i

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                     --------------------------------------


                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996


                           Commission File No. 0-20097


                                   ARC CAPITAL


                            A California Corporation
                   IRS Employer Identification No. 33-0256103
                               2067 Commerce Drive
                                Medford, OR 97504
                            Telephone: (541) 776-7700


                     --------------------------------------


Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                                               Yes |X|   No |_|

On September 30, 1996, registrant had 10,779,190 shares of Class A Common Stock,
and  110,168  shares  of Class B Common  Stock,  all no par  value,  issued  and
outstanding.














                            Exhibit Index at page 17

<PAGE>



                                      INDEX



                                                                     Page Number

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

        Consolidated Balance Sheets.....................................1
        Consolidated Statements of Operations...........................2 - 3
        Consolidated Statements of Cash Flows...........................4

        Notes to Unaudited Consolidated Financial Statements............5 - 10

Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations..........................10 - 17


Part II. OTHER INFORMATION

Item 1.  Legal Proceedings..............................................18

Item 6.  Exhibits and Reports on Form 8-K...............................19 - 20

         Signature......................................................20


<PAGE>



4


     1
--------------------------------------------------------------------------------
ARC Capital

Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                 September 30,        December 31,
                                                                                     1996                 1995
                                                       ASSETS                     (unaudited)           (audited)

<S>                                                                             <C>                <C>          
Current assets:
     Cash and cash equivalents                                                  $   1,467,000      $   4,171,000
     Accounts receivable, net                                                       3,548,000          1,904,000
     Inventories                                                                    9,265,000          3,810,000
     Prepaid expenses                                                               1,090,000            506,000
                                                                                -------------      -------------
              Total current assets                                                 15,370,000         10,391,000
Property, plant and equipment, net                                                  6,804,000          4,693,000
Goodwill and other assets, net                                                      7,846,000          2,544,000
                                                                                -------------      -------------

                                                                                $  30,020,000      $  17,628,000
                                                                                =============      =============
</TABLE>
<TABLE>
<CAPTION>

                                       LIABILITIES AND SHAREHOLDERS' EQUITY



<S>                                                                             <C>                <C>          
Current liabilities:
     Accounts payable                                                           $   2,999,000      $     769,000
     Accrued liabilities                                                            1,589,000            845,000
     Short-term borrowings                                                            974,000                 --
     Customer deposits                                                              2,500,000          1,083,000
     Accrued payroll                                                                  760,000            374,000
     Warranty reserve                                                                 470,000            408,000
     Current portion of notes payable                                               2,352,000             22,000
                                                                                -------------      -------------

              Total current liabilities                                            11,644,000          3,501,000
                                                                                -------------      -------------
Long-term liabilities:
     Notes payable, less current portion                                           15,078,000          4,875,000
                                                                                -------------      -------------
Shareholders' equity:
     Common stock:
         ClassA - no par value:  60,000,000  shares  authorized;  10,779,000 and
              8,718,000 shares issued and outstanding at September 30, 1996, and
              December 31, 1995,
              respectively                                                         24,988,000         22,966,000
         Class B - no par value:  3,000,000 shares authorized, 110,000
              and 705,000 shares issued and outstanding at
              September  30, 1996, and December 31, 1995, respectively                 71,000            458,000
         Class E - no par value: 3,000,000 shares authorized, 0 and
              497,000 shares issued and outstanding at September 30, 1996,
              and December 31, 1995, respectively                                          --            326,000
     Common stock warrants                                                          2,403,000          3,112,000
     Additional paid in capital                                                     2,797,000          1,500,000
     Accumulated deficit                                                          (26,994,000)       (19,110,000)
     Cumulative translation adjustment                                                 33,000                 --
                                                                                -------------      -------------

              Total shareholders' equity                                            3,298,000          9,252,000
                                                                                -------------      -------------

                                                                                $  30,020,000      $  17,628,000
                                                                                =============      =============
</TABLE>

























     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>



--------------------------------------------------------------------------------
ARC Capital

Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                    Three Months Ended September 30,
                                                                                           1996           1995

                                                                                               (unaudited)


<S>                                                                               <C>              <C>             
Net sales                                                                         $     10,097,000 $      6,548,000
Cost of sales                                                                            5,003,000        3,662,000
                                                                                      ------------     ------------

Gross profit                                                                             5,094,000        2,886,000
                                                                                      ------------     ------------

Operating expenses:
     Selling and marketing                                                               1,539,000        1,088,000
     Research and development                                                              988,000          583,000
     General and administrative                                                          1,093,000          422,000
     Goodwill amortization                                                                 180,000           93,000
                                                                                      ------------     ------------

                                                                                         3,800,000        2,186,000

Income from continuing operations before other income and expense                        1,294,000          700,000

Other income and expense:
     Investment and other income                                                            35,000           61,000
     Interest expense                                                                     (344,000)        (144,000)
                                                                                      -------------    ------------

Income from continuing operations before income taxes                                      985,000          617,000

Provision for income taxes                                                                      --               --
                                                                                      ------------     ------------

Income from continuing operations                                                          985,000          617,000

(Loss) from discontinued operations                                                             --          (53,000)
                                                                                      ------------     ------------

Net income                                                                            $    985,000     $    564,000
                                                                                      ============     ============

Earnings (loss) per common and common equivalent share (Note 5):
     Continuing operations                                                            $       0.07     $       0.07
     Discontinued operations                                                                    --            (0.01)
                                                                                      ------------     ------------

         Total                                                                        $       0.07     $       0.06
                                                                                      ============     ============

</TABLE>



















     See Accompanying Notes to Unaudited Consolidated Financial Statements.

<PAGE>



--------------------------------------------------------------------------------
ARC Capital

Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                     Nine Months Ended September 30,
                                                                                           1996           1995

                                                                                               (unaudited)


<S>                                                                               <C>              <C>             
Net sales                                                                         $     20,129,000 $     14,252,000
Cost of sales                                                                           10,958,000        8,505,000
                                                                                      ------------     ------------

Gross profit                                                                             9,171,000        5,747,000
                                                                                      ------------     ------------

Operating expenses:
     Selling and marketing                                                               3,230,000        2,342,000
     Research and development                                                            2,931,000        1,367,000
     General and administrative                                                          3,157,000        1,393,000
     Goodwill amortization                                                                 374,000          278,000
     Charge for acquired in-process technology                                           6,088,000               --
     Charge for royalty expense                                                            647,000               --
                                                                                      ------------     ------------

                                                                                        16,427,000        5,380,000

(Loss) income from continuing operations before other income and expense                (7,256,000)         367,000

Other income and expense:
     Gain on rescission of stock compensation                                                   --          732,000
     Investment and other income                                                           139,000          156,000
     Interest expense                                                                     (768,000)        (340,000)
                                                                                      -------------    ------------

(Loss) income from continuing operations before income taxes                            (7,885,000)         915,000

Provision for income taxes                                                                      --               --
                                                                                      ------------     ------------

(Loss) income from continuing operations                                                (7,885,000)         915,000

(Loss) from discontinued operations                                                             --          (22,000)
                                                                                      ------------     ------------

Net (loss) income                                                                     $ (7,885,000)    $    893,000
                                                                                      =============    ============

Earnings (loss) per common and common equivalent share (Note 5):
     Continuing operations                                                            $      (0.72)    $      0.09
     Discontinued operations                                                                    --            0.00
                                                                                      ------------     -----------

         Total                                                                        $      (0.72)    $      0.09
                                                                                      =============    ===========


</TABLE>


     See Accompanying Notes to Unaudited Consolidated Financial Statements.



<PAGE>

--------------------------------------------------------------------------------
ARC Capital

Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                     Nine Months Ended September 30,
                                                                                           1996           1995


                                                                                               (unaudited)


<S>                                                                                  <C>             <C>          
Cash flows from operating activities:
   Net (loss) income                                                                 $ (7,885,000)   $     893,000
   Loss from discontinued operations                                                           --           22,000
                                                                                     ------------    -------------

     (Loss) income from continuing operations                                          (7,885,000)         915,000
        Adjustments to reconcile net income (loss) to net cash used in
          operating activities:
           Cash outflows related to discontinued operations                                    --         (681,000)
           Charge for in-process technology                                             6,088,000               --
           Charge for royalty expense                                                     247,000               --
           Depreciation and amortization                                                  825,000          622,000
           Gain on rescission of stock compensation                                            --         (732,000)
           Changes in  assets  and  liabilities  (net of  amounts  purchased  in
             acquisition):
               Accounts receivable                                                       (725,000)        (548,000)
               Inventories                                                             (1,660,000)         291,000
               Prepaid expenses and other assets                                         (548,000)        (140,000)
               Accounts payable, accrued liabilities, customer deposits
                 accrued payroll, and warranty reserve                                  1,940,000        1,254,000

                  Net cash provided by (used in) operating activities                  (1,718,000)         981,000
                                                                                     ------------    -------------
Cash (used in) provided by investing activities:
   Acquisition of Pulsarr/Ventek                                                       (5,797,000)              --
   Purchases of property and equipment                                                 (1,515,000)        (315,000)
   Repayments of notes receivable                                                              --          187,000
                                                                                     ------------    -------------

                   Net cash (used in) investing activities                             (7,312,000)        (128,000)
                                                                                     -------------   --------------

Cash (used in) provided by financing activities:
   Notes payable to bank and others, net                                                4,690,000        2,143,000
   Proceeds from common stock issuances                                                 1,971,000               --
   Proceeds from exercise of stock options                                                 65,000           50,000
   Debt issuance costs                                                                   (400,000)              --
                                                                                     ------------    -------------


                   Net cash provided by financing activities                            6,326,000        2,193,000
                                                                                     ------------    -------------

Net (decrease) increase in cash                                                        (2,704,000)       3,046,000

Cash and cash equivalents, beginning of the period                                      4,171,000          790,000
                                                                                     ------------    -------------

Cash and cash equivalents, end of the period                                         $  1,467,000    $   3,836,000
                                                                                     ============    =============

</TABLE>











     See Accompanying Notes to Unaudited Consolidated Financial Statements.


<PAGE>


20

                          ARC CAPITAL AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.   Principles Of Consolidation
     In the opinion of the  management of ARC Capital (the  "Company" or "ARC"),
     the accompanying  consolidated  financial  statements,  which have not been
     audited by  independent  accountants  (except for the  balance  sheet as of
     December 31, 1995), reflect all adjustments (consisting of normal recurring
     accruals)  necessary to present fairly the Company's  financial position at
     September 30, 1996,  and December 31, 1995,  the results of operations  and
     cash flows for the three and nine month  periods  ended  September 30, 1996
     and 1995. The financial  statements include the accounts of the Company and
     its  four   wholly-owned   subsidiaries,   Applied  Laser   Systems,   Inc.
     ("ALS-Oregon"),  SRC VISION,  Inc. ("SRC"),  Pulsarr Holding BV ("Pulsarr")
     from its March 1, 1996,  acquisition date, and Ventek, Inc. ("Ventek") from
     its July 24,  1996,  acquisition  date.  See Note 8  regarding  the sale of
     ALS-Oregon in October 1995.

     Certain notes and other information are condensed or omitted in the interim
     financial statements presented in this Quarterly Report on Form 10-Q. These
     financial  statements should be read in conjunction with the Company's 1995
     annual report on Form 10-K.

     Certain  reclassifications  have been  made to the  fiscal  1995  financial
     statements to conform with the financial statement  presentation for fiscal
     1996.  Such  reclassifications  had no effect on the  Company's  results of
     operations or shareholders' equity.

2.   Nature Of Operations
     The   Company's   ALS-Oregon   subsidiary,   which   designed,   developed,
     manufactured  and marketed laser diode devices,  incorporating  its visible
     laser module, and "no-light"  products based on technology for illumination
     with infrared laser systems, was sold in October 1995 (see Note 8).

     In February  1994, the Company  acquired all of the issued and  outstanding
     capital stock of SRC for $8,100,000 in cash. SRC designs,  manufactures and
     markets  computer-aided vision sorting and defect removal equipment for use
     in a variety of industries,  including food  processing,  wood products and
     recycling.   SRC's  systems   combine   optical  and   mechanical   systems
     technologies to perform diverse scanning, analytical sensing, measuring and
     sorting  applications on a variety of products such as food,  wood,  glass,
     and plastic.

     On March 1, 1996,  the Company  acquired all of the issued and  outstanding
     stock of  Netherlands-based  Pulsarr for approximately $7.8 million in cash
     and notes and other  securities.  Pulsarr is a  manufacturer  and seller of
     computer aided vision sorting and defect removal  equipment similar to that
     produced by SRC (see Note 6).

     In July 1996, the Company acquired the business and certain assets, subject
     to certain  liabilities,  of Ventek for approximately $5.1 million in notes
     and other  securities.  Ventek  manufacturers  and  markets  computer-aided
     vision defect detection  systems used in the wood veneer industry (see Note
     6).

3.   Financing
     In April 1995, the Company  borrowed  $2,160,000  pursuant to a convertible
     subordinated  secured  note.  Interest on the note is 10.25% and is payable
     semi-annually.  The note is secured by the issued and  outstanding  capital
     stock of SRC. The note is  convertible  into the  Company's  Class A Common
     Stock at $1.875 per share.  In connection  with the borrowing,  the Company
     paid a finders  fee of  $160,000  and issued  300,000  warrants to purchase
     Class A Common  Stock at  $1.875  per  share.  In  October  1996,  $645,000
     principal  amount of the note was converted by the debtholders into 344,000
     shares of Class A Common Stock.  The remaining  principal  amount is due in
     April 1997.

     In April 1996, the Company  borrowed  $3,400,000  pursuant to a convertible
     secured note.  Interest on the note is 6.75% and is payable quarterly.  The
     interest rate may be adjusted upward on each  anniversary  date of the note
     if the market  price of the  Company's  Class A Common Stock fails to reach
     certain levels. The maximum possible coupon interest rate is 11.25% if none
     of the market  price  thresholds  are met. The  principal  amount is due in
     April 2001. The note is secured by 54% of the stock of ARC  Netherlands bv,
     a wholly owned subsidiary of the Company  established to purchase  Pulsarr.
     The note is convertible  into the Company's  Class A Common Stock at $2.125
     per share. In connection with the borrowing, the Company paid a finders fee
     of $400,000 and issued 340,000 warrants to purchase Class A Common Stock at
     $2.125 per share.

     See  Note 6 for a  description  of  notes  issued  in  connection  with the
     acquisition of Ventek.

4.   Stock  Transactions;  Shares Eligible For Future Sale;  Effect Of Warrants,
     Options And  Convertible  Securities;  Possible  Dilution In February 1995,
     Liviakis  Financial  Communications,  Inc. returned  approximately  668,000
     previously  issued  and  outstanding  shares  of ARC  Class A Common  Stock
     pursuant  to an award in  arbitration  in favor of the  Company.  A gain of
     $732,000 was recorded in February 1995 relating to the shares recovered.

     In March 1996,  the  Company  sold  1,400,000  shares of its Class A Common
     Stock in a private Regulation S offering to foreign investors at $1.625 per
     share, the market price on the date the related Subscription  Agreement was
     entered into. In connection  with the private  placement,  the Company paid
     finders  fees and other costs of $650,000  and issued  240,000  warrants to
     purchase Class A Common Stock at $2.00 per share.

     On February 15, 1996, the Company  redeemed all 497,094 shares of its Class
     E Common Stock for nominal consideration.  Also on that date, the 3,002,906
     Class E Warrants to purchase  Class A Common Stock ceased to exist  because
     escrow conditions related to the warrants were not met.

     Schedule of Outstanding Stock, Warrants,  Units and Potential Dilution: The
     following table summarizes,  as of September 30, 1996,  outstanding  common
     stock,  potential dilution to the outstanding common stock upon exercise of
     warrants,  UPO Units and convertible  debt, and proforma  proceeds from the
     exercise of warrants and UPO Units.


<PAGE>

<TABLE>
<CAPTION>

                                                                                                      Proforma
                                   Number or Principal                Class A Common                  Proceeds
                                   Amount Outstanding    Conversion     Stock After     Conversion     or Debt
          Security                at September 30, 1996    Factor       Conversion         Price      Reduction
          -----------------------------------------------------------------------------------------------------

<S>         <C>  <C>                     <C>                 <C>         <C>             <C>       <C>         
         Common Stock:
          Class A                       10,779,190                      10,779,190
          Class B                          110,168                         110,168
                                                                     -------------

         Total currently outstanding 10,889,358 Warrants (expiration date):
   
          A (3/9/98)                     2,941,963           1.4         4,118,748       $  2.84   $    11,697,000
          B (3/9/98)                     4,354,863 (A)       1.4         6,096,808          4.17        25,424,000
          C (3/9/98)                       846,250           1.4         1,184,750          2.21         2,618,000
          D (6/30/98-7/31/98)              275,000            1            275,000          2.75           756,000
          F (4/12/98)                      300,000            1            300,000          1.88           564,000
          G (2/28/99)                      240,000            1            240,000          2.00           480,000
          H (4/16/01)                      340,000            1            340,000          2.13           724,000
          I (7/23/01)                    1,000,000 (B)        1          1,000,000          2.25         2,250,000
          J (9/30/99)                      300,000            1            300,000          2.03           608,000
          Gerinda (8/97)                   300,000            1            300,000          5.00         1,500,000
          Laidlaw (4/1/97)                 135,000            1            135,000          2.25           304,000
                                                                     -------------                 ---------------

                                                                        14,290,306                      46,925,000
                                                                     -------------                 ---------------

         Unit Purchase Options:            188,400                                          6.38         1,187,000
          Class A Common                   376,800            1            376,800
          A Warrants                       376,800           1.4           527,520          2.84         1,498,000
          B Warrants                       565,200           1.4           791,280          4.17         3,300,000
                                                                     -------------                 ---------------

                                                                         1,695,600                       5,985,000
                                                                     -------------                 ---------------
         Convertible Debt (due date):
          10.25% Notes (4/13/97)       $ 2,160,000                       1,152,000          1.88         2,160,000
          6.75% Notes (4/16/01)          3,400,000                       1,600,000          2.13         3,400,000
          6.75% Ventek Note (7/23/99)    2,250,000                       1,000,000          2.25         2,250,000
          6% Note (2/28/01)                980,000                         441,486          2.22           980,000
          Ventek Note (7/23/99)          1,125,000 (B)                   1,800,000                       1,125,000
                                                                     -------------                 ---------------

                                                                         5,993,486                       9,915,000
                                                                     -------------                 ---------------
        Potentially outstanding shares and proforma proceeds
          and reduction of debt                                         32,868,750                 $    62,825,000
                                                                     =============                 ===============
<FN>

     (A)  Includes 1,412,900 outstanding plus 2,941,963 assuming exercise of the Class A Warrants.

     (B) The  Company  issued  the  $1,125,000  note  and  Class  I  Warrant  in
         connection  with the  Ventek  acquisition  (see  Note  6).  The note is
         payable,  (a) at the Company's  option, in cash or by delivery of up to
         1,800,000 shares of Class A Common Stock on the third  anniversary date
         of the note;  or (b)  solely in cash in the event ARC  Common  Stock is
         delisted from the Nasdaq Stock Market. The Warrant vests 25% in each of
         the next four years if sales and earnings objectives are achieved.
</FN>
</TABLE>

     The proforma amounts above are for illustrative  purposes only.  Unless the
     market  price of ARC's Class A Common Stock rises  significantly  above the
     exercise or  conversion  prices,  it is unlikely  that any warrants or unit
     purchase options will be exercised or that the debt will be converted.

     In addition, on September 30, 1996, ARC had outstanding options to purchase
     3,206,000 shares of Class A Common Stock,  2,844,000 of which are under its
     stock option plans.

     The existence of these outstanding warrants, options, and convertible debt,
     including  those granted or to be granted under ARC's Stock Option Plans or
     otherwise,   and  potentially  issuable  shares  pursuant  to  antidilution
     provisions of warrant  agreements  could adversely  affect ARC's ability to
     obtain  future  financing.  The price which ARC may receive for the Class A
     Common Stock  issued upon  exercise of options and  warrants,  or amount of
     debt  forgiven  in the case of  conversion  of debt,  may be less  than the
     market  price of Class A Common Stock at the time such options and warrants
     are exercised or debt is converted.  For the life of the warrants,  options
     and  convertible  debt,  the holders are given,  at little or no cost,  the
     opportunity  to profit  from a rise in the  market  price of their  Class A
     Common Stock without assuming the risk of ownership.  Moreover, the holders
     of the options and  warrants  might be expected to exercise  them at a time
     when ARC would,  in all  likelihood,  be able to obtain needed capital by a
     new offering of its  securities on terms more favorable than those provided
     for by the options and warrants.

5.   Earnings (Loss) Per Common and Common Equivalent Share
     Earnings (loss) per common and common equivalent share is computed based on
     the weighted average number of common shares and dilutive common equivalent
     shares  outstanding  during the period.  Dilutive common  equivalent shares
     consist  of the  shares  relating  to a note and stock  appreciation  right
     agreement, options and warrants.

     As  ARC  Capital  has  outstanding  options  and  warrants  which,  in  the
     aggregate,  exceed 20% of the common stock currently  outstanding (see Note
     4), ARC is required to follow the provisions of Accounting Principles Board
     (APB) Opinion No. 15,  paragraph 38, in calculating  earnings per share, if
     dilutive.  APB 15,  paragraph  38,  assumes the  aggregate  exercise of all
     options  and  warrants.  The assumed  exercise of all of ARC's  options and
     warrants would result in aggregate  proceeds of  approximately  $59,187,000
     and  $68,801,000  as of September  30, 1996 and 1995,  respectively.  These
     proceeds are then assumed to be used in the following order:

        a) Repurchase  up to 20% of the  number of ARC common  shares  currently
           outstanding.  This would result in the  repurchase  of 2,178,000  and
           1,872,000  shares for the quarters ended September 30, 1996 and 1995,
           respectively.

        b) Reduce all short-term and long-term borrowings.  This would result in
           the  reduction  of interest  expense of $318,000 and $144,000 for the
           quarters ended September 30, 1996 and 1995, respectively.

        c) Invest  the  remaining  proceeds  in  US  government   securities  or
           commercial  paper. This would result in investment income of $593,000
           and  $895,000  for the quarters  ended  September  30, 1996 and 1995,
           respectively, at an assumed interest rate of six percent.

     The computation of primary earnings per common and common  equivalent share
     for the three months ended September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>

                                                                    1996                  1995
                                                                    --------------------------

<S>                                                           <C>                   <C>          
     Net income as reported                                   $     985,000         $     564,000
     Reduction in interest expense accreted to a non-
         interest bearing note and stock  appreciation
         rights agreement payable by the issuance of up
         to 1,800,000 shares of Class A Common Stock or,
         at ARC's option, in cash in three years                     26,000                    --
     Reduction in interest expense as the result of the
         assumed retirement of all short-term and long-term
         borrowing                                                  318,000               144,000
     Increase in interest income as the result of the
         investment of excess cash generated from the
         assumed exercise of all options and warrants               593,000               895,000
                                                              -------------         -------------

     Net income                                               $   1,922,000         $   1,603,000
                                                              =============         =============

     Earnings per share                                       $        0.07         $        0.06
                                                              =============         =============

</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                                                Three Months Ended September 30,
                                                                    1996                  1995
                                                                    --------------------------

<S>                                                              <C>                    <C>      
         Weighted average shares outstanding:
              Common stock                                       10,887,000             9,362,000
              Shares relating to a note and stock appreciation
                 rights agreement, issued on July 24, 1996        1,330,000                    --
              Assumed aggregate exercise of all stock
                 options and warrants                            19,191,000            20,043,000
              Assumed repurchase of common shares, limited
                 to 20% of currently outstanding common
                 shares                                          (2,178,000)           (1,872,000)
                                                              -------------         -------------

         Shares used in calculations                             29,230,000            27,533,000
                                                              =============         =============
</TABLE>

     The computation of primary earnings per common and common  equivalent share
     for the nine months ended  September  30, 1996 and 1995, as required by APB
     Opinion No. 15,  paragraph 38, was not dilutive and  therefore,  net income
     (loss),  as  reported,  and the  weighted  average  shares  outstanding  of
     10,997,000 and 9,468,000,  respectively,  were used in calculating earnings
     per share.

     Fully  diluted and primary  earnings  (loss) per share are the same amounts
     for each period presented.

6.   Acquisitions Of Pulsarr and Ventek
     On March 1, 1996, the Company acquired all of the outstanding capital stock
     of Pulsarr for  approximately  $7.8 million in cash and notes payable.  The
     acquisition is accounted for under the purchase  method of accounting.  The
     $7.8 million  purchase price was allocated  based on the fair values of the
     identifiable assets of Pulsarr as follows:  $1.3 million represents the net
     assets of Pulsarr,  $6.1 million represents acquired in-process  technology
     which was  subsequently  charged to operations in the quarter  ending March
     31,  1996,  and the  remainder of $0.4  million  represents  goodwill to be
     amortized over 15 years. Goodwill amortization for the three and nine month
     periods ended September 30, 1996, was $6,000 and $15,000 respectively.

     On July 24, 1996, the Company  acquired  certain assets and the business of
     Ventek,  subject to certain  liabilities.  Ventek  manufactures and markets
     computer-aided  vision  defect  detection  systems  used in the wood veneer
     industry.  The purchase price was  approximately  $5.1 million in notes and
     other  securities:  (i) a 6.75% $1,000,000 note due in three years;  (ii) a
     6.75%  $2,250,000  note due in three years  convertible  into the Company's
     Class A  Common  Stock at  $2.25  per  share;  and  (iii) a note and  stock
     appreciation  rights  payable (a) by issuance of up to 1,800,000  shares of
     Class A Common Stock or at the Company's option, in cash in three years, or
     (b)  solely in cash in the  event ARC  Common  Stock is  delisted  from the
     Nasdaq  Stock  Market.  The  Company  also  issued a  warrant  to  purchase
     1,000,000  shares  of Class A Common  Stock  which  vests  over a four year
     period subject to Ventek meeting  specified sales and earnings  goals.  The
     $5.1 million  purchase price was allocated  based on the fair values of the
     identifiable  assets of Ventek as follows:  $0.2 million represents the net
     assets of Ventek, and the remainder of $4.9 million represents  goodwill to
     be  amortized  over 15 years.  Goodwill  amortization  for the three months
     ended September 30, 1996, was $81,000.

     The consolidated results of operations for the three and nine month periods
     ended  September  30,  1996,  include  Pulsarr's  and  Ventek's  results of
     operations beginning on March 1, 1996, and July 24, 1996, respectively.

     The proforma  condensed combined  statements of operations,  shown below as
     supplemental  information,  assumes the  acquisitions of Pulsarr and Ventek
     occurred as of the beginning of the three and nine month periods.  However,
     the proforma combined  balances are not necessarily  indicative of balances
     which would have resulted had the acquisitions occurred as of the beginning
     of the three and nine month periods presented.  Proforma condensed combined
     statements  of  operations  for the three  and nine  month  periods  are as
     follows:



<PAGE>
<TABLE>
<CAPTION>


                                           Three months ended September 30,    Nine months ended September 30,
                                                  1996             1995             1996             1995
                                                 Actual          Proforma         Proforma         Proforma

<S>                                         <C>              <C>                <C>             <C>          
             Sales                          $   10,097,000   $  10,396,000      $  25,136,000   $  26,180,000
             Cost of sales                       5,003,000       5,371,000         12,322,000      13,319,000
                                            --------------   -------------      -------------   -------------

             Gross profit                   $    5,094,000   $   5,025,000      $  12,814,000   $  12,861,000
                                            ==============   =============      =============   =============

             Net income (loss)              $      985,000   $     812,000      $     336,000   $   1,949,000
                                            ==============   =============      =============   =============

             Earnings (loss) per share      $        0.07    $        0.06      $       0.03    $        0.15
                                            =============    =============      ============    =============
</TABLE>

     The $6.1 million  charge for in-process  technologies  is excluded from the
     above proforma statement of operations.

7.   Inventories
     Inventories are stated at the lower of cost or market and include material,
     labor and related manufacturing overhead. The Company determines cost based
     on the first-in, first-out (FIFO) method.
<TABLE>
<CAPTION>

                                                             September 30,       December 31,
                                                                 1996                1995


<S>                                                          <C>                <C>          
           Raw materials                                     $   2,880,000      $   1,242,000
           Work-in-process                                       3,503,000            889,000
           Finished goods                                        2,882,000          1,679,000
                                                             -------------      -------------

                                                             $   9,265,000      $   3,810,000
                                                             =============      =============
</TABLE>

     The  increase is due  principally  to the addition of Pulsarr and Ventek in
     the current year.

8.   Discontinued Operation
     In  October  1995,  the  Company  sold the laser  diode  operations  of its
     ALS-Oregon  subsidiary to Coherent,  Inc. for  approximately  $1,052,000 in
     cash,  which  represented  the net book value of the  operation.  Operating
     results  for  this  discontinued  business  have  been  excluded  from  the
     Consolidated  Statements of Operations to present separately the results of
     continuing  operations.  The results of  ALS-Oregon  for the three and nine
     month periods ended September 30, 1995, are summarized as follows:

<TABLE>
<CAPTION>

                                                            3 Months Ended       9 Months Ended
                                                          September 30, 1995   September 30, 1995

<S>                                                          <C>                  <C>          
         Net sales                                           $     640,000        $   2,279,000
                                                             =============        =============

         (Loss) from operations of discontinued business     $     (53,000)       $    (22,000)
                                                             =============        ============

</TABLE>

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

     In October 1995, the Company sold its laser diode  operation for cash in an
     amount  equal to the book  value of net assets and  liabilities  sold.  The
     operations of ALS-Oregon have been  classified as a discontinued  business.
     On March 1, 1996,  the Company  acquired  Pulsarr.  On July 24,  1996,  the
     Company  acquired  Ventek.  The  discussion  below  pertains to the ongoing
     operations  of ARC for the three and nine months ended  September 30, 1996,
     namely SRC,  Pulsarr,  Ventek and the  holding  company,  with  Pulsarr and
     Ventek included from their respective acquisition dates.

     The Company's  backlog at September 30, 1996, was $13,598,000,  an increase
     of 142% when compared to the  $5,626,000  backlog as of September 30, 1995.
     The 1996 backlog is expected to be shipped within nine months.

Results of Operations - Comparison between three months ended September 30,
1996, and September 30, 1995

     Sales for the three  months  ended  September  30,  1996 ("Q3  1996")  were
     $10,097,000,  up 54% when  compared  to sales  for the three  months  ended
     September  30, 1995 ("Q3 1995") of  $6,548,000.  The increase is due to the
     inclusion of $4,790,000 of Pulsarr's  and Ventek's  sales,  offset by lower
     sales at SRC of $1,241,000.

     Cost of sales was 50% of sales in Q3 1996 and 56% in Q3 1995.

     Gross profit  increased by 37% to  $5,094,000  in Q3 1996 when  compared to
     $2,886,000 of gross profit in Q3 1995. In Q3 1996,  gross profit was 50% as
     compared to 44% in Q3 1995. The increase in gross profit as a percentage of
     sales is primarily related to the higher margin Ventek products included in
     Q3  1996,  as well as an  increase  at SRC due to  higher  margin  non-food
     industry systems.

     Selling  and  marketing  expense  increased  42% in Q3 1996 from Q3 1995 to
     $1,539,000  amounting  to 15% of sales in Q3 1996.  Similar  expenses in Q3
     1995 were  $1,088,000,  or 17% of sales. The increase is due principally to
     the addition of Pulsarr and Ventek in Q3 1996.

     Research and development expenses were $988,000 and $583,000 in Q3 1996 and
     Q3 1995,  or 10% and 9% of sales,  respectively.  The larger  research  and
     development level in Q3 1996 was due principally to $302,000 of Pulsarr and
     Ventek  expenses,  the  continuing  development  of SRC's  Advanced  Vision
     Processor and projects in non-food industry sorting applications.

     General and administrative  expenses increased $671,000 to $1,093,000 in Q3
     1996 from $422,000 in Q3 1995.  The increase in general and  administrative
     expenses is due principally to the addition of Pulsarr and Ventek.

     The increase in Goodwill amortization is due to the acquisitions of Pulsarr
     and Ventek.

     The  decrease in  investment  and other  income is the result of lower cash
     balances available for investment.

     The  increase  in  interest  expense is the result of the  increase in debt
     outstanding relating to the acquisitions of Pulsarr and Ventek.

     Net income for Q3 1996 was  $985,000  as compared to net income of $564,000
     in Q3 1995,  primarily as the result of  inclusion  of Ventek's  operations
     from the date of acquisition.

Results of Operations - Comparison between nine months ended September 30,
1996, and September 30, 1995

     Sales for the nine months  ended  September  30, 1996 ("the "1996  Period")
     were  $20,129,000,  up 41% when compared to sales for the nine months ended
     September 30, 1995 (the "1995 Period") of $14,252,000.  The increase is due
     to the inclusion of $8,073,000 of Pulsarr's and Ventek's  sales,  offset by
     lower sales at SRC of $2,196,000.

     Cost of  sales  was 54% of sales  in the  1996  Period  and 60% in the 1995
     Period.

     Gross  profit  increased  by 29% to  $9,171,000  in the  1996  Period  when
     compared to  $5,747,000  of gross  profit in the 1995  Period.  In the 1996
     Period,  gross profit was 46%, as compared to 40% in the 1995  Period.  The
     increase in gross profit as a percentage  of sales is primarily  related to
     the higher margin Ventek products  included in Q3 1996, as well as a change
     in product mix at SRC to higher margin non-food industry systems.

     Selling  and  marketing  expense  increased  38%  in  the  1996  Period  to
     $3,230,000 when compared to the 1995 Period due principally to the addition
     of Pulsarr and Ventek.  Selling and marketing  expenses  amounted to 16% of
     sales. Similar expenses in the 1995 Period were $2,342,000 or 16% of sales.

     Research and  development  expenses were  $2,931,000  and $1,367,000 in the
     1996 Period and the 1995 Period, or 15% and 10% of sales, respectively. The
     larger  research  and  development   level  in  the  1996  Period  was  due
     principally  to  the  continuing   development  of  SRC's  Advanced  Vision
     Processor  and  projects  in non-food  industry  sorting  applications  and
     $585,000 for Pulsarr and Ventek.

     General and administrative  expenses increased  $1,764,000 to $3,157,000 in
     the 1996 Period from $1,393,000 in the 1995 Period. The increase in general
     and administrative expenses is due to the addition of Pulsarr and Ventek as
     well as an increase in personnel costs and legal fees at SRC and ARC.

     The increase in Goodwill amortization is due to the acquisitions of Pulsarr
     and Ventek.

     As discussed in the Notes to the  Financial  Statements,  on March 1, 1996,
     the Company acquired Pulsarr for approximately $7.8 million.  Approximately
     $6.1 million of the purchase price was allocated to in-process  technology,
     which was  subsequently  charged to expense  during the quarter ended March
     31, 1996. This charge is not deductible for tax purposes.  The Company will
     need  to  invest  in  additional  development  related  to  the  in-process
     technology in order to make these technologies  commercially  viable. These
     expenditures  are  expected to be paid out through  1997 and will be funded
     primarily from cash generated from operations.

     In Q1 1996,  the Company  wrote off $647,000 of deferred  royalty  expenses
     relating to certain technologies, as all royalties have been earned and the
     Company  believes that no significant  future economic life exists relating
     to the  royalty  agreement,  as the result of  changing  technologies.  See
     Liquidity and Capital Resources below.

     In  February  1995,  Liviakis  Financial   Communications,   Inc.  returned
     approximately 668,000 previously issued and outstanding shares of ARC Class
     A Common Stock pursuant to an award in arbitration in favor of the Company.
     A gain of $732,000  was  recorded in February  1995  relating to the shares
     recovered.

     The increase in interest expense is due to the increase in debt outstanding
     relating to the acquisitions of Pulsarr and Ventek.

     The net loss for the 1996 Period was  $7,885,000  as compared to net income
     of $893,000 in the 1995  Period.  The  variation  is due  primarily  to the
     nonrecurring  charges for in-process  technology and royalty  expense,  the
     increased level of research and development expenses,  and the nonrecurring
     gain in the 1995 Period relating to the shares of ARC Common Stock returned
     pursuant to an arbitration award.


Liquidity and Capital Resources

     In March 1996, in conjunction with the acquisition of Pulsarr,  the Company
     received  $2,000,000  from the sale of  1,400,000  shares of Class A Common
     Stock pursuant to a private placement.  In April 1996, the Company received
     $3,000,000  representing  the net  proceeds  of a  private  placement  of a
     convertible  debt.  In October  1995,  the Company  received  approximately
     $1,052,000 from the sale of its laser diode operations.  In April 1995, the
     Company  received  $2,000,000  representing the net proceeds from a private
     placement of convertible  debt. The cash generated from these  transactions
     was used to finance the  acquisition  of Pulsarr  and to provide  funds for
     working capital purposes.

     The Company's  principal  sources of operating capital have been funds from
     the above  transactions,  its overseas  Regulation S offerings in September
     and October 1993 and in 1994 and its initial public offering in March 1992.
     As of September 30, 1996, the Company had $3,726,000 in working capital.

     As a result of the  settlement in July 1992 of a lawsuit  alleging  certain
     patent  infringements,  SRC entered into a royalty  agreement,  pursuant to
     which SRC will pay  royalties of 7% of its vision  system sales through the
     earlier of June 30, 2003, and the date at which aggregate  royalty payments
     equal  $1,600,000.  Until  aggregate  royalty  payments  equal  $1,600,000,
     maximum  annual  royalty  payments are  $400,000  through  1996.  The final
     $400,000  installment was paid in July 1996. During the quarter ended March
     31, 1996, the Company wrote off against income $647,000 of deferred royalty
     expense  related to the  settlement as all royalties had been earned and no
     significant future economic life is estimated to exist.

     The Company intends to continue to market its vision systems technology and
     products, and will evaluate selected acquisition opportunities.  Additional
     investments will be required for capital equipment, marketing and R & D for
     the Company to remain competitive.  For example,  funds must be expended to
     complete  development of the Company's Advanced Vision Processor ("AVP") to
     enhance the Company's  ability to  effectively  compete in certain  markets
     with Key  Technology  Inc.'s  (the  Company's  principal  competitor)  1995
     product introduction.  Furthermore,  if the Company consummates  additional
     technology  intensive   acquisitions,   additional  equipment  and  R  &  D
     investments  may be  necessary,  perhaps to a greater  extent  than for the
     Company's existing operations.

     The  Company's  ALS-Oregon  operation,  ARC's  only  business  prior to the
     February 1994 acquisition of SRC, had suffered losses since inception.  The
     operations of ALS-Oregon  were sold in October 1995. In 1995, SRC generated
     operating profits (before allocation of corporate overhead expenses).  Even
     though SRC reached operating profitability in four of the last six quarters
     and had a history of profitable operations prior to its acquisition by ARC,
     there can be no assurance  that long term  profitability  will be realized.
     Pulsarr has operated  profitably since 1990. Ventek has operated profitably
     since 1992. The Company operates in a highly competitive  environment,  and
     delays and difficulties  relating to  technological  changes and turnaround
     situations  often occur, any of which would materially and adversely affect
     the   Company's   cash  flow.   Furthermore,   operational   and  marketing
     difficulties  may  occur  relating  to  the  integration  of  the  recently
     completed acquisitions of Pulsarr and Ventek.

     The  acquisition  of  Pulsarr  occurred  on March 1,  1996.  In  connection
     therewith,  the Company has paid approximately $6.3 million to the sellers.
     Cash received  from the March and April 1996  placements of stock and notes
     detailed above generated approximately $5,000,000.  The balance of the cash
     payments of approximately  $1,300,000,  was paid from the Company's current
     cash balances.

     The  acquisition  of Ventek  occurred in July 1996.  Consideration  for the
     transaction was approximately $5.1 million in notes and other securities as
     described in Note 6 in this Form 10-Q.

     Prior to 1995,  the Company had a history of negative  operating cash flow.
     The Company  believes it will operate at a negative  cash flow for at least
     the next  several  months and during  certain  periods in the future due to
     payment  of notes  issued in  connection  with  prior  financings,  working
     capital requirements,  the need to fund certain development projects,  cash
     required  to enter new market  areas,  and  possible  cash  needed to fully
     integrate  Pulsarr's and Ventek's  operations.  To fulfill its  operational
     goals and to repay  approximately  $1.5  million in debt due in April 1997,
     the  Company  will  require   approximately   $1.5  million  of  additional
     financing.  Other than this financing  need,  management  believes that the
     Company has sufficient cash to enable the Company to sustain its operations
     and to  adequately  fund the cash  flow  expected  to be used in  operating
     activities  for the  next  twelve  months.  Until  the  Company  is able to
     consistently  generate  sustained  positive cash flow from operations,  the
     Company must rely on debt or equity financing.

     In  connection  with the  acquisition  of Pulsarr,  the  Company  wrote off
     approximately $6.1 million of acquired  in-process  technology in the first
     quarter of 1996.  This  non-recurring  charge  contributed  to  substantial
     reported  losses in that  quarter and the nine months ended  September  30,
     1996, even though sales for such periods, including Pulsarr and Ventek from
     their respective  acquisition dates, increased from the same periods in the
     prior year.

     The  Company  is seeking  additional  financing;  however,  there can be no
     assurance  the Company will be able to obtain any  additional  financing on
     terms  satisfactory to the Company,  if at all. The recent increases in (i)
     outstanding  shares of the  Company's  Class A Common  Stock due to private
     placements,  (ii) the  April  1995 and April  1996  private  placements  of
     convertible  debt, (iii) notes issued in connection with the acquisition of
     Ventek,  (iv) a substantial  loss in the first nine months of 1996, and (v)
     the number of securities issuable upon exercise of warrants and convertible
     debt may limit the Company's ability to negotiate additional debt or equity
     financing.  Cautionary  Statements  and Risk Factors The Company may,  from
     time to time,  make  forward  looking  statements  that  involve  risks and
     uncertainties. Factors associated with the forward looking statements which
     could cause actual  results to differ  materially  from those stated appear
     below.   Readers  should  carefully   consider  the  following   cautionary
     statements and risk factors.

     History of Losses;  Negative  Cash Flow:  Prior to 1995,  the Company had a
     history of losses and negative operating cash flow. The Company believes it
     may  operate at a  negative  cash flow in the future due to (i) the need to
     fund certain development  projects,  such as the AVP, (ii) cash required to
     enter new  market  areas,  (iii)  interest  costs  associated  with  recent
     financings,  (iv) cash required for the repayment of debt,  especially $1.5
     million due in April 1997, and (v) possible cash needed to fully  integrate
     Pulsarr's   and  Ventek's   operations.   Until  the  Company  is  able  to
     consistently  generate  sustained  positive cash flow from operations,  the
     Company must rely on debt or equity financing.

     Although  the  Company  achieved  profitability  in 1995,  there  can be no
     assurance as to the Company's  profitability on a quarterly or annual basis
     in the future.  Furthermore,  the non-recurring expenses in early 1996 will
     result in a significant loss for the 1996 year.

     Need for Additional Financing: The Company is seeking additional financing;
     however,  there can be no assurance  the Company will be able to obtain any
     additional  financing on terms satisfactory to the Company,  if at all. The
     recent increases in (i) outstanding  shares of the Company's Class A Common
     Stock due to private placements, (ii) the April 1995 and April 1996 private
     placements of convertible  debt, (iii) a substantial loss in the first nine
     months of 1996, (iv) debt incurred for the  acquisition of Ventek,  and (v)
     the number of securities issuable upon exercise of warrants and convertible
     debt may limit the Company's ability to negotiate additional debt or equity
     financing.

     Uncertain Ability to Manage Growth and Integrate  Acquired  Businesses:  As
     part of its business strategy,  the Company intends to pursue rapid growth.
     In  March  and  July  1996,  the  Company   acquired  Pulsarr  and  Ventek,
     respectively,  which had sales in 1995 of  approximately  $11.4 million and
     $4.4 million,  respectively,  and would have added approximately 80% to the
     Company's  1995  sales on a pro forma  basis.  This  growth  strategy  will
     require the  integration of new entities,  such as Pulsarr and Ventek,  the
     establishment of distribution relationships in foreign countries,  expanded
     customer service and support,  increased  personnel  throughout the Company
     and  the  continued   implementation   and  improvement  of  the  Company's
     operational,  financial and  management  information  systems.  There is no
     assurance that the Company will be able to attract  qualified  personnel or
     to accomplish  other measures  necessary for its successful  integration of
     Pulsarr,  Ventek or other acquired entities or for internal growth, or that
     the Company can  successfully  manage expanded  operations.  As the Company
     expands,  it may  from  time  to  time  experience  constraints  that  will
     adversely  affect  its  ability  to  satisfy  customer  demand  in a timely
     fashion.  Failure to manage growth  effectively  could adversely affect the
     Company's financial condition and results of operations.

     Rapid  Technological  Change;  Product  Development:  The  markets  for the
     Company's  machine vision products are  characterized  by rapidly  changing
     technology,   evolving   industry   standards   and  frequent  new  product
     introductions and enhancements.  For example, the Company believes that the
     1995 introduction by Key Technology, Inc. of its new line of vision sorting
     equipment  adversely  affected  bookings  in late 1995 and  1996.  Sales of
     products  such  as  those  offered  by the  Company  depend  in part on the
     continuing  development  and  deployment  of  emerging  technology  and new
     services and applications  based on such technology.  The Company's success
     will  depend to a  significant  extent  upon its  ability  to  enhance  its
     existing  products  and develop new products  that gain market  acceptance.
     There can be no assurance that the Company will be successful in selecting,
     developing  and  manufacturing  new  products  or  enhancing  its  existing
     products  on  a  timely  or  cost-effective   basis  or  that  products  or
     technologies  developed  by others will not render the  Company's  products
     noncompetitive or obsolete.  Moreover,  the Company may encounter technical
     problems in connection  with its product  development  that could result in
     the delayed introduction of new products or product  enhancements.  Failure
     to  develop  or  introduce  on a  timely  basis  new  products  or  product
     enhancements  that achieve market acceptance would materially and adversely
     affect the Company's business, operating results and financial condition.

     Market  Acceptance of New Products:  The Company's future operating results
     will depend upon its ability to  successfully  introduce  and market,  on a
     timely and cost-effective  basis, new products and enhancements to existing
     products.  There can be no assurance that new products or enhancements,  if
     developed and manufactured,  will achieve market acceptance. The Company is
     currently in the initial  prototype stage of development on its AVP, a high
     speed  software  and  digital  signal  processing  technology  designed  to
     significantly improve system performance.  There can be no assurance that a
     market for AVP systems will develop (i.e.  that a need for AVP systems will
     exist,  that AVP will be favored over other  products on the market,  etc.)
     or, if a market does develop, that the Company will be able, financially or
     operationally, to market and support AVP systems successfully.

     Dependence on Certain  Markets and Expansion  Into New Markets:  The future
     success and growth of the Company is  dependent  upon  continuing  sales in
     domestic and  international  food  processing  market as well as successful
     penetration of other existing and potential markets. A substantial  portion
     of the  Company's  historical  sales has been in the potato  and  vegetable
     processing  markets.  Reductions in capital equipment  expenditures by such
     processors due to commodity surpluses, product price fluctuations, changing
     consumer  preferences  or other factors could have an adverse effect on the
     Company's  results of  operations.  The Company  also intends to expand the
     marketing of its processing systems in additional food markets such as meat
     and granular food  products,  as well as nonfood  markets such as plastics,
     wood  products and tobacco,  and to expand its sales  activities in foreign
     markets.  In the case of Ventek, the wood products market served is narrow,
     and  saturation of that market and the potential  inability to identify and
     develop new markets could adversely  affect Ventek's growth rate. There can
     be no assurance that the Company can successfully penetrate additional food
     and nonfood markets or expand further in foreign markets.

     Lengthy  Sales  Cycle:  The sales  cycle in the  marketing  and sale of the
     Company's  machine  vision  systems,  especially in new markets or in a new
     application, is lengthy and can be as long as three years. Even in existing
     markets,  due to the $100,000 to $450,000 price range for each system,  the
     purchase of a machine  vision system can  constitute a substantial  capital
     investment  for a customer  (which may need more than one  machine  for its
     particular  proposed  application)   requiring  lengthy  consideration  and
     evaluation.  In particular, a potential customer must develop a high degree
     of assurance that the product will meet its needs,  successfully  interface
     with the customer's own manufacturing, production or processing system, and
     have minimal warranty, safety and service problems.  Accordingly,  the time
     lag from initiation of marketing efforts to final sales can be lengthy.

     Competition: The markets for the Company's products are highly competitive.
     A  major  competitor  of  the  Company  has  recently  made  a new  product
     introduction  which has increased the  competition  that the Company faces.
     Some of the Company's competitors may have substantially greater financial,
     technical,  marketing  and  other  resources  than the  Company.  Important
     competitive  factors in the Company's  markets include price,  performance,
     reliability,  customer  support and service.  Although the Company believes
     that it currently competes effectively with respect to these factors, there
     can be no  assurance  that the Company will be able to continued to compete
     effectively in the future.

     Dependence upon Certain Suppliers: Certain key components and subassemblies
     used in the Company's  products are currently obtained from sole sources or
     a limited group of  suppliers,  and the Company does not have any long-term
     supply  agreements to ensure an uninterrupted  supply of these  components.
     Although the Company seeks to reduce  dependence on sole or limited  source
     suppliers,  the  inability  to obtain  sufficient  sole or  limited  source
     components  as  required,  or to  develop  alternative  sources  if  and as
     required,  could result in delays or reductions in product  shipments which
     could materially and adversely  affect the Company's  results of operations
     and  damage  customer  relationships.   The  purchase  of  certain  of  the
     components used in the Company's products require an 8 to 12 week lead time
     for delivery. An unanticipated  shortage of such components could delay the
     Company's ability to timely manufacture units,  damage customer  relations,
     and  have  a  material  adverse  effect  on the  Company.  In  addition,  a
     significant  increase  in the price of one or more of these  components  or
     subassemblies could adversely affect the Company's results of operations.

     Dependence upon Significant Customers and Distribution Channel: The Company
     sold equipment to two unaffiliated  customers each totaling 20% of sales in
     1995. Sales to a third unaffiliated  customer totaled 15% of sales in 1994.
     Ventek's  sales have been to a relatively  small  number of  multi-location
     plywood  manufacturers.  The Company usually receives orders of from one to
     several machine vision systems,  but  occasionally  receives larger orders.
     While the  Company  strives  to  create  long-term  relationships  with its
     customers  and  distributors,  there  can be no  assurance  that  they will
     continue  ordering  additional  systems from the  Company.  The Company may
     continue to be dependent on a small number of customers  and  distributors,
     the loss of which would adversely affect the Company's business.

     Risk of International  Sales: Due to its export sales (from the U.S. in the
     case of SRC and Ventek,  or from the  Netherlands  in the case of Pulsarr),
     the Company is subject to the risks of conducting business internationally,
     including  unexpected changes in regulatory  requirements;  fluctuations in
     the value of the U.S.  dollar or Dutch  guilder,  which could  increase the
     sales prices in local currencies of the Company's products in international
     markets;  delays in obtaining export  licenses,  tariffs and other barriers
     and  restrictions;   and  the  burdens  of  complying  with  a  variety  of
     international laws. In addition,  the laws of certain foreign countries may
     not protect the Company's  intellectual  property rights to the same extent
     as do the laws of the United States or the Netherlands.

     Fluctuations in Quarterly Operating Results;  Seasonality:  The Company has
     experienced and may in the future  experience  significant  fluctuations in
     revenues  and  operating  results  from quarter to quarter as a result of a
     number of factors,  many of which are  outside the control of the  Company.
     These  factors  include  the timing of  significant  orders and  shipments,
     product mix, delays in shipment,  capital  spending  patterns of customers,
     competition and pricing,  new product  introductions  by the Company or its
     competitors, the timing of research and development expenditures, expansion
     of marketing and support operations,  changes in material costs, production
     or  quality  problems,  currency  fluctuations,  disruptions  in sources of
     supply,  regulatory changes and general economic conditions.  These factors
     are difficult to forecast, and these or other factors could have a material
     adverse effect on the Company's business and operating  results.  Moreover,
     due to the  relatively  fixed  nature  of  many  of  the  Company's  costs,
     including  personnel and facilities costs, the Company would not be able to
     reduce costs in any quarter to compensate for any  unexpected  shortfall in
     net sales, and such a shortfall would have a proportionately greater impact
     on the Company's  results of operations  for that quarter.  For example,  a
     significant portion of the Company's quarterly net sales depends upon sales
     of a relatively small number of high-priced  systems.  Thus, changes in the
     number of such high-priced systems shipped in any given quarter can produce
     substantial  fluctuations in net sales, gross profits,  and net income from
     quarter to quarter. In addition,  in the event the Company's machine vision
     systems'  average  selling  price  increases,  of  which  there  can  be no
     assurance,  the addition or cancellation of sales may exacerbate  quarterly
     fluctuations in revenues and operating results.

     The Company's  operating  results may also be affected by certain  seasonal
     trends.  The Company typically  experiences lower sales and order levels in
     the first  quarter when  compared  with the  preceding  fourth  quarter due
     primarily to the seasonality of certain  harvested food items.  The Company
     expects  these  seasonal  patterns  to  continue,  though  their  impact on
     revenues  will  decline as the Company  continues to expand its presence in
     nonagricultural and other markets which are less seasonal.

     Risks  Associated  with  Possible  Acquisitions:  The  Company  may  pursue
     strategic acquisitions or joint ventures in addition to the acquisitions of
     Pulsarr and Ventek as part of its growth strategy. While the Company has no
     understandings,  commitments  or  agreements  with  respect to any  further
     acquisition,   the  Company   anticipates   that  one  or  more   potential
     opportunities  may become  available in the future.  Acquisitions and joint
     ventures would require  investment of operational  and financial  resources
     and could require integration of dissimilar operations, assimilation of new
     employees,  diversion of management resources,  increases in administrative
     costs and additional costs associated with debt or equity financing.  There
     can be no assurance  that any  acquisition  or joint venture by the Company
     will not have an adverse  effect on the Company's  results of operations or
     will not  result  in  dilution  to  existing  shareholders.  If  additional
     attractive opportunities become available, the Company may decide to pursue
     them actively. There can be no assurance that the Company will complete any
     future  acquisitions  or joint  ventures or that such a future  transaction
     will not materially and adversely affect the Company.

     Dependence  upon  Key  Personnel:   The  Company's  success  depends  to  a
     significant extent upon the continuing contributions of its key management,
     technical, sales and marketing and other key personnel.  Except for William
     J. Young,  the Company's  President and Chief  Executive  Officer,  Alan R.
     Steel,  the  Company's  Chief  Financial  Officer,  Dr.  James Ewan,  SRC's
     President and Chief Executive  Officer,  Jan C. Scholt,  Pulsarr's Managing
     Director,  and the four former stockholders of Ventek, the Company does not
     have  long-term  employment  agreements  or other  arrangements  with  such
     individuals  which would  encourage  them to remain with the  Company.  The
     Company's  future  success  also  depends  upon its  ability to attract and
     retain  additional  skilled  personnel.  Competition  for such employees is
     intense.  The loss of any current key employees or the inability to attract
     and retain additional key personnel could have a material adverse effect on
     the  Company's  business and operating  results.  There can be no assurance
     that the Company will be able to retain its  existing  personnel or attract
     such additional skilled employees in the future.

     Intellectual  Property:  The Company's competitive position may be affected
     by its ability to protect its proprietary technology.  Although the Company
     has a  number  of  United  States  and  foreign  patents,  there  can be no
     assurance that any such patents will provide meaningful  protection for its
     product  innovations.  The Company may experience  additional  intellectual
     property  risks  in   international   markets  where  it  may  lack  patent
     protection.

     Product  Liability and Other Legal Claims:  From time to time,  the Company
     may be  involved  in  litigation  arising  out of the normal  course of its
     business,  including  product  liability and other legal claims.  While the
     Company has a general  liability  insurance  policy which includes  product
     liability  coverage up to an aggregate amount of $10 million,  there can be
     no assurance  that the Company will be able to maintain  product  liability
     insurance on acceptable  terms or that its insurance will provide  adequate
     coverage against potential claims in the future.  There can be no assurance
     that third parties will not assert infringement claims against the Company,
     that any such  assertion of  infringement  will not result in litigation or
     that the Company would prevail in such litigation. Furthermore, litigation,
     regardless  of  its  outcome,  could  result  in  substantial  cost  to and
     diversion of effort by the Company.  Any infringement  claims or litigation
     against the Company could  materially  and  adversely  affect the Company's
     business,  operating  results and  financial  condition.  If a  substantial
     product  liability or other legal claim against the Company were  sustained
     that was not covered by insurance,  there could be an adverse effect on the
     Company's financial condition and marketability of the affected products.

     Warranty  Exposure and Performance  Specifications:  The Company  generally
     provides a one-year  limited  warranty on its  products.  In addition,  for
     certain  custom-designed  systems,  the Company  contracts  to meet certain
     performance  specifications  for a specific  application.  In the past, the
     Company has incurred higher warranty  expenses related to new products than
     it typically  incurs with established  products.  There can be no assurance
     that the Company will not incur substantial warranty expenses in the future
     with respect to new  products,  as well as  established  products,  or with
     respect to its obligations to meet  performance  specifications,  which may
     have  an  adverse   effect  on  its  results  of  operations  and  customer
     relationships.




<PAGE>



                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

     Ford & Cohn

     In March  1993,  Wilson  Ford,  Robert  Paul  and  Maxwell  Cohn  (together
     "Claimants") brought various claims against ARC and William Patridge,  Asif
     Ahmad and Nagaraj Murthy, past or current directors or employees of ARC, in
     lawsuits in the Superior  Courts for Los Angeles  County and Orange County,
     California.  The lawsuits were  consolidated  in February,  1994,  and were
     litigated  in  Superior  Court  for Los  Angeles  County in  September  and
     October, 1995.

     Ford, a  consultant  to ARC,  claims that ARC  breached an agreement  dated
     September 17, 1987, and  subsequently  amended on August 16, 1988, by which
     he was to receive 25,000 shares of stock of CNVS, Inc., predecessor to ARC,
     at no cost and an option to purchase 25,000 additional shares in the future
     upon the occurrence of specified  events.  Ford claims he was promised that
     this  total of  50,000  shares  in the  Company  would  amount to 5% of the
     outstanding shares. Ford also claims ARC owes him royalties under a royalty
     agreement for certain low light video camera technology.  ARC contends that
     Ford  was  never  promised  that his  interest  would  amount  to 5% of the
     outstanding  shares,  that Ford failed to fulfill his obligations under the
     royalty  agreement,  and that Ford's  claims are barred under various legal
     theories.  Based on these  allegations,  Ford  made  claims  for  breach of
     contract and breach of the covenant of good faith and fair dealing.

     The Claimants  contend that statements  allegedly made by William  Patridge
     and Asif Ahmad to United States Alcohol Testing of America,  Inc.  ("USAT")
     caused USAT to rescind an Asset Purchase Agreement with the Claimants.  The
     Claimants allege that the statements  concerning  outstanding  lawsuits and
     disputes  between ARC and the Claimants were false and meant to disrupt the
     business  relationship  between  Prime  Lasertech  and USAT.  The Claimants
     allegedly  would  have  benefited  from the  Asset  Purchase  Agreement  as
     shareholders  and/or licensees.  Based on these allegations,  the Claimants
     made claims for intentional  and negligent  interference  with  prospective
     advantage,  intentional and negligent infliction of emotional distress, and
     civil conspiracy.

     On  October  2, 1995,  a jury  awarded  $375,000  to the  Claimants,  which
     included $281,000 of punitive damages for the breach of contract claim. The
     Company has filed motions with the court to eliminate the punitive  portion
     of the award.  ARC  believes  such  damages  are  improper  because (i) the
     claimants did not ask for punitive  damages in the contract claim, and (ii)
     such  damages  cannot be awarded  for breach of contract  under  applicable
     state laws. ARC is also attempting to overturn the balance of the breach of
     contract  award based on the fact that the claim was made after the statute
     of limitations had expired.  ARC has made an appeal to overturn the verdict
     on these factors and certain other  irregularities that occurred during the
     trial, which ARC believes unfairly affected the jury's decision. Due to the
     fact that a verdict was rendered,  a $93,000 loss on the breach of contract
     claim was recorded as a liability in the fourth quarter of 1995.

     Other

     ARC is a party  to  several  other  suits  in the  ordinary  course  of its
     business.  ARC believes that the outcome of all such  proceedings,  even if
     determined  adversely to ARC, will not have a material  adverse effect upon
     its financial statements.



<PAGE>



Item 6.  Exhibits And Reports On Form 8-K
<TABLE>
<CAPTION>

(a)  Exhibits

Exhibit
Number            Description


<S> <C>           <C>                                                      
    10.1          Stock Purchase Agreement dated March 1, 1996 (without exhibits), between Meijn Beheer B.V. and
                  ARC Netherlands B.V., a wholly owned subsidiary of the Company. (1)

    10.2          Stock Purchase Agreement dated March 1, 1996, between J. C. Scholt and ARC Netherlands B.V., a
                  wholly owned subsidiary of the Company. (1)

    10.3          Convertible Note dated March 1, 1996, issued in connection with that certain Stock Purchase
                  Agreement dated March 1, 1996, between J. C. Scholt and ARC Netherlands b.v. (1)

    10.4          Subscription Agreement dated January 18, 1996, between the Company and Swiss American
                  Securities, Inc. as agent for Credit Suisse related to the private placement of 1,400,000
                  shares of the Company's Class A Common Stock. (1)

    10.5          Convertible Secured Note dated April 17, 1996, between the Company and Ilverton International,
                  Inc. (3)

    10.6          Form of Class G Warrant Agreement. (2)

    10.7          Form of Class H Warrant Agreement. (3)

    10.8          Asset Purchase Agreement dated July 24, 1996, by and among ARC, Ventek and the shareholders of
                  Ventek. (4)

    10.9          $1,000,000 Note dated July 24, 1996, between ARC and Ventek. (4)

    10.10         $2.250,000 Convertible Note dated July 24, 1996, between ARC and Ventek. (4)

    10.11         $1,125,000 Note dated July 24, 1996, between ARC and Ventek. (4)

    10.12         Stock Appreciation Rights Agreement dated July 24, 1996, between ARC and Ventek. (4)

    10.13         Class I Warrant agreement dated July 24, 1996, between ARC and Ventek. (4)

    10.14         Form of Employment Agreement dated July 24, 1996, between each of the four stockholders of Ventek and
                  ARC. (4)

    10.15         Pledge and Security Agreement dated July 24, 1996, by and among ARC, ARC Subsidiary, Inc., Ventek and
                  Solin and Associates, P.C. (4)

    27            Financial Data Schedule

-------------------------------

(1)               Filed with the SEC on March 6, 1996, as an exhibit to the Company's Form 8-K dated March 1,
                  1996.

(2)               Filed with the SEC on April 14, 1996, as an exhibit to the Company's Form 10-K for the year
                  ended December 31, 1995.

(3)               Filed with the SEC on May 14, 1996, as an exhibit to the Company's Form 10-Q for the quarter
                  ended March 31, 1996.

(4)               Filed with the SEC on July 25, 1996, as an exhibit to the Company's Form 8-K regarding the
                  acquisition of Ventek.
</TABLE>

(b)  Reports on Form 8-K:

                  On  July  25,  1996,  a  Form  8-K  was  filed  regarding  the
                  acquisition of Ventek and the resignation of a director.

                  On  October  7, 1996,  a Form  8-K-A was filed  regarding  the
                  acquisition of Ventek to include audited financial  statements
                  of the  business  acquired  and  related  pro forma  financial
                  information.











                                    SIGNATURE

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.

          November 14, 1996                          /s/  Alan R. Steel
     -------------------------------          --------------------------------
                                                          Alan R. Steel
                                                    Vice President - Finance
                                                 (Principal Financial and duly
                                                       Authorized Officer)