SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ___________

                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended                December 31, 1996
                               --------------------------------------------

                                       OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to ______________________



                         Commission file number     0-935
                                               ----------------


                            BELL NATIONAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              California                               94-1451828
--------------------------------------------------------------------------------
(State or other jurisdiction of            (I.R.S. employer identification no.)
incorporation or organization)



4209 Vineland Road, Suite J-1, Orlando, Florida          32811
--------------------------------------------------------------------------------
(Address of principal executive offices)               (Zip code)


Registrant's telephone number, including area code:       (407) 849-0290
                                                    --------------------------
Securities registered pursuant to Section 12(b) of the Act:

      Title of each class             Name of each exchange on which registered
      -------------------             -----------------------------------------
             None                                   Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value
--------------------------------------------------------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. [ X] Yes [ ] No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not 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-K. [X]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Company as of March 8, 1997 was  $364,000  based upon the  average bid and asked
prices of shares of the Company's  common stock, no par value per share ("Common
Stock"),  of $0.075 per share as reported in the Electronic  Bulletin Board. The
number of shares of Common Stock outstanding at March 8, 1997 is 5,488,114.

<PAGE>

                                     PART I


ITEM 1.   BUSINESS

General

Bell National  Corporation  ("Bell National" and together with its subsidiaries,
the "Company") was incorporated in California on October 1, 1958.  Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered  savings and loan  association.  On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance  Corporation
("FSLIC")  as receiver  of Bell  Savings.  At the same time,  the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association,  Bell Federal.  The FSLIC's  appointment  followed shortly
after a determination  that Bell Savings had a negative net worth. On August 20,
1985,  Bell  National  filed  a  voluntary  petition  under  Chapter  11 of  the
Bankruptcy  Code.  A Plan of  Reorganization  (the  "Plan") was  approved by the
Bankruptcy Court, and became effective June 29, 1987.

After  emerging  from  bankruptcy  proceedings  in  June  1987,  and a  vote  by
shareholders  to continue the  operations of Bell National in October 1988,  the
Company reached an agreement ("Stock Purchase Agreement") with Milley Management
Incorporated  ("MMI"),  a private investment firm, in 1989 whereby Bell National
sold to a group of private investors Common Stock totaling  approximately 41% of
the outstanding voting shares on a fully diluted basis.

On June 15,  1990,  Bell  National  purchased  100% of the common stock of Payne
Fabrics,  Inc.  ("Payne"),  a designer and distributor of decorative drapery and
upholstery fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation  rights.  Bell  National's  other wholly owned  subsidiaries,  Bell
Savings and Pacific Coast Holdings Insurance Company,  have no operations or any
significant assets or liabilities.

Payne Business Summary

Payne,  a designer and  distributor  of high quality  fabric and wall  coverings
since  1865,  sells to the home  furnishing  industry.  The  Company's  products
include printed and plain textured  drapery  fabric,  woven  upholstery  fabric,
sheer fabrics,  casement window trimmings and wallpaper.  The selection,  design
and  distribution of decorative cut fabrics  comprise  approximately  86% of the
Company's annual revenues.  The Company also custom  manufactures  draperies and
bedding items  primarily for  institutions;  these sales represent the remaining
14% of total revenue.

Payne keeps in stock more than 7,100 different  fabrics,  composed of as many as
1,520 patterns,  of which roughly half represent  exclusive Payne designs.  Most
patterns  are  produced  in four to five  color  combinations.  Payne's  fabrics
reflect  classical  and  traditional  patterns  adapted  to  contemporary  color
combinations and weave blends.  The Company's  product line offers the decorator
the ability to purchase fabric from a single source.

                                       2

<PAGE>

The Company introduces collections of its product line each year in its fall and
spring fabric introductions. Each fabric collection is organized around a common
theme which is generally built upon in subsequent introductions as well as being
designed to  coordinate  with other  collections.  To  facilitate  the inventory
reductions,  the Company maintains an outlet store in Dayton, Ohio where remnant
fabric pieces of less than five yards, and obsolete inventory, are sold.

Payne  focuses the price range of its products on the medium and high end of the
market which it believes  represents  approximately 60% of the entire decorative
fabric  market.  Payne's  line is  primarily  targeted  to  interior  designers.
Interior designers are generally independent individuals whose taste and quality
requirements can only be met with a unique high-quality fabric or wall covering.
Payne  currently  maintains  a  customer  list of 12,000  U.S.  based  designers
consisting of a network of  independent  agents,  independent  mini-show  rooms,
company  show rooms and  company  sales  representatives.  Payne's  other  major
customers  are   hospitality   and   institutional   agencies  such  as  hotels,
universities,  government  agencies and similar  organizations  responsible  for
facilities maintenance and decoration.  Printed fabrics are also supplied to top
quality furniture manufacturers for their production needs.

The Company  markets its  products  principally  through the use of four Company
leased showrooms  (including one located at the Company's Dayton  facility),  as
well as sixteen U.S. and six foreign independent agent showrooms.  The Company's
leased showrooms feature Payne's fabric exclusively, whereas the independent and
mini showrooms,  which are operated by the Company's sales agents, display other
fabric lines in addition to those of the Company.  The Company  believes that it
is the dominant line for each of the independent  showrooms,  with the exception
of those in Boston,  Seattle,  San Francisco and Los Angeles. In these showrooms
it is the secondary line, after three fabric companies with products  positioned
in a higher price segment than the Company.  Payne's  showrooms are supported by
nine Company salaried sales people and twenty-one independent commissioned sales
agents.

The following sets forth Payne's sales by major product  category for 1996, 1995
and 1994, respectively:  Upholstery fabrics accounted for 27.7%, 29.0% and 32.5%
of Payne's sales.  The 1996 decrease in the upholstery  sales percentage was due
to an increase in trim sales, while upholstery sales declined slightly.  Drapery
fabric  represented  31.2%,  30.5% and 29.7% of Payne's sales in 1996,  1995 and
1994,  respectively.  The slight  increase in 1995  drapery  fabric sales is the
result of the  Company's  emphasis  on adding  new  institutional  customers  to
replace the loss in residential customers.  Supplies,  consisting of trim, rods,
etc.,  represented 15.4%, 16.2% and 15.7% in 1996, 1995 and 1994,  respectively.
The  increase  in the  percentage  of trim  sales is  attributable  to  customer
acceptance of the product and decreasing  sales of upholstery  and draperies.  A
wider range of products and variety  offered by Payne accounts for the increased
trim sales.

                                       3
<PAGE>



Sources of Raw Materials

Many of Payne's  fabrics,  wall  coverings and woven fabrics are designed by and
are exclusive to Payne. Other fabrics sold by Payne are licensed under exclusive
arrangements  with independent  designers.  Product offerings are contracted for
manufacture  by a network of  independently  owned  printing  and weaving  mills
primarily located in the United States and Europe. Product is also provided from
sources in Africa, Asia, as well as Central and South America.

Payne's  fabrics are printed by a variety of processes,  such as  hand-screening
and rotary printing. The type of process used in the printing of a fabric is the
major  determinant  of the cost of the product,  the quality of the print design
and the color schemes employed. The hand-screening process is typically used for
the more expensive fabric  products,  since it provides a finer design and color
imprint than is possible with a rotary printer.

The Company is not dependent on any one single source for the manufacture of its
fabric or the printing of its  designs.  Sourcing of product from outside of the
U.S. is subject to fluctuations in foreign currency exchange rates.

Licenses

The Company has  exclusive  copyrights on all of its designs.  In addition,  the
Company  obtains  exclusivity on the sale of certain  Company  selected  designs
provided by the  manufacturers.  Although not  evidenced by written  agreements,
independent designers, by industry standards,  have maintained exclusivity until
notified otherwise by the original exclusive distributor.

Seasonality

New product has traditionally been introduced  semi-annually in periods referred
to as the spring and fall introductions because the timing has roughly coincided
with  these  seasons.  Sample  lengths  and books  are  produced  to meet  these
introduction  periods.  The Company's  sales have  generally not been subject to
significant seasonality fluctuations.

Customers

The Company's  business is not dependent upon any single  customer.  The average
customer sale is approximately three hundred dollars.

Competitive Conditions

Because  the  Company  has   exclusive   copyright,   contract  or   exclusivity
arrangements on the designs that it markets,  there is no direct competition for
the sale of those  designs.  However there are numerous  competitors  who market
different  fabric  designs in the medium to high price range  categories and are
therefore in competition  with the Company for a share of the decorative  fabric
market.
                                       4

<PAGE>


The  Company's  designs  are  influenced  by current  fashion,  home  furnishing
lifestyles  and consumer  trends.  The process  from design  inception to actual
production takes approximately  eighteen months. The Company believes that after
production, six months are required before it can begin to determine a product's
degree of success or failure.

The long time frame necessary for the design of exclusive  fabrics gives rise to
a greater risk of obsolescence for these products.  Since Payne has to guarantee
minimum  order  commitments  from its source mills before it receives any market
feedback on its product  line, it runs the risk that it may misjudge the market,
thus creating an exclusive  product for which there may be little demand and for
which  it will  have to hold  significant  inventory.  When  the  fabric  is not
exclusive  to Payne,  reorder of open stock  fabrics  directly  from its milling
source  alleviates  the  requirement  that  it  carry  the  product  in its  own
inventory.

Employees

As of  December  31,  1996,  the  Company  had a total of 81 full and part  time
employees  (including  officers).  None of the  employees are  represented  by a
union.

Environmental

Management  believes that environmental  compliance will have no material effect
on capital expenditures, earnings and competitive position.


ITEM 2.   PROPERTIES

Payne's leased  facilities in Dayton,  Ohio serve as their  principal  offices,
storage  and  distribution  facility,  as well as housing an outlet  store and a
showroom.  Payne's  facility  in  Dayton  includes  a  workroom  where  customer
specified  draperies and window  appointments can be custom built. Bell National
rents  office  space for its  Corporate  headquarters  in Orlando,  Florida from
Milley  Management  Incorporated.  The Chairman of the Company is the President,
Chairman  and  majority  shareholder  of  Milley  Management  Incorporated.   In
addition,  certain of the other  officers of the  Company  are also  officers of
Milley Management Incorporated.

 Payne  leases  various  showroom  facilities  at  which  its  product  line  is
displayed.  The  showrooms  are located in strategic  cities that have  provided
strong acceptance,  or potential acceptance, of Payne's line. Whenever possible,
the showrooms are located in design centers that various  furniture,  fabric and
design  companies  also use to  display  their  goods and  services.  Designers,
Payne's principal customers, often use these centers as a "one stop" approach to
shopping for their needs.  Location in these design centers provide Payne's line
with  maximum  exposure  to its  principal  customers.  Loss of Payne's  current
locations,  or inability to locate new facilities could negatively  impact sales
volume  in the  affected  region.  With the  exception  of these  design  center
showrooms, facilities relocation would not affect the Company's operations.


                                       5
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party
or of which any of their property is subject nor are there any proceedings known
to be contemplated by government authorities against the Company.


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

There were no matters  submitted  to a vote of  shareholders  during the fourth
quarter of 1996.




                                       6
<PAGE>


                                     PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS

There is presently no established public trading market for the common stock of
the  Company  and  trading  activity is  limited.  The  following  dealers  have
indicated  an interest in trading the stock on the  Electronic  Bulletin  Board:
Wedbush  Securities,  Inc.;  Troster  Singer  Corporation;  and Carr  Securities
Corporation.

Holders

As of March 8, 1997 there were  approximately  1,070  holders of record of Bell
National's common stock.

Dividend History

Bell National does not pay a cash dividend and is not allowed to pay a dividend
under term of its credit agreement with Bank one, Dayton,  National Association.
In the  absence of such an  agreement,  it is likely  that Bell  National  would
retain its earnings for use in the development of its business.

Stock Transfer Agent

The Company's stock transfer agent is Continental  Stock Transfer and Trust Co.,
2 Broadway, New York, New York 10004, phone (212) 509-4000.


                                       7
<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

The selected financial data is derived from, and qualified by reference, to the
audited Financial  Statements and Notes included elsewhere in this Annual Report
on Form 10-K.

The following table sets forth the selected financial data as of the dates shown
and for the periods shown:

<TABLE>
<CAPTION>
Balance Sheet Data
(dollars in thousands):

                                     December 31,    December 31,   December 31,   December 31,    December 31,
                                         1996            1995           1994           1993            1992
                                     ------------    ------------   ------------   ------------    ------------

<S>                                   <C>            <C>             <C>            <C>            <C>
Total Assets                          $     6,119    $     7,910     $     7,505    $     7,298    $     7,596
Notes Payable                               2,225          3,042           2,921          3,139          4,019
Stockholders' Equity                        1,575          1,574           1,526          1,203          1,005

</TABLE>

<TABLE>
<CAPTION>
Statement of Operations Data
(dollars in thousands except per share amounts):

                                                               Years Ended December 31,
                                      -------------------------------------------------------------------------
                                         1996            1995           1994           1993            1992
                                      -----------    -----------     -----------    -----------    ------------

<S>                                   <C>            <C>             <C>            <C>            <C>
Net sales                             $    12,550    $    13,653     $    13,877    $    14,107    $    14,000
Operating income                              259            469             675            643            463
Net income (loss) before
    extraordinary item                        (14)            48             177            198             25
Net income (loss) after
    extraordinary item                        (14)            48             320            198             25

Net income per share
     before extraordinary item                 --            .01             .03            .04              --
Net income per share
     after extraordinary item                  --            .01             .06            .04              --
</TABLE>



                                       8
<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Revenues and Expenses See Note 1 to the  Consolidated  Financial  Statements for
background  on the  Company.  The  Company's  1996,  1995 and 1994  revenues and
expenses result from the operation of Payne, which was acquired in June 1990.

The Company's 1996 sales were $12,550,000 compared to 1995 sales of $13,653,000.
The 1996 sales decrease of $1,103,000 was  identifiable to $450,000 of decreased
sales of  Warner/Harris  fabrics  (a  competitors  line the  Company  no  longer
represents),  a $380,000 decrease in upholstery,  a $250,000 decrease in drapery
fabric, a $150,000 decrease in wallpaper, a $140,000 decrease in sample sales, a
$120,000 decrease in Hardware and Rods, and all others decreased $13,000, offset
by a $280,000 increase in sales of multipurpose  fabric.  The 1996 gross profits
were  $5,671,000  compared  to 1995 gross  profit of  $6,526,000.  The  $855,000
decrease  in  gross  profit  was due to the  sales  volume  decrease  and a 2.6%
decrease in the gross profit percentage from 47.8% in 1995 to 45.2% in 1996. The
decreased  sales level has caused lower margin items and fixed costs to become a
larger   component  of  the  margin   calculation   and  the  resulting   margin
deterioration.  Selling,  general and administrative expenses decreased $645,000
from $6,057,000 in 1995 to $5,412,000 in 1996. The decrease was  identifiable to
decreased  sample lengths  expense,  field sales  expenses,  agent  commissions,
styling expenses and stock  appreciation  rights  expenses,  partially offset by
increased  sample book expense.  The decreased sample lengths expense was caused
by the smaller amount of product introduced in 1996 compare to 1995. Lower sales
in 1996  caused  variable  expenses  in field  sales  and agent  commissions  to
decrease.  Styling  activity in New York was  discontinued  in late 1996 causing
this to  decrease.  Adjustments  to the stock  appreciation  rights  reserve for
expiring  rights,  a lower  valuation  due to the  lower  market  price  for the
Company's stock and the effect of exercises favorably impacted expenses.  Sample
book expense in 1996 increased due to the large 1995 spending,  40% of which was
expensed  in 1996.  As a result  of the  decrease  in gross  margin  offset by a
decrease  in selling,  general  and  administrative  expense,  operating  income
decreased  $210,000.  Management  believes that  significant  earnings growth is
dependent upon an increase in sales.  In comparison to prior years,  1996,  1995
and 1994 sales are down.

Interest expense decreased $86,000 from $347,000 in 1995 to $261,000 in 1996 due
to the lower debt balance in 1996. Other expenses in 1996 were $162,000 in 1996,
up $117,000 from other expenses in 1995 of $45,000.  The increased 1996 expenses
were caused by foreign currency exchange losses,  deferred debt amortization and
receivable  finance  charges not  recovered at levels higher than those of 1995.
The provision  (benefit) for taxes decreased $179,000 to $(150,000) in 1996 from
$29,000 in 1995  reflecting the change in the accrual for federal taxes.  Taking
into  account  these items the 1996 loss was  $14,000,  down  $62,000  from 1995
income of  $48,000.  The  resulting  1996 loss per  share was $0.00  versus  the
earning per share of $0.01 in 1995.

                                       9
<PAGE>



The Company's  1995 sales were  $13,653,000  compared to sales of $13,877,000 in
1994. The 1995 sales decrease of $224,000 was attributable to decreased sales of
drapery  and  upholstery   fabrics   partially   offset  by  increased   drapery
fabrications  sales.  Gross profit decreased $328,000 from $6,854,000 in 1994 to
$6,526,000  in 1995.  The  decrease in gross  profit was due to the sales volume
decrease and a 1.6% decrease in the gross profit  percentage  from 49.4% in 1994
to 47.8% in 1995.  This is  identifiable  to the lost high  margin  drapery  and
upholstery  fabric  sales  somewhat  replaced  with  the  lower  margin  drapery
fabrication  sales.  Selling,  general  and  administrative  expenses  decreased
$122,000  from  $6,179,000  in 1994 to  $6,057,000  in 1995.  The  decrease  was
identifiable  to decreased  stock  appreciation  rights  accruals and  decreased
sample book  amortization  expense  partly  offset by  increased  sample  length
expense.  During  1995  sample  book  amortization  decreased  as a result  of a
decrease in the total  expenditures  for deferred  sample books during the three
year period  ended  December 31, 1995 as compared to the three year period ended
December  31,  1994.  The  increased  sample  length  expense  in 1995 over 1994
reflects the larger number of new products  introduced year to year. As a result
of the  decrease in gross  margin  offset by a decrease in selling,  general and
administrative  expense,  operating income decrease by $206,000. The decrease in
sales in 1995  reflects  continuing  weakness in the fabric  market.  Management
believes  that  significant  earnings  growth is  dependent  upon an increase in
sales. In comparison to prior years, both 1995 and 1994 sales are down.

Interest expense increased $39,000 from $308,000 in 1994 to $347,000 in 1995 due
mainly to the higher  average  debt  balance in 1995.  The  provision  for taxes
decreased  $117,000  to $29,000 in 1995 from  $146,000  in 1994 due to the lower
reported  profit in 1995.  Taking into account  these items,  1995 income before
extraordinary  items was $48,000 in 1995,  down $129,000 from 1994 income before
extraordinary  items of  $177,000.  In 1994 there was an  extraordinary  gain of
$143,000,  net of taxes, due to the retirement of the senior  subordinated note.
After  taking  this  into  account  the net  income in 1995 of  $48,000  is down
$272,000  from 1994 net income of $320,000.  1995  earnings per share were $0.01
versus $0.06 in 1994,  however 1994 earnings per share  included  $0.03 from the
non-recurring  extraordinary item. Earnings per share before extraordinary items
in 1995 were $0.01 versus $0.03 in 1994.

The Company has a remaining Goodwill balance net of amortization of $663,000 and
$683,000 at  December  31, 1996 and 1995.  The  Company  believes  this asset is
fairly  valued  and  continues  to  amortize  it  over  a  40  year  period.   A
determination  contrary to this would  require that the  amortization  period be
shortened and profitability  effected by an adjustment which could be as much as
the then remaining balance.

The Company is not a party to any derivative or interest swap agreement.


LIQUIDITY AND CAPITAL RESOURCES

Available Resources.  The Company's  consolidated  unrestricted cash position at
December  31, 1996 and  December  31, 1995 was $0. The Company has  instituted a
cash  management  system whereby the net cash generated by operations is used to
reduce bank debt. The reduction of

                                       10

<PAGE>

outstanding debt provides the Company with a greater  reduction in interest
expense than could be offset with interest income from alternative  investments.
A  review  of the  financial  statements,  summary  data,  working  capital  and
discussion of liquidity must take into  consideration  that the Company does not
maintain any cash balances in its accounts by design.

During 1996, the Company had cash flow from  operations  before working  capital
changes of $1,022,000.  Working capital and other changes increased cash flow by
$490,000 resulting in cash flow provided by operating  activities of $1,512,000.
Cash  flow  from  operations  funded  spending  for  sample  books of  $689,000,
principal  payments on capital  lease  obligations  of $6,000 and net  principal
payments of $817,000.  The increase in 1996 working capital was due primarily to
decreases of  $1,343,000 in inventory  partly  offset by a $854,000  decrease in
accounts payable.

During 1995, the Company had cash flow from  operations  before working  capital
changes of $1,099,000.  Working capital and other changes increased cash flow by
$638,000 resulting in cash flow provided by operating  activities of $1,737,000.
The  cash  flow  from  operations  and net  borrowings  under  the  bank  credit
facilities  of $121,000  funded the  spending  for sample  books of  $1,727,000,
property and equipment of $76,000,  payment of deferred debt  commitment fees of
$52,000 and capital  lease  obligations  of $3,000.  On May 17, 1995 the Company
entered  into a new credit  agreement  (see  below).  Through  May 17,  1995 the
Company  made  scheduled  monthly  installment  payments  totaling  $275,000 and
borrowed $346,000 on the revolver loan facility with Bank of America,  Illinois.
On May 17, 1995 the Company  borrowed  $2,992,000 under its new credit agreement
with Bank One,  Dayton,  N.A. to  extinguish  the then  existing  debt with Bank
America,  Illinois.  The Company thereafter made scheduled quarterly installment
payments  totaling  $200,000 and  borrowed  $250,000 on the new  revolving  loan
facility. The increase in 1995 working capital was due primarily to decreases of
$390,000 in inventory and increases of $312,000 in accounts payable.

Future Needs For and Sources of Capital

During 1996 the Company did not meet  certain  covenants  of the  existing  loan
facility with Bank One, Dayton, National Association. The quarterly installments
due after  September 1, 1996 payment have not been made,  all interest  payments
are current. The Company has been in discussions with Bank One, Dayton, National
Association related to the Revolving Agreement. The outcome of these discussions
are unknown and the Company has  therefore  classified  all amounts owing to the
Bank as current liabilities  reflecting the Bank's ability to require payment of
the loan.


                                       11
<PAGE>



ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  consolidated  financial  statements  of the  Company for each of the fiscal
years in the three-year period ended December 31, 1996, together with the report
thereon  of Ernst & Young LLP  dated  March 7,  1997,  are filed as part of this
report commencing on page F-1.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

During 1996,  1995 and 1994, the Company  neither  changed its  accountants  nor
reported a  disagreement  on Form 8-K on any matter of  accounting  principle or
practice or financial statement disclosure.



                                       12
<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Set forth below is information regarding the executive officers and directors of
Bell  National,   including  information  furnished  by  them  as  to  principal
occupations for the last five years,  certain other  directorships held by them,
and their ages.  Directors  are elected to serve until the next annual  meeting.
Officers are elected annually by Bell National's Board of Directors and serve at
the discretion of the Board, unless otherwise indicated.

Name                            Age         Position
----                            ---         --------

Alexander M. Milley              44         Chairman and Secretary

Robert C. Shaw                   44         Director, President and Treasurer

Raymond O'S. Kelly               62         Director

Nicholas E. Toussaint            59         Director

Thomas R. Druggish               41         Director and Chief Financial Officer


Alexander M. Milley  became  Chairman of the Board of Directors and Secretary on
November 20, 1989. Mr. Milley is the founder, president and majority shareholder
of Milley Management  Incorporated  ("MMI"), a private investment and management
consulting  firm  incorporated  on September  25, 1990.  Mr.  Milley is also the
founder and  President of  Winchester  National,  Inc.  ("Winchester"),  another
private investment and management consulting firm. From August 1985 to May 1986,
Mr. Milley was Chairman of Neoax, Inc. ("Neoax"),  now an environmental services
company known as  EnviroSource,  Inc. and then a diversified  custom vehicle and
precision   metal   manufacturing   company.   Mr.   Milley  was   Senior   Vice
President-Acquisitions   from   December   1983   until   July   1986,   of  The
Dyson-Kissner-Moran  Corporation  ("DKM"),  a private  investment  company.  Mr.
Milley is  Chairman  of the  Board,  President  and Chief  Executive  Officer of
Azimuth  Corporation  ("Azimuth"),  a  producer  of trade  show  exhibits  and a
distributor  of fuses and  aerospace  fasteners,  and Chairman and  President of
Cadmus Corporation ("Cadmus"), a management consulting firm. Each of Azimuth and
Cadmus is a privately  held  company,  a majority of the  directors of which are
officers  of  Winchester.  Mr.  Milley has been  Chairman  of the  Board,  Chief
Executive Officer and President of ELXSI  Corporation  ("ELXSI") since September
1989. ELXSI owns and operates a chain of family restaurants in New England and a
manufacturer of sewer  inspection  equipment  incorporating  video technology in
Orlando, Florida.

Robert C. Shaw became President,  Treasurer and a Director on November 20, 1989,
as well as serving as Chief Financial Officer from November 20, 1989 to June 17,
1990.  Mr.  Shaw has been a Vice  President  of MMI  since  March,  1989.  Prior
thereto,  he was Vice President Berkeley  Softworks,  Incorporated  ("Berkeley")
from September 1987 to March 1989.  From January 1987 to September  1987, he was
Vice President, and July 1985 until January 1987, he was Director of Finance and
Operations, at Ansa Software, Incorporated ("Ansa"). Berkeley and Ansa developed
and  produced  personal  computer  software.  Mr. Shaw has been Chief  Financial
Officer and Executive Vice President of ELXSI since September 1989.

                                       13

<PAGE>

Raymond  O'S.  Kelly has been a  Director  since  October  1987,  and was a Vice
President of the Company from October 1987 to November  1989.  Since  January 1,
1982,  Mr.  Kelly has been the  President  and Chief  Executive  of Raymond O'S.
Kelly, Inc., a firm specializing in providing financial,  tax advisory,  and tax
compliance  services.  Mr.  Kelly  has  over  thirty  years of  experience  with
international and domestic accounting firms.

Nicholas E.  Toussaint has been a Director  since  October  1987,  and served as
President and Chief  Executive of the Company from August 1985 to November 1989.
Since 1979,  Mr.  Toussaint has been  President of N.E.  Toussaint & Associates,
Ltd., a San Francisco  consulting firm which advises banks, other  institutions,
and individuals concerning the feasibility of real estate investments.  The firm
specializes  in  planning  corporate  real  estate   portfolios,   and  in  this
connection,  performs  investment  analysis.  Mr. Toussaint has over twenty-five
years  of  experience  in  real  estate  asset  management,  has  held a  senior
management position with the Bank of California,  and was a founding Director of
a national bank and its associated bank holding company.

Thomas R.  Druggish  became a Director  effective  June 1, 1992 and became Chief
Financial  Officer of the Company on June 17, 1990. He currently  serves as Vice
President,  Treasurer  and  Secretary of ELXSI,  Secretary  and Treasurer of MMI
since September 1990.  Prior thereto,  Mr. Druggish was Assistant  Controller at
Borland International from April 1987 to December 1989. Borland,  which acquired
Ansa in September 1987, develops and markets personal computer software.

Val G. Blaugh has served as President of Payne Fabrics, Inc. since its inception
in July,  1988,  when the  assets  of the  Payne  Fabrics  Division  of  Stanley
Interiors Corporation were purchased by Azimuth Corporation.  From December 1983
to July, 1988, Mr. Blaugh was President of the Payne Fabrics Division of Stanley
Interiors  Corporation.  Mr.  Blaugh  originally  joined Payne Fabrics as a Vice
President of Sales and Marketing in January 1977.


                                       14
<PAGE>



ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the cash  compensation of each of the most highly
compensated executive officers of the Company and of all executive officers as a
group during the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                           Summary Compensation Table

                                                              Annual Compensation
                                                 --------------------------------------------
       Name and Principal                                                        Other Annual
            Position                  Year         Salary           Bonus        Compensation
            --------                  ----         -------          ------       ------------

<S>                                   <C>        <C>                <C>           <C>
Robert C. Shaw (1)                    1996       $      --          $   --        $     --
     Director, President and          1995              --              --              --
     Treasurer                        1994              --              --              --

Val G. Blaugh (2)                     1996         102,000              --           3,360(3)
     President of Payne               1995         102,000              --           2,230(3)
                                      1994         102,000              --           1,570(3)

</TABLE>

(1) Mr.  Shaw had been  retained  as of  November  20,  1989 under a  employment
agreement  for  three  years,  which  expired  in  November  1992,  at an annual
compensation of $50,000. As specified in the agreement, the remaining balance of
the  compensation  has been  deferred by the  Company.  The amounts  payable are
reflected  in the  attached  Consolidated  Balance  Sheets  for the years  ended
December 31, 1996 and 1995.

(2) Mr. Blaugh is a participant in the Company's  defined  benefit  pension plan
(see Note 8 to the  Consolidated  Financial  Statements for more detail).  As of
March 1, 1997 his vested benefit was $294,000.

(3) Represents calculated taxable value of leased vehicle used by Mr. Blaugh.



                                       15
<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

The following  table sets forth certain  information  regarding the ownership of
Bell National's capital stock as of March 8, 1997 by (i) all those known by Bell
National to be beneficial  owners of more than 5% of the Common Stock,  (ii) all
Directors  and highly  compensated  executive  officers and (iii) all  executive
officers  and  Directors  as  a  group.  Ownership  information  is  based  upon
information  furnished by the  respective  beneficial  owners.  Of the 5,488,118
shares of common stock of Bell National outstanding on March 8, 1997, 696,570 of
such shares of common stock have been  designated  "Class 4-B shares" (Class 4-B
shares are  essentially  without value)  pursuant to certain legal  proceedings.
Class  4-B  shares  do not  have  voting  rights  and  are not  entitled  to any
distributions  from Bell National on liquidation  or otherwise.  James Grauer is
currently the owner of all of the Class 4-B shares outstanding.  Each person has
sole voting and sole  investment  power with respect to the shares  listed below
and  described in the  footnotes to the table,  below (or shares such power with
his or her spouse).
<TABLE>
<CAPTION>

                                                                                 Percent of
Name and Address                            Amount and Nature                        Voting
of Beneficial Owner                     of Beneficial Ownership*                  Shares (1)
-------------------                     ------------------------              --------------

<S>                                              <C>                                 <C>
The Airlie Group L.P.                            453,176                             9.5%
   115 East Putnam Avenue
   Greenwich, CT  06830

Alexander M. Milley                            1,512,5142)(2)                       26.3%
   (Director, Chairman of
   the Board and Secretary)
   Milley & Company
   4209 Vineland Road, Suite J-1
   Orlando, FL  32811

Robert C. Shaw,                                   37,084                             0.8%
   (Director, President and
   Treasurer)


Raymond O'S. Kelly                                45,781(3)                          1.0%
   (Director)

Santa Fe Mortgage and
Development Company                              648,485                            13.5%
   Don Hancock
   Carol G. Avakian Hancock
   dba C.G.A. Avakian Co.
   Post Office Box 2540
   Fair Oaks, CA  95628

                                       16

<PAGE>

All officers and directors**                   1,595,379(4)                         27.8%
as a group (3 persons)


_______________________

*    To the best of the Company's  knowledge each of the persons and group has
     sole voting and dispositive  power with respect to the shares shown. (All
     such shares are held directly.)

**   The persons owning these shares, including Mr. Milley, may represent a
     group under section 13(d) of the Securities Exchange act of 1934, as
     amended.

(1)  These percentages are based upon  4,588,144  shares of common  stock
     outstanding  and  entitled  to vote (excluding Class 4-B shares).

(2)  Mr.  Milley's  ownership  assumes  the  exercise  of warrants  for the
     purchase  of 957,373  shares for the Company's Common Stock, which expire
     in 1999.

(3)  Consists entirely of shares held in trust for Mr. O'S. Kelly.

</TABLE>


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Bell  National  retained  Alexander  M.  Milley,  as  Chairman  of the Board and
Secretary, and Robert C. Shaw, as President and Treasurer under the terms of the
Stock  Purchase  Agreement and related  Employment  Agreements.  The  Employment
Agreements,  which became effective on November 20, 1989 and expired in November
1992 provided, for annual compensation of $50,000 to Mr. Shaw and $20,000 to Mr.
Milley,  of which only a portion of Mr.  Shaw's  agreement  was paid.  Under the
terms of the Employment  Agreements,  Mr. Shaw and Mr. Milley are free to pursue
other  business  ventures,  investments  and  personal  matters  as long as such
activities do not unreasonably  interfere with their  respective  obligations to
Bell National.

In 1988, Mr.  Toussaint was granted stock options to purchase  360,000 shares of
common  stock under the terms of Bell  National's  Stock Option Plan at $.30 per
share. Under the same Stock Option Plan, Mr. Kelly, a Director, was also granted
stock  options to purchase  90,000 shares at $.30 per share.  In November  1989,
such options  granted under the Bell National Stock Option Plan to Toussaint and
Kelly as well as  former  directors,  were  canceled  and  replaced  with  Stock
Appreciation  Rights  ("SAR's").   In  general,  the  number  of  stock  options
previously  granted  were  replaced  with an equal  number  of  SAR's.  Each SAR
entitles the holder to receive upon  exercise an amount equal to the excess,  if
any,  of the market  value per share at the date of exercise  over the  exercise
price of the SAR,  plus any  dividends or  distributions  per share made by Bell
National  prior to the exercise  date.  On November  15, 1995 Messrs.  Kelly and
Toussaint's SAR agreements  were amended to extend the term of their  agreements
to November 20, 2001.

                                       17
<PAGE>


On June 15, 1990,  Bell  National  completed the purchase of 83% of the stock of
Payne from Azimuth Corporation ("Azimuth") for $6,493,000,  which was based upon
the net asset value of Payne as reflected on its  unaudited  balance sheet as of
the close of  business  on June 3,  1990.  Of the total  purchase  price paid to
Azimuth,  $600,000 was supported by a five-year senior subordinated note bearing
interest  at the rate of 10% per annum.  The balance of the  purchase  price was
paid in cash,  partially  with  funds  obtained  under a bank  credit  agreement
between Bell National and Continental Bank N.A. (the "Bank").  The principals of
MMI currently own 12% of Bell  National's  outstanding  voting capital stock and
would own 27% upon their full exercise of stock warrants currently held. Certain
members of MMI,  among others,  Alexander M. Milley and Robert S. Shaw,  who are
principals  of MMI and the Chairman  and  President as well as Directors of Bell
National,  respectively, also own in the aggregate 16% of the outstanding voting
and non-voting common stock of Azimuth.  Messrs.  Milley and Shaw, together with
certain other members of MMI, also own  approximately 4% of the combined classes
of non-voting preferred stock of Azimuth. In addition,  Messrs.  Milley and Shaw
are directors of Azimuth.

In  connection  with  the  acquisition  of  Payne,  the  remaining  17%  of  the
outstanding capital stock was acquired from four individual  stockholders,  some
of whom are  current  management  employees  of  Payne.  The  Capital  Stock was
acquired  pursuant to separate  stock purchase  agreements,  each dated June 14,
1990,  in exchange  for an  aggregate  of 455,357  SAR's of Bell  National.  The
aggregate  number  of SAR's  issued  in  exchange  for  their  Payne  stock  was
determined based upon the initial investment paid by these individuals for their
holdings in Payne stock in relation to the initial  investment price paid by MMI
for its shares of Bell  National's  common  stock.  SAR's were  allocated  among
individuals in accordance with the ratio of the percentage of each  individual's
initial  investment in Payne to the total  investment of all four. The terms and
conditions of the SAR's are set forth in stock appreciation rights agreements.

Bell  National  currently  rents  office  space in Orlando,  Florida from Milley
Management   Incorporated.   Rent  and  administrative   support  expenses  were
approximately  $120,000 in each of the years ended  December 31, 1996 , 1995 and
1994.  The  Chairman  of the Company is the  President,  Chairman  and  majority
shareholder of Milley Management Incorporated. In addition, certain of the other
officers of the Company are also officers of Milley Management Incorporated.



                                       18
<PAGE>


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
          REPORTS ON FORM 10-K

  (a)    Documents filed as part of this report:

Index to Financial Statements
                                                                       Page
1.  Financial Statements                                             Number(s)
                                                                     ----------
Report of Independent Auditors                                       F-1
Consolidated Balance Sheets at December 31, 1996 and 1995            F-2 to F-3
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1995 and 1994                                   F-4
Consolidated Statements of Stockholders' Equity for the years
  ended December 31, 1996, 1995 and 1994                             F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994                                     F-6 to F-7
Notes to Consolidated Financial Statements                           F-8 to F-15


2.  Financial Statement Schedules

          Schedule                                                         Page
           Number                       Description                       Number
           ------                       -----------                       ------

            VIII             Valuation and Qualifying Accounts             S-1

All other schedules are omitted because they are not applicable or not required,
or because the required  information is included in the  consolidated  financial
statements or notes thereto.


3.   Exhibits

Exhibit
Number     Description
------     -----------

2.1        Bell  National   Corporation  Plan  of   Reorganization   (Annex  I).
           (Incorporated  herein by reference to Item 1 of the Company's  Annual
           Report on Form 10-K for the period  from  August 20, 1985 to December
           31, 1985 and for the years ended December 31, 1986 and 1987 (File No.
           0-935)).

3.1        Restated Articles of Incorporation. (Incorporated herein by reference
           to Exhibit 3.1 of the  Company's  Annual  Report on Form 10-K for the
           fiscal year ended December 31, 1988 (File No. 0-935)).

                                       19
<PAGE>

3.2        Bylaws of the Company.  (Incorporated  herein by reference to Exhibit
           3.2 of the  Company's  Annual Report on Form 10-K for the fiscal year
           ended December 31, 1989 (File No. 0-935)).

4.1        Registration Rights Agreement dated as of November 20, 1989 among the
           Company,   The  Airlie  Group  L.P.,   Liberty   Associates   Limited
           Partnership,  Winchester National, Inc., Alexander M. Milley, Alan D.
           Gordon, Kim G. Davis, Brian E. Kinsman,  Kevin P. Lynch and Robert C.
           Shaw  (collectively,  the  "Purchasers").   (Incorporated  herein  by
           reference to Exhibit 4.3 of the Company's  Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

4.2        Warrant to  purchase  957,373  shares of common  stock of the Company
           issued by the  Company on  November  20,  1989 to Liberty  Associates
           Limited Partnership. (Incorporated herein by reference to Exhibit 4.4
           of the Company's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1989 (File No. 0-935)).

9.1        Voting Trust  Agreement dated as of May 11, 1989 between Santa Fe and
           Mr.  Nicholas  E.  Toussaint,  as  amended.  (Incorporated  herein by
           reference to Exhibit 9.1 of the Company's  Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.1       Standstill  Agreement  between Bell  National  Corporation,  Santa Fe
           Development and Mortgage  Company,  Inc.,  Donald  Hancock,  Carol G.
           Avakian  Hancock,  and  Fred  L.  Harris,  dated  October  20,  1988.
           (Incorporated  herein by  reference  to Exhibit 3.1 of the  Company's
           Annual  Report on Form 10-K for the fiscal  year ended  December  31,
           1988 (File No. 0-935)).

10.2       Stock Purchase Agreement dated as of August 17, 1989 by and among the
           Company and the  Purchasers.  (Incorporated  herein by  reference  to
           Annex I of the  Company's  Proxy  Statement  dated  October  2,  1989
           delivered to shareholders of the Company in connection with a Special
           Meeting of  Shareholders  of Company held on November 3, 1989.  (File
           No. 0-935)).

10.3       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and Edward B.  Collins.  (Incorporated  herein by
           reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.4       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between  the Company  and  Charles J. Hart.  (Incorporated  herein by
           reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.5       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and Raymond O'S. Kelly.  (Incorporated  herein by
           reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.6       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and Edward K.  Taapken.  (Incorporated  herein by
           reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.7       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and Nicholas E. Toussaint.  (Incorporated  herein
           by reference to Exhibit 10.7 of the  Company's  Annual Report on Form
           10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.8       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and John Vida.  (Incorporated herein by reference
           to Exhibit 10.8 of the  Company's  Annual Report on Form 10-K for the
           fiscal year ended December 31, 1989 (File No. 0-935)).

10.9       Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between  the Company  and Robert A.  Huret.  (Incorporated  herein by
           reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1989 (File No. 0-935)).

                                       20
<PAGE>

10.10      Stock  Appreciation  Rights  Agreement  dated as of November 20, 1989
           between the Company and Alan E. Rothenberg.  (Incorporated  herein by
           reference to Exhibit  10.10 of the  Company's  Annual  Report on Form
           10-K for the fiscal year ended December 31, 1989 (File No. 0-935)).

10.11      Stock Purchase  Agreement  dated as of June 15, 1990 by and among the
           Company,   as  purchaser,   and  Azimuth   Corporation,   as  seller.
           (Incorporated  herein by reference  to Exhibit 2(a) of the  Company's
           Form 8-K filed June 15, 1990. (File No. 0-935)).

10.12      Loan  Agreement  dated as of June 14, 1990 between the  Company,  the
           borrower, and Continental Bank N.A., the lender. (Incorporated herein
           by reference to Exhibit  10.12 of the  Company's  Form 8-K filed June
           29, 1990. (File No. 0-935)).

10.13      Stock Appreciation Rights Agreement dated as of June 14, 1990 between
           the Company and Val G. Blaugh.  (Incorporated  herein by reference to
           Exhibit 4 of the  Company's  Form 8-K filed June 15, 1990.  (File No.
           0-935)).

10.14      Stock Appreciation Rights Agreement dated as of June 14, 1990 between
           the Company and Mark van der Kloet. (Incorporated herein by reference
           to Exhibit 4 of the Company's Form 8-K filed June 15, 1990. (File No.
           0-935)).

10.15      Stock Appreciation Rights Agreement dated as of June 14, 1990 between
           the Company and Roy D. Rafalco.  (Incorporated herein by reference to
           Exhibit 4 of the  Company's  Form 8-K filed June 15, 1990.  (File No.
           0-935)).

10.16      Stock Appreciation Rights Agreement dated as of June 14, 1990 between
           the Company and Jeffrey Pratt.  (Incorporated  herein by reference to
           Exhibit 4 of the  Company's  Form 8-K filed June 15, 1990.  (File No.
           0-935)).

10.17      Employment  Agreement  between the Company  and  Alexander  M. Milley
           dated November 20, 1989. (Incorporated herein by reference to Exhibit
           10.17 of the Company's Annual Report on Form 10-K for the fiscal year
           ended December 31, 1991 (File No. 0-935)).

10.18      Employment  Agreement  between  the  Company and Robert C. Shaw dated
           November 20, 1989. (Incorporated herein by reference to Exhibit 10.18
           of the Company's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1991 (File No. 0-935)).

10.19      Revolving  Credit  Agreement,  dated as of May 1, 1995,  among  Payne
           Fabrics,  Inc.,  Bell  National  Corporation  and Bank  One,  Dayton,
           National  Association.  (Incorporated  herein by reference to Exhibit
           10.19 of the Company's Annual Report on Form 10-K for the fiscal year
           ended December 31, 1995 (File No. 0-935)).

10.20      SAR Agreement Extension, dated November 15, 1995, between the Company
           and Raymond O'S. Kelly.  (Incorporated herein by reference to Exhibit
           10.20 of the Company's Annual Report on Form 10-K for the fiscal year
           ended December 31, 1995 (File No. 0-935)).

10.21      SAR Agreement Extension, dated November 15, 1995, between the Company
           and  Nicholas E.  Toussaint.  (Incorporated  herein by  reference  to
           Exhibit  10.21 of the  Company's  Annual  Report on Form 10-K for the
           fiscal year ended December 31, 1995 (File No. 0-935)).

21.1       Subsidiaries of the Company. (Incorporated herein by reference to the
           exhibits filed with the Company's  Annual Report on Form 10-K for the
           fiscal year ended December 31, 1990 (File No. 0-935)).

27         Financial data schedule.


(b)  Reports on Form 8-K

           Reports on Form 8-K filed during the fourth quarter of 1996.

                None


                                       21
<PAGE>



                                   SIGNATURES


Pursuant to the  requirements of 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.

                                             BELL NATIONAL  CORPORATION


Date:  March 20, 1997                        BY: /s/ Alexander M. Milley
                                                 ------------------------
                                                    Alexander M. Milley
                                             Chairman of the Board and Secretary


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

<TABLE>
<CAPTION>
              Signature                                  Title                               Date
              ---------                                  -----                               ----

<S>                                            <C>                                      <C>
     /s/ Alexander M. Milley                   Director, Chairman of the                March 20, 1997
    --------------------------------             Board and Secretary
       Alexander M. Milley


     /s/ Robert C. Shaw                        Director, President and                  March 20, 1997
        Robert C. Shaw                           Treasurer (Principal
                                                 Executive Officer)

     /s/ Raymond O'S. Kelly                    Director                                 March 20, 1997
    --------------------------------
        Raymond O'S. Kelly


     /s/ Nicholas E. Toussaint                 Director                                 March 20, 1997
    --------------------------------
        Nicholas E. Toussaint


     /s/ Thomas R. Druggish                    Director, Chief Financial                March 20, 1997
    --------------------------------             Officer (Principal Financial
        Thomas R. Druggish                       Officer and Accounting
                                                 Officer)
</TABLE>



                                       22
<PAGE>


                         Report of Independent Auditors


Shareholders and Board of Directors
Bell National Corporation


We have audited the  accompanying  consolidated  balance sheets of Bell National
Corporation  and  subsidiaries as of December 31, 1996 and 1995, and the related
consolidated  statements of operations,  stockholders' equity, and cash flow for
each of the three years in the period ended  December 31, 1996.  Our audits also
included the financial  statement  schedule listed in the accompanying  index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedule 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 Bell
National  Corporation  and  subsidiaries  at December 31, 1996 and 1995, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted  accounting  principles.  Also, in our opinion,  the related  financial
statement  schedule,   when  considered  in  relation  to  the  basic  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

The accompanying  financial statements have been prepared assuming Bell National
Corporation  will  continue as a going  concern.  As  discussed  in Note 11, the
Company is in default with respect to its revolving credit agreement. Demand for
repayment  by the lender  would  raise  substantial  doubt  about the  Company's
ability to continue as a going concern.  The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification  of assets and  liabilities  that may result  from the outcome of
this uncertainty.



                                                      /s/  Ernst & Young LLP
                                                      ----------------------

Dayton, Ohio
March 7, 1997

                                      F-1
<PAGE>

                            BELL NATIONAL CORPORATION
                           Consolidated Balance Sheets
                             (Dollars in Thousands)


                                     ASSETS

                                                           December 31,
                                                   ---------------------------
                                                      1996             1995
                                                   ---------         ---------
Current assets:

     Cash and cash equivalents                     $      --         $      --

     Accounts receivable, net                          1,222             1,082

     Inventory, net                                    2,740             4,083

     Prepaid expenses and other current assets            95               114
                                                   ---------         ---------

         Total current assets                          4,057             5,279

Property and equipment, net                              157               212

Goodwill, net                                            663               683

Deferred sample books, net                             1,242             1,696

Other assets                                              --                40
                                                   ---------         ---------

                                                   $   6,119         $   7,910
                                                   =========         =========












The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-2

<PAGE>
                            BELL NATIONAL CORPORATION
                           Consolidated Balance Sheets
                             (Dollars in Thousands)


                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                           December 31,
                                                                  -----------------------------
                                                                     1996               1995
                                                                  ----------         ----------

Current liabilities:
<S>                                                               <C>                <C>
     Accounts payable                                             $    1,047         $    1,901
     Current portion of capitalized lease obligations                     --                  3
     Current portion of long-term debt--in default in 1996             2,225                400
     Accrued compensation and employee benefits                          444                449
     Accrued expenses                                                    512                381
                                                                  ----------         ----------

         Total current liabilities                                     4,228              3,134

Long-term debt                                                            --              2,642

Accrued stock appreciation rights                                        268                356

Capital lease obligations, less current portion                           --                  3

Other liabilities                                                         48                201
                                                                  ----------         ----------
                                                                       4,544              6,336
Stockholders' equity:
     Common stock, no par value;
       authorized 12,000,000 shares, issued and
       outstanding 5,488,114 at December 31, 1996
       and 5,283,114 at December 31, 1995                             15,815             15,800

     Additional paid-in capital                                           10                 10

     Accumulated deficit                                             (14,250)           (14,236)
                                                                  ----------         ----------

         Total stockholders' equity                                    1,575              1,574
                                                                  ----------         ----------

                                                                  $    6,119         $    7,910
                                                                  ==========         ==========

The accompanying  notes are an integral part of these consolidated
financial statements.
</TABLE>

                                      F-3

<PAGE>

                            BELL NATIONAL CORPORATION
                      Consolidated Statements of Operations
             (Amounts in Thousands, Except Share and Per Share Data)


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                          ----------------------------------------------------
                                                              1996                1995               1994
                                                          -------------      -------------       -------------

<S>                                                       <C>                <C>                 <C>
Net sales                                                 $      12,550      $      13,653       $      13,877

Costs and expenses:
     Cost of sales                                                6,879              7,127               7,023
     Selling, general and administrative                          5,412              6,057               6,179
                                                          -------------      -------------       -------------

Operating income                                                    259                469                 675

Other income (expenses):
     Interest expense                                              (261)              (347)               (308)
     Other                                                         (162)               (45)                (44)
                                                          -------------      -------------       -------------

Income (loss) before income taxes and
     extraordinary item                                            (164)                77                 323

Provision (benefit) for income taxes                               (150)                29                 146
                                                          -------------      -------------       -------------

Income (loss) before extraordinary item                             (14)                48                 177

Extraordinary item, net of taxes of  $109                            --                 --                 143
                                                          -------------      -------------       -------------

Net Income (Loss)                                         $         (14)     $          48       $         320
                                                          =============      =============       =============

Earnings per common share
       Income before extraordinary item                   $          --      $         .01       $         .03
       Extraordinary item                                            --                 --                 .03
                                                          -------------      -------------       -------------
       Net income                                         $          --      $         .01       $         .06
                                                          =============      =============       =============
Weighted average number of common
     shares outstanding                                       5,306,142          5,283,114           5,280,790
                                                          =============      =============       =============



The accompanying  notes are an integral part of these consolidated
financial statements.
</TABLE>

                                      F-4

<PAGE>

                            BELL NATIONAL CORPORATION
                 Consolidated Statements of Stockholders' Equity
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                      Common Stock              Additional         Accum-           Total
                               ---------------------------        Paid-In          ulated       Stockholders'
                                   Shares        Dollars          Capital          Deficit          Equity
                               -----------     -----------    -------------     -------------    -------------

<S>                              <C>                <C>                  <C>          <C>                <C>
   January 1, 1994               5,274,186          15,797               10           (14,604)           1,203

   Issuance of common
     stock in connection
     with exercise
      of SAR's                       8,928               3               --                --                3

   Net income                           --              --               --               320              320
                               -----------     -----------    -------------     -------------    -------------

   December 31, 1994             5,283,114          15,800               10           (14,284)           1,526

   Net income                           --              --               --                48               48
                               -----------     -----------    -------------     -------------    -------------

   December 31, 1995             5,283,114          15,800               10           (14,236)           1,574


   Net Loss                             --              --               --               (14)            (14)

   Issuance of common
      stock in connection
      with exercise
      of SAR's                     205,000              15               --                --               15
                               -----------     -----------    -------------     -------------    -------------
   December 31, 1996             5,488,114     $    15,815    $          10     $     (14,250)   $       1,575
                               ===========     ===========    =============     ==============   =============









The accompanying  notes are an integral part of these consolidated
financial statements.
</TABLE>


                                      F-5

<PAGE>

                            BELL NATIONAL CORPORATION
                      Consolidated Statements of Cash Flows
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                          ----------------------------------------------------
                                                              1996                1995                1994
                                                          -------------      --------------      -------------
Operating activities:

<S>                                                       <C>                <C>                 <C>
Net income (loss)                                         $         (14)     $          48       $         320
   Adjustments to reconcile net income to
   net cash provided by operating activities:
     Depreciation                                                    55                 63                  80
     Amortization of goodwill                                        20                 20                  20
     Amortization of deferred sample books                        1,143                955               1,003
     Accretion of discount on notes payable to
         Azimuth                                                     --                 --                  14
     Accrual for Stock Appreciation Rights                          (73)                --                 146
     Amortization of deferred debt commitment fee                    40                 20                  17
     Provision for doubtful accounts and sales
         returns                                                     11                 (7)                (10)
     Provision (benefit) for income taxes                          (160)                --                 209

(Increase) decrease in assets:
   Accounts receivable                                             (151)                10                 117
   Inventory                                                      1,343                390                (605)
   Prepaid expenses and other current assets                         19                 (1)                (21)

Increase (decrease) in liabilities:
   Accounts payable                                                (854)               312                 (53)
   Accrued compensation and employee benefits                        (5)               (66)                 47
   Accrued expenses                                                 131                 46                (286)
   Other liabilities                                                  7                (53)                 45
                                                          -------------      --------------      -------------

Net cash provided by operating activities                         1,512              1,737               1,043
                                                          -------------      -------------       -------------

Investing activities:

Acquisition of property and equipment                                --                (76)                (24)
Production and purchase of deferred
     sample books                                                  (689)            (1,727)               (784)
                                                          -------------      -------------       -------------

Net cash used in investing activities                              (689)            (1,803)               (808)
                                                          -------------      -------------       -------------


The accompanying  notes are an integral part of these consolidated
financial statements.
</TABLE>
                                      F-6

<PAGE>

                            BELL NATIONAL CORPORATION
                Consolidated Statements of Cash Flows (Continued)

                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ----------------------------------------------------
                                                              1996                1995                1994
                                                          -------------      --------------      -------------

Financing activities:

<S>                                                       <C>                <C>                 <C>
Proceeds from the issuance of long-term debt                         --              5,994              14,783
Principal payments on long-term debt                               (817)            (5,873)            (15,015)
Principal payments on capital leases                                 (6)                (3)                 (3)
Payment of deferred debt commitment fee                              --                (52)                 --
                                                          -------------      --------------      -------------


Net cash (used in) financing activities                            (823)                66                (235)
                                                          --------------     -------------       -------------

Net increase in cash and cash equivalents                            --                 --                  --

Cash and cash equivalents at beginning of year                       --                 --                  --
                                                          -------------      -------------       -------------

Cash and cash equivalents at end of year                  $          --      $          --       $          --
                                                          =============      =============       =============



Supplemental disclosures of cash flow information:

Cash paid during the year for:
     Interest                                             $         259      $         371       $         267
     Income taxes                                                     1                 77                  55










The accompanying  notes are an integral part of these consolidated
financial statements.
</TABLE>
                                      F-7

<PAGE>

                            BELL NATIONAL CORPORATION
                   Notes To Consolidated Financial Statements
                                December 31, 1996


NOTE 1.  The Company and Basis of Presentation

Bell National  Corporation  ("Bell  National" and together with its subsidiaries
the "Company") was incorporated in California on October 1, 1958.  Through 1985,
its principal subsidiary was Bell Savings and Loan Association ("Bell Savings"),
a state chartered  savings and loan  association.  On July 25, 1985, the Federal
Home Loan Bank Board appointed the Federal Savings & Loan Insurance  Corporation
("FSLIC")  as receiver  of Bell  Savings.  At the same time,  the assets of Bell
Savings were transferred to a new, unrelated, federally chartered mutual savings
and loan association,  Bell Federal. The FSLIC's action followed shortly after a
determination  that Bell Savings had a negative  net worth.  On August 20, 1985,
Bell National  filed a voluntary  petition  under  Chapter 11 of the  Bankruptcy
Code. A plan of reorganization  was approved by the Bankruptcy Court, and became
effective June 29, 1987.

On June 15,  1990,  Bell  National  purchased  100% of the common stock of Payne
Fabrics,  Inc.  ("Payne"),  a designer and distributor of decorative drapery and
upholstery fabrics, for a purchase price of $6,493,000 and the issuance of stock
appreciation  rights.  Bell National's  other  wholly-owned  subsidiaries,  Bell
Savings and Pacific Coast Holdings Insurance Company, have no significant assets
or liabilities .

NOTE 2.  Summary of Significant Accounting Policies

Principles of Consolidation The consolidated  financial  statements include Bell
National  and its wholly  owned  subsidiaries.  All  intercompany  balances  and
transactions have been eliminated.

Use of Estimates The preparation of the financial  statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash  Equivalents The Company has instituted a cash management  system,
whereby  cash  generated  by  operations  is  immediately  used to reduce  debt.
Accordingly the Company maintains no cash or cash equivalents.

Inventories  Inventories are carried at the lower of cost (first-in,  first-out)
or market and consist  totally of  finished  goods.  The  reserve  for  obsolete
inventory at December 31, 1996 and 1995 is $137,000 and $106,000, respectively.


                                      F-8

<PAGE>


Property  and  Equipment  Property  and  equipment  are  stated  at cost and are
depreciated  using the  straight-line  method over the assets'  estimated useful
lives. Principal useful lives are as follows:

         Furniture and fixtures                   10 years
         Machinery and equipment                  12 years
         Leasehold improvements                   Useful life or life of lease,
                                                    whichever is shorter
         Computer equipment and software          5 years

Normal  maintenance and repairs are charged to expense as incurred,  significant
improvements are capitalized.

Goodwill Assets and liabilities  related to the Payne business  combination have
been  accounted  for as a  purchase  transaction  and  were  recorded  at  their
respective  fair values at the date of  acquisition.  Goodwill  arising from the
excess of the purchase cost, plus related  acquisition  expenses,  over the fair
value of aggregate net assets  acquired is recorded as an asset and amortized on
a straight-line  basis over 40 years.  Accumulated  amortization at December 31,
1996 and 1995 is $155,000 and $135,000, respectively.

The  Company  has adopted the  provisions  of SFAS No. 121,  Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
impact of adopting the standard was not material to the results of operations.

Deferred  Sample Books The cost of  producing  and  purchasing  sample books are
initially  recorded as an asset and amortized  over a three year period,  20% in
the year of  manufacture  and  initial  distribution  and 40% in each of the two
subsequent  years.  Accumulated  amortization  at December  31, 1996 and 1995 is
$1,174,000  and $816,000,  respectively.  Costs  included in the  development of
sample books include  labor,  material,  freight and supplies.  Labor  including
internal and subcontracted, together with fabric costs, constitute approximately
85% of total sample book costs.

Revenue  Recognition The Company  recognizes revenue upon shipment of product to
customers.

Income Taxes The Company  follows the liability  method in accounting for income
taxes.  Under this method,  deferred tax assets and  liabilities  are determined
based on  differences  between  financial  reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be in
effect when the  differences are expected to reverse.  Valuation  allowances are
provided  against  deferred  tax assets if it is more  likely  than not that the
deferred tax assets will not be realized.


                                      F-9
<PAGE>


Income Per Common Share  Income per common share is computed  using the weighted
average number of common shares outstanding during the respective  periods.  The
exercise of outstanding  warrants,  which are common stock equivalents,  are not
included in the  computation  as their effect would be  antidilutive.  The fully
diluted per share calculation was anti-dilutive for each year.

NOTE 3.  Accounts Receivable

Accounts  receivable  are net of  allowances  for  sales  returns  and  doubtful
accounts of $80,000 and $69,000 at December 31, 1996 and 1995, respectively. The
Company markets its decorative  drapery and upholstery  products  principally to
interior designers located throughout the United States.

NOTE 4.  Property and Equipment  Property and equipment consists of the
         following at December 31:

<TABLE>
<CAPTION>
                                                                      1996                1995
                                                                  -----------         -----------

<S>                                                               <C>                 <C>
     Furniture and fixtures                                       $   213,000         $   213,000
     Machinery and equipment                                          228,000             228,000
     Leasehold improvements                                           153,000             153,000
     Computer equipment and software                                  286,000             286,000
                                                                  -----------         -----------
                                                                      880,000             880,000
     Less accumulated depreciation and amortization                   693,000             668,000
                                                                  -----------         -----------
                                                                  $   157,000         $   212,000
                                                                  ===========         ===========
</TABLE>



NOTE 5. Long-Term Debt Long-term debt is summarized as follows at December 31:
<TABLE>
<CAPTION>
                                                                     1996                1995
                                                                  -----------         -----------
<S>                                                               <C>                 <C>
       Bank revolving and term facility                           $ 2,225,000         $ 3,042,000
       Less current portion                                         2,225,000             400,000
                                                                  -----------         -----------
           Long-term debt less current portion                    $        --         $ 2,642,000
                                                                  ===========         ===========
</TABLE>


On May 1, 1995 the Company entered into a Revolving  Credit  Agreement with Bank
One, Dayton, National Association ("Revolving Agreement"). The terms provide for
a total loan  facility of $4,125,000  consisting  of a term loan of  $1,025,000,
payable in seven  quarterly  installments  of $100,000 and a balloon  payment of
$325,000 due on June 1, 1997. The remaining  portion of the Revolving  Agreement
consists  of a  revolving  line of  credit,  which  matures  on  June  1,  1998.
Borrowings  under the  revolving  line of credit  are based on a  percentage  of
Payne's  eligible  accounts  receivable  and a  percentage  of Payne's  eligible
inventory,  as defined.  The Revolving Agreement is collateralized by all of the
assets of Payne, guaranteed by the Company and subject to restrictive covenants.

                                      F-10

<PAGE>

During 1996 the Company did not meet  certain  covenants  of the  existing  loan
facility.  The quarterly  installments  after the September 1, 1996 payment have
not been made,  but all interest  payments are current.  The Company has been in
discussions with Bank One, Dayton, National Association related to the Revolving
Agreement.  The  outcome of these  discussions  are  unknown and the Company has
therefore  classified  all  amounts  owing  to the Bank as  current  liabilities
reflecting the Bank's ability to require repayment of the loan.

In  connection  with the 1990  acquisition  of Payne the Company  entered into a
$450,000 senior subordinated note, net of a $150,000 discount (the "Note").  The
note which bore  interest  at 10% per annum was due on July 15,  1995.  In April
1994,  Bell National  Corporation  prepaid the Note at its then present value of
$570,000. In connection therewith, the holder, Azimuth Corporation,  forgave all
unpaid  interest,  which  totaled  $252,000 at December 31,  1993.  The interest
forgiven  is  reflected  as an  extraordinary  item  on  the  1994  consolidated
statement of operations.

In  addition  to  the  outstanding  obligations  noted  above,  the  Company  is
contingently  liable for  approximately  $26,000 under an irrevocable  letter of
credit.

NOTE 6.  Leases

Future  minimum  lease  payments  under  noncancelable  operating  leases  as of
December 31, 1996 are as follows:

           1997                               $     469,000
           1998                               $     495,000
           1999                               $     479,000
           2000                               $     413,000
           2001                               $     206,000
           2002 and thereafter                $     430,000
                                              -------------
                   Total                      $   2,492,000
                                              =============

The  noncancelable  operating  leases are  primarily  for Payne's  warehouse and
office  space and  expire  over the next nine  years.  Rent  expense  charged to
operations  for the year ended  December 31, 1996,  1995 and 1994 was  $461,000,
$444,000 and $455,000, respectively.

NOTE 7.  Employee Pension Plans

Payne has a defined  benefit  pension  plan  covering  substantially  all of its
employees. The benefits are based on years of service and annual compensation of
the employee calculated on the projected unit credit method.  Payne makes annual
contributions  to the plan equal to the maximum  amount that can be deducted for
income tax purposes. No contributions were required for the years ended December
31, 1996, 1995 and 1994.

Effective January 31, 1994, the plan was frozen and no additional  benefits will
accrue nor additional  employees become eligible for the plan beyond that point.
The individual  employees  currently eligible at that time became 100% vested in
their accumulated benefits as of that date.

                                      F-11

<PAGE>

The following table sets forth the plan's funded status,  amounts  recognized in
the  Consolidated  Balance  Sheet  at  December  31,  1996  and 1995 and the net
periodic pension cost recognized for the years then ended.
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                           -------------------------------------
                                                                                 1996                  1995
                                                                           ---------------       ---------------

<S>                                                                        <C>                   <C>
Actuarial present value of accumulated benefit obligation                  $     1,187,000       $     1,689,000
                                                                           ===============       ===============

Projected benefit obligation                                               $     1,187,000       $     1,689,000
Plan assets at fair value                                                        1,258,000             1,618,000
                                                                           ---------------       ---------------
Plan assets in excess of (less than) projected
     benefit obligation                                                             71,000               (71,000)
Unrecognized net (gain) loss                                                       (21,000)               93,000
Unrecognized prior service gain                                                         --                    --
Unrecognized transitional asset                                                    (19,000)              (51,000)
                                                                           ---------------       ---------------
     Net pension asset (liability)                                         $        31,000       $       (29,000)
                                                                           ===============       ===============

Net pension costs include the following components:
Service cost                                                               $            --       $            --
Interest on projected benefit obligation                                           122,000               119,000
Actual return on plan assets                                                      (142,000)             (132,000)
Other                                                                              (25,000)              (25,000)
                                                                           ---------------       ---------------
     Net periodic pension (income)                                         $       (45,000)      $       (38,000)
                                                                           ===============       ================

</TABLE>

Plan assets consist primarily of fixed income securities,  commingled investment
funds, commercial paper, and short-term securities.

The  following  is a summary of  significant  actuarial  assumptions  used as of
December 31:
<TABLE>
<CAPTION>
                                                                                 1996                  1995
                                                                           ---------------       ----------------
<S>                                                                                   <C>                   <C>
       Discount rate                                                                  8.0%                  7.5%
       Rate of increase in compensation levels                                        0.0%                  0.0%
       Expected long-term rate of return on assets                                    9.0%                  9.0%
</TABLE>

The Company  changed the assumed  discount  rate by adoption of the GATT pension
provisions  in 1995  resulting  in an increase in the  December 31, 1995 benefit
obligation of $123,000.

Payne maintains an employee  retirement savings plan under Section 401(k) of the
Internal  Revenue  Code.  Under the terms of such plan,  eligible  employees may
contribute  up to 20% of their annual  compensation,  up to a ceiling of $9,240.
The Plan allows Payne to make  matching  contributions.  In 1996,  1995 and 1994
Payne made matching contributions of $16,676, $27,988 and $7,782,  respectively.
Payne has the  ability to  activate  sections  of the plan in order to allow for
discretionary  contributions.  As of December 31, 1996,  such  sections have not
been activated. Effective November 1, 1996 the plan was amended and the matching
contribution made by Payne was suspended.

                                      F-12
<PAGE>

NOTE 8.  Income Taxes

The effective  income tax rates differed from the Federal  Statutory  income tax
rates as follows for the year December 31:
<TABLE>
<CAPTION>
                                                              1996                1995                1994
                                                          -------------      -------------       -------------

<S>                                                       <C>                <C>                 <C>
Statutory Federal income tax benefit (expense)            $      56,000      $     (26,000)      $    (195,000)
(Increase) Decrease resulting from:
     Effect of nondeductible amortization                       (19,000)           (16,000)            (14,000)
     Deferred tax benefits not recognized                            --             42,000                  --
     Reduction in valuation allowance
          for deferred tax assets                               129,000                 --                  --
     Other                                                       (6,000)                --                  --
     State income tax expense                                   (10,000)           (29,000)            (46,000)
                                                          -------------      -------------       -------------
Reported Income tax benefit (expense)                     $     150,000      $     (29,000)      $    (255,000)
                                                          =============      =============       =============


The components of income tax benefit (expense) are as follows:

                                                              1996                1995                1994
                                                          -------------      -------------       ---------

Deferred benefit (expense)                                $     160,000      $          --       $    (209,000)
State and local                                                 (10,000)           (29,000)            (46,000)
                                                          -------------      -------------       -------------
                                                          $     150,000      $     (29,000)      $    (255,000)
                                                          =============      =============       =============
</TABLE>


At December  31, 1996,  the Company had federal  income tax net  operating  loss
carryforwards  ("NOL's") of  approximately  $114,000,000  which expire from 1997
through  2011.  These NOL's  primarily  arose from income tax returns which were
subject to rulings by the Bankruptcy  Court.  The Internal  Revenue  Service has
objected  to the  Bankruptcy  Court's  ability  to  rule  as to the  amount  and
character of the  carryforwards.  In addition,  under the Internal  Revenue Code
("IRC"), the benefit of these NOL's could be limited, or eliminated,  if the IRS
determines  there  was an  "ownership  change"  involving  more  than 50% of the
Company's stock.  There is risk that the Company does not meet the continuity of
business requirements of the IRC. These matters create doubt as to whether these
carryforwards will be utilized by the Company. For financial reporting purposes,
the Company does not recognize the benefit of these NOL's.

                                      F-13

<PAGE>


Significant  components of the Company's  deferred tax asset and liability as of
December 31 were as follows:

                                                      1996             1995
                                                ---------------   -------------
Deferred tax assets related to:
         Net operating loss carryforwards       $    39,100,000   $  39,100,000
         Accrued stock appreciation rights               91,000         121,000
         Reserve for obsolete inventory                  47,000          36,000
         Inventory                                      235,000         330,000
         Accounts receivable reserves                    27,000          24,000
         Accrued vacation                                28,000          30,000
         Other                                           11,000          27,000
                                                  -------------   -------------
                                                     39,539,000      39,668,000
         Less valuation allowance                    39,475,000      39,604,000
                                                  -------------   -------------
                                                         64,000          64,000
Deferred tax liability related to:
         Depreciation                                    64,000          64,000
                                                  -------------   -------------
Net deferred tax asset                            $          --   $          --
                                                  -------------   -------------

The  Company  has  recorded  valuation  allowances  to offset  the amount of the
deferred tax asset in its entirety.


NOTE 9.  Stockholders' Equity

On November 20, 1989,  Bell National sold 1,317,373  shares of common stock to a
group of investors for  approximately  $443,000 or $0.34 per share. In addition,
Bell National  issued a warrant to acquire  957,373 shares of common stock.  The
warrant is exercisable through November 20, 1999 at $0.37 per share. The warrant
agreement,  among other  things,  provides  for the  repurchase  of  unexercised
warrants.  The  obligation of Bell National is  determined  by  multiplying  the
unexercised number of shares subject to the warrant by the excess of the current
market  price (as  defined)  per share of common  stock and the current  warrant
price (as defined) per share of common  stock.  Since the exercise  price of the
warrant is greater  than the fair market value of the stock at December 31, 1996
and 1995, no liability has been recorded for this obligation.

In addition to the  warrant,  the Company has issued under  various  agreements,
1,470,357 stock appreciation  rights (SAR's),  of which 360,000 have expired and
213,928 have been  exercised  as of December 31, 1996.  Included in these totals
are $0.30  exercise  price SAR's issued of 810,000 of which 360,000 have expired
and none  issued.  Also  included  in the total are $0.00  exercise  price SAR's
issued of 660,357 of which none have expired and 213,928  have been issued.  The
remaining  450,000 SAR's,  with a $0.30 exercise price can be exercised  through
November 20, 2001.  Included in the $0.00  exercise  price SAR's are the 455,357
issued in connection with the  acquisition of 17% of the  outstanding  shares of
Payne common stock which can be exercised at various dates through June 1997. In
general,  each SAR entitles the holder to receive upon  exercise an amount equal
to the  excess,  if any,  of the market  value per share at the date of

                                      F-14

<PAGE>

exercise over the exercise price of the SAR, plus any dividends or distributions
per share made by Bell National  prior to the exercise date. The warrant and SAR
agreements contain mandatory stock registration rights.

At  December  31,  1996,  1995 and 1994 the value of all issued and  outstanding
SAR's,  including related registration costs, has been estimated to be $268,000,
$356,000 and $356,000, respectively.


NOTE 10.  Related Party Transactions

The Company currently rents corporate office space on a month-to-month  basis in
Orlando, Florida from Milley Management  Incorporated,  a private investment and
management  consulting  firm.  The Chairman and  Secretary of the Company is the
President  and sole  stockholder  of Milley  Management  Incorporated.  Rent and
administrative support expenses were approximately $120,000 in each of the years
ended December 31, 1996, 1995 and 1994, respectively.


NOTE 11.  Going Concern

The accompanying  financial  statements have been prepared  assuming the Company
will  continue as a going  concern.  As  discussed  in Note 5, the Company  must
comply with certain restrictive covenants in connection with its borrowings. The
Company violated certain of these covenants during the year and, therefore,  has
defaulted on its revolving  credit note.  In addition,  it has not made required
quarterly  principal payments subsequent to September 1, 1996. The debt from the
lender,  amounting to $2,225,000 at December 31, 1996, has been  classified as a
current liability. The Company's future existence is contingent upon its ability
to meet the requirements of the agreement  and/or otherwise  refinance the debt.
The financial  statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.



                                      F-15
<PAGE>

<TABLE>
<CAPTION>
                                                       SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
                                                          BELL NATIONAL CORPORATION AND SUBSIDIARIES
                                                                    (Dollars in Thousands)

               Col. A                      Col. B                 Col. C - Additions               Col. D                Col. E
               ------                  --------------    ---------------------------------     -------------         -------------
                                         Balance at        Charged to          Charged to        Balance at
                                          Beginning        Costs and           Other Accts.      Deductions              End of
             Description                  of period         Expenses           (Describe)        (Describe)              Period

Year ended December 31, 1996:
  Deducted from asset accounts:
<S>                                    <C>               <C>                 <C>               <C>                  <C>
     Allowance for sales returns       $           16    $          385      $          --     $        3770 (A)    $           24
     Allowance for doubtful accounts               53                27                 --                24 (B)                56
                                       --------------    --------------      -------------     -------------        --------------
                                       $           69    $          412      $          --     $         401        $           80
                                       ==============    ==============      =============     =============        ==============
     Reserve for obsolete inventory    $          106    $           63      $          --     $          32 (C)    $          137
                                       ==============    ==============      =============     =============        ==============

Year ended December 31, 1995:
  Deducted from asset accounts:
     Allowance for sales returns       $           18    $          332      $          --     $         334 (A)    $           16
     Allowance for doubtful accounts               58                25                 --                30 (B)                53
                                       --------------    --------------      -------------     -------------        --------------
                                       $           76    $          357      $          --     $         364                    69
                                       ==============    ==============      =============     =============        ==============
     Reserve for obsolete inventory    $          132    $           15      $          --     $          41 (C)    $          106
                                       ==============    ==============      =============     =============        ==============

Year ended December 31, 1994:
  Deducted from asset accounts:
     Allowance for sales returns       $           19    $          321      $          --     $         322 (A)    $           18
     Allowance for doubtful accounts               67                29                 --                38 (B)                58
                                       --------------    --------------      -------------     -------------        --------------
                                       $           93    $          350      $          --     $         360                    76
                                       ==============    ==============      =============     =============        ==============
     Reserve for obsolete inventory    $          157    $           75      $          --     $         100 (C)    $          132
                                       ==============    ==============      =============     =============        ==============



(A)  Returns by customers during the year.
(B)  Uncollectible accounts written off during the year.
(C)  Obsolete inventory written off during the year.
</TABLE>
                                                                         S-1



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