<PAGE>
                                   FORM 10-QSB


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


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

                 For the quarterly period ended August 31, 1997

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

                         For the transition period from

                        Commission file number 01-10076 

                          APPLIED RESEARCH CORPORATION
        ----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


          Colorado                                               86-0585693  
--------------------------------                         ---------------------
 (State or other jurisdiction                                (I.R.S. Employer 
of incorporation or organization)                       Identification Number)


       8201 Corporate Drive, Suite 1110, Landover, Maryland          20785
      --------------------------------------------------------------------
             (Address of principal executive offices)       (Zip Code)


                                 (301) 459-8442
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

              ----------------------------------------------------
              (Former name, former address and former fiscal year, 
                          if changed since last report)

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

As of October 15, 1997, the Company had 6,311,083 shares of its $.01 par value
common stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes [ ]  No [ X ]
<PAGE>
<PAGE>
                                   FORM 10-QSB

                          APPLIED RESEARCH CORPORATION

                                      INDEX

Part I:    FINANCIAL INFORMATION                                      Page No.
-------    ---------------------                                      --------
Item 1     Financial Statements

           Condensed Consolidated Balance Sheets - 
              August 31, 1997 (unaudited) and May 31, 1997                 3-4

           Condensed Consolidated Statements of Operations - 
              Three months ended August 31, 1997 and 
              1996 (unaudited)                                               5

           Condensed Consolidated Statements of Cash Flows - 
              Three months ended August 31, 1997 and 
              1996 (unaudited)                                             6-7

           Notes to Condensed Consolidated Financial Statements           8-13

Item 2     Management's Discussion and Analysis of Financial 
              Condition and Results of Operations                        14-19

Part II:   OTHER INFORMATION                                    
--------   -----------------
Item 1     Legal Proceedings                                                20

Item 2     Changes in Securities                                            20

Item 3     Defaults Upon Senior Securities                                  20

Item 4     Submission of Matters to a Vote of Security Holders              20

Item 5     Other Information                                                20

Item 6     Exhibits and Reports on Form 8-K                                 20

Signatures                                                                  21
<PAGE>
<PAGE>
<TABLE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                        
<CAPTION>
                                                   August 31,        May 31,
                                                      1997            1997
                                                   (Unaudited)      (Audited)
                                                  ------------    ------------
<S>                                               <C>              <C>         
ASSETS
------
CURRENT ASSETS
  Cash                                            $   319,240      $   228,414 
  Accounts receivable, net                            240,765        1,165,749 
  Due from Space Applications Corporation, 
     short-term                                        34,900                - 
  Inventory, at cost                                      222            2,546 
  Other current assets                                 16,978            2,309 
                                                  ------------     ------------
TOTAL CURRENT ASSETS                                  612,105        1,399,018 
                                                  ------------     ------------

PROPERTY AND EQUIPMENT, AT COST 
  Furniture and equipment                              20,728          167,741 
  Computer equipment                                  136,002          488,295 
  Laboratory equipment                                      -          121,426 
  Leasehold improvements                                  200           22,322 
                                                  ------------     ------------
                                                      156,930          799,784 
  Less accumulated depreciation and 
  amortization                                        109,398          717,713 
                                                  ------------     ------------  
NET PROPERTY AND EQUIPMENT                             47,532           82,071 
                                                  ------------     ------------
INTANGIBLE ASSETS, NET OF 
  AMORTIZATION                                          2,664           25,654 
                                                  ------------     ------------
OTHER ASSETS
  Deposits                                                  -            7,359 
  Due from Space Applications Corporation, 
     long-term                                        287,500                - 
                                                  ------------     ------------
TOTAL OTHER ASSETS                                    287,500            7,359 
                                                  ------------     ------------  
      
TOTAL ASSETS                                      $   949,801      $ 1,514,102 
                                                  ===========      ===========
</TABLE>

See accompanying notes to the condensed consolidated financial statements<PAGE>
<PAGE>
<TABLE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS - Continued


<CAPTION>
                                                   August 31,        May 31,
                                                      1997            1997
                                                   (Unaudited)      (Audited)
                                                  ------------    ------------
<S>                                               <C>              <C>         
LIABILITIES
-----------
CURRENT LIABILITIES
  Liabilities not subject to compromise:
     Notes payable, current maturities            $     6,627      $   512,121 
     Loans payable to officers and directors           49,400           41,900 
     Accounts payable                                 449,391          419,023 
     Accrued salaries and benefits                     32,726          228,557 
     Accrued payroll taxes and withholdings            28,220          129,571 
     Other accrued liabilities                         78,925          153,787 
     Deferred revenue                                  30,035           30,035 
     Income taxes payable                                 100            1,000 
                                                  ------------     ------------
  Total liabilities not subject to compromise         675,424        1,515,994 
                                                  ------------     ------------
  Liabilities subject to compromise: 
     Accounts payable                                 275,192          325,192 
     Accrued salaries and benefits                    382,781          820,562 
     Accrued payroll taxes and withholdings           166,039          725,406 
     Accrued interest and penalties                   395,563          445,204 
                                                  ------------     ------------
  Total liabilities subject to compromise           1,219,575        2,316,364 
                                                  ------------     ------------
TOTAL CURRENT LIABILITIES                           1,894,999        3,832,358 
                                                  ------------     ------------
STOCKHOLDERS' DEFICIT
---------------------
Preferred stock, $.10 par value, 40,000,000 
  shares authorized, none issued                            -                - 
Common stock, $.0005 par value, 60,000,000 
  shares authorized, 6,811,083 shares 
  issued and 6,311,083 shares outstanding               3,155            3,155 
Capital in excess of par value                      1,140,529        1,140,529 
Accumulated deficit                                (2,088,882)      (3,461,940)
                                                  ------------     ------------
TOTAL STOCKHOLDERS' DEFICIT                          (945,198)      (2,318,256)
                                                  ------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT       $   949,801      $ 1,514,102 
                                                  ============     ============
</TABLE>

See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   THREE MONTHS ENDED AUGUST 31, 1997 AND 1996

<CAPTION>
                                                      1997          1996     
                                                   (Unaudited)    (Unaudited) 
                                                  ------------    ------------
<S>                                               <C>              <C>
Revenue                                           $   132,583      $   143,756 
                                                  ------------     ------------
Operating costs and expenses:                                  
  Direct cost of services                              61,827           57,712 
  General & administrative expenses                    86,280          109,053 
                                                  ------------     ------------
Total operating costs and expenses                    148,107          166,765 
                                                  ------------     ------------
Operating loss from continuing operations             (15,524)         (23,009)
                                                  ------------     ------------ 

Other expense:
  Interest expense, net                                   374              (22)
  Other, net                                            3,121              582 
                                                  ------------     ------------  
     
Total other expense                                     3,495              560 
                                                  ------------     ------------
Loss from continuing operations before 
income taxes (benefit)                                (19,019)         (23,569)
                                                  ------------     ------------
Income taxes (benefit)                               (537,600)               - 
                                                  ------------     ------------
Income (loss) from continuing operations              518,581          (23,569)
                                                  ------------     ------------
(Loss) income from discontinued operations 
  before reorganization items, net of income 
  tax (tax benefit) of $(37,700) in 1997              (32,024)          59,418 
Reorganization items: 
  Professional fees                                   (27,805)         (47,496)
Income from the sale of discontinued operations, 
  net of income tax of $575,300                       914,306                - 
                                                  ------------     ------------
Income from discontinued operations                   854,477           11,922 
                                                  ------------     ------------
Net income (loss)                                 $ 1,373,058      $   (11,647)
                                                  ============     ============
Net income (loss) per common share:
  Income (loss) before discontinued operations    $      0.08      $     (0.00)
  Income from discontinued operations                    0.14             0.00 
                                                  ------------     ------------
  Net income (loss) per common share              $      0.22      $     (0.00)
                                                  ============     ============
Weighted average number of shares outstanding       6,311,083        6,311,083 
                                                  ============     ============
</TABLE>

See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                   THREE MONTHS ENDED AUGUST 31, 1997 AND 1996

<CAPTION>
                                                      1997            1996
                                                   (Unaudited)     (Unaudited)
                                                  ------------    ------------
<S>                                               <C>              <C>
Cash flows from operating activities:
  Cash received from customers                    $ 1,127,709      $ 2,087,851 
  Cash paid to suppliers and employees             (1,663,274)      (1,882,710)
  Interest paid                                       (16,503)         (38,058)
  Income taxes paid                                      (900)          (1,000)
                                                  ------------     ------------
  Net cash provided from operating activities
     before reorganization items                     (552,968)         166,083 
                                                  ------------     ------------
  Operating cash flows from reorganization items:
     Professional fees paid for services rendered 
     in connection with the Chapter 11 proceeding     (27,805)         (47,496)
                                                  ------------     ------------
  Net cash used by reorganization items               (27,805)         (47,496)
                                                  ------------     ------------
Net cash provided from operating activities          (580,773)         118,587 
                                                  ------------     ------------
Cash flows from investing activities:
  Proceeds received from the sale of 
     discontinued operations                        1,172,400                - 
  Capital expenditures                                 (2,807)          (3,416)
                                                  ------------     ------------
Net cash provided from investing activities         1,169,593           (3,416)
                                                  ------------     ------------
Cash flows from financing activities:                     
  Proceeds from loans from officers and directors       7,500            9,000 
  Proceeds of loans from receivables 
     assignment - post-petition                       308,336        1,499,885 
  Repayment of loans from receivables 
     assignment - pre-petition                              -          (24,800)
  Repayment of loans from receivables 
     assignment - post-petition                      (812,379)      (1,580,338)
  Repayment of equipment loan - post petition          (1,451)               - 
                                                  ------------     ------------
Net cash used in financing activities                (497,994)         (96,253)
                                                  ------------     ------------
Net increase in cash                                   90,826           18,918 

Cash at the beginning of period                       228,414           78,689 
                                                  ------------     ------------
Cash at the end of period                         $   319,240      $    97,607 
                                                  ============     ============
</TABLE>

See accompanying notes to the condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                   THREE MONTHS ENDED AUGUST 31, 1997 AND 1996

<CAPTION>
                                                      1997            1996
                                                   (Unaudited)     (Unaudited)
                                                  ------------    ------------
<S>                                               <C>              <C>
Reconciliation of net income (loss) to net
   cash provided from operating activities:

Net income (loss)                                 $ 1,373,058      $   (11,647)

Adjustments to reconcile net income (loss) to net 
   cash provided from operating activities: 
   Depreciation                                        10,206           18,149 
   Amortization                                         1,332            1,656 
   Gain from the sale of discontinued operations     (914,306)               - 
   Income tax benefit generated by gain on the sale
     of discontinued operations                      (575,300)               - 
   Changes in assets and liabilities:
     Decrease in accounts receivable                  714,442           43,687 
     Decrease (increase) in inventory                   2,324           (1,879)
     Increase in other current assets                 (14,669)         (12,899)
     Decrease (increase) in other assets                7,359             (744)
     Decrease in accounts payable - pre-petition      (50,000)         (63,828)
     Increase in accounts payable - post-petition      30,368           96,828 
     Decrease in accrued salaries and benefits 
       - pre-petition                                (182,581)         (34,216)
     Increase (decrease) in accrued salaries and
       benefits - post-petition                      (195,831)         113,029 
     Decrease in accrued payroll taxes and 
       withholdings - pre-petition                   (559,367)         (49,442)
     Decrease in accrued payroll taxes and 
       withholdings - post-petition                  (101,351)         (18,687)
     Increase (decrease) in other accrued 
       liabilities - post-petition                    (75,916)          11,583 
     Decrease in accrued interest and penalties 
       - pre-petition                                 (49,641)               - 
     Decrease in billings in excess of costs and 
       anticipated profits                                  -           18,397 
     Increase in deferred revenue                           -            9,600 
     Decrease in income taxes payable                    (900)          (1,000)
                                                  ------------     ------------
Net cash provided from operating activities       $  (580,773)     $   118,587 
                                                  ============     ============
</TABLE>
<PAGE>
<PAGE>
                  APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                        
1.   BASIS OF PRESENTATION
     ---------------------
     The Condensed Consolidated Balance Sheet as of August 31, 1997, the
Condensed Consolidated Statements of Operations for the three months ended
August 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for
the three months ended August 31, 1997 and 1996, have been prepared by the
Company and are unaudited.  In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at August 31,
1997, and for all periods presented, have been made.

     The Company owns 95% of ARInternet which was formed during November,
1994.  However, because the minority interest in net losses of ARInternet
exceeded the carrying value of the minority interest amount at August 31,
1997, no minority interest has been reflected in the Condensed Consolidated
Financial Statements. 

     Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted.  It is suggested that these Condensed
Consolidated Financial Statements be read in conjunction with the Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended May 31, 1997.  The results of operations for
the period ended August 31, 1997, are not necessarily indicative of the
operating results for the full year.


2.   INCOME (LOSS) PER COMMON SHARE
     ------------------------------
     Income (loss) per share of common stock has been computed by dividing the
net income (loss) by the weighted average number of shares of common stock
outstanding during each of the periods presented.  Common stock equivalent
shares relating to stock options and warrants are included in the weighted
average only when the effect is dilutive.


3.   RECLASSIFICATIONS
     -----------------
     Certain amounts in the Condensed Consolidated Balance Sheet as of May 31,
1997, the Condensed Consolidated Statements of Operations for the three months
ended August 31, 1996, and the Condensed Consolidated Statements of Cash Flows
for the three months then ended have been reclassified to conform to the
August 31, 1997, presentation.


4.   VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF APPLIED RESEARCH
     OF MARYLAND, INC. AND MANAGEMENT'S PLANS TO CONTINUE AS A GOING CONCERN
     -----------------------------------------------------------------------
     On April 2, 1996, ARM filed a petition for relief under Chapter 11 of the
federal bankruptcy laws in the United States Bankruptcy Court for the Southern
District of Maryland.  Neither ARC, ARS nor ARInternet filed for relief. 
Under Chapter 11, certain claims against ARM in existence prior to the filing
of the petitions for relief under the federal bankruptcy laws are stayed while
ARM continues business operations as Debtor-In-Possession.  These claims are
reflected in the accompanying Condensed Consolidated Financial Statements
under "liabilities subject to compromise".  Additional claims (liabilities
subject to compromise) may arise subsequent to the filing date resulting from
the rejection of executory contracts, including leases, and from the
determination by the Bankruptcy Court (or agreement of the parties in
interest) of allowed claims for contingencies and other disputed amounts. 
Claims secured against ARM's assets ("secured claims") also are stayed,
although the holders of such claims have the right to move the court for
relief from the stay.  Secured claims are secured primarily by liens on ARM's
property, including ARM's accounts receivable.

     On April 5, 1996, ARM received an emergency hearing with the Bankruptcy
Court to determine its request to pay its employees their pre-petition wages
as well as its request to continue to operate the business.  Prior to the
emergency hearing, ARM reached an agreement with the IRS and its primary
lender, CFC, to allow the company to continue to operate and borrow money from
CFC against its billed receivables.  Under this agreement, ARM agreed to pay
$15,000 a month starting April 1996, towards its arrearage with the IRS.  The
April payment consisted of the $13,600 of cash seized by the IRS on April 1,
1996.  Subsequent monthly payments have been and will continue to be made
directly to the IRS by CFC from borrowings made by ARM.  ARM was also required
to remit to the IRS collections on certain billed receivables that were
outstanding as of April 2, 1996 (the final vouchers on 14 old contracts, which
totaled approximately $136,700).  In addition, as part of the agreement with
the IRS and as required by the Bankruptcy Court, ARM was required to remit its
post-petition taxes when due and provide proof of such payments to the IRS and
the Bankruptcy Court on a timely basis.  The Bankruptcy Court approved the
agreements with the IRS and CFC, and approved ARM's operating budget for 15
days through April 21, 1996.  These agreements have continued to be renewed by
the Bankruptcy Court. 

     ARM has determined that there is insufficient collateral to cover the
interest portion of scheduled payments on its pre-petition debt obligations,
most notably the installment obligation due to the IRS prior to the filing of
the petition.  ARM has curtailed accruing interest on all pre-petition
obligations except the amounts owed CFC because of the Bankruptcy filing.  In
addition, ARM has curtailed accruing interest on the unpaid amounts due to the
401(k) Plan, because of the Bankruptcy filing. 

          SALE OF ARM'S GOVERNMENT CONTRACTS.
          -----------------------------------
          On June 24, 1996, the Company accepted a contract for the sale of
certain of ARM's assets for approximately $1.5 Million.  The sale was subject
to Bankruptcy Court approval, a hearing on which was originally scheduled for
July 26, 1996.  This hearing was subsequently moved to July 30, 1996.  At the
hearing, a total of four qualified bidders attended, and after extensive
bidding, an offer was accepted for $2.1 Million.  

          During August 1996, a Bankruptcy Court order documenting the bidding
procedure as well as the related asset purchase agreement was submitted to the
Bankruptcy Court on September 26, 1996, and was approved on October 4, 1996. 
The sale also required the approval of a majority of the Company's
shareholders.  On October 30, 1996, at the Company's Annual Meeting of
Shareholders, a majority of the Company's shareholders approved the sale.  The
sale was also subject to the successful novation of ARM's government
contracts, which request was submitted to the Government in October 1996, with
the information supporting the request for novation submitted in early
November 1996.  Approval of the novation was expected to take approximately 60
to 90 days from submission.  On January 31, 1997, because novation by the
government had not occurred, the purchaser chose to terminate the purchase
agreement.  

          During February 1997, management met with several other interested
purchasers, including the other three bidders that had attended the July 1996,
hearing.  On March 3, 1997, the Company accepted a new contract for the sale
of certain of ARM's assets for $1.475 Million from Space Applications
Corporation ("SAC").  The sale was subject to Bankruptcy Court approval, a
hearing on which was scheduled for April 11, 1997.  At the hearing, a total of
three qualified bidders attended, and after extensive bidding, an offer was
accepted for $1.75 Million from SAC. The purchase price was payable as
follows:  $1,172,400 in cash at closing, $322,400 payable over three years and
the assumption of liabilities totaling $255,200.

          Because of the change in the purchase price as well as in the
distribution of funds, the original SAC contract required modifications.  An
amendment to the contract reflecting these changes was signed on April 16,
1997.  A Bankruptcy Court  order documenting the bidding procedure was
approved by the Bankruptcy Court on May 30, 1997.  The sale was subject to the
successful novation of ARM's government contracts, which request was approved
on June 19, 1997, at which time the sale was completed with payment of the
cash portion of the purchase price being placed in escrow.  The cash placed in
escrow was subsequently disbursed to creditors.  

          The following is a list of the purchased and excluded assets:

<TABLE>
<CAPTION>
        PURCHASED ASSETS                            EXCLUDED ASSETS
        ----------------                            ---------------
<S>                                        <C>
- All contract rights (including           - ARM's charter and status as a
  project contracts),                        corporation, its minute book,
- All inventory,                             stock transfer records, and
- All books and records,                     similar records relating to ARM's
- All furniture, fixtures and                organization, existence or
  equipment,                                 capitalization, and the capital
- All proprietary rights (patents,           stock of ARM,
  etc.),                                   - Billed accounts receivable as of
- All unbilled accounts receivable           closing,
  relating to expired contracts            - Intercompany receivables,
  as of January 31, 1997,                  - All ARM's cash accounts,
- All other unbilled accounts receivable   - ARM's rights to occupy real
  as of the closing date.                    property pursuant to leases of
                                             real property and any leasehold
                                             improvements made thereto,
                                           - Any other property identified by
                                             the Purchaser prior to the
                                             closing.
</TABLE>

          PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES.
          ------------------------------------------------------------
          Now that the sale has been completed, ARM will file a Plan of
Reorganization, which will, among other things, specify how much of the
outstanding pre-petition liabilities will be paid and over what period of
time.  It is expected that a Plan of Reorganization will be filed with the
Bankruptcy Court within 120-150 days of the completion of the sale.  This Plan
is expected to take several months to receive Bankruptcy Court approval.  It
is also expected that between the monies generated from the sale of ARM's
contracts rights, plus the collection of outstanding accounts receivable
(which are not part of the sale), there will not be sufficient monies to
liquidate all of ARM's pre-petition liabilities.  Furthermore, it appears that
the unsecured creditors (accounts payable) will receive little or nothing
towards their pre-petition claims.  Specifically, it appears that the
following will be paid in full as a result of the expected Plan of
Reorganization:  1) the secured claim of CFC, ARM's pre-petition and post-
petition lender; 2) the principal portions of the tax amounts owed to the IRS; 
3) approximately $255,200 of the $345,138 owed to the employees for accrued
vacation, $530,917 of the $676,000 owed to the 401(k) Plan as of April 2,
1996, as well as certain employees' pre-petition claims for unreimbursed
travel expenses of approximately $50,000; and 4) the majority of the principal
portions of the tax amounts owed to the various state authorities.  Although
these are the current expectations, there can be no assurance that these
amounts will be paid until the Plan of Reorganization is submitted and
confirmed by the Bankruptcy Court.

          COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM.
          ----------------------------------------------------
          As of April 2, 1996, ARS owed ARM approximately $1.2 Million and
ARInternet owed ARM $0.4 Million.  These amounts resulted from ARM paying
certain operating expenses of ARS and ARInternet during their start-up phases
and providing continued money thereafter to fund operations.  Since these
amounts are owed to ARM, the ultimate collection of these advances will be
supervised and controlled by the Bankruptcy Court.  As of August 31, 1997, ARS
has only one part-time employee and its assets and sales are minimal.  ARS has
still not achieved breakeven operations.  Therefore payment of any of the
amount it owes ARM is extremely doubtful.  On the other hand, ARInternet has
essentially achieved breakeven operations (on a cash basis) as of August 31,
1997.  Therefore, it can reasonably be expected that ARInternet will be
required to repay some amount to liquidate its debt to ARM.  The ultimate
amount will be determined by the Bankruptcy Court. 

          IMPACT ON ARC FROM THE SALE OF ARM.
          -----------------------------------
          During the fiscal year ended May 31, 1997, ARM's operations
constituted 93% of ARC's total revenue.  The sale transferred essentially all
of ARM's assets and operations to the Purchaser and eliminated all of ARM's
revenues.  Therefore, ARS and ARInternet are the only remaining operating
entities.  Up until the bankruptcy filing, ARM had been forced to continue to
fund ARS's and ARInternet's operations.  During the fiscal year ended May 31,
1996, (through April 2, 1996), ARM funded approximately $204,600 of ARS's and
ARInternet's expenses.  After April 2, 1996, because of the ARM bankruptcy
proceedings, ARM ceased all such advances and ARS and ARInternet were forced
to fund their own operations.  ARS is still not operating at cash flow
breakeven, so it is doubtful that it can survive without a substantial
infusion of cash or a significant increase in revenues.  Management is
considering several options for ARS, including ceasing its operations. 
ARInternet, on the other hand, has steadily increased its revenues and as of
August 31, 1997, had approximately 1,000 subscribers and had essentially
reached breakeven operations on a cash basis.  Management believes that
ARInternet's revenues and business will continue to grow and that ARInternet
will ultimately be a successful business on its own, however there can be no
assurance of this.

          The space previously occupied by ARM was not covered by the
Bankruptcy proceeding, because the lease is held by ARC.  On December 1, 1996,
ARM vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by
ARM.  Effective March 1, 1997, the Company signed a lease amendment that
reduced its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which
includes 5,011 of the 6,349 sq. ft. vacated on December 1, 1996.  Effective
August 1, 1997, the Company signed a second lease amendment that reduced its
rental obligation by an additional 6,462 sq. ft. to 2,272 sq. ft..  The
remaining 2,272 sq. ft. was vacated on September 30, 1997.  In return for
reducing the space the landlord required ARC to pay a total of $19,068,
payable monthly at $1,362 over the balance of the lease, plus forfeiture of
the $5,650 deposit held by the landlord.  This settlement with the landlord
will save the Company more than $103,500 over the remainder of the lease.  In
addition to the continuing lease costs, ARC will continue to incur expenses to
maintain its status as a public company.  

          The sale of ARM dramatically changed the Company's Balance Sheet and
statement of operations.  Through the Bankruptcy proceeding, all of ARM's
debts, which total $3.5 million at May 31, 1997, and $1.603 million at August
31. 1997, will be either liquidated or discharged.  This will decrease
interest and penalty costs that the Company has been incurring.  If ARS and
ARInternet's revenues can be increased to produce net profits and a positive
cash flow, the likelihood of which cannot be assured, the Company may in fact
benefit from the sale of ARM.  However, unless and until this occurs, the
Company may not have sufficient capital to achieve its current business plan,
which raises substantial doubt as to the Company's ability to continue as a
going concern after the sale of ARM is completed.  


<PAGE>
5.   DISCONTINUED OPERATIONS
     -----------------------
     On June 19, 1997, the Company consummated the sale of substantially all
of the assets of ARM to SAC (the "Sale").  Accordingly, results from
operations for ARM have been shown as discontinued operations for the three
months ended August 31, 1997 and 1996.  

     A reconciliation of the sales price to the net cash received is presented
below:

<TABLE>
<S>  <C>                                                        <C>   
     Sales price                                                $ 1,750,000 
     Less:  Payments due over a period of one to 
            three years                                            (322,400)
     Less:  Assumption of vacation liability                       (255,200)
                                                                ------------
     Net cash received at closing                               $ 1,172,400 
                                                                ============
</TABLE>

Distribution of the cash received at closing was as follows:

<TABLE>
<S>  <C>                                                        <C>
     Internal Revenue Service - pre-petition taxes              $   609,000 
     Employees - pre-petition 401(k) contributions                  271,017 
     Employees - pre-petition expenses                               50,000 
     Administrative expenses associated with sale of ARM             60,000 
     Cash held in Escrow for administrative claims                  182,383 
                                                                ------------
     Net cash received at closing                               $ 1,172,400 
                                                                ============
</TABLE>

A summary of ARM's results from operations for the three months ended
August 31, 1997 and 1996 is shown on the next page:

<PAGE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, 1997                  1997           1996
AND 1996:                                        (Unaudited)    (Unaudited)
                                                ------------   ------------
<S>                                               <C>          <C>
Revenue                                           $  280,683   $ 1,928,665 
                                                 ------------  ------------
Operating costs and expenses:                                  
  Direct cost of services                            174,190     1,241,802 
  Indirect operating costs                            74,224       389,790 
  General & administrative expenses                  108,793       192,727 
                                                 ------------  ------------
Total operating costs and expenses                   355,207     1,824,319 
                                                 ------------  ------------
Operating (loss) profit from discontinued 
operations                                           (74,524)      104,346 
                                                 ------------  ------------
Other (income) expense:
  Interest expense, net                               14,490        36,415 
  Other, net                                         (19,290)        6,513 
                                                 ------------  ------------
Total other (income) expense                          (4,800)       44,928 
                                                 ------------  ------------
Income tax (tax benefit)                             (37,700)            - 
                                                 ------------  ------------
(Loss) income from discontinued operations 
  before reorganization items                        (32,024)       59,418 
Reorganization items - professional fees             (27,805)      (47,496)
                                                 ------------  ------------
(Loss) income from discontinued operations        $  (59,829)  $    11,922 
                                                  ===========  ============
</TABLE>

6.   SUPPLEMENTAL SEGMENT INFORMATION

The Company's continuing operations have been classified into two business
segments:

<TABLE>
<CAPTION>
                                        ARS         ARInternet     Consolidated
                                    ----------      ----------     ------------
<S>  <C>                           <C>              <C><C>          
SALES TO UNAFFILIATED CUSTOMERS:
-------------------------------
     QUARTER ENDED:
     -------------
     August 31, 1997               $    36,542      $   96,041     $  132,583 
     August 31, 1996               $    31,834      $  111,922     $  143,756 

OPERATING LOSS FROM CONTINUING OPERATIONS BEFORE
OTHER INCOME (EXPENSE) AND INCOME TAXES: 
---------------------------------------
     QUARTER ENDED:
     -------------
     August 31, 1997               $   (1,243)      $  (14,281)    $  (15,524)
     August 31, 1996               $  (15,067)      $   (7,942)    $  (23,009)
</TABLE>

Operating loss equals total net revenues less operating expenses.  

ARM's results have been reported as discontinued operations in the
accompanying condensed consolidated financial statements, since the Company
sold substantially all of the operating assets of ARM (see Note 5).



               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
                      CONDITION AND RESULTS FROM OPERATIONS
                -------------------------------------------------

OVERVIEW
--------
     Applied Research Corporation ("the Company") is comprised of two wholly
owned subsidiaries, Applied Research of Maryland, Inc. ("ARM") and ARSoftware
Corporation ("ARS"), and a majority owned subsidiary, ARInternet Corporation
("ARInternet").  ARM currently consists of three unincorporated divisions: 
Technical Services Division, Instruments Division and ARInstruments Division
("ARInstruments").  Management's Discussion and Analysis of Financial
Condition and Results of Operations takes into consideration the activities of
the Company as a whole and each individual operating entity where necessary. 
Management's Discussion and Analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements, including the footnotes
thereto. 


RESULTS FROM OPERATIONS - THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO 1996
-----------------------------------------------------------------------------
     FROM CONTINUING OPERATIONS
     --------------------------
     The Company's revenues for the quarter ended August 31, 1997, were
$132,583, or 8% below revenues of $143,756 for the same period during 1996. 
The decrease of $11,173 in revenues during the quarter ended August 31, 1997,
is primarily attributable to the decrease in ARInternet's revenues of
$(15,881) or (14%), offset by an increase in ARS' revenues of $4,708 or 15%
over the same period in 1996.   The decrease in ARInternet's revenues related
to lower average revenues recognized as well as a loss in its customer base
during the current quarter when compared to the same period in 1996.  

     The Company's direct cost of services increased $4,115 or 7%, from
$57,712 during the quarter ended August 31, 1996, to $61,827 during the same
period in 1997.  Of this amount, ARS increased $6,314 while ARInternet's cost
of services decreased $(2,199).  The increase in direct costs of ARS was
primarily related to the increased sales for the quarter compared to the same
period in 1996.  The decrease in ARInternet's direct costs of sales was the
direct result of decreased sales during the current period. 

     General and administrative ("G&A") expenses decreased $22,773 or 21%,
from $109,053 in 1996, to $86,280 during 1997.  Most notably, the G&A expenses
associated with ARS decreased $15,429, while ARInternet's G&A expenses
decreased $7,344 during the quarter.  The decrease in ARS's G&A expenses was
predominantly attributable to a reduction in personnel and marketing related
expenses during the period.  The decrease in ARInternet's G&A expenses related
to a reduction in staffing during 1997 when compared to the same period in
1996.

     As a result of the foregoing, the Company realized an operating loss
from continuing operations for the quarter ended August 31, 1997, of $(15,524)
compared to an operating loss of $(23,009) for the same period during 1996. 
ARS posted an operating loss of $(1,243) for the quarter ended August 31,
1997, which loss represented an improvement of $13,823 or 92% from the
operating loss of $(15,067) during the same period in 1996.  This net
improvement for ARS is directly attributable to a decrease in salary and
related fringe benefit expenses and reductions in marketing and other
expenses.  ARInternet posted an operating loss of $(14,281) for the quarter
ended August 31, 1997, which represented a regression of $(6,339) from the
operating loss of $(7,942) during the same period in 1996.  

     Interest and other expenses increased $2,935, from $560 for the quarter
ended August 31, 1996, to $3,495 during the quarter ended August 31, 1997. 
The increase was primarily related to increased penalties incurred by the
Company during the quarter ended August 31, 1997 when compared to the same
period in 1996.   

     The Company realized income from continuing operations of $518,581 for
the quarter ended August 31, 1997, compared to a loss from continuing
operations of $(23,569) during the same period in 1996.  This change in
results from continuing operations was the result of a tax benefit from the
realization of the net operating loss carryforwards of the company, which
offset the taxes ascribed to the gain on the sale of ARM.

     Based on the foregoing, income (loss) per common share from continuing
operations increased from $(0.00) in 1996 to $0.08 in 1997.

     FROM DISCONTINUED OPERATIONS
     ----------------------------
     ARM's revenues for the quarter ended August 31, 1997, were $280,683, or
(86)% below revenues of $1,928,665 for the same period during 1996.  The
decrease in revenues during the quarter ended August 31, 1997, of $1,647,982
is attributable to the sale of ARM which was effective June 19, 1997. 
Effective with the sale of ARM, all of ARM's direct employees terminated their
employment relationships with ARM and, as a result, all revenues of ARM
ceased. 

     ARM's direct cost of services decreased $1,067,612 or 86%, from
$1,241,802 during the quarter ended August 31, 1996, to $174,190 during the
same period in 1997.  ARM's decrease in direct costs was due to the decrease
in direct labor due, which, in turn, was due to the sale of ARM.  

     ARM's indirect operating costs decreased $317,566 or 82%, from $389,790
during the quarter ended August 31, 1996, to $72,224 during the quarter ended
August 31, 1997.  This decrease is directly related to a decrease in direct
labor costs incurred.  

     ARM's general and administrative ("G&A") expenses decreased $83,934 or
44%, from $192,727 in 1996, to $108,793 during 1997.  The decrease in ARM's
G&A expenses was directly attributable to the sale of ARM.  ARM will continue
to incur some minor G&A expenses while winding down ARM's affairs in the
Bankruptcy Court, which is expected to take a few months.

     As a result of the foregoing, ARM realized an operating loss for the
quarter ended August 31, 1997, of $74,524 compared to operating income of
$104,346 for the same period during 1996.  The $178,870 decrease in ARM's 1997
operating margin was primarily related to the sale of ARM's contracts and the
discontinuation of ARM's operations.

     ARM's interest and other expenses decreased $49,728, from $44,928 for
the quarter ended August 31, 1996, to $(4,800) during the quarter ended August
31, 1997.  Net interest expense decreased $21,925 or 60% from 1996.  The
decrease in interest costs was the result of ARM paying off  its secured debt
during July 1997.  Other expenses also decreased $25,803 during the quarter
ended August 31, 1997.  This was primarily due to the fact that ARM collected
$19,290 against a previously written off bad debt during the quarter, which
was shown as other income.   

     ARM sustained a loss before the gain on the sale of ARM of $(59,829) for
the quarter ended August 31, 1997, compared to income of $11,922 during the
same period last year.  After recording the gain on the of $1,489,606 on the
sale of ARM, and after giving affect for the income taxes ascribed to the Sale
of $575,300, ARM reported income of $854,477 for the current fiscal period. 
Because the Company had net operating loss carryforwards available to offset
the gain, no tax will actually be due (the tax benefit for the net operating
loss carryforwards realized is shown under continuing operations, consistent
with the current accounting reporting standards).


LIQUIDITY AND CAPITAL RESOURCES - 1997 COMPARED TO 1996
-------------------------------------------------------
     Total assets decreased $564,301 or 37%, from $1,514,102 at May 31, 1997,
to $949,801 at August 31, 1997.  Total liabilities on the other hand decreased
from $3,832,358 to $1,894,999 over the same period, or a decrease of
$1,937,359, or 51%.

     The most significant reason for the decrease in total assets was the
decrease in accounts receivable.  At August 31, 1997, the Company had $240,765
and $0 in billed and unbilled receivables, respectively.  At May 31, 1997, the
Company had $955,207 and $210,542 in billed and unbilled receivables,
respectively.  Billed receivables decreased $924,984 or 75% from May 31, 1997,
while unbilled receivables decreased $210,542 or 100% from May 31, 1997.  The
decrease in billed accounts receivable was primarily the result of the
discontinuation of ARM's business as a result of the Sale on June 19, 1997,
and the subsequent collection of the majority of the previously outstanding
receivables.  The decrease in unbilled accounts receivable resulted from the
Sale, as all unbilled receivables were purchased by SAC.  

     The most significant reasons for the $840,570 decrease in post-petition
liabilities collectively, were decreases in: notes payable of $505,494,
accrued salaries and benefits of $195,831, accrued payroll taxes of $101,351
and other accrued liabilities of $74,862, while accounts payable increased by
$30,368.  The decreases were caused by the payment of the pre-closing
liabilities after the sale of ARM was completed.  The majority of the post-
petition accounts payable consisted of unpaid professional fees related to the
bankruptcy proceeding, which must be court approved by the Bankruptcy Court
before they can be paid.  

     The decrease in pre-petition liabilities of $(1,096,789) included
decreases of:  $(50,000) in accounts payable, $(437,781) in accrued salaries
and benefits, $(559,367) of accrued payroll taxes and withholdings, and
$(49,641) of accrued interest and penalties.  All of these decreases resulted
from payments from the proceeds of the sale of ARM to SAC, or the assumption
of the liability by SAC.  

     The Company's working capital deficit increased by 47% during the
quarter ended August 31, 1997, from a deficit of $(2,433,340) at May 31, 1996
to a deficit of $(1,282,894) at August 31, 1997.   

     FILING OF CHAPTER 11 PETITION BY ARM
     ------------------------------------
     The following is a chronology of the events leading up to ARM filing for
protection under Chapter 11 of the United States Bankruptcy laws on April 2,
1996, as well as a discussion of what has happened since the filing and
subsequent signing of an agreement to sell the majority of ARM's assets to
SAC. 

     Because ARM was in default under its December 1, 1995, installment
agreement with the IRS, the Company's assets were subject to immediate seizure
and possible sale by the IRS.  To that end, on April 1, 1996, the IRS issued
Levy Notices to ARM's bank, financing company and the majority of its
customers.  On April 2, 1996, the IRS attempted to close ARM.  As a result, on
April 2, 1996, ARM was forced to file for protection under Chapter 11 of the
United States Bankruptcy Code. 

     On April 5, 1996, ARM received an emergency hearing with the Bankruptcy
Court to determine its request to pay its employees their pre-petition wages
as well as continue to operate the business.  Prior to the emergency hearing,
ARM reached an agreement with the IRS and its primary lender, CFC, to allow
the company to continue to operate and borrow money from CFC against its
billed receivables.  Under this agreement, ARM agreed to pay $15,000 a month
starting April, 1996, towards its arrearage with the IRS.  The April payment
consisted of $13,600 in cash seized by the IRS on April 1, 1996.  Subsequent
monthly payments have been and will continue to be made directly to the IRS by
CFC from borrowings made by ARM.  ARM was also required to remit to the IRS
collections on certain billed receivables that were outstanding as of April 2,
1996 (which totaled approximately $139,700 and consisted of final vouchers on
14 old contracts).  In addition, as part of the agreement with the IRS, and as
required by the Bankruptcy Court, ARM was required to remit its post-petition
taxes when due and provide proof of such payments to the IRS and the
Bankruptcy Court on a timely basis.  The Bankruptcy Court approved the
agreements with the IRS and CFC, and approved ARM's operating budget for 15
days through April 21, 1996. These agreements have continued to be renewed by
the Bankruptcy Court.  

     SALE OF ARM'S GOVERNMENT CONTRACTS
     ----------------------------------
     ARM informed the Bankruptcy Court and the IRS that it would continue to
pursue the sale of substantially all of ARM's assets .  To that end, ARM
placed ads in several newspapers, including The Wall Street Journal.  ARM
received approximately 34 inquires to these ads.  During May and June 1996,
the Company sent information about ARM to 18 Companies and held serious
discussions with 7 Companies concerning the sale of ARM's assets. 

     On June 24, 1996, the Company accepted a contract for the sale of
certain of ARM's assets for approximately $1.5 Million.  The sale was subject
to Bankruptcy Court approval, a hearing on which was originally scheduled for
July 26, 1996.  This hearing was subsequently moved to July 30, 1996.  At the
hearing, a total of four qualified bidders attended, and after extensive
bidding, an offer was accepted for $2.1 Million.  

     During August 1996, management and ARM's bankruptcy attorney negotiated
a contract, which was signed on August 30, 1996.  A Bankruptcy Court  order
documenting the bidding procedure as well as the related asset purchase
agreement was submitted to the Bankruptcy Court on September 26, 1996, and was
approved on October 4, 1996.  The sale also required the approval of a
majority of the Company's shareholders.  On October 30, 1996, at the Company's
Annual Meeting of Shareholders, a majority of the Company's shareholders
approved the sale.  The sale was also subject to the successful novation of
ARM's government contracts, which request was submitted to the Government in
October 1996, with the information supporting the request for novation
submitted in early November 1996.  Approval of the novation was expected to
take approximately 60 to 90 days from submission.  On January 31, 1997,
because novation by the government had not occurred, the purchaser chose to
terminate the purchase agreement.  

     During February 1997, management met with several other interested
purchasers, including the other three bidders that had attended the July 1996,
hearing.  On March 3, 1997, the Company accepted a new contract for the sale
of certain of ARM's assets for $1.475 Million from SAC.  The sale was subject
to Bankruptcy Court approval, a hearing on which was scheduled for April 11,
1997.  At the hearing, a total of three qualified bidders attended, and after
extensive bidding, an offer was accepted for $1.75 Million from SAC.  The
purchase price was payable as follows:  $1,172,400 in cash at closing,
$322,400 payable over three years and the assumption of liabilities totaling
$255,200.

     Because of the change in the purchase price as well as in the
distribution of funds, the original SAC contract required modifications.  An
amendment to the contract reflecting these changes was signed on April 16,
1997.  A Bankruptcy Court order documenting the bidding procedure was approved
by the Bankruptcy Court on May 30, 1997.  The sale was subject to the
successful novation of ARM's government contracts, which request was approved
on June 19, 1997, at which time the sale was completed.  

     The following is a list of the purchased and excluded assets:

<PAGE>
<PAGE>
<TABLE>
<CAPTION>
  PURCHASED ASSETS                           EXCLUDED ASSETS
  ----------------                           ---------------
<S>                                        <C>
- All contract rights (including           - ARM's charter and status as a
  project contracts),                        corporation, its minute book,
- All inventory,                             stock transfer records, and
- All books and records,                     similar records relating to 
- All furniture, fixtures and                ARM's organization, existence or
  equipment,                                 capitalization, and the capital
- All proprietary rights (patents,           stock of ARM,
  etc.),                                   - Billed accounts receivable as of
- All unbilled accounts receivables          closing
  relating to expired contracts as         - Intercompany receivables,
  January 31, 1997,                        - All ARM's cash accounts,
- All other unbilled accounts receivable   - ARM's rights to occupy real
  as of the closing date.                    property pursuant to leases of
                                             real property and any leasehold
                                             improvements made thereto,
                                           - Any other property identified by
                                             the Purchaser prior to the
                                             closing.
</TABLE>


     PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
     -----------------------------------------------------------
     Now that the sale has been completed, ARM will file a Plan of
Reorganization, which will, among other things, specify how much of the
outstanding pre-petition liabilities will be paid and over what period of
time.  It is expected that a Plan of Reorganization will be filed with the
Bankruptcy Court within 120-150 days of the completion of the sale.  This Plan
is expected to take several months to receive Bankruptcy Court approval.  It
is also expected that between the monies generated from the sale of ARM's
contract rights, plus the collection of outstanding accounts receivable (which
are not part of the sale), there will not be sufficient monies to liquidate
all of ARM's pre-petition liabilities.  Furthermore, it appears that the
unsecured creditors (accounts payable) will receive little or nothing towards
their pre-petition claims.  Specifically, it appears that the following will
be paid in full as a result of the expected Plan of Reorganization:  1) the
secured claim of CFC, ARM's pre-petition and post-petition lender; 2) the
principal portions of the tax amounts owed to the IRS; 3) approximately
$255,200 of the $345,138 owed to the employees for accrued vacation, $530,917
of the $676,000 owed to the 401(k) Plan as of April 2, 1996, as well as
certain employees' pre-petition claims for unreimbursed travel expenses of
approximately $50,000; and 4) the majority of the principal portions of the
tax amounts owed to the various state authorities.  Although these are the
current expectations, there can be no assurance that these amounts will be
paid until the Plan of Reorganization is submitted and confirmed by the
Bankruptcy Court.

     COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM
     ---------------------------------------------------
     As of April 2, 1996, ARS owed ARM approximately $1.2 Million and
ARInternet owed ARM $0.4 Million.  These amounts resulted from ARM paying
certain operating expenses of ARS and ARInternet during their start-up phases
and providing continued money thereafter to fund operations.  Since these
amounts are owed to ARM, the ultimate collection of these advances will be
supervised and controlled by the Bankruptcy Court.  As of August 31, 1997, ARS
has only one part-time employee and its assets and sales are minimal.  ARS has
still not achieved breakeven operations.  Therefore payment of any of the
amount it owes ARM is extremely doubtful.  On the other hand, ARInternet has
essentially achieved breakeven operations (on a cash basis) as of August 31,
1997.  Therefore, it can reasonably be expected that ARInternet will be
required to repay some amount to liquidate its debt to ARM.  The ultimate
amount will be determined by the Bankruptcy Court.  

     IMPACT ON ARC FROM THE SALE OF ARM.
     -----------------------------------
     During the fiscal year ended May 31, 1997, ARM's operations constituted
93% of ARC's total revenue.  The sale transferred essentially all of ARM's
assets and operations to the Purchaser and eliminated all of ARM's revenues. 
Therefore, ARS and ARInternet are the only remaining operating entities.  Up
until the bankruptcy filing, ARM had been forced to continue to fund ARS's and
ARInternet's operations.  During the fiscal year ended May 31, 1996, (through
April 2, 1996), ARM funded approximately $204,600 of ARS's and ARInternet's
expenses.  After April 2, 1996, because of the ARM bankruptcy proceedings, ARM
ceased all such advances and ARS and ARInternet were forced to fund their own
operations.  ARS is still not operating at cash flow breakeven, so it is
doubtful that it can survive without a substantial infusion of cash or a
significant increase in revenues.  Management is considering several options
for ARS, including ceasing its operations.  ARInternet, on the other hand, has
steadily increased its revenues and as of August 31, 1997, had approximately
1,000 subscribers and had essentially reached breakeven operations. 
Management believes that ARInternet's revenues and business will continue to
grow and that ARInternet will ultimately be a successful business on its own,
however there can be no assurance of this.

     The space previously occupied by ARM was not covered by the Bankruptcy
proceeding, because the lease is held by ARC.  On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM. 
Effective March 1, 1997, the Company signed a lease amendment that reduced its
rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes 5,011 of
the 6,349 sq. ft. vacated on December 1, 1996.  Effective August 1, 1997, the
Company signed a second lease amendment that reduced its rental obligation by
an additional 6,462 sq. ft. to 2,272 sq. ft.  The remaining 2,272 sq. ft. was
vacated on September 30, 1997.  In return for reducing the space the landlord
required ARC to pay a total of $19,068, payable monthly at $1,362 over the
balance of the lease, plus forfeiture of the $5,650 deposit held by the
landlord.  This settlement with the landlord will save the Company more than
$103,500 over the remainder of the lease.  In addition to the continuing lease
costs, ARC will continue to incur expenses to maintain its status as a public
company.  

     The sale of ARM dramatically changed the Company's Balance Sheet and
statement of operations.  Through the bankruptcy proceeding, all of ARM's
debts, which total $3.5 million at May 31, 1997, and $1.603 million at August
31, 1997, will be either liquidated or discharged.  This will decrease
interest and penalty costs that the Company has been incurring.  If ARS and
ARInternet's revenues can be increased to produce net profits and a positive
cash flow, the likelihood of which cannot be assured, the Company may in fact
benefit from the sale of ARM.  However, unless and until this occurs, the
Company may not have sufficient capital to achieve its current business plan,
which raises substantial doubt as to the Company's ability to continue as a
going concern after the sale of ARM is completed.  


INFLATION
---------
     The Company anticipates increases in costs associated with the operation
of the business and reflects this in the cost of living escalation factors
proposed on all new work.  In addition, the Company is continually researching
areas to minimize cost increases and strives for improved efficiencies in all
aspects of its business environment.
<PAGE>
<PAGE>
                           PART II - OTHER INFORMATION


Item 1:   Legal Proceedings    
---------------------------
          None


Item 2:   Changes in Securities    
-------------------------------
          None

                                                         
Item 3:   Defaults Upon Senior Securities    
-----------------------------------------
          None


Item 4:   Submission of Matters to a Vote of Security Holders    
-------------------------------------------------------------
          None


Item 5:   Other Information    
---------------------------
          None


Item 6:   Exhibits and Reports on Form 8-K    
------------------------------------------
          Current Report on Form 8-K, dated August 25, 1997, as amended by the
Registrant's Amended Current Report on Form 8-K/A-1 filed with the Securities
and Exchange Commission on September 5, 1997, pertaining to a change in the
Company's certifying accountant from Friedman & Fuller, P.C., Certified Public
Accountants, to Aronson, Fetridge and Weigle, a Professional Corporation,
Certified Public Accountants, which change was effective August 25, 1997.

<PAGE>
                                   SIGNATURES

     Pursuant to the requirements 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.

                                                              


                                                    October 17, 1997        
-------------------------------------               ------------------------
Dr. S.P.S. Anand                                    Date
President and Chief Executive Officer




                                                    October 17, 1997        
-------------------------------------               ------------------------
Dennis H. O'Brien                                   Date
Vice President and Chief Financial Officer