<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

                                   (Mark One)

        [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 2001

       [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
            For the transition period from _____\_____ to __________

                         Commission file number 0-12705

                        APPLIED DATA COMMUNICATIONS, INC.
                        ---------------------------------
           (Name of small business issuer as specified in its charter)

               DELAWARE                                 95-2828385
               --------                                 ----------
     (State or other jurisdiction            (IRS Employer Identification No.)
   of incorporation or organization

        3324 South Susan Street                       (714) 668-5200
          Santa Ana, CA 92704                   (Issuer's telephone number)
(Address of principal executive officers


                                 NOT APPLICABLE

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

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

There were 9,951,835 shares outstanding of the registrants Common Stock as of
February 28, 2002.

Transitional small business disclosure format (check one): Yes [_] No [X]

<PAGE>

                        APPLIED DATA COMMUNICATIONS, INC.

                                      INDEX

<TABLE>
<CAPTION>
PART I     Financial Information                                            Page
<S>                                                                         <C>
   Item 1  Financial Statements

           Condensed Balance Sheet at December 31, 2001 (unaudited)           3

           Condensed Statements of Operations For the Three Months
              Ended December 31, 2001 and December 31, 2000 (unaudited)       4
           Condensed Statements of Operations For the Nine Months
              Ended December 31, 2001 and December 31, 2000 (unaudited)       5
           Condensed Statements of Cash Flow For the Nine Months
              Ended December 31, 2001 and December 31, 2000 (unaudited)       6
           Notes to Condensed Financial Statements (unaudited)                7

   Item 2  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                       8

PART II    Other Information

   Item 1  Legal Proceedings                                                 14
   Item 2  Changes in Securities                                             15
   Item 3  Defaults Upon Senior Securities                                   15
   Item 4  Submission of Matters to a Vote of Security Holders               15
   Item 5  Other Information                                                 15
   Item 6  Exhibits and Reports on Form 8-K                                  15

SIGNATURES                                                                   15
</TABLE>

                                        2

<PAGE>

APPLIED DATA COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                               2001
                                                                           ------------
<S>                                                                        <C>
ASSETS
Current assets
  Cash                                                                     $      -
  Accounts receivable, net of allowance for

  Doubtful accounts of $245,000                                                  47,941
  Inventories                                                                    29,707
  Other                                                                          97,145
                                                                           ------------
     Total current assets                                                       174,793
Machinery and equipment, net of accumulated depreciation
         of $1,210,486                                                        1,153,666
                                                                           ------------

                                                                           $  1,328,459
                                                                           ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
  Current liabilities
     Due to Related Parties                                                $  1,775,496
     Notes Payable                                                            1,336,165
     Capital Lease Obligations                                                1,823,235
     Accounts Payable                                                         1,084,644
     Accrued expenses                                                         1,313,405
                                                                           ------------
        Total current liabilities                                             7,332,945

Long-term liabilities
     Notes Payable                                                              883,351
     Capital Lease Obligations                                                  764,192
                                                                           ------------
Total Liabilities                                                             8,980,488
                                                                           ------------
Commitments and contingencies                                                     -

Stockholders' deficit:
     Preferred stock - Series A,  500,000 shares authorized, $.01 par
        value; 479,696 shares issued and outstanding                              4,797
     Preferred stock - Series B,  200,000 shares authorized, $.01 par
        value; 115,109 shares issued and outstanding                              1,151
     Preferred stock - Series C, 150,000 shares authorized, $.01 par
        value; 68,404 shares issued and outstanding                                 684
     Common stock - 10,000,000 shares authorized, $.01 par
        value; 9,951,835 shares issued and outstanding                           99,518
     Additional paid-in Capital - Preferred                                   9,327,679
     Additional paid-in Capital - Common                                      9,839,797
     Accumulated deficit                                                    (26,925,655)
                                                                           ------------
        Total stockholders' deficit                                          (7,652,029
                                                                           ------------

                                                                           $  1,328,459
                                                                           ============
</TABLE>


        The accompanying notes are an integral part of these statements.

                                        3

<PAGE>

APPLIED DATA COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          Three Months Ended December 31,
                                                          -------------------------------
                                                               2001            2000
                                                            ----------      ----------
<S>                                                       <C>               <C>
Net revenues                                                $  521,274         919,243

Cost of revenues                                               605,025         941,644
                                                            ----------      ----------

Gross loss                                                     (83,751)        (22,401)

Selling and administrative expenses                            196,581         304,647
                                                            ----------      ----------

    Loss from operations                                      (280,332)       (327,048)

Interest expense, finance charges, factor fees
    Related parties                                             73,948         122,413
    Other                                                      174,923         290,403
                                                            ----------      ----------
                                                               248,871         412,816
                                                            ----------      ----------

Net loss                                                    $ (529,203)       (739,864)
                                                            ==========      ==========

Basic and diluted net loss per common share                 $    (0.05)     $    (0.07)
                                                            ==========      ==========

Basic and diluted weighted average shares outstanding        9,951,835       9,951,835
                                                            ==========      ==========
</TABLE>


         The accompanying notes are an integral part of these statements

                                        4

<PAGE>

APPLIED DATA COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATONS
(UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              Nine Months Ended December 31,
                                                                 2001               2000
                                                             ------------       ------------
<S>                                                          <C>                <C>
Net revenues                                                 $  1,950,129       $  3,050,701

Cost of revenues                                                2,104,995          2,856,844
                                                             ------------       ------------

Gross profit (loss)                                              (154,866)           193,857

Selling and administrative expenses                               707,383          1,041,513
                                                             ------------       ------------

         Loss from operations                                    (862,249)          (847,656)

Interest expense, finance charges, factor fees
         Related parties                                          313,263            464,408
         Other                                                    491,475            720,039
                                                             ------------       ------------
                                                                  804,738          1,184,447
                                                             ------------       ------------

Net loss                                                     $ (1,666,987)      $ (2,032,103)

Basic and diluted net loss per common share                  $      (0.17)      $      (0.20)
                                                             ============       ============

Basic and diluted weighted average shares outstanding           9,951,835          9,951,835
                                                             ============       ============
</TABLE>


         The accompanying notes are an integral part of these statements

                                        5

<PAGE>

APPLIED DATA COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 Nine Months Ended December 31,
                                                                     2001             2000
                                                                  -----------     -----------
<S>                                                              <C>              <C>
Cash flows from operating activities
   Net loss                                                       $(1,666,987)    $(2,032,103)
   Adjustments to reconcile net loss to net cash used by
     Operating activities;
       Depreciation                                                   334,015         273,567
       Fees converted to preferred stock                               30,000              --
       Changes in assets and Liabilities:
       (Increase) decrease in:
       Accounts receivable                                            418,491          (1,013)
       Inventories                                                      6,791          11,489
       Other                                                          (15,463)         92,001
       Increase (decrease) in:
       Due to related parties
       Accrued officer compensation                                     7,500          37,461
       Accrued finance fees                                           (65,517)        349,340
       Accounts payable                                              (112,424)        718,011
       Accrued interest on notes payable                              110,086          87,000
       Accrued interest on capital lease obligations                  301,705         150,774
       Accrued expenses                                                (5,580)        547,588
                                                                  -----------     -----------

   Net cash (used in) provided by operating activities               (657,383)        234,115
                                                                  -----------     -----------

Cash flows from investing activities
   Purchase of equipment                                              (79,806)        (51,680)
                                                                  -----------     -----------

   Net cash used in investing activities                              (79,806)        (51,680)
                                                                  -----------     -----------

Cash flows from financing activities
   Proceeds from notes payable                                        354,708          17,448
   Proceeds from preferred stock subscription                         433,750              --
   Payments on amounts due to related parties                              --        (449,627)
   Payments on notes payable                                           (6,484)         (7,807)
   Payments on capital lease obligations                              (49,169)       (107,852)
   Proceeds from issuance of preferred stock                               --         365,403
                                                                  -----------     -----------

   Net cash provided by (used in) financing activities                732,805        (182,435)
                                                                  -----------     -----------

Net decrease in cash and equivalents                                   (4,384)             --
Cash at beginning of period                                             4,384              --
                                                                  -----------     -----------

Cash at end of period                                             $        --     $        --
                                                                  -----------     -----------

Non-cash investing and financing activities:
   Notes and accrued interest converted to preferred stock        $   336,000     $        --
   Financed equipment purchases                                        25,806         520,000
   Accrued officer compensation converted to preferred stock          436,800              --
   Accrued finance fees converted to preferred stock                  248,937              --

   Cash paid during the period for interest                       $    78,376     $    97,771
</TABLE>


         The accompanying notes are an integral part of these statements

                                        6

<PAGE>

                        APPLIED DATA COMMUNICATIONS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.  Basis of Presentation

The accompanying unaudited condensed financial statements of Applied Data
Communications, Inc. have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.

The information furnished herein reflects all adjustments, consisting of only
normal recurring accruals and adjustments which are, in the opinion of
management, necessary to fairly state the operating results for the respective
periods. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The notes to the condensed financial statements should be read in conjunction
with the notes to the financial statements contained in the Company's Form
10-KSB for the year ended March 31, 2001. Company management believes that the
disclosures are sufficient for interim financial reporting purposes. Interim
operating results are not necessarily indicative of the results of any future
period.

2.  Accounting Policies

The Company's accounting policies are as stated in its annual report on Form
10-KSB, dated March 31, 2001.

3.  Going Concern

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has reported significant losses
for the last several years and revenues from existing products do not provide
sufficient cash to cover current operating needs. The Company has relied on
related party and other borrowings and private placements of preferred stock to
meet its obligations.

4.  New Factoring Agreement

In November 2001, the Company entered into a new agreement to factor its
accounts receivable. The agreement provides for the sale of accounts receivable
without recourse, and for a holdback to be refunded to the Company (at a varying
rate depending on the length of time the receivable is outstanding) when the
customer payment is received within the 90-day period after factoring. This new
agreement is expected to reduce the cost of factoring when compared to the
previous financing arrangement. As part of obtaining this new agreement, the
Company reached an agreement with the previous related party lender, where a new
note payable was exchanged for the total of borrowings and accrued interest
outstanding after the new factor paid the old lender for the current accounts
receivable. This new note is for $1,429,069, bears interest at the rate of 8%,
and requires repayment from proceeds of factoring beginning in February 2002.

Included in Accounts Receivable at December 31, 2001 is the holdback receivable
from the new factor of $31,419. Included in Interest expense, Financing charges,
Factor fees is the loss recorded on the sale of accounts receivable for the
period of $20,384.

                                        7

<PAGE>

                        APPLIED DATA COMMUNICATIONS, INC.

                                December 31, 2001
                                -----------------

ITEM 2   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS, NOTE 1. TO THE
FINANCIAL STATEMENTS INCLUDED ABOVE AND THE RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS THAT FOLLOWS.

THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS
OR THE COMPANY'S FUTURE FINANCIAL PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE COMPANY'S ACTUAL
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.

Three Months Ended December 31, 2001 and 2000.
---------------------------------------------

Net Revenues
Net revenues for the three months ended December 31, 2001 were $521,274, down
$397,969 or 43% from the $919,243 reported in the comparable period of fiscal
2001. This decrease is the result of a decline in the order rate that began late
in fiscal 2001 and continued through the current quarter and the additional
slowdown that occurred in orders following the events of September 2001 that
affected October revenues.

The Company shipped approximately 1,276,000 CD units in the current quarter, as
compared to 1,882,000 CDs in the same period in the prior year. This decrease of
32% occurred primarily due to reduced operating revenues. Reduced prices for CDs
as the result of market competition in the previous period contributed to a
lesser decline in the number of CDs shipped.

Cost of Revenues
Cost of revenues were $605,025, or 116% of net revenues, as compared to
$941,644, or 102% of net revenues in the comparable prior year quarter. The
negative gross margin in both periods reflects revenue levels that were not
sufficient to cover the fixed costs associated with manufacturing. The current
period includes higher depreciation and utilities expenses when compared to the
earlier period, but significantly lower labor and repairs and maintenance costs.

Selling and Administrative Expenses
Selling and administrative expenses were $196,581 (38% of net revenues) in the
current three months, a decrease of $108,066, or 35% from the $304,647 (33% of
net revenues) reported during the comparable quarter in the prior fiscal year.
Lower expenses were primarily the result of the reduction of personnel and
related costs in December, 2000, continued management of other costs in light of
low revenue levels and tight cash flows, and no corresponding increase in the
allowance for doubtful accounts as was necessary in the third quarter of fiscal
2001 when a major customer encountered cash flow difficulties. In addition, the
Company incurred higher legal and consulting fees in the previous year period.

                                        8

<PAGE>

Interest expense, Financing charges, Factoring fees
Financing expense in the current period was $248,871, compared with $412,816 for
the comparable prior year period. The decrease of $163,945, or 40% reflects
primarily the lower levels of receivables financing, the conversion of debt to
preferred stock in the fourth quarter of fiscal 2001 and in the first two
quarters of fiscal 2002, and the new accounts receivable factoring arrangement
begun in November, 2001, which is at lower rates than the company's previous
factoring agreement.

Nine Months Ended December 31, 2001 and 2000
--------------------------------------------

Net Revenues
Net revenues for the nine months ended December 31, 2001 were $1,950,129, down
$1,100,572, or 36% from the $3,050,701 reported for the comparable period of
fiscal 2001. Revenues for the current period reflect the slowing of order rates
that began in fiscal 2001, the impact of limited working capital on obtaining
and keeping customers and the loss of the single customer whose business
accounted for approximately 24% of total revenues in the first three quarters of
the previous year, which the Company has not been able to replace. Already weak
order rates for the current year were further hampered by the events of
September 2001 and the business slowdown experienced by the Company in September
and October. Since the Company does not have a large order backlog, as most
orders are shipped within two weeks of their receipt, any disruption in orders
impacts shipments and revenues in the same period.

Cost of Revenues
Cost of revenues were $2,104,995 or 108% of net revenues in the nine months
ending December 31, 2001. This compares to $2,856,844 in the comparable period
in the prior year, or 94% of net revenues. The current period negative gross
profit reflects the lower revenues in the current period and the inability of
revenues to provide enough margin on direct costs to cover the fixed
manufacturing costs of depreciation, rent, other labor costs and utilities. The
previous year's first nine month's revenues were sufficient to provide a gross
margin even though material costs were higher due to a fire at a major supplier
that caused plastic shortages, higher prices and outsourcing costs. Shipping and
repair costs were also higher in the prior year period, but were partially
offset by lower depreciation and utilities expenses.

Selling and Administrative Expenses
Selling and administrative expenses for the nine months ended December 31, 2001
were $707,383 (36% of net revenues), a decrease of $334,130, or 32%, from the
$1,041,513 (34% of net revenues) reported during the comparable period in the
prior fiscal year. Reduced personnel and related costs, reductions in the
allowance for doubtful accounts and lower legal expenses were the primary
reasons for the decrease. Management's attempts to reduce selling and
administrative expenses in order to reduce losses did not succeed, as declining
revenues negated the impact of the reductions.

Interest Expense, Financing Charges, Factoring fees
Interest and financing expenses in the current period were $804,738 as compared
to $1,184,447 for the nine-month period in the prior year. The decrease of
$379,709, or 32% reflects the debt conversions to preferred stock and the lower
average borrowings for the Company's accounts receivable financing during the
period. Additionally, the combined cost of the new accounts receivable factoring
and note payable for the old financing arrangement were lower than the cost of
the previous financing.

Liquidity and Capital Resources
During the nine months ended December 31, 2001 the Company continued to
experience a significant amount of operating losses, relative to its resources.
Net cash used in operating activities in the current period was $657,383 as
compared with net cash provided of $234,115 in the prior year.

                                        9

<PAGE>

The high cash usage in operations in the current period related primarily to the
net loss and reductions in accounts payable. Cash flows were augmented by the
receipt of the proceeds from preferred stock previously subscribed and
short-term borrowings that were subsequently converted to preferred stock. In
the year earlier period, net cash provided by operations was primarily due to
increases in accrued finance fees, accounts payable and accrued expenses.
Proceeds from the issuance of preferred stock also aided cash flow in the prior
year period, and were used along with the cash flow from operations to reduce
related party debt. Even with the significant loss for the current nine months,
due to the conversion of debt to preferred stock, the Company's net worth at
December 31, 2001 was a deficit of approximately $7.7 million compared to a
deficit of almost $7.5 million at March 31, 2001.

The Company's ability to operate effectively during the past several years has
been constrained by the extremely low level of its financial resources, by
expenditures involving its transition to the manufacture of CD-ROMs and by an
increasingly competitive market for its CD-ROM manufacturing and packaging
services. The lack of working capital impacts the Company's ability to fund
orders and to react quickly to customer requirements in an industry where the
quick turnaround of customer orders is essential to repeat business. In order to
meet the demands of the market and increase current revenue levels to obtain
profitable operations, additional capital investment will be required.
Management believes that improved vendor relations and further investment in the
sales and marketing areas will lead to increased revenues, and it is hopeful
that additional capital will be obtained on a timely basis to facilitate these
ends.

In the meantime, the Company's operating cash environment continues to reflect a
shortfall of revenues from existing customer orders to cover its cash needs that
minimizing cash outlays, delaying vendor payments and the lower costs of the
current factoring agreement have not yet corrected. In December 2001, the
Company initiated a private placement of its Series B Convertible Preferred
Stock at a price of $25 per share (convertible to 100 shares of common stock)
with warrants to purchase additional one-half shares at higher prices during the
two year period following the offering. The company will raise $500,000 before
expenses and the proceeds will be used for working capital needs. The first
subscriptions in the offering were received in January 2002.

                   RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
                   -------------------------------------------

Except for the historical information contained herein, the information in this
report constitutes forward-looking statements. When used in this report the
words "shall", "should", "forecast", "all of", "projected", "believes",
"anticipates", "expects" and similar expressions are intended to identify
forward-looking statements where the context is otherwise unclear. We wish to
caution readers that a number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this report.

POTENTIAL LOSS OF MANAGEMENT

The Company is dependent to a substantial degree on the services of Walter J.
("Pat") Kane, its Chief Executive Officer and a founder of the Company, and its
performance could be adversely affected should he cease to be active in the
Company's management. Temporary disability of key management personnel also
could materially and adversely affect our financial results, as occurred in some
of calendar year 1996 when Mr. Kane was temporarily disabled by a partially
blocked coronary artery and successful bypass surgery.

                                       10

<PAGE>

INSUFFICIENT CASH FLOW FROM OPERATIONS

The Company's operating cash flow is insufficient to fund ongoing operations,
and the Company requires continued external financing to support such operations
and its future plans. The Company has a deficiency of working capital and a
deficit net worth and the majority of its debts payable are past due.
Consequently, its financial condition raises doubt regarding its ability to
continue as a going concern, and its auditor's opinion for the year ended March
31, 2001 was qualified in such regard.

NEED FOR ADDITIONAL FINANCING TO CONTINUE OPERATIONS

We have incurred substantial losses and we are continuing to experience a severe
shortage of working capital and accordingly are in discussions with a number of
potential sources to provide additional working capital whether through the
issuance of additional equity or debt securities, or otherwise. No assurance can
be given that prices for future issuances of equity securities will not be
reduced below prices in earlier issuances. ADC has not recently been, and may
never again be, profitable. Since its most recent profitable year, fiscal year
1985, ADC has transitioned from its profitable business to other, different
businesses. At times, ADC has, to fund working capital, sold all of its customer
receivables at a large discount to their face amount, and sold equity at prices
that diluted other investors.

POTENTIAL LOSS OF NOL TAX ADVANTAGE:

At March 31, 2001, the Company had a net operating loss carry forward for
federal corporate income tax purposes of approximately $19,295,000, which, if
not used to offset future taxable income, will expire between 2002 and 2021, and
approximately $4,704,000 for California corporate income tax purposes, which
will expire, if not used, between 2002 and 2006. See Footnote 9 of the Notes to
Financial Statements included under Item 7 of the Report on Form 10-K. Under
Section 382 of the Internal Revenue Code, the utilization of net operating loss
carry forwards may be further limited after an ownership change. Financing and
other business needs have necessitated share issuances, which may impact future
strategies for utilizing net operating loss carry forwards. It is difficult for
the Company to determine, or give assurances regarding, its status under Section
382 of the Internal Revenue Code or under corresponding State Tax Code
provisions.

POTENTIAL TAX LIABILITIES

Corporate entities and officers or employees of entities who discharge
obligations with equity or who receive equity or advantages for services or
commitments may incur tax obligations inadvertently and unrecognized and
therefore may be required to make allowances or advances or other commitments to
discharge tax and related liabilities. The Company may be obligated to withhold
certain amounts otherwise paid or payable to such persons. Determinations of
obligations are sometimes difficult to make and no assurance can be given with
respect to the Company's meeting or having met all such obligations which it may
have incurred in the past or may incur in the future.

CORPORATE CONTROL

Because of the accumulation of share ownership arising from options and shares
issued to investors or as compensation or in connection with dispute settlements
and other factors, effective ownership control of the Company is concentrated
among Walter J. ("Pat") Kane, one of the Company's founders and its Chief
Executive Officer and a director; John Fuini, a director of the Company; Thomas
Garlock, a former director of the Company; and several recent investors. All of
such persons, in the aggregate, hold over 50% of the voting power of the
Company.

                                       11

<PAGE>

ELECTRICAL POWER CONSUMPTION

The Company relies on a continuous supply of electricity to conduct normal
operations. California is in the midst of an energy crisis that could disrupt
our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for the State of California fall below
1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout California. We currently do
not have backup generators or alternate sources of power in the event of a power
blackout, and the Company does not have insurance coverage for any damages that
we or our customers may suffer as a result of any interruption in our power
supply. If blackouts interrupt our power supply, we would be temporarily unable
to continue operations at our facilities and would also incur associated costs,
such as costs from major or incidental damage to plant and essential equipment.
The operations of the Company could be halted or over-burdened by additional
business interruptions and additional repair or replacement costs. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue. Any of these events
could substantially harm our business and results of operations.

Furthermore, the partial deregulation of the energy industry instituted in 1996
by the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. Our operating expenses have increased, since our facilities are located in
California. Any of our competitors may be more capable than we are, financially
or otherwise, to protect themselves and their shareholders against events or
conditions which may occur from any of the Risk Factors described above.

SOFTNESS OF CD-ROM REPLICATION MARKET

Our revenues during the periods subsequent to March 31, 2001 were lower by a
significant margin than the Company's revenues for the comparable periods in
fiscal years 2000 and 2001. See "Management's Discussion and Analysis -Liquidity
and Capital Resources" above. ADC may not be able to achieve revenue levels
comparable or higher than revenues realized in fiscal years 2000 and 2001.

POTENTIAL LITIGATION

ADC may be subject to claims arising in the normal course of its business and
financing activities that could be costly and time-consuming to resolve. If any
and all such claims cannot be resolved through a negotiated settlement, ADC
could become a party to resulting litigation. Any litigation, even if ADC should
prevail , could result in substantial costs and diversion of resources and
management attention. An adverse determination in any litigation could also
subject ADC to significant liability, under the judgment of a court or by
default. Also see "Legal Proceedings" in Part II, Section 1.

POTENTIAL LOSS OF KEY PERSONNEL (See also "Potential Loss of Management,"
above.)

The loss of key personnel may harm ADC's ability to grow its business. The
future success of ADC depends in part on the continued service of key management
personnel, and on ADC's ability to attract, retain and motivate skilled
employees. Competition for technical machine support engineers and other
technical personnel and senior sales and marketing personnel is intense, and ADC
may be unable to attract or retain such key employees. The employment of ADC's
employees is "at will" and can be terminated at any time. The loss of the
services of any key employee or the failure to attract and retain other
qualified employees could harm ADC's ability to develop and manage its business.

                                       12

<PAGE>

LACK OF TRADING MARKET AND COMMON STOCK

There were issued and outstanding 31.5 million Common equivalent shares at March
31, 2001, on a fully diluted basis. We have had an insufficient number of Common
shares available to permit conversion of Series A, Series B or Series C,
Convertible Preferred Stock, or to permit exercise of options or warrants to
purchase Common Stock or to purchase convertible Preferred Stock. The Company's
Common Stock has not been actively traded since 1989. The Company has not
consistently filed reports under the Securities Exchange Act of 1934 since 1989.
These and other factors may negatively impact the Company's ability to raise
capital, continue operations and execute its business strategies or plans.

EFFECTS OF ADVERSE RESULTS TO SUPPLIERS AND CUSTOMERS

Near the end of our first quarter of fiscal year 2001, our primary plastic
supplier suffered a production slowdown as a result of a fire at one of its
plants. Plastic shortages in turn slowed our production, forced us into
outsourcing more orders, and caused us loss of additional orders, which had been
booked and cancelled due to resulting delays or price increases. At the same
time, our major customer in previous periods, a developer of security software,
had become unable to sustain its growth due to its severe funding limitations.
Due to the revenue levels currently experienced by ADC, events adversely
affecting significant suppliers or customers may have a significant negative
impact on our cash flow and loss situation.

COMPETITORS

ADC may lose market share to competitors resulting in potential losses of
revenue. There are many companies that provide CD manufacturing and printing in
California, nationally and internationally. ADC competes with all of these
companies for sales orders. This competition is intense and is expected to
increase significantly in the future as the number of competitors continues to
grow. ADC's success will depend upon the perceived value of its products and
services relative to other available alternatives. Increased competition could
result in:

..  price reductions and lower profit margins;
..  lower revenues;
..  loss of customers;
..  reduced cash flow;
..  loss of market share.

Many of ADC's current and potential competitors have significantly greater
financial, technical, marketing, sales, and other resources than does ADC. ADC's
competitors may develop products, services and other offerings that are superior
to ADC's or that achieve greater market acceptance or that entirely replace
those of ADC in the market. Competitors also may be able to:

..  undertake more extensive marketing campaigns for their products and services;
..  adopt more aggressive pricing policies;
..  use superior technology platforms to manufacture and sell their products and
   services; and
..  make more attractive offers to potential employees, distribution partners,
   advertisers and third party vendors and providers

COMPETING TECHNOLOGIES

Other existing technologies also compete with the Company's products that
deliver digital information. Portable media, such as digital audiotape, digital
compact cassette and mini-disc have already been introduced commercially but
have not yet achieved widespread consumer acceptance.

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<PAGE>

In addition, one-time recordable CDs ("CD-R") are available and are often used
to replicate short run products that are more expensive to manufacture in the
traditional manner. Electronic on-line delivery of digital information, such as
through the Internet, is a potential future competitor of CD technology. If such
technology makes CD's obsolete, or reduces the demand for replication services
in the markets we serve, ADC's business model may not remain viable, and it may
have insufficient resources to implement an adequate contingency plan.

PART II  OTHER INFORMATION
--------------------------

Item 1  Legal Proceedings.

Roger Saville filed suit in Orange County Superior Court (Case No. 0OCC15340) on
December 3, 2001 to collect for indemnity reimbursement promised by ADC. ADC has
settled the suit by agreeing to a stipulated judgment in the amount of $675,619
for damages claimed plus attorneys' fees and interest. ADC has defaulted on the
original payment schedule occasionally and needs to negotiate a different
payment schedule and to cure any outstanding defaults.

Trans Group Express, Inc., filed suit in Orange County Superior Court (Case No.
01CC05337) on August 31, 2001 to collect allegedly unpaid obligations for
delivery services contracted by ADC on behalf of Uniloc, which defaulted on its
obligations to ADC. ADC is sued along with Uniloc jointly and severally for
damages in the amount of $60,654 of damages claimed plus attorneys' fees and
interest. Uniloc has defaulted on the original payment schedule occasionally and
in order to avoid liability, ADC needs to negotiate a different payment schedule
and to cure any outstanding defaults.

Credit Advisory (DOCdata) filed suit in Orange County Superior Court (Case No.
00CC13057) to collect $51,832 for materials sold to ADC. ADC has settled the
suit by agreeing to a stipulated judgment in the amount claimed plus attorneys'
fees and interest.

Cinram, Inc. apparently obtained a default judgment against ADC in an Indiana
state court in the amount of $23,864.07 for non-payment for materials allegedly
sold to ADC. In March 2002, Cinram filed suit in Los Angeles Superior Court
(Case No. 01CL07451) to enforce its out-of-state default judgment. ADC disputes
the imposition of the judgment because it was improperly sued in Indiana and
should not be held liable for default.

Polvone Distribution apparently obtained a default judgment against ADC in an
Illinois court in the amount of $32,458 for non-payment for materials allegedly
sold to ADC. ADC's information is as reported pursuant to a notice received by
ADC on November 29, 2001 from the claimant.

MacArthur Enterprises, which is ADC's landlord, filed suit in Orange County
Superior Court (Case No. 00CL07171) on October 30, 2001 for unlawful detainer
and recovery of $31,371.90 of unpaid rent. ADC settled the suit by agreeing to a
stipulated judgment in the amount claimed plus future rent, attorneys' fees and
interest. As of April 2002, ADC has paid the landlord its past due rent.

Rfmage filed suit in Orange County Superior Court (Case No. 971C3637) on March
16, 1999 for recovery of unpaid obligations. ADC settled the suit by agreeing to
a stipulated judgment under which the original principal amount of $19,287will
be payable in $500-per-month installments.

The Company is party to other litigation in two other instances as of April 4,
2002 with various of its creditors regarding payment of past due financial
obligations in amounts claimed of less that $10,000 in each instance. The
Company has initiated negotiations with such creditors relative to arranging
extended payment schedules for such obligations on terms comparable with those
effected over the past year.

                                       14

<PAGE>

All amounts claimed have been accrued and are reflected in the financial
statements forming a part of this report.

Item 2  Changes in Securities.

In the period from April 1, 2001 through December 31, 2001, the Company issued a
total of 40,364 shares of Series B Preferred Stock as follows: In June 2001,
12,864 shares were issued for the conversion of short-term debt and accrued
interest totaling $336,000. In September 2001, 10,000 shares were issued for the
conversion of finance fees totaling $248,937 and 17,500 shares were issued for
the conversion of accrued officer's compensation of $436,800. The transactions
were private placements pursuant to Section 4(2) of the Securities Act of 1933.

Item 3  Defaults Upon Senior Securities.

None

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

None

Item 5  Other Information.

None

Item 6  Exhibits and Reports on Form 8-K.

     a) Exhibits

        Filed Herewith
        --------------

10.73   Security Agreement between United California Discount Corporation, doing
        business as United California Factors, and the Company, dated November
        1, 2001.

10.74   Repurchase Letter and Promissory Note between Interim Capital, Inc. and
        the Company, dated November 14,2001.

     b) Reports on Form 8-K

        None

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                        APPLIED DATA COMMUNICATIONS, INC.
                        ---------------------------------
                                  (Registrant)

March 28,2002                                By: /s/ Walter J. Kane
-------------                                    ------------------
    Date                                         Walter J. Kane, Chief
                                                 Executive Officer,
                                                 Chairman of the Board
                                                 And Interim CFO

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