMITMENTS
The Company leases a manufacturing  facility in Knoxville,  Tennessee,  which is
accounted for as an operating lease. The lease is due to expire on September 30,
2000 with two consecutive  three year renewal  options.  In addition to the base
annual rent,  the Company is  responsible  for the payment of property taxes and
other  operating  expenses.  The  Company  also  leases  certain  equipment  and
automobiles.   Rent  expense  under  all  operating   lease   arrangements   was
approximately $130 and $151 in 1998 and 1997, respectively. At May 31, 1998, the
future minimum lease payments on these operating leases are as follows:

                      YEAR ENDED MAY 31,
                   -------------------------
                             1999                              $   140
                             2000                                  132
                             2001                                   45
                             2002                                    -
                             2003                                    -
                                                          =============
                                                               $   317
                                                          =============
EMPLOYMENT AGREEMENT
The Company  has an  employment  contract  with an officer  resulting  in future
commitments for payments of approximately $110 in the fiscal year ending May 31,
1999.  This agreement  expires in January 1999,  but contains  provisions for an
automatic two year extension.

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

Ronald Gale and Jan Gale are directors and  stockholders  of the Company and are
officers,  directors and principal  stockholders of Universal  Process Equipment
("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
1998 and 1997.

On November  28, 1995,  the Company and UPE entered  into a sales and  marketing
agreement  whereby UPE will market certain used equipment  owned by the Company.
As consideration for its services, UPE would receive from the Company 50% of the
net selling  price  (defined as the sales price less the cost of the  equipment)
plus 1/2 of the sales commission paid by UPE to its sales people.  The agreement
provides  that UPE will pay the Company any  interest it will be required to pay
on the original acquisition of the inventory from its supplier. The amounts paid
to and earned by UPE were $256 and $378 in 1998 and 1997,  respectively.  In May
1998 this agreement was terminated  when all equipment  under this agreement was
transferred to UPE.

From  time to time,  UPE  advances  funds to the  Company  for  working  capital
purposes.  At May 31, 1997, advances  outstanding totaled $782. Related interest
expense on such advances  totaled $79 in 1998 and $53 in 1997. The interest rate
on the advances range from prime rate plus 1% to prime rate plus 2.5%.



================================================================================
                                                                            F-25
<PAGE>

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

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

On February 28, 1997, the Company  purchased a two stage  environmental  thermal
process  system for $545. In order to effect the  acquisition  of the equipment,
the  Company  borrowed  $225 from UPE at an  interest  rate of prime  plus 2.5%.
Interest  expense in 1998 and 1997 totaled $12 and $6,  respectively.  This loan
was paid in full during the third and fourth  quarters of 1998. The Company also
secured  a loan with the  Royal  Bank of Canada in the  amount of $320 to assist
with the purchase of these assets at the borrowing  rate of Canadian  prime rate
plus 1.5% per annum. This loan was paid in full in September of 1997.

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, 1998
                                                  -------------------------------------------
                                                      ACCOUNTS 
                                                      RECEIVABLE      ACCOUNTS PAYABLE
                                                  (RELATED PARTIES)    (RELATED PARTIES)
                                                  -------------------------------------------
<S>                                                     <C>                 <C>      
  a.  UPE (Owned by  Ronald & Jan
         Gale through Universal Baling &
         Processing, Inc. UPE's parent)                 $   2,715           $   2,925
  b.  Universal Industrial Gases, Inc.
         (U.I.G.) (100% owned by UPE)                          23                   3
  c.  Universal Industrial  Refrigeration, Inc.
         (U.I.R.) (80% owned by UPE)                           10                 233
  d.    Universal Glastell Equipment
          (U.G.E.) (50% owned by Gale Glass)                   11                   -
  e.    R. Simon Dryers, Ltd. (Directors are
          Ronald & Jan Gale)                                  115                  26
                                                  -------------------------------------------
                                                        $   2,874           $   3,187
                                                  ===========================================
</TABLE>

Since the right of offset exists between the Company, UPE and related parties, a
net amount payable to related  parties of $313 is presented in the  accompanying
May 31, 1998 balance sheet.

Related party sales were as follows:
                                        YEAR ENDED MAY 31,

                                      1998           1997
                                 --------------------------------
                 UPE                 $  1,318        $   54
                 U.I.G.                     -            22
                                 --------------------------------
                                     $  1,318        $   76
                                 ================================

Rental income from related parties totaled $39 in 1998.

The Company purchases equipment and services from UPE and its affiliates.  These
purchases  total  approximately  10% and 7% of the total  cost of goods sold for
1998 and 1997, respectively.

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

================================================================================
                                                                            F-26
<PAGE>

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

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

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,  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  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 11, in March 1996,  the Board of  Directors  approved the
issuance of 350,000  stock  options  with an  exercise  price of $1.81 to UPE in
exchange  for  consideration  for  guarantees  on  the  Company's  various  debt
obligations.  In  April  1998,  the  grant  of  options  received  stockholders'
approval. The ascribed fair value to these options approximated $424. Such costs
were  allocated  to  current  and future  periods  based on  existing  and prior
guarantees.  Of this amount, $296 was expensed as a financing charge in the 1998
statement of income,  and $128 was  capitalized  (included in "Other Assets") at
May 31, 1998.

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

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

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

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 20% and 17% of the
accounts  receivable balance at May 31, 1998.  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 15  -  MAJOR CUSTOMERS AND EXPORT SALES:
--------------------------------------------------------------------------------

In 1998,  five customers  individually  represented  11% to 17% of  consolidated
sales and, in the aggregate,  accounted for 68% of  consolidated  sales. In 1997
one customer  accounted  for  approximately  35% of the  Company's  consolidated
sales.

For the years ended May 31, 1998 and 1997, export sales were as follows:


                                           YEAR ENDED MAY 31,
                CUSTOMER                1998                 1997
            --------------------------------------------------------------
                Scotland          $    2,096              $          -
                Netherlands               72                     2,723
                Brazil                     -                     1,149
                Taiwan                 1,781                     1,566
                Indonesia                  -                       620
                Mexico                   620                       534
                Japan                      8                       352
                Estonia                  195                        38
                Russia                   145                         -
                Chile                      -                       138
                South Africa             127                         -
                Israel                     -                        33
                Canada                    53                         6
                All Others               339                         6
                                 -----------------------------------------

                                 $     5,436              $      7,165
                                 =========================================


--------------------------------------------------------------------------------
NOTE 16  -  SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES:
--------------------------------------------------------------------------------

                                                    YEAR ENDED MAY 31,
                                                   1998             1997
                                              ---------------  ---------------
         Cash paid for interest                     $    660      $       591
                                              ===============  ===============
         Cash paid for income taxes                 $     90      $         -
                                              ===============  ===============

NONCASH INVESTING AND FINANCING ACTIVITIES:
In April 1998,  the Company  issued  350,000 shares of common stock to a related
party in exchange for a 50% interest in used inventory (see Note 13).

In  connection  with a transfer of inventory  (see Note 13), UPE assumed $534 of
the Company's bank debt.



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

--------------------------------------------------------------------------------
NOTE 17 - EARNINGS PER SHARE
--------------------------------------------------------------------------------

Basic and  Diluted  earnings  per share for 1998 and 1997 have been  computed as
follows:


<TABLE>
<CAPTION>
                                                                           1998
                                               INCOME                     SHARES                PER SHARE
                                            (NUMERATOR)               (DENOMINATOR)              AMOUNT
-----------------------------------------------------------------------------------------------------------------
<S>                                       <C>                             <C>                    <C>     
Basic Earnings Per Share
  Net Income                              $    531                        1,975                  $    .27
Effect of dilutive securities
  Warrants and options                           -                        1,460                         -
Diluted Earnings Per Share
 Net Income                               $    531                        3,435                  $    .15


</TABLE>

<TABLE>
<CAPTION>
                                                                           1997
                                               INCOME                     SHARES                 PER SHARE
                                            (NUMERATOR)               (DENOMINATOR)               AMOUNT
-----------------------------------------------------------------------------------------------------------------
<S>                                       <C>                             <C>                    <C>     
Basic Earnings Per Share
  Net Income                              $    713                        1,939                  $   0.37
Effect of dilutive securities
  Warrants and options                           -                        1,322                         -
Diluted Earnings Per Share
 Net Income                               $    713                        3,261                  $    .22

</TABLE>

Options to purchase  80,000 and 50,000  shares of common stock,  exercisable  at
between  $2.87 and  $3.15  per  share in 1998 and $2.50 and $3.15 in 1997,  were
outstanding at May 31, 1998 and 1997 respectively,  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 18 -  FOURTH QUARTER ADJUSTMENTS:
--------------------------------------------------------------------------------

In the fourth  quarter of 1998,  the Company  recognized  a deferred tax benefit
related to a reduction in the deferred tax asset valuation  allowance of $96. As
discussed  in Notes 11 and 13, in the  fourth  quarter  of 1998,  the  Company's
stockholders  approved the issuance of common stock and stock options to UPE and
certain  directors.  As a  result,  the  Company  recognized  an  operating  and
financing charge of $158 and $296, respectively.

--------------------------------------------------------------------------------
NOTE 19 -  SUBSEQUENT EVENT:
--------------------------------------------------------------------------------

On July 31, 1998, the Company entered into a new collective bargaining agreement
with  the  Bethlehem   Corporation  Employees   Association,   which  represents
approximately  44 workers at the Company's main production  facility  located in
Easton, Pennsylvania. This agreement has a three year term due to expire on July
31, 2001.


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