APPLIED RESEARCH CORP, 10KSB, 1997-09-12

APPLIED RESEARCH CORP
10KSB, 1997-09-12
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<PAGE>
FORM 10-KSB

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------

Commission file number 01-10076

APPLIED RESEARCH CORPORATION
----------------------------
(Exact Name of Registrant 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 Offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.0005 None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB. [ ]

Issuer's revenues for the fiscal year ended May 31, 1997 were $8,270,222.

On September 5, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $94,432.

On September 12, 1997, there were 6,311,083 shares of $0.0005 par value Common
Stock outstanding.
<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-KSB

PART I Page

Item 1: Description of Business . . . . . . . . . . . . . . . . 4
Item 2: Description of Property . . . . . . . . . . . . . . . . 10
Item 3: Legal Proceedings . . . . . . . . . . . . . . . . . . . 10
Item 4: Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . 10

PART II

Item 5: Market for Common Equity and Related Stockholder
Matter . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6: Management's Discussion and Analysis of
Financial Condition and Results from Operation. . . . . 12
Item 7: Financial Statements and Supplementary Data . . . . . . 18
Item 8: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . 19

PART III

Item 9: Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . . . . . . . 20
Item 10: Executive Compensation. . . . . . . . . . . . . . . . . 20
Item 11: Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . 20
Item 12: Certain Relationships and Related Transactions. . . . . 20

PART IV

Item 13: Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant hereby incorporates by reference the following Documents:

PART III

Item 9: Directors and Executive Officers of the Registrant
Item 10: Executive Compensation
Item 11: Security Ownership of Certain Beneficial Owners and Management
Item 12: Certain Relationships and Related Transactions

The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of Stockholders,
which will be filed in an amendment within 120 days of May 31, 1997.

PART IV - EXHIBITS

1. Incorporated herein by reference from the Registrant's May 31,
1996, Annual Report on Form 10-K, filed with Securities and
Exchange Commission on September 12, 1996.

2. Incorporated herein by reference from the Registrant's May 31,
1995, Annual Report on Form 10-K, filed with Securities and
Exchange Commission on August 29, 1995.

3. Incorporated herein by reference from the Registrant's May 31,
1994, Annual Report on Form 10-K, filed with Securities and
Exchange Commission on September 6, 1994.

4. Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on June 28, 1994, S.E.C. File No. 01-10076.

5. Incorporated herein by reference from the Registrant's Current
Report on Form 8-K, dated August 25, 1997, filed with Securities
and Exchange Commission on August 27, 1997, as amended by the
Registrant's Amended Current Report on Form 8-K/A-1 filed with the
Securities and Exchange Commission on September 5, 1997.

6. Incorporated by reference from the Registrant's Registration
Statement on Form S-18, as amended, filed with Securities and
Exchange Commission on June 21, 1989, S.E.C. File No. 33-11943-LA.
<PAGE>
<PAGE>
PART I
------

ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------

(A) BUSINESS DEVELOPMENT

Applied Research Corporation was organized under the laws of the State of
Colorado on March 26, 1986, as Dollar Ventures, Inc., for the primary purpose
of engaging in a merger with or acquisition of, one or a small number of
private firms. On December 29, 1987, Dollar Ventures, Inc. acquired 100% of
the outstanding shares of common stock of Applied Research Corporation, a
Maryland corporation, in exchange for 5,000,000 shares of Dollar Ventures,
Inc. common stock. The acquisition was legally classified as a
reorganization. For accounting and financial reporting purposes, the
transaction was treated as a reverse acquisition at book value.

Following the acquisition, Applied Research Corporation (the original Maryland
corporation) changed its name to Applied Research of Maryland, Inc. ("ARM"),
and Dollar Ventures, Inc. changed its name to Applied Research Corporation
("ARC"). Applied Research of Maryland, Inc. is a high technology company
specializing in research and development, design and fabrication of sensors
and instrumentation, technical support services and software development. On
April 2, 1996, ARM filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. See Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations.

ARSoftware Corporation ("ARS"), a Maryland corporation and wholly owned
subsidiary of the Company was formed in April, 1992, to diversify ARC's
business by developing niche markets in the computer software industry. The
objective of ARS is to develop and distribute scientific and technical
software to academic, commercial and federal, state and local government
entities. ARS is currently reselling existing products under licensing
agreements.

ARInternet Corporation ("ARInternet"), a Maryland corporation and majority
owed subsidiary of the Company was formed in November 1994, to diversify the
business base of ARC by developing niche markets in the computer online
services industry.

As hereinafter used, the term "Company" shall refer to Applied Research
Corporation and its wholly- owned subsidiaries Applied Research of Maryland,
Inc. and ARSoftware Corporation and the majority- owned (95%) subsidiary
ARInternet Corporation, except when otherwise indicated by context.

(B) BUSINESS OF ISSUER:

The Company's wholly-owned subsidiaries, Applied Research of Maryland, Inc.
and ARSoftware Corporation, and majority-owned (95%) subsidiary ARInternet
Corporation, are operating entities.

APPLIED RESEARCH OF MARYLAND, INC.
- ----------------------------------
ARM is the principal business of ARC. ARM's activities are divided into three
divisions: Technical Services Division, Instruments Division and ARInstruments
Division, each of which is described in the paragraphs that follow.

Technical Services Division
----------------------------
The Technical Services Division provides scientific software design and
development, mathematical analysis, laboratory experiment design and
implementation, and scientific data analysis to support research programs in
the earth and space sciences, optics, electronics, and chemistry. Most of
these support services are performed on-site at U.S. Government ("Government")
laboratories at NASA/Goddard Space Flight Center. In addition, during 1993,
the Company began work on a subcontract with Hughes Information Systems
Company ("Hughes") where the work is performed on-site at a Hughes location.

Instruments Division
--------------------
The Instruments Division designs and fabricates specialized hardware used
to carry out space borne scientific observations. Primary emphasis is in the
development of ultraviolet to near infrared imaging and spectrographic
instruments for use in astrophysical and atmospheric research. The
Instruments Division has expanded into the manufacture of rocket and
spacecraft attitude-control sensors. The Company's classified contracts were
carried out in the Instruments Division.

ARInstruments Division
----------------------
During its many years of performing under government contracts, the
Company has developed expertise in custom design and fabrication work. In
addition, members of the Company's technical staff have investigated and
researched other government and commercial applications for existing
technologies. The Company formed its ARInstruments Division ("ARInstruments")
in fiscal 1993 to penetrate the government and commercial instrumentation
markets, and specifically segregate these activities from other government
contract operations in the design, fabrication, and distribution of
instrumentation products. During fiscal 1994, ARInstruments had begun
research and development efforts related to product development and initiated
two patent applications. These patents were granted during fiscal 1995 and,
accordingly, the Company began amortizing the costs associated with the
patents during the year ended May 31, 1995.

On April 2, 1996, ARM filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. Under Chapter 11, certain claims
against ARM (the "Debtor") in existence prior to the filing of the petition
for relief under the federal bankruptcy laws are stayed while the Debtor
continues business operations as Debtor-In-Possession. Prior to the filing of
the Chapter 11 petition, management of the Debtor had been attempting to sell
the assets of ARM. Subsequent to the filing, and following one unsuccessful
attempt to sell a majority of ARM's assets, the Debtor entered into an
agreement to sell a majority of ARM's assets for $1.475 Million. At a
Bankruptcy Court hearing on April 11, 1997, this agreement was subjected to
counter offers, and the sale price ultimately became $1.75 Million (the "Asset
Purchase Agreement".). The court order approving the Asset Purchase Agreement
was signed by the Bankruptcy Court on May 30, 1997. Completion of the sale
was subject to approval by the Debtor's principal customer of the transfer of
certain contract rights and obligations. Approval was granted on June 19,
1997, at which time the sale was completed with payment of the cash portion of
the purchase price being placed in escrow. See Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations for
additional information on the Bankruptcy proceedings and the sale.

ARSOFTWARE CORPORATION
- ----------------------
ARSoftware Corporation ("ARS") was established to diversify the Company's
business base by developing niche markets in the computer software industry.
Currently, ARS is reselling selected products to academic institutions,
industry and government agencies, focusing on end users working on scientific
and engineering applications.

ARINTERNET CORPORATION
- ----------------------
From its inception, ARInternet Corporation ("ARInternet") has been committed
to providing to its customers three essential ingredients for a successful
Internet experience: reliable connectivity, quality service and support and
innovative application of state-of-the-art technology. ARInternet had
approximately 1,000 subscribers as of May 31, 1997. ARInternet offers
monthly, quarterly, semi-annual and annual subscription agreements, each
requiring payment in advance. ARInternet offers the ability to pay the
subscription amounts by credit card to facilitate payment.

Connectivity
------------
ARInternet provides a reliable, high-speed full-service link to the
Internet, utilizing state-of-the-art networking hardware and software with
built-in capacity for expansion and improvement. ARInternet currently
operates with a T1 connection (1.544Mpbs) off the Sprint backbone. Sprint was
chosen as the Internet provider due to its reputation, the size and scope of
its network, the upgradability of its service and its strong customer support.

ARInternet arranges for almost any type of Internet connection the
customer needs, at a reasonable price, in keeping with its clear emphasis on
customer service.

FULL-SERVICE DIALUP (SHELL) ACCOUNT: Subscribers have access to
all the "standard" connection options, such as e-mail, telnet. ftp,
WWW, gopher, and finger, etc.

SLIP (SERIAL-LINE INTERNET PROTOCOL) AND PPP (POINT-TO-POINT
PROTOCOL) CONNECTIONS: This type of account establishes the
customer's own computer as a peer-to-peer host with all other
Internet host computers. It allows the user to navigate the World
Wide Web using popular multimedia-capable programs, such as
Netscape, and to directly download a vast array of programs from
software archives around the world.

DEDICATED AND LEASED-LINE ACCESS: These connections range from
dedicated phone line access (private line), to high bandwidth frame
relay and Centrex-based ISDN, for those who need full-time or high-
speed access.

Internet Support Services
-------------------------
WWW SERVICES: The remarkable growth of interest in the Internet
that has occurred over the last several years is largely due to the
introduction of the WWW protocol suite and the increasing
sophistication of its graphical browsers. These factors, in
combination with the surging tide of commercialization, have lead
to the rapid emergence of several new phenomena: online
advertising via company brochures (hyperlinked HTML pages), virtual
shopping malls, which are really collections of these documents
(stores) organized in creative ways, and companies providing
services in support of these activities.

ARInternet offers several very competitively-priced Web services:

- Hosting of Web pages on ARI servers.
- Collection of customer equipment on ARI's Ethernet.
- Database integration and other customized applications.
- Design and installation of turnkey WWW servers.

INTERNET TRAINING: ARInternet offers customized instruction to
meet the needs of its clients, ranging from introducing staff of a
small business to e-mail and ftp, or guiding managers and systems
specialists through advanced features of various TCP/IP services.

SYSTEMS INTEGRATION AND CONSULTING: Today, many businesses are
installing "Intranet" and "extranets" (virtual private networks
which use the TCP/IP protocol suite) to leverage the tremendous
potential of the technology to deliver information to (and collect
information from) its employees and field agents. ARInternet's
network specialists provide consulting for the design and
installation of such systems.

Commitment to growth and innovation
-----------------------------------
The pace of development of Internet-related products and services is
enormous. In order to keep abreast of all of the important new developments
(i.e. Java, ActiveX, VRML) ARInternet has initiated strategic alliances or
sub-contracting relationships with experts in these areas, and as the need
arises, hires new staff with these skills.

RESEARCH AND DEVELOPMENT
- ------------------------
ARM conducts research and development activities in several areas. Through
its ARInstruments division, ARM has been conducting research and development
related to the development of a proprietary technique and instrument, the BIO-
UVB Meter, for directly measuring biological effects of solar UVB. During the
years ended May 31, 1997 and 1996, approximately $95,000 and $87,000 was
spent, respectively on research and development.

ARS does not conduct any significant research and development effort. ARS
does, however, capitalize the cost of producing "product masters", in
accordance with Statement of Financial Accounting Standards No. 86. However,
during the years ended May 31, 1997 and 1996, nothing was spent or
capitalized. ARS does not anticipate any such expenditures for the year ended
May 31, 1998. ARInternet had no research and development expenditures during
the years ended May 31, 1997 and 1996.

INTELLECTUAL PROPERTY
- ---------------------
Patents, copyrights, trademarks and trade secrets are the principal protection
source for the Company's intellectual property. The Company also holds
various copyrights covering its published materials and proprietary software,
most of which are derived from original works created by employees of the
Company and/or its subsidiaries or by independent contractors hired under
specific project agreements. The remaining copyrights are held by the Company
through licensing agreements with the authors.

ARM applied for and has been granted two (2) patents relating to instrument
technology it has developed. These two patents are among the property being
sold under the Asset Purchase Agreement. See Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations for additional
information concerning the sale.

All of the patents, copyrights, trademarks and licenses are considered by the
Company to be valuable property rights. The protection afforded by these
intellectual property rights and the law of trade secrets is believed by the
Company to be adequate. However, notwithstanding the Company's intellectual
property rights, it is possible for a competitor to develop near imitations of
the Company's products by implementing modifications, without violating those
rights.

SEASONALITY
- -----------
Revenues for ARM typically are not seasonal, but will sometimes depend on the
availability of Government funding. The Government budgets and operates on a
fiscal year ending September 30th.

In the past, ARS revenues have been seasonal, with ARS typically showing
greater revenues in the second, third and fourth fiscal quarters. ARS also
has experienced inventory and accounts receivable variations due to the
seasonal nature of its business.

Revenues for ARInternet have not been seasonal.

CUSTOMERS - MARKETS AND MARKETING
- ---------------------------------
Predominantly all of ARM's revenues (99%) are derived from agencies of the
Government and prime contractors to those agencies. During fiscal 1997, ARM
had one customer that accounted for approximately 35 percent (35%) of its
revenue during the year. This customer, NASA, had 8 contracts with ARM, of
which one contract provided 20 percent (20%) and a second provided 14 percent
(14%) of ARM's revenue. Another customer, Hughes Corporation, had two
contracts which accounted for 60 percent (60%) of ARM's revenue, of which the
largest accounted for 42 percent (42%). The contracts held by ARM are among
the property being sold under the Asset Purchase Agreement.

ARS has no significant major customers.

ARInternet has no significant major customers. At May 31, 1997 and 1996,
ARInternet had approximately 1,000 subscribers.

On a local level, ARInternet reaches its target market primarily through
advertisements placed in the Washington Post. ARInternet intends to increase
its marketing efforts, particularly on a national level, by placing
advertisements in certain widely distributed scientific journals, and,
possibly, through direct mailings to members of its target market.

ARInternet benefits from word-of-mouth advertising as the number of
subscribers multiplies and ARInternet's exposure on the Internet increases.
Additionally, ARInternet participates in a number of e-mail discussion groups
and cultivates subscribers through ARInternet-sponsored Internet training
sessions.

BACKLOG
- -------
ARM's total backlog of contracts as of May 31, 1997, was approximately $20.8
million ($2.8 million funded and $18 million unfunded). This compares with
the backlog of approximately $27.5 million ($2.8 million funded and $24.7
million unfunded) at May 31, 1996. If ARM were to continue its current
business, it would expect that approximately 40 percent (40%) of the total
backlog as of May 31, 1997, would be realized within one year. The contracts
held by ARM are among the property being sold under the Asset Purchase
Agreement.

ARS had no backlog at May 31, 1997. ARS's backlog as of May 31, 1996, was
approximately $5,000, consisting of purchase orders that were received, but
not shipped. These purchase orders were shipped during fiscal year 1997.

ARInternet's backlog as of May 31, 1997, was approximately $30,000 which
related to prepaid subscriptions received in advance. This amount will be
earned during the current fiscal year. ARInternet's backlog as of May 31,
1996, was approximately $27,600 which related to prepaid subscriptions
received in advance. This amount was earned during fiscal year 1997.

GOVERNMENT CONTRACTS
- --------------------
ARM's Government contracts contain standard clauses permitting the termination
of contracts and subcontracts at the election of the Government. The
Company's contracts with prime contractors also typically contain similar
clauses permitting termination of the contract at the election of the
Government. In the event of termination of such contracts, the Company is
entitled to receive reimbursement on the basis of costs incurred plus a
reasonable profit. The Company has not had any significant contracts
terminated at the election of the Government during the past two fiscal years.
The contracts held by ARM are among the property being sold under the Asset
Purchase Agreement.

COMPETITION
- -----------
Both ARM and ARS face competition from other firms which provide similar
products and services. Some of these firms are larger and better capitalized
than both ARM and ARS. The Company does not consider any one firm to hold a
dominant position in the industry. ARM has established an excellent
reputation within the Government scientific community and therefore has
created a niche market for itself. This is largely due to its talented
employees, more than 50% of which have PhD's. The contracts held by ARM are
among the property being sold under the Asset Purchase Agreement.

ARInternet faces competition from many businesses offering Internet access
ranging in size from sole proprietorships to large corporations. The services
provided by these competitors vary from simply furnishing Internet
connectivity to providing a full complement of services including e-mail, in-
home shopping and banking, and complete on-line research and document delivery
services. Many of these competitors are larger and have greater financial
resources than ARInternet.

ARInternet intends to meet or exceed competitive demands by recognizing that
many disciplines and subdisciplines of science and technology exist, each with
its own needs and level of exposure to Internet resources. By recognizing
these differences, ARInternet provides its subscribers with easy access to a
suite of customized tools and Internet services unique to the scientific
community as a whole, and, more importantly, designed to provide discipline-
specific information, including access to public and commercial databases,
software archives, suppliers of products and materials, print and electronic
publication, and announcements of on-line and traditional meetings in many
different areas of science and technology, many of which were previously
unavailable from more established sources.

EMPLOYEES
- ---------
At May 31, 1997, 94 full-time and 8 part-time employees were employed by the
Company and its wholly- owned and majority-owned subsidiaries. ARM employed
89 full-time and 6 part-time employees while ARS employed one part-time
employee at May 31, 1997.

ARInternet employed 5 full-time employees and 1 part-time employee at May 31,
1997. Outside consultants with specialized knowledge and experience in
designing and operating TCP/IP networks, client/server and database
application development, CD-ROM publishing and familiarity with biological and
medical resources and markets have been utilized to extend the Company's
capabilities and to enhance the range of services covered. As resources
permit and circumstances warrant, additional personnel with specialized
talents and experience will be added to the present staff. Anticipated needs
include application software developers, customer service representatives,
database specialists, and technical assistants.

ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------

The Company's corporate headquarters are located at 8201 Corporate Drive,
Landover, Maryland 20785. Through March 1, 1997, 12,633 sq. ft. were leased
by ARC, with an expiration date of September 30, 1998. Effective March 1,
1997, the space was reduced to 11,295 sq. ft. at a monthly rental of $15,177.
Effective August 1, 1997, the space was reduced to 4,833 sq. ft. through
September 30, 1997, at a monthly rental of $7,834. Effective October 1, 1997,
the space will be reduced to 2,561 sq. ft. at a monthly rental of $4,805. The
Company has agreed to pay a total of $19,068 to the landlord in return for
reducing the space from 12,633 to 2,561 sq. ft., plus the forfeiture of the
security deposit held by the landlord totaling $5,650. The $19,068 is payable
monthly at the rate of $1,362 starting in August 1997.

All of the reductions in the office space outlined above are related to ARM,
which started the year with 7,283 and 2,789 sq. ft. of office and laboratory
space, respectively. ARS occupies 1,551 sq. ft. of office space and
ARInternet occupies 1,010 sq. ft. of office space. The Company's corporate
headquarters are expected to be adequate to meet the Company's needs for the
foreseeable future.

The Company's capital equipment consists primarily of furniture and office
equipment, laboratory equipment and computer hardware located at its corporate
headquarters. See Notes to Consolidated Financial Statements, Note 5. ARM's
and ARS' capital equipment is believed to be adequate to meet their projected
needs for the foreseeable future. ARInternet will require additional
computer-related equipment as its customer base increases. The amount of such
purchases required for fiscal 1998 will depend on growth and therefore can not
be reasonably determined at this time.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------

Neither the Company, nor ARS or ARInternet is currently a party to any pending
litigation or other material legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1997.
<PAGE>
<PAGE>
PART II
-------

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------

(A) MARKET INFORMATION

The Company's common stock commenced trading over the counter on November 23,
1987. The Company's common stock was listed on the Philadelphia Stock
Exchange on November 9, 1988, and began trading on November 17, 1988, under
the symbol "ARL.X". The Company's common stock continued to be listed on the
Philadelphia Stock Exchange until February 7, 1995, when it was delisted for
failure to meet the Philadelphia Stock Exchange's maintenance requirements.

As a result of its delisting from the Philadelphia Stock Exchange, the
Company's common stock is now traded on the Over-the-Counter Electronic
Bulletin Board ("OTCBB") under the symbol "APLS". The high and low bid prices
as quoted on the OTCBB system, are shown below for the period June 1, 1995
through August 31, 1997. The high and low bid information as quoted on the
OTCBB represents prices between brokers and dealers does not include retail
mark-ups and mark-downs or any commissions to the broker-dealer. The prices
may not reflect prices in actual transactions.

<TABLE>
<CAPTION>
High Low Last
---- --- ----
<S> <C> <C> <C>
FISCAL 1996
First Quarter 0.34375 0.12500 0.34375
Second Quarter 0.87500 0.25000 0.26000
Third Quarter 0.68750 0.15625 0.33375
Fourth Quarter 0.31250 0.06250 0.10000

FISCAL 1997
First Quarter 0.15000 0.06000 0.06000
Second Quarter 0.12000 0.02000 0.02000
Third Quarter 0.05000 0.02000 0.02500
Fourth Quarter 0.05000 0.02000 0.02000

FISCAL 1998
First Quarter 0.12500 0.02000 0.05000

</TABLE>

NUMBER OF SHAREHOLDERS
- ----------------------
The approximate number of shareholders of record for the Company's common
stock as of August 31 , 1997, was 461. This amount represents the number of
certificate holders and individual non-objecting beneficial owners of the
Company's common stock held in "street name".

DIVIDENDS
- ---------
No cash dividends have been declared on the common stock of the Company for
either of the last two fiscal years ending May 31, 1997 and 1996. In
addition, while there are no limitations on the ability of the Company to pay
dividends, management does not anticipate the declaration of a cash dividend
on any class of common stock of the Company in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 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 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, and
the Company's Consolidated Financial Statements, including the related notes
thereto, appearing elsewhere in this report.

ON APRIL 2, 1996, ARM FILED A VOLUNTARY PETITION FOR RELIEF UNDER
CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE. Under Chapter 11, certain
claims against ARM (the "Debtor") in existence prior to the filing of the
petition for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-In-Possession. Prior to the
filing of the Chapter 11 petition, management for the Debtor had been
attempting to sell the assets of ARM. Subsequent to the filing, and following
one (1) unsuccessful attempt to sell a majority of ARM's assets, the Debtor
entered into an agreement to sell a majority of ARM's assets to Space
Applications Corporation ("SAC"). At a Bankruptcy Court hearing on April 11,
1997, this agreement was subjected to counter offers from three qualified
bidders and after extensive bidding, an offer was accepted for $1.75 Million
from SAC. Completion of this sale was subject to approval by the Debtor's
principal customer of the transfer of certain contract rights and obligations,
which was received on June 19, 1997, at which time the sale was completed,
with the cash portion of the purchase price being placed in escrow. The cash
placed in escrow was subsequently disbursed to creditors. See Notes to
Consolidated Financial Statements, Note 15.

RESULTS FROM OPERATIONS - 1997 COMPARED TO 1996
- -----------------------------------------------

From Continuing Operations
- --------------------------
The Company's revenues for the year ended May 31, 1997, were $542,575, or (4)%
below revenues of $563,596 for the same period during 1996. The decrease in
revenues during the year ended May 31, 1997, of $21,021 is primarily
attributable to the decrease in ARS's revenues of $181,800 or 69% when
compared with revenues of $261,921 generated during the same period in 1996.
ARInternet's revenues were $462,454, an increase of $160,779 or 53%, over the
previous year, and partially offset the declines experienced by ARS.

The Company's direct cost of services decreased $79,622 or 31%, from $259,772
during the year ended May 31, 1996, to $180,150 during the same period in
1997. Of this amount, ARS decreased $107,913 while ARInternet's cost of
services increased $28,291. The decrease in direct costs of ARS was primarily
related to the lower sales for the period and a decrease in the amount of
amortization of previously capitalized software development costs, compared to
the same period in 1996. The increase in ARInternet's direct costs of sales
was the direct result of increased sales during the current year.

Indirect operating costs decreased $31,743 or 100%, from $31,743 during the
year ended May 31, 1997, to $0 during the current year. 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 $186,708 or 32%, from
$592,497 in 1996, to $405,749 during 1997. Most notably, the G&A expenses
associated with ARS decreased $128,380 or 68%, while ARInternet's G&A expenses
decreased $58,328 or 14%, during the year ended May 31, 1997. The decrease in
ARS's G&A expenses was predominantly attributable to a reduction in personnel
and marketing related expenses during the period. The decrease in
ARInternet's G&A expenses related to a reduction in staffing during 1997 when
compared to the same period in 1996.

As a result of the foregoing, the Company realized an operating loss from
continuing operations for the year ended May 31, 1997, of $(43,324) compared
to an operating loss of $(320,376) for the same period during 1996. ARS
posted an operating loss of $(31,790) for the year ended May 31, 1997, which
loss represented an improvement of $86,236 or 73% from the operating loss of
$(118,026) during the same period in 1996. This net improvement for ARS is
directly attributable to a decrease in salary and related fringe benefit
expenses and reductions in marketing and other expenses. ARInternet posted an
operating loss of $(11,534) for the year ended May 31, 1997, which represented
an improvement of $190,816 or 94% from the operating loss of $(202,350) during
the same period in 1996. This net improvement for ARInternet was directly
attributable to an increase in the overall revenue levels from the previous
year.

Interest and other expenses decreased $87,649 or 92%, from $95,028 for the
year ended May 31, 1996, to $7,379 during the current fiscal year. The
decrease was primarily related to the fact that the Company eliminated
consulting expenses incurred during the same period in 1996.

The Company sustained a loss from continuing operations of $(50,703) for the
year ended May 31, 1997, compared to a loss from continuing operations of
$(415,404) during the same period in 1996. This reduction in losses from
continuing operations was the result of improved operating margins from both
ARS and ARInternet, as well as the reduction in consulting expenses.

Loss per common share from continuing operations decreased from $(0.07) in
1996 to $(0.01) in 1997, as a result of the reduced loss for the current
fiscal year when compared to the same period in 1996.

From Discontinued Operations
- ----------------------------
ARM's revenues for the year ended May 31, 1997, were $7,727,647, or (8)% below
revenues of $8,393,868 for the same period during 1996. The decrease in
revenues during the current fiscal year of $666,221 is primarily attributable
to a decrease in the number of contracts, and therefore, the number of direct
employees generating revenue during the current fiscal period compared to the
previous fiscal year.

ARM's direct cost of services decreased $318,444 or 6%, from $5,207,341 during
the year ended May 31, 1996, to $4,888,897 during the same period in 1997.
ARM's decrease in direct costs consisted of a decrease in direct labor and a
decrease in subcontract, material and equipment charges. The decrease in
direct labor related to a decrease in the number of contracts being performed
at the Company's headquarters, as well as a decrease in the number of
employees doing work at customer sites.

ARM's indirect operating costs decreased $237,359 or 12%, from $1,902,456
during the year ended May 31, 1996, to $1,665,097 during the year ended May
31, 1997. This decrease is directly related to a decrease in the amount of
indirect labor being charged to overhead, as well as a decrease in fringe
benefit costs incurred as a result of fewer staff.

ARM's general and administrative ("G&A") expenses decreased $26,378 or 3%,
from $934,453 in 1996, to $908,075 during 1997. The decrease in ARM's G&A
expenses was directly attributable to the reduction in ARM's G&A staff during
the current year which was partially offset by an increase in professional
fees.

As a result of the foregoing, ARM realized operating income for the year ended
May 31, 1997, of $265,578 compared to operating income of $349,618 for the
same period during 1996. The $84,040 decrease in ARM's 1997 operating margin
was primarily related to a decrease in fees realized on ARM's contracts due to
the higher indirect rates realized by ARM during 1997, in particular its
general and administrative rate, as well as, a decrease in award fees being
realized on the Company's largest contract.

ARM's interest and other expenses decreased $288,968 or 51%, from $562,507 for
the year ended May 31, 1996, to $273,539 during the year ended May 31, 1997.
Net interest expense decreased $218,401 or 58% from 1996. The decrease in
interest costs was the result of ARM not accruing any interest on either the
delinquent employee 401(k) contributions nor the unpaid federal withholding
taxes (relating to its pre-petition liabilities) during the current fiscal
year when compared to the same period in 1996. Other expenses also decreased
$70,567 during the year ended May 31, 1997. This was primarily due the fact
that ARM did not record any penalties during the current period because the
accrual of penalties and interest is stayed as a result of the Company filing
for protection under Chapter 11 of the United States Bankruptcy Code. The
decrease in penalties of $152,963 was offset by the increase in other expenses
of $22,396 and $60,000 of expenses associated with the sale of a majority of
ARM's assets.

ARM sustained a net loss before income taxes of $(164,785) for the year ended
May 31, 1997, compared to a net loss of $(241,652) during the same period last
year. The primary reasons for this improvement were the lower interest and
penalty costs realized during 1997, offset by the increase in bankruptcy
related professional fees.

LIQUIDITY AND CAPITAL RESOURCES - 1997 COMPARED TO 1996
- -------------------------------------------------------
Total assets decreased $283,518 or 16%, from $1,797,620 at May 31, 1996, to
$1,514,102 at May 31, 1997. Total liabilities on the other hand decreased
from $3,899,769 to $3,832,358 over the same period, or a decrease of $67,411,
or 2%.

The most significant reason for the decrease in total assets was the decrease
in accounts receivable. At May 31, 1997, the Company had $955,207 and
$210,542 in billed and unbilled receivables, respectively. Billed receivables
decreased $135,654 or 12% from May 31, 1996, while unbilled receivables
decreased $223,282 or 51% from May 31, 1996. The decrease in billed accounts
receivable was primarily the result of the decreases in the average amount
billed due to decreases in revenues. The decrease in unbilled accounts
receivable consisted of: approximately $90,000 related to the write down of
unbilled receivables resulting from audit adjustments for the years ended May
31, 1994, 1995 and 1996 which were completed during 1997. Additionally,
during May 1997, the Company billed the majority of all of the work performed
during May 1997.

The most significant reasons for the $249,690 increase in post-petition
liabilities collectively, were increases in: accounts payable of $256,709,
accrued salaries and benefits of $51,983, accrued payroll taxes of $72,428 and
other accrued expenses of $76,122, while notes payable decreased by $140,542
and the provision for contract losses decreased by $60,000. The increase in
accounts payable related primarily to unpaid professional fees related to the
bankruptcy proceeding, which must be court approved by the Bankruptcy Court
before they can be paid. The primary reason for the increase in accrued
salaries and benefits was the increase in accrued wages earned by employees (5
days at May 31, 1997 as compared to 4 days at May 31, 1996). The primary
reason for the increase in the accrued payroll taxes and withholdings related
to the last payroll paid during May 1997. Taxes for that payroll were not due
until June 1997. The increase in other accrued liabilities related to accrued
professional fees as well as expenses related to the sale of ARM's assets.
The provision for contract losses was eliminated at May 31, 1997, since all of
the incurred cost audits through May 31, 1996 were finalized, and therefore,
the unbilled receivables were adjusted to reflect the audit results.

The decrease in pre-petition liabilities of $(317,101) included decreases of:
$(78,620) in accounts payable, $(40,589) in accrued salaries and related
benefits, and $(205,388) of accrued payroll taxes and withholdings. The
decrease in pre-petition accounts payable resulted from two customers
offsetting their pre-petition receivable claims against their pre-petition
payable claims. These two customers were both customers and vendors of ARM,
and according to bankruptcy rules, have the right to offset amounts owed to
them by the amounts owed by them. The decrease in pre-petition accrued
salaries and benefits related to the decrease in pre-petition accrued
vacation, the payment for which was authorized by a Bankruptcy Court order.
The decrease in pre-petition accrued taxes and withholdings included $180,000
of monthly payments being made by ARM to the IRS under court order, plus the
collection of a $29,442 in pre-petition accounts receivable which was to be
paid to the IRS as part of the same court order.

The Company's working capital deficit increased by 7% during the year ended
May 31, 1997, from a deficit of $(2,273,810) at May 31, 1996 to a deficit of
$(2,433,340) at May 31, 1997.

Filing of Chapter 11 Petition by ARM
- ------------------------------------
The following is a chronology of the events leading up to ARM filing for
protection under Chapter 11 of the United States Bankruptcy laws on April 2,
1996, as well as a discussion of what has happened since the filing and
subsequent signing of an agreement to sell the majority of ARM's assets to a
third party purchaser.

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 primary 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. Subsequent monthly
payments have been and will continue to be made directly to the IRS by CFC
from borrowings made by ARM. ARM was also required to remit to the IRS
collections on certain billed receivables that were outstanding as of April 2,
1996 (which totaled approximately $139,700 and consisted of final vouchers on
14 old contracts). In addition, as part of the agreement with the IRS, and as
required by the Bankruptcy Court, ARM was required to remit its post-petition
taxes when due and provide proof of such payments to the IRS and the
Bankruptcy Court on a timely basis. The Bankruptcy Court approved the
agreements with the IRS and CFC, and approved ARM's operating budget for 15
days through April 21, 1996. These agreements have continued to be renewed by
the Bankruptcy Court.

Sale of ARM's Government Contracts
- ----------------------------------
ARM informed the Bankruptcy Court and the IRS that it would continue to pursue
the sale of substantially all of ARM's assets. To that end, ARM placed ads in
several newspapers, including THE WALL STREET JOURNAL. ARM received
approximately 34 inquires to these ads. During May and June 1996, the Company
sent information about ARM to 18 Companies and held serious discussions with 7
Companies concerning the sale of ARM's assets.

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

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

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

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

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

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
- - All furniture, fixtures and ARM's organization, existence
equipment, or capitalization, and the
- - All proprietary rights (patents, capital stock of ARM,
etc.), - Billed accounts receivable as
- - All unbilled accounts receivable of closing,
relating to expired contracts as - Intercompany receivables,
of January 31, 1997, - All of ARM's cash accounts,
- - All other unbilled accounts - ARM's rights to occupy real
receivable as of the closing date. property pursuant to leases of real
property and any leasehold
improvements made thereto,
- Any other property identified by
the Purchaser prior to the closing.

Plan of Reorganization/Payment and Pre-Petition Liabilities
- -----------------------------------------------------------
After the sale has been completed, ARM will file a Plan of Reorganization,
which will, among other things, specify how much of the outstanding pre-
petition liabilities will be paid and over what period of time. It is
expected that a Plan of Reorganization will be filed with the Bankruptcy Court
within 90 days of the completion of the sale. This Plan is expected to take
several months to receive Bankruptcy Court approval. It is also expected that
between the monies generated from the sale of ARM's contract rights plus the
collection of outstanding accounts receivable (which are not part of the
sale), there will not be sufficient monies to liquidate all of ARM's pre-
petition liabilities. Furthermore, it appears that the unsecured creditors
(accounts payable) will receive little or nothing towards their pre-petition
claims. Specifically, it appears that the following will be paid in full as a
result of the expected Plan of Reorganization: 1) the secured claim of CFC,
ARM's pre-petition and post-petition lender; 2) the principal portions of the
tax amounts owed to the IRS; 3) approximately $255,200 of the $345,138 owed to
the employees for accrued vacation, $530,917 of the $676,000 owed to the
401(k) Plan as of April 2, 1996, as well as certain employees' pre-petition
claims for unreimbursed travel expenses of approximately $50,000; and 4) the
majority of the principal portions of the tax amounts owed to the various
state authorities. Although these are the current expectations, there can be
no assurance that these amounts will be paid until the Plan of Reorganization
is submitted and confirmed by the Bankruptcy Court.

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

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

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

The sale of ARM, will dramatically change the Company's balance sheet and
statement of operations. Through the bankruptcy proceeding, all of ARM's
debts, which total $3.5 million at May 31, 1997, will be either liquidated or
discharged. This will decrease interest and penalty costs that the Company
has been incurring. If ARS and ARInternet's revenues can be increased to
produce net profits and a positive cash flow, the 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.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Page
------
Index to Consolidated Financial Statements and Supplementary Data:
- -----------------------------------------------------------------
Report of Independent Auditors 22-23

Financial Statements:

Consolidated Balance Sheets - May 31, 1997 and 1996 24-25

Consolidated Statements of Operations - Years Ended
May 31, 1997 and 1996 26

Consolidated Statements of Changes in Stockholders'
Deficit - Years Ended May 31, 1997 and 1996 27

Consolidated Statements of Cash Flows - Years Ended
May 31, 1997 and 1996 28-29

Notes to Consolidated Financial Statements 30-45

The Financial Statement Schedules and Exhibits
are Listed in Part III Item 14 20

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------

On August 25, 1997, the Company's Board of Directors approved a change in the
Company's certifying accountant. The change was effective August 25, 1997.

The independent accountants who were previously engaged as the principal
accountant to audit the Company's financial statements were Friedman & Fuller,
P.C., Certified Public Accountants. The reports of Friedman & Fuller, P.C.,
covering the Company's 1996, 1995 and 1994 consolidated financial statements
contain a going concern qualification. Other than the foregoing, none of
Friedman & Fuller, P.C.'s reports over the past two (2) years on the financial
statements of the Company contained any adverse opinion or disclaimer of
opinion, or was qualified or was modified as to uncertainty, audit scope of
accounting principles. Nor have there been any disagreement with the Company
and Friedman & Fuller, P.C., on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure
during the past two (2) years and through the date of this report on Form 8-K.

The Company has retained the accounting firm of Aronson, Fetridge and Weigle,
A Professional Corporation, Certified Public Accountants, to serve as the
Company's principal accountant to audit the Company's financial statements.
This engagement is effective August 25, 1997.

Prior to its engagement as the Company's principal independent accountant,
Aronson, Fetridge and Weigle has not been consulted by the Company either with
respect to the application of accounting principles to a specific transaction
or the type of audit opinion that might be rendered on the Company's financial
statements or on any matter which was the subject of any prior disagreement
between the Company and its previous certifying accountant.
<PAGE>
<PAGE>
PART III
--------

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Part III, Items 9, 10, 11 and 12, are incorporated by reference from the
Registrant's definitive Proxy Statement relating to its Annual Meeting of
Shareholders which will be filed in an amendment within 120 days of May 31,
1997.

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------

(a) Certain documents filed as part of the Form 10-KSB
Page
----
(1) The financial statements included are listed in
Part II Item 7 18

(b) Reports on Form 8-K.

The Company did not file any Current Report on
Form 8-K during the quarter ended May 31, 1997.

All schedules not included herewith are presented in the
footnotes to the consolidated financial statements or are not applicable.
<PAGE>
<PAGE>

APPLIED RESEARCH CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Applied Research Corporation:

We have audited the accompanying consolidated balance sheet of Applied
Research Corporation and subsidiaries as of May 31, 1997, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Research Corporation and subsidiaries as of May 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern: however, the Company had
net working capital and stockholders' capital deficits as of May 31, 1997, as
well as a history of losses. As discussed in Note 3, the Company's principal
subsidiary has filed for reorganization under Chapter 11 of the United States
Bankruptcy Code and, subsequent to year end, substantially all of its contract
rights and certain other assets were sold to a third party. This subsidiary
has served as the main source of cash flow for the Company and has provided
continued funding (through the date of the bankruptcy filing) to the Company's
two other subsidiaries, both of which have a history of losses and both of
which have substantial working capital and stockholders' capital deficits.
The foregoing factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

ARONSON, FETRIDGE & WEIGLE

Rockville, Maryland
August 25, 1997
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Applied Research Corporation:

We have audited the accompanying consolidated balance sheet of Applied
Research Corporation and subsidiaries as of May 31, 1996, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Research Corporation and subsidiaries as of May 31, 1996, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern: however, the Company had
net working capital and stockholders' capital deficits as of May 31, 1996, as
well as a history of losses. As discussed in Note 3, the Company's principal
subsidiary has filed for reorganization under Chapter 11 of the United States
Bankruptcy Code and is subject to a pending agreement under which
substantially all of its contract rights and certain other assets are to be
sold to a third party. This subsidiary has served as the main source of cash
flow for the Company and has provided continued funding (through the date of
the bankruptcy filing) to the Company's two other subsidiaries, both of which
have a history of losses and both of which have substantial working capital
and stockholders' capital deficits. The foregoing factors raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

FRIEDMAN & FULLER, P.C.

Rockville, Maryland
August 18, 1996, except for Note 3,
as to which the date is August 31, 1996

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
<CAPTION>
1997
Pro-Forma
Giving Effect
to Sale of ARM
1997 (Notes 3 and 15) 1996
----------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash (Note 2) $ 228,414 $ 440,210 $ 78,689
Accounts receivable, net
(Notes 3, 4, 5 and 15) 1,165,749 955,207 1,524,685
Due from Space Applications
Corporation, short-term
(Note 15) - 34,900 -
Inventory, at cost (Note 2) 2,546 2,546 1,492
Other current assets 2,309 2,309 21,093
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,399,018 1,435,172 1,625,959
----------- ----------- -----------
PROPERTY AND EQUIPMENT, AT COST
(Notes 2, 3, 5 and 15)
Furniture and equipment 167,741 20,728 167,405
Computer equipment 488,295 133,195 462,206
Laboratory equipment 121,426 - 121,426
Leasehold improvements 22,322 200 22,322
----------- ----------- -----------
799,784 154,123 773,359
Less accumulated depreciation
and amortization 717,713 99,193 640,589
----------- ----------- -----------
NET PROPERTY AND EQUIPMENT 82,071 54,930 132,770
----------- ----------- -----------
INTANGIBLE ASSETS, NET OF
AMORTIZATION (Notes 2, 3 and 15) 25,654 3,997 32,276
----------- ----------- -----------
OTHER ASSETS
Deposits 7,359 7,359 6,615
Due from Space Applications
Corporation, long-term
(Note 15) - 287,500 -
----------- ----------- -----------
TOTAL OTHER ASSETS 7,359 294,859 6,615
----------- ----------- -----------
TOTAL ASSETS $ 1,514,102 $ 1,788,958 $ 1,797,620
=========== =========== ===========
</TABLE>

See accompanying notes to the consolidated financial statements.

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
MAY 31, 1997 AND 1996
<CAPTION>
1997
Pro-Forma
Giving Effect
to Sale of ARM
1997 (Notes 3 and 15) 1996
----------- ---------------- -------------
<S> <C> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Liabilities not subject
to compromise:
Notes payable (Note 5) $ 512,121 $ 512,121 $ 689,563
Loans payable to officers
and directors (Note 13) 41,900 41,900 4,000
Accounts payable 419,023 419,023 162,314
Accrued salaries and benefits
(Notes 6 and 7) 228,557 137,046 176,574
Accrued payroll taxes and
withholdings (Notes 2 and 8) 129,571 129,571 57,143
Other accrued liabilities 153,787 153,787 77,665
Billings in excess of costs
and anticipated profits - - 9,999
Deferred revenue (Note 2) 30,035 30,035 27,635
Income taxes payable (Note 9) 1,000 1,000 1,411
Provision for contract losses - - 60,000
------------ ------------ ------------
Total liabilities not subject
to compromise 1,515,994 1,424,483 1,266,304
------------ ------------ ------------
Liabilities subject to
compromise: (Note 3)
Accounts payable 325,192 275,192 403,812
Accrued salaries and benefits
(Notes 6 and 7) 820,562 385,856 861,151
Accrued payroll taxes and
withholdings (Note 8) 725,406 166,039 930,794
Accrued interest and
penalties (Notes 7 and 8) 445,204 395,571 437,708
------------ ------------ ------------
Total liabilities subject to
compromise 2,316,364 1,222,658 2,633,465
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 3,832,358 2,647,141 3,899,769
------------ ------------ ------------
TOTAL LIABILITIES 3,832,358 2,647,141 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,
6,311,083 shares issued and
outstanding in 1997 and 1996
(Notes 11 and 12) 3,155 3,155 3,155
Capital in excess of par value 1,140,529 1,140,529 1,140,529
Accumulated deficit (3,461,940) (2,001,867) (3,245,833)
------------ ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,318,256) (858,183) (2,102,149)

COMMITMENTS AND CONTINGENCIES
(Notes 2, 3, 5, 7, 8, 10,
11, 12 and 15) ------------ ------------ ------------

TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 1,514,102 $ 1,788,958 $ 1,797,620
=========== =========== ===========
</TABLE>

See accompanying notes to the consolidated financial statements

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996

<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue (Notes 2 and 15) $ 542,575 $ 563,596
------------- ------------
Operating costs and expenses:
Direct cost of services 180,150 259,772
Indirect operating costs - 31,743
General & administrative expenses 405,749 592,457
------------ -------------
Total operating costs and expenses 585,899 883,972
------------- ------------
Operating loss from continuing operations (43,324) (320,376)
------------- ------------
Other expense:
Interest expense, net 1,531 88
Consulting expense associated with
stock awards (Note 11) - 89,063
Penalties 4,927 3,711
Other, net 921 2,166
------------- ------------
Total other expense 7,379 95,028
------------- ------------
Loss before discontinued operations,
reorganization items and income taxes (50,703) (415,404)
------------- ------------
Loss from discontinued operations before
reorganization items (Note 15) (7,961) (212,889)
Reorganization items:
Professional fees (156,824) (28,763)
------------- ------------
Loss from discontinued operations (164,785) (241,652)
------------- ------------
Loss before income taxes (215,488) (657,056)

Income taxes (Note 9) 619 -
------------- ------------
Net loss $ (216,107) $ (657,056)
============= ============
Net loss per common share:
Loss before discontinued operations $ (0.01) $ (0.07)
Loss from discontinued operations (0.03) (0.04)
------------- ------------
Net loss per common share $ (0.03) $ (0.11)
============= ============
Weighted average number of shares
outstanding 6,311,083 6,214,817
============= ============
</TABLE>

See accompanying notes to the consolidated financial statements

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED MAY 31, 1997 AND 1996

<CAPTION>
Common
Stock Capital in
Par Excess of Accumulated Stockholders'
Value Par Value Deficit Deficit
------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance May 31, 1995 $ 2,972 $ 1,026,649 $(2,588,777) $(1,559,156)

Conversion of convertible note
to common stock (Note 11) 33 24,967 - 25,000

Stock awards (Note 11) 150 88,913 - 89,063

Net loss - - (657,056) (657,056)
------- ----------- ------------ ------------
Balance May 31, 1996 3,155 1,140,529 (3,245,833) (2,102,149)

Net loss - - (216,107) (216,107)
------- ----------- ------------ ------------
Balance May 31, 1997 $ 3,155 $ 1,140,529 $(3,461,940) $(2,318,256)
======= =========== ============ ============

</TABLE>

See accompanying notes to the consolidated financial statements

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996

<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 8,561,558 $ 9,189,228
Cash paid to suppliers and employees (7,922,503) (8,530,333)
Interest paid (165,539) (268,729)
Income taxes paid (1,000) (18,449)
------------ ------------
Net cash provided from operating activities
before reorganization items 472,516 371,717
------------ ------------
Operating cash flows from reorganization items:
Professional fees paid for services rendered
in connection with the Chapter 11 proceeding (156,824) (28,763)
------------ ------------
Net cash used by reorganization items (156,824) (28,763)
------------ ------------
Net cash provided from operating activities 315,692 342,954
------------ ------------
Cash flows from investing activities:
Capital expenditures (26,425) (61,175)
------------ ------------
Net cash used in investing activities (26,425) (61,175)
------------ ------------
Cash flows from financing activities:
Proceeds from loans from officers and directors 37,900 4,000
Proceeds from equipment loans - post-petition 9,774 -
Proceeds of loans from receivables assignment -
pre-petition - 6,299,537
Proceeds of loans from receivables assignment -
post-petition 6,466,890 1,430,489
Repayment of loans from receivables assignment -
pre-petition 24,800 (6,568,076)
Repayment of loans from receivables assignment -
post-petition (6,627,610) (1,342,530)
Repayment of equipment loan - pre-petition - (41,538)
Repayment of equipment loan - post-petition (1,696) -
------------ ------------
Net cash used in financing activities (139,542) (218,118)
------------ ------------
Net increase in cash 149,725 63,661

Cash at the beginning of year 78,689 15,028
------------ ------------
Cash at the end of year $ 228,414 $ 78,689
============ ============
</TABLE>

See accompanying notes to the consolidated financial statements

<PAGE>
<PAGE>
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
YEARS ENDED MAY 31, 1997 AND 1996

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

Net loss $ (216,107) $ (657,056)

Adjustments to reconcile net loss to net cash
provided from operating activities:
Depreciation 77,124 77,722
Amortization 6,622 25,776
Provision for contract losses (60,000) 20,000
Consulting expense associated with stock awards - 89,063
Changes in assets and liabilities:
Decrease in accounts receivable 358,936 268,168
Decrease (increase) in inventory (1,054) 2,217
Decrease in other current assets 18,784 39,726
Increase in intangible assets - (695)
Decrease (increase) in other assets (744) 34,460
Decrease in accounts payable - pre-petition (78,620) (145,483)
Increase in accounts payable - post-petition 256,709 162,314
Decrease in accrued salaries and
benefits - pre-petition (40,589) (354,133)
Increase in accrued salaries and
benefits - post-petition 51,983 176,574
Increase (decrease) in accrued payroll taxes
and withholdings - pre-petition (205,388) 449,218
Increase in accrued payroll taxes and
withholdings - post-petition 72,428 57,143
Increase in accrued interest and penalties -
pre-petition 7,496 75,128
Increase in other accrued liabilities -
post-petition 76,122 77,665
Decrease in billings in excess of costs
and anticipated profits (9,999) (49,595)
Increase in deferred revenue 2,400 13,191
Decrease in income taxes payable (411) (18,449)
------------ ------------
Net cash provided from operating activities $ 315,692 $ 342,954
============ ============
</TABLE>

Supplemental disclosure of cash flow information:

During the year ended May 31, 1996, the holder of a $25,000 note converted the
note into 66,667 shares of common stock of the Company (See Note 11 for
additional information).

During the year ended May 31, 1996, two companies were issued 300,000 shares
of common stock as compensation for their services under consulting agreements
(See Note 11 for additional information).

See accompanying notes to the consolidated financial statements

<PAGE>
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996

1. ORGANIZATION
------------
Applied Research Corporation is organized under the laws of the state of
Colorado and is comprised of two wholly-owned subsidiaries, Applied Research of
Maryland, Inc. ("ARM") and ARSoftware Corporation ("ARS"), and one majority-
owned subsidiary, ARInternet Corporation ("ARInternet"). In addition, the
Company formed ARInstruments Division ("ARInstruments"), an unincorporated
commercial instrumentation division of ARM.

ARM is a high technology company specializing in research and development,
design and fabrication of sensors and instrumentation, technical support
services and scientific related software creation. ARM's major areas of
service include Astronomy and Astrophysics, Atmospheric Sciences, Meteorology,
the Space Sciences and Computer Related Analytical Services. ON APRIL 2, 1996,
ARM FILED A VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 OF THE UNITED STATES
BANKRUPTCY CODE. SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
ADDITIONAL INFORMATION.

ARInstruments was formed in fiscal 1993 to penetrate the government and
commercial instrumentation markets. During its many years of performing under
government contracts, the Company has developed expertise in custom design and
fabrication work. In addition, members of the Company's technical staff have
investigated and researched other government and commercial applications for
existing technologies. The Company formed ARInstruments to segregate these
operations from the government contract operations in the design, fabrication,
and distribution of instrumentation products. During the fiscal year ended May
31, 1994, ARInstruments began research and development efforts related to
product development and initiated two patent applications. These patents were
granted during the fiscal year ended May 31, 1995. The costs associated with
obtaining these patent applications have been capitalized.

ARS was established in April 1992, to diversify the business base of the
Company by developing niche markets in the computer software industry. ARS is
currently reselling existing products under licensing agreements.

ARInternet was established in November 1994, to diversify the business base of
the Company by developing niche markets in the on-line computer services
industry. ARInternet is an Internet provider and plans on providing scientific
and other information to the scientific and engineering communities.

Applied Research Corporation maintains only minimal resources and derives all
of its income from its subsidiaries. As hereinafter used, Applied Research
Corporation or the term "Company" shall refer to Applied Research Corporation
and its subsidiaries, except when otherwise indicated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

PRINCIPLES OF CONSOLIDATION
- ---------------------------
The accompanying consolidated financial statements include the accounts of
Applied Research Corporation and its wholly and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.

CONTRACT REVENUE
- ----------------
Revenue on cost-plus fixed fee contracts is recorded on the basis of
recoverable direct costs incurred plus indirect expenses and the allocable
portion of the fixed fee. Fixed price contracts are accounted for under the
percentage of completion method measured by cost of services performed to total
estimated cost of services. Revenue under time and material contracts is
recorded at negotiated rates as labor hours and other direct costs are
incurred. Cost-to-complete estimates are reviewed periodically and revised as
required and a provision for estimated losses on contracts is recorded when
identified.

All contract costs, including direct and indirect costs are subject to audit by
the Defense Contract Audit Agency ("DCAA") and ultimate reimbursement of costs
is contingent upon the outcome of such audits. As of May 31, 1997, the DCAA
has completed audits for the years 1982 to 1996 and all adjustments resulting
from these audits are reflected in the consolidated financial statements
presented.

In the opinion of management, adequate provision has been made in the
accompanying consolidated financial statements for adjustments, if any, which
may result from the audit for fiscal year 1997.

SOFTWARE REVENUE
- ----------------
ARS resells software products developed by other companies as well as state of
the art proprietary software products developed by the Company for use in the
scientific and engineering communities. Revenue is recorded when the software
program is shipped to the customer.

SUBSCRIPTION REVENUE
- --------------------
ARInternet provides online computer access to the internet (information super
highway). ARInternet offers monthly, quarterly, semi-annual and annual
subscriptions to its customers. These subscriptions are billable in advance.
ARInternet recognizes revenue on an as-earned basis. Deferred revenue is
recorded for amounts received from customers in advance. Subscriptions may be
canceled by the customer at any time, upon written notice.

CASH EQUIVALENTS
- ----------------
Cash equivalents are defined as highly liquid short-term investments whose
maturity dates do not extend past three months from the original date of
purchase. At May 31, 1997, the Company held no such investments. At May 31,
1997, ARM held $145,840 of cash that is restricted, as follows.

<TABLE>
<CAPTION>
Description Amount
-------------------------------- ----------
<S> <C> <C>
Held for ARM withholding taxes $ 101,226
Held for 401(k) Plan (see Note 7
to the Consolidated Financial
Statements) 44,614
---------
Total $ 145,840
</TABLE>
<PAGE>
<PAGE>

INVENTORY
- ---------
Inventory consists principally of computer software and is stated at the lower
of purchased cost or market. Cost is determined by using the first-in, first-
out (FIFO) method.

DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation of furniture, office equipment, lab equipment and computer
equipment is computed on the straight-line method over the estimated useful
economic lives of the assets, generally 3 to 5 years. Leasehold improvements
are amortized over the estimated economic life of the improvement or the
remaining term of the lease, whichever is shorter.

INTANGIBLE ASSETS
- -----------------
Intangible assets consist of capitalized computer software costs and patent
development costs.

Capitalized computer software costs consist of expenses associated with
producing "product masters" for two products developed by ARS. These costs
have been capitalized in accordance with Statement of Financial Accounting
Standard #86 (SFAS No. 86). In accordance with SFAS No. 86, the annual
amortization of these capitalized costs shall be the greater of the amount
computed using (a) the ratio that current gross revenues for a particular
product bear to the total of current and anticipated future gross revenues for
the product or (b) the straight line method over the remaining estimated
economic life of the product. At May 31, 1997 and 1996, net capitalized
software costs were $3,997 and $9,325, net of accumulated amortization of
$288,124 and $282,796, respectively. ARS began amortizing these costs on a
product-by-product basis as the associated products became available for
general release to customers. During the years ended May 31, 1997 and 1996,
$5,328 and $24,483, respectively, in amortization expense had been recorded for
products associated with the capitalized software development costs.

During the year ended May 31, 1995, the Company was granted two patents. The
costs associated with obtaining these patents were capitalized and are being
amortized over the life of the patents, which is 20 years from application, or
approximately 18.5 years after notification of receipt.

DEFERRED OFFERING EXPENSES
- --------------------------
During the year ended May 31, 1995, the Company paid approximately $30,500 of
costs that were associated with arranging for the raising of additional capital
in fiscal 1996, which effort was abandoned. As a result, these costs were
charged to expense during the year ended May 31, 1996.

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
- --------------------------------------------
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 May 31, 1996 and 1997, no
minority interest has been reflected in the consolidated financial statements.
In the future, if ARInternet earns profits, to the extent that such profits
attributable to the minority interest exceed the minority interest losses
absorbed by the Company, such minority interest will be recognized in the
financial statements.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
- -------------------------------------------------------
The preparation if financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

INCOME TAXES
- ------------
Deferred income taxes result from temporary differences in the recognition of
revenue and expenses for financial accounting and tax purposes. The principal
source of temporary differences relates to differences in the amount of
financial statement and tax treatment of net operating loss carryforwards,
compensated absences, capitalized software development costs, certain accrued
expenses and certain accrued contract amounts.

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.

RECLASSIFICATIONS
- -----------------
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation. The 1996 Consolidated
Statement of Operations has been changed to show the effect of the discontinued
operations.

3. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF ARM AND
MANAGEMENT'S 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 information provided in Note 14 under
"liabilities subject to compromise". Additional claims (liabilities subject to
compromise) may arise subsequent to the filing date resulting from the
rejection of executory contracts, including leases, and from the determination
by the 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. Subsequent monthly
payments have been and will continue to be made directly to the IRS by CFC from
borrowings made by ARM. ARM was also required to remit to the IRS collections
on certain billed receivables that were outstanding as of April 2, 1996 (the
final vouchers on 14 old contracts, which totaled approximately $136,700). In
addition, as part of the agreement with the IRS and as required by the
Bankruptcy Court, ARM was required to remit its post-petition taxes when due
and provide proof of such payments to the IRS and the 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 is insufficient collateral to cover the
interest portion of scheduled payments on its pre-petition debt obligations,
most notably the installment obligation due to the IRS prior to the filing of
the petition. The Debtor has curtailed accruing interest on all pre-petition
obligations except the amounts owed CFC (See Note 5) 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, a hearing on which was originally scheduled for July
26, 1996. This hearing was subsequently moved to July 30, 1996. At the
hearing, a total of four qualified bidders attended, and after extensive
bidding, an offer was accepted for $2.1 Million.

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

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

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

PURCHASED ASSETS EXCLUDED ASSETS

PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES
- -----------------------------------------------------------
After the sale has been completed, ARM will file a Plan of Reorganization,
which will, among other things, specify how much of the outstanding pre-
petition liabilities will be paid and over what period of time. It is expected
that a Plan of Reorganization will be filed with the Bankruptcy Court within 90
days of the completion of the sale. This Plan is expected to take several
months to receive Bankruptcy Court approval. It is also expected that between
the monies generated from the sale of ARM's contracts rights plus the
collection of outstanding accounts receivable (which are not part of the sale),
there will not be sufficient monies to liquidate all of ARM's pre-petition
liabilities. Furthermore, it appears that the unsecured creditors (accounts
payable) will receive little or nothing towards their pre-petition claims.
Specifically, it appears that the following will be paid in full as a result of
the expected Plan of Reorganization: 1) the secured claim of CFC, ARM's pre-
petition and post-petition lender; 2) the principal portions of the tax amounts
owed to the IRS; 3) approximately $255,200 of the $345,138 owed to the
employees for accrued vacation, $530,917 of the $676,000 owed to the 401(k)
Plan as of April 2, 1996, as well as certain employees' pre-petition claims for
unreimbursed travel expenses of approximately $50,000; and 4) the majority of
the principal portions of the tax amounts owed to the various state
authorities. Although these are the current expectations, there can be no
assurance that these amounts will be paid until the Plan of Reorganization is
submitted and confirmed by the Bankruptcy Court.

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

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

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

The sale of ARM, will dramatically change the Company's balance sheet and
statement of operations. Through the bankruptcy proceeding, all of ARM's
debts, which total $3.5 million at May 31, 1997, will be either liquidated or
discharged. This will decrease interest and penalty costs that the Company has
been incurring. If ARS and ARInternet's revenues can be increased to produce
net profits and a positive cash flow, the 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.

4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable are comprised of the following at May 31:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Billed accounts receivable, (1997
includes $214,638 of May 1997
expenses billed in June 1997) $ 963,686 $ 1,100,861
Unbilled costs, fees and retentions
under cost-type contracts 210,542 433,824
------------ ------------
1,174,228 1,534,685
Less: allowance for doubtful accounts 8,479 10,000
------------ ------------
Accounts receivable - net of allowance $ 1,165,749 $ 1,524,685
============ ============
</TABLE>

Principally all of the Company's revenues are generated from contracts with
departments or agencies of the U.S. Government ("Government") and are subject
to audit by Government auditors (see Note 2 - Contract Revenue). In 1997 and
1996, net sales to the Government or to prime contractors under Government
contracts amounted to approximately $7,632,300 and $8,393,900, respectively.

The Company extends unsecured credit to essentially all of its customers. As
of May 31, 1997 and 1996, billed accounts receivables included approximately
$868,825 and $1,066,953, respectively, due from either the Government or from
prime contractors under Government contracts.

In accordance with industry practice, accounts receivable relating to long-term
contracts are classified as current assets. In 1997 and 1996, accounts
receivable of approximately $112,000 and $166,000 respectively are not expected
to be realized within one (1) year. These amounts are comprised primarily of
retainages on long-term contracts.

5. NOTES PAYABLE
-------------
Notes payable are comprised of the following at May 31:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes payable to asset-based
lending organization $ 504,043 $ 689,563

Equipment loan 8,078 -
--------- ---------
Total notes payable $ 512,121 $ 689,563

</TABLE>

On November 17, 1995, ARM entered into an agreement with a lender ("CFC") to
provide financing at an interest rate of prime plus 4%, calculated on the mid-
month and end-of-month balances. There is also a 0.65% service charge for each
15 day period on outstanding invoices.

Subsequent to the filing of the Chapter 11 petition in the Bankruptcy Court,
CFC was granted a "First Lien" position in all post-petition financing. CFC
has continued lending to ARM against its post-petition receivables. During
July 1997, CFC was paid in full from the collection of the post-petition
receivables secured by the agreement.

During September 1996, ARInternet entered into an equipment financing
arrangement to provide capital to purchase equipment and related software. The
loan carries an interest rate of 10% and is payable over two years and is
secured by the equipment.

6. ACCRUED SALARIES AND BENEFITS
-----------------------------
Accrued salaries and benefits are comprised of the following at May 31:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Liabilities not subject to compromise:
Accrued salaries $ 101,647 $ 122,681
Accrued vacation 104,072 35,403
Retirement plan contributions
(employer) (see Note 7) 7,161 3,698
Retirement plan contributions
(employee) (see Note 7) 13,912 14,792
Retirement plan loan payments
(employee) 1,765 -
--------- ---------
Total accrued salaries and benefits -
not subject to compromise $ 228,557 $ 176,574
========= =========
Liabilities subject to compromise:
Accrued vacation $ 253,627 $ 294,216
Retirement plan contributions
(employer) (see Note 7) 203,449 203,449
Retirement plan contributions
(employee) (see Note 7) 326,383 326,383
Retirement plan loan payments
(employee) 37,103 37,103
--------- ---------
Total accrued salaries and benefits -
subject to compromise $ 820,562 $ 861,151
========= =========
</TABLE>

As part of the agreement to sell the majority of assets of ARM, the purchaser
has agreed to assume $255,200 of the combined pre and post-petition vacation
liability. In addition, the purchase agreement provides for total combined
payments to the 401(k) plan of $530,917.

7. RETIREMENT PLAN
---------------
The Company has a retirement plan (401(k) Plan) which is available to all
qualified employees. Employee contributions up to 10 percent of annual
compensation, up to $9,500 for calendar year 1996, may be made to the plan.
The Company provides matching funds up to 25 percent of the employee's
contributions to the plan. The plan provides that forfeitures may be used to
reduce the Company's contribution. The Company's matching funds, net of
forfeitures, totaled $39,647 and $49,401 in 1997 and 1996, respectively.

As of April 2, 1996, ARM had not remitted employee contributions of $326,383,
employer contributions of $203,449, and loan payments of $37,103, as well as
$109,000 of accrued interest to the Plan. Prior to the filing of the
bankruptcy ARM had accrued interest at the rate of 15% per annum on the unpaid
employee withholdings and approximately 5% on the unpaid employer
contributions.

During July, 1995, ARM agreed to and signed contract modifications on its two
largest contracts with NASA. The contract modifications require ARM to remit
an increasing portion of its fee earned on these two contracts directly to the
401(k) plan in order to reduce the past due amounts owed. The portion of the
fees applied to the plan was 25% for the fees earned beginning January 1, 1995
and increased to 75% during calendar year 1995. Effective January 1, 1996, the
percentage increased to 100%. The contract modifications will remain in effect
until all past due amounts owed the 401(k) plan have been repaid. Through
April 2, 1996, fees totaling $80,274 earned under these contracts had been
remitted to the 401(k) plan in accordance with the contract modifications.
Although ARM continued to segregate these monies collected after the filing of
the bankruptcy these funds were not remitted to the Plan since they were pre-
petition claims. These modifications were eliminated upon novation of these
contracts to SAC.

The Company's failure to remit 401(k) contributions in a timely fashion and/or
bring its past due obligations current may subject the Company to legal
proceedings seeking to collect unpaid contributions, together with interest
thereon, liquidated damages and attorney's fees.

During December 1995, the Department of Labor ("DOL") conducted an
investigation into the Company's 401(k) Plan and the status of the past due
contributions. There has been no indication that the DOL will impose any fines
and/or penalties as a result of the past due contributions therefore no
estimates can be made regarding any potential additional liabilities. At May
31, 1997, other than the interest that has already been accrued as discussed
above, no additional amounts have been recorded.

8. WITHHOLDING TAXES
-----------------
As of April 2, 1996, ARM had not remitted pre-petition federal payroll tax
withholdings and unemployment taxes totaling $764,755. ARM has accrued
penalties and interest on those delinquent amounts totaling approximately
$315,000 through April 2, 1996. As of May 31, 1997, $559,367 of the pre-
petition federal payroll tax withholdings and unemployment taxes remained
outstanding, which were paid upon the closing of the ARM sale.

As of April 2, 1996, ARM was also delinquent in remitting $153,062 of 1995 and
1996 state withholding taxes, as well as $12,977 in state unemployment taxes.
These claims are all pre-petition claims covered by the Bankruptcy proceeding.
Collection of these taxes are stayed by the Bankruptcy proceeding.

9. INCOME TAXES
------------
Statement of Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.

SFAS 109 provides that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion of the deferred asset will not
be realized.

The tax effects of temporary differences computed at statutory rates in effect
as of May 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
Net
Deferred tax assets: 1997 1996 Change
----------- ----------- ------------
<S> <C> <C> <C>
Accrued vacations $ 39,000 $ 78,000 $ (39,000)
Bad debt allowances 3,000 4,000 (1,000)
Reserves for contract losses - 24,000 (24,000)
Unfunded pension (employer) 80,000 81,000 (1,000)
Unfunded pension (employee) 23,000 131,000 (108,000)
Depreciation 15,000 2,000 13,000
Accrued interest 70,000 72,000 (2,000)
Deferred revenue 12,000 11,000 1,000
N.O.L. carryforward 733,000 544,000 189,000
----------- ----------- ------------
975,000 947,000 28,000

Valuation allowance (926,000) (877,000) (49,000)
----------- ----------- ------------
$ 49,000 $ 70,000 $ (21,000)
=========== =========== ============
Deferred tax liabilities:
Retainages $ (43,000) $ (66,000) $ 23,000
Capitalized software (6,000) (4,000) (2,000)
----------- ----------- ------------
$ (49,000) $ (70,000) $ 21,000
=========== =========== ============
</TABLE>

The net increase in the deferred tax asset valuation allowance during the 1997
was $49,000. In recognizing its deferred tax assets, the Company has used
assumptions about levels of future pretax income that are consistent with
historical results.

The Company had a net loss for federal income tax purposes for fiscal years
1997 and 1996. A provision for current state income taxes for fiscal year 1997
of $619 has been included in the determination of net income. This provision
arises from the reporting of taxable income by the Company's ARM subsidiary on
its separately filed state returns.

The Company has unused net operating loss (NOL) carryforwards of approximately
$1,900,000 for consolidated federal and state income tax purposes. These
carryforwards expire between fiscal years 2004 and 2012, if not previously
used.

10. LEASE COMMITMENTS
-----------------
The Company has a noncancelable operating lease for its office facilities which
expires September 1998. This lease is subject to standard real estate
escalation factors and building operating expense pass-throughs. Effective
August 1, 1997, the Company signed a lease amendment that reduced its rental
obligation on the ARM space by 6,462 sq. ft. to 2,272 sq. ft.. The remaining
2,272 sq. ft. will be vacated by September 30, 1997, leaving only 2,561 sq. ft.
under lease. (See Note 3 for details of the settlement agreement.)

Rental expense for operating leases was approximately $201,600 and $212,200 for
the years ended May 31, 1997, and 1996, respectively.

Future minimum operating lease payments on the noncancelable leases are as
follows:

<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C> <C>
1998 $ 84,500
1999 19,200
---------
$ 103,700
=========
</TABLE>

11. COMMON STOCK ISSUED/WARRANTS EXERCISABLE
----------------------------------------
In a 1995 Registration Statement, the Company registered with the Securities
and Exchange Commission 920,000 shares of restricted common stock and 184,000
shares of common stock purchase warrants convertible at $0.75 per share issued
to the president of the Company upon conversion of $230,000 of debt, and 66,667
shares convertible at $0.375 per share issuable upon the conversion of an
outstanding $25,000 convertible note. The holder of the convertible note
converted the note into 66,667 shares of common stock of the Company. The
184,000 common stock warrants discussed above expired in November 1996.

During August, 1995, the Company entered into two (2) agreements with New York-
based companies to provide public relations services for the Company and to
find and attract market makers for the Company's common stock. As
compensation, the Companies were to receive up to a total of 400,000 shares of
the Company's common stock. The Company registered with the Securities and
Exchange Commission the stock issued pursuant to these agreements. Both
agreements were cancelable by the Company at any time. All of the stock
represented by these two agreements (800,000 shares) was issued in escrow
pending release as specified in the agreements. Upon the release of the stock,
the Company recorded compensation expense equal to the average of the bid and
asked prices (approximately $0.30 a share) on the date the agreements were
signed. During fiscal 1996, a total of 150,000 shares was released to each of
these Companies, resulting in the recognition of $89,063 in consulting expense.
During December 1995, the Company and the consulting companies agreed to
terminate these agreements. Therefore, the remaining 500,000 shares will not
be released and are considered to be unissued.

During January 1995, the Company entered into consulting agreements with two
individuals. These consultants agreed to provide various services to the
Company including identifying potential analysts, broker-dealers, underwriters,
market-makers, money managers, financial planners, investors, and/or other new
sources of capital, as well as, providing investor and stockholder relations
and identifying any potential acquisitions and/or joint ventures. As
compensation for these services, the Company agreed to pay these individuals up
to 3.5% of any capital raised and has granted each of these individuals Class A
common stock warrants exercisable to purchase 100,000 shares of the common
stock of the Company at an exercise price of $0.375 per share. The Company
agreed to register with the Securities and Exchange Commission the stock
underlying these warrants. The warrants were exercisable for a period of two
years and expired in March 1997.

12. STOCK OPTION PLAN
-----------------
Under the terms of its 1986 stock option plan, options to purchase shares of
the Company's common stock were granted at $.50 per share, which was the market
price at the time of the reorganization of the Company. All shares were
exercisable over a 5 year period at 20 percent per year and if unexercised,
expire 10 years from the date of grant. As of May 31, 1997, there were options
outstanding to purchase 51,000 shares of the Company's common stock, which
expire during fiscal year 1998.

During fiscal 1995, the Company adopted a new incentive stock option plan.
This plan was approved by the shareholders on November 15, 1995. Under this
plan, the Company may issue options to purchase up to 300,000 shares of the
Company's common stock, at a price not less than the then current market price
of the Company's common stock. All shares are exercisable over a 5 year period
at 20 percent per year and if unexercised, expire no later than 10 years from
the date of grant.

The following is a summary of transactions for common shares under options:

<TABLE>
<CAPTION>
Stock Under Options: 1997 1996
-------- --------
<S> <C> <C> <C>
Outstanding, beginning of year 251,000 220,000
Granted during the year - 40,000
Canceled or expired during year (40,000) (9,000)
-------- --------
Outstanding, end of year 211,000 251,000
-------- --------
Shares eligible for exercise at
end of year 131,000 91,000
======== ========
</TABLE>

As of May 31, 1997, no options issued under the plans have been exercised.

13. RELATED PARTY TRANSACTION
-------------------------
During fiscal 1996 and 1997, the President advanced $4,000 and $37,900,
respectively, to ARS to cover operating expenses. These advances do not bear
interest and are due on demand. Therefore these advances have been shown as
short term loans payables in the accompanying financial statements.

14. SIGNIFICANT CUSTOMERS
---------------------
For fiscal 1997, one customer of ARM accounted for approximately 33 percent
(33%) of the Company's total revenue. This customer, NASA, had 8 contracts
with the Company of which one contract provided 18 percent (18%) and a second
provided 14 percent (14%) of total revenue. Another customer of ARM accounted
for 56 percent (56%) of the Company's revenue during the year. This customer,
Hughes Corporation ("Hughes"), had two contracts with the Company of which one
provided 42 percent (42%) of total revenue.

For fiscal 1996, one customer of ARM accounted for approximately 35 percent
(35%) of the Company's total revenue. This customer, NASA, had 10 contracts
with the Company of which one contract provided 18 percent (18%) and a second
provided 12 percent (12%) of total revenue. Another customer of ARM accounted
for 47 percent (47%) of the Company's revenue during the year. This customer,
Hughes Corporation ("Hughes"), had two contracts with the Company of which one
provided 35 percent (35%) of total revenue. The Company maintained one
contract with General Sciences Corporation ("GSC"), which contributed
approximately 4 percent (4%) of total revenue. The Company had two contracts
with the Naval Research Laboratory ("NRL") which accounted for 3 percent (3%)
of the Company's revenue.

15. 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 years ended May 31, 1997 and 1996. Included with the
consolidated balance sheet is a pro-forma balance sheet which reflects the
effect of the ARM sale assuming it had been consummated on May 31, 1997.
ARM's balance sheet as of May 31, 1997, and a pro-forma balance sheet adjusted
for the sale is shown below:

<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma
As of Adjusted
May 31, 1997 For Sale
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 230,122 $ 441,918
Accounts receivable from customers, net 1,112,416 901,874
Intercompany advances receivable 1,576,205 1,576,205
Due from Space Application Corporation,
short-term - 34,900
Other current assets 2,309 2,309
------------ ------------
TOTAL CURRENT ASSETS 2,921,052 2,957,206

PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 147,013 -
Computer equipment 355,100 -
Laboratory equipment 121,426 -
Leasehold improvements 22,122 -
------------ ------------
645,661 -
Less accumulated depreciation and amortization 618,520 -
------------ ------------
NET PROPERTY AND EQUIPMENT 27,141 -

INTANGIBLE ASSETS, NET OF
AMORTIZATION 21,657 -

OTHER ASSETS:
Deposits 7,359 7,359
Due from Space Applications Corporation,
long-term - 287,500
------------ ------------
TOTAL OTHER ASSETS 7,359 294,859
------------ ------------
TOTAL ASSETS $ 2,977,209 $ 3,252,065
============ ============
</TABLE>

<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Pro-Forma
As of Adjusted
May 31, 1997 For Sale
------------- -------------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES:
Liabilities not subject to compromise:
Notes payable $ 504,043 $ 504,043
Accounts payable 278,260 278,260
Accrued salaries and benefits 193,178 101,667
Accrued payroll taxes and withholdings 99,236 99,236
Other accrued liabilities 152,255 152,255
Income taxes payable 1,000 1,000
------------ ------------
Total liabilities not subject to compromise 1,227,972 1,136,461
------------ ------------
Liabilities subject to compromise:
Accounts payable 325,192 275,192
Accrued salaries and benefits 820,562 385,856
Accrued payroll taxes and withholdings 725,406 166,039
Accrued interest and penalties 445,204 395,571
------------ ------------
Total liabilities subject to compromise 2,316,364 1,222,658
------------ ------------
TOTAL CURRENT LIABILITIES 3,544,336 2,359,119

STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------
Investment by ARC 1,029,621 1,029,621
Accumulated deficit (1,596,748) (136,675)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (567,127) 892,946
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,977,209 $ 3,252,065
============ ============
</TABLE>

A summary of ARM's results from operations for the years ended May 31, 1997 and
1996, are shown below:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenue $ 7,727,647 $ 8,393,868
------------ ------------
Operating costs and expenses:
Direct cost of services 4,888,897 5,207,341
Indirect operating costs 1,665,097 1,902,456
General & administrative expenses 908,075 934,453
------------ ------------
Total operating costs and expenses 7,462,069 8,044,250
------------ ------------
Operating profit from discontinued operations 265,578 349,618
------------ ------------
Other expense:
Interest expense, net 160,684 379,085
Expenses associated with the sale 60,000 -
Penalties 6,104 159,067
Other, net 46,751 24,355
------------ ------------
Total other expense 273,539 562,507
------------ ------------
Loss from discontinued operations
before reorganization items (7,961) (212,889)
Reorganization items - professional fees (156,824) (28,763)
------------ ------------
Loss from discontinued operations $ (164,785) $ (241,652)
============ ============
</TABLE>

16. INDUSTRY SEGMENT INFORMATION
----------------------------
The Company's operations have been classified into three business segments:

<TABLE>
<CAPTION>
ARS ARInternet Consolidated
----------- ---------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers:

YEARS ENDED:
-----------
May 31, 1997 $ 80,121 $ 462,454 $ 542,575
May 31, 1996 $ 261,921 $ 301,675 $ 563,596

Operating income (loss) from
continuing operations before income
taxes and extraordinary item:

YEARS ENDED:
-----------
May 31, 1997 $ (31,790) $ (11,534) $ (43,324)
May 31, 1996 $(118,026) $(202,350) $(320,376)

Capital expenditures:

YEARS ENDED:
-----------
May 31, 1997 $ - $ 26,425 $ 26,425
May 31, 1996 $ - $ 38,542 $ 38,542

Depreciation and amortization:

YEARS ENDED:
-----------
May 31, 1997 $ 7,754 $ 36,603 $ 44,357
May 31, 1996 $ 29,372 $ 25,977 $ 55,349

Research and development costs:

YEARS ENDED:
-----------
May 31, 1997 $ - $ - $ -
May 31, 1996 $ - $ - $ -

Identifiable assets at:

YEARS ENDED:
-----------
May 31, 1997 $ 23,271 $ 89,827 $ 113,098
May 31, 1996 $ 33,687 $ 84,975 $ 118,662

</TABLE>

Operating loss equals total net revenues less operating expenses. In computing
operating loss, items comprising other income (expense) have not been added or
deducted.

Identifiable assets by segment are those assets that are used in the Company's
operations in each industry segment, net of intercompany eliminations.

<PAGE>
APPLIED RESEARCH CORPORATION
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1997
INDEX TO EXHIBITS

NUMBER DESCRIPTION
- ------ -----------
2.0 Reorganization Agreement between Dollar Ventures, Inc. and Applied
Research Corporation (Note 1)
3.1 Articles of Incorporation of Dollar Ventures, Inc. (Note 1)
3.2 Amended Articles of Incorporation of Dollar Ventures, Inc. (Note 1)
3.3 Articles of Incorporation of Applied Research Corporation (Note 1)
3.4 Amended Articles of Incorporation of Applied Research Corporation
(Note 1)
3.5 By-Laws of Dollar Ventures, Inc. (Note 1)
3.6 By-Laws of Applied Research Corporation (Note 1)
4.1 Warrant Agreement (Note 1)
4.2 Specimen Certificate of Common Stock (Note 2)
4.3 Specimen Class A Common Stock Purchase Warrant (Note 2)
4.4 Specimen Subscription Agreement (Note 2)
4.5 Convertible Note (Note 2)
4.6 Convertible Note Purchase Agreement (Note 2)
10.1 Employment Agreements (Note 1)
10.2 Sovran Bank Loan (Note 1)
10.3 401(k) Plan of Applied Research Corporation (Note 1)
10.4(a) Lease Agreement on Maryland Property, dated October 22, 1993
(Note 3)
10.4(b) First Amendment to Lease Agreement on Maryland Property, dated
October 22, 1993 (Note 3)
10.4(c) Second Amendment to Lease Agreement on Maryland Property, dated
May 12, 1994 (Note 3)
10.4(d) Third Amendment to Lease Agreement on Maryland Property, dated
January 13, 1997 (Note 7)
10.4(e) Fourth Amendment to Lease Agreement on Maryland Property, dated
August 1997 (Note 7)
10.5 Patent (Note 4)
10.6 Patent (Note 4)
10.7 Contract with Hughes Applied Information Systems, dated 6-03-93
(Note 3)
10.8 Contract with NASA, dated 9-27-93 (Note 3)
10.9 Contract with NASA, dated 1-10-94 (Note 3)
10.10 (a) Financing Agreement with PrinCap Finance Company, L.L.C., dated
March 21, 1994 (Note 3)
10.10 (b) Amended Financing Agreement with Princeton Capital Finance Company,
L.L.C., dated May 10, 1995 (Note 4)
10.10 (c) Default letter from Princeton Capital Finance Company, L.L.C.,
dated November 14, 1995 (Note 5)
10.11 1994 Incentive Stock Option Plan (Note 4)
10.12 Consulting Agreement with William Hayde (Note 4)
10.13 Consulting Agreement with Market Visibility, Inc. (Note 4)
10.14 Financing Agreement with Commerce Funding Corporation, dated
November 17, 1995 (Note 5)
10.15 (a) Consolidated Asset Purchase Agreement with Fidelity Technologies
Corporation (Note 5)
10.15 (b) Asset Purchase Agreement with Space Applications Corporation
(Note 7)
10.15 (c) First Amendment to the Asset Purchase Agreement with Space
Applications Corporation (Note 7)
10.15 (d) Second Amendment to the Asset Purchase Agreement with Space
Applications Corporation (Note 7)
16.1 Letter of Friedman & Fuller, dated August 25, 1997 (Note 6)
21 Subsidiaries of the Registrant (Note 7)
27 Financial Data Schedule (Note 7)

NOTES TO EXHIBITS:
- -----------------
(1) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on
Form S-18, as amended, filed with Securities and Exchange
Commission on June 2, 1989, S.E.C. File No. 33-11943-LA.

(2) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Registration Statement on
Form S-3, filed with Securities and Exchange Commission on June 28,
1994, S.E.C. File No. 01-10076.

(3) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1994, filed with Securities and Exchange
Commission on September 6, 1994, S.E.C. File No. 01-10076.

(4) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1995, filed with Securities and Exchange
Commission on August 29, 1995, S.E.C. File No. 01-10076.

(5) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1996, filed with Securities and Exchange
Commission on September 12, 1996, S.E.C. File No. 01-10076.

(6) Previously Filed. The documents are incorporated herein by
reference from the Registrant's Current Report on Form 8-K, dated
August 25, 1997, filed with Securities and Exchange Commission on
August 27, 1997, S.E.C. File No. 01-10076.

(7) Filed herewith.

<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Applied Research Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:

APPLIED RESEARCH CORPORATION

/s/ S.P.S. Anand September 12, 1997
- ---------------------------------------- ------------------
Dr. S.P.S. Anand, Director, Date
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

/s/ S.P.S. Anand September 12, 1997
- ---------------------------------------- ------------------
Dr. S.P.S. Anand, Director Date

/s/ Manjit K. Anand September 12, 1997
- ---------------------------------------- ------------------
Manjit K. Anand, Director & Treasurer Date

/s/ Dennis H. O'Brien September 12, 1997
- ---------------------------------------- ------------------
Dennis H. O'Brien, Director, Secretary, Date
Vice President & Chief Financial Officer

/s/ Andrew S. Endal September 12, 1997
- ---------------------------------------- ------------------
Dr. Andrew S. Endal, Senior Vice President Date

<PAGE>
EXHIBIT 10.4(d)
---------------

THIRD AMENDMENT OF LEASE AGREEMENT
----------------------------------

This THIRD AMENDMENT OF LEASE AGREEMENT is made and entered into this 1st
day of January 1997, by and between LANDMARK ASSOCIATES OF MARYLAND II, a
Maryland limited partnership herein called Landlord, and APPLIED RESEARCH
CORPORATION, A Colorado corporation herein called Tenant.

WITNESSETH:

WHEREAS, Landlord and Tenant heretofore entered into a Lease Agreement
dated October 22, 1993, and subsequent amended said Lease Agreement on October
22, 1993 and May 12, 1994; and Tenant currently occupies approximately 12, 633
rentable square feet on the eleventh (11th) floor (herein called the Premises)
in the building located at 8201 Corporate Drive, Landover, Maryland, (herein
called the Building); and

WHEREAS, Landlord and Tenant desire to make certain modifications to said
Lease Agreement;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Landlord and Tenant agree as follows:

1. Effective January 1, 1997, and subject to the terms, covenants and
conditions hereinafter set forth, Landlord and Tenant agree to reduce the
area of the Premises to approximately 11, 295 rentable square feel
substantially as shown on the floor plan attached hereto as Exhibit A.
Tenant certifies that it has vacated approximately 1,338 rentable square
feel of the Premises as shown in Exhibit A (herein called the "Reduction
Premises"). Tenant further agrees that it will allow the Landlord, its
agent or employees, to enter the Reduction Premises at all times to
examine, inspect, or to make such alterations and repairs to the
Reduction Premises as the Landlord may deem necessary, or to exhibit the
same to prospective tenants.

2. Effective March 1, 1997, Paragraph 3 (Rent; Adjustment Rent) of the Lease
Agreement, as previously amended, shall be deleted in its entirely and
replace with the following language:

3. RENT: ADJUSTMENT RENT
---------------------
a. Tenant shall pay rent for the Premises during the Term at the rate of
One Hundred Eighty Two Thousand One Hundred Twenty Five and 92/100
Dollars ($182,125.92) per annum (herein called the "Minimum Rent") in
lawful money of the United States, in equal monthly installments of
Fifteen Thousand One Hundred Seventy Seven and 16/100 Dollars
($15,177.16), in advance, on or before the first (lst) day of each and
every month during the Term at the office of Landlord herein designated
(or such other place as Landlord may designate in a notice to Tenant),
without prior demand therefor and without any setoff or deduction
whatsoever. In the event that Tenant fails to pay any installment of
Minimum Rent or additional rental on the first (1st) day of the month in
which such installment is due, or any other sum hereunder within ten (10)
days after accrual thereof or billing therefor, shall be added to such
unpaid amount a late charge of ten percent (10%) of the installment or
amount due in order to compensate Landlord for the extra administrative
expenses thereby incurred. After fifteen (15) days have elapsed from the
date of accrual or billing there shall be added to such unpaid amount a
second late charge of an additional ten (10%) of the installment or
amount due. After twenty (20) days have elapsed from the date of accrual
or billing, the total amount due shall bear interest at the maximum rate
allowable by law. The Minimum Rent for the first calendar month of the
term shall be due and payable at the time of execution and delivery of
this Lease. If the Commencement Date shall occur on a date other than
the first day of any calendar month, Tenant shall pay to Landlord on the
first day of the month next succeeding the month in which the
Commencement Date shall occur an amount equal to the regular monthly
installment of Minimum Rent divided by thirty (30) multiplied by the
number of days int he period from and including the Commencement Date to
and including the last day of the month in which the Commencement Date
shall occur.

b. Commencing with the first calendar year after the Base Year, and for
each subsequent calendar year or portion thereof thereafter during the
Term, Tenant shall pay to Landlord as additional rent (the "Adjustment
Rent") the sum of the following:

i. Tenant's Pro Rata Share (as hereinafter defined) of any increase
in Operating Expenses (as hereinafter defined) between the then Current
Lease year and the Base year; and

ii. A percentage of the annual Minimum Rent set forth in Paragraph
3.a. above, equal to the percentage by which the Consumer Price Index for
All Urban Consumers for All Items for Washington, DC. - Maryland -
Virginia (hereinafter referred to as the "Index:), issued from time to
time by the Federal Bureau of Labor Statistics or any successor agency,
for the last calendar month available prior to the then Current Lease
Year in question exceeds the Index for the last calendar month available
prior to the month in which the Commencement Date falls.

In the event that the Index is substantially modified or is no longer
published, Landlord hereby agrees to substitute a comparable index
thereto. In the event that Tenant does not agree to the comparable
substitute, the matter will be determined by arbitration in accordance
with the rules of the American Arbitration Association, at the expense of
Tenant.

Notwithstanding the foregoing, Landlord may alternatively elect that the
amount of the increase in Operating Expenses shall be determined by
multiplying (A) the amount by which the Operating Expenses in the Current
Lease Year divided by the average number of square feet of rented space
in the Building during said year exceed the Operating Expenses in the
Base Year divided by the average number of square feet of rented space in
the Building during said year, time (B) the average number of square feet
of rented space in the Building during the Current Lease Year, and in
that event, Tenant shall be required to pay Tenant's Pro Rata Share
thereof as the sum due under Paragraph 3.b.i, above.

If the Expiration Date of this Lease shall occur on a date other than the
last day of a calendar year, then Tenant share of Adjustment Rent for the
calendar year in which the Expiration Date falls shall be determined by
multiplying the Adjustment Rent for the calendar year in which the
Expiration Date falls (calculated as if the Expiration Date were the last
day of such lease year) by a fraction, the numerator of which is the
number of days from and including the first day of such calendar year to
and including the Expiration Date, and the denominator of which is 365.

For purposes of the foregoing, the following terms shall have the
following meanings:

(1) The term "Base Year" shall mean the twelve calendar months
ending December 31, 1997.

(2) The term "Current Lease Year" shall mean each calendar year or
part thereof during the Term after the Base Year.

(3) The "Tenant's Pro Rata Share" shall be six and 18/100 percent
(6.18%).

(4) Operating Expenses, as that term is used herein, shall consist
of only the expenses described below as they relate to the Building and
other appurtenant structures and facilities (collectively, the
"Property"), all of which shall be computed on an accrual basis:

(a) All costs associated with janitorial services. Said
services shall consist of (I) nightly cleaning services throughout the
Property, including, but not limited to, the Premises and other office
suited, restroom (common area and private), common areas such as
corridors, stairwell, and lobbies, (ii) periodic cleaning services
including, but not limited to, stripping and waxing common area floors,
machine scrubbing restroom (common area and private) floors, stripping
and waxing vinyl composition floors in the common areas and in the office
suites. In addition to the cost of janitorial services, the cost of all
supplies necessary to perform the above slated services, and the cost of
all paper products used to stock towel dispensers, toilet paper
dispensers, etc., on an as needed basis, throughout the Building, shall
also be considered to be included in this category of Operating Expense.

(b) All costs associated with electrical, water, wastewater,
and natural gas service, (herein referred to as Utilities") for the
Property. These utilities shall provide electrical current for such
things as heating, lighting, air conditioning, office equipment, etc.;
water to office suites, restrooms, lawn irrigation systems, etc.;
wastewater service for office suites and restrooms; and drainage from the
Property. In addition to the cost for the utilities, all other charges
whether federal, state, county or municipal, of other entity, whether
such costs presently exist or are subsequently added, which are included
as part of the invoices for the utilities listed herein. Landlord and
Tenant agree that the income received from the Tenant, and/or other
tenants of the Building, for after-hours use of the heating and cooling
systems shall be credited against the total cost of utilities for the
Property.

(c) All taxes (including, but not limited to, real estate
taxes), assessments and governmental charges whether federal, state,
county or municipal and whether they be by taxing districts or
authorities presently taxing the Property or by other subsequently
created or otherwise, and any other taxes and assessments attributable to
the Property or its operation. Taxes for the Base year and any calendar
year shall be deemed to be the taxes payable in the Base Year or calendar
year in question, even though the levy or assessment may be for a
different fiscal year. In the event Landlord elects to contest, or
review to determine if it should contest, the costs (actual and/or
proposed) associated with taxes, assessments and/or governmental charges
for the Property as defined above, all costs related to such dispute(s),
including, but not limited to, consultants, attorneys, other
representatives, and related charges, shall be included in this category
of Operating Expenses.

c. Increases in each category of Operating Expenses described in
Paragraph 3.b above shall be calculated separately (i.e., the categories
of Operating Expenses described in subparagraphs (4)(a), (4)(b) and
(4)(c) of Paragraph 3.b shall be computed independently of each other,
and not on an aggregate basis).

d. For each calendar year during the term of this lease following the
Base Year, Tenant shall pay to Landlord on account of Adjustment Rent for
any calendar year on the first day of each month during such calendar
year an amount equal to one-twelfth (1/12) of Landlord's estimate of
Tenant's Adjustment Rent for such calendar year. After the end of any
such calendar year and the delivery of Tenant's Adjustment Rent Statement
(as discussed below), if the amount paid by Tenant during such calendar
year shall exceed the actual amount set forth in said statement, such
excess shall be paid by Landlord to Tenant within thirty (30) days after
Tenant's receipt of the Tenant's Adjustment Rent Statement; if, on the
other hand, the amount shown in Tenant's Adjustment Rent Statement shall
be greater than the aggregate amount paid by Tenant as an estimate on
account of such Adjustment Rent for the calendar year in question, Tenant
shall pay to Landlord, within thirty (30) days after Tenant's receipt of
the Tenant's Adjustment Rent Statement, the difference between the amount
theretofore paid by Tenant and the actual amount of such Adjustment Rent.

e. Following the end of any calendar year, Landlord shall furnish Tenant
with a statement (herein called the "tenant's Adjustment Rent
Statement"), setting forth the amount of Adjustment Rent payable by
Tenant pursuant to Paragraph 3.b., above, by reason of any increase in
any category of Operating Expenses, and any increase attributable to any
increase in the Index. If Tenant does not request the additional
information provided for herein, Tenant shall, within thirty (30) days of
receipt of Tenant's Adjustment Rent Statement, pay the amount of
Adjustment Rent shown thereon. Upon written request from Tenant to
Landlord, Landlord shall provide, within a reasonable time after
Landlord's receipt of Tenant's written request, reasonable supporting
information to substantiate the actual amount of each category of
Operating Expenses for such calendar year. Tenant's written request must
be received by Landlord within thirty (30) days of Tenant's receipt of
Tenant's Adjustment Rent Statement. Upon receipt of such supporting
information, if Tenant disputes any charge(s) shown on the Tenant's
Adjustment Rent Statement, Tenant must advise Landlord of their claim in
writing within thirty (30) days of receipt of the additional supporting
information. If no notice is received by Landlord during this thirty
(30) day time period, all amounts included in the Tenant's Adjustment
Rent Statement shall be deemed acceptable to Tenant, and no further
dispute of the charges may be filed. Notwithstanding the foregoing,
Tenant shall have the right, following written notice to Landlord, as per
above, to audit Landlord's books and records relating to the calculation
of Operating Expenses upon the following terms and conditions: (1) Tenant
may not request such audit more frequently than once per calendar year;
(2) Tenant's written request must specify the category of Operating
Expenses to be audited; (3) such audit must be performed by an accounting
firm approved by Landlord, such approval not to be unreasonable withheld;
(4) such audit must be performed in Landlord's offices in Austin, Texas
for a period of no more than three (3) consecutive business days; and (5)
the cost of such audit shall be the responsibility of Tenant' provided
however, if such audit reveals a discrepancy of five percent (5%) or more
in any category of Operating Expenses which negatively impacts Tenant,
Landlord shall pay the cost of such audit.

3. For the purpose only of calculating the portion of Adjustment Rent stated
in paragraph 3.b.ii. of the Lease, the Commencement Date shall be January
1, 1997.

4. Tenant hereby releases Landlord from any obligation to pay and expressly
waives any claim to the construction allowance stated in paragraph 1 of
the First Amendment of Lease Agreement. The terms of Paragraph 1 of the
First Amendment of Lease Agreement are hereby deleted and shall be
considered null and void.

5. If any of the terms or provisions of the original Lease Agreement or any
subsequent amendments are in conflict with the terms or provisions of
this Amendment, the terms or provision of this Amendment shall prevail.

6. Landlord and Tenant hereby agree and certify that the Lease is in full
force and effect and, except as expressly modified herein, all of the
terms, covenants and conditions of the Lease and the prior Amendments
shall remain in effect and unchanged. Landlord and Tenant further agree
and certify that (a) there exists no default or breach on the part of
either Landlord or Tenant under the Lease, nor has an event occurred
which with the giving of notice, passage of time or both, would
constitute an event of default or breach under the terms of the Lease;
(b) there exists no defenses against the enforcement of any right or
remedy of either party under the Lease, or of any duty or obligation of
Landlord or Tenant thereunder; and (c) both Landlord and Tenant have the
full right, title and authority to execute and enter this Amendment and
have taken all actions and obtained all approvals and consents necessary
on their respective parts to authorize the transactions contemplated by
this Amendment.

TENANT: LANDLORD:

APPLIED RESEARCH CORPORATION LANDMARK ASSOCIATES OF MARYLAND II

/s/ /s/
- ---------------------------- -------------------------------------
S. P. S. Anand, President ____________________, General Partner

<PAGE>
EXHIBIT 10.4(e)
---------------

FOURTH AMENDMENT OF LEASE AGREEMENT
------------------------------------

This FOURTH AMENDMENT OF LEASE AGREEMENT is made and entered into this
1st day of August 1997, by and between LANDMARK ASSOCIATES OF MARYLAND II, a
Maryland limited partnership herein called Landlord, and APPLIED RESEARCH
CORPORATION, A Colorado corporation herein called Tenant.

WITNESSETH:

WHEREAS, Landlord and Tenant heretofore entered into a Lease Agreement
dated October 22, 1993, and subsequent amended said Lease Agreement on October
22, 1993, May 12, 1994, and January 13, 1997; and Tenant currently occupies
approximately 11,295 rentable square feet on the eleventh (11th) and ground
floors (herein called the Premises) in the building located at 8201 Corporate
Drive, Landover, Maryland, (herein called the Building); and

WHEREAS, Landlord and Tenant desire to make certain modifications to said
Lease Agreement;

NOW, THEREFORE, effective August 1, 1997, in consideration of the mutual
covenants and agreements herein contained, Landlord and Tenant agree as
follows:

1. Upon and subject to the terms, covenants and conditions hereinafter set
forth, Landlord and Tenant agree to reduce the area of Premises to
approximately 2,561 rentable square feet substantially as shown on the
floor plan attached hereto as Exhibit A-4.

2. The first sentence of Paragraph 3.1 (rent: Adjustment Rent) of the Lease
Agreement, as previously amended, shall be deleted in its entirely and
replaced with the following language:

Tenant shall pay rent for the Premises during the Term at the rate of
Fifty Seven Thousand Six Hundred Sixty and No/100 Dollars ($57,660.00)
per annum (herein called the "Minimum Rent") in lawful money of the
United States, in equal monthly installments of Four Thousand Eight
Hundred Five and No/100 Dollars ($4,805.00), in advance, on or before the
first (lst) day of each and every month during the Term at the office of
Landlord herein designated (or such other place as Landlord may designate
in a notice to Tenant), without prior demand therefor and without any
setoff or deduction whatsoever.

3. Paragraph 3.b.(3) (Rent: Adjustment Rent)of the Lease Agreement, as
previously amended, shall be deleted in its entirety and replaced with
the following language:

The "Tenant's Pro Rata Share" shall be one and 40/100 percent (1.40%).

4. Landlord shall have the right to terminate the Lease of approximately
1,551 rentable square feet of the Premises substantially as shown on the
floor plan or plans attached hereto as Exhibit A-4 (herein called the
"Reduction Premises"), by providing Tenant written notice at least thirty
(30) days prior to the date on which Tenant's occupancy of the Reduction
premises shall be terminated. Effective upon the termination of the
lease by the Reduction Premises, Tenant's Minimum rent shall be Thirty
Two Thousand Six Hundred Forty and No/100 Dollars ($32,640.00) per annum,
in equal monthly installment of Two Thousand Seven Hundred Twenty and
No/100 Dollars ($2,720.00), and Tenant's Pro Rata Share shall be zero and
55/100 percent (0.55%).

5. Upon and subject to the terms, covenants and conditions set forth in the
Lease and hereinafter, Landlord hereby leases to Tenant and Tenant hereby
rents from Landlord approximately 2,272 rentable square feet on the
eleventh (11th) floor substantially as shown on the floor plan or plans
attached hereto as Exhibit A-4 (herein called the "additional premises").
The terms, covenants and conditions set forth in the Lease applicable to
the Premises shall apply also to the Additional Premises.

6. The Additional Premises are leased for a term commencing August 1,1997
and ending September 30, 1997 (herein called the "Temporary Term").
Landlord may terminate the lease of the Additional Premises prior to the
end of the Temporary Term by providing Tenant written notice at least
thirty (30) days prior to the date on which tenant's occupancy of the
Additional Premises shall be terminated.

7. Tenant shall pay rent for the Additional Premises during the Temporary
Term at the rate of Three Thousand Twenty Nine and No/100Dollars
($3,029.00) per month, in advance, on or before the first (1st) day of
each and every month during the Temprary Term at the office of Landlord
hereind esignated (or suchother place as Landlord may desingate in a
notice to Tenant), without prior demand therefor and without any setoff
or deduciton whatsoever. The terms, covenants and conditions set forth
in the Lease applicable to Minimum Rent shall apply also to rent for the
Additional Premises.

8. In consideration for execution of the Amendment, Tenant agrees to forfeit
to Landlord Tenant's security deposit of Five Thousand Six Hundred Fifty
and No/.100 ($5,650.00).

9. The following language shall be inserted into the Lease as Paragraph 39.
(Holding Over):

Tenant shall have no right to remain in possession of all or any part of
the Premises after the expiration of the Term. If Tenant remains in
possession of all or any part of the Premises after the expiration of the
Term, with the express of implied consent of Landlord; (a) such tenancy
shall be deemed a periodic tenancy from month-to-month only (b) such
tenancy shall not constitute a renewal or extension of the Term of this
Lease for any further term;and (c) such tenancy may be terminated by
Landlord upon the earlier of thirty (30) days prior written notice or the
earliest date permitted by law. In such event, monthly rent shall be
increased to an amount equal to one hundred fifty percent (150%) of the
Minimum and Adjustment Rent payable during the last month of the Term,
and any other sums due under this Lease will be payable in the amount and
at the time specified in this Lease. Such month-to-month tenancy shall
be subject to every other term, condition and covenant contained in this
Lease.

10. Tenant understands and agrees that in the event that the Tenant fails to
fully comply with any of the provisions of this Fourth Amendment of Lease
Agreement, which causes the Landlord to seek a legal remedy against the
tenant, that, as part of their legal proceedings, the Landlord retains
the right to include the full financial obligations that would have
otherwise been in effect over the Term of the original Lease Agreement
and all previous Amendments.

11. If any of the terms or provisions of the original Lease Agreement or any
subsequent amendments are in conflict with the terms or provisions of
this Amendment, the terms or provisions of this Amendment shall prevail.

12. Landlord and Tenant hereby agree and certify that the Lease is in full
force and effect and, except as expressly modified herein, all of the
terms, covenants and conditions of the Lease and the prior Amendments
shall remain in effect and unchanged. Landlord and Tenant further agree
and certify that (a) there exists no default or breach on the part of
either Landlord or Tenant under the Lease, nor has an event occurred
which, with the giving of notice, passage of time or both, would
constitute an event of default or breach under the terms of the Lease;
(b) there exists no defenses against the enforcement of any righ tor
remedy of either party under the Lease, or of any duty or obligation of
Landlord or Tenant thereunder; and (c) both Landlord and Tenant have the
full right, title and authority to execute and enter this Amendment and
have taken all actions and obtained all approvals and consents necessary
on their respective parts to authorize the transactions contemplated by
this Amendment.

TENANT: LANDLORD:

APPLIED RESEARCH CORPORATION LANDMARK ASSOCIATES OF MARYLAND II

/s/ /s/
- ---------------------------- -------------------------------------
S. P. S. Anand, President ____________________, General Partner

<PAGE>
EXHIBIT 10.15(b)
----------------

ASSET PURCHASE AGREEMENT
------------------------

THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of the _____
day of March, 1997, by and between SPACE APPLICATIONS CORPORATION, a
California corporation ("Purchaser" or "Buyer") and APPLIED RESEARCH OF
MARYLAND, INC., a Maryland corporation also doing business as Applied Research
Corporation ("Seller").

RECITALS
--------
R.1 Seller is a high technology company specializing in research and
development, design and fabrication of sensors and instrumentation, technical
support services and software development. Seller operates its business at
8201 Corporate Drive, Suite 1120, Landover, Maryland 20785.

R.2 Seller is a wholly owned subsidiary of Applied Research Corporation,
Colorado corporation ("Parent"). Dr. S.P.S. Anand ("Dr. Anand") is the
President and Chairman of the Boards of Directors of both Seller and Parent.

R.3 On April 2, 1996 (the "Petition Date"), Seller filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Maryland, Southern Division (the "Bankruptcy Court"), as case number 96-1-
2425DK (the "Bankruptcy Case").

R.4 Purchaser desires to purchase, and Seller desires to sell, the
assets of Seller identified herein.

NOW, THEREFORE, for and in consideration of the mutual promises and other
good and valuable consideration contained herein, the adequacy and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS
-----------
1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings:

"Accounts Receivable" shall mean all accounts, claims, choses in
action or other right to receive money or other property or consideration from
any person or entity, whether such claim, account, right or chose in action is
disputed or undisputed, fixed or contingent, matured or unmatured, liquidated
or unliquidated, evidenced by an instrument or other writing or unwritten,
including, without limitation: all of Seller's present and future accounts,
contract rights (other than Contract Rights), receivables, promissory notes
and other instruments, chattel paper, all present and future tax refunds of
Seller and all present and future rights of Seller to refunds or returns of
prepaid expenses, including, unearned insurance premiums; all present and
future judgments, orders, awards and decrees in favor of Seller and causes of
action in favor of Seller; all present and future claims, rights of
indemnification and other rights of Seller under or in connection with any
contracts or agreements to which Seller is or becomes a party or third party
beneficiary, including letters of credit (and the proceeds thereof) issued or
assigned for the benefit of Seller; all goods previously or hereafter
returned, repossessed or stopped in transit, the sale, lease or other
disposition of which contributed to the creation of any account, instrument or
chattel paper of Seller; all present and future rights of Seller as an unpaid
seller of goods, including rights of stoppage in transit and reclamation; all
rights which Seller may now or at any time hereafter have, by law or
agreement, against any account debtor or other obligor of Seller, and all
rights, liens and security interests which Seller may now or at any time
hereafter have, by law or agreement, against any property of any account
debtor or other obligor of Seller, all present and future interests and rights
of Seller, including rights to the payment of money, under or in connection
with all present and future leases and subleases of real or personal property
to which Seller is a party, as lessor, sublessor, lessee or sublessee; all
other present and future contingent and noncontingent rights of Seller to the
payment of money for any reason whatsoever whether arising, in contract, tort
or otherwise; all deposit accounts now or hereafter maintained or established
by, for or on behalf of Seller with any bank or other person and all balances
of funds now or hereafter on deposit in all such accounts, including, without
limitations all checking accounts, collection accounts, lockbox accounts,
disbursement accounts and concentration accounts.

"Affiliate" shall mean any person that is an affiliate (as such term
is used in Section 101 of the Bankruptcy Code) of Seller, including, without
limitation, Parent, ARS and ARInternet.

"ARInternet" shall mean ARInternet Corporation, a Maryland
corporation.

"ARS" shall mean ARSoftware Corporation, a Maryland corporation.

"Balance Sheet" shall mean the statement of assets and liabilities
of the Seller previously provided to Purchaser and dated as of December 31,
1996.

"Balance Sheet Date" shall mean the date as of which the Balance
Sheet is effective, that is, December 31, 1996.

"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended from time to time.

"Books and Records" shall mean all records pertaining to the
Purchased Assets, including without limitation records pertaining, to
customers, suppliers, lessors and employees of the Seller.

"Business Day" shall mean any day that is not a weekend or legal
holiday as defined in Rule 9006 of the Bankruptcy Rules.

"Closing" shall mean the closing of the transactions contemplated
hereby, as set forth in Section 3.1, below.

"Closing Date" shall mean the tenth (10th) Business Day following
the date on which all of the conditions to Purchaser's obligations to close,
as set forth in Article VIII, below, have been, and remain, satisfied or have
been waived in writing by Purchaser, or such other date following entry of the
Order on which the Seller and the Purchaser may agree.

"Consulting and Non-Compete Agreement" shall mean an agreement
between Purchaser and Dr. Anand providing engagement of Dr. Anand by Purchaser
as a consultant and for prohibitions against competition by Dr. Anand for
three years, in the forms and in substance reasonably acceptable to Purchaser.
The terms and conditions of the Consulting and Non-Compete Agreement shall be
disclosed in accordance with the Bankruptcy Code and the Bankruptcy Rules.

"Contract" shall mean any of the agreements, contracts, leases or
commitments described in the Disclosure Schedule.

"Contract Rights" shall mean all of Seller's rights under the
Contracts.

"Court" shall mean the United States Bankruptcy Court for the
District of Maryland.

"Deferred Payments" shall mean the components of the Purchase Price
referred to in items D and F of the definition of Purchase Price herein which
are payable after the Closing Date.

"Direct Employees" shall mean all employees of Seller whose salary
and benefits are chargeable in majority part to one or more Project Contract
as a direct, reimbursable expense.

"Disclosure Schedule" shall mean a schedule executed and delivered
by Seller to Purchaser within ten (10) Business Days following the date
hereof, which sets forth the exceptions to the representations and warranties
contained in Article IV hereof and certain other information called for by
Article IV hereof and other provisions of this Agreement. Unless Purchaser
terminates this Agreement pursuant to Section 9.1(C), the final Disclosure
Schedule delivered by Seller to Purchaser (which shall be designated by Seller
as the Final Disclosure Schedule) shall be incorporated into and made a part
of this Agreement.

"Employee" shall mean any employee or consultant engaged or employed
by Seller as of the date hereof or following the date hereof until Closing,
whether such engagement or employment is pursuant to a written or unwritten
contract or is at will. Notwithstanding the foregoing, "Employee" shall not
include Dr. Anand.

"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance, entitlement, right of
offset or recoupment or other right of any Person.

"Excluded Assets" shall mean the following items, which are not to
be acquired by Purchaser under this Agreement.

A. The Seller's franchise, charter and status as a corporation,
its minute books, stock transfer records and similar records relating to the
Seller's organization, existence or capitalization, and the capital stock of
the Seller;

B. Claims and causes of action arising under Sections 547, 548,
549 and 550 of the Bankruptcy Code including without limitation claims and
causes of action for preferences, fraudulent transfers, fraudulent
conveyances, illegal or improper dividends (collectively, "Avoidance Claims");

C. Accounts Receivable of the Seller that are billed, fixed,
matured and liquidated as of the Closing Date (other than (i) Accounts
Receivable arising on account of the Last Payroll and (ii) Accounts Receivable
that were unbilled on January 31, 1997 except up to $25,000 of award fees on
Contract No. 1271;

D. Intercompany Receivables;

E. The Seller's rights to occupy real property pursuant to leases
of real property other than leases specifically identified in writing by the
Buyer after delivery of the final Disclosure Schedule and any leasehold
improvements made pursuant thereto to the extent that the Seller has no right
to remove such leasehold improvements or that such removal would be
impracticable;

F. Any proceeds from the refund of unearned insurance premiums,
if any;

G. The Seller's cash on hand or in banks other than cash in the
Purchased Receivables Proceeds Account; and

H. Any other property or asset that the Buyer identified in
writing as an Excluded Asset at or prior to the Closing.

"Final Order" shall mean an order of the Bankruptcy Court or any
appellate court that has not been reversed, modified, amended or stayed with
respect to which the time to appeal or seek certiorari has expired, and with
respect to which no appeal or request for certiorari is sending.

"Financial Statements" shall mean financial statements of the Seller
as of the Balance Sheet Date and for the periods then ended.

"Fixtures and Equipment" shall mean all of the furniture, fixtures,
furnishings, machinery and equipment owned by Seller as of the date hereof,
plus all additions, replacements or deletions approved by the Purchaser
following the date hereof until Closing, including, without limitation all
equipment of Seller of every type and description, now owned and hereafter
acquired and wherever located, including, without limitation, all machinery,
vehicles and other rolling stock, furniture, tools, dies, leasehold
improvements, fixtures, computers, computer peripherals, computer systems and
related furniture, and materials and supplies relating to any of the
foregoing; all present and future documents of title relating to any of the
foregoing; all present and future rights, claims and causes of action of
Seller in connection with purchases of (or contracts for the purchase of), or
warranties relating to, or letters of credit (and the proceeds thereof issued
or assigned for the benefit of Seller relating to, or damages to, goods held
or to be held by Seller as equipment; all present and future warranties,
manuals and other written materials (and packaging thereof or relating
thereto) relating to any at the foregoing; and all present and future general
intangibles of Seller in any way relating to any of the foregoing, including,
without limitation, all Intellectual Property associated with, used or useable
in connection with, or necessary for the manufacture, operation, sale or lease
of, any of the foregoing.

"Hired Employee" shall mean any Employee (including Project
Managers) to whom Purchaser offers employment or engagement commencing upon
the consummation of the transactions contemplated by this Agreement, and who
accepts such employment or engagement and, if requested by Purchaser, enters
into an employment, consulting or other engagement agreement. Employment
shall be offered to all Direct Employees upon substantially the same terms and
conditions as currently exist with Seller; provided, however, that Purchaser
shall have no obligation to provide credit to any Hired Employee on account of
services rendered, benefits accrued, or seniority achieved prior to Closing;
and further provided that Purchaser shall have no obligation to offer benefits
to any Hired Employee that are greater or different than the benefits that
Purchaser generally provides with respect to its employees of similar,
education, experience, salary and job responsibilities.

"Indemnification Agreement" shall mean this Agreement, in which Dr.
Anand hereby agrees to indemnify, defend and hold harmless Purchaser and
Purchaser's agents, affiliates, predecessors, successors and assigns, against
and in respect of any and all Losses that any of them shall incur or suffer,
which arise, result from or relate to any breach of, or failure by Seller to
perform, any of their respective representations, warranties, covenants or
agreements in this Agreement, or in any schedule, certificate, exhibit or
other instrument furnished or to be furnished by Seller under or pursuant to
this Agreement. The liability of Dr. Anand under this Indemnification
Agreement shall expire unless action hereunder is commenced against him on or
before the first business day following the first anniversary of the first to
occur of the Closing or the termination of this Agreement.

Acknowledged and Agreed: _______________________
Dr. S.P.S. Anand

"Intellectual Property" shall mean all of Seller's right, title and
interest, whether now or existing or hereafter arising or acquired, in and to
(a) all domestic and foreign copyrights, copyright registrations and copyright
applications, whether or not registered or filed with any governmental or
other authority, (b) all United States and foreign patents, and all pending
and abandoned United States and foreign patent applications, including,
without limitation, the inventions and improvements described or claimed
therein, together with any reissues, divisions, continuations, certificates of
re-examination, extensions and continuations-in-part thereof, and (c) all
domestic and foreign trademarks, trademark registrations, trademark
applications, service marks and trade names, whether or not registered or
filed with any governmental or other authority; all present and future
licenses and license agreements of Seller, and all rights of Seller under or
in connection therewith, whether Seller is licensee or licensor thereunder,
including, without limitation, any present or future franchise agreements
under which Seller is franchisee or franchisor, all goodwill of Seller; all
present and future trade secrets of Seller; all other present and future
intellectual property of Seller; all income, royalties, damages and payments
now or hereafter due and/or payable to Seller under or with respect to any of
the foregoing, including, without limitation, rights to sue, damages and
payments for past, present or future infringements thereof, and all rights
corresponding to any of the foregoing throughout the world.

"Intercompany Receivables" shall mean any Account Receivable that is
matured, fixed and liquidated as of the date hereof owed to Seller by any
Affiliate.

"Inventory" shall mean all of all inventory of Seller of every type
and description, now owned and hereafter acquired and wherever located,
including, without limitation, raw materials, work in process, finished goods,
goods returned or repossessed, and goods held for demonstration, marketing or
similar purposes; all present and future materials and supplies of Seller
used, useable or consumed in the course of Seller's business whether relating
to the manufacture, assembly, installation repair, packaging, packing or
shipment of goods by Seller, or relating to advertising or any other aspect of
Seller's business; all present and future property of Seller in, on or with
which any of the foregoing is stored or maintained; all present and future
warranties, manuals and other written materials (and packaging thereof or
relating thereto) relating to any of the foregoing; all present and future
documents of title relating to any of the foregoing; and all present and
future rights of Seller in connection with goods consigned to or by Seller;
all present and future rights of Seller as an unpaid seller of goods,
including rights of stoppage in transit and reclamation, all present and
future rights, claims and causes of action of Seller in connection with
purchases of (or contracts for the purchase of), or warranties relating to, or
letters of credit (and the proceeds thereof) issued or assigned for the
benefit of Seller relating to, or damages to, goods held or to be held by
Seller as inventory; and all present and future general intangibles of Seller
in any way relating to any of the foregoing, including, without limitation,
all Intellectual Property associated with, used or useable in connection with,
or necessary for the manufacture, operation, sale or lease of, any of the
foregoing.

"Last Payroll" shall mean Seller's last payroll not to exceed
fourteen (14) days prior to Closing; but only to the extent that such Payroll
is for services rendered during the period covered by such payroll for
existing Employees.

"Non-Direct Personnel" shall mean all Personnel whose salary and
benefits are not chargeable in whole to one or more Project Contract as a
direct, reimbursable expense.

"Parent Consent and Indemnification Agreement" shall mean an
instrument in form and substance acceptable to Purchaser and its counsel:
(1) certifying that Parent consents to the transactions contemplated by this
Agreement; (2) certifying that the representations and warranties set forth in
this Agreement are true and correct; (3) and providing that Parent agrees to
indemnify, defend and hold harmless Purchaser and Purchaser's agents,
affiliates, predecessors, successors and assigns, against and in respect of
any and all Losses that any of them shall incur or suffer, which arise, result
from or relate to any claim by, through or on behalf of any existing, future
or former shareholder or creditor of Parent relating to the subject matter of
the foregoing certifications or Seller's entering into or performing under
this Agreement; and (4) agreeing and covenanting not to compete with Purchaser
on the same terms and conditions set forth therein with respect to Seller.
Seller and Parent shall be solely responsible for complying with all Laws
(including without limitation all corporate and securities laws, rules and
regulations) as may be applicable in obtaining Parent Consent and
Indemnification Agreement.

"Parent Opinion" shall mean one or more legal opinions of Parent's
general corporate counsel, in a form and in substance satisfactory to
Purchaser and its counsel, which shall contain the opinion of Parent's counsel
that: (a) Parent is duly organized and existing with all requisite power and
authority to enter into and perform the Parent Consent and Indemnification
Agreement; (b) Parent has taken all corporate action necessary to enter into
and perform the Parent Consent and Indemnification Agreement; (c) the Parent
Consent and Indemnification Agreement does not conflict with or violate any
law, rule, regulation, order, contract, covenant or agreement governing
Parent; (d) the Parent Consent and Indemnification Agreement is enforceable;
and (e) all necessary consents and approvals for the Parent Consent and
Indemnification Agreement have been obtained.

"Permits" shall mean all of Seller's licenses, permits and other
governmental authorizations required to operate the Seller's business in the
manner presently conducted and in the manner as any Contract may require
Seller's business to be conducted.

"Personnel" shall mean all officers, employees and agents of the
Seller.

"Plan" shall mean the 401(k) plan of Seller dated December 11, 1991.

"Plan Trustees" shall mean the trustees under the Plan.

"Professionals" shall mean all attorneys, accountants, appraisers,
auctioneers or other professional persons engaged by or on behalf of the
Seller.

"Project Contracts" shall mean those Contracts specified in Exhibit
"A" hereto.

"Project Managers" shall mean those Employees who have management
responsibility with respect to one or more projects of Seller.

"Proprietary Rights" shall mean all of Seller's Intellectual
Property, trade secrets, designs, plans, specifications, customer fists and
other proprietary rights.

"Purchase Price" shall mean payments and assumption of specified
liabilities in an amount totaling up to One Million Four Hundred Seventy-Five
Thousand and No/100 dollars ($1,475,000.00). The Purchase Price shall consist
of the following items:

A. A deposit (the "Deposit") in the amount of Fifty Thousand and
No/100 dollars ($50,000.00) paid to the Escrow Agent upon
execution of this Agreement and held in an interest-bearing
deposit account. The Deposit shall be released and paid to the
Internal Revenue Service ("IRS") at Closing with any accrued
interest being applied to the payment next due pursuant to item
D below;

B. A payment at Closing in the amount of Six Hundred Seventy-Six
Thousand and No/100 dollars ($676,000.00) by Purchaser to the
Plan (the "Initial Plan Payment");

C. An assumption of liabilities of Seller to its Employees for
liabilities of Seller to its Employees for accrued and unpaid
vacation liabilities ("Vacation Liability") in an amount not to
exceed Three Hundred Twenty Five Thousand and No/100 dollars
($325,000.00), to be paid or provided for by Purchaser to such
Employees in accordance with the Purchaser's existing vacation
policy as though such Vacation Liability had accrued under such
policy; provided that Purchaser shall not be required to make
any cash payments for Vacation Liability within less than one
year following the Closing Date; and further provided that
Purchaser shall not require that any cash payments for Vacation
Liability be paid for across a period greater than two years
following the Closing Date (the "Assumed Vacation Liability");
the Assumed Vacation Liability shall include $10,000 of Dr.
Anand's accrued and unpaid vacation which shall be paid to the
IRS on behalf of Dr. Anand, without interest, after the first
anniversary of the Closing Date and prior to the second
anniversary of the Closing Date (the "Assigned Vacation
Payment");

D. Payment to the Seller in the amount of One Hundred Forty-Four
Thousand and no/100 dollars ($144,000.00), to be paid, without
interest, as follows: $45,000.00 shall be paid to the Seller
for the IRS at Closing; $33,000.00 shall be paid to the Seller
for the IRS no later than the first anniversary of the Closing
Date; $33,000.00 shall be paid to the Seller for the IRS no
later than the second anniversary of the Closing Date; and
$33,000 shall be paid to the Seller for the IRS no later than
the third anniversary of the Closing Date;

E. Payment to the Seller of the aggregate amount of Twenty
Thousand and no/100 dollars ($20,000.00) for the IRS, $10,000
of which is pursuant and subject to the Consulting and Non-
Compete Agreement with Dr. Anand and $10,000 of which is
pursuant to the Non-Compete covenants of Seller in Section 10.1
of this Agreement (the "Assigned Non-Compete Payments") to be
paid, without interest, as follows: $10,000 shall be paid no
later than the first anniversary of the Closing Date; and
$10,000 shall be paid no later than the second anniversary of
the Closing Date; and

F. Payment to the Seller of the aggregate amount of Two Hundred
Ten Thousand and no/100 dollars ($210,000.00) for allowed
administrative expenses incurred by the Seller in the
Bankruptcy Case, to be paid, without interest as follows:
$30,000 shall be paid at the Closing; $60,000 shall be paid no
later than the first anniversary of the Closing Date; $60,000
shall be paid no later than the second anniversary of the
Closing Date; and $60,000 shall be paid no later than the third
anniversary of the Closing Date; and

G. Purchaser shall reimburse Seller's Employees for their
prepetition travel expenses in an aggregate amount not to
exceed Fifty Thousand and No/100 dollars ($50,000.00) for all
such Employees.

The foregoing allocation shall be without prejudice to any right of
the holder of a claim for administrative expenses incurred by the Seller in
the Bankruptcy Case to object to such allocation.

"Purchased Assets" shall mean all of Seller's right, title and
interest in and to properties, assets and rights of any kind, whether tangible
or intangible, real or personal, owned by Seller or in which Seller has any
interest (other than Excluded Assets), including without limitation, the
following:

A. all Contract Rights (including, without limitation all Project
Contracts);

B. all Inventory;

C. all Books and Records;

D. all Fixtures and Equipment;

E. all Proprietary Rights;

F. to the extent transferable, all Permits;

G. all Accounts Receivable that were unbilled as of January 31,
1997 (other than those relating to award fees on Contract No.
1271); any and all proceeds of such Accounts Receivable (and
those referred to in item H) received by the Seller shall be
held in trust for the Purchaser subject to the terms of this
Agreement, segregated from all other assets of the Seller and
promptly deposited in a separate account (the "Purchased
Receivables Proceeds Account") at a financial institution
approved by the Purchaser;

H. Accounts Receivable relating to award fees on Contract No. 1271
that were unbilled as of January 31, 1997 and are billed prior
to the Closing Date, to the extent, and only to the extent,
such amount exceeds $25,000;

I. all Accounts Receivable (billed and unbilled) relating to the
Last Payroll;

J. all Accounts Receivable that are unbilled as of the Closing
Date; and

K. all items of real or personal property specified in Exhibit
"B", hereto.

"Seller" shall mean Applied Research of Maryland, Inc., a Maryland
corporation.

"Seller Opinion" shall mean one or more legal opinions of Seller's
bankruptcy counsel and general corporate counsel, in a form and in substance
satisfactory to Purchaser and its counsel, which shall contain the opinion of
Seller's counsel that: (a) Seller is duly organized as represented and
warranted in Section 4.1; (b) Seller is authorized to enter into and perform
this Agreement as represented and warranted in Section 4.2; (c) this Agreement
does not conflict with or violate any law, rule, regulation, order, contract,
covenant or agreement governing Seller as represented and warranted in Section
4.6; (d) this Agreement is enforceable as represented and warranted in Section
4.2; (e) all necessary consents and approvals have been obtained as
represented and warranted in Sections 4.7, 6.8 and 8.18 of this Agreement;
(f) notice as is required under this Agreement and under the Bankruptcy Code,
the Bankruptcy Rules, the Local Rules, and other applicable Law has been given
to all creditors and parties in interest; and (g) the Order is a Final Order.

1.2 OTHER DEFINED TERMS. The following terms shall have the meanings
defined for such terms in the Sections of this Agreement set forth below:

<TABLE>
<CAPTION>
Term Section
-------------------- -------------
<S> <C> <C>
Actions Section 4.9
Bankruptcy Case Recital 3
Bankruptcy Court Recital 3
Bankruptcy Rules Section 6.8
Benefit Arrangement Section 4.15
Employee Benefit Plan Section 4.15
ERISA Affiliate Section 4.15
ERISA Section 4.15
Law or laws Section 4.11
Local Rules Section 6.8
Losses Section 10.2
Motion Section 6.5
Order Section 7.4
Parent Recital 2
Transfer Taxes Section 2.3

</TABLE>
ARTICLE II
PURCHASE AND SALE OF ASSETS
---------------------------
2.1 TRANSFER OF ASSETS. On the Closing Date:

A. Effective as of the Closing, Seller will sell, convey,
transfer, assign and deliver to Purchaser, the Purchased Assets, free and
clear of all Encumbrances (other than as provided in the next sentence), and
Purchaser will acquire from Seller the Purchased Assets. Purchaser shall
acquire the unbilled Accounts Receivable relating to Contracts subject only to
potential audit adjustments by the other party to each such Contract which may
reduce the amount of such unbilled Account Receivable (but no other
Encumbrances); provided that the Purchaser shall assume no monetary,
performance, warranty or other liability, or obligations relating to expired
Contracts awaiting closeout.

B. Purchaser shall not assume or acquire any obligation or
liability of Seller except, effective as of the Closing, the following:

(i) all obligations and liabilities accruing, arising out
of, or relating to events or occurrences happening after the Closing under
Contracts identified on the Disclosure Schedule as being assumed by Purchaser
(but in any case, not including any obligation or liability for any breach
occurring prior to the Closing); and

(ii) the Assumed Vacation Liability (not to exceed
$325,000.00 in the aggregate);

(iii) Seller's Last Payroll; and

(iv) all obligations specifically undertaken by Purchaser
pursuant to the other provisions of this Agreement.

2.2 PURCHASE PRICE. On the Closing Date, Purchaser shall make the
following payments and deliveries of documents, and shall assume the
designated liabilities in consideration for the sale, transfer, assignment,
conveyance and delivery of the Purchased Assets:

(a) the Deposit shall be paid to the Seller for the IRS, at
Purchaser's option, by wire transfer of immediately available funds or by
cashier's or certified check;

(b) the Initial Plan Payment shall be paid to the Plan, at
Purchaser's option, by wire transfer of immediately available funds or by
cashier's or certified check;

(c) the Employee Expense Liability (not to exceed $50,000.00
in the aggregate) shall be paid pro rata to Employees of the Seller holding
allowed claims for employee expenses;

(d) the other components of the Purchase Price which are
payable at the Closing shall be paid at Purchaser's option, by wire transfer
of immediately available funds or by cashier's or certified check;

(e) Purchaser shall make the Assigned Vacation Payment, the
Deferred Payments and the Assigned Non-Compete Payments on or before the
designated anniversaries of the Closing Date; and

(f) the Assumed Vacation Liability shall be assumed by
Purchaser, and, subject to the next sentence of this paragraph (f), shall be
paid or provided for in accordance with the Purchaser's existing vacation
policy. Purchaser shall not be required to make any cash payment for Assumed
Vacation Liability within less than one year following the Closing Date, and
Purchaser shall not require that any cash payment for Assumed Vacation
Liability be paid for across a period greater than two years following the
Closing Date.

To the extent that Seller is liable as of the Closing Date to any governmental
agency or taxing authority whose consent or action is required for the
transfer of any Permit, Purchaser, at its election, may pay or provide for
payment of amounts due to such agency or authority and may deduct amounts paid
or required to be paid to such agency or authority from the Designated
Payment. For the purpose of the foregoing sentence, the Seller shall be
considered liable if the taxing authority or governmental agency has a right
to payment that constitutes a "claim" against Seller within the meaning of
Section 101(5) of the Bankruptcy Code. Notwithstanding subsection (b) of this
Section 2.2, in the event that a claim is allowed against Seller in favor of
any current or former employee of Seller as a priority claim under Sections
507(a)(3) or 507(a)(4) of the Bankruptcy Code before Closing, then the portion
of the Initial Plan Payment that is equal to the amount of such allowed
priority claims shall be paid to Seller, and not to the Plan, and the
remaining portion of the Initial Plan Payment shall be paid to the Plan. All
payments to the Plan shall be made directly to T. Rowe Price as the
administrator of the Plan, or to the successor administrator of the Plan.

2.3 CLOSING COSTS; TRANSFER TAXES. The parties shall endeavor to
obtain exemptions under Section 1146 of the Bankruptcy Code and otherwise from
documentary transfer taxes and any other sales, use or other taxes imposed by
reason of the transfers of the Purchased Assets provided hereunder ("Transfer
Taxes"). To the extent that payment of a Transfer Tax is not subject to an
exemption, Purchaser shall be responsible for the payment of any such Transfer
Tax (provided, however, that Seller shall be responsible for the payment of
any Transfer Tax or other tax accruing or arising prior to the Closing).

2.4 PURCHASE PRICE ALLOCATIONS. At Closing, Seller and Purchaser
shall agree in writing to an allocation of the Purchase Price and shall
execute, and thereafter file on a timely basis with their respective federal
income tax returns, the initial asset acquisition statement and any
supplemental statements on Internal Revenue Service Form 8594 required by
Temporary Treasury Regulation Section 1.1060-1T.

2.5 WAIVERS AND RELEASES OF CERTAIN CLAIMS. At Purchaser's request,
at Closing, and thereafter from time to time, Seller shall waive and release
any and all claims, known and unknown, they, or any of them, have or may have,
as of the Closing Date, including without limitation Avoidance Claims, against
all Hired Employees. Such release shall be a general release and shall be in
a form that is reasonably satisfactory to Purchaser and its counsel.

ARTICLE III
CLOSING
-------
3.1 CLOSING. The Closing of the transactions contemplated herein (the
"Closing") shall take place at or about the hour of 11:00 a.m. on the Closing
Date at the offices of Greenan, Walker, Trainor & Billman, 6411 Ivy Lane,
Seventh Floor, Greenbelt, Maryland 20770, unless the parties hereto agree
otherwise.

3.2 CONVEYANCES AT CLOSING.

A. INSTRUMENTS AND POSSESSION. To effect the transfer referred
to in Section 2.1 of this Agreement, Seller will, on the Closing Date, execute
and deliver to Purchaser:

(i) one or more bills of sale substantially in the form
attached hereto as Exhibit "C," conveying in the aggregate all of Seller's
owned personal property included in the Purchased Assets;

(ii) assignments or novations of all Contract Rights
included in the Purchased Assets (including, without limitation Project
Contracts) such assignments or novations to include appropriate and
enforceable "no setoff" commitments;

(iii) assignment of all Proprietary Rights in recordable
form to the extent necessary to assign such rights or to perfect the
assignment of such rights;

(iv) such other instruments as shall be reasonably
requested by Purchaser to vest in Purchaser title in and to the Purchased
Assets in accordance with the provisions of this Agreement;

(v) all Books and Records included in the Purchased
Assets; and

(vi) physical possession of all tangible personal property
included in the Purchased Assets.

B. FORM OF INSTRUMENTS. All of the foregoing instruments shall
be in form and substance, and shall be executed and delivered in a manner,
reasonably satisfactory to Purchaser.

3.3 OTHER DELIVERIES AT CLOSING. In addition to the foregoing
matters, at the Closing:

A. Purchaser and Seller shall deliver officers' certificates
confirming the accuracy of the representations and warranties set forth in
Articles IV and V;

B. Purchaser and the Seller shall deliver the certificates and
other matters described in Articles VII and VIII;

C. Purchaser and Dr. Anand shall execute and deliver the
Consulting and Non-Compete Agreement and the Indemnification Agreement;

D. Seller shall deliver a copy of the Order, certified by the
Bankruptcy Court and evidence that the Order has become a Final Order (unless
Purchaser in writing waives the finality requirement);

E. Seller shall deliver the Seller Opinion and the Parent
Opinion;

F. Seller shall deliver a schedule of accrued vacation time and
allowances with respect to each of its employees; and

G. Seller shall deliver the Parent Consent and Indemnification
Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Except as set forth on the Disclosure Schedule, Seller hereby represents
and warrants to Purchaser as follows:

4.1 ORGANIZATION OF SELLER. Seller is duly organized, validly
existing and in good standing under the laws of the State of Maryland, has
full corporate power and authority to conduct its business as it is presently
being conducted and to own and lease its properties and assets. Seller is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which such qualification is necessary under applicable
law as a result of the conduct of its business or the ownership of its
properties and where the failure to be so qualified would have a material
adverse effect on the business or financial condition of Seller. Each
jurisdiction in which Seller is qualified to do business as a foreign
corporation is listed on the Disclosure Schedule.

4.2 AUTHORIZATION. Seller has all necessary corporate power and
authority and has taken all corporate action necessary to enter into this
Agreement, to consummate the transactions contemplated hereby and to perform
its obligations hereunder. This Agreement has been duly executed and
delivered by Seller and, subject to approval by the Court, is a legal, valid
and binding obligation of Seller enforceable against Seller in accordance with
its terms.

4.3 ABSENCE OF CERTAIN CHANCES OR EVENTS. Since the Balance Sheet
Date, there has not been any:

(a) (i) except for normal periodic increases in the ordinary
course of business consistent with past practice, increase in the compensation
payable or to become payable by Seller to any of its Personnel, (ii) bonus,
incentive compensation, service award or other like benefit granted, made or
accrued, contingently or otherwise, for or to the credit of any of any Non-
Direct Personnel, (iii) employee welfare, pension, retirement, profit-sharing
or similar payment or arrangement made or agreed to by Seller for any
Personnel except pursuant to the existing plans and arrangements described in
the Disclosure Schedule or (iv) new employment agreement to which Seller is a
party with any new Non-Direct Employee;

(b) sale, assignment or transfer of any of the assets of Seller,
other than in the ordinary course of business;

(c) cancellation of any indebtedness or waiver of any rights of
substantial value to Seller, whether or not in the ordinary course of
business;

(d) amendment, cancellation or termination of, or notice of
default by Seller under any Contract, Permit, license or other instrument
material to Seller;

(e) capital expenditure, other than in the ordinary course of
business and consistent with past practice;

(f) failure to operate the business of Seller in the ordinary
course consistent with past practice;

(g) damage, destruction or loss (whether or not covered by
insurance) with respect to any of the Purchased Assets;

(h) any declaration, setting aside or payment of dividends or
distributions in respect of any capital stock of Seller or any redemption,
purchase or other acquisition of any of Seller's equity securities;

(i) any payment, discharge or satisfaction of any liabilities
other than the payment, discharge or satisfaction in the ordinary course of
business and consistent with past practice of liabilities reflected or
reserved against in the Balance Sheet or incurred in the ordinary course of
business and consistent with past practice since the Balance Sheet Date, or as
otherwise approved by the Bankruptcy Court;

(j) incurring of any indebtedness for borrowed money, or
guarantee of any such indebtedness of another Person by the Seller, issuances
or sale of any debt securities of the Seller or guarantee of any debt
securities of another Person by the Seller or any loan, advances or capital
contributions to, or investments in, any other Person by the Seller;

(k) agreement by Seller to do any of the foregoing; or

(l) any other material adverse change in the business, financial
condition or operations of Seller (items (a) through (k), above, being
referred to collectively herein as "Material Adverse Changes").

4.4 TITLE TO ASSETS, ETC. Seller has good and marketable title to the
Purchased Assets. Without limiting the generality of the foregoing, neither
Parent nor any other Affiliate has any legal or equitable interest in any of
the Project Contracts. None of the Purchased Assets is subject to any
Encumbrances, except (a) liens which are specified in the Disclosure Schedule
and which are to be discharged pursuant to the Order at or prior to the
Closing and (b) audit adjustments by the other party to each such Contract
which may reduce the amount of unbilled Accounts Receivable relating to
expired Contracts that are awaiting closeout. Seller enjoys peaceful, and
undisturbed possession of all its facilities, and its facilities are not
subject to any Encumbrances, encroachments, building or use restrictions,
exceptions, reservations or limitations which in any material respect
interfere with or impair the present and continued use thereof in the usual
and normal conduct of the business of Seller. None of the real property
improvements (including leasehold improvements), equipment and other assets
owned or used by Seller at its facilities is subject to any commitment or
other arrangement for their sale or use by any affiliate of Seller or third
parties.

4.5 CONTRACTS AND COMMITMENTS.

A. Seller is not a party to any written or oral:

(a) commitment, contract, note, loan, evidence of
indebtedness, purchase order or letter of credit involving any obligation or
liability on the part of Seller;

(b) lease of real property (the Disclosure Schedule
indicates with respect to each Lease listed on the Disclosure Schedule the
term, annual rent, renewal options and number of square feet leased);

(c) lease of personal property (the Disclosure Schedule
indicates with respect to each lease listed on the Disclosure Schedule a
general description of the leased items, term, annual rent and renewal
options);

(d) contract or commitment not otherwise described above or
listed in the Disclosure Schedule (including purchase orders, franchise
agreements and undertakings or commitments to any governmental or regulatory
authority) relating to the business of Seller and otherwise materially
affecting Seller's business under contracts not in the ordinary course of e
business;

(e) Permit;

(f) contracts or agreements containing covenants limiting
the freedom of Seller to engage in any line of business or compete with any
person; or

(g) employment contracts, including, without limitation,
contracts to employ executive officers and other contracts with officers or
directors of Seller.

B. Seller is not (and, to the best knowledge of Seller, no other
party is) in material breach or violation of, or default under any of the
Contracts or other instruments, obligations, evidences of indebtedness or
commitments described in (a) through (g) above, the breach or violation of
which would have a material adverse effect on the business, financial
condition or operations of Seller, other than and to the extent alleged for
the filing of a petition in bankruptcy.

C. Except as otherwise set forth on the Disclosure Schedule:
(i) none of the Project Contracts has been assigned or is the subject of any
security agreement; (ii) each of the Project Contracts is a valid and binding
obligation of the Seller and (to the best knowledge of the Seller) the other
party or parties thereto, enforceable in accordance with its terms;
(iii) neither the Seller nor (to the best knowledge of the Seller) any other
party thereto, has terminated, canceled, modified or waived any term or
condition of any Project Contract, (iv) neither the Seller nor (to the best
knowledge of the Seller) any other party to any Project Contract is in default
or alleged to be in default under any Project Contract and there exists no
event, condition or occurrence that, after notice or lapse of time, or both,
would constitute such a default by the Seller or (to the best knowledge of the
Seller) any other party to any such Project Contract; and (v) none of the
Project Contracts contains any covenant or other restriction preventing or
limiting the consummation of the transactions contemplated hereby, including
any provision prohibiting the assignment of the Seller's rights thereunder or
granting any party a right of termination or modification of any provision as
a result thereof.

4.6 NO CONFLICT OR VIOLATION. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will result in (a) a violation of or a conflict with any provision of the
Articles of Incorporation or Bylaws of Seller, (b) a breach of, or a default
under, any term or provision of any Contract or other contract or agreement,
or any indebtedness, lease, Encumbrance, commitment, license, franchise,
Permit, authorization or concession to which Seller is a party or by which the
Purchased Assets are bound or encumbered, which breach or default would have a
material adverse effect on the business, financial condition or operations of
Seller or any adverse effect on its ability to consummate the transactions
contemplated hereby, (c) a violation by Seller of any statute, rule,
regulation, ordinance, code, order, judgment, writ, injunction, decree or
award, which violation would have a material adverse effect on the business,
financial condition or operations of Seller or any adverse effect on its
ability to consummate the transactions contemplated hereby, or (d) an
imposition of any Encumbrance, restriction or charge on any of the Purchased
Assets.

4.7 CONSENTS AND APPROVALS. Except for the approval of the Court
contemplated by Sections 6.5, 7.4 and 8.6, no consent, approval or
authorization of, or declaration, registration with, any governmental or
regulatory authority, or any other person or entity, required to be made or
obtained by, Seller in connection with the execution, delivery and performance
of this Agreement, and the consummation of the transactions contemplated
hereby.

4.8 FINANCIAL STATEMENTS. Seller has heretofore delivered to
Purchaser the Financial Statements. Except as otherwise set forth therein,
the Financial Statements are complete, are in accordance with the books and
records of Seller, accurately reflect the assets, liabilities and financial
condition and results of operations indicated thereby in accordance with
generally accepted accounting principles consistently applied, and contain and
reflect all necessary adjustments for a fair representation of the Financial
Statements as of the date and for the period covered thereby.

4.9 LITIGATION. There are no suits, actions, proceedings or
investigations pending or, to the best knowledge of Seller, threatened
(whether or not any such suit, action, proceeding or investigation involves,
or seeks recourse against, Seller or any of the Purchased Assets) ("Actions")
which materially affect or would, if adversely determined, materially
adversely affect any of the Purchased Assets or Seller's ability to execute
and deliver this Agreement or consummate the transactions contemplated hereby.

4.10 LABOR MATTERS. Seller is not a party to any labor agreement with
respect to its employees with any labor organization, group or association.
Seller has not experienced any attempt by organized labor or its
representatives to make Seller conform to demands of organized labor relating
to its employees or to enter into a binding agreement with organized labor
that would cover the employees of Seller. Seller is in material compliance
with all applicable laws respecting employment practices, terms and conditions
of employment and wages and hours and is not engaged in any unfair labor
practice. There is no unfair labor practice charge or complaint against
Seller pending before the National Labor Relations Board or any other
governmental agency arising out of Seller's activities, and Seller has no
knowledge of any facts or information which would give rise thereto; there is
no labor strike or labor disturbance pending or threatened against Seller nor
is any grievance currently being asserted; and Seller has not experienced a
work stoppage or other labor difficulty.

4.11 COMPLIANCE WITH LAW. Seller and the conduct of its business are
in compliance with all applicable laws, statutes, ordinances, rules,
regulations and orders, whether federal, state or local (collectively, "Law"
or "Laws"), except where the failure to comply would not have a material
adverse effect on the business, financial condition or operations of Seller.
Seller has not received any written notice to the effect that, or otherwise
been advised that, it is not in compliance with Law where the failure to
comply would have a material adverse effect on the business, financial
condition or operations of Seller, and Seller has no reason to anticipate that
any presently existing circumstances are likely to result in violations of any
such Law which would, in any one case or in the aggregate, have a material
adverse effect on the business, financial condition or operations of Seller.
All Permits that are required by Law, or which are otherwise necessary or
appropriate for the operation and conduct of the business of Seller, are held
by Seller in its name, are in full force and effect. Seller is in good
standing under, and in compliance with, all Permits.

4.12 NO BROKERS. Neither Seller nor any Affiliate has entered into or
will enter into any Contract, agreement, arrangement or understanding with any
person or firm which will result in the obligation of Purchaser to pay any
finder's fee, brokerage commission or similar payment in connection with the
transactions contemplated hereby.

4.13 NO OTHER AGREEMENTS TO SELL THE ASSETS OR SELLER. Neither Seller
nor any shareholder of Seller has any legal obligation, absolute or
contingent, to any other person or firm to sell the Purchased Assets, to sell
a majority of the capital stock of Seller or to effect any merger,
consolidation or other reorganization of Seller or to enter into any agreement
with respect thereto.

4.14 PROPRIETARY RIGHTS. All of Seller's Proprietary Rights are listed
in the Disclosure Schedule. The Proprietary Rights listed in the Disclosure
Schedule are in all material respects all those used in the business of
Seller. No person has a right to receive a royalty or similar payment in
respect of any Proprietary Rights pursuant to any contractual arrangement
entered into by Seller, and no person otherwise has a right to receive a
royalty or similar payment in respect of any such Proprietary Rights. Seller
has no licenses granted by or to it or no other agreements to which it is a
party, relating in whole or in part to any of the Proprietary Rights.
Seller's use of the Proprietary Rights is not infringing upon or otherwise
violating the rights of any third party in or to such Proprietary Rights, and
no proceedings have been instituted against or notices received by Seller that
are presently outstanding alleging that Seller's use of its Proprietary Rights
infringes upon or otherwise violates any rights of a third party in or to such
Proprietary Rights.

4.15 EMPLOYEE BENEFIT PLANS.

(a) DEFINITIONS. The following terms, when used in this Section
4.15, shall have the following meanings. Any of these terms may, unless the
context otherwise requires, be used in the singular or the plural depending on
the reference.

(1) ERISA. "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended.

(2) ERISA AFFILIATE. "ERISA Affiliate" shall mean any
entity which is (or at any relevant time was) a member of a "controlled group
of corporations" with or under "common control" with the Company as defined in
Section 414(b) or (c) of the IRC.

(3) BENEFIT ARRANGEMENT. "Benefit Arrangement" shall mean
any employment, consulting, severance or other similar contract, arrangement
or policy and each plan, arrangement (written or oral), program agreement or
commitment providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, life, health,
disability or accident benefits (including, without limitation, any "voluntary
employees' beneficiary association" as defined in Section 501(c)(9) of the IRC
providing for the same or other benefits) or for deferred compensation, profit
sharing bonuses, stock options, stock appreciation rights, stock purchases or
other forms of incentive compensation or post-retirement insurance,
compensation or benefits which is

(i) entered into, maintained, contributed to or
required to be contributed to, as the case may be, by the Company or an ERISA
Affiliate or under which the Company or any ERISA Affiliate may incur any
liability, and

(ii) covers any employee or former employee of the
Company or any ERISA Affiliate (with respect to their relationship with such
entities).

(b) REPRESENTATIONS. Except for the Plan, neither the Seller nor
any ERISA Affiliate maintains, administers, contributes to or is required to
contribute to any "employee benefit plan" as defined in Section 3(3) of ERISA,
any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA or any
Benefit Arrangement, which covers any employee or former employee of the
Company or any ERISA Affiliate (with respect to their relationship with such
entities) (collectively, "Employee Benefit Plans"), or within the five years
prior to the Closing Date, maintained, administered, contributed to or is
required to contribute to any such Employee Benefit Plan or under which
Employee Benefit Plan the Company or any ERISA Affiliate may incur any
liability.

(c) EMPLOYEE PLAN LIABILITIES. Except as otherwise expressly
provided by this Agreement, Purchaser shall have no liability or obligation
with respect to any Employee Benefit Plan, including without limitation any
responsibility for contributions required to fund any benefits payable
thereunder with respect to the employees of the Seller for any period prior
to, at or following the Closing. Seller shall indemnify, defend and hold
Purchaser harmless from and against any such claims and liabilities.

(d) NO CONTINUING OBLIGATION. Purchaser shall have no obligation
to assume or continue any benefits under any Employee Benefit Plan. Purchaser
shall have no obligation to provide the same or similar benefits on account of
any period prior to Closing. Purchaser's sole obligation with respect to
benefits is to make the Initial Plan Payment.

4.16 SEVERANCE ARRANGEMENTS. Seller has not entered into any severance
or similar arrangement in respect of any present or former Personnel that will
result in any obligation (absolute or contingent) of Purchaser or Seller to
make any payment to any present or former Personnel following termination of
employment, other than such agreements requiring Seller (but not Purchaser) to
make such payments, which agreements must be approved by the Bankruptcy Court
and which shall not affect Hired Employees. Purchaser shall have no
obligation to assume any severance arrangement between Seller and any other
person (including without limitation, Hired Employees). No payment made by
Seller on any severance arrangement shall affect the net profit from
operations under Section 6.9, below.

4.17 COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY.
There are no toxic wastes or other toxic or hazardous substances or materials
being stored or otherwise held on, under or about any facilities owned or
operated by Seller or any of its predecessors in interest (the "Facilities").
The Facilities have been maintained in compliance with all federal, state and
local environmental protection, occupational, health and safety or similar
laws, ordinances, restrictions, licenses, and local environmental protection,
occupational, health and safety or similar laws, ordinances, restrictions,
licenses and regulations, including, but not limited to the Federal Water
Pollution Control Act (42 U.S.C. Section 1251 et seq.), Resource Conservation
& Recovery Act (42 U.S.C. Section 6901 et seq.), Safe Drinking Water Act (21
U.S.C. Section 349, 42 U.S.C. Sections 201; 300f), Toxic Substances Control
Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42 U.S.C. Section 7401 et
seq.), Comprehensive Environmental Response, Compensation and Liability Act
(42 U.S.C. Section 9601 et seq.).

4.18 TAX MATTERS. Seller has filed or caused to be filed all federal
income tax returns and all other federal, state, county, local or city tax
returns which are required to be filed, and it has paid or caused to be paid
all taxes shown on said returns or on any tax assessment received by it to the
extent that such taxes have become due and before such taxes became
delinquent.

4.19 INSURANCE. The Disclosure Schedule contains a complete and
accurate list of all policies or binders of fire, liability, title, worker's
compensation and other forms of insurance maintained by Seller on its
business, property or Personnel. Such policies and binders provide sufficient
coverage for the risks insured against, are in full force and effect on the
date hereof and shall be kept full force and effect by Seller through the
Closing.

4.20 FULL DISCLOSURE. None of the representations and warranties made
by Seller, nor in any certificate or memorandum furnished or to be furnished
by Seller, or on its behalf, including the Disclosure Statement, contains or
will contain any untrue statement of material fact, or omit any material fact,
the omission of which would he misleading.

4.21 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; APPLICABILITY. All of
the representations and warranties of Seller contained in this Article IV
shall survive the Closing.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to Seller as follows:

5.1 ORGANIZATION OF PURCHASER. Purchaser is duly organized, validly
existing and in good standing under the laws of the State of California.

5.2 AUTHORIZATION. Purchaser has all necessary corporate power and
authority and has taken all corporate action necessary to enter into this
Agreement, to consummate the transactions contemplated hereby and to perform
its obligations hereunder. This Agreement has been duly executed and
delivered by Purchaser and, subject to approval by the Court, is a legal,
valid and binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms.

5.3 NO CONFLICT OR VIOLATION. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will result in (a) a violation of or a conflict with any provision of the
Articles of Incorporation or Bylaws of Purchaser, (b) a breach of, or a
default under, any term or provision of any contract, agreement, indebtedness,
lease, commitment, license, franchise, permit, authorization or concession to
which Purchaser is a party which breach or default would have a material
adverse effect on the business, financial condition or operations of Purchaser
or its ability to consummate the transactions contemplated hereby or (c) a
violation by Purchaser of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award, which violation would have
a material adverse effect on the business or financial condition of Purchaser
or its ability to consummate the transactions contemplated hereby.

5.4 CONSENTS AND APPROVALS. Except for the approval of the Court
contemplated by Sections 7.4 and 8.6, and such governmental agencies as may be
identified by Seller in the Disclosure Schedule, no consent, approval or
authorization of, or declaration, filing, or registration with, any
governmental or regulatory authority, or any other person or entity, is
required to be made or obtained by Purchaser in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.

ARTICLE VI
COVENANTS OF SELLER AND PURCHASER
---------------------------------
Seller and Purchaser each covenants with the other as follows:

6.1 COOPERATION AND BEST EFFORTS. Prior to the Closing, the Purchaser
and the Seller shall cooperate and diligently pursue and use their respective
commercially reasonable efforts to obtain the assignments and novations of the
Contract Rights and Contracts, the Order, and any required consent of the
relevant third parties to the assignment of the Contracts. Purchaser and
Seller agree that the novations and/or assignments of Project Contracts shall
be obtained pursuant to applicable laws, rules and regulations governing the
novation and/or assignment of such contracts.

6.2 MAINTENANCE OF ASSETS AND RELATIONSHIPS. Prior to the Closing,
the Seller shall duly perform and discharge its obligations and liabilities
under the Project Contracts and the Contracts; operate its business in the
ordinary course; maintain the Fixtures and Equipment and its other assets and
properties in good repair and operating condition; and will use its best
efforts to preserve and maintain good relationships with its clients,
customers, vendors and Employees.

6.3 OTHER ACTION. Neither the Seller nor the Purchaser shall take any
action that would result in any of their respective representations and
warranties not being true in all material respects as of the Closing Date.
Each of the parties shall use its commercially reasonable efforts to cause the
fulfillment at the earliest practicable date of all of the conditions to its
obligations to consummate the sale and purchase under this Agreement.

6.4 INVESTIGATION BY PURCHASER. Seller shall allow Purchaser at its
own expense during regular business hours to make such inspection of the
Purchased Assets and to inspect and make copies of other Contracts, Books and
Records or information requested by Purchaser and necessary for or reasonably
related to the business, financial condition and operations of Seller. All
such information small be provided to Purchaser in such form as information
may presently exist or be readily available. Seller hereby authorizes
Purchaser and its agents, representatives, employees, accountants and lawyers
to contact, communicate with: Employees, customers of Seller and Affiliates
(including parties to Contracts), governmental agencies and permitting
authorities, licensors, shareholders of Seller and Affiliates, creditors and
other parties in interest in the Bankruptcy Case, in order to facilitate
Purchaser's investigation and/or the consummation of transactions contemplated
by this Agreement. Seller shall hold Purchaser and its agents harmless from
any and all claims and liability, and shall not assert any claim or liability
against Purchaser or its agents, arising from or in connection with the
activities of Purchaser and its agents pursuant to this Section, except for
actions by Purchaser that are intended to cause harm to Seller or that
constitute gross misconduct.

6.5 COURT APPROVAL; BEST EFFORTS. Within five (5) Business Days
following the date hereof, Seller shall file a motion or motions pursuant to
Section 363 of the Bankruptcy Code (and such other Sections of the Bankruptcy
Code and Bankruptcy Rules as may be appropriate) (the "Motion") seeking the
Court's approval of this Agreement and the transactions contemplated hereby.
Seller shall use its best efforts to obtain Court approval of this Agreement
and the transactions contemplated hereby.

6.6 CERTAIN PROHIBITED TRANSACTIONS. Except as otherwise required by
the Court or the Bankruptcy Code or expressly provided herein, Seller shall
not take any of the following actions without the prior written consent of
Purchaser:

(a) pay or incur any obligation to pay any dividend on its
capital stock or make or incur any obligation to make any distribution or
redemption with respect to its capital stock;

(b) make any change to its Articles of Incorporation or bylaws;

(c) mortgage, pledge or otherwise encumber any of its properties
or assets or sell, transfer or otherwise dispose of any of its properties or
assets or cancel, release or assign any indebtedness owed to it or any claims
held by it, except in the ordinary course of business and consistent with past
practice;

(d) make any investment of a capital nature either by purchase of
stock or securities, contributions to capital, property transfer or otherwise,
or by the purchase of any property or assets of any other individual,
partnership, firm or corporation, except in the ordinary course of business
and consistent with past practice;

(e) enter into, terminate or reject any material contract or
agreement, or make any material change in the Leases or any of its Contracts,
other than in the ordinary course of business and consistent with past
practice, or as may be approved by the Bankruptcy Court; provided, however,
that Seller shall not terminate, reject or make any material adverse change in
any Project Contract;

(f) (y) incur any indebtedness for borrowed money or guarantee
any such indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Seller,
guarantee any debt securities of another Person, enter into any "keep well" or
other agreement to maintain any financial statement condition of another
Person or enter into any arrangement having the economic effect of any of the
foregoing, or (z) make any loans, advances or capital contributions to, or
investments in, any other Person, other than travel advances to Employees in
the ordinary course of the Seller's business;

(g) do any other act which would cause any representation or
warranty of Seller in this Agreement to be or become untrue in any material
respect; or

(h) directly or indirectly file or make any motion or request, or
consent or agree to, any motion or request, for the dismissal or conversion of
the Bankruptcy Case, the appointment of a Trustee in the Bankruptcy Case, or
any plan of reorganization or liquidation that is inconsistent with the terms
of this Agreement.

6.7 NOTIFICATION OF CERTAIN MATTERS. Seller shall give prompt notice
to Purchaser, and Purchaser shall give prompt notice to Seller, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure
would cause any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect any time from the date hereof to
the Closing Date and (ii) any material failure of Seller or Purchaser, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder. Additionally, Seller shall
give prompt notice to Purchaser of any objection, allegation or threat of
legal action that Seller may receive in connection with this Agreement or the
transactions contemplated hereby. Each party shall use all reasonable efforts
to remedy any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder.

6.8 NOTICES TO CREDITORS AND PARTIES IN INTEREST. Seller shall
provide notice to all creditors and parties in interest of all matters that
are required by the Bankruptcy Code or the Federal Rules of Bankruptcy
Procedure ("Bankruptcy Rules"). Without limiting the generality of the
foregoing, Seller shall provide notice to all persons and entities who are
shareholders in Parent as of the time such notice is given or required to be
given. Such notices shall be given in a manner, and within the time, required
by the Bankruptcy Code, Bankruptcy Rules, local rules of the Court ("Local
Rules") or order of the Court, as applicable. At Closing, Seller shall
certify Seller's compliance with all notice requirements by sworn affidavit of
an officer of Seller executed under penalty of perjury. In addition to
providing notices as required above, Seller shall cause Parent to conduct
meeting of Parent's board of directors and, as soon as practicable after the
date of the Order, a meeting of Parent's shareholders to obtain approval and
authorization of the Parent Consent and Indemnification Agreement. Seller and
Parent shall comply with all applicable Laws (including without limitation,
applicable corporate and securities laws, rules and regulations) in obtaining
such approval and authorization.

6.9 NET PROFIT FROM OPERATIONS; CERTAIN EMPLOYEE TRAVEL ADVANCES.
Within thirty (30) days following the Closing, Seller shall make payment to
Purchaser in immediately available funds in an amount equal to Seller's net
profits from operations computed pursuant to generally accepted accounting
principles, consistently with those applied in the preparation of the
Financial Statements, accrued during the period commencing on February 28,
1997, and ending on the Closing Date. If Seller has made postpetition
advances of travel expenses to Employees and has not included such expenses in
Accounts Receivable billed as of the Closing Date, then to the extent
Purchaser may include such expenses in Accounts Receivable billed after the
Closing Date and receives payment therefor Purchaser shall make prompt payment
to the Seller thereof.

6.10 DISCLOSURE SCHEDULE. Within five (5) Business Days following the
date of delivery of the initial Disclosure Schedule, Seller shall deliver to
Purchaser the Final Disclosure Schedule.

6.11 BREAKUP FEE/OVERBID PROTECTION. In the event that the Court
authorizes or permits the sale or assignment of the Purchased Assets, or any
portion thereof, to a person or entity other than Purchaser, the Purchaser
shall be entitled to recover all of its out-of-pocket fees and expenses
(including without limitation legal fees and expenses) incurred by Purchaser
(the "Break Up Fee"); provided, however, that the Break Up Fee shall not
exceed an amount equal to 10% of the Purchase Price. Additionally, any
competing bidder shall be required to outbid Purchaser by an amount not less
than 10% in excess of the Purchase Price ("Overbid Amount"). Within three (3)
Business Days following the date hereof, the Seller shall submit and pursue
expedited approval by the Court of a motion seeking entry of an order (the
"Break Up/Overbid Order") authorizing the Break Up Fee and the Overbid Amount.

ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
----------------------------------
The obligations of Seller to consummate the transactions required to take
place at Closing are subject, in the discretion of Seller, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions:

7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations
and warranties of Purchaser contained in this Agreement shall be true and
correct in all material respects at and as of the Closing Date, except as, and
to the extent that, the facts and conditions upon which such representations
and warranties are based are expressly required or permitted to be changed by
the terms hereof, and Purchaser shall have performed all agreements and
covenants required hereby to be performed by it prior to or at the Closing
Date.

7.2 CERTIFICATES. Purchaser shall have furnished Seller with such
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VII and the representations and
warranties in Article V.

7.3 CORPORATE DOCUMENTS. Seller shall have received from Purchaser
resolutions adopted by the board of directors of Purchaser approving this
agreement and the transactions contemplated hereby, certified by Purchaser's
corporate secretary.

7.4 COURT APPROVAL. The Court shall have entered an order or orders,
including any findings of fact and conclusions of law (collectively, the
"Order") in a form acceptable to Purchaser that (1) approves the form and
content of this Agreement; (2) authorizes Seller to enter into each and every
transaction contemplated by this Agreement; and (3) authorizes Seller to
convey to Purchaser the Purchased Assets effective on the Closing Date.

ARTICLE VIII
CONDITIONS TO PURCHASER'S OBLIGATIONS
-------------------------------------
The obligations of Purchaser to consummate the transactions required to
take place at Closing are subject, in the discretion of Purchaser, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions

8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations
and warranties of Seller contained in this Agreement shall be true and correct
in all material respects at and as of the Closing Date, except as, and to the
extent that, the facts and conditions upon which such representations and
warranties are based are expressly required or permitted to be changed by the
terms hereof, and Seller shall have performed all agreements and covenants
required hereby to be performed by them prior to or at the Closing Date.

8.2 CONSENTS. All consents, approvals and waivers from third parties
and governmental authorities and other Parties, including without limitation
appropriate "no setoff" commitments, necessary to permit Seller to transfer
the Purchased Assets to Purchaser as contemplated hereby shall have been
obtained.

8.3 NO GOVERNMENTAL PROCEEDINGS OR LITIGATION. No Action by any
governmental authority shall have been instituted or threatened which
questions the validity or legality of the transaction contemplated hereby and
which could reasonably be expected to affect materially the right or ability
of Purchaser to own, operate or possess the Purchased Assets after the Closing
or to damage Purchaser materially if the transactions contemplated hereunder
are consummated.

8.4 CERTIFICATES. Seller shall have furnished Purchaser with such
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VIII and the representations and
warranties set forth in Article IV.

8.5 CORPORATE DOCUMENTS. Purchaser shall have received from Seller
resolutions adopted by the boards of directors and shareholders of Seller
approving this Agreement and the transactions contemplated hereby, certified
by Seller's corporate secretary.

8.6 COURT APPROVAL. On or before March 18, 1997, or such later date
as Purchaser may agree in writing in Purchaser's sole and absolute discretion,
the Court shall have entered the Order in a form and in substance acceptable
to Purchaser that (1) approves the form and content of this Agreement
effective February 28, 1997; (2) authorizes Seller to enter into each and
every transaction contemplated by this Agreement; (3) authorizes Seller to
convey to Purchaser the Purchased Assets free and clear of all Encumbrances of
all parties and entities; (4) approves the assumption and assignment to
Purchaser of any Contract that is an executory contract and is a Purchased
Asset; (5) determines that the consideration given by Purchaser under this
Agreement represents the fair market value of the Purchased Assets;
(6) determines that this Agreement is in the best interest of Seller and its
Affiliates, including without limitation, Parent and Parent's shareholders.

8.7 FINALITY. The Order shall have become a Final Order.

8.8 THIRD PARTY ESTOPPELS; CONSENTS AND NOVATIONS. Within forty-five
(45) days following the entry of the Order, all parties to any Project
Contract have executed and delivered to Purchaser legally binding instruments
consenting to the assumption and assignment to Purchaser of each such Project
Contract, without conditions, restrictions or modifications to which Purchaser
has not agreed in writing, and verifying the absence of any default, defense
or cure requirement in connection with such Project Contract, or alternatively
entering into a novation of the Project Contract with Purchaser, all in a form
and in substance acceptable to Purchaser and its counsel.

8.9 MATERIAL ADVERSE CHANGE. There shall not have been a Material
Adverse Change.

8.10 CONSULTING AND NON-COMPETE AGREEMENT. Purchaser and Dr. Anand
shall have agreed to and executed and delivered the Consulting and Non-Compete
Agreement in form and in substance acceptable to Purchaser.

8.11 PERMITS. All licenses, Permits and other governmental
authorizations required for Purchaser to conduct the business of Seller shall
have been obtained.

8.12 EMPLOYEES AND PROJECT MANAGERS. At least 90% of the Employees to
whom Purchaser has offered employment have agreed to become Hired Employees on
terms and conditions that are mutually acceptable to Purchaser and each such
Employee; and all of the Project Managers to whom Purchaser has offered
engagement or employment have agreed to such employment or engagement on terms
and conditions that are mutually acceptable to Purchaser and each such Project
Manager.

8.13 ARTICLES OF TRANSFER. Seller shall have executed and furnished to
Purchaser Articles of Transfer describing the sale of assets contemplated
hereby, which Articles of Transfer shall have been filed with the Maryland
State Department of Assessments and Taxation as of the Closing Date.

8.14 PURCHASE PRICE ALLOCATIONS. Seller shall have executed and
delivered the Purchase Price allocation referenced in Section 2.4, above.

8.15 PLAN TRUSTEES. The Plan Trustees have executed and
delivered to Purchaser an instrument consenting to the terms and conditions of
this Agreement and the performance and consummation thereof, in form and
substance acceptable to Purchaser and its counsel.

8.16 INDEMNIFICATION AGREEMENT. Dr. Anand shall have executed and
delivered this Agreement which includes the Indemnification Agreement.

8.17 PARENT CONSENT. Seller shall have delivered the Parent Consent
and Indemnification Agreement, duly executed by Parent, and all documentation
reasonably requested by Purchaser to evidence corporate authority and
approvals and authorizations required under this Agreement.

8.18 OPINIONS. Seller shall have delivered the Parent Opinion and the
Seller Opinion.

8.19 CLOSING DATE. The Closing shall have occurred on or before April
30, 1997.

8.20 NO SETOFF. Purchaser shall have received assurances reasonably
satisfactory to Purchaser and its counsel that no government, department
agency, or other Person will exercise, or is asserting or will assert, any
administrative equitable or common law right of offset in favor of such entity
against any of the Purchased Assets other than as provided in the next
sentence. It is understood that Purchaser shall acquire the unbilled Accounts
Receivable relating to Contracts subject only to potential audit adjustments
by the other party to each such Contract which may reduce the amount of such
unbilled Account Receivable (but no other Encumbrances); provided that the
Purchaser shall assume no monetary, performance, warranty or other liability,
or obligations relating to expired Contracts awaiting closeout.

ARTICLE IX
MISCELLANEOUS
-------------
9.1 BREACH; REMEDIES; TERMINATION.

A. If any condition precedent to Seller's obligations hereunder
is not satisfied and such condition is not waived by Seller at or prior to the
Closing Date, or if any condition precedent to Purchaser's obligations
hereunder is not satisfied and such condition is not waived by Purchaser at or
prior to the Closing Date, Seller or Purchaser, as the case may be, may
terminate this Agreement at its option by notice to the other party.

B. Either party may terminate this Agreement upon the occurrence
of a breach of this Agreement by the other party that is not cured within ten
(10) Business Days after notice of the breach; provided, however, that a party
may not terminate this Agreement solely on the grounds of a material breach by
the other party if the terminating party is itself in material breach of this
Agreement at the time.

C. Purchaser may terminate this Agreement at any time on or
before the later of: (i) tenth (10th) Business Day following the delivery by
Seller of the Final Disclosure Schedule to Purchaser; and (ii) the entry of
the Break Up/Overbid Order.

D. In the event of the termination of this Agreement by either
party pursuant to Sections 9.1(A) or 9.1(B), above, neither party shall have
any liability hereunder of any nature whatsoever to the other party, including
any liability for damages, unless such party has materially breached its
obligations hereunder, in which event the party in default shall be liable to
the other party in damages. In the event of the termination of this Agreement
by Purchaser pursuant to Section 9.1(C), above, neither party shall have any
liability hereunder of any nature whatsoever, regardless of the occurrence and
continuation of a breach or default. In the event of a breach or default by
Seller, in addition to other remedies available at law or in equity, Purchaser
shall be entitled to specific performance of this Agreement without posting
bond or other security.

E. In the event that a condition precedent to its obligations is
not satisfied, nothing contained herein shall be deemed to require any party
to terminate this Agreement, rather than to waive such condition precedent and
proceed with the Closing.

9.2 ASSIGNMENT. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by either party without the prior
written consent of the other party. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.

9.3 NOTICES. Unless otherwise provided herein, any notice, requests,
instruction or other document to be given hereunder by either party to the
other shall be in writing and delivered personally or mailed by certified
mail, postage prepaid, return receipt requested (such mailed notice to be
effective on the date such receipt is acknowledged or refused) as follows:

If to Seller, addressed to: Dr. S.P.S. Anand
Applied Research Corporation
8201 Corporate Drive
Suite 1120
Landover, MD 20875

With a copy to: James M. Greenan, Esquire
Greenan, Walker, Trainor &
Billman
6411 Ivy Lane, 7th Floor
Greenbelt, MD 20770

<PAGE>
<PAGE>
If to Purchaser, addressed to: Mr. Michael G. Stolarik
Space Applications Corporation
901 Follin Lane
Suite 400
Vienna, VA 22180

With a copy to: George R. Pitts, Esquire
Dickstein Shapiro Morin &
Oshinsky LLP
2101 L Street, N.W.
Washington, DC 20037

or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.

9.4 CHOICE OF LAW. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the State
of Maryland (without reference to the choice of law provisions of Maryland
law)

9.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement,
together with all exhibits and schedules hereto and all agreements
contemplated hereby, constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties and their employees, agents, representatives and attorneys. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.

9.6 MULTIPLE COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

9.7 EXPENSES. Except as set forth below or as otherwise specified
herein, each party hereto shall pay its own legal, accounting, out-of-pocket
and other expenses incident to this Agreement and to any action taken by such
party in preparation for carrying this Agreement into effect. The obligations
of the parties under this Section shall survive termination of this Agreement.

9.8 TITLES. The titles, captions or headings of the Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.

9.9 FURTHER ASSURANCES. Each party shall at any time and from time to
time hereafter, both before and after Closing, execute, acknowledge and
deliver to the other party any and all instruments or assurances that the
other party may reasonably require for the purpose of giving full force and
effect to the provisions of this Agreement, and shall otherwise cooperate with
the other's reasonable requests made in aid of consummating the transactions
herein contemplated.

9.10 SIGNED UNDER SEAL. This Agreement is signed under seal by the
parties.

9.11 TIME IS OF THE ESSENCE. Time is of the essence under this
Agreement.

9.12 NO THIRD PARTY BENEFICIARIES. This Agreement is for the benefit
of the undersigned parties and is not intended to create rights in, or be
enforceable by, any third party.

9.13 JURY TRIAL. EACH PARTY HERETO WAIVES THE RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY CLAIM OR CAUSE OF ACTION ARISING UNDER OR IN CONNECTION
WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

9.14 PUBLICITY. All notices to third parties and all publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between Purchaser and Seller. None of the
parties shall act unilaterally in this regard without the prior written
approval of the others; however, this approval shall not be unreasonably
withheld.

9.15 REQUIRED FILINGS. Seller shall file all documents and reports
required by Law in connection with the transactions contemplated by this
Agreement, including without limitation filings as may be required under
securities laws.

9.16 CONFIDENTIALITY. Each party hereto and its respective
accountants, attorneys, employees and other agents, will keep confidential all
information, oral and written, obtained from any other party hereto or its
affiliates and refrain from using in any manner all information obtained from
the others and not otherwise publicly available notwithstanding any
termination of this Agreement. Seller shall not disclose or discuss the
existence or terms of this Agreement to or with any persons other than its
attorneys, accountants, financial advisors and such of its executives as may
be required to know same in implementing the provisions of this Agreement
(each of whom shall be instructed not to disclose such information), and
except as necessary in connection with any filing with the Bankruptcy Court
seeking approval of this Agreement. The foregoing shall not prohibit any
other disclosure required by law, provided that the disclosing party shall use
its best efforts to consult with the others in advance of any such disclosure.

ARTICLE X
POST-CLOSING OBLIGATIONS
------------------------
10.1 COVENANT NOT TO COMPETE. Seller acknowledges and agrees that:
(i) Seller's business is conducted in Montgomery County and Prince Georges
County, Maryland; (ii) Seller's reputation and goodwill are an integral part
of its business; (iii) if Seller deprives Purchaser of any of Seller's
goodwill or in any manner utilizes its reputation and goodwill in competition
with Purchaser, Purchaser will be deprived of the benefits it has bargained
for pursuant to this Agreement; and (iv) this covenant is necessary to
transfer the business and goodwill of Seller to Purchaser effectively.
Accordingly, as an inducement for Purchaser to enter into this Agreement,
Seller agrees that for a period of three years after the Closing, Seller shall
not, without Purchaser's prior written consent, directly or indirectly, own,
manage, operate, join, control or participate in the ownership, management,
operation or control of, or be connected with, any, profit or nonprofit
business or organization either in Montgomery County or Prince Georges County,
Maryland, which involves high technology research or development, design or
fabrication of sensors or instrumentation, technical support services, or
software development. Seller further agrees that it shall not solicit or
enter into any business or transaction with any person or entity that is a
party to any Project Contract for a period of three years after the Closing.
Seller shall maintain in confidence, and not to disclose to any third party,
any ideas, methods, developments, inventions, improvements, trade secrets and
business plans and information which are confidential information of Seller.
In the event the agreement in this Section 10.1 shall be determined by any
court of competent jurisdiction to be unenforceable by reason of its extending
for too great a period of time or over too great a geographical area or by
reason of its being too extensive in any other respect, it shall be
interpreted to extend only over the maximum period of time for which it may be
enforceable and/or over the maximum geographical area as to which it may be
enforceable and/or to the maximum extent in all other respects as to which it
may be enforceable, all as determined by such court in such action.

Seller acknowledges that a breach of the covenants contained in this
Section 10.1 will cause irreparable damage to Purchaser, the exact amount of
which will be difficult to ascertain, and that the remedies at law for any
such breach will be inadequate. Accordingly, Seller agrees that if Seller
breaches the covenant contained in this Section 10.1, in addition to any other
remedy which may be available at law or in equity, Purchaser shall be entitled
to specific performance and injunctive relief, without posting bond or other
security.

10.2 INDEMNIFICATION BY THE SELLER. Subject to Section 9.1 and the
further provisions of this Article X, the Seller shall protect, defend, hold
harmless and indemnify the Purchaser, its officers, directors, stockholders,
employees and agents, and their respective successors and assigns from,
against and in respect of any and all losses, liabilities, deficiencies,
penalties, fines, costs, damages and expenses whatsoever (including reasonable
professional fees and costs of investigation, litigation, settlement, and
judgment and interest) ("Losses") that may be suffered or incurred by any of
them arising from or by reason of any of the following.

(a) Any breach of any representation, warranty, covenant or
agreement made by the Seller, in this Agreement or contained in any
certificate executed by the Seller and delivered to the Purchaser in
connection with this Agreement;

(b) Any liability or obligation of the Seller which has not been
assumed by the Purchaser pursuant to the express provisions of this Agreement;
and

(c) Any and all costs and expenses (including reasonable legal
fees) incident to the enforcement of the provisions of this Section.

10.3 INDEMNIFICATION BY THE PURCHASER. Subject to Section 9.1 and the
further provisions of this Article X, from and after the Closing the Purchaser
shall protect, defend, hold harmless and indemnify the Seller, its officers,
directors, employees and agents, and stockholders and their respective
successors and assigns from, against and in respect of any all Losses that may
be suffered or incurred by any of them arising from or by reason of any of the
following.

(a) Any breach of any representation, warranty, covenant or
agreement made by the Purchaser in this Agreement or contained in any
certificate executed by the Purchaser and delivered to the Seller in
connection with this Agreement; and

(b) Any and all costs and expenses (including reasonable legal
fees) incident to the enforcement of the provisions of this Section.

10.4 INDEMNIFICATION PROCEDURES. Whenever a party hereto (such party
and each other Person which is entitled to indemnification pursuant to any
provisions of this Agreement, an "Indemnified Party") shall learn after the
Closing of a claim that, if allowed (whether voluntarily or by judicial or
quasi-judicial tribunal or agency), would give rise to an obligation of
another party (the "Indemnifying Party") to indemnify the Indemnified Party
under any provision of this Agreement, before paying the same or agreeing
thereto, the Indemnified Party shall promptly notify the Indemnifying Party in
writing of all such facts within the Indemnified Party's knowledge with
respect to such claim and the amount thereof (a "Notice of Claim"). If, prior
to the expiration of fifteen (15) days from the mailing of a Notice of Claim,
the Indemnifying Party shall request, in writing, that such claim not be paid,
the Indemnified Party shall not pay the same, provided the Indemnifying Party
proceeds promptly, at its or their own expense (including employment of
counsel reasonably satisfactory to the Indemnified Party), to settle,
compromise or litigate, in good faith, such claim. After notice from the
Indemnifying Party requesting the Indemnified Party not to pay such claim and
the Indemnifying Party's assumption of the defense of such claim at its or
their expense, the Indemnifying Party shall not be liable to the Indemnified
Party for any legal or other expense subsequently incurred by the Indemnified
Party in connection with the defense thereof. However, the Indemnified Party
shall have the right to participate at its expense and with counsel of its
choice in such settlement, compromise or litigation. The Indemnified Party
shall not be required to refrain from paying any claim which has matured by a
court judgment or decree, unless an appeal is duly taken therefrom and
execution thereof has been stayed, nor shall the Indemnified Party be required
to refrain from paying any claim where the delay in paying such claim would
result in the foreclosure of a lien upon any of the property or assets then
held by the Indemnified Party. The failure to provide a timely Notice of
Claim as provided in this Section shall not excuse the Indemnifying Party from
its or their continuing obligations hereunder; however, the Indemnified
Party's claim shall be reduced by any damages to the Indemnifying Party
resulting from the Indemnified Party's delay or failure to provide a Notice of
Claim as provided in this Section.

10.5 ALLEGATIONS BY THIRD PARTIES. For purposes of this Article X, any
assertion of fact and/or law by a third party that, if true, would constitute
a breach of a representation or warranty made by a party to this Agreement or
make operational an indemnification obligation hereunder, shall, on the date
that such assertion is made, immediately invoke the Indemnifying Party's
obligation to protect, defend, hold harmless and indemnify the Indemnified
Party pursuant to this Article X.

10.6 CLOSEOUT OF EXPIRED CONTRACTS. From and after the Closing,
Purchaser shall complete documentation required for closeout of each of the
expired Contracts designated on the Disclosure Schedule and shall take all
actions reasonably required to obtain closeout on each such Contract;
provided, however, that Purchaser shall not be required to assume any
monetary, performance, warranty or other liability or obligation of Seller
under any such Contract.

<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their respective behalf, by their respective officers
thereunto duly authorized, all as of the day and year first above written.

SELLER:

APPLIED RESEARCH OF MARYLAND INC.

By _______________________ (Seal)

Title: __________________________

PURCHASER:

SPACE APPLICATIONS CORPORATION

By _______________________ (Seal)

Title: __________________________

Agreed and consented to: __________________________ (Seal)
DR. S.P.S. ANAND

<PAGE>
EXHIBIT 10.15(c)
----------------

AMENDMENT NO. 1
TO
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
SPACE APPLICATIONS CORPORATION
AND
APPLIED RESEARCH OF MARYLAND, INC.

THIS AMENDMENT NO. 1, dated as of April 11, 1997, by and between SPACE
APPLICATIONS CORPORATION and APPLIED RESEARCH OF MARYLAND, INC.

RECITALS
--------
WHEREAS, the parties hereto executed and delivered the Asset Purchase
Agreement, dated March 3, 1997, and now wish to amend certain of the
provisions of and Schedules to that Asset Purchase Agreement. Unless
otherwise defined herein, capitalized terms shall have the meanings given them
in the Asset Purchase Agreement

NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto agree to amend the Asset
Purchase Agreement as follows:

1. Section 1.1 shall be amended by revising the definition of Deferred
Payments to read as follows:

"`Deferred Payments' shall mean the components of the Purchase
Price referred to in items B, D and F of the definition of Purchase
Price herein which are payable after the Closing Date."

2. Section 1.1 shall be amended by revising the definition of Purchase Price
to read as follows:

"`Purchase Price' shall mean payments and assumption of specified
liabilities in an amount totaling up to One Million Seven Hundred Fifty
Thousand and No/100 dollars ($1,750,000.00). The Purchase Price shall consist
of the following items:

A. A deposit (the "Deposit") in the amount of Fifty Thousand and No/100
dollars ($50,000.00) paid to the Escrow Agent upon execution of this
Agreement and held in an interest-bearing deposit account. The
Deposit shall be released and paid to the Internal Revenue Service
("IRS") at Closing with any accrued interest being applied to the
payment next due pursuant to item D below;

B. A payment to the Plan in the amount of Five Hundred Thirty Thousand
Nine Hundred Seventeen and No/100 dollars ($530,917.00), to be paid,
without interest, as follows: $398,617.00 shall be paid to the Plan
at Closing (the "Initial Plan Payment"); $34,900.00 shall be paid to
the Plan no later than the first anniversary of the Closing Date;
$34,900.00 shall be paid to the Plan no later than the second
anniversary of the Closing Date; and $62,500.00 shall be paid to the
Plan no later than the third anniversary of the Closing Date;

C. An assumption of liabilities of Seller to its Employees for
liabilities of Seller to its Employees for accrued and unpaid
vacation liabilities ("Vacation Liability") in an amount not to
exceed Two Hundred Fifty-Five Thousand Two Hundred and No/100
dollars ($255,200.00), to be paid or provided for by Purchaser to
such Employees in accordance with the Purchaser's existing vacation
policy as though such Vacation Liability had accrued under such
policy; provided that Purchaser shall not be required to make any
cash payments for Vacation Liability exceeding, in the aggregate,
$127,600.00 within less than one year following the Closing Date;
and further provided that Purchaser shall not require that any cash
payments for Vacation Liability be paid for across a period greater
than two years following the Closing Date (the "Assumed Vacation
Liability");

D. Payment to the Seller of the aggregate amount of Five Hundred
Seventy-Eight Thousand Eight Hundred Eighty-Three and No/100 dollars
($578,883)for the IRS, to be paid, without interest as follows:
$539,000.00 shall be paid at the Closing; and $39,883.00 shall be
paid no later than the third anniversary of the Closing Date;

E. Payment to the Seller of the aggregate amount of Twenty Thousand and
No/100 dollars ($20,000.00) for the IRS, $10,000.00 of which is
pursuant and subject to the Consulting and Non-Compete Agreement
with Dr. Anand and $10,000.00 of which is pursuant to the Non-
Compete covenants of Seller in Section 10.1 of this Agreement (the
"Assigned Non-Compete Payments") to be paid at the Closing;

F. Payment to the Seller of the aggregate amount of Two Hundred Sixty-
Five Thousand and No/100 dollars ($265,000.00) for allowed
administrative expenses incurred by the Seller in the Bankruptcy
Case, to be paid, without interest as follows: $242,383.00 shall be
paid at the Closing; and $22,617.00 shall be paid no later than the
third anniversary of the Closing Date; and

G. Purchaser shall reimburse Seller's Employees for their prepetition
travel expenses in an aggregate amount not to exceed Fifty Thousand
and No/100 dollars ($50,000.00) for all such Employees."

3. Section 8.8 shall be amended by adding the following to the end of such
Section:

"Provided that all other conditions to the Purchaser's
obligations set forth in Article VIII shall have been satisfied or
waived, and the Purchaser and its counsel have received no objection
to the form of novation presented to a party to any Project
Contract, the Purchaser shall deposit funds, and the Seller shall
deposit all of its Closing deliveries, into escrow, pursuant to
terms reasonably satisfactory to the parties and their counsel,
pending delivery of all such novation agreement with respect to the
Project Contracts."

4. Section 8.19 shall be amended to read as follows:

"8.19 CLOSING DATE. The Closing shall have occurred on or
before May 30, 1997."

5. Section 10.6 shall be amended by adding the following to the end of such
Section:

"In order to facilitate the foregoing, the Seller shall
cooperate with the Purchaser, and execute and deliver, or cause to
be executed and delivered, all such other instruments, including
closeout certificates, instruments of conveyance, assignment and
transfer, and one or more power or powers of attorney appointing the
Purchaser, or its designee or designees, the lawful attorney-in-fact
and agent of the Seller to execute any of the foregoing on the
Seller's behalf and in its name, and take all such other actions as
may be reasonably requested by the Purchaser from time to time,
consistent with the terms of this Agreement, to effectuate the
purposes and provisions of this Agreement. In order to facilitate
the foregoing the Seller shall maintain its corporate existence for
a period of not less than one (1) year following the Closing Date."

6. The Final Disclosure Schedule shall be amended as set forth in the
Exhibit to this Agreement.

7. Except as modified by this Amendment No. 1, the Asset Purchase Agreement
remains in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed on their respective behalf, by their respective officers thereunto
duly authorized, all as of the day and year first above written.

SELLER:

APPLIED RESEARCH OF MARYLAND INC.

By _______________________ (Seal)

Title: __________________________

PURCHASER:

SPACE APPLICATIONS CORPORATION

By _______________________ (Seal)

Title: __________________________

Agreed and consented to: __________________________ (Seal)
DR. S.P.S. ANAND

<PAGE>
EXHIBIT 10.15(d)

AMENDMENT NO. 2
TO
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
SPACE APPLICATIONS CORPORATION
AND
APPLIED RESEARCH OF MARYLAND, INC.

THIS AMENDMENT NO. 2, dated as of June , 1997, by and between SPACE
APPLICATIONS CORPORATION and APPLIED RESEARCH OF MARYLAND, INC.

RECITALS
--------
WHEREAS, the parties hereto executed and delivered the Asset Purchase
Agreement, dated March 3, 1997, as amended by Amendment No. 1 to Asset
Purchase Agreement, dated April 11, 1997 and now wish to further amend certain
of the provisions of the Asset Purchase Agreement. Unless otherwise defined
herein, capitalized terms shall have the meanings given them in the Asset
Purchase Agreement

NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto agree to amend the Asset
Purchase Agreement as follows:

1. Section 1.1 shall be amended by revising paragraphs B and C of the
definition of Purchase Price to read as follows:

B. A payment to the Plan in the amount of Five hundred thirty thousand
nine hundred seventeen and No/100 ollars ($530,917.00), to be paid,
without interest, as follows: $271,017.00 shall be paid to the Plan
at Closing (the "Initial Plan Payment"); $34,900.00 shall be paid to
the Plan no later than the first anniversary of the Closing Date;
$162,500.00 shall be paid to the Plan no later than the second
anniversary of the Closing Date; and $62,500.00 shall be paid to the
Plan no later than the third anniversary of the Closing Date;

2. Except as modified by this Amendment No. 2, the Asset Purchase Agreement,
as amended by Amendment No. 1, remains in full force and effect.

[The balance of this page has been intentionally left blank.]<PAGE>
<PAGE>

SELLER:

APPLIED RESEARCH OF MARYLAND INC.

By _______________________ (Seal)

Title: __________________________

PURCHASER:

SPACE APPLICATIONS CORPORATION

By _______________________ (Seal)

Title: __________________________

OFFICIAL UNSECURED CREDITORS' COMMITTEE

By ______________________________

Title: __________________________

Agreed and consented to: __________________________ (Seal)
DR. S.P.S. ANAND

<PAGE>
EXHIBIT 21
<TABLE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT

<CAPTION>
Percentage of
Incorporated voting securities
under the owned by
Name laws of Parent immediate parent
- ------------------- ------------ ----------------- ----------------
<S> <C> <C> <C>
Applied Research
Corporation Colorado Registrant

Applied Research Applied Research
of Maryland, Inc. Maryland Corporation 100%

ARSoftware Applied Research
Corporation Maryland Corporation 100%

ARInternet Applied Research
Corporation Maryland Corporation 95%

</TABLE>

Note: The subsidiaries of the Registrant as of May 31, 1997, are
included in the consolidated financial statements of the
Registrant.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 24, 25 AND 26 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED MAY 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 228,414
<SECURITIES> 0
<RECEIVABLES> 1,174,228
<ALLOWANCES> (8,479)
<INVENTORY> 2,546
<CURRENT-ASSETS> 1,399,018
<PP&E> 799,784
<DEPRECIATION> (717,713)
<TOTAL-ASSETS> 1,514,102
<CURRENT-LIABILITIES> 3,832,358
<BONDS> 0
0
0
<COMMON> 3,155
<OTHER-SE> (2,321,411)
<TOTAL-LIABILITY-AND-EQUITY> 1,514,102
<SALES> 542,575
<TOTAL-REVENUES> 542,575
<CGS> 180,150
<TOTAL-COSTS> 585,899
<OTHER-EXPENSES> 5,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,531
<INCOME-PRETAX> (50,703)
<INCOME-TAX> 619
<INCOME-CONTINUING> (51,322)
<DISCONTINUED> (164,785)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (216,107)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)

</TABLE>