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, 1997
                               --------------------------------------------

                                       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)



3600 Rio Vista Avenue, Suite A, Orlando, FL              32805
--------------------------------------------------------------------------------
(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, 1998 was  $395,000  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, 1998 is 5,916,686.


                                       1

<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  (including  MMI)  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. 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 ("SAR's").  Bell National's other wholly owned subsidiaries,
Bell Savings and Pacific Coast Holdings Insurance Company, have no operations or
any significant assets or liabilities.

On August 4, 1997 Payne Fabrics,  Inc. sold  substantially all of its assets and
most of its  liabilities  related to the business of designing and  distributing
decorative   drapery  and   upholstery   fabrics  to  Westgate   Fabrics,   Inc.
("Westgate"),  an  unaffiliated  third party (the "Asset Sale").  The Asset Sale
included  the  transfer to the buyer of the use and rights to the Payne  Fabrics
name,  accordingly,  Payne  Fabrics,  Inc.,  changed  its  name to PFI  National
Corporation  ("PFI"). The Asset Sale left PFI without any substantial assets and
on August 4, 1997 all operations were ceased.

The Board of Directors is reviewing the future  direction of the Company.  Among
alternatives are the possible sale of stock or debt to raise additional  capital
to either fund the  acquisition  of an  operating  company or to fund a start-up
company (either from inception or in an early  development  phase). It is highly
likely that in order to fund an  acquisition  of a meaningful  size  significant
additional  funds would be  required,  and no  assurance  can be given that such
funds


                                       2

<PAGE>


could be obtained on terms deemed favorable by management.  Another option would
be the possibility of a liquidating  dividend.  The discussion contained in this
section is not intended to be an exhaustive review of alternatives  available to
the  Company,  nor does  inclusion  or omission of any  alternative  provide any
indication  of what course of action may finally be decided upon.  However,  the
Company  is not,  nor does it intend to engage, in the  business  of  investing,
reinvesting, owning, holding or trading securities.


ITEM 2.   PROPERTIES

Simultaneous  to the Asset Sale PFI's lease  obligations  were either settled or
assumed by the buyer. The one outstanding lease obligation  remaining after this
transaction  was settled on February 11, 1998. A provision  for this  settlement
has been made to the financial  statements  included herein.  The Company has no
remaining physical properties.


ITEM 3.   LEGAL PROCEEDINGS

There are no material  pending legal  proceedings to which the Company or any of
its  subsidiaries  is a party or of which any of their  property is the 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 1997.



                                       3

<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, 1998 there  were  approximately  1,076  holders of record of Bell
National's Common Stock.

Dividend History

Bell  National  has not paid a cash  dividend  and the Board of Directors is not
contemplating paying one at this time.

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.



                                       4

<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA

The selected financial data is derived from, and qualified by reference,  to the
audited  consolidated  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:

Balance Sheet Data
(dollars in thousands):

<TABLE>
<CAPTION>

                                     December 31,    December 31,   December 31,   December 31,    December 31,
                                        1997            1996           1995           1994             1993
                                     ------------    ------------   ------------   ------------    ------------
<S>                                      <C>             <C>            <C>            <C>             <C>
Total Assets                             $  1,348        $  6,119       $  7,910       $  7,505        $  7,298
Notes Payable                                   0           2,225          3,042          2,921           3,139
Stockholders' Equity                          388           1,575          1,574          1,526           1,203

Statement of Operations Data
(dollars in thousands except per share amounts):

                                                             Years Ended December 31,
                                      ------------------------------------------------------------------------
                                         1997            1996            1995          1994            1993
                                      ---------        ---------      ---------     ---------        ---------

Net sales                             $  6,576         $  12,550      $  13,653     $  13,877        $  14,107
Operating income                            50               259            469           675              643
Net income (loss) before
    extraordinary item                  (1,221)              (14)            48           177              198
Net income (loss) after
    extraordinary item                  (1,221)              (14)            48           320              198

Net income per share
     before extraordinary item           (.21)                --            .01           .03              .04
Net income per share
     after extraordinary item            (.21)                --            .01           .06              .04

</TABLE>

On August 4, 1997 the Company sold  substantially all the assets and most of its
liabilities  relating to the business of designing and  distributing  decorative
drapery and upholstery fabrics.  This business constituted all the operations of
the  Company.  See  Item 1.  (Business)  above  and  Note 1 to the  Consolidated
Financial Statements.


                                       5

<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  1997,  1996 and 1995  revenues and
expenses  result from the operation of PFI, which was acquired in June 1990. The
comparisons  included in this Management's  Discussion and Analysis of Financial
Condition and Results of Operations include the Company's  ownership interest in
PFI's  results  up to the date of the  Asset  Sale.  The  Company's  last day of
ownership was August 4, 1997.

In 1997  the  Company  had net  sales  of  $6,576,000,  cost  of  goods  sold of
$3,521,000,  and  selling,  general and  administrative  expenses of  $3,005,000
resulting in an operating  gain of $50,000.  The operating gain was decreased by
interest  expense of $134,000 and other  expense of $17,000,  resulting in a net
loss before the Asset Sale of  $101,000.  These  results  include the  Company's
ownership of PFI through August 4, 1997.  PFI's  operations  through the date of
sale  caused  an  operating  loss of  $185,000,  substantially  offset by income
resulting  from the  complete  release of $235,000  of  reserves  related to SAR
agreements.  With a  substantial  amount of SAR  agreements  expiring  and being
exercised  in 1997,  and the  stock  price  well  below  the  exercise  price of
remaining  SAR's,  this liability was no longer needed.  In connection  with the
Asset Sale, PFI recorded a loss on the sale of assets of  $1,169,000.  This loss
together  with  the  year to  date  operating  loss  resulted  in a net  loss of
$1,221,000.

The 1997 results are  dramatically  different  than those of 1996 since the 1997
results include seven months of PFI operations  while the 1996 results include a
full twelve  months of PFI  operations.  The 1997 results also include a loss on
the Asset Sale.

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 had caused lower margin items and fixed costs to become a
larger   component   of  the  margin   calculation   resulting   in  the  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

                                       6

<PAGE>

to the SAR 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.

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
earnings per share of $0.01 in 1995.

The Company  had a remaining  goodwill  balance  net of  amortization  of $0 and
$663,000  at  December  31,  1997 and  1996,  respectively.  Goodwill  was being
amortized over a 40 year period.

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, 1997 and December 31, 1996 was $1,300,000 and $0, respectively.

During 1997, the Company had negative cash flow from  operations  before working
capital changes of $870,000.  Working  capital and other changes  increased cash
flow by $980,000  resulting  in cash flow  provided by operating  activities  of
$110,000.  Included in the negative cash flow from  operations was a loss on the
Asset Sale of $1,169,000.  In 1997 the Company purchased or produced $369,000 of
sample books. The Asset Sale provided proceeds of $3,750,000 which was primarily
used to  extinguish  the  bank  debt of  $2,225,000.  In 1997 the  Company  also
received  $34,000 from the issuance of SAR's. The net of this 1997 activity left
the Company with $1,300,000 of cash on hand at December 31, 1997.

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.


                                       7

<PAGE>

Future Needs For and Sources of Capital

The Board of Directors is reviewing the future  direction of the Company.  Among
alternatives are the possible sale of stock or debt to raise additional  capital
to either fund the  acquisition  of an  operating  company or to fund a start-up
company (either from inception or in an early  development  phase). It is highly
likely that in order to fund an  acquisition  of a meaningful  size  significant
additional  funds would be  required,  and no  assurance  can be given that such
funds could be obtained on terms deemed favorable by management.  Another option
would be the possibility of a liquidating dividend.  The discussion contained in
this  section  is  not  intended  to be an  exhaustive  review  of  alternatives
available to the  Company,  nor does  inclusion  or omission of any  alternative
provide any indication of what course of action may finally be decided upon. The
terms of the Asset Sale agreement  have required the Company to concentrate  all
of its efforts to the  favorable  settlement  of the  remaining  liabilities  to
insure the largest possible cash balance.

Absent another acquisition, the Company can survive as a non-operating entity on
it current cash balances for the foreseeable future.


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, 1997, together with the report
thereon  of Ernst & Young LLP dated  March 16,  1998,  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

Since the beginning of 1996:  (i) Ernst & Young LLP, the  Company's  independent
accountants engaged as the principal accountant to audit the Company's financial
statements,  has neither  resigned  (or  indicated  it has declined to stand for
re-election after the completion of a current audit) or been dismissed, and (ii)
no new  independent  accountant  has been  engaged by the  Company as either the
principal  accountant  to audit  the  Company's  financial  statement,  or as an
independent accountant to audit a significant subsidiary.

                                       8

<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            45           Chairman and Secretary

Robert C. Shaw                 45           Director, President and Treasurer

Raymond O'S. Kelly             63           Director

Nicholas E. Toussaint          60           Director

Thomas R. Druggish             42           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. 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 of
which he is a  controlling  shareholder.  Azimuth and Cadmus are both  privately
held  companies.  Mr.  Milley has been  Chairman of the Board,  Chief  Executive
Officer and President of ELXSI Corporation ("ELXSI") since September 1989. ELXSI
is a NASDAQ-NMS  company that owns and operates a chain of family restaurants in
New  England  and  a  manufacturer   of   environmental   inspection   equipment
incorporating video technology in Orlando, Florida.

Robert C. Shaw became  President,  Treasurer and a Director on November 20, 1989
and was Chief  Financial  Officer from  November 20, 1989 to June 17, 1990.  Mr.
Shaw has been a Vice  President  of MMI  since  March,  1989 an  officer  and/or
director of Azimuth and/or certain  subsidiaries  thereof since November 1990, a
director of Cadmus since  January 1992 and an officer  and/or  director of ELXSI
since September 1989. Prior to that he was Vice President of Berkeley Softworks,
Incorporated  ("Berkeley")  from September 1987 to March 1989. From January 1987
to September 1987, he was Vice President, and from 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.

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

                                       9


<PAGE>


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  on June 1, 1992 and  became  the Chief
Financial  Officer on June 17,  1990.  He  currently  serves as Vice  President,
Treasurer and Secretary of ELXSI and Secretary and Treasurer of MMI and has been
Vice President and Secretary of Cadmus since November 1992 and an officer and/or
director of Azimuth  and/or  certain  subsidiaries  thereof since November 1990.
Prior to that Mr.  Druggish was Assistant  Controller  at Borland  International
from April 1987 to December 1989.


                                       10


<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth the total 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, 1997, 1996 and 1995.

                           Summary Compensation Table

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


Robert C. Shaw (1)             1997    $   --        --          $     --
  Director, President and      1996        --        --                --
  Treasurer                    1995        --        --                --

Val G. Blaugh (2)              1997      59,500      --             1,960 (3)
                               1996     102,000      --             3,360 (3)
                               1995     102,000      --             2,230 (3)


(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, 1997 and 1996.

(2)  Mr. Blaugh served as President of PFI National  Corporation up to the Asset
     Sale date of August 4, 1997. Compensation excludes 375,000 shares of Common
     Stock issued under an SAR  agreement  entered into in  connection  with the
     Company's acquisition of PFI National Corporation. See Item 1 above.

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


                                       11

<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, 1998 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 5,916,686
shares of Common Stock of Bell National outstanding on March 8, 1998, 696,570 of
such shares of Common Stock have been  designated  "Class 4-B shares" (Class 4-B
shares are 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).

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

The Airlie Group L.P.                          453,176               8.7% (1)
   115 East Putnam Avenue
   Greenwich, CT  06830

Alexander M. Milley                          1,512,514              24.5% (2)
   (Director, Chairman of
   the Board and Secretary)
   Milley & Company
   3600 Rio Vista Avenue, Suite A
   Orlando, FL  32805

Robert C. Shaw,                                 37,084               0.7% (1)
   (Director, President and
   Treasurer)


Raymond O'S. Kelly                              45,781               0.9% (1)(3)
   (Director)

Santa Fe Mortgage and
Development Company                            648,485              12.4% (1)
   Don Hancock
   Carol G. Avakian Hancock
   dba C.G.A. Avakian Co.
   Post Office Box 2540
   Fair Oaks, CA  95628


                                       12

<PAGE>


All officers and directors**                 1,595,379              25.8% (2)
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  5,220,116  shares  of  Common  Stock
     outstanding and entitled to vote (excluding Class 4-B shares).

(2)  This ownership percentage assumes the exercise of warrants for the purchase
     of 957,373  shares for the Company's  Common  Stock,  which expire in 1999.
     This percentage is also based upon a total of 6,177,489 shares,  the sum of
     the shares outstanding noted above and the warrants.


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  compensation 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,  a  Director,  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
entitled 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 Mr. Kelly and Mr.
Toussaint's SAR agreements  were amended to extend the term of their  agreements
to November 20, 2001.


                                       13

<PAGE>



On June 15, 1990,  Bell  National  completed the purchase of 83% of the stock of
PFI from Azimuth  Corporation  ("Azimuth") for $6,493,000,  which was based upon
the net asset value of PFI 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,
including  Mr.  Milley  and Mr.  Shaw,  currently  own  12% of  Bell  National's
outstanding  voting  capital stock and would own 25% upon their full exercise of
stock warrants currently held. Mr. Milley and Mr. Shaw, who are the Chairman and
President  (respectively)  as  well  as  Directors  of Bell  National  are  also
officers, directors and/or significant stockholders of Azimuth.

In connection  with the acquisition of PFI, the remaining 17% of the outstanding
capital stock was acquired from four individual stockholders who were management
employees of PFI.  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 PFI stock was  determined  based upon the initial  investment  paid by
these  individuals  for their  holdings  in PFI 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  PFI  to  the  total
investment of all four.  In 1994,  8,929 shares of Common Stock were issued to a
plan  participant  under the terms of the agreement.  In 1997 the SAR agreements
were deemed exercised and 428,571 shares of Common Stock were issued with 17,858
shares held is reserve for possible  issuance in the future.  In accordance with
the terms of these SAR's,  they became  automatically  exercised during 1997 and
the Company  elected to issue  shares of Common Stock (one for each SAR) in lieu
of cash otherwise payable by the Company upon exercise.

Bell National  currently  rents office space in Orlando,  Florida from MMI. Rent
and administrative  support expenses were approximately  $120,000 in each of the
years ended December 31, 1997,  1996 and 1995.  Mr. Milley,  the Chairman of the
Company is the President, Chairman and majority shareholder of MMI. In addition,
certain of the other officers of the Company are also officers of MMI.


                                       14

<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, 1997 and 1996            F-2 to F-3
Consolidated Statements of Discontinued Operations for the years
     ended December 31, 1997, 1996 and 1995                          F-4
Consolidated Statements of Stockholders' Equity for the years
     ended December 31, 1997, 1996 and 1995                          F-5
Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995                                F-6 to F-7
Notes to Consolidated Financial Statements                           F-8 to F-15


2.  Financial Statement Schedules

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

             II            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)).

2.2        Asset  Purchase  Agreement,  dated as of July 17, 1997,  by and among
           Payne Fabrics,  Inc., Bell National Corporation and Westgate Fabrics,
           Inc.  (Incorporated  herein  by  reference  to  Exhibit  2.2  to  the
           Company's  Quarterly  Report  on Form 10-Q for the  quarterly  period
           ended June 30, 1997 (File No. 0-935)).


                                       15

<PAGE>


2.3        Amendment No. 1 to the Asset Purchase  Agreement,  dated as of August
           5,  1997,  by  and  between  Payne  Fabrics,   Inc.,   Bell  National
           Corporation  and  Westgate  Fabrics,  Inc.  (Incorporated  herein  by
           reference to Exhibit 2.3 to the  Company's  Quarterly  Report on Form
           10-Q for the quarterly period ended June 30, 1997 (File No. 0-935)).

2.4        Post-Closing  Escrow  Agreement,  dated as of August 5, 1997,  by and
           among  Westgate  Fabrics,  Inc.  Payne  Fabrics,  Inc. and Crouch and
           Hallet,  L.L.P.  (Incorporated  herein by reference to Exhibit 2.4 to
           the Company's  Quarterly Report on Form 10-Q for the quarterly period
           ended June 30, 1997 (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)).

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)).


                                       16

<PAGE>


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)).

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      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)).

10.13      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)).

10.14      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)).

10.15      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)).

10.16      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)).

10.17      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)).

10.18      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)).

10.19      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)).

10.20      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, 1995 (File No. 0-935)).

27         Financial data schedule.



                                       17

<PAGE>





(b)   Reports on Form 8-K

            Reports on Form 8-K filed during the fourth quarter of 1997.

                   None


                                       18

<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, 1998                       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>                                      <C>

     /s/ Alexander M. Milley                   Director, Chairman of the                March 20, 1998
     -------------------------
       Alexander M. Milley                       Board and Secretary


     /s/ Robert C. Shaw                        Director, President and                  March 20, 1998
     -------------------------
        Robert C. Shaw                           Treasurer (Principal
                                                 Executive Officer)


     /s/ Raymond O'S. Kelly                    Director                                 March 20, 1998
     -------------------------
        Raymond O'S. Kelly


     /s/ Nicholas E. Toussaint                 Director                                 March 20, 1998
     -------------------------
        Nicholas E. Toussaint


     /s/ Thomas R. Druggish                    Director, Chief Financial                March 20, 1998
     -------------------------
        Thomas R. Druggish                       Officer (Principal Financial
                                                 Officer and Accounting
                                                 Officer)
</TABLE>


                                       19

<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, 1997 and 1996, and the related
consolidated  statements of discontinued  operations,  stockholders' equity, and
cash flow for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1997, 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 1, on August
4, 1997 the Company sold all of its operating  assets subject to the majority of
its  liabilities.  The Board of  Directors  is  reviewing  various  alternatives
relating to the future of the Company. These alternatives include liquidation or
raising additional capital to fund an acquisition.  Because of the nature of the
remaining  assets and  liabilities at December  31,1997,  this balance sheet can
also be considered as comparable to a liquidation basis presentation.



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


Columbus, Ohio
March 16, 1998

                                      F-1

<PAGE>

                            BELL NATIONAL CORPORATION
                           Consolidated Balance Sheets
                             (Dollars in Thousands)


                                     ASSETS

                                                        December 31,
                                               ----------------------------
                                                   1997             1996
                                               ------------     -----------
Current assets:

     Cash and cash equivalents                   $    1,300       $     --

     Accounts receivable, net                            41          1,222

     Inventory, net                                      --          2,740

     Prepaid expenses and other current assets            7             95
                                                 ----------       --------

         Total current assets                         1,348          4,057

Property and equipment, net                              --            157

Goodwill, net                                            --            663

Deferred sample books, net                               --          1,242

Other assets                                             --             --
                                                 ----------       --------

                                                 $    1,348       $  6,119
                                                 ==========       ========






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,
                                                                  --------------------------------------------
                                                                         1997                      1996
                                                                  ------------------         -----------------
<S>                                                               <C>                        <C>

Current liabilities:
     Accounts payable                                             $               --         $           1,047
     Current portion of long-term debt--in default in 1996                        --                     2,225
     Accrued compensation and employee benefits                                  502                       444
     Accrued expenses                                                            318                       512
     Reserve for Asset Sale                                                      140                        --
                                                                  ------------------         -----------------

         Total current liabilities                                               960                     4,228

Accrued stock appreciation rights                                                 --                       268

Other liabilities                                                                 --                        48
                                                                  ------------------         -----------------
                                                                                 960                     4,544
Stockholders' equity:
     Common stock, no par value;
       authorized 12,000,000 shares, issued and
       outstanding 5,916,686 at December 31, 1997
       and 5,488,114 at December 31, 1996                                     15,849                    15,815

     Additional paid-in capital                                                   10                        10

     Accumulated deficit                                                     (15,471)                  (14,250)
                                                                  ------------------         -----------------

         Total stockholders' equity                                              388                     1,575
                                                                  ------------------         -----------------

                                                                  $            1,348         $           6,119
                                                                  ==================         =================
</TABLE>




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

                                      F-3

<PAGE>

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

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                          ----------------------------------------------------
                                                              1997                1996                1995
                                                          -------------      -------------       -------------
<S>                                                       <C>                <C>                 <C>
Net sales                                                 $       6,576      $      12,550       $      13,653

Costs and expenses:
     Cost of sales                                                3,521              6,879               7,127
     Selling, general and administrative                          3,005              5,412               6,057
                                                          -------------      -------------       -------------

Operating income                                                     50                259                 469

Other income (expenses):
     Interest expense                                              (134)              (261)               (347)
     Other                                                          (17)              (162)                (45)
                                                          -------------      -------------       -------------

Income (loss) before income taxes and
     loss on Sale of Assets                                        (101)              (164)                 77

Provision (benefit) for income taxes                                 49               (150)                 29
                                                          -------------      -------------       -------------

Income (loss) before Asset Sale                                     (52)               (14)                 48

Loss on Asset Sale                                               (1,169)                --                  --
                                                          -------------      -------------       -------------

Net Income (Loss)                                         $      (1,221)     $         (14)      $          48
                                                          =============      =============       =============

Earnings per common share (basic and diluted)
       Income (loss) before Asset Sale                    $        (.01)     $           --      $         .01
       Loss on Asset Sale                                          (.20)                 --                 --
                                                          -------------      --------------      -------------
       Net income                                         $        (.21)     $           --      $         .01
                                                          =============      ==============      =============
Weighted average number of common
     shares outstanding                                       5,749,859           5,306,142           5,283,114
                                                          =============      ==============      ==============

</TABLE>


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

                                      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, 1995               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

   Issuance of common
     stock in connection
     with exercise
      of SAR's                     205,000              15               --                --               15

   Net loss                             --              --               --               (14)             (14)
                                 ---------     -----------      -----------       -----------       ----------

   December 31, 1996             5,488,114          15,815               10           (14,250)           1,575

   Issuance of common
      stock in connection
      with exercise
      of SAR's                     428,572              34               --                --               34

   Net loss                             --              --               --            (1,221)          (1,221)
                                 ---------     -----------      -----------       -----------       ----------
   December 31, 1997             5,916,666     $    15,849      $        10       $   (15,471)      $      388
                                 =========     ===========      ===========       ===========       ==========


</TABLE>









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

                                      F-5

<PAGE>

                            BELL NATIONAL CORPORATION
                      Consolidated Statements of Cash Flows
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                             -------------------------------------------------
                                                                 1997             1996                1995
                                                             ----------        -----------         -----------
<S>                                                          <C>                <C>               <C>

Operating activities:

Net income (loss)                                            $   (1,221)       $       (14)        $        48
   Adjustments to reconcile net income (loss) to
   net cash provided by discontinued operating activities:
     Depreciation                                                    32                 55                  63
     Amortization of goodwill                                        11                 20                  20
     Amortization of deferred sample books                          624              1,143                 955
     Accrual for Stock Appreciation Rights                         (268)               (73)                 --
     Amortization of deferred debt commitment fee                    --                 40                  20
     Provision for doubtful accounts and sales
         returns                                                     --                 11                  (7)
     Provision (benefit) for income taxes                           (48)              (160)                 --

(Increase) decrease in assets:
   Accounts receivable                                              129               (151)                 10
   Inventory                                                         64              1,343                 390
   Prepaid expenses and other current assets                         17                 19                  (1)

Increase (decrease) in liabilities:
   Accounts payable                                                 155               (854)                312
   Accrued compensation and employee benefits                       321                 (5)                (66)
   Accrued expenses                                                 294                131                  46
   Other liabilities                                                 --                  7                 (53)
                                                             ----------        -----------         -----------

Net cash provided by operating activities                           110              1,512               1,737
                                                             ----------        -----------         -----------

Investing activities:

Acquisition of property and equipment                                --                 --                 (76)
Production and purchase of deferred
     sample books                                                  (369)              (689)             (1,727)
                                                             ----------        -----------         -----------

Net cash used in investing activities                              (369)              (689)             (1,803)
                                                             ----------        -----------         -----------

</TABLE>

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


                                      F-6

<PAGE>

                            BELL NATIONAL CORPORATION
                Consolidated Statements of Cash Flows (Continued)

                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                               -----------------------------------------------
                                                                 1997                1996               1995
                                                               --------            --------           --------
<S>                                                            <C>                 <C>                <C>

Financing activities:

Proceeds from Asset Sale                                       $  3,750            $      --          $     --
Proceeds from the issuance of long-term debt                         --                   --             5,994
Principal payments on long-term debt                             (2,225)                (817)           (5,873)
Principal payments on capital leases                                 --                   (6)               (3)
Proceeds from stock issued on SAR's                                  34                   --                --
Payment of deferred debt commitment fee                              --                   --               (52)
                                                               --------            ---------          --------


Net cash (used in) financing activities                           1,559                 (823)               66
                                                               --------            ---------          --------

Net increase in cash and cash equivalents                         1,300                   --                --

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

Cash and cash equivalents at end of year                       $  1,300            $      --          $     --
                                                               ========            =========          ========


Supplemental disclosures of cash flow information:

Cash paid during the year for:
     Interest                                                  $    133            $     259          $    371
     Income taxes                                                    --                    1                77

</TABLE>





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

                                      F-7

<PAGE>


                            BELL NATIONAL CORPORATION
                   Notes To Consolidated Financial Statements
                                December 31, 1997



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., 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 .

On August 4, 1997 Payne Fabrics,  Inc. sold  substantially all of its assets and
most of its  liabilities  related to the business of designing and  distributing
decorative   drapery  and   upholstery   fabrics  to  Westgate   Fabrics,   Inc.
("Westgate"),  an  unaffiliated  third party (the "Asset Sale").  The Asset Sale
included  the  transfer to the buyer of the use and rights to the Payne  Fabrics
name,  accordingly,  Payne  Fabrics,  Inc.,  changed  its  name to PFI  National
Corporation  ("PFI"). The Asset Sale left PFI without any substantial assets and
on August 4, 1997 all operations were ceased.

Under the terms of the Asset Sale PFI received  $3,750,000  from Westgate net of
an unfavorable  working  capital  adjustment of roughly  $100,000.  The day just
preceding the Asset Sale saw net receivables of approximately $100,000 collected
as cash (which the Company retained). This offset the working capital adjustment
effectively  yielding the Company the same $3,850,000  sale price.  The Board of
Directors  is  reviewing  the  various  options  open  to  the  Company.   Among
alternatives are the possible sale of the corporate entity or the possibility of
a liquidating  dividend.  The Company could also try to raise additional capital
from the sale of either  stock or debt to fund the  acquisition  of an operating
business.  To fund an  acquisition  of a  meaningful  size,  it is  likely  that
substantial  additional  funds would be required,  and no assurance can be given
that these funds can be obtained.



                                      F-8

<PAGE>


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 considers all highly liquid  investments
with a  maturity  of  three  monthsor  less at the time of  purchase  to be cash
equivalents.

Inventory.  Inventory is 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, 1997 and 1996 is $0 and $137,000, respectively.

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:

<TABLE>
<CAPTION>
     <S>                                 <C>

     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

</TABLE>


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

Goodwill.  Assets and liabilities  related to the PFI 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,
1997 and 1996 is $0 and $155,000, respectively.

Deferred  Sample Books.  The cost of producing and purchasing  sample books were
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, 1997 and 1996 is $0
and $1,174,000,  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.


                                      F-9

<PAGE>


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.

Income (Loss) Per Common Share.  In 1997,  the  Financial  Accounting  Standards
Board Issued  Statement  No. 128 Earnings per Share.  Statement 128 replaced the
calculation  of  primary  and fully  diluted  earnings  per share with basic and
diluted earnings per share.  Unlike primary  earnings per share,  basic earnings
per share excludes any dilutive effects of options or warrants. Diluted earnings
per share is very similar to the previously  reported fully diluted earnings per
share. This had no impact on the Company's per share results.

NOTE 3.  Accounts Receivable

Accounts  receivable  are net of  allowances  for  sales  returns  and  doubtful
accounts of $0 and $80,000 at December 31, 1997 and 1996, respectively.

NOTE 4.  Property and Equipment

Property and equipment consists of the following at December 31:

                                                                    1996
                                                            -----------------

     Furniture and fixtures                                 $         213,000
     Machinery and equipment                                          228,000
     Leasehold improvements                                           153,000
     Computer equipment and software                                  286,000
                                                            -----------------
                                                                      880,000
     Less accumulated depreciation and amortization                   723,000
                                                            -----------------
                                                            $         157,000
                                                            =================

All property and equipment were included in the Asset Sale of August 4, 1997.

NOTE 5.  Long-Term Debt

On May 1, 1995 the Company entered into a Revolving  Credit  Agreement with Bank
One, Dayton,  National Association ("Revolving  Agreement").  The terms provided
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
consisted  of a  revolving  line of  credit,  which  matured  on  June 1,  1998.
Borrowings  under the  revolving  line of credit were based on a  percentage  of
PFI's


                                      F-10

<PAGE>


eligible accounts  receivable and a percentage of PFI's eligible  inventory,  as
defined. The Revolving Agreement was collateralized by all of the assets of PFI,
guaranteed by the Company and subject to restrictive covenants.

During 1996 the Company did not meet  certain  covenants  of the  existing  loan
facility.  The quarterly installments after September 1, 1996 had not been made,
but all interest payments had remained current.  Accordingly, the entire balance
outstanding was classified as current at December 31, 1996.

This Long-Term Debt obligation was  extinguished by payment from the proceeds of
the Asset Sale.

NOTE 6.  Leases

At December  31, 1997 PFI either  settled all leases or they were assumed by the
buyer as a part of the Asset Sale.

NOTE 7.  Employee Pension Plans

PFI  had a  defined  benefit  pension  plan  covering  substantially  all of its
employees.  The benefits were based on years of service and annual  compensation
of the employee  calculated on the projected unit credit method. PFI made annual
contributions to the plan equal to the maximum amount that could be deducted for
income tax purposes. No contributions were required for the years ended December
31, 1997, 1996 or 1995.  Effective  January 31, 1994, the plan was frozen and no
additional benefits accrued nor did additional employees become eligible for the
plan after that time. The individual employees eligible at that time became 100%
vested in their accumulated benefits at that date.

With the  cessation of all  activities  on August 4, 1997 and the release of all
employees,  the Company  determined that terminating the plan would be the least
expensive method of handling the plan.  Effective December 31, 1997 the plan was
terminated and the Company began the process of making distributions to eligible
employees and developing the final regulatory  filings. At December 31, 1997 the
Company recorded $295,357 for liabilities and expenses in excess of plan assets.
This amount is included in accrued  compensation  and  employee  benefits in the
current liabilities section of the balance sheet.

The following table sets forth the plan's funded status.  The amounts recognized
in the  Consolidated  Balance  Sheet at  December  31, 1997 and 1996 and the net
periodic pension cost recognized for the years then ended:


                                      F-11

<PAGE>


<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                           -------------------------------------
                                                                                 1997                  1996
                                                                           ---------------       ---------------
<S>                                                                        <C>                   <C>

Actuarial present value of accumulated benefit obligation                  $       620,160       $     1,187,000
                                                                           ===============       ===============

Projected benefit obligation                                               $       620,160       $     1,187,000
Plan assets at fair value                                                          324,803             1,258,000
                                                                           ---------------       ---------------
Plan assets in excess of (less than) projected
     benefit obligation                                                           (295,357)               71,000
Unrecognized net (gain) loss                                                            --               (21,000)
Unrecognized prior service gain                                                         --                    --
Unrecognized transitional asset                                                         --               (19,000)
                                                                           ---------------       ---------------
     Net pension asset (liability)                                         $      (295,357)      $        31,000
                                                                           ===============       ===============

Net pension costs include the following components:
Service cost                                                               $            --       $            --
Interest on projected benefit obligation                                            92,000               122,000
Actual return on plan assets                                                      (110,000)             (142,000)
Other                                                                              313,000               (25,000)
                                                                           ---------------       ---------------
     Net periodic pension expense(income)                                  $       295,000       $       (45,000)
                                                                           ===============       ===============

</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:

                                                          1997           1996
                                                       ----------     ----------

       Discount rate                                       6.48%          8.0%

       Expected long-term rate of return on assets          N/A%          9.0%


PFI maintained an employee  retirement  savings plan under Section 401(k) of the
Internal Revenue Code. Under the terms of the plan, eligible employees were able
to contribute up to 20% of their annual compensation, up to a ceiling of $9,240.
The Plan allowed PFI to make matching contributions.  In 1997, 1996 and 1995 PFI
made matching  contributions of $0, $16,676 and $27,988.  PFI had the ability to
activate sections of the plan in order to allow for discretionary contributions.
As of  December  31,  1997,  such  sections  had not been  activated.  Effective
November 1, 1996 the plan was amended and the matching  contribution made by PFI
was suspended.  Due to the Asset Sale of August 4, 1997 and the cessation of all
activities   the  Company  has   determined   that  the  401(k)  plan  would  be
discontinued.  The Company has undertaken the process of making distributions to
eligible employees and developing the final regulatory filings.


                                      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>

                                                              1997               1996                1995
                                                          -------------      -------------       -------------
<S>                                                       <C>                <C>                 <C>

Statutory Federal income tax benefit (expense)            $     402,000      $      56,000       $     (26,000)
(Increase) Decrease resulting from:
     Effect of nondeductible amortization                        (4,000)           (19,000)            (16,000)
     Deferred tax benefits not recognized                      (398,000)                --              42,000
     Reduction in valuation allowance
          for deferred tax assets                                    --            129,000                  --
     Other                                                       49,000             (6,000)                 --
     State income tax expense                                        --            (10,000)            (29,000)
                                                          -------------      -------------       -------------
Reported Income tax benefit (expense)                     $      49,000      $     150,000       $     (29,000)
                                                          =============      =============       =============


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


                                                              1997                1996                1995
                                                          -------------      -------------       -------------

Deferred benefit (expense)                                $      49,000      $     160,000       $          --
State and local                                                      --            (10,000)            (29,000)
                                                          -------------      -------------       -------------
                                                          $      49,000      $     150,000       $     (29,000)

</TABLE>


At December  31, 1997,  the Company had federal  income tax net  operating  loss
carryforwards  ("NOL's") of  approximately  $116,000,000  which expire from 1997
through 2011.  Approximately  $114,000,000  of 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  NOL's  will be  utilized  by the  Company.  For  financial
reporting  purposes,  the Company does not recognize the benefit of these NOL's.
The  remaining  $2,000,000  of NOL's were  generated  by the  operations  of the
Company subsequent to the bankruptcy reorganization. These post-bankruptcy NOL's
expire from 2005 through 2012.  However,  the  discontinuation  of the Company's
operations in August, 1997 and other federal income tax regulations  relating to
the utilization of NOL's may impact the future utilization of these amounts.

The Company has recorded a valuation allowance for the total future value of the
NOL's.

                                      F-13

<PAGE>


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

                                                    1997                1996
                                                -----------         -----------

Deferred tax assets related to:
         Net operating loss carryforwards       $39,440,000         $39,100,000
         Accrued stock appreciation rights               --              91,000
         Reserve for obsolete inventory                  --              47,000
         Inventory                                       --             235,000
         Accounts receivable reserves                    --              27,000
         Accrued vacation                           102,000              28,000
         Other                                           --              11,000
                                                 ----------          ----------
                                                 39,542,000          39,539,000
         Less valuation allowance                39,542,000          39,475,000
                                                 ----------          ----------
                                                         --              64,000
Deferred tax liability related to:
         Depreciation                                    --              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 was greater than the fair market value of the stock at December 31, 1997
and 1996, no liability was recorded for this obligation.

In addition to the  warrant,  the Company had issued under  various  agreements,
1,470,357 stock  appreciation  rights (SAR's),  of which 360,000 had expired and
642,500 had been exercised as of December 31, 1997. Included in these totals are
810,000 of $0.30  exercise  price SAR's of which  360,000  have expired and none
issued.  Also  included in the total are 660,357 of $0.00  exercise  price SAR's
642,500 of which  have been  issued  and  17,858  which are held in reserve  for
possible  issuance.  The remaining 450,000 SAR's with a $0.30 exercise price can
be exercised through November 20, 2001.

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
exercise over the exercise price of the SAR, plus

                                      F-14

<PAGE>


any  dividends or  distributions  per share made by Bell  National  prior to the
exercise date. In lieu of making cash  payments,  the Company may elect to issue
shares of Common  Stock on a one  share-for-one  SAR basis.  The warrant and SAR
agreements contain mandatory stock registration rights.

At  December  31, 1997 and 1996 the value of all issued and  outstanding  SAR's,
including related  registration costs, has been estimated to be $0 and $268,000,
respectively.

Included in the common shares  outstanding are 696,570 of shares of Common Stock
which have been  designated  "Class 4-B  shares"  (Class 4-B shares are  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.

NOTE 10.  Related Party Transactions

The Company  pays  Milley  Management  Incorporated,  a private  investment  and
management  consulting firm a monthly fee for management services.  The Chairman
and Secretary of the Company,  Mr. Milley, is the President and sole director of
Milley  Management  Incorporated,  and he and a trust for the benefit of certain
members  of his  immediate  family  are its sole  stockholders.  The  management
services include rent for  administrative  offices  (including space,  supplies,
furniture  and  fixtures,  computers and  electronic  equipment and  utilities),
clerical support staffing, investor relations, maintenance of banking relations,
preparation  of  management  reports  (including  monthly,  quarterly and annual
budgets, forecasts and results reporting) and staffing to prepare Securities and
Exchange  Commission  reports,  among the more  prominent of services  provided.
These management service fees were  approximately  $120,000 in each of the years
ended  December  31,  1997,  1996  and  1995,  respectively  and  amount  to  an
outstanding  liability of $242,000 at December 31, 1997. This amount is included
in the accrued expenses of current liabilities of the balance sheet.

                                      F-15

<PAGE>


                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                   BELL NATIONAL CORPORATION AND SUBSIDIARIES
                             (Dollars in Thousands)

<TABLE>
<CAPTION>


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

<S>                                     <C>                <C>                <C>                <C>                  <C>

Year ended December 31, 1997:
 Deducted from asset accounts:
  Allowance for sales returns           $        24        $       --         $       --         $      24 (D)       $        --
  Allowance for doubtful accounts                56                --                 --                56 (D)                --
                                        -----------        ----------         ----------         ---------           -----------
                                        $        80        $       --         $       --         $      80           $        --
                                        ===========        ==========         ==========         =========           ===========
     Reserve for obsolete inventory     $       137        $      --          $       --         $     137 (D)       $        --
                                        ===========        ==========         ==========         =========           ===========

Year ended December 31, 1996:
   Deducted from asset accounts:
     Allowance for sales returns        $        16        $     385          $       --         $     377 (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
                                        ===========        =========          ==========         =========           ===========


   (A)  Returns by customers during the year.                         (C)   Obsolete inventory written off during the year.
   (B)  Uncollectible accounts written off during the year.           (D)   Included in Asset Sale of August 4, 1997.

</TABLE>


                                       S-1