VENTURIAN CORP, 10-K, 1997-03-14

VENTURIAN CORP
10-K, 1997-03-14
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 1996

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

Commission file number

0-12117

VENTURIAN CORP.
(Exact name of registrant as specified in its charter)

Minnesota 41-1460782
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

11111 Excelsior Boulevard, Hopkins, MN 55343
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code 612-931-2500

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
NONE

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common stock, $1.00 par value

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. Yes _X_ 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 or any amendment to this
Form 10-K. ___

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 7, 1997 was $6,622,000.

The number of shares outstanding of each of the registrant's classes of common
stock, as of March 7, 1997:

Class Outstanding at March 7, 1997
Common stock, $1.00 par value 750,189

Documents Incorporated by Reference
1996 Annual Report to Shareholders - Part I and Part II
Proxy Statement--Part III

Venturian Corp. and Subsidiaries

FORM 10-K

TABLE OF CONTENTS

For the year ended December 31, 1996

Description Page
----------- ----

Part I
Item 1.-Business 3
Item 2.-Properties 6
Item 3.-Legal Proceedings 7
Item 4.-Submission of Matters to a Vote of Security Holders 7

Part II
Item 5.-Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6.-Selected Financial Data 8
Item 7.-Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8.-Financial Statements and Supplementary Data 9
Item 9.-Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 9

Part III
Item 10.-Directors and Executive Officers of the Registrant 10
Item 11.-Executive Compensation 10
Item 12.-Security Ownership of Certain
Beneficial Owners and Management 10
Item 13.-Certain Relationships and Related Transactions 10

Part IV
Item 14.-Exhibits, Financial Statement Schedules
and Reports on Form 8-K 10

Part I

Anuual Report on Form 10-K

Forward-looking statements contained throughout this Annual Report on
Form 10-K are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. There are certain important factors
that could cause results to differ materially from those anticipated by the
statements made herein. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Among the factors that could cause
actual results to differ materially are the following:

With respect to Napco International, one of the primary risks relates
to its export sales which could be affected by political decisions by the U.S.
government which could prevent future sales to foreign nations or monetary,
military or economic conditions in certain countries that may affect sales in
such countries. Management believes that these risks are reduced by Napco's wide
geographic and product diversification. While historically there has not been a
reliance on one single customer, sales to one customer accounted for
approximately 32 percent, 38 percent and 18 percent of Napco sales for the years
ended December 31, 1996, 1995 and 1994, respectively. Other factors such as
competition, the potential for labor disputes and interruption in sources of
supply also could cause results to differ.

With respect to Venturian Software, the company is one of many
companies offering solutions to the information needs of businesses both locally
and regionally. Because of the rapid pace of technological improvements and new
software development, competition is a significant risk. The ability to hire and
retain competent personnel also provides an element of risk, in part because,
currently, a substantial portion of Venturian Software's revenues are derived
from consulting activities.

Item 1. Business

Venturian Corp., a Minnesota corporation (the "Company"), was incorporated in
September 1983 as a wholly owned subsidiary of Napco Industries, Inc. Effective
as of the close of business on April 30, 1984, Napco Industries, Inc.
transferred to the Company all of the assets associated with the international
marketing and the U.S. government business which had been conducted by Napco
Industries, Inc. for more than thirty years. As of May 1, 1984, the Company
commenced the active operation of that business under the name of Napco
International Inc.

In June 1987, the Company changed its name to Venturian Corp., and
formed a subsidiary, Napco International Inc., through which the Company
conducts its international marketing and U.S. government business. In October
1992, the Company acquired the capital stock of PC Express, Inc. In July 1995,
the Company discontinued operations of PC Express due to continued losses. In
January 1993, the Company commenced operations of Venturian Software, Inc. The
operations of the parent corporation, Venturian Corp., consist primarily of
investment and management activities.

Napco International Inc.

Napco International Inc. ("Napco") is a distribution, manufacturing and service
business that sells a broad line of defense-related products to commercial
customers, the U.S. government and to foreign governments. Typically, Napco's
sales are made in United States currency. However, from time to time Napco may
enter into contracts denominated in foreign currency. Napco has sales offices or
representatives located in over 60 countries throughout the world. Napco's
operations are conducted through its various product divisions.

The Ordnance Division markets replacement parts for most U.S.-made
military wheeled and tracked vehicles. Its product line covers a wide variety of
items ranging from power train components to tank track. Ordnance Division sales
comprised 76.3 percent of Napco's total sales for the year ended December 31,
1996 and 86.0 percent of Napco's total sales for the years ended December 31,
1995 and 1994.

The Defense Electronics Division designs, manufactures and markets a
broad range of tactical military electronics equipment, including VHF FM
tactical manpack radios, secure handsets, and active noise reduction intercom
systems. Spare parts are supplied for many U.S. manufactured systems at either
the component or assembly level. The division also designs and supplies
transportable shelters for a variety of applications, such as air traffic
control, ground-to-air communications, command air control, electronic warfare
or for mobile repair facilities. The Defense Electronics Division's sales
comprised 9.3 percent, 9.6 percent and 7.4 percent of Napco's total sales for
the years ended December 31, 1996, 1995 and 1994, respectively.

The Tank Automotive Division designs and markets proprietary
modernization kits to improve the reliability, maintainability and performance,
and to increase the capabilities of, a wide variety of U.S. military wheeled and
tracked vehicles. The division provides technical assistance for the
installation and maintenance of these repowering systems as well as continuing
parts support. The Tank Automotive Division also supplies new trucks, vans and
other wheeled and tracked vehicles for military, medical, industrial and
construction applications. Tank Automotive Division sales were 11.9 percent, 4.1
percent and 6.0 percent of Napco's total sales for the years ended December 31,
1996, 1995 and 1994, respectively.

The Special Products Division markets a range of light weapons systems,
spare parts and accessories. Sales for the Special Products Division comprised
2.5 percent of Napco's total sales in 1996 and less than one percent of Napco's
total sales for the years ended December 31, 1995 and 1994.

Napco's products are either supplied from inventory, manufactured or
purchased from vendors to meet specific customer orders. Napco does not
routinely allow cancellation of customer orders. However, at times Napco may
accommodate cancellation requests from customers in order to preserve goodwill.
Increases in inventory attributable to cancelled orders and returns from
customers have not been material.

Napco generally warrants the products it sells for a period of one
year, agreeing to repair or replace defective items. Warranty expense has not
been material.

Napco markets a broad variety of products and generally has alternate
sources of supply for the items it sells. In those instances where Napco has
only a single source of supply, the suppliers generally are large, financially
stable companies. Napco has not experienced, and management has no reason to
believe that Napco will experience, any interruption in supply.

Substantially all of Napco's foreign shipments are licensed by either
the United States Commerce or State Departments.

The primary risks to which Napco is exposed with respect to its export
sales do not relate to the circumstances of particular customers within foreign
countries, which typically are governments. There is, however, a continuing risk
that decisions made by the United States Government could prevent future sales
to certain foreign nations or that monetary or military policies or economic
problems in customer nations could affect sales by Napco to such nations. As a
result, Napco's principal exposure in foreign countries is of a political
nature. Management believes that these risks are reduced by Napco's wide
geographic and product diversification. In addition, the primary countries to
which Napco sells change from year to year so that Napco is not dependent for
its sales upon any one country. Napco also has some risk of foreign currency
losses when it enters into sales contracts denominated in foreign currency.

Napco's sales by principal geographic area for the last three years
were as follows (thousands of dollars):

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

United States and Canada $16,461 $14,622 $ 8,754
Europe 4,037 5,465 4,378
Far East 4,791 2,583 9,974
Mediterranean and Middle East 1,051 697 618
Latin America 899 731 1,110
Africa 311 -- --
------- ------- -------
$27,550 $24,098 $24,834
======= ======= =======

During 1996 and 1995, no sales to customers in foreign countries
accounted for over 10 percent of Napco's sales. During 1994, sales of $6,789,000
to a customer in one foreign country accounted for over 10 percent of Napco's
sales. In general, the company considers Napco's sales to customers in specific
countries to be more relevant than sales to individual foreign customers because
the primary risks with respect to its export sales relate to political decisions
by the U.S. government which could prevent sales to foreign nations or monetary,
military or economic conditions in certain countries that may affect sales in
such countries.

Napco's sales in the United States were $15,795,000, $14,024,000 and
$8,632,000 in 1996, 1995 and 1994, respectively, and consisted primarily of
sales to various U.S. government agencies and to a large number of commercial
customers. During 1996, 1995 and 1994, sales to one customer in the United
States accounted for 32, 38 and 18 percent of Napco sales, respectively.
However, historically, there has not been a reliance on that one customer.

Competition

Napco is one of the major independent suppliers of a broad line of parts and
components for United States military vehicles and other equipment maintained by
foreign governments. Because there are many other suppliers of such parts and
components, the pricing of Napco's products is highly competitive.

Backlog

Napco's backlog of orders at December 31, 1996 was $15,861,000, down from
$16,300,000 at the end of 1995. Management reasonably expects to fill nearly all
of its current backlog within one year.

Napco's business with the U.S. Government is principally comprised of
firm fixed price contracts and therefore not subject to renegotiation of
profits, nor are they subject to termination at the unilateral election of the
U.S. Government.

Employees

Napco employed 111 people at December 31, 1996.

Venturian Software, Inc.

Venturian Software, Inc. ("VSI") provides high-technology information services
in the Upper Midwest as a Value-Added Dealer of MagicTM software, a highly
productive application development tool for professional programmers. VSI
provides consulting, development and training services for downsizing,
rightsizing and client-server applications development and runs the authorized
regional training center for Magic. In 1996, VSI became the exclusive North
American distributor of CybercallTM, a call center solution for the Internet
that allows companies to establish virtual call centers through their World Wide
Web sites. VSI also distributes MulticallTM, an interactive voice response
product that offers a cost-effective solution for CTI (computer telephony
integration) technology.

In 1996, approximately 83 percent of VSI sales were derived from
consulting activities, 15 percent from product sales and 2 percent from training
activities. In 1995, approximately 74 percent of VSI sales were derived from
consulting activities, 23 percent from product sales and 3 percent from training
activities. In 1994, approximately 69 percent of VSI sales were derived from
consulting activities, 26 percent from product sales and 5 percent from training
activities.

Competition

VSI is one of many companies offering solutions to the information needs of
businesses both locally and regionally. Because of the rapid pace of
technological improvements and new software development, VSI operates in a
highly competitive climate.

Employees

VSI employed 14 individuals at December 31, 1996.

Backlog

Backlog for VSI product sales is low, since most product is in stock or direct
shipped to customers from the supplier.

Venturian Corp.

Employees

Venturian Corp. employed 3 individuals at December 31, 1996.

Item 2. Properties

The Company's corporate offices consist of approximately 19,000 square feet
located in a 386,000 square foot industrial plant building acquired by the
Company in 1994. These offices are principally used in Napco's sales and
administrative activities. The building is constructed of steel frame, block and
brick. The building is a multi-tenant building with twenty-seven additional
tenants presently occupying space. Although the property is presently for sale,
management expects that it will continue to lease its office space from the
buyer. The property contains industrial contaminants and must be remediated (see
Note 4 to the Consolidated Financial Statements). VSI leases approximately 9,000
square feet of office space in the Company's former headquarters facility.

The Company is involved in an environmental investigation related to
its former office headquarters location, which was sold in 1994. Management has
retained a consultant to determine what, if any, remedial action is required at
this site. Based upon a 1993 study, the consultant has recommended that no
further investigation or remediation at the site is warranted. This
recommendation is subject to the approval of the Minnesota Pollution Control
Property Transfer Unit.

Adjacent to the corporate offices is a 123,000 square foot warehouse in
which Napco performs receiving, inspection, packaging, shipping, light
manufacturing and repair and inventory functions.

At December 31, 1996, the Company owned approximately 24 acres of land
near its corporate office with an average cost of approximately $9,000 per acre.

The Company believes that its facilities, including machinery and
equipment, are well maintained and are more than adequate for its current
volume. The Company is continually re-evaluating the adequacy of its facilities.

Item 3. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Information required by this item has been included in the Company's 1996 Annual
Report to Shareholders, incorporated herein by reference. Such information and
the related Annual Report caption and page references are: the high and low bid
prices of the Company's common stock for the period ended December 31, 1996,
under the caption "Quarterly Financial Data," page 22; the number of common
stockholders of record as of December 31, 1996, under the caption "Five-Year
Financial Summary," page 23; the Company's dividend policy, under the caption
"Shareholder Information," page 6; and dividend history information, in the
"Five-Year Financial Summary," page 23.

Item 6. Selected Financial Data

Information required by this item has been included in the Company's 1996 Annual
Report to Shareholders, incorporated herein by reference under the caption
"Five-Year Financial Summary," page 23.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Management's Discussion and Analysis of Financial Condition and Results of
Operations is contained in the Company's 1996 Annual Report to Shareholders,
incorporated herein by reference, pages 2 - 6.

Item 8. Financial Statements and Supplementary Data

The following pages of the Company's 1996 Annual Report to Shareholders are
incorporated herein by reference as follows:

(a) Financial Statements: Page
No(s).
Consolidated Statements of Operations,
three years ended December 31, 1996 7

Consolidated Balance Sheets,
as of December 31, 1996 and 1995 8

Consolidated Statements of Cash Flows,
three years ended December 31, 1996 9

Consolidated Statements of Changes in
Stockholders' Equity, three years ended
December 31, 1996 10

Notes to the Consolidated Financial Statements 11-20

Report of Independent Certified Public Accountants 21

(b) Supplementary Data:

Quarterly Financial Data 22

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

None.

Part III

Items 10, 11, 12 & 13

Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management) and Item 13 (Certain Relationships and Related Transactions),
constituting Part III of Form 10-K, are incorporated herein by reference to the
company's definitive Proxy Statement with respect to its 1997 Meeting of
Shareholders, which will be filed not later than 120 days after the close of the
fiscal year.

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on 8-K
- -------------------------------------------------------------------
Page
----
<S> <C>
(a) Financial Statements and Schedules

(1) Financial Statements - See Part II, Item 8 (a) for a complete listing
of financial statements incorporated by reference from the company's
1996 Annual Report to Shareholders

(2) Financial Statement Schedules

Report of Independent Certified Public
Accountants on Schedule 11

Schedule II Valuation and Qualifying Accounts, for each of the
three years in the period ended December 31, 1996 12

(3) Other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
provided in the financial statements or the notes thereto.

(b) No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1996.

Exhibit (10.8)
Amendment No. 1 to 1995 Stock Option Plan and Venturian Corp.
1995 Stock Option Plan

Exhibit (13)
1996 Annual Report to Shareholders, incorporated herein by reference

Exhibit (21)
Subsidiaries of the Registrant

Exhibit (23.1)
Consent of independent certified public accountants to incorporate by
reference on Forms S-8 their report dated February 12, 1997

Exhibit (27.1)
Financial Data Schedule

</TABLE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE

Board of Directors
Venturian Corp.

In connection with our audit of the consolidated financial statements of
Venturian Corp. and Subsidiaries referred to in our report dated February 12,
1997 which is included in the Annual Report to shareholders and incorporated by
reference, we have also audited Schedule II for each of the three years in the
period ended December 31, 1996. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 12, 1997

Venturian Corp. and Subsidiaries

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Three years ended December 31, 1996

Column A Column B Column C Column D Column E
- --------------------------------- ------------ ---------------------- ----------- ---------
Balance at Charged to Charged to Balance
beginning of costs and other at end
Description period expenses accounts Deductions of period
- --------------------------------- ------------ ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:

Year ended

December 31, 1994 $143,000 $136,000 -- $ 8,000 (a) $271,000

Year ended
December 31, 1995 $271,000 $ 5,000 -- $111,000 (a) $165,000

Year ended
December 31, 1996 $165,000 $ 91,000 -- $ 60,000 (a) $196,000

(a) Write-offs, less recoveries.

</TABLE>

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.

By: /s/ Gary B. Rappaport
Gary B. Rappaport
Chairman of the Board,
Chief Executive Officer and President

Pursuant to the requirements of the Securites 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.

/s/ Gary B. Rappaport
Gary B. Rappaport
Chairman of the Board, Director, Chief Executive
Officer and President March 13, 1997

/s/ Morris M. Sherman
Morris M. Sherman
Director March 13, 1997

/s/ Charles B. Langevin
Charles B. Langevin
Director March 13, 1997

/s/ Anthony S. Cleberg
Anthony S. Cleberg
Director March 13, 1997

/s/ Richard F. McNamara
Richard F. McNamara
Director March 13, 1997

/s/ Mary F. Jensen
Mary F. Jensen
Controller, Treasurer and
Chief Financial Officer March 13, 1997

AMENDMENT NO. 1 TO
VENTURIAN CORP.
1995 STOCK OPTION PLAN

This Instrument, dated the 26th day of March, 1996 is an amendment to
the Venturian Corp. 1995 Stock Option Plan.

RECITALS:

A. The Board of Directors of Venturian Corp. adopted the Venturian
Corp. 1995 Stock Option Plan by Record of Action dated March 28, 1995, which
Plan was approved by the shareholders of Venturian Corp. at a meeting held May
31, 1995; and

B. Section XVI of the Plan gives the Board the authority to amend the
Plan; and

C. Any amendment to increase the maximum number of shares that can be
issued pursuant to options under the Plan requires shareholder approval; and

D. The Board has determined to amend the Plan to increase the number of
shares that can be issued pursuant to options under the Plan.

NOW, THEREFORE, the Venturian Corp. 1995 Stock Option Plan is amended
as follows:

1. The Venturian Corp. 1995 Stock Option Plan is amended by
substituting the number "250,000" for the number "125,000" where it appears in
Section II of the Plan.

2. Unless approved by the shareholders of Venturian Corp. within one
year of the date of this Amendment, this Amendment shall not be effective. Any
options with respect to the additional 125,000 shares that may be granted in
anticipation of such approval shall be deemed to be cancelled. No option with
respect to said 125,000 shares shall be exercisable until shareholder approval
is obtained.

IN WITNESS WHEREOF, the undersigned has executed this Amendment as of
the day and year first above written.

VENTURIAN CORP.

By /s/ Gary B. Rappaport
------------------------------
Its Chairman of the Board
--------------------------

VENTURIAN CORP.
1995 STOCK OPTION PLAN

I. PURPOSE

Venturian Corp. (the "Company") hereby adopts a stock option plan (the
"Plan") to replace the Venturian Corp. Restated Stock Option Plan, which has
been adopted to promote the Company's welfare by encouraging selected employees
of the Company or of any present or future subsidiary of the Company to acquire
a proprietary interest in the Company, thereby creating an additional incentive
on the part of such employees to advance the progress and financial success of
the Company and to continue in its employ. Options granted under this Plan may
be either incentive stock options ("Incentive Stock Options"), within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or options which are not Incentive Stock Options ("Nonqualified
Options").

II. SHARES SUBJECT TO PLAN

The shares subject to options under the Plan are shares of the
Company's authorized common shares of the par value of $1.00 per share (the
"Common Stock"). Subject to adjustment as provided in Section IX, the maximum
number of shares for which options may be exercised from the inception of this
Plan is 125,000 shares. Any shares optioned hereunder which remain unpurchased
and as to which the option ceases to be exercisable by reason of lapse,
surrender, or other circumstance may be the subject of subsequent options within
the limitations herein set forth.

III. ADMINISTRATION OF THE PLAN

A. The Plan shall be administered by the Board of Directors of the
Company (the "Board"). At any time, the Board may authorize the formation of a
Stock Option Committee (the "Committee"), which would have authority to exercise
the powers conferred on the Board under the Plan, other than the power under
Section XVI hereof to terminate and amend the Plan. The Committee shall consist
of two or more directors who qualify as "disinterested persons" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934.
Committee members shall be appointed from time to time by the Board, and shall
serve at the pleasure of the Board. If a Committee is appointed to administer
the Plan, then references in this Plan to the "Board" shall be read to mean the
"Committee," where appropriate.
B. The Board shall have full authority in its discretion, but subject
to the express provisions of this Plan: (i) to determine the purchase price of
the shares of Common Stock covered by each option, (ii) to determine the persons
to whom and the time or times at which such options shall be granted and the
number of shares to be subject to each option, (iii) to determine whether the
options granted are Incentive Stock Options or Nonqualified Options, (iv) to
determine the terms of exercise of each option, (v) to interpret the Plan, (vi)
to prescribe, amend, and rescind rules and regulations relating to the Plan,
(vii) to determine the terms and provisions (and amendments thereof) of each
Stock Option Agreement (the "Agreement") under this Plan (which Agreements need
not be identical), and (viii) to make all other determinations necessary or
advisable for the administration of the Plan. The Board may, in addition,
correct any defect, overcome any omission, or reconcile any inconsistency in the
Plan or in any Agreement in the manner and to the extent it may determine. No
member of the Board or of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any rights granted
hereunder.

IV. ELIGIBILITY

All salaried employees or independent contractors of the Company or any
present or future subsidiary or parent of the Company shall be eligible to
participate in the Plan. Provided, however, that an independent contractor shall
not be eligible to be granted Incentive Stock Options. In determining the
persons to whom options shall be granted and the number of shares subject to
each option, the Board may take into account the nature of the services rendered
by such persons, their present and potential contributions to the success of the
Company, and such other factors as the Board in its discretion shall deem
relevant. A person who has been granted an option under the Plan may be granted
an additional option or options under the Plan if the Board shall so determine.

V. PRICE

The option price for all options granted under the Plan, whether
Incentive Stock Options or Nonqualified Options, shall be determined by the
Board but shall not be less than 100% (or, in the case of Incentive Stock
Options granted to employees owning stock possessing more than 10% of the total
combined voting power of all classes of the Company's stock, 110%) of the fair
market value of the Common Stock on the date of granting of such option as
determined by the Board in good faith.

VI. TERM

Subject to the provisions of Sections VII and VIII, each option and all
rights and obligations thereunder shall expire on the date determined by the
Board and specified in the Agreement. The Board shall be under no duty to
provide terms of like duration for options granted under the Plan; provided,
however, that the term of an Incentive Stock Option shall not extend more than
10 (or, in the case of an Incentive Stock Option granted to an employee owning
stock possessing more than 10% of the total combined voting power of all classes
of the Company's stock, 5) years from the date the option is granted.

VII. EXERCISE OF OPTIONS

A. Subject to Section VIII hereof, the Board shall have full and
complete authority to determine whether the option will be exercisable in full
at any time or from time to time during the term of the option, or to provide
for the exercise thereof in such installments and at such times during the term
of the option as the Board may determine; provided, however, that the aggregate
fair market value (determined as of the time the option is granted) of the
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by the holder during any calendar year shall not exceed $100,000.
B. An optionee electing to exercise an option shall give written notice
to the Company of such election and of the number of shares subject to such
exercise. The full option price of such shares (whether paid in cash, in shares
of Common Stock or in any combination thereof) shall be tendered with such
notice of exercise. Payment may be made with shares of the Company's Common
Stock which are already owned by the optionee and which are properly surrendered
to the Company for transfer. Such shares shall be valued at their fair market
value on the exercise date. No option shall be exercisable with respect to
fractional shares. Until the optionee has been issued a certificate or
certificates for the shares subject to such exercise, the optionee shall possess
no rights as a shareholder with respect to such shares.

VIII. TERMINATION OF EMPLOYMENT

A. If an optionee shall cease to be employed by the Company or its
subsidiaries or parent for any reason other than gross and willful misconduct,
or if the optionee shall die or become totally disabled (as certified to the
Company by a duly licensed physician approved by the Company) while in the
employ of the Company or a subsidiary or parent, and if such optionee shall not
have fully exercised any option, such optionee (or the personal representative
or administrator of the estate or person or persons to whom the option is
transferred by will or the applicable laws of descent and distribution or
guardian of the optionee, as applicable) shall have the right to exercise the
option at any time within 90 days after such termination of employment, death,
or disability, as the case may be, to the extent of the full number of shares
such optionee was entitled to purchase under the option on the date of
termination of employment, death, or disability, as the case may be, subject to
the condition that no option shall be exercisable after the expiration of the
term of the option. For purposes hereof, if any subsidiary or parent of the
Company shall cease to be a subsidiary or parent of the Company (whether by
reason of sale, exchange, or any other kind of disposition) for any reason other
than merger with the Company, the employees of such subsidiary or parent shall
be deemed to have terminated their employment as of the date of such sale,
exchange, or other disposition.
B. If an optionee shall cease to be employed by the Company or its
parent or subsidiary by reason of the optionee's gross and willful misconduct
during the course of the optionee's employment, including but not limited to
dishonesty, fraud, failure to perform the optionee's duties, or other conduct
adverse to the Company's interest, the option shall be terminated as of the
termination of employment.

IX. ADJUSTMENT OF SHARES

A. The aggregate number and class of shares on which options may be
granted under this Plan, the number and class of shares covered by each
outstanding option and the option price shall all be proportionately adjusted
for any increase or decrease in the number of issued shares resulting from a
split-up or consolidation of shares or any like capital adjustment, or the
payment of any stock dividend, or any other increase or decrease in the number
of issued and outstanding shares without receipt of consideration by the
Company.
B. If the outstanding shares of the Common Stock be changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation, whether through reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger or
consolidation, or otherwise, then there shall be substituted for the shares of
Common Stock covered by each outstanding option and for the shares available for
issuance pursuant to the Plan, but not yet covered by an option, the number and
kind of shares of stock or other securities which would have been substituted
therefor if such shares had been outstanding on the date fixed for determining
the list of shareholders entitled to receive such changed or substituted stock
or other securities.
C. If there be any change other than as specified above in the number
or kind of securities into which shares of Common Stock will have been changed
or for which they will have been exchanged, then if the Board determines, in its
discretion, that such change equitably requires an adjustment in the number or
kinds of shares covered by the outstanding options or which are available for
issuance pursuant to the Plan, but not yet covered by an option, such adjustment
shall be made by the Board and shall be effective and binding on each
outstanding Agreement and for all purposes of the Plan.
D. In the event of any adjustment in the number of shares covered by an
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
E. All such adjustments shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. Any adjustments under this Section IX
shall be subject to the provisions of the Company's Articles of Incorporation,
as amended, and applicable law.

X. NO GUARANTY OF EMPLOYMENT

Neither anything in this Plan nor the grant of any option shall be
construed as guaranteeing future employment to any employee nor as being a
contract of employment. Each employee continues to be an employee of the Company
solely at the will of the Company as that term is broadly defined or subject to
the terms and conditions of any employment agreement between the employee and
the Company. Neither the Plan nor the grant of any option shall act as a
limitation on the right of the Company to terminate the employee for any reason,
with or without cause.

XI. NON-TRANSFERABILITY OF OPTIONS

No option granted under the Plan shall be transferable by the optionee,
in whole or in part, or subject to seizure or sale upon execution, attachment,
or other legal process against the optionee. An option shall be exercisable only
by the optionee (or by a personal representative, administrator of the estate,
guardian, or the person entitled thereto by will or the laws of descent and
distribution, as hereinbefore provided). Upon any attempt by an optionee to
transfer, pledge, hypothecate, or otherwise dispose of an option or any right or
privilege conferred thereby, or upon any attempt by an adverse party to seize or
sell the same, contrary to the provisions hereof, the option shall lapse and
immediately become null and void.

XII. REPURCHASE OF OPTION SHARES

In the event of the severance of an optionee's employment with the
Company for any reason, other than retirement at or after age 65, death or total
disability, within six months after the date of the optionee's exercise of any
segment of an option, then such optionee will be required, at the election of
the Company, upon written notice to such optionee, to sell back to the Company
all option shares purchased during such six-month period and the three months
ensuing, at the fair market value of the shares as of the date when the subject
shares had been purchased.

XIII. LISTING AND REGISTRATION

A. If at any time the Board determines, in its discretion, that the
listing, registration, or qualification of the shares subject to an option upon
any securities exchange or under any federal or state law or the consent or
approval by any governmental regulatory body is necessary or desirable as a
condition of or in connection with the issuance or purchase of shares hereunder,
the option may not be exercised, in whole or in part, unless such listing,
registration, qualification, consent, or approval will have been effected or
obtained, and the same shall be free of any conditions not acceptable to the
Board.
B. Until and unless the shares purchased pursuant to the exercise of an
option be the subject of an effective registration statement filed with the
Securities and Exchange Commission, the optionee shall receive and hold the
shares for investment and shall not distribute or otherwise dispose of the same
without the Company's receipt of an opinion from its counsel to the effect that
such distribution or other disposal will not be violative of any applicable law,
regulation, or rule. Each Agreement shall contain a commitment by the optionee
to comply with the foregoing limitation and the certificate(s) evidencing the
purchased shares shall bear an appropriate legend in conformity herewith.

XIV. INDEMNIFICATION OF BOARD

In addition to such other rights of indemnification as they may have as
directors of the Company, each and all directors and members of the Committee,
if constituted, shall be indemnified by the Company against all costs and
expenses reasonably incurred by them in connection with any action, suit, or
proceeding to which they or any of them may be party by reason of any action
taken, or failure to act, under or in connection with the Plan or any option
granted thereunder, and against all amounts paid by them or any of them in
satisfaction of a judgment in any such action, suit, or proceeding, except a
judgment based upon a finding of bad faith; provided that upon institution of
any such action, suit, or proceeding, the affected party shall, in writing, give
the Company an opportunity, at its own expense, to handle and defend the same
before such affected party undertakes to handle or defend on the party's own
behalf.

XV. APPLICATION OF FUNDS

The proceeds received by the Company from the sale of Common Stock
pursuant to options under the Plan shall be used for general corporate purposes.

XVI. AMENDMENT OR DISCONTINUANCE OF PLAN

The Board may amend or discontinue the Plan at any time. Subject to the
provisions of Section IX, however, no amendment of the Plan, shall, without
shareholder approval, increase the maximum number of shares under the Plan as
provided in Section II, expand the class of persons eligible to be granted
options under the Plan as provided in Section IV, or decrease the minimum option
price provided in Section V. Except as provided in Section IX, the Board shall
not impair any option theretofore granted under the Plan, whether by reason of
Plan termination or otherwise, without the consent of the holder of the option.

XVII. TIME OF GRANTING

Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board or by the shareholders of the Company, and no action taken
by the Board (other than the execution and delivery of an Agreement) shall
constitute the granting of an option hereunder. The granting of an option
pursuant to the Plan shall take place only when an Agreement shall have been
duly executed and delivered by or on behalf of the Company to an eligible
optionee to whom such option is granted.

XVIII. EFFECTIVE DATE OF PLAN

This Plan is adopted by the Board effective April 25, 1995. Unless
approved by the shareholders of the Company within one year of the date hereof,
the provisions of the Plan permitting the grant of Incentive Stock Options shall
lapse and all Incentive Stock Options that may have been granted before that
date shall be deemed to be cancelled. No Incentive Stock Option shall be
exercisable until shareholder approval is obtained. Unless the Plan shall be
discontinued as provided in Section XVI, the Plan shall continue in full force
and effect until all shares reserved hereunder will have been purchased by
optionees; provided, however, no Incentive Stock Options shall be granted under
the Plan after April 24, 2005.

VENTURIAN CORP.

By /s/ Gary B. Rappaport
---------------------
Its President

Management's Discussion and Analysis of Results of Operations

Forward-looking statements contained throughout this Annual Report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. There are certain important factors that could cause results
to differ materially from those anticipated by the statements made herein.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. Among the factors that could cause actual results to differ
materially are the following:

Net Sales

Napco sales increased to $27,550,000 in 1996, up 14 percent from
$24,098,000 in 1995. In 1995, sales were down 3 percent from sales of
$24,834,000 in 1994. A portion of the increase in Napco sales in 1996 was
attributable to higher sales under the U.S. Government's Simplified Non-Standard
Acquisition Process (SNAP). Sales under the SNAP program increased to $2,431,000
in 1996 from $849,000 in 1995 and $1,057,000 in 1994. An increase in sales at
Napco's International Precision Machining, Inc. (IPM) subsidiary also
contributed to higher sales in 1996. Sales at IPM, including sales to Napco,
were $1,928,000 in 1996, $1,246,000 in 1995 and $1,158,000 in 1994.

Venturian Software sales were $848,000 in 1996, increasing 12 percent
from $755,000 a year earlier. In 1995, Venturian Software sales increased by
approximately 82 percent from $414,000 in 1994, primarily due to a significant
increase in consulting revenues. In 1996, approximately 83 percent of Venturian
Software sales were derived from consulting activities, 15 percent from product
sales and 2 percent from training activities. In 1995, approximately 74 percent
of Venturian Software sales were derived from consulting activities, 23 percent
from product sales and 3 percent from training activities. In 1994,
approximately 69 percent of Venturian Software sales were derived from
consulting activities, 26 percent from product sales and 5 percent from training
activities.

Cost of Products Sold

Napco markets a wide variety of defense-related products, and the
profit margins associated with its products can vary greatly. Cost of products
sold was approximately 72 percent of Napco sales in 1996, up from approximately
70 percent of net sales in 1995. Cost of products sold was approximately 73
percent of net sales in 1994.

Venturian Software's cost of products sold as a percent of net revenues
is low because a significant portion of its revenues are derived from consulting
activities and the related expenses are included in operating expenses as
administrative expense. Cost of products sold was 9.1 percent of net sales in
1996, 15.2 percent of net sales in 1995 and 17.1 percent of net sales in 1994.

Operating Expenses

Napco operating expenses were $6,446,000, $5,807,000 and $6,173,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.

Napco sales and marketing expenses were $2,755,000 in 1996, including
commission expense of $453,000. In 1995, sales and marketing expenses totaled
$2,355,000, including commission expense of $378,000. Commission expense was 1.6
percent of net sales in both 1996 and 1995. In 1994, sales and marketing
expenses totaled $2,620,000, including commission expense of $591,000, or 2.4
percent of sales. Commission expense as a percent of net sales decreased in 1996
and 1995, primarily as a result of an increase in sales in the United States for
which no commission is paid. Napco generally pays commissions only to in-country
representatives for its export sales.

Excluding commission expense, Napco sales and marketing expenses were
$2,302,000 in 1996, up 16 percent compared with $1,977,000 last year. Sales and
marketing expenses, excluding commissions, were $2,029,000 in 1994. Several new
sales and marketing positions were created mid-year in 1996 as part of an effort
to increase sales opportunities over the long-term. As a result, payroll and
related costs were up by approximately $130,000. Advertising and Napco's
participation in trade shows also increased, contributing to higher expense
levels. In addition, Napco incurred approximately $100,000 in prototype costs in
1996 in connection with a potential substantial repowering project in the Far
East. In 1994, marketing expenses included costs of approximately $192,000
related to a $7.1 million upgrade contract. Excluding the one-time costs from
1994, sales and marketing expenses increased by $140,000 in 1995 compared with
the prior year. In 1995, sales and marketing expenses were up due to several
factors, including higher payroll and related costs, bank charges and late
shipment penalty expense. Excluding commission expense, sales and marketing
expenses were approximately 8 percent of net sales in each of the last three
years.

Napco administrative expenses totaled $2,056,000 in 1996, compared with
$1,981,000 in 1995. Administrative expenses were $2,063,000 in 1994. In 1996,
administrative expenses were up in part due to costs associated with the
relocation of Napco's office facility late in 1996 and also due to legal
expenses incurred to explore business opportunities overseas. Administrative
expenses were lower in 1995, primarily due to decreases in amortization of
computer software costs and outside services.

Napco warehousing expense increased to $1,635,000 in 1996, up from
$1,471,000 in 1995 and $1,490,000 in 1994. The increase in warehousing expense
in 1996 was primarily due to higher payroll costs related to the increase in
sales for the year. Warehousing expense was approximately 6 percent of net sales
in each of the last three years.

Venturian Software operating expenses totaled $1,272,000 in 1996, up
substantially from $729,000 in 1995. Sales and marketing expenses increased to
$545,000 in 1996, compared with $257,000 a year earlier. Administrative expenses
totaled $727,000 in 1996, compared with $472,000 in 1995. In 1994, Venturian
Software operating expenses totaled $439,000, including marketing expenses of
$128,000 and administrative expenses of $311,000. Expenses were increased in
both categories in 1996 as a result of costs incurred in connection with the
introduction of Cybercall(TM), a call center solution for the Internet that
allows companies to establish virtual call centers through their World Wide Web
sites. Sales and marketing expenses increased in 1995 as compared with 1994,
primarily due to the introduction of Multicall(TM), which is an interactive
voice response product that offers a cost-effective solution for CTI (computer
telephony integration) technology. Administrative expenses had also increased in
1996 and 1995 over 1994 levels, primarily due to the addition of programming
staff as a result of increased demand for consulting services. Management
expects that expense levels in both categories will continue to be higher in the
future due to the introduction of Cybercall.

Corporate overhead expenses were $646,000, $482,000 and $409,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Corporate
overhead increased in 1996 primarily due to higher payroll and related costs.
Corporate overhead increased in 1995 primarily due to legal expenses incurred in
connection with the Hopkins Tech Center remediation (see Note 4 to the
Consolidated Financial Statements) and also as a result of higher payroll and
related expenses. Management expects that corporate overhead will approximate
prior years' historical levels going forward due to staff reductions which
occurred at the end of 1996.

Operating Profit (Loss)

Napco generated operating profits of $1,242,000, $1,490,000 and
$651,000 in 1996, 1995 and 1994, respectively. While sales increased 14 percent
in 1996, higher cost of products sold and operating expenses led to a decline in
the level of operating profit in the current year. An improvement in profit
margins as well as reductions in operating expenses contributed to a strong
operating profit in 1995 as compared with results for 1994, when sales were just
3 percent higher than in 1995.

Venturian Software reported an operating loss of $501,000 in 1996, up
significantly from the prior years' losses due to costs associated with the
introduction of Cybercall. Venturian Software reported operating losses of
$89,000 and $96,000 in 1995 and 1994, respectively.

Other Income (Expense)

Investment income was $42,000, $114,000 and $126,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Investment income has
decreased as a result of lower levels of invested funds.

Rental income, net of expenses, of $428,000, $456,000 and $376,000 in
1996, 1995 and 1994, respectively, was derived from the acquisition of rental
real estate in March 1994 (see Note 4 to the Consolidated Financial Statements).

Interest expense related primarily to the company's deferred
compensation plan. Interest expense decreased to $371,000 in 1996 from $428,000
a year earlier which resulted from the repayment of insurance policy loans in
early 1996. Interest expense had increased in 1995 from $369,000 in 1994,
primarily due to insurance policy loans as well as financing related to the
acquisition of rental real estate in March of 1994.

Income Tax Expense

The company had no income tax expense for the year ended December 31,
1996. The company recorded income tax expense of $199,000 and $32,000 for the
years ended December 31, 1995 and 1994, respectively, relating to continuing
operations. This tax expense was fully offset by a tax benefit relating to
discontinued operations.

The company did not record a net tax benefit for 1995 and 1994 because
no taxes would have been recoverable from a carryback of net losses in those
years, nor is it more likely than not that net deferred tax assets will be
realized in future years.

Discontinued Operations

On July 31, 1995, the company discontinued operations of its PC Express
subsidiary due to continued losses. PC Express ceased operations effective as of
that date and management proceeded with an orderly liquidation of the
subsidiary. Net losses from operations of PC Express were $1,851,000, net of an
income tax benefit of $336,000, for the seven months ended July 31, 1995, on
sales of $12,202,000. The 1995 loss included a $1,012,000 write-off of goodwill
and non-compete agreements. As of December 31, 1995, management had
substantially completed the liquidation. Based upon the results of the
liquidation, there were insufficient assets to satisfy the remaining obligations
of the subsidiary. Accordingly, the remaining net liabilities of $756,000, net
of income tax expense of $137,000, were written off during 1995. In 1994, PC
Express reported a net loss from operations of $3,235,000, net of an income tax
benefit of $32,000, on sales of $26,070,000. The 1994 loss included a charge to
operations of $1,500,000 recorded to write-down goodwill to an estimated net
realizable value of $600,000.

Backlog

Napco's order backlog totaled $15,861,000 at December 31, 1996, down
from $16,300,000 at the end of 1995. The order backlog totaled $15,025,000 at
December 31, 1994. Management expects that nearly all of its present backlog
will be filled within the current fiscal year.

Management's Discussion and Analysis of Financial Condition

The company's current ratio was 2.4 to one at December 31, 1996, up
from 2.1 to one at the end of 1995. Current assets comprised 67 percent of total
assets at year-end and exceeded total liabilities by $4,440,000. Long-term debt
at December 31, 1996 was $163,000 and was less than one percent of total assets
at the end of the year. Cash and cash equivalents at December 31, 1996 increased
slightly to $1,011,000, compared with $910,000 a year ago.

Inflation has not adversely affected the company's business and
financial performance. The company is not capital intensive and, therefore,
depreciation on a current cost basis would not significantly affect results. The
company had no material commitments for capital expenditures as of December 31,
1996.

Napco has an agreement with a bank to provide a $4,000,000 line of
credit for international transactions and cash advances. The agreement requires
that letters of credit be collateralized 100 percent with a restricted cash
balance. The agreement also allows for cash advances of up to 90 percent of the
cash surrender value of certain of the company's life insurance policies. The
life insurance policies are assigned as collateral on the line of credit.
Advances on the line bear interest at one percent over the bank's base rate. At
December 31, 1996, approximately $2,000,000 was available for cash advances
pursuant to this agreement. There were no cash advances outstanding against this
line of credit at December 31, 1996.

Napco has additional lines of credit available for international
transactions on a transaction basis for which restricted cash balances are
required. Letters of credit issued by financial institutions under all lines of
credit totaled $65,000 and $658,000 as of December 31, 1996 and 1995,
respectively, and were collateralized by a restricted cash balance.

Management believes that the company's present cash reserves and
available credit should be sufficient to fund its operations and to
collateralize all international transactions. In addition, management has been
successful in obtaining insurance bonds with no collateral requirements for
certain of its international transactions rather than utilizing its traditional
bank lines of credit. The company has additional sources of funds in the form of
borrowings against life insurance policies or other assets.

Shareholder Information

The company paid no dividends in 1996, pursuant to a determination by
the Board of Directors that presently available funds should be used to provide
working capital.

VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)

Years ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales ........................................................ $ 28,398 $ 24,845 $ 25,206

Cost of products sold ............................................ 19,939 16,916 18,081
-------- -------- --------
Gross profit ................................................... 8,459 7,929 7,125

Operating expenses
Sales and marketing ............................................ 3,300 2,612 2,748
Administrative ................................................. 3,429 2,927 2,741
Warehousing .................................................... 1,635 1,471 1,490
-------- -------- --------
Total operating expenses ..................................... 8,364 7,010 6,979
-------- -------- --------

Operating profit ................................................. 95 919 146

Other income (expense)
Investment income .............................................. 42 114 126
Rental income, net of expenses ................................. 428 456 376
Gain (loss) on sale of property and equipment .................. (97) 64 --
Interest expense ............................................... (371) (428) (369)
Other .......................................................... (13) 11 20
-------- -------- --------
(11) 217 153
-------- -------- --------

Earnings from continuing operations
before income taxes and discontinued operations ................ 84 1,136 299

Income tax expense ............................................... -- 199 32
-------- -------- --------

Earnings from continuing operations before discontinued operations 84 937 267

Discontinued operations
Loss from discontinued operations,
net of income tax benefit .................................... -- (1,851) (3,235)
Write-off net liabilities of PC Express,
net of income tax expense .................................... -- 756 --
-------- -------- --------
-- (1,095) (3,235)
-------- -------- --------

NET EARNINGS (LOSS) .............................................. $ 84 $ (158) $ (2,968)
======== ======== ========

Net earnings (loss) per share
Continuing operations .......................................... $ .11 $ 1.25 $ .36
Discontinued operations ........................................ -- (1.46) (4.33)
-------- -------- --------
NET EARNINGS (LOSS) PER SHARE .................................. $ .11 $ (.21) $ (3.97)
======== ======== ========

The accompanying notes are an integral part of these statements.

</TABLE>

VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
ASSETS 1996 1995
-------- --------
CURRENT ASSETS
Cash and cash equivalents ........................... $ 1,011 $ 910
Accounts receivable, less allowance for doubtful
accounts of $196 in 1996 and $165 in 1995 ......... 4,254 6,666
Inventories ......................................... 3,668 3,977
Restricted cash ..................................... 65 658
Rental real estate held for sale .................... 2,898 2,592
Prepaid expenses .................................... 208 243
-------- --------
Total current assets .............................. 12,104 15,046

PROPERTY AND EQUIPMENT - AT COST
Buildings and improvements .......................... 1,741 1,741
Equipment ........................................... 5,429 5,311
-------- --------
7,170 7,052
Less accumulated depreciation and amortization ...... 5,690 5,528
-------- --------
1,480 1,524
Land ................................................ 314 529
-------- --------
1,794 2,053

OTHER ASSETS
Cash surrender value of life insurance,
net of policy loans of $750 in 1995 ............... 3,786 2,721
Other ............................................... 369 496
-------- --------
4,155 3,217
-------- --------
$ 18,053 $ 20,316
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ...................................... $ 409 $ 395
Current maturities of long-term debt ................ 118 147
Accounts payable .................................... 1,981 3,243
Advances from customers ............................. 237 400
Accrued liabilities
Payroll and related benefits ...................... 507 700
Other ............................................. 736 784
Rental real estate mortgage and related costs ....... 1,130 1,640
-------- --------
Total current liabilities ......................... 5,118 7,309

LONG-TERM DEBT, LESS CURRENT MATURITIES ............... 163 271

DEFERRED COMPENSATION AND POSTRETIREMENT BENEFITS ..... 2,383 2,448

COMMITMENTS AND CONTINGENCIES ......................... -- --

STOCKHOLDERS' EQUITY
Common stock - authorized 30,000,000 shares of $1 par
value, issued 749,789 in 1996 and 747,789 in 1995 . 750 748
Additional contributed capital ...................... 14,676 14,661
Accumulated deficit ................................. (5,037) (5,121)
-------- --------
Total stockholders' equity ........................ 10,389 10,288
-------- --------
$ 18,053 $ 20,316
======== ========

The accompanying notes are an integral part of these statements.

VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)

Years ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................... $ 84 $ (158) $(2,968)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 534 534 554
Loss (gain) on sale of property and equipment ...... 97 (64) --
Issuance of common stock for services .............. 17 -- --
Discontinued operations ............................ -- 923 2,074
Change in assets and liabilities:
Accounts receivable .............................. 2,412 (3,068) 2,387
Inventories ...................................... 309 427 (362)
Restricted cash .................................. 593 1,445 568
Prepaid expenses ................................. 35 36 88
Other ............................................ 51 (59) (61)
Bank overdraft ................................... 14 78 (43)
Accounts payable ................................. (1,262) 1,397 (797)
Advances from customers .......................... (163) (7) (5,033)
Accrued liabilities .............................. (241) 364 (54)
Deferred compensation and
postretirement benefits ........................ 235 258 262
Payments on deferred compensation
and postretirement benefits .................... (300) (293) (257)
------- ------- -------
Total adjustments .................................. 2,331 1,971 (674)
------- ------- -------

Net cash provided by (used in) operating activities ...... 2,415 1,813 (3,642)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (388) (323) (426)
Purchase of rental real estate ........................... -- -- (400)
Improvements to rental real estate ....................... (721) (62) (16)
Purchase of other assets ................................. (315) (286) (268)
Proceeds from the sale of property and equipment ......... 193 102 1,312
Other .................................................... 14 14 14
------- ------- -------

Net cash provided by (used in) investing activities ...... (1,217) (555) 216

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and rental real estate mortgage (462) (355) (587)
Proceeds from long-term debt ............................. 115 213 72
Payments on life insurance loans ......................... (750) -- --
Proceeds from life insurance loans ....................... -- 119 --
Discontinued operations, net ............................. -- (1,150) 892
------- ------- -------

Net cash provided by (used in) financing activities ...... (1,097) (1,173) 377
------- ------- -------

Net increase (decrease) in cash and cash equivalents ....... 101 85 (3,049)
Beginning cash and cash equivalents ........................ 910 825 3,874
------- ------- -------

Ending cash and cash equivalents ........................... $ 1,011 $ 910 $ 825
======= ======= =======

The accompanying notes are an integral part of these statements.

</TABLE>

VENTURIAN CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)

ADDITIONAL
COMMON CONTRIBUTED ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 ....... $ 748 $ 14,661 $ (1,995) $ 13,414

Net loss for 1994 .............. -- -- (2,968) (2,968)
-------- -------- -------- --------

Balance at December 31, 1994 748 14,661 (4,963) 10,446

Net loss for 1995 .............. -- -- (158) (158)
-------- -------- -------- --------

Balance at December 31, 1995 748 14,661 (5,121) 10,288

Issuance of common stock ....... 2 15 -- 17
Net earnings for 1996 .......... -- -- 84 84
-------- -------- -------- --------

Balance at December 31, 1996...... $ 750 $ 14,676 $ (5,037) $ 10,389
======== ======== ======== ========

The accompanying notes are an integral part of these statements.

</TABLE>

VENTURIAN CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Venturian Corp.
and its wholly-owned subsidiaries, Napco International Inc. (Napco) and Napco
International Foreign Sales Corporation, Venturian's majority-owned subsidiary,
Venturian Software, Inc., Napco's majority-owned subsidiary, International
Precision Machining, Inc., and the accounts of Venturian's wholly-owned
subsidiary, PC Express, Inc., which have been reflected as discontinued
operations (collectively, the "company"). Significant intercompany accounts and
transactions have been eliminated in consolidation.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

A summary of the company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:

Cash and Cash Equivalents - The company considers its investments with an
original maturity of three months or less to be cash equivalents. The company
invests excess funds in reverse repurchase agreements for U.S. government
securities. At December 31, 1996 and 1995, the company had purchased $300,000
and $500,000, respectively, of U.S. government securities under agreements to
resell. Generally, the maturity date of the company's reverse repurchase
agreements is the next day of business. Due to the short-term nature of the
agreements, the company does not take possession of the securities, which are
instead held at the bank from which it purchases the securities. The carrying
value of the agreements approximates fair market value because of the short
maturity of the investments, and the company believes that it is not exposed to
any significant risk on its investments in reverse repurchase agreements.
Exclusive of the reverse repurchase agreements, substantially all the cash and
cash equivalents were held at one financial institution in Minnesota at December
31, 1996 and 1995.

Supplemental disclosures of cash flow information for the Statements of Cash
Flows are as follows (thousands of dollars):

Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Cash paid during the year for:
Interest ................ $226 $188 $270
Income taxes............. 21 12 94

During 1994, the company acquired rental real estate for $2,108,000, consisting
of $400,000 cash and a $1,708,000 note payable. The company also recorded and
capitalized $607,000 for the estimated costs to remediate the property. During
1996, based upon a revised cost to remediate, the company recorded a reduction
of $300,000 in the liability and carrying value of the property (see Note 4).

Accounts receivable - The company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs on-going credit evaluations
of customers. The company maintains allowances for potential credit losses
which, when realized, have been within management expectations.

Inventories - Inventories are stated at the lower of cost or market, principally
using the specific identification method. A portion of Napco's inventory is
acquired on a speculative basis in varying quantities when it becomes available
for purchase. Napco's sales of this inventory may vary from the current period
to several years. It is the company's practice to classify this inventory, which
totaled $1,908,000 and $1,757,000 at December 31, 1996 and 1995, respectively,
within current assets. The company's obsolescence policy requires that purchases
of this inventory be written off if not sold after four years. The four-year
period was selected after a review of customers' historical buying patterns and
is reviewed annually to determine whether the period continues to be
appropriate.

Property and Equipment - Depreciation and amortization are provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Depreciation is computed for financial reporting and
tax purposes using both accelerated and straight-line depreciation methods.
Estimated lives used in the calculation of depreciation for financial statement
purposes are:

Buildings and improvements.. 17-40 years
Equipment .................. 3-15 years

Employee Stock Options - The company's employee stock option plans are accounted
for under the intrinsic value method.

Foreign Currency - From time to time Napco enters into sales contracts
denominated in foreign currency. During 1996 and 1995, Napco also entered into
forward exchange contracts with a bank to hedge against exchange rate
fluctuations related to such sales. Gains and losses on transactions in foreign
currency and forward exchange contracts are included in results of operations.
At December 31, 1996, the company had a foreign exchange contract maturing in
February 1997 for the delivery of 20,893,000 Spanish pesetas and accounts
receivable from a foreign customer totaling 5,414,000 Spanish pesetas. The fair
value of these amounts were $161,000 and $42,000, respectively, at December 31,
1996. At December 31, 1995, the company had a foreign exchange contract maturing
in February 1996 for the delivery of 24,048,000 Spanish pesetas and accounts
receivable from a foreign customer totaling 32,074,000 Spanish pesetas. The fair
value of these amounts were $198,000 and $223,000, respectively, at December 31,
1995.

Income Taxes - Deferred tax assets and liabilities are recorded based on the
differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.

Revenue Recognition - The company recognizes revenue when goods are shipped or
services are rendered.

Net Earnings (Loss) Per Share - Net earnings (loss) per share are computed based
on the weighted average outstanding common shares and common share equivalents,
when dilutive. Weighted average shares outstanding were 748,712 for the year
ended December 31, 1996 and 747,789 for the years ended December 31, 1995 and
1994, respectively.

Recent Accounting Pronouncements - The company implemented Statement of
Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective
January 1, 1996. SFAS 121 establishes guidance for when to recognize and how to
measure impairment losses of long-lived assets and identifiable intangibles, and
how to value long-lived assets to be disposed of. The adoption of this Standard
did not have a material effect on the company's financial position or results of
operations.

The company implemented SFAS 123, "Accounting for Stock-Based Compensation,"
effective January 1, 1996. The adoption of this Standard did not have a material
effect on the company's financial position or results of operations (see Note
11).

Reclassifications - Certain reclassifications have been made to the 1995 and
1994 financial statements to conform with the 1996 presentation.

NOTE 3 - DISCONTINUED OPERATIONS

On July 31, 1995, the company discontinued operations of its PC Express
subsidiary due to continued losses. PC Express ceased operations effective as of
that date, and management proceeded with an orderly liquidation of the
subsidiary. Net losses from operations of PC Express were $1,851,000, net of an
income tax benefit of $336,000, for the seven months ended July 31, 1995, on
sales of $12,202,000. The 1995 loss included a $1,012,000 write-off of goodwill
and non-compete agreements. As of December 31, 1995, management had
substantially completed the liquidation. Based upon the results of the
liquidation, there were insufficient assets to satisfy the remaining obligations
of the subsidiary. Accordingly, the remaining net liabilities of $756,000, net
of income tax expense of $137,000, were written off during 1995, including net
liabilities of $427,000, which were written off during the fourth quarter. In
1994, PC Express reported a net loss from operations of $3,235,000, net of an
income tax benefit of $32,000, on sales of $26,070,000. The 1994 loss included a
charge to operations of $1,500,000 recorded to write-down goodwill to an
estimated net realizable value of $600,000.

The accounts of PC Express have been reclassified to discontinued operations in
the consolidated financial statements.

NOTE 4 - RENTAL REAL ESTATE

In February 1994, the company signed an agreement to settle a lawsuit by
agreeing to reacquire previously sold property at a cost of $2,108,000 and by
also agreeing to formulate a plan for the environmental remediation of the
property that is acceptable to both the Minnesota Pollution Control Agency
(MPCA) and the company.

In connection with the lawsuit and settlement negotiations, management retained
a consultant to prepare a preliminary cost estimate related to the remediation
at the property. At the time of settlement, the most likely alternative for the
site included remediation efforts over five years at an estimated discounted
cost of $607,000, using a ten percent discount rate.

The property was transferred to the company in March 1994. The company recorded
the acquisition cost for the property at $2,715,000, which included $400,000
paid at closing, estimated costs at the time of settlement of $607,000 to
remediate any contamination at the site and a $1,708,000 note payable. The note
payable is due in monthly installments of $16,000, including interest at 8.875
percent per annum, through January 2004 and is collateralized by a mortgage on
the property, all company equipment and all capital stock of the company's
subsidiaries. Aggregate future principal payments of the real estate mortgage
are $109,000 in 1997, $117,000 in 1998, $128,000 in 1999, $140,000 in 2000,
$154,000 in 2001 and $354,000 thereafter. Based upon borrowing rates currently
available to the company for a note payable with a similar term and average
maturities, the carrying amount approximates fair market value at December 31,
1996 and 1995.

The property is a 386,000 square foot multi-tenant building with twenty-seven
tenants presently occupying space. Minimum rental commitments receivable in
future years under non-cancelable long-term leases at the property are
$1,025,000 in 1997, $920,000 in 1998, $524,000 in 1999 and $278,000 in 2000.

In 1996, the MPCA granted approval of the Phase II Investigation and Review of
Remedial Alternatives Report and the Response Action Plan and Remedial Design
Report submitted by management's consultant in connection with the environmental
remediation of the property. Remediation at the property commenced in 1996 and
is expected to be completed in Spring 1997, with the exception of a five-year
annual groundwater monitoring program which began in December 1996. In
connection with the commencement of remediation activity, the consultant
prepared a revised cost estimate based upon the remediation plan approved by the
MPCA. Based on this revised cost estimate, the company reduced its remaining
liability for the expected cost of remediation to $128,000 at December 31, 1996.
The $300,000 reduction in the liability was recorded as a decrease in the
carrying value of the property.

During 1996, the company also incurred costs of $721,000 for improvements to the
property. Based upon an independent appraisal of the expected value of the
property once remediation has been completed, management believes the property's
current carrying value of $2,898,000 is recoverable. Since the property is held
for sale, its carrying value has been recorded as a current asset under the
caption "Rental real estate held for sale" and the related liability for the
mortgage and remediation costs is reflected as a current liability under the
caption "Rental real estate mortgage and related costs."

NOTE 5 - LINES OF CREDIT

Napco has an agreement with a bank to provide a $4,000,000 line of credit for
international transactions and cash advances. The agreement requires that
letters of credit be collateralized 100 percent with a restricted cash balance.
The agreement allows for cash advances of up to 90 percent of the cash surrender
value of certain of the company's life insurance policies. The life insurance
policies are also assigned as collateral on the line of credit. Advances on the
line bear interest at one percent over the bank's base rate. At December 31,
1996, approximately $2,000,000 was available for cash advances pursuant to this
agreement. There were no cash advances outstanding against this line of credit
at December 31, 1996 and 1995.

Napco has additional lines of credit available for international transactions
such as letters of credit and bid, performance and advance payment guarantees on
a transaction basis for which restricted cash balances are required.

Letters of credit issued by financial institutions under all lines of credit
totaled $65,000 and $658,000 as of December 31, 1996 and 1995, respectively, and
were collateralized by a restricted cash balance.

NOTE 6 - LONG-TERM DEBT

Long-term debt consisted of the following at December 31 (thousands of dollars):

1996 1995
---- ----

Obligation to U.S. government (a) $ 90 $135

Other (b) ....................... 191 283
---- ----
281 418

Less current maturities ......... 118 147
---- ----

$163 $271
==== ====

(a) The obligation is payable to the U.S. government pursuant to the terms of a
settlement agreement reached in February 1994 and is collateralized by real
estate. Payments are due in annual installments of $45,000 through 1998, plus
interest at the 52-week United States Treasury bill auction rate, adjusted
annually (weighted average effective rate of 4.64 percent and 6.59 percent for
1996 and 1995, respectively, and at December 31, 1996 and 1995, respectively).

(b) These obligations are collateralized by certain equipment.

Aggregate future maturities of long-term debt are $118,000 in 1997, $100,000 in
1998, $51,000 in 1999 and $12,000 in 2000.

Based upon the borrowing rates currently available to the company for loans with
similar terms and average maturities, the carrying amount of long-term debt
approximates fair market value at December 31, 1996 and 1995.

NOTE 7 - DEFERRED COMPENSATION

The company has deferred compensation agreements with certain present and former
key employees. The agreements provide for monthly retirement benefit payments
for 15 years following an employee's retirement. The company has purchased life
insurance policies to fund the deferred compensation agreements. The company had
recorded $1,816,000 and $1,871,000 at December 31, 1996 and 1995, respectively,
for its liability related to these agreements. Deferred compensation expense was
$12,000 in 1994. There was no deferred compensation expense in 1996 and 1995.
Interest expense related to the deferred compensation agreements was $212,000,
$217,000 and $210,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.

NOTE 8 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The company sponsors an unfunded defined benefit postretirement plan that covers
a limited number of former employees and dependents of former employees who
retired prior to February 1988. The plan provides for medical and dental
benefits as well as limited life insurance benefits. At December 31, 1996 and
1995, the company had recorded $567,000 and $577,000, respectively, for the
accumulated postretirement benefit obligation under this plan.

Interest cost on the accumulated postretirement benefit obligation was $39,000,
$40,000 and $38,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.

For measurement purposes, a 6 percent annual rate of increase in the per capita
cost of covered medical benefits was assumed for 1997, decreasing gradually to 4
percent in 1999 and thereafter. A 4 percent annual rate of increase in the per
capita cost of covered dental benefits was assumed for all years. The health
care cost trend rate assumption has an effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $38,000. The effect of a one percent increase
in the health care cost trend rate would not have a significant effect on
interest cost included in the net periodic postretirement benefit cost for the
years ended December 31, 1996, 1995 and 1994.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7 percent.

NOTE 9 - PENSION AND PROFIT SHARING PLANS

The company has retirement plans, in the form of pension or profit sharing
plans, that are provided for substantially all employees of the company. No
contributions to the profit sharing plan were made for the years ended December
31, 1996, 1995 or 1994.

Benefits under the defined benefit pension plan are provided pursuant to the
terms of a collective bargaining agreement covering approximately one-third of
the company's employees. The agreement expires in August 1998. Benefits under
the plan are based on years of service. Net pension expense includes the
following components (thousands of dollars):

Years ended December 31,
1996 1995 1994
----- ----- -----
Service cost - benefits
earned during the year ...... $ 14 $ 11 $ 11
Interest cost on projected
benefit obligation .......... 57 55 51
Actual return on plan assets... (180) (71) (10)
Net amortization and deferral.. 127 17 (49)
----- ----- -----

Net pension expense ........... $ 18 $ 12 $ 3
===== ===== =====

Assumptions used in the accounting were:
Discount rate ................... 7.0% 7.0% 7.0%
Expected long-term
return on assets .............. 7.5% 7.5% 7.5%
Increase in compensation level... N/A N/A N/A

The following sets forth the plan's funded status and amounts recognized in the
consolidated balance sheet as of December 31 (thousands of dollars):

1996 1995
----- -----
Accumulated benefit obligation,
including vested benefits of $858 and
$848 at December 31, 1996 and
1995, respectively ...................... $ 864 $ 852
===== =====

Plan assets at fair value, invested
in fixed income securities .............. $ 898 $ 787
Projected benefit obligations for
participants' service rendered to date .. 864 852
----- -----

Difference ................................ 34 (65)

Unrecognized prior service cost ........... 127 134

Unrecognized net gain ..................... (157) (43)

Unrecognized net transition asset ......... (61) (65)

Adjustments to recognize minimum liability -- (25)
----- -----

Pension liability recognized in
the consolidated balance sheet .......... $ (57) $ (64)
===== =====

The company's funding policy for the defined benefit plan has been to contribute
such amounts as necessary, computed on an actuarial basis, to provide the plan
with assets sufficient to meet the benefit payment requirements.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

At December 31, 1996, the company had performance and advance payment guarantees
outstanding on various sales contracts totaling $406,000. These guarantees were
backed by insurance bonds, which do not require cash collateral.

The company has guaranteed certain indebtedness of Mass Merchandisers, Inc., a
former affiliate. At December 31, 1996, this indebtedness was $509,000. The
indebtedness is secured by a first mortgage lien against certain real estate
owned and operated by Mass Merchandisers, Inc., a wholly-owned subsidiary of
McKesson Corp.

The company owns rental real estate that contains industrial contaminants and
must be remediated (see Note 4).

The company is involved in an environmental investigation related to its former
office headquarters location. Management has retained a consultant to determine
what, if any, remedial action is required at this site. Based upon a 1993 study,
the consultant has recommended that no further investigation or remediation at
the site is needed. This recommendation is subject to the approval of the
Minnesota Pollution Control Property Transfer Unit. Management believes that the
ultimate liability to be incurred as a result of this investigation, if any,
will not have a material adverse effect on the company's financial position or
results of operations.

NOTE 11 - EMPLOYEE STOCK PLANS

The company has a stock option plan that grants employees options for the right
to purchase common stock of the company through incentive and non-qualified
stock options. Shares available for grant under this stock option plan expired
in 1994. At December 31, 1996, 44,000 options previously granted under this plan
were exercisable.

In 1995, the company adopted and the shareholders approved a new stock option
plan which provides for the granting of options to employees to purchase shares
of the company's common stock. In May 1996, the shareholders approved an
amendment to the plan to allow for an aggregate of 250,000 shares of the
company's stock to be granted under the plan. At December 31, 1996, 169,850
shares were available for grant under this plan with 29,250 currently
exercisable.

Under both plans, incentive stock options may not be granted at a purchase price
less than the fair market value of the common shares on the date of the grant
(or for an option granted to a person holding more than 10 percent of the
company's voting stock at less than 110 percent of fair market value). Under
both plans, the option term is fixed at the date of grant and may not exceed ten
years from the date the option is granted (except that an incentive stock option
granted to a person holding more than 10 percent of the company's voting stock
may be exercisable only for five years). Options become exercisable in whole or
in installments, generally over five years. No options have been granted to a
person holding more that 10 percent of the company's voting stock in the last
three years. No compensation expense has been recorded by the company in the
previous three years.

A summary of the status of the company's stock option transactions for the years
ended December 31, 1996, 1995 and 1994 is as follows:

1996 1995 1994
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 51,000 $ 8.36 63,620 $ 8.80 68,620 $ 8.84
Granted .............................. 125,000 $ 6.27 -- -- -- --
Forfeited ............................ (45,850) $ 7.08 (8,500) $ 8.44 (5,000) $ 9.40
Expirations .......................... (6,000) $ 7.77 (4,120) $15.00 -- --
-------- -------- ------

Outstanding at end of year ........... 124,150 $ 6.75 51,000 $ 8.36 63,620 $ 8.80
======== ======== ======

Options exercisable at end of year ... 73,250 $ 7.49 49,000 $ 8.30 57,620 $ 8.76
======== ======== ======

Weighted-average fair value of options
granted during the year ........... $ 3.44 N/A N/A

</TABLE>

The following information applies to grants that are outstanding at December 31,
1996:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Exercise Number Average Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ---------------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
$5.00 to $7.13 80,150 9 years $5.83 29,250 $6.06
$8.00 to $9.75 44,000 3 years $8.44 44,000 $8.44
-------- ------
124,150 73,250
======== ======
</TABLE>

The Financial Accounting Standards Board has issued Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), which introduces an
alternative method for recognizing compensation costs based upon the fair value
of the awards on the date they are granted. SFAS 123 allows entities to continue
to account for stock option plans using the intrinsic value method provided pro
forma net earnings and net earnings per share as if the fair value based method
had been used are disclosed. The company's net earnings and net earnings per
share for 1996 would have been reduced to the pro forma amounts indicated below
had the fair value based method been used. These effects may not be
representative of the future effects of applying this statement.

(Dollars in thousands, except per share data)

Net earnings (loss) As reported........... $ 84
Pro forma............. (11)

Net earnings (loss) per share As reported........... $ .11
Pro forma............. (.02)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used in 1996: zero dividend yield; expected volatility of 64.68
percent; risk-free interest rate of 5.66 percent; and an expected life of five
years.

The company has a Key Employee Stock Purchase Plan for its officers and key
employees under which the company provides loans for the employees to purchase
shares of Venturian common stock on the open market. The company has agreed to
repurchase the shares covered by the plan at the purchase price, adjusted for a
proportionate increase or decrease in the book value per share since the date of
purchase. The company has also agreed to purchase the covered shares at the book
value per share at the normal retirement age of the plan participant. The plan
authorizes the purchase of 100,000 shares of common stock. Of the authorized
shares, 56,365 shares have been purchased through December 31, 1996, and loans
totaling $192,000 were outstanding from key employees under the plan. The loans
are interest bearing at 8 percent per annum and are collateralized by 20,095
Venturian shares which had a market value of $163,000 at December 31, 1996. The
company's obligation to repurchase the outstanding shares under the plan at
December 31, 1996 was approximately $182,000.

NOTE 12 - INCOME TAXES

The components of income tax expense were as follows (thousands of dollars):

Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Current expense $ -- $ 199 $ 32
Deferred expense -- -- --
---- ---- ----
Total expense $ -- $ 199 $ 32
==== ==== ====

Additionally, current income tax benefits of $199,000 in 1995 and $32,000 in
1994 were recorded relating to discontinued operations. The 1995 current income
tax benefit consists of $336,000 relating to the loss from discontinued
operations net of a current tax expense of $137,000 relating to the write-off of
net liabilities of PC Express.

Income tax expense for each of the last three years differed from the expected
amount computed by applying the statutory federal income tax rate to pretax
earnings due to the following (thousands of dollars):

Years ended December 31,
1996 1995 1994
----- ----- -----
Expected income tax expense
at statutory rate ................... $ 29 $ 386 $ 102
Difference in tax resulting from:
Change in valuation allowance(a) .. 29 (169) (36)
Net change in cash surrender
value of life insurance policies (56) (46) (40)
Other ............................. (2) 28 6
----- ----- -----
Actual income tax expense ............. $ -- $ 199 $ 32
===== ===== =====
Actual income tax expense
percentage .......................... N/A 17.5% 10.7%

(a) The change in the valuation allowance is attributable to deferred items
relating to continuing operations and excludes the effect of net operating
losses from discontinued operations.

Deferred income tax assets and liabilities were as follows at December 31
(thousands of dollars):

1996 1995
---- ----
Deferred tax assets:
Deferred compensation and
retirement benefits .......... $ 903 $ 928
Inventory write-off
and capitalization ........... 723 699
Alternative minimum tax
credit carryforwards ......... 123 123
Net operating loss carryforwards 970 939
Other .......................... 316 349
------- -------
3,035 3,038
Valuation allowance ............ (2,943) (2,914)
------- -------
92 124
Deferred tax liabilities:
Depreciation ................... (92) (124)
------- -------
$ -- --
======= =======

At December 31, 1996, the company had approximately $2,648,000 of federal net
operating loss carryforwards and $1,798,000 of state net operating loss
carryforwards, both of which expire through the year 2011.

NOTE 13 - SEGMENT INFORMATION

Segment information for the company for the years ended December 31, 1996, 1995
and 1994 is as follows (thousands of dollars):

1996 1995 1994
-------- -------- --------
Net sales
Napco International ............ $ 27,550 $ 24,098 $ 24,834
Venturian Software ............. 848 755 414
Elimination .................... -- (8) (42)
-------- -------- --------
$ 28,398 $ 24,845 $ 25,206
======== ======== ========
Operating profit (loss)
Napco International ............ $ 1,242 $ 1,490 $ 651
Venturian Software ............. (501) (89) (96)
Corporate ...................... (646) (482) (409)
-------- -------- --------
$ 95 $ 919 $ 146
======== ======== ========

Depreciation and amortization
Napco International ............ $ 356 $ 359 $ 395
Venturian Software ............. 14 6 3
Corporate ...................... 164 169 156
-------- -------- --------
$ 534 $ 534 $ 554
======== ======== ========

Additions to property and equipment
Napco International............. $ 294 $ 234 $ 413
Venturian Software ............. 77 7 5
Corporate ...................... 17 82 8
-------- -------- --------
$ 388 $ 323 $ 426
======== ======== ========

Assets at year-end
Napco International ............ $ 10,941 $ 13,752 $ 12,800
Venturian Software ............. 362 290 205
Corporate ...................... 6,750 6,274 6,106
-------- -------- --------
$ 18,053 $ 20,316 $ 19,111
======== ======== ========

Napco International Inc. manufactures and supplies a wide variety of
defense-related products to governments and commercial customers around the
world. A substantial portion of Napco's sales are replacement parts for U.S.
made military and tracked vehicles. Napco's sales by geographic region for the
last three years were as follows (thousands of dollars):

Years ended December 31,
1996 1995 1994
------- ------- -------
United States
and Canada ... $16,461 $14,622 $ 8,754
Europe ............ 4,037 5,465 4,378
Far East .......... 4,791 2,583 9,974
Mediterranean and
Middle East .. 1,051 697 618
Latin America ..... 899 731 1,110
Africa ............ 311 -- --
------- ------- -------
$27,550 $24,098 $24,834
======= ======= =======

During 1996 and 1995, no sales to customers in foreign countries accounted for
over 10 percent of Napco's sales. During 1994, sales of $6,789,000 to a customer
in one foreign country accounted for over 10 percent of Napco's sales. In
general, the company considers Napco's sales to customers in specific countries
to be more relevant than sales to individual foreign customers because the
primary risks with respect to its export sales relate to political decisions by
the U.S. government which could prevent future sales to foreign nations or
monetary, military or economic conditions in certain countries that may affect
sales in such countries.

Napco's sales in the United States were $15,795,000, $14,024,000 and $8,632,000
in 1996, 1995, and 1994 and consisted primarily of sales to various U.S.
government agencies and to a large number of commercial customers. During 1996,
1995 and 1994, sales to one customer in the United States accounted for 32, 38
and 18 percent of Napco sales, respectively. However, historically there has not
been a reliance on that one customer.

Venturian Software, Inc. provides high-technology information services in the
Upper Midwest as a value-added dealer of Magic(TM) software, providing
consulting, training and custom applications development. Venturian Software
also distributes Cybercall(TM), a call center solution for the Internet that
allows companies to establish virtual call centers through their World Wide Web
sites and Multicall(TM), an interactive voice response product that offers a
cost-effective solution for CTI (computer telephony integration) technology.

Board of Directors and Stockholders
Venturian Corp.

We have audited the accompanying consolidated balance sheets of
Venturian Corp. (a Minnesota corporation) and Subsidiaries as of December 31,
1996 and 1995 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Venturian Corp. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.

/S/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 12, 1997

VENTURIAN CORP. AND SUBSIDIARIES
Quarterly Financial Data
(Dollars in thousands, except per share data)
(Unaudited)

First Quarter Second Quarter Third Quarter Fourth Quarter
1996 1995 1996 1995(a) 1996 1995(b) 1996 1995(b)
----- ----- ----- ----- ----- ----- ----- -----

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $ 6,783 $ 5,818 $ 7,752 $ 5,470 $ 6,820 $ 5,621 $ 7,043 $ 7,936

Gross profit .................. 2,090 1,922 2,025 1,544 2,060 1,719 2,284 2,744

Earnings (loss) from continuing
operations .................. 272 314 (44) (32) (97) 96 (47) 559

Discontinued operations ....... -- (248) -- (1,520) -- 149 -- 524

Net earnings (loss) ........... 272 66 (44) (1,552) (97) 245 (47) 1,083

Earnings (loss) per share
Continuing operations ....... $ .36 $ .42 $ (.06) $ (.04) $ (.13) $ .13 $ (.06) $ .75
Discontinued operations ..... -- (.33) -- (2.03) -- .20 -- .70

Net earnings (loss) per share $ .36 $ .09 $ (.06) $ (2.07) $ (.33) $ .13 $ (.06) $ 1.45

(a) Discontinued operations includes a $1,012,000 write-off of goodwill and
noncompete agreements.

(b) Discontinued operations includes the write-off of net liabilities of PC
Express of $466,000 and $427,000 in the third and fourth quarters,
respectively. An additional net income tax benefit of $97,000 was
recorded in the fourth quarter.

Stock prices are based upon the high and low sales prices of Venturian Corp.
(VENT) as quoted on NASDAQ's National Market. Market quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily reflect actual market transactions.

High......................... $ 8.25 $ 8.25 $ 14.25 $ 9.25 $ 13.25 $ 6.50 $ 11.25 $ 6.25
Low.......................... 5.00 5.75 6.75 5.50 9.75 4.00 7.25 4.50

</TABLE>

VENTURIAN CORP. AND SUBSIDIARIES
Five-Year Financial Summary
(Dollars in thousands, except per share data)

1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 28,398 $ 24,845 $ 25,206 $ 23,045 $ 34,010

Earnings (loss) from continuing
operations before discontinued operations
and cumulative effect of a change
in accounting principle ................. 84 937 267 (1,462) 765

Discontinued operations ................... -- (1,095) (3,235) 304 (84)

Cumulative effect of a change
in accounting principle ................. -- -- -- (571) --

Net earnings (loss) ....................... 84 (158) (2,968) (1,729) 681

PER SHARE DATA

Earnings (loss) from continuing
operations before discontinued operations
and cumulative effect of a change
in accounting principle ................. $ .11 $ 1.25 $ .36 $ (1.96) $ 1.02

Discontinued operations ................... -- (1.46) (4.33) .41 (.11)

Cumuative effect of a change
in accounting principle ................. -- -- -- (.76) --

Net earnings (loss) ....................... .11 (.21) (3.97) (2.31) .91

Dividends per share ....................... -- -- -- .28 .28
Common stockholders' equity per share ..... 13.86 13.76 13.97 17.94 20.53
Year end stock price ...................... 8.13 5.00 5.75 7.25 9.75

Stockholders of record at year end ........ 537 724 591 724 694

FINANCIAL POSITION

Working capital ........................... $ 6,986 $ 7,737 $ 8,027 $ 9,965 $ 12,032
Current ratio ............................. 2.4 2.1 2.4 2.4 3.5
Total assets .............................. 18,053 20,316 19,111 23,243 22,087
Long-term liabilities at year end ......... 2,546 2,719 2,805 2,855 1,907

</TABLE>

Exhibit (21)

Venturian Corp. and Subsidiaries

SUBSIDIARIES OF THE REGISTRANT

December 31, 1996

The Company's subsidiaries are:

State or Other
Jurisdiction in which
Name Incorporated or Organized
---- -------------------------

Napco International Inc. Minnesota

Venturian Software, Inc. Minnesota

Napco International Foreign Sales Corporation U.S. Virgin Islands

PC Express, Inc. Minnesota

Exhibit 23.1

Venturian Corp. and Subsidiaries

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our reports dated February 12, 1997 accompanying the consolidated
financial statements and schedule incorporated by reference or included in the
Annual Report of Venturian Corp. on Form 10-K for the year ended December 31,
1996. We hereby consent to the incorporation by reference of said reports in the
Registration Statements of Venturian Corp. on Forms S-8 (File No. 2-93660
effective October 29, 1984 and File No. 333-09223 effective August 30, 1996).

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 12, 1997

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,011
<SECURITIES> 0
<RECEIVABLES> 4,450
<ALLOWANCES> 196
<INVENTORY> 3,668
<CURRENT-ASSETS> 12,104
<PP&E> 7,484
<DEPRECIATION> 5,690
<TOTAL-ASSETS> 18,053
<CURRENT-LIABILITIES> 5,118
<BONDS> 0
0
0
<COMMON> 750
<OTHER-SE> 9,639
<TOTAL-LIABILITY-AND-EQUITY> 18,053
<SALES> 28,398
<TOTAL-REVENUES> 28,398
<CGS> 19,939
<TOTAL-COSTS> 19,939
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 371
<INCOME-PRETAX> 84
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<EPS-PRIMARY> .11
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</TABLE>