<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 September 30, 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 officer)

                                 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 [_] No [X]

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>
                                                                           Page
<S>                                                                        <C>
PART I    Financial Information

  Item 1  Financial Statements

          Condensed Balance Sheet at September 30, 2001 (unaudited)          3
          Condensed Statements of Operations For the Three Months
             Ended September 30, 2001 and September 30, 2000 (unaudited)     4
          Condensed Statements of Operations For the Six Months
             Ended September 30, 2001 and September 30, 2000 (unaudited)     5
          Condensed Statements of Cash Flow For the Six Months
             Ended September 30, 2001 and September 30, 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>
                                                                          September 30,
                                                                              2001
                                                                          -------------
<S>                                                                       <C>
ASSETS
Current assets
   Cash                                                                   $      -
   Accounts receivable, net of allowance for
   Doubtful accounts of $257,846                                               380,780
   Inventories                                                                  49,605
   Other                                                                        95,748
                                                                          ------------
        Total current assets                                                   526,133
Machinery and equipment, net of accumulated depreciation
   of $1,098,162                                                             1,270,976
                                                                          ------------

                                                                          $  1,797,109
                                                                          ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
   Current liabilities
      Due to Related Parties                                              $  1,948,717
      Notes Payable                                                          1,330,320
      Capital Lease Obligations                                              1,648,126
      Accounts Payable                                                       1,110,697
      Accrued expenses                                                       1,188,072
                                                                          ------------
        Total current liabilities                                            7,225,932

Long-term liabilities
   Notes Payable                                                               888,719
   Capital Lease Obligations                                                   805,284
                                                                          ------------

Total Liabilities                                                            8,919,935
                                                                          ------------
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                                                     (26,396,452)
                                                                          ------------
        Total stockholders' deficit                                         (7,122,826)
                                                                          ------------

                                                                          $  1,797,109
                                                                          ============
</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 September 30,
                                                       --------------------------------
                                                              2001             2000
                                                          ----------           ----
<S>                                                    <C>                 <C>
Net revenues                                              $  614,229        1,188,693

Cost of revenues                                             675,429          958,017
                                                          ----------       ----------

Gross loss                                                  ( 61,200)         230,676

Selling and administrative expenses                          205,977          374,494
                                                          ----------       ----------

     Loss from operations                                   (267,177)       (143,818)

Interest expense, finance charges, factor fees
     Related parties                                         108,054          147,640
     Other                                                   148,512          254,917
                                                          ----------       ----------
                                                             256,566          402,557
                                                          ----------       ----------
Net loss                                                  $ (523,743)        (546,375)
                                                          ==========       ==========

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

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>
                                                          Six Months Ended September 30,
                                                               2001           2000
                                                          ------------   ------------
<S>                                                       <C>            <C>
Net revenues                                              $  1,428,855   $  2,131,458

Cost of revenues                                             1,499,970      1,915,201
                                                          ------------   ------------

Gross profit (loss)                                            (71,115)       216,257



Selling and administrative expenses                            490,333        736,865
                                                          ------------   ------------

      Loss from operations                                    (561,448)      (520,608)

Interest expense, finance charges, factor fees
      Related parties                                          239,315        341,995
      Other                                                    337,021        429,636
                                                          ------------   ------------
                                                               576,336        771,631
                                                          ------------   ------------

Net loss                                                  $ (1,137,784)  $ (1,292,239)
                                                          ============   ============

Basic and diluted net loss per common share               $      (0.11)  $      (0.13)
                                                          ============   ============

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>
                                                                    Six Months Ended September 30,
                                                                            2001            2000
                                                                    ---------------   -------------
<S>                                                                 <C>               <C>
Cash flows from operating activities
      Net loss                                                      $    (1,137,784)  $  (1,292,239)
      Adjustments to reconcile net loss to net cash used by
                 Operating activities;
            Depreciation                                                    221,691         182,378
            Fees converted to preferred stock                                30,000              --
            Changes in assets and Liabilities:
            (Increase) decrease in:
            Accounts receivable                                              85,652         (73,487)
            Inventories                                                     (13,107)        (10,960)
            Other                                                           (14,066)         92,478
            Increase (decrease) in:
            Due to related parties
            Accrued officer compensation                                    (25,600)         21,086
            Accrued finance fees                                             86,960         202,512
            Accounts payable                                                 86,371)        539,264
            Accrued interest on notes payable                                51,365          58,000
            Accrued interest on capital lease obligations                   189,119         103,575
            Accrued expenses                                               (130,913)        409,756
                                                                    ---------------   -------------

      Net cash (used in) provided by operating activities                  (743,054)        232,363
                                                                    ---------------   -------------

Cash flows from investing activities
      Purchase of equipment                                                (110,598)        (51,680)
                                                                    ---------------   -------------

      Net cash used in investing activities                                (110,598)        (51,680)
                                                                    ---------------   -------------

Cash flows from financing activities
      Proceeds from notes payable                                           412,453          11,632
      Proceeds from preferred stock subscription                            433,750              --
      Proceeds from factor controlled by related party                       53,844              --
      Payments on amounts due to related parties                                 --        (410,479)
      Payments on notes payable                                              (5,985)         (2,938)
      Payments on capital lease obligations                                 (44,794)        (99,670)
      Proceeds from issuance of preferred stock                                  --         320,772
                                                                    ---------------   -------------

      Net cash provided by (used in) financing activities                   879,268        (180,683)
                                                                    ---------------   -------------

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                                               --         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                      $        90,468   $      53,785
</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.


                                        7

<PAGE>

                        APPLIED DATA COMMUNICATIONS, INC.

                               September 30, 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 September 30, 2001 and 2000.
----------------------------------------------

Net Revenues
Net revenues for the three months ended September 30, 2001 were $614,229, down
48%, or $574,464 from the $1,188,693 reported in the second quarter of fiscal
2001. This decrease is the result of a decline in the order rate that began in
fiscal 2001 and continued through the current quarter and a single customer
order that accounted for 38% of net revenues in the prior year quarter. The
largest customer in the current period accounted for only 15% of net revenues as
continued working capital deficiencies hampered the Company's ability to attract
large orders and retain customers.

In the second quarter of fiscal 2002, the Company shipped approximately 929,000
CD units, down approximately 65% from the approximately 2,643,000 units shipped
in the same period of the prior year. In the second quarter of fiscal 2001, one
customer accounted for approximately 500,000 of the CDs shipped at a lower price
than the overall average per CD.

Cost of Revenues
Cost of revenues was $675,429 or 110% of net revenues in the current quarter.
This compares to $958,017 in the comparable prior year period, or 81% of net
revenues. The negative gross margin in the current year period reflects the
lower revenue level in the current period that was not sufficient to cover the
fixed costs associated with manufacturing. In addition, the current period
includes higher depreciation and utilities expenses when compared to the year
earlier period. The prior year period reflects the higher revenue level that was
sufficient to cover fixed manufacturing costs and provide a 19% gross profit.
The prior year gross margin occurred in spite of a fire at the plant of the
Company's major plastic supplier that reduced the availability of plastic and
increased the cost of supplies during the quarter, and also required the
outsourcing of some of the production.

Selling and Administrative Expenses
Selling and administrative expenses were $205,977 (34% of net revenues), a
decrease of $168,517 or 45% from the $374,494 (32% 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 operating costs in light of low revenue
levels and tight cash flows, and no

                                        8

<PAGE>

corresponding increase in the allowance for doubtful accounts as was necessary
in the second quarter of fiscal 2001 when the company's major customer
encountered cash flow difficulties. In addition, the Company incurred higher
legal and consulting fees in the previous year period.

Interest expense, Finance charges, Factoring fees
Financing expense in the current period was $256,566 compared to $402,557 for
the comparable prior year period. The decrease of $145,991, or 36% reflects
primarily the conversions of debt to preferred stock in the fourth quarter of
fiscal 2001 and the first quarter of fiscal 2002 and lower levels of receivables
financing.

Six Months Ended September 30, 2001 and 2000
--------------------------------------------

Net Revenues
Net revenues for the six months ended September 30, 2001 were $1,428,855, down
$702,603, or 33% from the $2,131,458 reported in 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 single customer whose business accounted for
approximately 34% of total revenues in the first half 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. 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 period.

Cost of Revenues
Cost of revenues were $1,499,970, or 105% of net revenues in the current
six-month period. This compares to $1,915,201 or 90% of net revenues in the
comparable period in fiscal 2001. The current period negative gross profit
reflects the lower revenues of the period and the inability to cover fixed
manufacturing costs such as depreciation, rent, other labor costs and utilities.
The previous year's first half revenues were sufficient to provide a gross
margin even though material and shipping costs and repairs and maintenance on
equipment were higher. These higher expenses were partially offset by lower
depreciation and utilities expense in the prior year first half.

Selling and Administrative Expenses
Selling and administrative expenses were $490,333 (34% of net revenues) for the
first two quarters of fiscal 2002, a decrease of $246,532, or 33% from the
$736,865 (35% 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 turn the Company towards profitability only
succeeded in reducing these expenses at the same rate as the decline in
revenues, and so no progress was made towards that end.

Interest expense, Finance charges, Factoring fees
Interest and financing expense in the current six-month period was $576,336
compared with $771,631 for the same period in the prior year. The decrease of
$195,295, or 25% reflects the conversion of debt to preferred stock in fiscal
2001 and the lower levels of borrowing of the Company's accounts receivable
financing.

Liquidity and Capital Resources
During the period ended September 30, 2001 the Company continued to experience a
significant level of operating losses, relative to its resources. Net cash used
in operating activities in the current period was $743,054 compared with net
cash provided of $232,363 in the prior year. The high cash usage in operations
in the current period related primarily to the net loss and reductions in
accounts payable and accrued expenses. Cash flows were augmented by the receipt
of the proceeds from preferred stock

                                        9

<PAGE>

previously subscribed and short-term borrowings that were subsequently converted
to preferred stock. Additionally, related party debt was converted to preferred
stock in September 2001. 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 was used along with the cash flow
from operations to reduce related party debt. Even with the significant loss for
the current six months, due to the conversion of debt to preferred stock, the
Company's net worth at September 30, 2001 was a deficit of approximately $7.1
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 CD-ROM manufacturing and by an
increasingly competitive market for 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. The
Company will continue to minimize cash outflows and rely on existing credit
facilities, other short-term borrowings and delayed vendor payments where
practical, until such time as it achieves positive operating cash flows.

                   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.

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.

                                       10

<PAGE>

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

                                       12

<PAGE>

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.

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 in
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;

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<PAGE>

.. 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 suppliers

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. 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.

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<PAGE>

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.

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 September 30, 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.

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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