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, 1996.

(  )     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:  $18,078,000.

As of August 29, 1996,  1,938,520 shares of the  registrant's  common stock were
outstanding  and the  aggregate  market  value  of  such  common  stock  held by
non-affiliates  was  approximately  $1,995,452  based on the  average of the bid
(1,9375) and asked (2.00) prices on that date of $1.9688.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions  of the Proxy  Statement  for 1996 Annual  Meeting of  Stockholders
incorporated by reference in Part III, Items 9, 10, 11 and 12.
<PAGE>
                                     PART II

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

          Four of the  Company's  five  main  business  units,  namely  the Heat
Transfer Process Equipment Unit, the Environmental  Systems Unit, the Filtration
Process  Equipment  Unit  and the  Specialty  Heavy  Machining  and  Fabrication
Services Unit each serve several billion dollar worldwide  markets.  The Company
expects  the future size of each of these  markets to remain in the  billions of
dollars.  However,  the Company's ability to sell its products is limited by its
marketing and manufacturing  ability. To the extent that the Company's marketing
and  manufacturing  capabilities  increase,  the  Company's  ability  to exploit
opportunities in these markets should improve.


                                       -1-
<PAGE>
The market  size  serviced  by the  Company's  fifth  main  business  unit,  the
Rebuild/Remanufactures Equipment Unit, is considerably more limited. The Company
expects  the  future  size  of  this  market  to vary  in  relation  to  factors
influencing  cost of  capital  such as  interest  rates,  export/import  duties,
manufacturing capacity and utilization.

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

          (1)     HEAT TRANSFER AND FILTRATION UNITS

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

                  o        Technology barrier is medium.

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

          (2)     ENVIRONMENTAL SYSTEMS UNIT

                  o        Markets are concentrated.

                  o        Technology barrier is low.

                  o        Competition  is domestic in North America and Western
                           Europe.

          (3)     SPECIALTY HEAVY MACHINING AND FABRICATION SERVICES UNIT

                  o        Market is highly concentrated.

                  o        Technology barrier is low.

                  o        Competition is domestic and often regional.

          (4)     REBUILD/REMANUFACTURE UNIT

                  o        Market is diffuse.

                  o        Technology Barrier is low.

                  o        Competition is domestic.

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

          Historically,  the sale of the Company's  products has primarily  been
limited to North  America  and Europe.  The  Company has sought to increase  its
international  sales because it believes demand and opportunity for its products
are increasing in direct  proportion to the  development  of process  industries
such as chemical,  food and  pharmaceutical  in  countries  outside of the North
American  and Western  European  markets.  The  Company's  ability to compete in
certain  countries,  particularly  Japan,  is  restricted  by trade laws in such
countries.  Further, the Company's ability to sell its products  internationally
is limited by its marketing and  manufacturing  ability.  The Company  estimates
that approximately  $750,000 for new inventory and $150,000 for additional sales
and marketing expenditures is required to support international market expansion
and sales growth. The Company enjoys access


                                       -2-
<PAGE>
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  will help the Company  increase  its sales.  The Company  does not
believe,  however,  that  the  termination  of this  relationship,  which is not
anticipated,  would have a significant  material adverse effect on the Company's
results of operations.

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

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

RESULTS OF OPERATIONS

Fiscal Year Ended May, 31 1996 Compared to Fiscal Year Ended May 31, 1995

          Revenues  of  $18,078,000  for the  fiscal  year  ended  May 31,  1996
represent  an  increase  of 24% over the fiscal year ended May 31, 1995 level of
$14,541,000.  The principal  reason for the increase in revenues was an increase
in sales due to  expansion  in the  chemical  process  industry.  Several  major
contracts in the Company's proprietary equipment line, part of the Heat Transfer
Process Unit and in the Specialty Heavy Machining and Fabrication  Services Unit
were awarded during this period.

          The  Company's  largest  customer in the Heat  Transfer  Process  Unit
accounted  for 30% of the  Company's  net  sales in  fiscal  1996.  Other  major
contracts awarded were with Fortune 500 companies.

          Export sales for the fiscal year ended May 31, 1996  equaled  $953,000
(5% of revenue)  compared to $4,687,000  (32% of revenue) for the year ended May
31, 1995.  In fiscal 1996 export sales were to six countries  including  Israel,
Indonesia,  Japan,  Finland,  United Kingdom and Canada. The largest total for a
single  country was  $236,000  for Israel.  In fiscal 1995 export  sales were to
Indonesia, Canada, Korea and Netherlands with the bulk of such sales coming from
single sales of $2,030,500 and $1,780,920 in Canada and Indonesia, respectively.
Also,  current  backlog  which is  composed  of orders  received  in fiscal 1996
includes approximately $4,000,000 in sales to the Netherlands and Indonesia. All
sales were in U.S, dollars, therefore,  currency fluctuations did not affect the
transactions.

          Gross profit equaled  $4,867,000 (27% of revenues) for the fiscal year
ended May 31, 1996  compared to a gross profit of  $2,581,000  (18% of revenues)
for the fiscal year ended May 31, 1995. The increased gross profit was primarily
attributable to increased sales in the Company's proprietary product lines which
produced higher profit margins than had been  historically  experienced in these
lines.  These  higher  margins were a result of the  implementation  of a timely
method of reviewing and revising all major  quotations,  cost estimates and work
in process.


                                      -3-
<PAGE>
          Backlog as of May 31, 1996 was $10,464,000  compared to backlog at May
31, 1995 of $3,443,000.  New orders received by the Company were $25,099,000 for
fiscal 1996 compared to new orders of $11,519,000 for fiscal 1995, including new
orders from related parties of $994,000 and $2,015,000 respectively.

          The Company reported  operating income of $975,000 for the fiscal year
ended May 31, 1996 as compared to  operating  income of $224,000  for the fiscal
year ended May 31, 1995. Selling and  Administrative  expenses increased for the
year ended May 31,  1996 to  $3,891,000  (22% of net  revenues)  as  compared to
$2,357,000  (16% of net  revenues)  for the fiscal year ended May 31, 1995.  The
implementation  of the  Company's  sales and  marketing  programs  called for an
increased  sales force as well as increased  advertising,  travel and  marketing
expenditures to expand entry into potential  foreign markets and support product
sales.  The  increase  in  administrative  expense was due to  increased  salary
expense for both  management  and  support  staff  combined  with  increases  in
financing costs, legal and professional fees. Included in administrative expense
are certain non recurring expenses of approximately $300,000 associated with the
asset acquisition made by BAM and other miscellaneous  administrative  expenses.
Approximately  $250,000  of prior  year's  pension  obligation  expense  is also
classified as  administrative  expense.  The Company recorded the additional bad
debt reserve because one of its customers  sought  protection under the Canadian
Bankruptcy  and Insolvency  Act.  Subsequent to the issuance of the May 31, 1996
financial statements,  the Company determined reimbursements from U.P.E. for bad
debt  losses   (previously   accounted   for  as  a  reduction  of  general  and
administrative  expense)  should  be  accounted  for  as a  contribution  to the
Company's paid in capital. Accordingly, the 1996 administrative expense has been
restated to recognize this expense of $63,000 (or $.01 per share) (see Note 24).
The Company has a security  interest in the equipment and expects to recover the
difference  between  the  accounts  receivable  balance  and  the  cost  of  the
equipment. In addition, the Company has submitted a proposal on behalf of itself
and several other  companies to restructure  the Canadian  entity  pursuant to a
Plan of Management under the Canadian Business  Corporation Act. If the proposal
is  accepted,  the Company may convert all or a portion of its  receivable  into
equity in the Canadian entity.

          Other  expenses  equaled  $536,000  for the year  ended  May 31,  1996
compared  to $118,000  for the year ended May 31,  1995.  The  increase in other
expenses was primarily the result of increased  interest  expenses incurred on a
restructured  real estate  mortgage  loan and the secured  term loan and line of
credit  obtained  in July,  1995.  Net income  for the year  ended May 31,  1996
equaled  $403,000 as  compared to net income of $105,000  for the year ended May
31, 1995.  During the year ended May 31,  1996,  the  management  of the Company
concluded that certain legal fees totalling $125,000 capitalized during the year
ended May 31,  1995 would have been more  appropriately  accounted  for had they
been expensed.  Accordingly, the financial statements for the year ended May 31,
1995 have been restated to recognize  these legal fees totalling  $125,000 as an
expense.

          The Company has begun to purchase and sell used  process  equipment as
an adjunct to its new equipment and rebuild  capabilities.  The Company has been
able to enter this  market in the last year  through the  additional  sources of
financing  obtained from CIT. The Company has utilized  UPE's  expertise in this
area to advise it on  certain  purchases  and has  purchased  certain  pieces of
equipment  jointly with UPE. The Company  believes this venture could positively
impact revenues, profits and cash flow because used equipment sales generally do
not require  significant  labor costs. As a result,  the Company can recover its
investment in the equipment more quickly.

          In summary,  the Company's  results of operations have improved due to
the following factors:

          -       Increased domestic sales and marketing efforts;
          -       Expansion of the senior management team;
          -       Increased production efficiency; and
          -       Joint   marketing   efforts  with  UPE,  the  Company's  major
                  shareholder.

Liquidity and Capital Resources

          Net cash used for operating  activities was $1,889,000 for fiscal 1996
compared  to net cash  provided  by  operating  activities  for  fiscal  1995 of
$784,000.

          During the fiscal  year ended May 31,  1996,  the  Company's  accounts
receivable,  inventory and accounts payable  increased.  The increased  accounts
receivable  in fiscal 1996 was due to  increased  sales  volume.  The  increased
inventory  in fiscal 1995 was due to increased  sales  volume which  resulted in
increased  production  in the  Company's  new  equipment  product  lines and the
Company's ability to purchase  equipment through  additional  financing obtained
from CIT.  Inventory  consists  of finished  goods,  raw  materials  and work in
process.  Finished goods inventory consists of new and used processing equipment
that the Company is marketing and is in the business


                                      -4-
<PAGE>
of selling as an adjunct to its new  equipment  and rebuild  capabilities.  This
equipment is valued at the lower of cost or market value. It is anticipated that
approximately 42% of the Company's finished goods inventory will not sell within
one year.  That portion of the inventory is  classified as a non current  asset.
Historically,  this type of equipment has maintained market value.  However,  no
estimate can be made of the  possible  loss should the Company be unable to sell
this inventory.  The Company believes that the related reserves were adequate at
May 31, 1996.

          The significant  increase in accounts  payable is due to the increased
sales volume which  required  major material  purchases.  In addition,  accounts
payable at May 31, 1996 include those of BAM which was formed in September  1995
and  acquired the assets of the American  Furnace  Division of Third  Millennium
Products in November 1995.  Currently the Company is delinquent  with respect to
certain  accounts  payable.  In some  instances the Company has  negotiated  new
payment terms. If the Company's  working capital position does not improve,  the
Company's  delinquencies  with its accounts  payable could adversely  effect the
Company's  future  ability  to  structure  favorable  terms in the  purchase  of
materials and services.

          Cash  provided by financing  activities  equalled  $2,629,000  for the
fiscal year ended May 31, 1996  compared to cash used for  financing  activities
for the fiscal  year ended May 31, 1995 in the amount of  $613,000.  On July 14,
1995,  the Company  prepaid its note payable to G.E.  Capital and paid  relevant
closing costs with  proceeds  from advances  against a $6.5 million total credit
facility available from a group of lenders as follows:

          (1) A $1.5 million five year first  mortgage loan from  Sterling.  The
          loan is  collateralized  by a first mortgage lien on real estate owned
          by the Company and a second lien on all other  Company  owned  assets.
          The loan bears interest at 14.25% per annum. The outstanding principal
          and  interest  is payable in 59  consecutive  equal  monthly  payments
          calculated  to  fully  amortize  over a 15  year  period  with a final
          payment of all then outstanding  principal and interest.  As of August
          30, 1996, the amount  outstanding  under the loan was $1,469,035.  The
          loan agreement contains a number of covenants which among other things
          will require the Company to maintain specified levels of net worth and
          working  capital and will impose  certain  limitations  on the Company
          with respect to (I) the  incurrence of additional  indebtedness;  (II)
          the  incurrence  of  additional  liens;  (III)  the  payment  of  cash
          dividends  and (IV) mergers and  investments.  UPE agreed to provide a
          limited  guarantee  for up to  $350,000  of the  mortgage  payable and
          subordinate all of its outstanding  receivables or other extensions of
          credit  due from the  Company to the  mortgage.  The  Company  granted
          warrants  to the  three-party  lending  group to purchase up to 40,000
          shares of the Company's  Common Stock. The purpose of this loan was to
          pay off the existing mortgage loan.

          (2) A  three-year  $5  million  maximum  line of credit  and term loan
          facility from CIT,  secured by a third lien position (behind the three
          party lending group referenced above and the Harrisburg  Authority) on
          Company owned real estate and a first lien on substantially  all other
          owned assets of the Company.  This credit  facility  includes:  (a) an
          $800,000 term loan requiring $13,333 monthly  principal  payments plus
          interest  at prime  rate  (Chemical  Bank,  New York)  plus 3% and (b)
          advances  against a  percentage  of eligible  inventory  not to exceed
          $4,000,000 in the aggregate.  Initial proceeds of this credit facility
          were used to fund working capital. The amount outstanding as of August
          30, 1996 was $627,000 on the term loan and  $1,702,000  on the secured
          credit line. As of August 30, 1996, the interest rate on both the term
          loan and the secured credit line was 11.25%.  Additional advances will
          be for the purpose of acquiring eligible inventory. The loan agreement
          contains  certain  restrictions  among  other  things on the making of
          investments,  loans and capital  expenditures,  on borrowings,  on the
          sale of assets and on the  payment of  dividends.  The loan  agreement
          contains    customary   events   of   default    including    material
          misrepresentations, payment defaults and default in the performance of
          other covenants. An additional condition of the loan agreement is that
          UPE will  purchase all of the Company's  used resale  inventory in the
          event of  default.  The term of the  agreement  is for three years and
          automatically  renewable for successive  terms of two years thereafter
          unless  terminated  by either  party at the end of the  initial or any
          renewal term.  Notwithstanding  the  foregoing,  the  agreement  shall
          terminate  automatically  upon  termination  or  non-renewal  of CIT's
          financing  agreements with UPE. The Company granted warrants to CIT to
          purchase 50,000 shares of the Company's Common Stock.

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


                                      -5-
<PAGE>
          Capital  expenditures were $659,000 during fiscal 1996 versus $133,000
in fiscal 1995.  The increase in capital  expenditures  was due primarily to the
acquisition and  construction of high  temperature  furnaces for toll processing
and renovations to existing  manufacturing and office  buildings.  The Company's
current commitment for capital expenditures is less than $50,000. If the Company
receives  sufficient  net proceeds in a proposed  distribution  of  transferable
subscription  rights to its shareholders to purchase additional shares of Common
Stock (the "Rights  Offering"),  the Company intends to continue to renovate its
one-story  office  building and  laboratory  and upgrade roofs on several of its
manufacturing facilities. See "Business -- Properties." The Company also intends
to purchase laboratory  equipment and a management  information  system/network.
Additional  capital  expenditures  will be  dependent  upon  whether the Company
engages in significant expansion opportunities.

          The Company believes that cash generated from existing  business,  new
orders and sales of used equipment, together with the net proceeds of the Rights
Offering,  will be sufficient to meet operating  requirements through the fiscal
year ending May 31, 1997.  In the event that the  Company's  operations  were to
expand significantly or the Company were to desire to make further acquisitions,
further  external  sources of  financing  would be  required.  While the Company
believes that such financing would be available to it, there can be no assurance
in this regard.

          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.

RECENT DEVELOPMENTS

          As of June 1,  1996 the  Company  began a three  year  profit  sharing
arrangement  with UPE. This  arrangement  was agreed upon as  consideration  for
UPE's  role  in   identifying,   introducing,   screening  and  negotiating  the
acquisition of the assets of the American  Furnace  Division of Third Millennium
Products Inc., by BAM and their role in originating, negotiating, developing and
assisting in the marketing of the Tower Filter Press  product  line.  Under this
arrangement which expires in May 1999, UPE is entitled to receive 25% of the net
pre-tax profits of BAM and the Tower Filter Press product line.

NET OPERATING LOSS CARRYFORWARD

          At May 31, 1996 the Company had  approximately  $4.7 million of unused
federal net  operating  losses and  $119,000 of unused  federal  investment  and
research tax credit  carryforwards.  The Company has determined  that the Rights
Offering will not effect a change of control of the Company,  which would result
in  material  limitations  on the use of such  carryforwards  to  offset  future
taxable income.

FORWARD LOOKING STATEMENTS

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

Item 7.   FINANCIAL STATEMENTS.

          The response to this item is  submitted as a separate  section to this
          Form 10-KSB


                                      -6-
<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 __, 1997         By: /S/ Antoinette L. Martin
                                    -----------------------
                                        Antoinette L. Martin, Chief Financial 
                                         Officer (Principal Financial Officer
                                         and Principal Accounting Officer)





                                       -7-
<PAGE>
                   THE BETHLEHEM CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

             FOR THE YEARS ENDED MAY 31, 1996 (as Restated) AND 1995

                               INCLUDING REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


                                      F-1
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES


CONTENTS


                                                                     PAGE

Independent Auditors' Report......................................    F-3

CONSOLIDATED FINANCIAL STATEMENTS:

    Balance Sheet
      May 31, 1996................................................F-4 - F-5

    Statements of Income
      for the Years Ended May 31, 1996 and 1995...................    F-6

    Statements of Stockholders' Equity (Deficiency)
      for the Years Ended May 31, 1996 and 1995...................    F-7

    Statements of Cash Flows
      for the Years Ended May 31, 1996 and 1995...................   F-8

    Notes to Financial Statements.................................F-9 - F-28


================================================================================
                                                                             F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT




To The Board of Directors and Stockholders
The Bethlehem Corporation


We have audited the  accompanying  consolidated  balance  sheet of The Bethlehem
Corporation and Subsidiaries as of May 31, 1996, and the consolidated statements
of income, stockholders' equity (deficiency), and cash flows for the years ended
May 31, 1996 and 1995. These financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of The
Bethlehem  Corporation and Subsidiaries as of May 31, 1996, and the consolidated
results of their  operations  and their  cash flows for the years  ended May 31,
1996 and 1995, in conformity with generally accepted accounting principles.

As  discussed  in Note  21 to the  financial  statements, an  overstatement  of
intangibles  as of and for the  year  ended  May 31,  1995,  was  determined  by
management  of the  consolidated  company  during the year  ended May 31,  1996.
Accordingly,  the financial statements for the year ended May 31, 1995 have been
restated to reflect the correction of this overstatement.

As discussed in Note 24 to the financial statements, certain errors resulting in
an  understatement of previously  reported  allowances for doubtful accounts was
determined  by  management  in the  current  year.  Accordingly,  the  financial
statements  for the year ended May 31,  1996 have been  restated  to correct the
error.




                                                 SOBEL & CO., LLC
                                                 Certified Public Accountants

Livingston, New Jersey
September 4, 1996 (except for Note 24
which is dated August 15, 1997)


================================================================================
                                                                             F-3
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
================================================================================


ASSETS


  CURRENT ASSETS:
      Cash and cash equivalents                                $        18,976
      Accounts receivable (Net of allowance for doubtful
        accounts of $187,450)                                        2,588,319
      Accounts receivable - related parties                          1,757,550
      Costs and accumulated gross profit in excess of billings
        on long-term contracts                                       1,269,655
      Inventories                                                    3,089,407
      Prepaid expenses and other current assets                        121,647
                                                               -----------------

              Total Current Assets                                   8,845,554
                                                               -----------------


  PROPERTY, PLANT AND EQUIPMENT, at cost                             9,319,480


      Less accumulated depreciation and amortization                (6,977,215)
                                                               -----------------

              Property, Plant and Equipment, Net                     2,342,265
                                                               -----------------


  OTHER ASSETS:
      Goodwill (net of $9,935 of accumulated amortization)             387,459
      Deferred financing costs                                         195,809
      Inventories, net of current                                    2,203,142
      Intangible pension and deferred compensation plan assets         172,953
      Other                                                            151,523
                                                               -----------------

              Total Other Assets                                     3,110,886
                                                               -----------------



                                                                   $14,298,705
                                                               =================


================================================================================
See notes to consolidated financial statements.                              F-4
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
MAY 31, 1996
================================================================================


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

  CURRENT LIABILITIES:
      Current maturities of long-term debt                     $     307,389
      Accounts payable                                             4,361,421
      Accounts payable - related parties                           2,194,500
      Accrued liabilities                                            635,385
      Contract billings in excess of costs and accumulated gros
         profit on long-term contracts                               310,506
      Advances on short term contracts                               238,377
      Commissions payable                                            176,961
      Payroll and state income taxes payable                         134,576
      Note payable - related party                                   310,000
                                                               --------------
              Total Current Liabilities                            8,669,115
                                                               --------------

  OTHER LIABILITIES:
      Accounts payable - long-term                                 1,360,225
      Long-term debt, net of current maturities                    4,593,764
      Deferred compensation and other pension liabilities            999,786
                                                               --------------
              Total Long-Term Liabilities                          6,953,775
                                                               --------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIENCY):
      Preferred stock - authorized, 5,000,000 shares
        without par value, none issued or outstanding                      -
      Common stock - authorized, 20,000,000 shares
        without par value, stated value of $.50 per share;
        1,938,532 shares issued; 1,938,520 shares outstanding        969,266
      Additional paid-in capital                                   4,994,676
      Accumulated deficit                                         (7,288,117)
                                                               --------------
                                                                  (1,324,175)
      Less - treasury stock, at cost, 12 shares                           10
                                                               --------------
              Total Stockholders' Equity (Deficiency)             (1,324,185)
                                                               --------------

                                                                 $14,298,705
                                                               ==============


================================================================================
See notes to consolidated financial statements.                              F-5
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
================================================================================


<TABLE>
<CAPTION>
                                                               YEAR ENDED MAY 31,
                                                             1996            1995
                                                         as Restated
                                                        (See Note 24)
                                                         ------------    ------------
<S>                                                      <C>             <C>         
NET SALES                                                $ 18,077,726    $ 14,540,591

COST OF GOODS SOLD                                         13,211,211      11,959,486
                                                         ------------    ------------

GROSS PROFIT                                                5,111,988       2,581,105
                                                         ------------    ------------

SELLING AND ADMINISTRATIVE EXPENSES:
      Selling                                               1,270,253         677,055
      Administrative                                        2,620,970       1,679,818
                                                         ------------    ------------
                                                            3,891,223       2,356,873
                                                         ------------    ------------

              Income from Operations Before Other
                Income (Expenses) and Income Taxes            975,292         224,232
                                                         ------------    ------------

OTHER INCOME (EXPENSES):
      Interest expense                                       (530,470)       (253,940)
      Gains on sales of equipment                                --            72,092
      Royalty income - related party                             --            35,500
      Other                                                   (15,671)         19,709
      Interest income                                           9,780           8,166
                                                         ------------    ------------
                                                             (536,361)       (118,473)
                                                         ------------    ------------

              Income before provision for income taxes        438,931         105,759

PROVISION FOR INCOME TAXES                                     36,000           1,105
                                                         ------------    ------------

NET INCOME                                               $    402,931    $    104,654
                                                         ============    ============

EARNINGS PER COMMON AND COMMON
  EQUIVALENT SHARE:
      Primary                                            $        .13    $        .04
                                                         ============    ============

      Assuming full dilution                             $        .12    $        .03
                                                         ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON
  AND COMMON EQUIVALENT SHARES OUTSTANDING
      Primary                                               3,219,517       2,946,423
                                                         ============    ============

      Fully diluted                                         3,259,686       3,026,762
                                                         ============    ============
</TABLE>


================================================================================
See notes to consolidated financial statements.                              F-6
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
================================================================================


<TABLE>
<CAPTION>
                                        COMMON STOCK           ADDITIONAL                       TREASURY STOCK
                                  -------------------------     PAID-IN     ACCUMULATED    -------------------------
                                     SHARES       AMOUNT        CAPITAL   EQUITY (DEFICIT)   SHARES        AMOUNT         TOTAL
                                  -----------   -----------   -----------   -----------    -----------   -----------    -----------
<S>                                 <C>         <C>           <C>           <C>                     <C>  <C>            <C>         
Balance at May 31, 1994             1,888,532   $   944,266   $ 4,594,628   $(7,795,702)            12   $       (10)   $(2,256,818)

Net Income for the Year Ended
  May 31, 1995                           --            --            --         104,654           --            --          104,654
                                  -----------   -----------   -----------   -----------    -----------   -----------    -----------

Balance at May 31, 1995             1,888,532       944,266     4,594,628    (7,691,048)            12           (10)    (2,152,164)

Net Income for the Year Ended
  May 31, 1996                           --            --            --         402,931           --            --          402,931

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

Receipt of Used Equipment
  Inventory from Related Party           --            --         208,548          --             --            --          208,548
                                  -----------   -----------   -----------   -----------    -----------   -----------    -----------

Capital Contribution - Related
  Party                                                            62,500                                                    62,500

Balance at May 31, 1996
  (as Restated) (See Note 24)       1,938,532   $   969,266   $ 4,932,176   $(7,288,117)            12   $       (10)   $(1,324,185)
                                  ===========   ===========   ===========   ===========    ===========   ===========    ===========
</TABLE>


================================================================================
See notes to consolidated financial statements.                              F-7
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================


<TABLE>
<CAPTION>
                                                                                    YEAR ENDED MAY 31,
                                                                                1996                    1995
                                                                              as Restated
                                                                             (See Note 24)
                                                                      ------------------------- ---------------------
<S>                                                                       <C>                             <C>     
CASH FLOWS PROVIDED BY (USED FOR):
  OPERATING ACTIVITIES:
    Net income                                                            $      402,931                  $104,654
     Adjustments to reconcile net income to net
      cash provided by (used for) operating activities:
          Depreciation and amortization                                          385,953                   287,768
          Gains on sales of equipment                                                  -                   (72,092)
          Accrued loss on contracts and obsolete inventory write-offs             67,451                    88,459
      (Increase) decrease in assets:
          Accounts receivable                                                 (1,119,140)                 (640,256)
          Accounts receivable - related parties                                 (728,693)                 (767,652)
          Inventories                                                         (3,508,649)                 (426,033)
          Prepaid expenses and other current assets                               34,064                   (40,622)
          Costs and accumulated gross profit in excess of billings              (530,935)                        -
          Other assets                                                           (68,471)                   30,590
      Increase (decrease) in liabilities:
          Accounts payable                                                     2,855,972                 1,301,330
          Accounts payable - related parties                                     812,597                 1,102,321
          Accrued liabilities                                                    (58,757)                  (54,784)
          Billings in excess of costs and accumulated gross profit               (37,971)                 (772,743)
          Advances on contracts                                                   98,377                         -
          Commissions payable                                                    (63,237)                  (16,790)
          Payroll and state income taxes payable                                (584,589)                  603,080
          Deferred compensation and pension liabilities                           91,509                    57,009
                                                                      ------------------------- ---------------------
                Net Cash Provided by (Used for)Operating Activities           (1,889,088)                  784,239
                                                                      ------------------------- ---------------------

  INVESTING ACTIVITIES:
      Purchase and construction of property, plant and equipment                (659,260)                 (133,385)
      Proceeds from the sales of equipment                                             -                    77,792
      Increase in deferred financing costs                                      (212,895)                  (25,000)
                                                                      ------------------------- ---------------------
         Net Cash Used for Investing Activities                                 (872,155)                  (80,593)
                                                                      ------------------------- ---------------------

  FINANCING ACTIVITIES:
      Borrowings on line of credit                                            13,646,842                         -
      Repayments on line of credit                                           (11,886,383)                        -
      Proceeds from issuance of long-term debt                                   860,268                         -
      Principal payments on long-term debt                                      (301,367)                 (612,912)
      Proceeds from notes payable - related party                                310,000                         -
                                                                      ------------------------- ---------------------
         Net Cash Provided by(Used for) Financing Activities                   2,629,360                  (612,912)
                                                                      ------------------------- ---------------------

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                              (131,883)                   90,734

CASH AND CASH EQUIVALENTS -
  BEGINNING OF PERIOD                                                            150,859                    60,125
                                                                      ------------------------- ---------------------

CASH AND CASH EQUIVALENTS -
  END OF PERIOD                                                           $       18,976                  $150,859
                                                                      ========================= =====================
</TABLE>


================================================================================
See notes to consolidated financial statements.                              F-8
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 1  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------------------

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

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

REVENUE RECOGNITION:
Profits 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.  Profit on short-term  contracts are
recognized on the completed contract method. Profits on short-term contracts are
recorded when a contract is  substantially  complete.  Generally,  a contract is
deemed to be substantially  complete when it is shipped to a customer or when it
is ready for  shipment  to a customer.  Progress  billings  applicable  to their
contracts  have been  recorded  as  advances on  contracts  on the  accompanying
balance sheet.

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 costs and income,  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  job
performance, job conditions, contract penalty provisions, claims, change orders,
and  settlements,  are  accounted  for as changes in  estimates  in the  current
period.

The  asset,  "Costs  and  accumulated  gross  profit  in  excess  of  billings,"
represents  revenues  recognized  in  excess  of  amounts  billed  on long  term
contracts.  The liability  "Contract billings in excess of costs and accumulated
gross profit" represents  billings in excess of revenues recognized on long term
contracts.

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company  utilizes the allowance  method for determining bad debts based upon
management's evaluation of outstanding receivables.  Where a bad debt is secured
by a collateral  interest in equipment  sold to the  customer,  the allowance is
equal to the difference between the amount due from the customer and the cost or
net realizable value of the collateral, which ever is less.

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. Inventoried costs are reduced to the lower of
cost or market by charging costs in excess of estimated net realizable  value to
cost of goods sold.


================================================================================
                                                                             F-9
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 1  -  SUMMARY OF SIGNIFICANT POLICIES: (Continued)
--------------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. The cost of self-constructed
assets include  material,  direct labor and overhead  expenses.  Betterments and
extraordinary  repairs that extend the useful life or  functionality of an asset
are capitalized,  other repairs and maintenane charges are expensed as incurred.
Depreciation and amortization are provided in amounts sufficient to amortize the
cost of depreciable  assets over their estiamted useful lives on a straight-line
basis.

The estimated useful lives of the principal classes of assets are as follows:

The estimated useful lives of the principal classes of assets are as follows:

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

GOODWILL:
The  excess of the  purchase  price over net  assets  acquired  by BAM have been
recorded as goodwill.  Goodwill is being amortized on a straight line basis over
a period of twenty  years.  Amortization  was $9,935 and $ 0 for the years ended
May 31, 1996 and 1995, respectively.

DEFERRED FINANCING COSTS:
Costs incurred with the  origination of financing have been  capitalized and are
being amortized over the term of the related debt. Loan origination costs, which
amount to $237,895  include  discount fees,  legal fees and brokerage  fees. Any
remaining  balance in Deferred  Financing  Costs  related to a specific  debt is
written off in the period such debt is refinanced  or becomes due.  Amortization
expenses on the deferred financing costs equalled $46,086 for the year ended May
31, 1996.

RIGHTS OFFERING COSTS:
Professional  fees incurred in  connection  with a Stock Rights  Offering  being
undertaken by the Company have been  capitalized  and will be offset against the
proceeds obtained from the offering.  If in a period it is determined the Rights
Offering will not be  successful,  the Company will  write-off  the  capitalized
costs against income in such period.

EARNINGS (LOSS) PER COMMON SHARE:
The  computation  of  earnings  or loss per share in each  period is computed by
dividing  earnings  (loss) by the  weighted  average  number  of  common  shares
outstanding  during each period.  When dilutive,  stock options and warrants are
included as common  share  equivalents  using the  treasury  stock  method.  For
primary  earnings per share,  the Company is using the average  market price for
its common stock. For fully diluted earnings per share, the Company is using the
average market price for the year ended May 31, 1996. For the year ended May 31,
1995,  the company  used the market  price at May 31, 1995 because the price was
higher than the average.

USE OF ESTIMATES:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities,  the  disclosure  of
contingent assets and liabilities at the date of financial  statements,  and the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from those estimates.

INCOME TAXES:
The Company  utilizes the asset and liability  method of  accounting  for income
taxes  pursuant  to SFAS No.  109.  SFAS No. 109  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 tax loss
and  tax  credit   carryforwards.   SFAS  No.  109  additionally   requires  the
establishment of a valuation  allowance to reflect the likelihood of realization
of deferred tax assets.

Temporary  differences  primarily  result from different book and tax methods of
accounting  for  contracts,  depreciation,  and  tax  deductibility  differences
related to accrued bad debts, vacation, payroll, deferred compensation and legal
settlements.


================================================================================
                                                                            F-10
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

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

CASH EQUIVALENTS:
The Company  considers  investments with original  maturities of three months or
less to be cash equivalents.

ENVIRONMENTAL COSTS:
The  Company  is  subject  to  certain   environmental   laws  and  regulations.
Environmental  costs that  relate to past or present  operations  are charged to
operations in the year identified.

PROSPECTIVE ACCOUNTING CHANGES:
In 1995, the FASB issued SFAS 121  "Accounting  for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to be Disposed of", which requires the Company
to evaluate the  recoverability of long-lived assets, if facts and circumstances
indicate possible impairment. If an evaluation is required, the estimated future
undiscounted  cash flows  associated  with the asset  would be  compared  to the
assets  carrying  amount  to  determine  if a  write-down  to  market  value  or
discounted cash flow is required.

In 1995, the FASB issued SFAS 123  "Accounting  for  Stock-Based  Compensation",
which  describes a method of  accounting  for stock  compensation  plans that is
based  on  the  fair  value  of  employee   stock  options  and  similar  equity
instruments.  The method is in contrast to that  described  in APB 25,  which is
based on the intrinsic value of equity instruments.  The Company is permitted to
continue using the method of accounting  described in APB 25, but is required to
disclose  proforma net income and earnings per share,  determined as if the fair
value method of FASB 123 had been used to measure compensation cost.

Both of  these  pronouncements  become  effective  for the  Company's  financial
statements  for fiscal year ending May 31, 1997.  The Company  believes that the
future adoption of these  pronouncements  will not have a significant  impact on
results of operations or financial position.

RECLASSIFICATION:
Certain items for the year ended May 31, 1995 have been  reclassified to conform
with the 1996 presentation.

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

Accounts receivable are comprised of the following at May 31, 1996:

      Billed (net of allowance
        for doubtful accounts of $124,951)                   2,118,318
      Unbilled receivables                                     469,171
      Retention on contracts                                    63,330
                                                            ----------
                                                            $2,650,819
                                                            ==========

The three most common contract billing methods are as follows:

1.    Actual progress billings based on pre-established milestones,

2.    Actual  billings  based on the  Company's  agreement  with the  respective
      customer,

3.    Billing when the job or equipment is shipped.

Unbilled receivables represent revenues earned on contracts accounted for on the
completed contract method not billed by the Company at May 31, 1996.

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

In May 1996, a customer that owes the Company  $575,000 sought  protection under
the Canadian Bankruptcy & Insolvency Act. The Company has a security interest in
the equipment it sold to the customer  related to this accounts  receivable.  In
addition,  UPE, a related  party and the  supplier of certain  equipment  to the
Company sold to this customer,  has agreed to a chargeback  equal to one half of
the actual loss on this bad debt.  The Company  recorded this  transaction  as a
capital contribution  receivable.  The Company has included in its allowance for
doubtful  accounts the  remaining  difference  between the  accounts  receivable
balance and the cost of the equipment  expected to be recovered.  It is possible
that the actual loss on this  receivable may exceed the amounts  received by the
Company.


================================================================================
                                                                            F-11
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

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

At May  31,  1996,  costs,  estimated  earnings,  and  billings  on  uncompleted
long-term  contracts  accounted for on the  percentage of completion  method are
summarized as follows:


Costs incurred on long term  contracts                           $4,966,732
Estimated earnings                                                3,175,235
                                                          --------------------
                                                                  8,141,967
Less billings to date                                            (7,182,818)
                                                          --------------------
                                                                $   959,149
                                                          ====================

These amounts are included in the accompanying balance sheet under the following
captions:
    Contract costs in excess of billings
      and accumulated gross profit on
      long term contracts                                        $1,269,655
    Billings in excess of costs and
      accumulated gross profit on
      long term contracts                                          (310,506)
                                                          --------------------

                                                                $   959,149
                                                          ====================

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

The components of inventories are comprised of the following at May 31, 1996:

      Finished goods                                          $3,531,673
      Raw materials and components                               169,197
      Work in process                                          1,591,679
                                                              ----------
                                                               5,292,549
      Less amount classified as a
        long-term asset                                        2,203,142
                                                              ----------

                                                              $3,089,407
                                                              ==========

At May 31, 1996,  the Company's  finished goods  inventories  consist of new and
used processing  equipment for resale.  The processing  equipment is specialized
with a limited customer base.  Based upon  management's  experience,  40% of the
finished goods inventory will not sell within one year. As a result, the company
has classified as a non-current  asset that portion of the inventory that is not
expected to sell within one year. The Company is in the process of attempting to
sell these  items and  management  believes  no loss will be  incurred  upon the
disposition or sale of the finished goods inventories.

The Company  provides for the  write-down  of specific raw material and finished
goods inventory to net realizable value. Such write-downs  approximated  $39,800
and  $88,000  for the  years  ended  May 31,  1996 and  1995,  respectively.  In
addition,  for the year ended May 31, 1996 the company has established a reserve
for inventory writedowns of approximatley $64,500. While management believes the
Company is carrying inventories at net realizable value, no estimate can be made
of a  range  of  possible  loss  should  the  Company  be  unable  to  sell  the
inventories.

Work in  process  consists  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.

On  November  28,  1995,  the  Company   entered  into  an  agreement  with  IDM
Environmental Corporation for the purchase of the finished process equipment for
the sum of $2,500,000.


================================================================================
                                                                            F-12
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 5  -  PROPERTY, PLANT AND EQUIPMENT:
--------------------------------------------------------------------------------

At May 31, 1996, property, plant and equipment consist of the following:

Land                                                               $  348,250
Buildings                                                           1,306,827
Machinery and equipment                                             7,281,151
Equipment under capital lease                                         108,093
Construction in progress                                              275,159
                                                                   ----------
                                                                    9,319,480
Less accumulated depreciation and amortization                      6,977,215
                                                                    ---------
Property, plant and equipment, net of accumulated depreciation
                                                                   $2,342,265
                                                                   ==========

Depreciation  and  amortization  expense on property,  plant and equipment is as
follows:

                                            YEAR ENDED MAY 31,
                                           1996           1995
                                      -------------- ---------------

Depreciation of buildings, machinery
  and equipment                             $319,614       $282,965

Amortization of equipment
  under capital leases                        14,318          4,803
                                      -------------- ---------------

                                            $333,932       $287,768
                                      ============== ===============

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

At May 31, 1996, accrued liabilities consist of the following:

Salaries and wages                                $322,769
Current portion of deferred compensation           102,588
Postretirement obligation (health insurance)        24,110
Other                                              185,918
                                                  --------

                                                  $635,385
                                                  ========


================================================================================
                                                                            F-13
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 7  -  LEASE COMMITMENTS:
--------------------------------------------------------------------------------

The Company leases a  manufacturing  facility in Knoxville,  Tennessee  which is
treated as an operating  lease. The lease is due to expire on September 30, 2000
with two consecutive  three year renewal options.  Under the terms of the lease,
the Company's annual rent is $99,810,  payable in monthly installments,  with 3%
annual increases.

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  which have been
classified as operating leases for financial statement purposes.


The following table  represents  expenses under these  operating  leases for the
respective periods:

                                  YEAR ENDED MAY 31,
                              1996                     1995
                    ------------------------ ------------------------

Lease Expense               $80,810                 $ 11,154
                    ======================== ========================

At May 31, 1996, the future minimum lease payments on these operating leases are
as follows:
                      YEAR ENDED MAY 31,
                      ------------------
                            1997                    $146,914
                            1998                     121,579
                            1999                     113,760
                            2000                     116,996
                            2001                      37,402
                                                    --------

                                                    $536,651
                                                    ========

--------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT:
--------------------------------------------------------------------------------

At May 31, 1996, long-term debt consists of the following:

Line of credit - CIT                              $1,760,459
Note payable - Sterling Commercial Capital         1,477,192
Note payable - Harrisburg Authority                  857,180
Note payable - CIT                                   666,667
Capital lease obligations                             99,848
Note payable - Former corporate legal counsel         24,357
Note payable - Other                                  15,450
                                                  ----------
                                                   4,901,153
Less current maturities                             (307,389)
                                                  ----------

                                                  $4,593,764
                                                  ==========


================================================================================
                                                                            F-14
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 8  -  LONG-TERM DEBT: (Continued)
--------------------------------------------------------------------------------

NOTE PAYABLE - G.E. CAPITAL:
On July 16,  1995,  the Company  prepaid its note payable from G. E. Capital The
Company did not incur any prepayment penalties in connection with this payoff.

NOTE PAYABLE - STERLING COMMERCIAL CAPITAL,  INC., FIRST WALL STREET SBIC, L.P.,
AND INTEREQUITY CAPITAL PARTNERS, L.P.:
In July 1995, the Company signed a $1.5 million,  five year, first mortgage loan
(the Mortgage) with Sterling Commercial  Capital,  Inc., First Wall Street SBIC,
L.P., and InterEquity  Capital  Partners,  L.P. The mortgage is payable in equal
monthly   installments  of  $20,229  including  interest  at  14.25%  commencing
September  1, 1995 with a final  principal  balloon  payment of  $1,290,317  due
August 1, 2000.

The loan is  collateralized by a first mortgage lien on real estate owned by the
Company and  substantially  all other Company  owned  assets,  subject only to a
first lien on the assets  (excluding  real estate) in favor of CIT  Group/Credit
Finance,  Inc.  All debts owed by the  Company to the  directors  and  executive
officers are subordinated to the repayment of the loan. U.P.E. Inc. agreed to:

      1)    Provide a  limited  guarantee  for up to  $350,000  of the  mortgage
            payable.
      2)    Subordinate all of its outstanding  receivables or other  extensions
            of the credit due from the Company to the mortgage.

The Company granted warrants to the three-party  lending group to purchase up to
40,000 shares of the Company's  stock at $1.87 per share,  the fair market value
of the stock on the date the warrants were granted.

NOTE PAYABLE - CIT GROUP/CREDIT  FINANCE, INC. In July 1995 the Company signed a
five year $5 million  maximum  credit  facility  including an $800,000 term loan
from CIT Group/Credit Finance, Inc. secured by a third lien position (behind the
three party lending group referenced above and the Harrisburg Sewerage Authority
Judgment)  on Company  owned real estate and a first lien on  substantially  all
other wned assets of the  Company.  In addition,  U.P.E.  has agreed to purchase
certain of the  Company's  used  equipment  inventory  in the event the  Company
defaults  on the loan or  certain  other  specified  events  occur.  The  credit
facility is for three years and is  automatically  renewed for an additional two
years so long as it is not  terminated  by either  party.  The  credit  facility
includes:

      1)    An $800,000  term loan  requiring  $13,333  monthly  principal  plus
            interest at prime plus 3% from August 1, 1995 through July 1, 2000.
      2)    A line of credit  against a percentage of eligible  inventory not to
            exceed  $4,000,000 in the  aggregate.  The line of credit is payable
            interest  only at prime  plus 3% until  the line of credit is due in
            full. At May 31, 1996 $1,760,459 is outstanding under the line.
      3)    Advances against other eligible  collateral not to exceed the unused
            balance of the line of credit.

The Company granted warrants to the CIT Group/Credit  Finance,  Inc. to purchase
50,000 (2.65%) shares of the Company's stock at $1.87 per share, the fair market
value of the stock on the date the warrants were granted.

NOTE PAYABLE - FORMER CORPORATE LEGAL COUNSEL:
The Company's former legal counsel agreed during 1993 to settle obligations owed
to them by the Company for a down payment of $6,518 and a $175,000  non-interest
bearing note from the Company.  The Company discounted this obligation using its
incremental  borrowing  rate of 10.5%.  The remaining  obligation on the note is
payable  in  monthly  installments  of  $5,000,  which  includes  principal  and
interest, through October 15, 1996.


================================================================================
                                                                            F-15
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 8  -  LONG-TERM DEBT: (Continued)
--------------------------------------------------------------------------------

NOTE PAYABLE - HARRISBURG AUTHORITY:
In November 1995, as part of a settlement  agreement between the Company and The
Harrisburg  Authority,  the Company  executed a  $1,200,000  note payable to the
Harrisburg  Authority.  The  Harrisburg  Authority  has a  second  lien  on  the
Company's owned real estate.  The note's remaining  principal payment provisions
at May 31, 1996 are as follows:

      1)    Payable in equal monthly installments of $7,258,  including interest
            discounted at 10.5% due the first day of each month through November
            1, 1999.
      2)    The balance of $603,000  will be paid from 50% of the proceeds  from
            the sale of certain  machinery  or  equipment  included  in U.P.E.'s
            inventory and certain equipment  co-owned by U.P.E. and the Company.
            U.P.E.  is a related  party of the  Company  and  agreed to serve as
            guarantor and surety for the Company on this  obligation.  (See Note
            17)
      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 are due and payable to
            the Harrisburg Authority.

At May 31, 1996 long-term debt maturities are as follows:

    YEAR ENDED MAY 31,
    ------------------
           1997                        $   305,877
           1998                            298,266
           1999                            312,820
           2000                            883,394
           2001                          1,340,337
                                       -----------

                                       $ 3,140,694
                                       ===========

CAPITAL LEASE OBLIGATIONS:
The Company acquired certain  equipment under the provisions of leases that have
been capitalized for financial statement  purposes.  The following is a schedule
by years of future minimum lease payments together with the present value of the
net minimum lease payments as of May 31, 1996.

         YEAR ENDING MAY 31,
----------------------------------------------------------
           1997                          $  33,710
           1998                             33,098
           1999                             30,039
           2000                             23,663
           2001                              8,363
                                         ---------
Minimum lease payments                     128,873
Less amount representing interest           29,025
                                         =========
Present value of minimum
  lease payment                          $  99,848
                                         =========


================================================================================
                                                                            F-16
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 9  -  INCOME TAXES:
--------------------------------------------------------------------------------

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

                                                       MAY 31,
                                               1996               1995
                                        ------------------- ------------------
Deferred Tax Assets:
  Bad debt reserve                      $        66,000     $        51,000
  Inventory basis difference                     27,000               6,000
  Net operating loss
    carryforwards                             1,440,000           1,285,000
  Tax credits                                   119,000             121,000
  Lawsuit settlement                            191,000             240,000
  Deferred compensation
    and retirement benefit                      333,000             242,000
  Other                                          70,000              66,000
                                        ------------------- ------------------
    Total Gross Deferred
      Tax Asset                               2,246,000           2,011,000
  Valuation allowance                        (2,014,000)         (1,782,000)
                                        ------------------- ------------------
    Total Deferred Tax Asset                    232,000             229,000
Deferred Tax Liability:
  Property, plant and
    equipment                                  (232,000)           (229,000)
                                        =================== ==================
Net Deferred Tax Asset
  (Liability)                           $           -       $          -
                                        =================== ==================

The assumed rates used were as follows:
                                               1996               1995
                                        ------------------- ------------------
Federal                                         25%                 15%
State                                           10%                 10%

The Company has recorded a valuation  allowance for the amount by which deferred
tax assets exceed deferred tax liabilities and, as a result, the Company has not
recorded any liability or asset for deferred  taxes as of May 31, 1996 and 1995.
The valuation  allowance on the deferred assets increased by $232,000 during the
year ended May 31, 1996.

For the year  ended May 31,  1996,  the  Company  utilized  net  operating  loss
carryforwards  totalling  $702,000  and  $500,000  for federal and state  income
taxes, respectively.

For the year ended May 31, 1995 the  Company had a loss for income tax  purposes
of  approximately  $160,000.  The tax  expense  for the year ended May 31,  1995
related to minimum taxes for the Company and its' subsidiaries.

At May 31, 1996,  the Company has  approximately  $4.7 million of unused federal
net operating losses and $119,000 of unused 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 will expire during the
years ended May 31, 1997 through 2002. In addition, at May 31, 1996, the Company
has unused state net operating loss  carryforwards of approximately $2.7 million
that expire in May 1997 and 1998.

The provision for domestic income taxes is as follows:


                                     -----------------------------------------
                                            YEAR                 YEAR
                                           ENDED                ENDED
                                        MAY 31,1996          MAY 31, 1995
                                     ------------------- ---------------------
Current:
  State                                     $36,000              $1,105
                                     ------------------- ---------------------

The statutory  federal income tax rate is reconciled to the Company's  effective
income tax rate as follows:

                                                YEAR ENDED MAY 31,
                                             1996                 1995
                                      -------------------- -------------------
Statutory federal income
  tax rate                                    25%                 15%
Change in deferred asset
  valuation reserve                          (25%)               (15%)
                                      -------------------- -------------------
Effective income tax rate                     0%                   0%
                                      ==================== ===================


================================================================================
                                                                            F-17
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 10 -  DEFERRED COMPENSATION PLANS:
--------------------------------------------------------------------------------

The  Company  has two  unfunded  nonqualified  deferred  compensation  plans for
certain  employees  which  provide for 10-15 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 plans
provide 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  with  proceeds  from life  insurance
contracts and operating cash.

PLAN 1:
The "Professional  Executive Incentive Plan" is accounted for in accordance with
Accounting Principles Board (APB) Statement No. 12. At May 31, 1996, the Company
has an accrued  liability of $88,419  relating to its unfunded  obligation.  Net
periodic  income related to this deferred  compensation  plan,  primarily due to
change in estimates was as follows:

                     YEAR ENDED MAY 31,
                 1996                    1995
       ------------------------ -----------------------

               $(22,898)               $(4,259)
       ======================== =======================

The unfunded obligations were discounted using the following discount rates:

                     YEAR ENDED MAY 31,
                1996                     1995
       ------------------------ -----------------------

                 8%                       7%
       ======================== =======================

PLAN 2:
The  "Retirement  Income  Security  Plan" is a  noncontributory  plan and covers
eligible plan  participants not covered by Plan 1. During the year ended May 31,
1995, the Company notified all active  employees  covered by this plan that they
will no longer be eligible for the plan. Instead, the Company has agreed to fund
a portion of the active employees accrued benefit obligation to a 401(k) plan.

Net periodic  expense for the  "Retirement  Income  Security Plan" in accordance
with FAS No. 87 is as follows:

                                              1996               1995
                                        ------------------ -----------------

Service cost                                 $   -            $    7,126
Interest expense                                54,983            70,832
Transition obligation
  amortization                                  33,378            33,378
Prior service cost and
  amortization of gain                          (9,521)           (9,490)
                                        ------------------ -----------------

                                             $  78,840        $  101,846
                                        ================== =================
Weighted average
  discount rate                                 8%                 8%
                                        ================== =================

The following table sets forth the funded status and amounts  recognized for the
"Retirement Income Security Plan" in the Company's consolidated balance sheet at
May 31, 1996.

Actuarial present value of benefit obligations:

     Accumulated benefit obligation                              $657,948
                                                                 ========

     Projected benefit obligations                               $657,948
     Plan assets at estimated fair value                                -
                                                                 --------
     Excess of projected benefit obligation over plan assets      657,948
     Unrecognized gain                                            149,338
     Unamortized net obligation at adoption which is being
       amortized over 15 years                                   (386,624)
                                                                 --------

     Accrued pension expense                                     $420,662
                                                                 ========


================================================================================
                                                                            F-18
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 11  -  PENSION AND RETIREMENT PLANS:
--------------------------------------------------------------------------------

The Company  maintains two  noncontributory  defined benefit  retirement  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  transition
obligations  are  being  amortized  over a twelve  year  term for one plan and a
thirty year term for the other plan.  The Company  funds the plan, at a minimum,
based upon the statutory amounts required under ERISA.

Net periodic pension expense includes the following components:

                                                         YEAR ENDED MAY 31,
                                                         1996           1995
                                                      ---------      ---------
Service cost                                          $    --        $  17,543
Interest cost on projected benefit obligation           222,918        216,629
Actual return on plan assets                           (502,310)      (240,995)
Amortization of transition obligation                    54,901         54,901
Net amortization and deferral                           341,675         75,372
                                                      ---------      ---------

                                                      $ 117,184      $ 123,450
                                                      =========      =========

Weighted average discount rate assumed
  in determining the actuarial present value
  of the projected benefit obligation                      8%             8%
                                                      =========      =========

Expected long-term return on plan assets                   8%             8%
                                                      =========      =========

The following  table sets forth the Plan's funded status and amounts  recognized
in the Company's  consolidated balance sheet for its defined benefit plans. Plan
assets are stated at fair value and are comprised  primarily of common stock and
corporate bonds.

                                                             MAY 31, 1996
                                                             -------------
Actuarial present value of benefit obligations:

  Vested benefit obligation                                    $2,852,955
                                                             =============

  Accumulated benefit obligation                               $2,852,955
                                                             =============

  Projected benefit obligations                                $2,852,955

  Plan assets at estimated fair value                           2,497,745
                                                             -------------

  Excess of projected benefit obligation over plan assets         355,210

  Unrecognized net gain and prior service cost                    463,965

  Unamortized net obligation at adoption                         (399,633)
                                                             -------------

  Accrued pension expense                                      $  419,542
                                                             =============

401(K) PLAN:
During the year ended May 31,  1995,  the Company  adopted a 401(k) plan for all
eligible  employees.  Employees can contribute at their  discretion up to 15% of
compensation. The Company matches 25% of the employees contribution to a maximum
contribution  of 1 1/2% of  compensation.  The plan is  funded at the end of the
calendar year. At May 31, 1996 approximately  $20,000 of employer  contributions
were due to the plan.  The 401K  expense  was $64,407 for the year ended May 31,
1996.


================================================================================
                                                                            F-19
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 12  - POSTRETIREMENT BENEFIT PLANS:
--------------------------------------------------------------------------------

The  Company  provides  certain  employees  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 utilizes  Financial  Accounting  Standard No. 106
(SFAS No. 106),  "Employers'  Accounting for Postretirement  Benefits Other Than
Pensions".  SFAS No. 106  requires  the accrual of 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.  The following
table presents the Company's postretirement medical benefit expense:

                                  YEAR ENDED MAY 31,
                                  1996           1995
                             -----------------------------
  Service cost               $    6,158          $  5,702
  Interest cost                  90,712            83,993
  Amortization
    of transition
    obligation                   58,295            58,295
  Expected
    contributions
    from retirees              (131,055)          (97,248)
                             -----------------------------
                             $   24,110          $ 50,742
                             =============================
Discount rate                      7%                  7%
                             =============================
Medical trend rate             13.5%                 13.5%
                             =======                ======

The Company's accumulated  postretirement  medical benefit obligation at May 31,
1996 is as follows:

    Active plan participants                                $    135,111
    Retirees                                                   1,160,777
                                                            ------------
                                                               1,295,888
Plan assets                                                           -
                                                            ------------
Accumulated postretirement benefit
  obligation in excess of plan assets                         $1,295,888
Unrecognized transition obligation
  and net gain                                                 1,271,778
                                                            ------------
Accrued medical postretirement liability                    $     24,110
                                                            ============

The effect of raising health care cost trend rates 1% for each future year would
increase the accumulated benfit obligation by appoximately $130,000 and increase
the  aggregate  service  and  interest  cost  components  of net  periodic  post
retirement health care benefit costs by approximately $16,000.

LIFE INSURANCE:  Term life insurance in the face amount of $3,000 is provided to
salaried retirees. Term life insurance in the face amount of $10,000 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 $1,250 to
$2,500 is provided to retired hourly employees.

The   Company's   actuary   calculated   the  net  present   value  of  unfunded
postretirement  life  insurance  obligations  to be  provided  in the  future to
approximately  130 active and retired  employees at May 31, 1996.  The following
table presents accumulated  postretirement life insurance benefit obligations at
May 31, 1996:

Active hourly employees                         $   8,514
Inactive hourly & salaried
  employees                                       110,128
                                                ---------
                                                $ 118,642
                                                ---------
Accumulated postretirement
  benefit obligation in excess
  of plan assets                                $ 118,642
Unrecognized transition obligation                105,877
                                                ---------
Accrued life insurance post-
  retirement liability                          $  12,765
                                                =========

Net periodic  postretirement life insurance expense for premiums paid for hourly
and salaried retirees is as follows.

                            YEAR ENDED MAY 31,
                     1996                      1995
           -------------------------- -----------------------
                    $2,241                    $2,284
           ========================== =======================

================================================================================
                                                                            F-20
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 13  -  STOCK OPTIONS:
--------------------------------------------------------------------------------

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

The Company's  Board of Directors  granted options to officers and key employees
with an  exercise  price of $2.50 per  share.  The  following  table  summarizes
certain key points of the plan at:

                                                MAY 31,           MAY 31,
                                                 1996               1995
                                           ------------------ -----------------
a)  Options outstanding                            25,000            42,500
b)  Options available for
       granting                                   125,000           107,500
c)  Persons holding options                             4                 7

PLAN 2:
During 1991, the "Equity Incentive Plan" 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 "Equity Incentive Plan"
(the Plan) 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 Plan.  The exercise  price of each option  granted
under  the Plan  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 Plan is not limited in duration.  The following  table  summarizes
certain key points of the plan at:

                                                 MAY 31,          MAY 31,
                                                  1996              1995
                                            ----------------- -----------------
a)  Options outstanding                          100,000           100,000
b)  Options available for
         granting                                 30,000            30,000
c)  Directors holding options                         10                10


================================================================================
                                                                            F-21
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 13  -  STOCK OPTIONS: (Continued)
--------------------------------------------------------------------------------

PLAN 3:
During 1995, the  stockholders  approved the "1994 Stock Option Plan".  The 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 plan. The
Board has granted options to twenty-one employees.  The maximum number of shares
that may be granted to one person  pursuant to the Plan is 250,000  shares.  The
1994 Stock  Option 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
Plan 4, vest ratably over a three year period,  however, if there is a change in
control, the options become fully vested. The Plan provides for directors of the
Company, elected after December 1, 1994 to receive 10,000 options if they do not
receive  options  under Plan 2. 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 $100,000. The options are nontransferable
and the Plan expires December 23, 2004. The following table  summarizes  certain
key points of the plan:

                                                   MAY 31,
                                           1996              1995
                                     ----------------- -----------------
a)  Options outstanding                   400,000           250,000
b)  Options available for
        granting                                -           150,000
c)  Persons holding
       options                                 21                 1

OTHER OPTIONS:
During 1996, the Board of Directors appoved and issued an additional  683,000 of
stock options outside of any existing plan to the Company's  Chairman,  a former
Company  Chairman,  a Director of the Company,  a former Director of the Company
and a consultant  for the Company and U.P.E.  All of the options were granted at
an exercise  price equal to the fair market value at the date of the grant.  The
following is a summary of the options issued:

          NUMBER OF OPTIONS              OPTION EXERCISE PRICE
          -----------------              ---------------------
                 303,000                         $1.8125
                  30,000                         $2.1875
                 350,000                         $1.8125


================================================================================
                                                                            F-22
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 14  -  COMMITMENTS AND CONTINGENCIES:
--------------------------------------------------------------------------------

A.    In response to a lawsuit initiated by the Company against Denver Equipment
      Company,  Inc. and its  successor  Svedala  Industries,  Inc.  ("Denver"),
      Denver  filed a counter  claim  against  the  company  in July  1995.  The
      Counterclaim  alleged that the Company  initiated  and has  continued  the
      litigation   against  Denver  for  the  purpose  of   suppressing   lawful
      competition  which has resulted in expenses incurred by Denver of not less
      than  $20,000  and asks the  Court  for an award in favor of  Denver in an
      amount  not less than  $20,000.  This  matter,  along  with the  Company's
      lawsuit, was settled in full in November 1995.

B.    The Company has a wholly owned subsidiary which is currently inactive that
      is named Federal  Boiler  Company  (FBC).  FBC was named as a defendant in
      fifty-one  lawsuits  in which it was sued  for  asbestos  related  reasons
      stemming  from  FBC's  sales of the  boilers  it  manufactured  for use in
      industry  and  government.   The  Company  successfully  obtained  summary
      judgments in  thirty-seven  of the fifty-one  cases,  and legal counsel is
      filing summary judgment motions for the remaining cases.

      The Company believes the courts will grant FBC summary  judgments on these
cases on the following grounds:

      1.    The lawsuits  were  wrongfully  asserted  against FBC as FBC did not
            manufacture the boilers in question.
      2.    FBC did not use asbestos in the manufacture of its products.
      3.    None of the  plaintiffs  were exposed to FBC's  products or, if they
            were exposed to an FBC product, then FBC's product legally could not
            have caused their injuries.

      The Company  believes  that even if summary  judgments  are not granted in
      favor of the Company,  the Company does not appear to be exposed to a risk
      of significant damage awards.  Accordingly, no provision has been made for
      any loss from these lawsuits in the accompanying financial statements.

C.    The  Company  is a party to a  proposed  settlement  in  United  States v.
      Charles Chrin et. al. The matter involved an action to obtain site cleanup
      and reimbursement of costs at the Industrial Lane Landfill Superfund site.
      The Company elected to join the proposed  settlement in order to eliminate
      the  possibility  of any future  potential  liability  connected with this
      site. The settlement is under review by the court.  While the Company does
      not  believe  that it is  responsible  for any of the  problems  or  costs
      associated  with the cleanup,  it has  disposed of waste at the site.  The
      Company accrued $55,000 at May 31, 1995 , which was subsequently paid to a
      settlement  fund  during  fiscal  1996.  The Company is  uncertain  of its
      ultimate liability, if any, relating to this case.

D.    In May 1996, a complaint was filed  alleging that the plaintiff  sustained
      injuries in the course of  providing  maintenance  on a piece of equipment
      manufactured  by the  Company in  1979-80.  The suit  seeks  damages in an
      unspecified amount.

      While the Company is still  investigating this matter, it appears that the
      equipment  was  relocated  by the  plaintiff's  employer  from a plant  in
      Virginia to a facility  in  Reading,  PA.  Moreover,  it appears  that the
      equipment had been substantially modified, by others, prior to plaintiff's
      injury and that those  modifications may have defeated the safety features
      designed and installed by the Company prior to shipment of the  equipment.
      The Company is also investigating  insurance  coverages that were in place
      for the appropriate periods involved.

      The Company intends to vigorously defend this matter and can not determine
      the  likelihood  of success by the  plantiff  or even if  successful,  the
      amount of damage, if any, that would be awarded.

E.    At May 31, 1996, the Company is not aware of any other material pending or
      threatened  litigation or other  environmental  claims which have not been
      remedied, disclosed or accrued at May 31, 1996.


================================================================================
                                                                            F-23
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 15  -  RELATED PARTY TRANSACTIONS:
--------------------------------------------------------------------------------

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

      On September 9, 1992, the Company and U.P.E. entered into an agreement for
      the foreign  production of the Company's dryer  equipment.  This agreement
      provides  for  payment to the  Company of fees for design  drawings  and a
      license  fee for sales of  equipment  manufactured  in the  Eastern  Block
      countries  of Europe.  The Company  earned a $35,500  royalty for the year
      ended May 31, 1995 related to sales of products covered by the agreement.

      On November  28,  1995,  the Company and U.P.E.  entered  into a sales and
      marketing  agreement whereby U.P.E. will market inventory  acquired by the
      Company  from IDM  Environmental  Corp.  in the amount of  $2,500,000.  As
      consideration  for its services,  U.P.E. will receive from the Company 50%
      of the net selling price  (defined as the sales price less the cost of the
      equipment)  plus 1/2 of the sales  commission  paid by U.P.E. to its sales
      people.  The  agreement  provides  that  U.P.E.  will pay the  Company any
      interest  it will be required to pay on the  original  acquisition  of the
      inventory from its supplier.

      During May 1996, the Company received a $310,000 advance from U.P.E.  This
      advance had no formal terms and was repaid in June and August 1996.

      The  related  party  receivables  and  payables  are derived in the normal
      course of business activities and are included in the accompanying balance
      sheet as follows:

                                                   MAY 31, 1996
                                            ----------------------------
                                              ACCOUNTS       ACCOUNTS
                                             RECEIVABLE       PAYABLE
                                              (RELATED       (RELATED
                                               PARTIES)       PARTIES)
                                            ----------------------------
a.    U.P.E. (Owned by  Ronald
        & Jan Gale through
        Universal Baling &
        Processing, Inc.
        U.P.E'.s parent)                    $1,502,143        $1,748,568
b.    Universal Envirogenics, Inc.
        (U.E.I.) (80% owned by
        U.P.E.)                                145,724            24,000
c.    Universal Industrial
        Refrigeration, Inc. (U.I.R.)
        (80% owned by Ronald &
         Jan Gale)                                   -           105,181
d.    R. Simon Dryers, Ltd.
        (Directors are Ronald &
        Jan Gale)                              109,343           231,321
e.    Employees, Directors and
        Other Affiliates                           340            85,430
                                            ----------------------------

                                            $1,757,550        $2,194,500
                                            ============================


================================================================================
                                                                            F-24
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 15  -  RELATED PARTY TRANSACTIONS: (Continued)
--------------------------------------------------------------------------------

Since the amounts are in the ordinary course of business,  management expects to
collect and repay the amounts within one year.

The approximate total revenues derived from related party sales were as follows:

                                      YEAR ENDED MAY 31,
                                    1996               1995
                             ------------------- ------------------
U.P.E.                          $   977,000          $2,450,000
U.E.I.                              132,000                   -
                             ------------------- ------------------
                                 $1,109,000          $2,450,000
                             =================== ==================

The Company  purchases  equipment and services from U.P.E.  and its  affiliates.
These purchases total  approximately  8% and 10% of the total cost of goods sold
for the year ended May 31, 1996 and 1995, respectively.

In November  1993, the Company and  Harrisburg  Authority  settled a lawsuit for
$1,300,000  based  upon  negotiations  between  the  Company,   U.P.E.  and  the
Harrisburg Authority. Under the terms of the settlement agreement, U.P.E. agreed
to serve as a  guarantor  and surety for the  obligation.  In  addition,  U.P.E.
agreed to pay up to  $650,000  from the  proceeds  of the sale of certain of its
machinery and equipment  inventory and certain equipment co-owned by the Company
and U.P.E.  During the year ended May 31, 1995,  proceeds  from sales under this
agreement of $47,000 were used to reduce the payable to Harrisburg.  The $47,000
is included  in Accounts  Payable-related  parties.  Pursuant to the  settlement
agreement,  the Company  granted stock options to U.P.E.  These options  provide
that at U.P.E.'s discretion,  the Company will issue additional shares of common
stock to U.P.E. in exchange for payments made by U.P.E. on behalf of the Company
to Harrisburg under the settlement  agreement  instead of reimbursing  U.P.E. in
cash.  U.P.E.  may make payments  (without prior approval of the Company) on the
outstanding  amounts due to  Harrisburg  and thereby be entitled to exercise its
options  or accept  reimbursement  for  payments  it  advanced  on behalf of the
Company. Provided however, for any such payment made by U.P.E., the Company will
not be  obligated  to issue  more  than  1,450,000  shares  to  U.P.E.  for such
payments. The ratio of exchange shall be as follows: three (3) shares issued for
each  $1.00 in  payment  made by  U.P.E.,  up to a total of  450,000  shares  in
exchange  for a total of $150,000 in  payments,  and after such total of 450,000
shares has been  reached,  two (2) shares  issued for each  additional  $1.50 in
payment made by U.P.E. up to a total of 1,000,000  additional shares in exchange
for a total of $750,000 in additional  payments.  As of May 31, 1996, no options
have been exercised by U.P.E. under this plan.

In addition, the Board of Directors approved and issued 350,000 stock options to
U.P.E. in March, 1996 for consideration of U.P.E.'s  guarantees on the CIT debt.
As of May 31, 1996 none of these  options  have been  excercised  by U.P.E.  The
options  were granted at an exercise  price of $1.825,  the fair market value of
the stock on the date of the grant.

In July 1995, U.P.E exchanged used equipment  inventory to the Company for $1 of
consideration.  The Company  recorded the transaction as contribution to paid in
capital in an amount equal to U.P.E.'s cost  ($208,548),  which is less than the
inventories  net realizable  value.  The Company  treated this  transaction as a
capital  contribution.  U.P.E.  entered  into  this  transaction  as a result of
supplying certain  equipment to the Company which the Company  subsequently sold
to a customer that sought protection under the Canadian  Bankruptcy & Insolvency
Act in May 1996.

In March  1996,  the Board  authorized  the Company to issue  300,000  shares of
common stock in exchange for used equipment inventory.  As of September 4, 1996,
the inventory has not been exchanged and the stock has not been issued.

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

--------------------------------------------------------------------------------
NOTE 16  -  CONCENTRATION OF CREDIT RISK:
--------------------------------------------------------------------------------

TRADE ACCOUNTS RECEIVABLE:
The Company designs,  manufacturers sells and services a product line of capital
equipment  used to process  materials for a variety of  industrial  applications
primarily in the United States.  In addition,  the Company operates a production
facility  that  fabricates   machines  and  assembles   equipment  to  customers
specifications.  In connection with these activities,  the Company grants credit
to its customers.  At May 31, 1996, the Company's accounts receivable (excluding
related  parties)  include  a  concentration  of  two  customer  balances  which
represent  31%  of  the  accounts  receivable   outstanding  (excluding  related
parties).

================================================================================
                                                                            F-25
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 17  -  EMPLOYMENT CONTRACTS:
--------------------------------------------------------------------------------

The Company  entered  into  employment  contracts  with  several  members of its
management  team  resulting  in future  purchase  commitments  for  services  as
follows:

               YEAR ENDED MAY 31,
                     1997                       330,000
                     1998                       141,000
                     1999                       156,000
                                             ----------

                                               $627,000
                                             ----------

--------------------------------------------------------------------------------
NOTE 18  -  MAJOR CUSTOMERS AND EXPORT SALES:
--------------------------------------------------------------------------------

For the years  ended May 31,  1996 and 1995,  customers  with 10% or more of the
Company's sales are as follows:

                              YEAR ENDED MAY 31,
      CUSTOMER              1996              1995
------------------------------------------------------------
         A                   30%                -
         B                    -                13%
         C                    -                10%
         D                    -                12%
         E                    -                12%
                                      
For the years ended May 31, 1996 and 1995, export sales were as follows:

                              YEAR ENDED MAY 31,
      CUSTOMER              1996              1995
------------------------------------------------------------
   Israel                 $235,988           $        -
   Indonesia               210,792            1,780,920
   Japan                   204,099                    -
   Finland                 195,560                    -
   United Kingdom           70,562                    -
   Canada                   35,874            2,030,500
   Korea                         -              839,120
   Netherlands                   -               36,888
                      --------------------------------------

                          $952,875           $4,687,428
                      ======================================

--------------------------------------------------------------------------------
NOTE 19  -  FUTURE OPERATIONS:
--------------------------------------------------------------------------------

As reflected in the accompanying financial statements, liabilities exceed assets
by approximately $1,324,185 at May 31, 1996. Furthermore,  the Company continues
to rely  on  extended  terms  from  vendors  in  order  to meet  its  cash  flow
shortfalls.

In May, 1996 the Company filed a Registration Statement with the SEC to initiate
a Rights Offering to existing stockholders in order to raise additional capital.
There can be no assurance that such offering will become  effective,  or even if
it becomes effective,  it will raise sufficient capital. U.P.E. has informed the
Company of its intent to exercise its Rights  under the offering  (approximately
267,000  shares).  The Company is also  continuing  to seek  outside  sources of
financing when cost effective and appropriate.  In addition, the Company has had
net income  for the past two  consecutive  fiscal  years and  management's  1997
forecast indicates continued positive trends for sales, earnings and cash flows.


================================================================================
                                                                            F-26
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 20  -  CASH FLOW STATEMENT DISCLOSURES:
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       YEAR ENDED MAY 31,
                                                                        1996         1995
                                                                     ----------   ----------
<S>                                                                  <C>          <C>       
A.  Cash paid for interest                                           $  593,155   $  256,285
                                                                     ==========   ==========

B.  Cash paid for income taxes                                       $  103,904   $     --
                                                                     ==========   ==========

C.  Non Cash Investing and Financing Activities:
      1.  Purchase of accounts receivable, machinery and
             equipment and goodwill from the American Furnace
             Division of the Third Millenium Corporation
             via issuance of common stock and assumption
             of accounts payable                                     $  446,683   $     --
                                                                     ==========   ==========

      2.  Equipment capitalized with corresponding
             increase to long-term debt and capital leases           $  101,589   $   33,009
                                                                     ==========   ==========
      3.  Balance of G.E. Capital Financing paid directly
             by Sterling Commercial Capital, Inc.                    $1,439,732   $     --
                                                                     ==========   ==========
      4. Receipt of used equipment  inventory form U.P.E with a
             corresponding  increase in additional paid in capital   $  208,548   $     --
                                                                     ==========   ==========
</TABLE>

--------------------------------------------------------------------------------
NOTE 21 - RESTATEMENT:
--------------------------------------------------------------------------------

During the year ended May 31, 1996, the management of the  consolidated  company
determined  that certain legal fees totalling  $125,000  capitalized  during the
year ended May 31, 1995 should have been  expensed.  Accordingly,  the financial
statements for the year ended May 31, 1995 have been restated to recognize these
legal fees totalling $125,000 as an expense. As a result net income for the year
ended May 31, 1995 has been  restated  from $229,694 to $104,654 (a reduction of
$.04 per share).

--------------------------------------------------------------------------------
NOTE 22  -  FAIR VALUE OF FINANCIAL INSTRUMENTS:
--------------------------------------------------------------------------------

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments.

CASH AND CASH EQUIVALENTS:
The carrying amount approximates fair value because of the short-term maturities
of these instruments.

LONG-TERM DEBT:
The fair value of the consolidated  companys  long-term debt (including  current
installments)  is estimated  based on current rates available to the company for
similar debt of the same remaining maturities.

The estimated  fair values of the  corporation's  financial  instruments  are as
follows:

                                                          MAY 31, 1996
                                                CARRYING AMOUNT     FAIR VALUE
                                                ---------------   --------------
Financial Assets:
  Cash                                            $     18,976      $   18,976
Financial Liabilities:
  Long-term debt (including current portion)         4,901,153       4,901,153


================================================================================
                                                                            F-27
<PAGE>
THE BETHLEHEM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

--------------------------------------------------------------------------------
NOTE 23  -  BUSINESS COMBINATION:
--------------------------------------------------------------------------------

On November  28,  1995,  the Company  acquired  certain  assets of the  American
Furnace Division of Third Millenium  Products,  Inc. pursuant to the terms of an
Asset  Purchase  Agreement.  The business  combination  is being  accounted  for
utilizing the purchase method of accounting.  Results of operations are included
in the accompanying statement of income as of November 28, 1995.

Pursuant to the agreement,  the Company purchased certain accounts  receivables,
customer  contracts,  machinery and equipment and goodwill  (including  customer
lists and a covenant  not to  compete.)  The  purchase  price of  $446,683,  was
comprised of 50,000 shares of the Company's common stock valued at approximately
$3.08  per  share  on  the  date  of  closing  and  the  assumption  of  certain
liabilities.  The allocation of the purchase price to the acquired assets are as
follows:

    Accounts receivable             $  29,289
    Machinery and equipment            20,000
    Goodwill                          397,394
                                    ---------
                                     $446,683
                                    =========

--------------------------------------------------------------------------------
NOTE 24 - 1996 RESTATEMENT
--------------------------------------------------------------------------------


Subsequent to the issuance of the May 31, 1996 financial statements,  management
determined  an error  resulting in the  understatement  of  previously  reported
allowances  for  doubtful  accounts.  As  discussed  in Note 2, UPE  agreed to a
chargeback of one half the bad debt on certain equipment sold to a customer. The
Company  originally  treated this chargeback as a reduction in the allowance for
doubtful account and bad debt expense.  The revised financial statements reflect
the chargeback to UPE as a contribution of capital.  Accordingly,  the financial
statements  for the year ended May 31, 1996 have been  restated to recognize the
additional allowance for bad debts and bad debt expense. As a result, net income
for the year ended May 31, 1996 has been  restated  from $465,431 to $402,431 (a
reduction of $.01 per share).

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