<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, 1996

                                      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 October 21, 1996, 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 at
            August 31, 1996 (unaudited) and May 31, 1996               3-4

         Condensed Consolidated Statements of Operations - 
            Three Months ended August 31, 1996 and 1995 
            (unaudited)                                                 5

         Condensed Consolidated Statements of Cash Flows - 
            Three Months ended August 31, 1996 and 1995 
            (unaudited)                                                6-7
 
         Notes to Condensed Consolidated Financial Statements
            (unaudited)                                               8-12

Item 2   Management's Discussion and Analysis of Financial 
            Condition and Results of Operations                       13-19



Part II: OTHER INFORMATION
_______  _________________

Item 1      Legal Proceedings                                          19

Item 2      Changes in Securities                                      19

Item 3      Defaults Upon Senior Securities                            19

Item 4      Submission of Matters to a Vote of Security Holders        19

Item 5      Other Information                                          19

Item 6      Exhibits and Reports on Form 8-K                           19

Signatures                                                             20
<PAGE>
<PAGE>
                 APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                       

<TABLE>
<CAPTION>

                                                 August 31,       May 31,
                                                    1996           1996
                                                 (Unaudited)    (Audited) 
                                                ------------   ------------
<S>                                             <C>            <C>         
ASSETS
------
CURRENT ASSETS                                  
  Cash                                          $    97,607    $    78,689 
  Accounts receivable, net                        1,480,998      1,524,685   
  Inventory, at cost                                  3,371          1,492 
  Other current assets                               33,992         21,093 
                                                ------------   ------------
TOTAL CURRENT ASSETS                              1,615,968      1,625,959 

PROPERTY AND EQUIPMENT, AT COST 
  Furniture and equipment                           167,405        167,405 
  Computer equipment                                465,622        462,206 
  Laboratory equipment                              121,426        121,426 
  Leasehold improvements                             22,322         22,322 
                                                ------------   ------------
                                                    776,775        773,359 
  Less accumulated depreciation 
     and amortization                               658,738        640,589 
                                                ------------   ------------
NET PROPERTY AND EQUIPMENT                          118,037        132,770 

INTANGIBLE ASSETS, NET OF 
  AMORTIZATION                                       30,620         32,276 

OTHER ASSETS                                          7,359          6,615 
                                                ------------   ------------
TOTAL ASSETS                                    $ 1,771,984    $ 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>
                                                     August 31,       May 31,
                                                        1996           1996
                                                     (Unaudited)     (Audited)
                                                    ------------   ------------
  
<S>                                                 <C>            <C>         
LIABILITIES
-----------
CURRENT LIABILITIES
  Liabilities not subject to compromise:
    Notes payable, current maturities               $   584,310    $   689,563 
    Notes payable to officers and directors, 
      current maturities                                 13,000          4,000 
    Accounts payable                                    259,142        162,314 
    Accrued salaries and benefits                       289,603        176,574 
    Accrued payroll taxes and withholdings               38,456         57,143 
    Other accrued liabilities                            89,248         77,665 
    Billings in excess of costs and anticipated 
      profits                                            28,396          9,999 
    Deferred revenue                                     37,235         27,635 
    Income taxes payable                                    411          1,411 
    Provision for contract losses                        60,000         60,000 
                                                    ------------   ------------
  Total liabilities not subject to compromise         1,399,801      1,266,304 
                                                    ------------   ------------
  Liabilities subject to compromise: 
    Accounts payable                                    339,984        403,812 
    Accrued salaries and benefits                       826,935        861,151 
    Accrued payroll taxes and withholdings              881,352        930,794 
    Accrued interest and penalties                      437,708        437,708 
                                                    ------------   ------------
  Total liabilities subject to compromise             2,485,979      2,633,465 
                                                    ------------   ------------
TOTAL CURRENT LIABILITIES                             3,885,780      3,899,769 

NOTES PAYABLE, NET OF CURRENT MATURITIES                      -              - 
                                                    ------------   ------------
TOTAL LIABILITIES                                     3,885,780      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                                  (3,257,480)    (3,245,833)
  
                                                    ------------   ------------
TOTAL STOCKHOLDERS' DEFICIT                          (2,113,796)    (2,102,149)
  
                                                    ------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT         $ 1,771,984    $ 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 AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                         1996          1995
                                                      (Unaudited)   (Unaudited)
                                                      -----------   -----------
<S>                                                    <C>          <C>        
Revenue                                                $ 143,756     $ 165,330 

Operating costs and expenses:                                  
  Direct cost of services                                 57,712        99,780 
  Indirect operating costs                                     -        15,932 
  General & administrative expenses                      109,053       160,078 
                                                       ----------    ----------
Total operating costs and expenses                       166,765       275,790 
                                                       ----------    ----------
Operating loss from continuing operations                (23,009)     (110,460)
  
Other expense:
  Interest expense, net                                      (22)          513 
  Consulting expense associated with stock awards              -        29,688 
  Penalties                                                  268             - 
  Other, net                                                 314             - 
                                                       ----------    ----------
Total other expense                                          560        30,201 
                                                       ----------    ----------
Loss before discontinued operations, reorganization 
  items and income taxes                                 (23,569)     (140,661)

Profit (loss) from discontinued operations before 
  reorganization items                                    59,418       (53,819)
Reorganization items: 
  Professional fees                                      (47,496)            - 
                                                       ----------    ----------
Profit (loss) from discontinued operations                11,922       (53,819)
                                                       ----------    ----------
Loss before income taxes                                 (11,647)     (194,480)

Income taxes                                                   -             - 
                                                       ----------    ----------
Net loss                                               $ (11,647)    $(194,480)
                                                       ==========    ==========
Net loss per common share:
  Loss before discontinued operations                  $    0.00     $   (0.02)
  Profit (loss) from discontinued operations                0.00         (0.01)
                                                       ----------    ----------
Net loss per common share                              $    0.00     $   (0.03)
                                                       ==========    ==========
  
Weighted average number of shares outstanding          6,311,083     5,944,416 
                                                       =========     ========= 
</TABLE>
                        See accompanying notes to the 
                  condensed consolidated financial statements<PAGE>
<PAGE>
                 APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                        1996           1995
                                                     (Unaudited)    (Unaudited)
                                                    ------------   ------------
<S>                                                 <C>            <C>         
Cash flows from operating activities:
  Cash received from customers                      $ 2,087,851    $ 2,521,200 
  Cash paid to suppliers and employees               (1,882,710)    (2,360,274)
  Interest paid                                         (38,058)       (24,473)
  Income taxes paid                                      (1,000)       (10,300)
                                                    ------------   ------------
  
  Net cash provided from operating activities
    before reorganization items                         166,083        126,153 
                                                    ------------   ------------
  
  Operating cash flows from reorganization 
    items:
    Professional fees paid for services 
      rendered in connection with the 
      Chapter 11 proceeding                             (47,496)             - 
                                                    ------------   ------------
  
  Net cash used by reorganization items                 (47,496)               
             - 
                                                    ------------   ------------
  
Net cash provided from operating activities             118,587        126,153 
                                                    ------------   ------------
  
Cash flows from investing activities:
  Capital expenditures                                   (3,416)       (24,862)
                                                    ------------   ------------
  
Net cash used in investing activities                    (3,416)       (24,862)
                                                    ------------   ------------
  
Cash flows from financing activities:                     
  Proceeds from loans to officers and 
    directors                                             9,000              - 
  Proceeds of loans from receivables 
    assignment - pre-petition                                 -      1,743,939 
  Proceeds of loans from receivables 
    assignment - post-petition                        1,499,885              - 
  Repayment of loans from receivables 
    assignment - pre-petition                                 -     (1,825,948)
  Repayment of loans from receivables 
    assignment - post-petition                       (1,605,138)             - 
  Repayment of equipment loan - 
    pre-petition                                              -         (3,586)
                                                    ------------   ------------
  
Net cash used in financing activities                   (96,253)       (85,595)
                                                    ------------   ------------
  
Net increase in cash                                     18,918         15,696 

Cash at the beginning of period                          78,689         15,028 
                                                    ------------   ------------
  
Cash at the end of period                           $    97,607    $    30,724 
                                                    ===========    =========== 
                                   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
                  THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                        1996           1995
                                                     (Unaudited)    (Unaudited)
                                                      ----------    -----------
<S>                                                   <C>            <C>       
Reconciliation of net loss to net cash 
  provided from operating activities:

Net loss                                              $ (11,647)     $(194,480)

Adjustments to reconcile net loss to net cash 
  provided from operating activities:                                          
  Depreciation                                           18,149         19,095 
  Amortization                                            1,656          5,076 
  Changes in assets and liabilities:
    Decrease in accounts receivable                      43,687        224,080 
    Decrease (increase) in inventory                     (1,879)           790 
    Decrease (increase) in other current 
      assets                                            (12,899)           312 
    Increase in intangible assets                             -           (695)
    Increase in other assets                               (744)        (2,200)
    Decrease in accounts payable - 
      pre-petition                                      (63,828)       (55,668)
    Increase in accounts payable - 
      post-petition                                      96,828              - 
    Decrease in accrued salaries and 
      benefits - pre-petition                           (34,216)       (78,924)
    Increase in accrued salaries and 
      benefits - post-petition                          113,029              - 
    Increase (decrease) in accrued payroll 
      taxes and withholdings - pre-petition             (49,442)       168,436 
    Decrease in accrued payroll taxes 
      and withholdings - post-petition                  (18,687)             - 
    Increase in other accrued liabilities - 
      pre-petition                                            -         71,357 
    Increase in other accrued liabilities - 
      post-petition                                      11,583              - 
    Increase (decrease) in billings in excess 
      of costs and anticipated profits                   18,397        (26,706)
    Increase in deferred revenue                          9,600          5,980 
    Decrease in income taxes payable                     (1,000)       (10,300)
                                                      ----------     ----------
Net cash provided from operating activities           $ 118,587      $ 126,153 
                                                      =========      ========= 
</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 August 31, 1996, 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 ended August 31, 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, 1996, 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, 1996, 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 
August 31, 1996, 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 months ended
August 31, 1995, and the condensed consolidated statements of cash flows for
the three months then ended have been reclassified to conform to the August 31,
1996, presentation.


4.   VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF ARM AND MANAGEMENTS
     PLANS TO CONTINUE AS A GOING CONCERN

On April 2, 1996, ARM (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.  Neither ARC, ARS nor ARInternet filed for
relief.  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 August 31,
1996 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 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 will 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.  The Debtor has curtailed accruing interest on all
pre-petition obligations except the amounts owed CFC because of the Bankruptcy
filing.  In addition, the Debtor 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, which was 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 biding, an offer was accepted for $2.1
     Million.  The following is a list of the purchased and excluded assets:

       PURCHASED ASSETS                           EXCLUDED ASSETS
       ----------------                           ---------------
- All contracts 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 receivables as       closing,
  of the closing date.                     - Intercompany receivables,
                                           - ARM's rights to occupy real
                                             property pursuant to leases of
                                             real property and any leasehold 
                                             improvements made thereto,
                                           - Any other property identified by
                                             the Purchaser prior to the
                                             closing.

     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 is subject to the successful novation of ARM's government
     contracts.  This is expected to take approximately 60 to 90 days from
     contract execution.  The sale must also be approved by a majority of the
     Company's shareholders.  The Company plans to submit the matter to a vote
     at the Company's Annual Meeting of Shareholders currently scheduled for
     October 30, 1996.  Upon notification of the government's novation
     approval, and approval by the Company's shareholders, the sale will be
     completed.  

     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 the outstanding accounts receivables (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 amounts
     owed to the employees for accrued vacation (up to $325,000), the amount
     owed to the 401(k) Plan as of April 2, 1996, of approximately $676,000, as
     well as certain employees' pre-petition claims for unreimbursed travel
     expenses of approximately $50,000, and, 3) the principal portions of the
     tax amounts owed to both the IRS and the various state authorities.  In
     addition, it appears that various taxing authorities will receive a
     portion of the pre-petition penalties and interest, but not the full
     amount.  Although these are the current expectations, there can be no
     assurances that these amounts will be paid until the Plan of
     Reorganization is submitted and confirmed by the Bankruptcy Court.

<PAGE>
     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, 1996, ARS has only one full-time employee and its 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 as of
     August 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 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 August 31, 1996, 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 assurances 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 October 3, 1996, the landlord offered to remove the
     portion of space currently occupied by ARM from the Company's lease, in
     return for a payment of approximately $64,000, $14,000 of which would be
     due immediately upon signing the lease amendment and the balance in equal
     monthly installments over the balance of the lease.  The Company is
     currently considering the landlord's offer but, to date, has made no
     commitment to the landlord.  In addition, 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 August 31,
     1996, will be either liquidated or discharged.  This will decrease the
     Company's interest and penalties costs that it had 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 months ended August 31, 1996 and 1995.  

A summary of ARM's results from operations for the three months ended August
31, 1996 and 1995 are shown below:

<TABLE>
<CAPTION>
                                                  1996          1995
                                               (Unaudited)   (Unaudited)
                                              ------------  ------------
<S>                                           <C>           <C>         
Revenue                                       $ 1,928,665   $ 2,152,516 

Operating costs and expenses:                                  
  Direct cost of services                       1,241,802     1,341,261 
  Indirect operating costs                        389,790       517,581 
  General & administrative expenses               192,727       221,400 
                                              ------------  ------------
Total operating costs and expenses              1,824,319     2,080,242 
                                              ------------  ------------
Operating profit from discontinued operations     104,346        72,274 

Other expense:
  Interest expense, net                            38,415        80,477 
  Other, net                                        6,513        45,616 
                                              ------------  ------------
Total other expense                                44,928       126,093 
                                              ------------  ------------
Profit (loss) from discontinued operations 
  before reorganization items                      59,418       (53,819)
Reorganization items - professional fees          (47,496)            - 
                                              ------------  ------------
Profit (loss) from discontinued operations    $    11,922   $   (53,819)
                                              ===========   ============
</TABLE>

6.   SUPPLEMENTAL SEGMENT INFORMATION

The Company's continuing operations have been classified into two business
segments:
<PAGE>
Sales to unaffiliated customers:

<TABLE>
<CAPTION>
                                       ARS        ARInternet    Consolidated
                                   ----------     ----------    ------------
     QUARTER ENDED:
     -------------
<S>                                <C>            <C>            <C>       
     August 31, 1996               $  31,834      $ 111,922      $ 143,756 
     August 31, 1995               $ 122,386      $  42,944      $ 165,330 

Operating income (loss) from continuing operations
before other income (expense) and income taxes: 

<CAPTION>

     QUARTER ENDED:
     -------------
<S>                                <C>             <C>          <C>        
     August 31, 1996               $ (15,067)      $  (7,942)   $  (23,009)
     August 31, 1995               $ (26,520)      $ (83,940)   $ (110,460)

</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 FEBRUARY 29, 1996 COMPARED TO 1995
-------------------------------------------------------------------------------
From Continuing Operations
--------------------------
The Company's revenues for the quarter ended August 31, 1996, were $143,756, or
(13)% below revenues of $165,330 for the same period during 1995.  The decrease
in revenues during the quarter ended August 31, 1996, of $21,574 is primarily
attributable to the decrease in ARS's revenues of $90,552 or 74% when compared
with revenues of $122,386 generated during the same period in 1995. 
ARInternet's revenues were $111,922, an increase of $68,978 over the previous
year, and partially offset the declines experienced by ARS. 

The Company's direct cost of services decreased $42,068 or 42%, from $99,780
during the quarter ended August 31, 1995, to $57,712 during the same period in
1996.  Of this amount, ARS decreased $55,801 while ARInternet's cost of
services increased $13,733.  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 1995.  The increase in ARInternet's direct costs of sales
was the direct result of increased sales during the current period. 

Indirect operating costs decreased $15,932 or 100%, from $15,932 during the
quarter ended August 31, 1995, to $0 during the quarter ended August 31, 1996. 
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 $51,025 or 32%, from
$160,078 in 1995, to $109,053 during 1996.  Most notably, the G&A expenses
associated with ARS decreased $30,272, while ARInternet's G&A expenses
decreased $20,753 during the quarter.  The decrease in ARS's G&A expenses was
predominantly attributable to a reduction in marketing related expenses during
the period.  The decrease in ARInternet's G&A expenses related to a reduction
in staffing during 1996 when compared to the same period in 1995.

As a result of the foregoing, the Company realized an operating loss from
continuing operations for the quarter ended August 31, 1996, of $(23,009)
compared to an operating loss of $(110,460) for the same period during 1995. 
ARS posted an operating loss of $(15,067) for the quarter ended August 31,
1996, which loss represented an improvement of $11,453 or 43% from the
operating loss of $(26,520) during the same period in 1995.  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 $(7,942) for the quarter ended August
31, 1996, which loss represented an improvement of $75,998 or 91% from the
operating loss of $(83,940) during the same period in 1995.  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 $29,641 or 98%, from $30,201 for the
quarter ended August 31, 1995, to $560 during the quarter ended August 31,
1996.  The decrease was primarily related to the fact that the Company
eliminated consulting expenses incurred during the same period in 1995 in
conjunction with the issuance of common stock by the Company.  

The Company sustained a loss from continuing operations of $(23,569) for the
quarter ended August 31, 1996, compared to a loss from continuing operations of
$(140,661) during the same period in 1995.  The 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 $(0.02) in 1995
to $(0.00) in 1996, as a result of the reduced loss for the current fiscal
quarter when compared to the same period in 1995.


From Discontinued Operations
----------------------------
ARM's revenues for the quarter ended August 31, 1996, were $1,928,665, or (10)%
below revenues of $2,152,516 for the same period during 1995.  The decrease in
revenues during the quarter ended August 31, 1996, of $223,851 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 August 31, 1995.  

ARM's direct cost of services decreased $99,459 or 7%, from $1,341,261 during
the quarter ended August 31, 1995, to $1,241,802 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 $127,791 or 25%, from $517,581 during
the quarter ended August 31, 1995, to $389,790 during the quarter ended August
31, 1996.  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 decreased $28,673 or 13%,
from $221,400 in 1995, to $192,727 during 1996.  The decrease in ARM's G&A
expenses was directly attributable to the 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 an operating income for the quarter
ended August 31, 1996, of $104,346 compared to an operating income of $72,274
for the same period during 1995.  The $32,072 increase in ARM's 1996 operating
margin was primarily related to an increase in fees realized on ARM's
contracts, due to the lower indirect rates realized by ARM during 1996.  

ARM's interest and other expenses decreased $81,165 or 64%, from $126,093 for
the quarter ended August 31, 1995, to $44,928 during the quarter ended August
31, 1996.  Net interest expense decreased $42,062 or 52% from 1995.  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 during the quarter ended August 31, 1996, when compared to
the same period in 1995.  Other expenses also decreased $39,103 during the
quarter ended August 31, 1996.  This was primarily due the fact that ARM did
not record any penalties during the current period as a result of the Company
filing for protection under Chapter 11 of the United States Bankruptcy Code,
which stays these expenses. 

ARM sustained a net profit before income taxes of $11,922 for the quarter ended
August 31, 1996, compared to a net loss of $(53,819) 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 1996.


LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995
-------------------------------------------------------
Total assets decreased $25,632 or 1%, from $1,797,620 at May 31, 1996, to
$1,771,984 at August 31, 1996.  Total liabilities on the other hand decreased
from $3,899,769 to $3,885,780 over the same period, a decrease of $13,989.

The most significant reason for the decrease in total assets was the decrease
in accounts receivable, offset by the increase in cash and other current
assets.  At August 31, 1996, the Company had $1,182,758 and $298,241 in billed
and unbilled receivables, respectively.  Billed receivables increased $91,896
or 8% from May 31, 1996, while unbilled receivables decreased $135,583 or 31%
from May 31, 1996.  The increase in billed accounts receivable was primarily
the result of a delay in the receipt of customer receipts realized on two
contracts (which were subsequently received during September, 1996), offset by
a decrease in the average amount billed due to the decrease in revenues.  The
decrease in unbilled accounts receivable related to a decrease in the amount of
work that was unbilled of zero days at August 31, 1996, compared to four days
at May 31, 1996.

The most significant reason for the $133,497 increase in collectively post-
petition liabilities was increases in accounts payable and accrued salaries and
benefits which increased $209,857 from May 31, 1996 to August 31, 1996, offset
by the decrease in notes payable.  The increase in post-petition accounts
payable related to the professional fees incurred as a result of ARM filing for
protection under Chapter 11 of the Bankruptcy Code, which cannot be paid
without bankruptcy court approval.  The increase in post-petition accrued
salaries and related benefits was directly related to the increase in accrued
payroll which totaled ten days at August 31, 1996, compared to only five days
at May 31, 1996.

The decrease in pre-petition liabilities of $(147,486) consists of decreases
of:  $(63,828) in accounts payable, $(34,216) in accrued salaries and related
benefits, and $(49,442) 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 $45,000 of monthly
payments being made by ARM to the IRS under court order, plus the collection of
a $4,442 pre-petition accounts 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
three months ended August 31, 1996.  At August 31, 1996, the working capital
deficit was $(2,273,810) compared to a deficit of $(2,269,812) 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 will 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.  


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, which was 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 biding, an offer was accepted for $2.1 Million.  The following
is a list of the purchased and excluded assets:

       PURCHASED ASSETS                           EXCLUDED ASSETS
       ----------------                           ---------------
- All contracts 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 receivables as       closing,
  of the closing date.                     - Intercompany receivables,
                                           - ARM's rights to occupy real
                                             property pursuant to leases of
                                             real property and any leasehold 
                                             improvements made thereto,
                                           - Any other property identified by
                                             the Purchaser prior to the
                                             closing.

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
for approval on September 26, 1996, and was signed on October 4, 1996.  The
sale is subject to the successful novation of ARM's government contracts.  This
is expected to take approximately 60 to 90 days from contract execution.  The
sale must also be approved by a majority of the Company's shareholders.  The
Company plans to submit the matter to a vote at the Company's Annual Meeting of
Shareholders currently scheduled for October 30, 1996.  Upon notification of
the government's novation approval, and approval of the Company's shareholders,
the sale will be completed.  


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 the outstanding accounts receivables (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 amounts owed to the
employees for accrued vacation (up to $325,000), the amount owed to the 401(k)
Plan as of April 2, 1996, of approximately $676,000, as well as certain
employees' pre-petition claims for unreimbursed travel expenses of
approximately $50,000, and, 3) the principal portions of the tax amounts owed
to both the IRS and various state authorities.  In addition, it appears that
the various taxing authorities will receive a portion of the pre-petition
penalties and interest, but not the full amount.  Although these are the
current expectations, there can be no assurances 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, 1996, ARS has only
one full-time employee and its 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 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 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 August 31, 1996, 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 assurances 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 October 3, 1996, the
landlord offered to remove the portion of space currently occupied by ARM from
the Company's lease, in return for a payment of approximately $64,000, $14,000
of which would be due immediately upon signing the lease amendment and the
balance in equal monthly installments over the balance of the lease.  The
Company is currently considering the landlord's offer but, to date, has made no
commitment to the landlord.  In addition, 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 August 31, 1996, will be either
liquidated or discharged.  This will decrease the Company's interest and
penalties costs that it had 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.




                          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:     October 21, 1996       By:   Dr. S.P.S. Anand
          ----------------             -------------------------------------
                                       Dr. S.P.S. Anand                    
                                       President and Chief Executive Officer


Date:     October 21, 1996       By:   Dennis H. O'Brien
          -----------------            -------------------------------------
                                       Dennis H. O'Brien
                                       Vice President and Chief Financial
                                       Officer