<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 February 28, 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 1120, 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 April 14, 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 - 
             February 28, 1997 (unaudited) and May 31, 1996                  3-4

              Condensed Consolidated Statements of Operations - 
             Three months ended February 28, 1997 and 
             February 29, 1996 (unaudited)                                     5

              Condensed Consolidated Statements of Operations - 
             Nine months ended February 28, 1997 and 
             February 29, 1996 (unaudited)                                     6

              Condensed Consolidated Statements of Cash Flows - 
             Nine months ended February 28, 1997 and 
             February 29, 1996 (unaudited)                                   7-8

              Notes to Condensed Consolidated Financial Statements          9-15


   Item 2     Management's Discussion and Analysis of Financial
              Condition and Results of Operations                          14-23

   Part II:   OTHER INFORMATION

   Item 1     Legal Proceedings                                               25

   Item 2     Changes in Securities                                           25

   Item 3     Defaults Upon Senior Securities                                 25

   Item 4     Submission of Matters to a Vote of Security Holders             25

   Item 5     Other Information                                               25

   Item 6     Exhibits and Reports on Form 8-K                                25

   Signatures                                                                 26

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                           

<TABLE>
<CAPTION>

                                                      February 28,       May 31,
                                                          1997            1996
                                                       (Unaudited)      (Audited)
                                                      ------------     ------------
<S>                                                   <C>              <C>         
ASSETS
------
CURRENT ASSETS
  Cash                                               $     50,447      $    78,689 
  Accounts receivable, net                              1,421,019        1,524,685    
  Inventory, at cost                                          222            1,492 
  Other current assets                                     12,650           21,093 
                                                      ------------     ------------
TOTAL CURRENT ASSETS                                    1,574,512        1,625,959 

PROPERTY AND EQUIPMENT, AT COST 
  Furniture and equipment                                 167,741          167,405 
  Computer equipment                                      484,285          462,206 
  Laboratory equipment                                    121,426          121,426 
  Leasehold improvements                                   22,322           22,322 
                                                      ------------     ------------
                                                          795,774          773,359 
  Less accumulated depreciation and amortization          697,441          640,589 
                                                      ------------     ------------
NET PROPERTY AND EQUIPMENT                                 98,333          132,770 

INTANGIBLE ASSETS, NET OF
  AMORTIZATION                                             27,309           32,276 

OTHER ASSETS                                                7,359            6,615 
                                                      ------------     ------------
TOTAL ASSETS                                           $1,617,339       $1,797,620 
                                                      ===========      =========== 

</TABLE>


                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
                                                      February 28,       May 31,
                                                          1997            1996
                                                       (Unaudited)      (Audited)
                                                      ------------    ------------    
<S>                                                   <C>             <C>         
LIABILITIES
-----------
CURRENT LIABILITIES
  Liabilities not subject to compromise:
     Notes payable, current maturities                $   434,763      $   689,563 
     Notes payable to officers and directors, 
        current maturities                                 33,500            4,000 
     Accounts payable                                     346,549          162,314 
     Accrued salaries and benefits                        343,692          176,574 
     Accrued payroll taxes and withholdings                64,117           57,143 
     Other accrued liabilities                            127,532           77,665 
     Billings in excess of costs and 
        anticipated profits                                 9,179            9,999 
     Deferred revenue                                      30,035           27,635 
     Income taxes payable                                     381            1,411 
     Provision for contract losses                         60,000           60,000 
                                                      ------------     ------------
  Total liabilities not subject to compromise           1,449,748        1,266,304 
                                                      ------------     ------------
  Liabilities subject to compromise:
     Accounts payable                                     336,557          403,812 
     Accrued salaries and benefits                        832,475          861,151 
     Accrued payroll taxes and withholdings               770,406          930,794 
     Accrued interest and penalties                       445,204          437,708 
                                                      ------------     ------------
  Total liabilities subject to compromise               2,384,642        2,633,465 
                                                      ------------     ------------
TOTAL CURRENT LIABILITIES                               3,834,390        3,899,769 
                                                      ------------     ------------

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                                    (3,360,735)      (3,245,833)   

                                                      ------------     ------------
TOTAL STOCKHOLDERS' DEFICIT                            (2,217,051)      (2,102,149)   
                                                      ------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT            $1,617,339       $1,797,620    
                                                      ===========      =========== 
</TABLE>

                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
                                                          1997            1996
                                                       (Unaudited)     (Unaudited)
                                                       -----------     -----------
<S>                                                    <C>             <C>        
Revenue                                                  $142,413        $ 132,453 

Operating costs and expenses:                                  
  Direct cost of services                                  34,186           49,846 
  Indirect operating costs                                      -            1,724 
  General & administrative expenses                        94,671          133,631 
                                                        ----------       ----------
Total operating costs and expenses                        128,857          185,201 
                                                        ----------       ----------
Operating income (loss) from continuing 
operations                                                 13,556          (52,748)

Other expense:
  Interest expense, net                                     1,035              (22)
  Penalties                                                   790            2,567 
  Other, net                                                  (15)               - 
                                                        ----------       ----------
Total other expense                                         1,810            2,545 
                                                        ----------       ----------
Income (loss) before discontinued operations, 
  reorganization items and income taxes                    11,746          (55,293)

Loss from discontinued operations before
  reorganization items                                    (42,208)         (74,220)
Reorganization items:
  Professional fees                                       (34,324)               - 
                                                        ----------       ----------
Loss from discontinued operations                         (76,532)         (74,220)
                                                        ----------       ----------
Loss before income taxes                                  (64,786)        (129,513)

Income taxes                                                    -                - 
                                                        ----------       ----------
Net loss                                                $ (64,786)       $(129,513)
                                                        ==========       ==========
Net loss per common share:
  Loss before discontinued operations                   $       -        $   (0.01)
  Loss from discontinued operations                         (0.01)           (0.01)
                                                        ----------       ----------
Net loss per common share                               $   (0.01)       $   (0.02)
                                                        ==========       ==========   
Weighted average number of shares outstanding           6,311,083        6,311,083 
                                                        =========        ========= 
</TABLE>
                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               NINE MONTHS ENDED FEBRUARY 28, 1997 and FEBRUARY 29, 1996
<TABLE>
<CAPTION>
                                                          1997            1996
                                                       (Unaudited)     (Unaudited)
                                                       -----------     -----------
<S>                                                    <C>             <C>        
Revenue                                                  $413,454        $ 428,601 

Operating costs and expenses:                                  
  Direct cost of services                                 134,720          207,755 
  Indirect operating costs                                      -           31,742 
  General & administrative expenses                       300,754          458,453 
                                                        ----------       ----------
Total operating costs and expenses                        435,474          697,950 
                                                        ----------       ----------
Operating loss from continuing operations                 (22,020)        (269,349)

Other expense:
  Interest expense, net                                     1,151              601 
  Consulting expense associated with stock awards               -           89,063 
  Penalties                                                 2,416            3,371 
  Other, net                                                  451                - 
                                                        ----------       ----------
Total other expense                                         4,018           93,035 
                                                        ----------       ----------

Loss before discontinued operations, 
  reorganization items and income taxes                   (26,038)        (362,384)

Income (loss) from discontinued operations before 
  reorganization items                                     36,029         (189,762)
Reorganization items: 
  Professional fees                                      (124,893)               - 
                                                      ------------     ------------
Loss from discontinued operations                         (88,864)        (189,762)

Loss before income taxes                                 (114,902)        (552,146)

Income taxes                                                    -                - 
                                                      ------------     ------------
Net loss                                              $  (114,902)     $  (552,146)
                                                      ============     ============   
Net loss per common share:
Loss before discontinued operations                   $         -      $     (0.06)
Loss from discontinued operations                          (0.01)            (0.03)
                                                      ------------     ------------
Net loss per common share                             $     (0.02)     $     (0.09)
                                                      ============     ============
Weighted average number of shares outstanding           6,311,083        6,182,494 
                                                        =========        ========= 
</TABLE>
                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 
<TABLE>
<CAPTION>
                                                             1997             1996
                                                          (Unaudited)      (Unaudited)
                                                          ------------   ------------
<S>                                                       <C>            <C>         
Cash flows from operating activities:
  Cash received from customers                             $6,348,416     $6,779,377 
  Cash paid to suppliers and employees                     (5,886,122)    (6,303,926)
  Interest paid                                              (116,898)      (210,148)
  Income taxes paid                                            (1,030)       (18,449)
                                                          ------------   ------------
  Net cash provided from operating activities
  before reorganization items                                 344,366        246,854 
                                                          ------------   ------------
  Operating cash flows from reorganization items:
  Professional fees paid for services rendered 
  in connection with the Chapter 11 proceeding               (124,893)             - 
                                                          ------------   ------------
  Net cash used by reorganization items                      (124,893)             - 
                                                          ------------   ------------
Net cash provided from operating activities                   219,473        246,854 
                                                          ------------   ------------
Cash flows from investing activities:
  Capital expenditures                                        (22,415)       (53,732)
                                                          ------------   ------------
Net cash used in investing activities                         (22,415)       (53,732)
                                                          ------------   ------------
Cash flows from financing activities:                     
  Proceeds from loans from officers and directors              29,500          4,000 
  Proceeds of loans from receivables assignment - 
    pre-petition                                                    -      5,685,182 
  Proceeds of loans from receivables assignment - 
    post-petition                                           4,622,829              - 
  Repayment of loans from receivables assignment - 
    pre-petition                                                    -     (5,835,026)
  Repayment of loans from receivables assignment - 
    post-petition                                          (4,877,629)             - 
  Repayment of equipment loan - pre-petition                        -        (41,538)
                                                          ------------   ------------
Net cash used in financing activities                        (225,300)      (187,382)
                                                          ------------   ------------
Net increase (decrease) in cash                               (28,242)         5,740 

Cash at the beginning of period                                78,689         15,028 
                                                          ------------   ------------
Cash at the end of period                                 $    50,447   $     20,768 
                                                          ===========    =========== 

                                       CONTINUED
</TABLE>

                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
               NINE MONTHS ENDED FEBRUARY 28, 1996 and FEBRUARY 29, 1997
<TABLE>
<CAPTION>
                                                             1997            1996
                                                          (Unaudited)     (Unaudited)
                                                           ----------     -----------
<S>                                                        <C>             <C>       
Reconciliation of net loss to net cash 
  provided from operating activities:

Net loss                                                   $(114,902)      $(552,146)

Adjustments to reconcile net loss to net cash 
  provided from operating activities:                                                
  Depreciation                                                56,852          59,140 
  Amortization                                                 4,967          15,227 
  Consulting expense associated with
  stock awards                                                     -          89,063 
  Changes in assets and liabilities:
  Decrease in accounts receivable                            103,666          23,993 
  Increase (decrease) in inventory                             1,270            (303)
  Decrease in other current assets                             8,443           2,509 
  Increase in intangible assets                                    -            (695)
  Increase (decrease) in other assets                           (744)         30,470 
  Increase (decrease) in accounts payable - 
    pre-petition                                             (67,255)         20,797 
  Increase in accounts payable - post-petition               184,235               - 
  Decrease in accrued salaries and benefits - 
    pre-petition                                             (28,676)        (91,611)
  Increase in accrued salaries and benefits - 
    post-petition                                            167,118               - 
  Increase (decrease) in accrued payroll taxes 
    and withholdings - pre-petition                         (160,388)        527,918 
  Increase in accrued payroll taxes and 
    withholdings - post-petition                               6,974               - 
  Increase in other accrued liabilities - 
    pre-petition                                               7,496         167,832 
  Increase in other accrued liabilities - 
    post-petition                                             49,867               - 
  Decrease in billings in excess of costs 
  and anticipated profits                                       (820)        (40,371)
  Increase in deferred revenue                                 2,400          13,480 
  Decrease in income taxes payable                            (1,030)        (18,449)
                                                         ------------    ------------
Net cash provided from operating activities                $ 219,473       $ 246,854 
                                                           =========       ========= 
</TABLE>
                             See accompanying notes to the
                      condensed consolidated financial statements

<PAGE>
<PAGE>
                     APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   BASIS OF PRESENTATION
     ---------------------
     The condensed consolidated balance sheet as of February 28, 1997, the
condensed consolidated statements of operations for the three months and nine
months ended February 28, 1997 and February 29, 1996, and the consolidated
statements of cash flows for the nine months ended February 28, 1997 and
February 29, 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 February 28, 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 February 28,
1997, no minority interest has been provided. 

     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, 1996.  The results of operations for
the period ended February 28, 1997, are not necessarily indicative of the
operating results for the full year.


2.   LOSS PER COMMON SHARE
     ---------------------
     Loss per share of common stock has been computed by dividing the net 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,
1996, the condensed consolidated statements of operations for the three and
nine months ended February 29, 1996, and the condensed consolidated statements
of cash flows for the nine months then ended have been reclassified to conform
to the February 28, 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, Applied Research of Maryland, Inc. ("ARM", also
referred to as "the Debtor") 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 (the "Bankruptcy Filing").  ARC, ARS and
ARInternet have not filed for relief under the federal bankruptcy laws.  Under
Chapter 11, certain claims against the Debtor in existence prior to the filing
of the petitions for relief under the federal bankruptcy laws are stayed while
the Debtor continues business operations as Debtor-In-Possession.  These
claims are reflected in the condensed financial statements for February 28,
1997 as "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 court (or agreement of the parties in interest) of
allowed claims for contingencies and other disputed amounts.  Claims secured
against the Debtor'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 the Debtor's property,
including the Debtor'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 to continue to operate the business.  Prior to the emergency
hearing, ARM reached an agreement with the IRS and CFC (its lender - see Note
5) 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.  Future monthly payments have been and 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 $136,700 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.  

     The Debtor has determined that there exists 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.  However, as a result of the Bankruptcy Filing,
the Debtor is not longer accruing interest on pre-petition obligations, except
the amounts owed CFC. 


     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.  On July
30, 1996, the hearing was conducted.  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 court order documenting the
bidding procedure as well as the contract 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 choose to terminate the purchase agreement.  

     During February 1997, management meet 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 approximately $1.5 Million from Space
Applications Corporation ("SAC").  The sale was subject to Bankruptcy Court
approval, which was scheduled for April 11, 1997.  On April 11, 1997, the
hearing was conducted.  At the hearing, a total of three qualified bidders
attended, and after extensive bidding, an offer was accepted for $1.75 Million
from SAC.  

     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 court order documenting the bidding procedure is also expected to be
finalized within the 10 days of the hearing.  The sale is subject to the
successful novation of ARM's government contracts, which request is expected
to be submitted to the Government within 5 to 10 days of the hearing.  It is
hoped that approval of the novation will take place within 45 to 60 days from
submission, although this is not certain.  Upon notification of the
government's novation approval the sale will be completed, although there can
be no assurances that the government will approve the novation.

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


         PURCHASED ASSETS                               EXCLUDED ASSETS
         ----------------                               ---------------
- 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 
- All proprietary rights (patents,                capital stock of ARM,
  etc.),                                        - Billed accounts receivable as 
- All unbilled accounts receivable                of 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 lease-
                                                  hold improvements made 
                                                  thereto,
                                                - Any other property identified 
                                                  by the Purchaser prior to the
                                                  closing.


     PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
     -----------------------------------------------------------
     In the event that the sale referenced above is completed, ARM (the
"Debtor") 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 30 days of completing 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 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 $343,361 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) approximately 90% 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, ARSoftware ("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 February 28,
1997, ARS has only one part-time employee and its assets and sales are
minimal.  As a result, ARS still has 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
during the current fiscal year.  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 AFTER THE SALE OF ARM IS COMPLETED
     ------------------------------------------------
     During the fiscal year ended May 31, 1996, ARM's operations constituted
94% of ARC's total revenue.  The sale currently contemplated will sell
essentially all of ARM's operations and eliminate all of ARM's revenues. 
Therefore, ARS and ARInternet will be 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 and
ARInternet expenses.  From April 2, 1996 on, 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 an infusion of cash
or a substantial 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 February 28, 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 currently occupied by ARM is not covered by the Bankruptcy
proceeding, since the lease is held by ARC.  Management of ARC has enlisted
the services of a real estate broker to find a tenant to take over this space
when ARM's operations are sold.  The landlord has also been apprised of the
ARM sale and is attempting to find an alternate tenant, but is under no
obligation to release ARC from its obligation under the lease.  On December 1,
1996, ARM vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously
occupied by ARM.  Effective January 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. 
The landlord and the Company have been negotiating to relieve the Company of
all obligations related to the space vacated by the Company on December 1,
1996, as well as the remainder of the leased space when the ARM sale is
completed.  The landlord's last offer in this regard was that it would do so
for a total payment of approximately $56,000, $13,600 of which would be due at
the time of signing the lease amendment and the balance in equal installments
over the remainder of the lease.  The Company countered this proposal, which
counteroffer is currently being considered by the Landlord.  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, if completed, will dramatically change the Company's
balance sheet and statement of operations.  Through the bankruptcy proceeding,
all of ARM's debts, which total $3.5 million at February 28, 1997, will be
either liquidated or discharged.  This will decrease the interest and penalty
costs the Company has been incurring.  If ARS and ARInternet's revenues can be
increased to produce net profits and a positive cash flow, 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.  


5.   DISCONTINUED OPERATIONS
     -----------------------
     Because the Bankruptcy Court has approved the sale of substantially all
of the assets of ARM, results from operations for ARM have been shown as
discontinued operations for the three and nine months ended February 28, 1997
and February 29, 1996.  

     A summary of ARM's results from operations for the three and nine months
ended February 28, 1997 and February 29, 1996 are shown on the next page:


<TABLE>
<CAPTION>
                                                        1997            1996
                                                     (Unaudited)     (Unaudited)
                                                      ------------  ------------
<S>                                                   <C>           <C>         
THREE MONTHS ENDED FEBRUARY 28, 1997 AND 
FEBRUARY 29, 1996:
Revenue                                               $1,861,484     $2,056,125 

Operating costs and expenses:
  Direct cost of services                              1,147,950      1,242,225 
  Indirect operating costs                               468,313        464,975 
  General & administrative expenses                      237,896        209,629 
                                                     ------------   ------------
Total operating costs and expenses                     1,854,159      1,916,829 
                                                     ------------   ------------
Operating profit from discontinued operations              7,325        139,296 

Other expense:
  Interest expense, net                                   38,463        120,804 
  Other, net                                              11,070         92,712 
                                                     ------------   ------------
Total other expense                                       49,533        213,516 
                                                     ------------   ------------
Profit (loss) from discontinued operations 
  before reorganization items                            (42,208)       (74,220)
Reorganization items - professional fees                 (34,324)             - 
                                                     ------------   ------------
Profit (loss) from discontinued operations           $   (76,532)   $   (74,220)
                                                     ===========    ============

NINE MONTHS ENDED FEBRUAERY 28, 1997 AND 
FEBRUARY 29, 1996:

Revenue                                               $5,829,716     $6,353,675 

Operating costs and expenses:                                  
  Direct cost of services                              3,647,246      3,908,592 
  Indirect operating costs                             1,312,983      1,481,297 
  General & administrative expenses                      699,130        683,318 
                                                     ------------   ------------
Total operating costs and expenses                     5,659,359      6,073,207 
                                                     ------------   ------------
Operating profit from discontinued operations            170,357        280,468 

Other expense:
  Interest expense, net                                  113,223        305,675 
  Other, net                                              21,105        164,555 
                                                     ------------   ------------
Total other expense                                      134,328        470,230 
                                                     ------------   ------------
Income (loss) from discontinued operations before 
  reorganization items                                    36,029       (189,762)
Reorganization items - professional fees                (124,893)             - 
                                                     ------------   ------------
Loss from discontinued operations                    $   (88,864)   $  (189,762)
                                                     ============   ============
</TABLE>

6.   SUPPLEMENTAL SEGMENT INFORMATION

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

<PAGE>
<TABLE>
<CAPTION>

                                           ARS          ARInternet     Consolidated
                                       ----------       ----------     ------------
<S>  <C>                                <C>             <C>            <C>           
SALES TO UNAFFILIATED CUSTOMERS:
-------------------------------
     QUARTER ENDED:
     -------------
     February 28, 1997                  $    6,113      $  136,300      $  142,413 
     February 29, 1996                  $   37,379      $   95,074      $  132,453 

     NINE MONTHS ENDED:
     ----------------
     February 28, 1997                  $   59,558      $  353,896      $  413,454 
     February 29, 1996                  $  224,449      $  204,152      $  428,601 


OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES:
--------------------------------------------------
     QUARTER ENDED:
     -------------
     February 28, 1997                  $  (7,166)      $   20,722      $   13,556 
     February 29, 1996                  $ (28,555)      $  (24,193)     $  (52,748)

     NINE MONTHS ENDED:
     ----------------
     February 28, 1997                  $ (28,021)      $    6,001      $  (22,020)
     February 29, 1996                  $ (95,041)      $ (174,308)     $ (269,349)

</TABLE>

     Operating income (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
has accepted and the Bankruptcy Court has approved of an offer to sell
substantially all of the operating assets of ARM (see Note 5).
<PAGE>
<PAGE>
                   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 NOVEMBER 30, 1996 COMPARED TO
1995
------------------------------------------------------------------------------

     FROM CONTINUING OPERATIONS
     --------------------------
     The Company's revenues for the quarter ended February 28, 1997, were
$142,413, or 8% above revenues of $132,453 for the same period during 1996. 
The increase of $9,960 in revenues during the quarter ended February 28, 1997,
is primarily attributable to the increase in ARInternet's revenues of
$136,300, an increase of $41,226 or 43% over revenues of $95,074 generated
during the same period in 1996.  ARS' revenues were $6,113, a decrease of
$(31,266) over the previous year.

     The Company's direct cost of services decreased $15,660 or 31%, from
$49,846 during the quarter ended February 29, 1996, to $34,186 during the same
period in 1997.  Of this amount, ARS decreased $19,900 while ARInternet's cost
of services increased $4,240.  The decrease in direct costs of ARS was
primarily related to the lower sales for the quarter and a decrease in the
amount of amortization of previously capitalized software development costs,
compared to the same period in 1996.  The increase in ARInternet's direct
costs of sales was the direct result of increased sales during the current
period. 

     Indirect operating costs decreased $1,724 or 100%, from $1,724 during
the quarter ended February 29, 1996, to $0 during the quarter ended February
28, 1997.  The entire decrease was directly related to a decrease by ARS in
technical staff which occurred during the second half of the previous fiscal
year. 

     General and administrative ("G&A") expenses decreased $38,960 or 29%,
from $133,631 in 1996, to $94,671 during 1997.  Most notably, the G&A expenses
associated with ARS decreased $31,029, while ARInternet's G&A expenses
decreased $7,931 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 operating income from
continuing operations for the quarter ended February 28, 1997, of $13,556
compared to an operating loss of $(52,748) for the same period during 1996. 
ARS posted an operating loss of $(7,166) for the quarter ended February 28,
1997, which loss represented an improvement of $21,389 or 75% from the
operating loss of $(28,555) 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 operating income of $20,722 for the quarter ended
February 28, 1997, which represented an improvement of $44,915 from the
operating loss of $(24,193) during the same period in 1996.  This net
improvement for ARInternet was directly attributable to an increase in the
overall revenue levels from the previous year due to increases in the number
of subscribers to ARInternet.  

     Interest and other expenses decreased $735 or 29%, from $2,545 for the
quarter ended February 29, 1996, to $1,810 during the quarter ended February
28, 1997.  The decrease was primarily related to the fact that the Company
reduced the amount of penalties it had incurred during the quarter ended
February 28, 1997 when compared to the same period in 1996.   

     The Company realized income from continuing operations of $11,746 for
the quarter ended February 28, 1997, compared to a loss from continuing
operations of $(55,293) during the same period in 1996.  This change in
results from continuing operations was the result of improved operating
margins from both ARS and ARInternet.  

     Loss per common share from continuing operations decreased from $(0.01)
in 1996 to $0.00 in 1997, as a result of the income for the current fiscal
quarter when compared to loss for the same period in 1996.


     FROM DISCONTINUED OPERATIONS
     ----------------------------
     ARM's revenues for the quarter ended February 28, 1997, were $1,861,484,
or (9)% below revenues of $2,056,125 for the same period during 1996.  The
decrease in revenues during the quarter ended February 28, 1997, of $194,641
is primarily attributable to a decrease in the number of contracts, and
therefore, the number of direct employees generating revenue during the
current fiscal quarter compared to the quarter ended February 29, 1996.  

     ARM's direct cost of services decreased $94,275 or 8%, from $1,242,225
during the quarter ended February 29, 1996, to $1,147,950 during the same
period in 1997.  ARM's decrease in direct costs consisted of a decrease in
direct labor and a decrease in subcontract, material and equipment charges. 
The decrease in direct labor related primarily to a decrease in the number of
contracts being performed at the Company's headquarters.  

     ARM's indirect operating costs increased $3,338 or 1%, from $464,975
during the quarter ended February 29, 1996, to $468,313 during the quarter
ended February 28, 1997.  This increase is directly related to a increase in
the amount in fringe benefit costs incurred.  

     ARM's general and administrative ("G&A") expenses increased $28,267 or
13%, from $209,629 in 1996, to $237,896 during 1997.  The increase in ARM's
G&A expenses was directly attributable to the increase in professional fees. 
This was partially offset by a reduction in ARM's G&A staff for the current
fiscal period when compared to the previous year.  

     As a result of the foregoing, ARM realized operating income for the
quarter ended February 28, 1997, of $7,325 compared to operating income of
$139,296 for the same period during 1996.  The $131,971 decrease in ARM's 1997
operating margin was primarily related to a decrease in fees realized on ARM's
contracts, due to the higher indirect rates realized by ARM during 1997, in
particular its general and administrative expenses, as well as a decrease in
award fees being realized on the Company's largest contract, related to the
performance on the contract of the prime contractor.  A portion of the
Company's award fees on this contract are directly tied to that received by
the prime contractor.

     ARM's interest and other expenses decreased $163,983 or 77%, from
$213,516 for the quarter ended February 29, 1996, to $49,533 during the
quarter ended February 28, 1997.  Net interest expense decreased $82,341 or
68% from 1996.  The decrease in interest costs was the result of ARM not
accruing any interest on either the delinquent employee 401(k) contributions
nor the unpaid federal withholding taxes (on its pre-petition liabilities)
during the quarter ended February 28, 1997, when compared to the same period
in 1996.  Other expenses also decreased $81,642 during the quarter ended
February 28, 1997.  This was primarily due to the fact that ARM did not record
any penalties during the current period because the accrual of penalties and
interest is stayed as a result of the Company filing for protection under
Chapter 11 of the United States Bankruptcy Code.  

     ARM sustained a net loss before income taxes of $(76,532) for the
quarter ended February 28, 1997, compared to a net loss of $(74,220) during
the same period last year.  


RESULTS FROM OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995
-----------------------------------------------------------------------------

     FROM CONTINUING OPERATIONS
     --------------------------
     The Company's revenues for the nine months ended February 28, 1997, were
$413,454, or (4)% below revenues of $428,601 for the same period during 1996. 
The decrease in revenues during the nine months ended February 28, 1997, of
$15,147 is primarily attributable to the decrease in ARS's revenues of
$164,891 or 74% when compared with revenues of $224,449 generated during the
same period in 1996.  ARInternet's revenues were $353,896, an increase of
$149,744 or 73%, over the previous year, and partially offset the declines
experienced by ARS. 

     The Company's direct cost of services decreased 73,035 or 35%, from
$207,755 during the nine months ended February 29, 1996, to $134,720 during
the same period in 1996.  Of this amount, ARS decreased $95,876 while
ARInternet's cost of services increased $22,841.  The decrease in direct costs
of ARS was primarily related to the lower sales for the period and a decrease
in the amount of amortization of previously capitalized software development
costs, compared to the same period in 1996.  The increase in ARInternet's
direct costs of sales was the direct result of increased sales during the
current period. 

     Indirect operating costs decreased $31,742 or 100%, from $31,742 during
the nine months ended February 29, 1996, to $0 during the nine months ended
February 28, 1997.  The entire decrease was directly related to a decrease by
ARS in technical staff which occurred during the second half of the previous
fiscal year. 

     General and administrative ("G&A") expenses decreased $157,699 or 34%,
from $458,453 in 1996, to $300,754 during 1997.  Most notably, the G&A
expenses associated with ARS decreased $104,293 or 68%, while ARInternet's G&A
expenses decreased $53,406 or 17%, during the nine months ended February 28,
1997.  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 nine months ended February 28, 1997, of
$(22,020) compared to an operating loss of $(269,349) for the same period
during 1996.  ARS posted an operating loss of $(28,021) for the nine months
ended February 28, 1997, which loss represented an improvement of $67,020 or
71% from the operating loss of $(95,041) 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 operating income of $6,001 for the nine months
ended February 28, 1997, which represented an improvement of $180,309 from the
operating loss of $(174,308) during the same period in 1996.  This net
improvement for ARInternet was directly attributable to an increase in the
overall revenue levels from the previous year due to increases in the number
of subscribers to ARInternet.  

     Interest and other expenses decreased $89,017 or 96%, from $93,035 for
the nine months ended February 29, 1996, to $4,018 during the nine months
ended February 28, 1997.  The decrease was primarily related to the fact that
the Company eliminated consulting expenses incurred during the same period in
1996 in conjunction with the issuance of common stock by the Company.  

     The Company sustained a loss from continuing operations of $(26,038) for
the nine months ended February 28, 1997, compared to a loss from continuing
operations of $(362,384) during the same period in 1995.  This reduction in
losses from continuing operations was the result of improved operating margins
from both ARS and ARInternet, as well as the lack of any consulting expenses
related to the issuance of stock awards.

     Loss per common share from continuing operations decreased from $(0.06)
in 1996 to $(0.00) in 1997, as a result of the reduced loss for the current
fiscal quarter when compared to the same period in 1996.


     FROM DISCONTINUED OPERATIONS
     ----------------------------
     ARM's revenues for the nine months ended February 28, 1997, were
$5,829,716, or (8)% below revenues of $6,353,675 for the same period during
1996.  The decrease in revenues during the nine months ended February 28,
1997, of $523,959 is primarily attributable to a decrease in the number of
contracts, and therefore, the number of direct employees generating revenue
during the current fiscal period compared to the nine months ended February
29, 1996.  

     ARM's direct cost of services decreased $261,346 or 7%, from $3,908,592
during the nine months ended February 29, 1996, to $3,647,246 during the same
period in 1996.  ARM's decrease in direct costs consisted of a decrease in
direct labor and a decrease in subcontract, material and equipment charges. 
The decrease in direct labor related primarily to a decrease in the number of
contracts being performed at the Company's headquarters.  

     ARM's indirect operating costs decreased $168,314 or 11%, from
$1,481,297 during the nine months ended February 29, 1996, to $1,312,983
during the nine months ended February 28, 1997.  This decrease is directly
related to a decrease in the amount of indirect labor being charged to
overhead, as well as a decrease in fringe benefit costs incurred as a result
of fewer staff.  

     ARM's general and administrative ("G&A") expenses increased $15,812 or
2%, from $683,318 in 1996, to $699,130 during 1997.  The increase in ARM's G&A
expenses was directly attributable to the increase in professional fees.  This
was partially offset by a reduction in ARM's G&A staff for the current fiscal
period when compared to the previous year.  

     As a result of the foregoing, ARM realized operating income for the nine
months ended February 28, 1997, of $170,357 compared to operating income of
$280,468 for the same period during 1996.  The $110,111 decrease in ARM's 1997
operating margin was primarily related to a decrease in fees realized on ARM's
contracts due to the higher indirect rates realized by ARM during 1997, in
particular its general and administrative expenses, as well as, a decrease in
award fees being realized on the Company's largest contract.

     ARM's interest and other expenses decreased $335,902 or 71%, from
$470,230 for the nine months ended February 29, 1996, to $134,328 during the
nine months ended February 28, 1997.  Net interest expense decreased $192,452
or 63% from 1996.  The decrease in interest costs was the result of ARM not
accruing any interest on either the delinquent employee 401(k) contributions
nor the unpaid federal withholding taxes (relating to its pre-petition
liabilities) during the nine months ended February 28, 1997, when compared to
the same period in 1996.  Other expenses also decreased $143,450 during the
nine months ended February 28, 1997.  This was primarily due the fact that ARM
did not record any penalties during the current period because the accrual of
penalties and interest is stayed as a result of the Company filing for
protection under Chapter 11 of the United States Bankruptcy Code.  

     ARM sustained a net loss before income taxes of $(88,864) for the nine
months ended February 28, 1997, compared to a net loss of $(189,762) during
the same period last year.  The primary reasons for this improvement were the
increase in operating margins together with lower interest and penalty costs
realized during 1997, offset by the increase in bankruptcy related
professional fees.


LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995
-------------------------------------------------------
     Total assets decreased $180,281 or 10%, from $1,797,620 at May 31, 1996,
to $1,617,339 at February 28, 1997.  Total liabilities on the other hand
decreased from $3,899,769 to $3,834,390 over the same period, an decrease of
$65,379, or 2%.

     The most significant reason for the decrease in total assets was the
decrease in accounts receivable.  At February 28, 1997, the Company had
$679,880 and $741,139 in billed and unbilled receivables, respectively. 
Billed receivables decreased $410,981 or 37% from May 31, 1996, while unbilled
receivables increased $307,315 or 71% from May 31, 1996.  The decrease in
billed accounts receivable was primarily the result of the decreases in the
average amount billed due to decreases in revenues and increases in unbilled
receivables.  The increase in unbilled accounts receivable related to an
increase in the amount of work that was unbilled at February 28, 1997, which
was 10 days as compared to the 3 days at May 31, 1996.  

     The most significant reasons for the $183,444 increase in post-petition
liabilities collectively, were increases: in accounts payable of $184,235,
accrued salaries and benefits of $167,118 and other accrued expenses of
$49,687, while notes payable decreased by $254,800.  The increase in accounts
payable related primarily to unpaid professional fees related to the
bankruptcy proceeding, which must be court approved before they can be paid. 
The primary reason for the increase in accrued salaries and benefits was the
increase in accrued wages earned by employees (10 days as compared to 4 days
at May 31, 1996). 

     The decrease in pre-petition liabilities of $(248,823) consisted of
decreases of:  $(67,255) in accounts payable, $(28,676) in accrued salaries
and related benefits, and $(160,388) of accrued payroll taxes and
withholdings.  The decrease in pre-petition accounts payable resulted from two
customers offsetting their pre-petition receivable claims against their pre-
petition payable claims.  These two customers were both customers and vendors
of ARM, and according to bankruptcy rules, have the right to offset amounts
owed to them by the amounts owed by them.  The decrease in pre-petition
accrued salaries and benefits related to the decrease in pre-petition accrued
vacation, the payment for which was authorized by a bankruptcy court order. 
The decrease in pre-petition accrued taxes and withholdings represented
$135,000 of monthly payments being made by ARM to the IRS under court order,
plus the collection of a $29,442 pre-petition account receivables which was to
be paid to the IRS as part of the same court order.

     The Company's working capital deficit remained relatively the same
during the nine months ended February 28, 1997.  At February 28, 1997, the
working capital deficit was $(2,350,052) compared to a deficit of $(2,273,810)
at May 31, 1996.  


FILING OF CHAPTER 11 PETITION BY ARM
------------------------------------
     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 CFC (its lender) 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.  Future 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 ARM's business.  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.  On July
30, 1996, the hearing was conducted.  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 court order documenting
the bidding procedure as well as the contract 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 choose to terminate the purchase agreement.  

     During February 1997, management meet 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 approximately $1.5 Million from Space
Applications Corporation ("SAC").  The sale was subject to Bankruptcy Court
approval, which was scheduled for April 11, 1997.  On April 11, 1997, the
hearing was conducted.  At the hearing, a total of three qualified bidders
attended, and after extensive bidding, an offer was accepted for $1.75 Million
from SAC.  

     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 court order documenting the bidding procedure is also expected to
finalized within the 10 days of the hearing.  The sale is subject to the
successful novation of ARM's government contracts, which request is expected
to be submitted to the Government within 5 to 10 days of the hearing.  Is it
is hoped that approval of the novation will take place within 45 to 60 days
from submission, although this is not certain.  Upon notification of the
government's novation approval the sale will be completed, although there can
be no assurances that the government will approve the novation.

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

  PURCHASED ASSETS                                EXCLUDED ASSETS
  ----------------                                ---------------
- 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 
  equipment,                                      or capitalization, and the 
- All proprietary rights (patents,                capital stock of ARM,
  etc.),                                        - Billed accounts receivable as 
- All unbilled accounts receivables               of 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 lease-
                                                  hold improvements made 
                                                  thereto,
                                                - Any other property identi-
                                                  fied by the Purchaser prior
                                                  to the closing.


PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
-----------------------------------------------------------
     In the event that the sale referenced above is completed, ARM (the
"Debtor") 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 30 days of completing 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 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 $343,361 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) approximately 90% 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's 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 February 28,
1997, ARS has only one part-time employee and its assets and sales are
minimal.  As a result, 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 as of
May 31, 1996.  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 AFTER THE SALE OF ARM IS COMPLETED
------------------------------------------------
     During the fiscal year ended May 31, 1996, ARM's operations constituted
94% of ARC's total revenue.  The sale currently contemplated will sell
essentially all of ARM's operations to the Purchaser and eliminate all of
ARM's revenues.  Therefore, ARS and ARInternet will be 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 and ARInternet expenses.  From April 2, 1996 on, 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
February 28, 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 currently occupied by ARM is not covered by the Bankruptcy
proceeding, since the lease is held by ARC.  Management of ARC has enlisted
the services of a real estate broker to find a tenant to take over this space
when ARM's operation are sold.  The landlord has also been apprised of the ARM
sale and is attempting to find an alternate tenant, but is under no obligation
to release ARC from its obligation under the lease.  On December 1, 1996, ARM
vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM. 
Effective January 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 the
5,011 of the 6,349 sq. ft. vacated on December 1, 1996.  Effective January 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.  The landlord and the Company have been
negotiating to relieve the Company of all obligations related to the space
vacated by the Company on December 1, 1996 as well as the remainder of the
leased space when the ARM sale is completed.  The landlord's last offer in
this regard was that it would do so for a total payment of approximately
$56,000, $13,600 of which would be due at the time of signing the lease
amendment and the balance in equal installments over the remainder of the
lease.  The Company countered this proposal, which counteroffer is currently
being considered by the Landlord.  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, if completed, will dramatically change the Company's
balance sheet and statement of operations.  Through the bankruptcy proceeding,
all of ARM's debts, which total $3.6 million at February 28, 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 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>
                              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
------     --------------------------------
           None

<PAGE>
<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.

                                    APPLIED RESEARCH CORPORATION


Date:      April 21, 1997           By:    Dr. S.P.S. Anand
           ----------------                -------------------------------------
                                           Dr. S.P.S. Anand       
                                           President and Chief Executive Officer


Date:      April 21, 1997           By:    Dennis H. O'Brien
           -----------------        -------------------------------------
                                           Dennis H. O'Brien
                                           Vice President and Chief Financial
                                           Officer