UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10–K  (Mark
One) /
X /   Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year
ended December 31, 2000 or /    /    Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition
period from ______ to ______ Commission
File Number 0-26778  APPLIED  MICROSYSTEMS  CORPORATION(Exact name of
registrant as specified in its charter)  Washington(State
  of  incorporation)
  
  91–1074996(I.R.S.
  Employer Identification Number)5020 148th Avenue N.E. , Redmond, Washington   98052-5172
  (425) 882-2000(Address,
  including zip code, of registrants principal executive offices and telephone
  number, including area code) Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes X         No Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this form 10-K.  /X/ Indicate the
number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date. Common
stock: 7,003,921 shares outstanding as of March 14, 2001. The aggregate market value of the common stock held by non–affiliates
of the registrant, based on the closing price on March 14, 2001, as reported on
the Nasdaq National Market, was $14,319,987. 1 1Excludes shares held of record on that date by directors,
executive officers and greater than 10% shareholders of the registrant.
Exclusion of such shares should not be construed to indicate that any such
person directly or indirectly possesses the power to direct or cause the
direction of the management of the policies of the registrant. Documents Incorporated by Reference Portions of
the registrant's Proxy Statement relating to the registrant's 2001 Annual
Meeting of Shareholders to be held on May 22, 2001, are incorporated by
reference into Part III of this report.


TABLE
OF CONTENTS PART IITEM 1.
  BusinessITEM 2.
  PropertiesITEM 3.
  Legal
  ProceedingsITEM 4.
  Submission
  of Matters to a Vote of Security Holders  PART IIITEM 5.
  Market
  for Registrants Common Equity and Related Stockholder MattersITEM 6.
  Selected
  Consolidated Financial DataITEM 7.
  Managements
  Discussion and Analysis of Financial Condition and Results of OperationsITEM 7A.
  Quantitative
  and Qualitative Disclosures about Market RiskITEM 8.
  Financial
  Statements and Supplementary DataITEM 9.
  Changes
  in and Disagreements with Accountants on Accounting and Financial Disclosure  PART IIIITEM 10.
  Directors
  and Executive Officers of the RegistrantITEM 11.
  Executive
  CompensationITEM 12.
  Security
  Ownership of Certain Beneficial Owners and ManagementITEM 13.
  Certain
  Relationships and Related Transactions  PART IV.ITEM 14.
  Exhibits,
  Financial Statement Schedules, and Reports on Form 8-K


PART I  ITEM 1.
  BUSINESS  The following Business section
includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 
The Act provides a safe harbor for forward-looking statements to
encourage companies to provide prospective information about their business so
long as they identify these statements as forward-looking and provide
meaningful cautionary statements identifying important factors that could cause
actual results to differ from the projected results.  All statements other than statements of historical fact the
Company makes in this document or in any document incorporated by reference are
forward-looking.  In particular, the
statements herein regarding industry prospects and the Company's future results
of operations or financial position are forward-looking statements.  Forward-looking statements reflect
management's current expectations and are inherently uncertain.  The Company's actual results may differ
significantly from expectations.  The
section entitled Risk Factors Affecting Future Results and Forward-Looking
Statements describes some, but not all, of the factors that could cause these
differences. Overview Applied Microsystems Corporation
(Applied or the Company) is a leader and innovator in software development
tools and technologies. Applieds products and services help customers bring
products to market faster by providing innovative tools to develop, debug, and
test products faster, more reliably, and at a lower cost.  For more than 20 years, the Company has
targeted its products to meet the needs of embedded systems markets and has
developed significant experience and expertise in high-end microprocessors,
real-time systems, and software analysis technology  three key competencies
that position the Company to meet the needs of software developers.  Applied develops, markets and supports a
comprehensive suite of software and hardware-enhanced development and test tools
for the development of complex embedded microprocessor-based applications.  The embedded systems market has in recent
years expanded from its traditional base of industrial automation, medical
devices, and avionic applications to include a number of rapidly growing market
segments such as Internet devices, high-speed networking, wireless
technologies, game consoles, and set top boxes. The Companys products enhance
customers productivity by providing a set of solutions that span a products
lifecycle.  Applieds products and
services assist customers with the development of software and the integration
of software and hardware in creating embedded products.  The Companys software analysis tools
include the CodeOPTIX family of high-level software visibility tools for
application software verification, analysis and test as well as providing the
ability to add executable code to programs running in the target systems.  Applied provides development tools for
customers using a variety of third-party operating systems, including Wind
River Systems VxWorksÒand pSOSÔ, Sun
Microsystems ChorusOSÔ, Enea OSE
Systems OSE, QNX Software Systems NeutrinoÒ, and Lynx
Real-Time Systems LynxOSÔoperating
systems.  The Company supports
development, debug and testing for a wide range of popular microprocessors from
companies such as Motorola, Inc., Intel Corporation, Advanced Micro Devices,
Inc., Hitachi, and MIPS Technologies, Inc. 
Applied offers its custom engineering capability to provide customers
with specialized development tools and design services.  The Company has recently expanded its
expertise into development tools for game consoles, and has signed agreements
with Nintendo and Microsoft to develop and manufacture development tools for
the Nintendo Gamecube and Microsoft Xbox video gaming systems. Applied
distributes its development solutions primarily through a network of direct
sales and service offices located in the United States, Japan, and Europe,
through distributors in the rest of the world, as well as through partnerships
with selected companies  including third-party developers of integrated
development environments.

Applied was incorporated in Washington
in 1979 and is headquartered at 5020 148th Avenue NE, Redmond,
Washington. The Company is ISO 9002 certified. 
For more information, visit Applieds home page on the World Wide Web:
http://www.amc.com.

Background

Applied has developed significant
expertise in providing development solutions to the embedded systems
marketplace.  Embedded systems generally
include an embedded microprocessor, program storage (e.g. in flash memory),
real–time operating system (RTOS) software, and custom software to
implement assigned applications. 
Embedded systems are incorporated within electronic devices and are
dedicated to performing specific tasks quickly and reliably in response to
rapidly occurring external events. 
Manufacturers worldwide are making increasing use of embedded systems to
enhance the functionality and performance, reduce the cost and size, and
improve the reliability of a broad variety of products.

Manufacturers are faced with an
expanding competitive market that requires them to bring increasingly complex
products to market faster and at reduced costs. As the computing power of
embedded microprocessors has grown, and as unit prices for embedded
microprocessors have declined, manufacturers have been able to incorporate
vastly improved features, speed and reliability into their products.  This additional sophistication has resulted
in significantly larger and more complicated application software and increased
challenges associated with delivering a product on schedule.

The development of embedded systems
using today's high–speed microprocessors requires the design, debugging
and testing of substantial amounts of complex custom application software,
which is typically written in a high–level programming language.  As the complexity and volume of such
software increases, so does the potential for programming errors, the need to
eliminate performance shortcomings, and the difficulty of thoroughly testing
the complete system.

In their efforts to remain
competitive, manufacturers are increasingly faced with conflicting
pressures.  As they incorporate advanced
microprocessors into their products, these manufacturers must develop more
embedded software and intensify their debugging and testing efforts, which
tends to lengthen product development cycles and increase development costs.  At the same time, competitive demands for
lower-cost, technologically superior products create pressures to minimize
development costs and time–to–market.  Applieds current development solutions are designed to help
customers respond successfully to these conflicting demands.

Game
console manufacturers face similar pressures to design consoles with advanced
hardware features, and then face the added complexity of coordinating with
in-house and external game developers to develop games that fully utilize the
advanced hardware features.  The
time-to-market pressures in the games industry are significant, and Applied has
expanded its expertise to provide DVD emulation technology that significantly
aids in the rapid development of video games.

Products

Applied
develops, markets and supports a comprehensive suite of software and
hardware-enhanced development and test tools for the development of complex
embedded microprocessor-based applications. 
Applieds current development solutions are targeted principally for use
by software engineers in the development of embedded software and associated
products.  Applied designs its products
to support major market segments utilizing 
32 and 64–bit embedded microprocessors, as well as products to
meet the specific needs of game console developers.

The
Company's products generally enable engineers to perform debugging functions in
high–level programming languages and operate on IBM–compatible
personal computers or engineering workstations.  The Company's tools also enable engineers to observe software
interaction and functions with several commercially available RTOS products and
to read file format output from compatible compilers.

The
Companys current products can be classified into three broad categories:
hardware-enhanced debugging tools, software analysis tools, and game
development systems.

Hardware-Enhanced Debugging
Tools

The Company manufactures a wide range
of hardware–enhanced software tools for the design and debugging of
embedded software.  These in–circuit
microprocessor and ROM emulators are utilized primarily by software engineers
during the highly iterative software development and system integration phases
of the embedded systems development process. 
To a lesser extent, they are also used by software engineers for low–level
testing of software functions and by hardware engineers in system integration
and troubleshooting their designs.

The Company's emulators perform four
basic functions or subsets thereof, depending on product configuration:


  Download and Run Control __the ability to load the developer's software program into the system
  under development; to specify predetermined events or problems that may occur
  in the course of software execution; to stop system operation upon such an
  occurrence; and to resume operation at the desired point after any
  alterations have been made to the system or software
  Execution Trace__the
  ability to detect, observe and provide an execution history of detailed
  software instructions and flow by collecting this data in a minimally intrusive
  manner in the probe's random access memory, which is a capability
  particularly important in identifying bugs or timing problems or in
  reconstructing the events leading up to a system failure.
  Overlay Memory__the
  ability to replace the target system's memory with memory residing in the
  emulator where embedded software can be debugged and modified easily before
  it is permanently burned into the target system's ROM.
  High–Level Language Debugging__the
  ability to display source code, data and relevant RTOS information, and to
  control each of the development tool's other basic functions through a high–level
  language interface to the target system under development.



Applied offers a broad selection of
hardware–enhanced software design and debugging tools with a variety of
features and prices.  The tools are
accessed through a high-level language debugger human interface licensed from
CAD-UL, Mentor Graphics Corporation, Metrowerks (a subsidiary of Motorola), or
Paradigm Systems, Inc. and generally resold with Applieds product. Applieds
hardware-enhanced debugging products are available in two categories:
lower-priced, feature-focused products and high-end, higher-priced products
based on traditional embedded architecture.

The lower-priced, feature-focused
products include CodeTAPÒ, PowerTAP,
and SuperTAP tools that are pocket sized and provide a full range of feature
capabilities; this category also includes NetROM, which provides
cost-efficient target ethernet access and memory substitution. These tools
support a broad range of popular microprocessors used in embedded systems.  This product group represented the largest
revenue category for Applied in 2000, totaling nearly 60% of revenues for the
year (including support services).

The high-end, higher-priced products
include Applieds EL Series and CodeICE emulators that represent
previous-generation technology. These full-featured products support older
families of microprocessors from Motorola (680X0 series) and Intel (80960
series).  Based upon a shift in designs
to newer microprocessors, demand for these products has declined in recent
years and represented less than 5% of the Companys revenues in 2000.

Applied
plans to continue to support its hardware-enhanced debugging tools and expects
to support existing and future microprocessors, as well as to continue to
enhance and broaden its user–interface technology with third parties.

Software Analysis Tools

The
Companys software analysis tools include the CodeOPTIX family of high-level
software visibility tools based on instrumentation for application software
verification, analysis and test as well as providing the ability to add
executable code to programs running in the target systems.  Applied is focused on growing its software
analysis tools business, which accounted for 19% of revenues in 2000 (including
support services).

Applieds
CodeTESTÒsoftware
products consist of a line of software testing tools which are designed
specifically to offer a broad range of optimization and testing capabilities to
software developers.  These tools
measure the performance and reliability of software, as well as the adequacy of
the test process itself, in a minimally intrusive manner.  The measurements are then displayed in an
intuitive format.  Software engineers
use these products during the full range of system development  beginning with
initial software development, extending to system integration, and then to
final system test and validation.

CodeTEST
software analysis tools currently include the following modules:


  Coverage Analysis Basic Block Coverage: the ability to measure the percentage of a
  software program's routines actually exercised by certain tests; to identify
  redundancies among tests; to identify the optimal set of tests to maximize
  the percentage of code tested in the shortest test period; and to determine
  the point at which the cost of continued testing is likely to exceed the
  benefits to be derived.


  Advanced Coverage Tools adds a finer degree of granularity for analyzing test execution to
  the Statement, Decision and Modified Condition Decision Coverage levels.  For certain industries such as avionics,
  government regulations mandate test methodologies for each type of software
  application based on the criticality of that application.  Advanced Coverage Tools show what
  conditions, decision paths, and code statements have been tested.
  Performance Analysis the ability to measure the time that a software program takes to
  perform a particular function and the degree of embedded microprocessor
  utilization; to identify any hindrances to high–speed processing so
  that system reaction times and compliance with performance specifications can
  be optimized.
  Memory Allocation Analysisthe ability to monitor the use of memory during software
  execution; to identify likely memory leaks and other memory allocation
  errors in order to improve programming reliability and aid in minimizing the
  size and cost of the target system's memory.
  Software Execution Trace the ability to
  observe software functions from the source code level to the task level at
  any point in execution history to address software performance or memory
  problems.The
CodeTEST product line currently includes software modules sold separately or
with a separate hardware probe. 
CodeTEST supports a range of the most popular 32-bit microprocessors and
RTOS offerings, and Applied plans to support additional CodeTEST releases
during 2001.  The Companys development
efforts in 2001 are expected to include extending CodeTEST to provide greater
support for engineers developing complex multi-processor systems, in particular
for developers at communications infrastructure companies.

Applied
has an OEM agreement with Wind River Systems, a third-party developer of real
time operating systems, for integration of certain CodeTEST modules within its
integrated development environment.  In
1998, Applied released and began shipping a software-only version of CodeTEST
modules through Wind River.  This agreement
remained in place throughout 2000, and an additional software module was added
to the agreement.  The modules run on
the embedded target within Wind Rivers integrated development environment.

In
1999, Applied announced LiveCODE, the industrys first interactive run-time
tracing system.  LiveCODE incorporates
Applieds automated instrumentation technology, which allows users to
interactively debug their software while the application runs in the target.
With LiveCODE, developers can graphically display program execution at a high
level to quickly understand its operation, trace details in areas of interest
and insert code to diagnose problems. 
All of this can be done without recompiling or stopping the program.
Interactively debugging software while the application runs in the target means
developers can significantly reduce the time spent debugging and spend more
time on developing code.  During 2001,
Applied intends to extend the LiveCODE technology to provide for remote
monitoring and debugging of communications switches, base station controllers,
and other communications equipment.



Game Development Systems

In
July 2000, the Company announced a letter of intent with Microsoft Corporation
to develop and manufacture DVD-emulation technology for inclusion in
Microsofts Xbox Development Kit, the development platform that allows game
developers to optimize games for Xbox, Microsofts initial entry into the video
gaming system.  In December 2000, the
Company announced that it had signed definitive agreements with Microsoft, thus
formalizing the relationship established by the letter of intent. Applied had
previously signed an agreement with Nintendo in 1999 to develop and manufacture
development kits for Gamecube, Nintendos next-generation video gaming
system.  Applied intends to leverage these
relationships over time to also provide its software analysis tools to game
developers, as well as provide other products and services to the gaming
markets.

The
Companys game development tools currently include a DVD emulator, which
replaces the game developers target DVD drive with a hard disk, DVD mechanics
emulation, and may also provide specific DVD layout and mastering tools.  Data that would normally be read from the
DVD is translated to files on a hard disk on the game developers computer. The
emulator lets developers see their games run as if they were actually accessing
target DVDs and eliminates the need to burn DVDs, which can be a time-consuming
and expensive process. And because the data can be accessed more easily from
the developers hard drive, the total development time for any game system is
significantly reduced.

Customers

The Company's sales are presently
concentrated primarily in the telecommunications industry, with a secondary but
increasing concentration in the video games industry.  Sales are generally made pursuant to customer purchase orders.

Sales, Marketing and Customer
Support

Applied
distributes its development solutions primarily through a network of direct
sales and service offices located in the United States, Japan, and Europe,
through distributors in the rest of the world, as well as through partnerships
with selected companies  including third-party developers of integrated
development environments.  During 2000,
Applied focused on two vertical market segments  high-speed networking
equipment and networked game consoles. 
As a result of that strategic decision, the Company aligned its sales
force to focus on key global accounts that drive those defined markets.  This organizational-selling model increased
the sales cycle somewhat in 2000, but is expected to increase overall revenues
over time as the Company enhances relationships with large OEMs, provides a
more complete solution to customers, and increases the average order size.  Applied also sought out partnerships to
extend its marketing reach to other market segments, customers, or geographies.
As a result, in 2000 Applied announced agreements with Arrow Electronics,
Metrowerks, and Wind River, in addition to the aforementioned agreements with
Microsoft and Nintendo for game development tools.

As
of December 31, 2000, the Company had 63 sales and support employees worldwide,
including 42 field sales engineers, inside sales specialists and application
engineers located at the Company's headquarters and in direct or home sales
offices throughout North America, and in the Company's wholly owned
subsidiaries in Japan, Germany, France and the United Kingdom.  Due to the technical nature of its products,
the Company believes that an important aspect of its sales strategy is the
technical support provided to customers. 
In addition, a high level of customer service and support is important
to customer adoption and successful utilization of design, debugging and
testing technology.  The Companys field
application engineers offer product support and assist customers in
incorporating Applieds design, debugging and testing tools into their design
process.

The
Company maintains international distribution agreements covering various
countries.  These agreements generally
have a term of three years and may be exclusive, on a country–by–country
basis. The sale of products in foreign countries involves risks associated with
currency exchange rate fluctuations and restrictions, export–import
regulations, customs matters, potentially longer payment cycles, differing collection
issues, and military, political and transportation risks.  The Company's sales through its foreign
subsidiaries are generally denominated in foreign currencies.  As a result, fluctuations in currency
exchange rates can have a significant effect on the Company's sales, even in
the absence of an increase or decrease in unit sales to foreign customers.  In addition, foreign sales involve
uncertainties arising from local business practices and cultural considerations,
and risks associated with international trade tensions.  The Company expects that international sales
will continue to account for a significant portion of Applieds revenues in the
future.

Applied participates from time to time
in cooperative marketing activities with other embedded systems development
tools providers and embedded microprocessor manufacturers.  These relationships enable the Company to
further leverage its technical capabilities, customer relationships and
international sales and support infrastructure.  The Company believes that developing and maintaining these
relationships is important to its ability to achieve broad market
penetration.  Applieds marketing
efforts also include attending trade shows, publishing articles, and advertising
in trade magazines and journals, direct mail and product demonstrations.

The time between order and delivery of
the Company's products is often quite short. 
The number of orders, as well as the size of individual orders, can vary
substantially from month to month. Because of the short period between order
receipt and shipment of products, the Company typically does not have a
meaningful backlog of unfilled orders and believes a backlog is neither
significant to an understanding of its business nor representative of potential
revenue for any future period.

Competition

The traditional market for embedded
software development solutions is fragmented and highly competitive, with many
providers offering technical solutions to address the design, debugging,
testing and service needs of embedded software developers.  In addition, many companies choose to
develop their own proprietary solutions as opposed to purchasing development
tools and services from outside vendors. 
This market is also subject to rapid change, as technological
developments create new needs and render prior technical solutions
obsolete.  The Company's ability to
compete successfully in this market will depend on its ability to develop and
introduce new products and features that address the increasingly sophisticated
needs of its customers, to implement business relationships that enable it to
broaden its product offerings, to provide worldwide customer service and
support, and to respond to technological advances, emerging industry standards
and practices and competitive developments.

The principal competition for the
Company's hardware–enhanced debugging tools comes primarily from Agilent
Technologies, Inc., Lauterbach Datentechnik GmbH, and a division of Wind River
(formerly Embedded Support Tools Corporation), as well as from various other
domestic and international providers of in–circuit emulators.  Many of these competitors focus primarily on
developing products to support specific microprocessors.  To a lesser extent, competition also comes
from domestic providers of embedded microprocessor simulators, RTOS debugging
software, logic analyzers, ROM monitors and ROM emulators.

Competition for Applieds software
analysis tools comes principally from domestic providers of embedded debug
software, emulators and logic analyzers, which are generally able to perform
only portions of the software testing functions offered by the Companys
CodeOPTIX tools.  The Company has also
historically experienced competition from the engineering departments of major
manufacturers, which may choose to develop internal technical solutions to
their design, debugging or testing problems.

Competition
for game development solutions has historically been from console manufacturers
who have proprietary development tools. 
However, Applied anticipates that the opportunity in the game
development market segment may lead other companies to pursue products that
will compete with Applieds game development solutions.

Competition among providers of
embedded software design, debugging, testing and services focuses on a variety
of factors, including the availability of tools that are compatible with the
customer's chosen embedded microprocessor, engineering workstation and other
software development equipment; performance characteris­tics and features such
as high–speed processing, real–time visibility and control, high–level
programming language and ease–of–use; product reliability;
price/performance characteristics; customer service and world­wide support; and
product availability and delivery time. 
The Company believes that the relative importance of each of these
factors to a prospective customer varies for each development project,
depending upon the complexity of the embedded system design, the microprocessor
to be used, the project development schedule, and the engineering teams budget
and experience level.

The Company anticipates that the
embedded systems development market is likely to experience continued
consolidation as companies strive to broaden their product offerings.  The Company expects competition to increase
from both established and emerging companies. 
The Company believes that much of its competition is now, and will
increasingly be, from larger companies having substantially greater technical,
financial and marketing resources, as well as larger customer bases and greater
name recognition, than Applied.

Manufacturing

The Company maintains manufacturing
operations to support its hardware-enhanced development solutions and game
development tools.  The manufacturing
operations consist of the procurement and inspection of parts and components,
assembly, software duplication, and extensive testing of components and
finished products. Applieds products incorporate the Company's proprietary
software, as well as software licensed from others.  The Company conducts virtually all steps of the assembly process,
including board assembly, at its facility in Redmond, Washington.  The Company has a computerized manufacturing
inventory control system that integrates and monitors purchasing, inventory
control and production.

The Company thoroughly inspects and
tests its manufactured products during the manufacturing process and tests
finished products using tests designed and developed internally based on the
custom requirements and functionality of the product.  In addition, the Company's products undergo thorough quality
inspection and testing, including burn–in procedures throughout the
manufacturing process to ensure the quality and reliability of the Company's
products.  Applied also requires that
all employees involved in the assembly process undergo thorough training.  The Company has maintained its ISO 9002
certification since December 1995.  The
Company provides standard warranty that its hardware, software and mechanical
parts will be free from defects in materials and workmanship for periods
generally ranging from three to twelve months, depending on the product and
location.

The
Company pursues a strategy of using the latest high–performance hardware
components in the manufacture of its development tools.  Certain product components are available
only from a single source or a limited number of distributors.  The Company has entered into agreements with
a number of its vendors that include provisions requiring the vendor to
maintain specified levels of key parts and components.  In addition, due to fluctuating demand
levels and limits on production, it is typical for a number of key components
to be on allocation at any given time. 
There can be no assurance that the Company will be able to obtain key
components in the future in a timely manner, in sufficient quantities, and/or
on favorable price terms.  The Company
has a limited ability to avoid or offset future price increases by suppliers of
key components.  If the Company were to
experience significant future delays, interruptions, or reductions in its
supply of key components, or unfavorable price terms, its business, financial
condition, and results of operations could be materially adversely affected.

As
part of its agreement with Microsoft relating to Xbox development tools,
Applied must maintain certain levels of available inventory, manufacturing
capacity, and quality control requirements. 
In addition, the Company is responsible for reimbursing Microsoft for
certain costs in the event of an epidemic failure of its products that are
incorporated into Microsofts Xbox Development Kit.

Although the Company's customers
occasionally forecast projected purchase requirements in advance of shipment
dates, customers more frequently order on an as–needed basis, and
products are often shipped within a few weeks after an order is received.  As a result, the Company's ability to plan
production and inventory levels is limited. 
The need for immediate delivery by many customers, as well as the
numerous products and configurations sold by the Company, require the Company
to maintain a relatively high level of parts in inventory.

The Company is subject to a variety of
federal, state and local governmental regulations related to the storage, use,
discharge and disposal of toxic, volatile or otherwise hazardous chemicals used
in its manufactur­ing process.  The
Company may be subject to future environmental regulations that may impose the
need for additional capital equipment or other requirements.  Any failure by the Company to control the
use of, or adequately to restrict the discharge of, hazardous substances under
present or future regulations could subject the Company to liability.  The Company is not aware of any significant
liability related to environmental issues.

Research and Development

Applied believes that continued
investment in research and development is critical to the Companys future
success.  Applied continues to make
substantial investments in the development of new technologies and
products.  Because of the competitive
importance of offering development solutions that are compatible with
particular microprocessors and other equipment to be used in developing
embedded systems, solutions providers such as Applied are under continuing
pressure to support major new families of embedded microprocessors, as well as
advances in other development software and hardware.  Applied believes that its future growth and financial performance
will depend heavily on its ability to enhance its existing products, develop
and introduce new products and features that address the increasingly
sophisticated needs of its customers, and respond to technological advances,
emerging industry standards and practices, and competitive developments.  Applieds engineering and development group
includes 104 full-time employees. 
During 2000, research and development expenses were $13.1 million,
compared to $11.4 million in 1999 and $10.4 million in 1998.

Proprietary Rights

The Company's success will depend in part
on its ability to protect its technology and to preserve its trade
secrets.  Although the Company relies
primarily upon continuing technological innovations, trade secrets and know–how
to develop and maintain its competitive position, it also relies on a
combination of patent, copyright and trademark laws, confidentiality
procedures, and contractual provisions to protect its proprietary rights.  The Company has limited patent protection,
and there can be no assurance that any patents will provide a competitive
advantage or will afford protection against competitors with similar
technology, or will not be successfully challenged or circumvented by
competitors.  The Companys policies and
other measures designed to protect trade secrets and proprietary rights may not
be adequate to prevent or deter misappropriation of its technology; in
addition, competitors may be able to independently develop technologies having
similar functions or performance characteristics.  The laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.  The Company may not have an adequate legal
remedy to prevent or seek redress for future unauthorized misappropria­tions of
the Company's technology.

The embedded systems development
market is characterized by rapid technological change, with frequent
introductions of new products and technologies.  As a result, industry participants often find it necessary to
develop products and features similar to those introduced by others, increasing
the risk that their products and processes may give rise to claims that they
infringe the patents of others. 
Accordingly, the Company's current and future products and processes
within the traditional embedded markets or in new markets may conflict with
patents that have been granted or may be granted to competitors or others. Such
competitors or others could bring legal actions against the Company or its
customers, claiming damages and seeking to enjoin manufacturing, marketing or
use of the affected product or processes. 
Similarly, the Company may in the future find it necessary to commence
litigation in order to enforce and protect its proprietary rights.  If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's resources
and result in a significant diversion of management attention.  If the outcome of any such litigation were
adverse to the Company or its customers, the Company's business, financial
condition and results of operations could be materially and adversely affected.

The Company believes that it currently
owns or has adequate rights to utilize all material technologies relating to
its existing products; however, as it continues to develop new products and
features, the Company anticipates that it may find it desirable or necessary to
obtain nonexclusive or exclusive licenses from third parties entitling it to
use certain technologies or software solutions.  Such licenses may not be available to the Company on acceptable
terms, if at all.  The Company currently
has licenses to several software programs that are used in its design,
debugging and testing products. 
Termination of any such agreement, or failure to renew any such
agreement upon its expiration with respect to products the Company intended to
continue to market, would require product redesign and could significantly
increase the cost to the Company of manufacturing such products and have a
material adverse effect on the Company's business, financial condition and
results of operations.  The Company's
loss of or inability to obtain necessary or desirable licenses from third
parties could have a material adverse effect on the Company's business,
financial condition and results of operations.

Employees

As of December 31, 2000, the Company
had 236 employees, of whom 204 were based in the United States and 32 were
based internationally.  Of the total,
101 were engaged in Sales, General and Administrative, 104 were in research and
development and 31 were in manufacturing. None of the Company's employees is
represented by a labor union.  The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.

ITEM 2.
  PROPERTIES

The Company's principal
administrative, sales, marketing, research and development and manufacturing
facility is located in an approximately 59,000 square–foot building in
Redmond, Washington that is leased through May 31, 2007.  The Company also leases seven other domestic
research, sales and/or support offices in the United States, and sales offices
in Japan, France, Germany and the United Kingdom. The Company believes that its
facilities are adequate to satisfy its projected requirements, including its
requirements for production capacity through 2001, and that additional space
will be available if needed.

ITEM 3.
  LEGAL  PROCEEDINGS

From time to time, Applied is involved
in legal proceedings, none of which is currently considered material to the
Companys business.



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

No matters were submitted to a vote of
security holders during the fourth quarter of 2000.

Part II

ITEM 5.
  MARKET
  FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Applied Microsystems common stock
trades on The Nasdaq National Market (Nasdaq) under the symbol APMC.  The Company estimates that at March 14,
2001, there were approximately 3,000 beneficial owners of the Companys common
stock, as estimated by the number of record holders including participants in
security positions listings.

The closing price of the Company's
common stock as reported by Nasdaq on March 14, 2001 was $3.00 per share.  The price per share in the following table
sets forth the low and high closing prices on Nasdaq for the quarter indicated:



Low
  High1999First quarter
  $2.75
  $4.81Second quarter
  2.50
  3.44Third quarter
  2.19
  4.13Fourth quarter
  3.56
  13.752000First quarter
  $8.56
  $21.25Second quarter
  5.50
  15.75Third quarter
  6.19
  13.00Fourth quarter
  2.13
  9.25The Company has not paid dividends and
does not plan to pay dividends on its common stock in the foreseeable future.

ITEM 6.
  SELECTED CONSOLIDATED FINANCIAL
  DATA



Year Ended December 31,2000
  1999
  1998
  1997
  1996(in thousands, except
  per-share amounts)Statement of Operations Data:Net sales
  $32,315
  $33,241
  $37,020
  $39,124
  $38,662Cost of sales
  9,674
  8,664
  9,587
  10,532
  10,793Gross profit
  22,641
  24,577
  27,433
  28,592
  27,869Operating expenses:Sales, general and administrative
  17,094
  18,929
  18,104
  18,542
  15,142Research and development
  13,101
  11,435
  10,438
  8,468
  7,988Total operating expenses
  30,195
  30,364
  28,542
  27,010
  23,130Income (loss) from operations
  (7,554)
  (5,787)
  (1,109)
  1,582
  4,739Interest income and other, net
  659
  706
  783
  669
  559Income (loss) before income taxes and
  cumulative effect of change in accounting principle
  (6,895)
  (5,081)
  (326)
  2,251
  5,298Income taxes
  
  
  19
  349
  1,582Income (loss) before cumulative effect of
  change in accounting principle
  (6,895)
  (5,081)
  (345)
  1,902
  3,716Cumulative effect of change in accounting
  principle
  (1,110)
  
  
  
  Net income (loss)
  $(8,005)
  $(5,081)
  $(345)
  $1,902
  $3,716Per-share amounts:Basic earnings (loss) per share before
  cumulative effect of change in accounting principle
  $(1.00)
  $(0.76)
  $(0.05)
  $0.28
  $0.57Cumulative effect of change in accounting
  principle
  (0.16)
  
  
  
  Basic earnings (loss) per share
  $(1.16)
  $(0.76)
  $(0.05)
  $0.28
  $0.57Shares used in basic per-share calculation
  6,915
  6,727
  6,811
  6,769
  6,545Diluted earnings (loss) per share before
  cumulative effect of change in accounting principle
  $(1.00)
  $(0.76)
  $(0.05)
  $0.26
  $0.52Cumulative effect of change in accounting
  principle
  (0.16)
  
  
  
  Diluted earnings (loss) per share
  $(1.16)
  $(0.76)
  $(0.05)
  $0.26
  $0.52Shares used in diluted per-share calculation
  6,915
  6,727
  6,811
  7,297
  7,097Pro forma amounts, assuming the change in
  accounting principle was applied retroactively:Net income (loss)
  $(6,895)
  $(4,514)
  $(245)
  $2,495
  $2,942Basic income (loss) per share
  $(1.00)
  $(0.67)
  $(0.04)
  $0.37
  $0.45Diluted income (loss) per share
  $(1.00)
  $(0.67)
  $(0.04)
  $0.34
  $0.41See Note 1 of Notes to Consolidated Financial Statements
for information on the change in accounting principle.



December 31,2000
  1999
  1998
  1997
  1996(in thousands)Balance Sheet Data:Working capital
  $8,253
  $16,311
  $20,116
  $20,547
  $19,415Total assets
  21,453
  28,042
  33,290
  32,582
  30,824Long-term debt, net of current portion
  
  
  
  
  15Shareholders' equity
  10,823
  19,187
  23,931
  24,291
  22,607ITEM 7.
  MANAGEMENTS DISCUSSION AND
  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Overview

Applied Microsystems Corporation is a
leader and innovator in software development tools and technologies. Applieds
products and services help customers bring products to market faster by
providing innovative tools to develop, debug, and test products faster, more
reliably, and at a lower cost.  For more
than 20 years, the Company has targeted its products to meet the needs of
embedded systems markets and has developed significant experience and expertise
in high-end microprocessors, real-time systems, and software analysis
technology  three key competencies that position the Company to meet the needs
of software developers.  Applied
develops, markets and supports a comprehensive suite of software and
hardware-enhanced development and test tools for the development of complex
embedded microprocessor-based applications. 
The embedded systems market has in recent years expanded from its
traditional base of industrial automation, medical devices, and avionic
applications to include a number of rapidly growing market segments such as
Internet devices, high-speed networking, wireless technologies, game consoles,
and set top boxes.

Results of Operations



(dollars
  in thousands)
  2000
  Change From 
  Prior Year
  1999
  Change From 
  Prior Year
  1998Net sales
  $32,315
  $(926)
  $33,241
  $(3,779)
  $37,020(3%)
  
  (10%)The
Company earns revenue on the sale of hardware and software products.  The Company also earns revenue on the sale
of services, including hardware and software support, installation, training,
and professional engineering services.

As
further described under Cumulative effect of change in accounting principle,
the Company adopted the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, effective retroactive to January 1, 2000.  As a result, certain revenues that were
previously recorded in 1999 were deferred under the new revenue rules, and then
recognized in 2000, resulting in an additional $1.1 million in revenue in 2000.

The Companys sales have historically
been derived primarily from sales of debug, test, and performance solutions, as
well as product support and consulting services.  Over the past three years, the Company experienced continuing
declines in sales volumes and average sales prices of its higher-priced
high-end emulator products as the overall market demand for this type of
product declined.  The Companys
high-end products support older families of microprocessors that are not used
as frequently by customers in their development projects.  High-end debug products accounted for over
40% of net sales in 1997, but have since declined to 4% of net sales in
2000.  High-end debug products accounted
for 9% of net sales in 1999, and 22% in 1998.



The Companys lower-priced,
hardware-enhanced debug products have been 56% - 58% of net sales in each of
the three years ended December 31, 2000. 
The Companys software analysis tools, including CodeTEST and LiveCODE
products, accounted for 19% of net sales in 2000, compared to 25% in 1999 and
14% in 1998.  The decline in software
analysis tools revenues in 2000, compared to 1999, was due primarily to the
timing of customer orders from a third-party developer of integrated
development environments.  The Company's
net sales also include product support revenues, which are included within the
aforementioned major categories of Applieds products.  These support revenues represented
approximately 13% of net sales in 2000, compared to 14% in 1999 and 13% in
1998.

Development solutions for game
consoles represent a new revenue source for Applied and, including
non-recurring engineering fees, accounted for approximately 13% of 2000 net
sales, compared to 2% of net sales in 1999. 
These increases were offset by generally lower revenues in Applieds
hardware-enhanced debug development solutions.

The decrease in net sales in 1999 as
compared to 1998 was primarily attributable to a decrease in unit sales of
high-end debug products and decreases in unit sales of certain older
lower-priced debug products.  The
overall lower net sales were partially offset by increased sales of software
analysis tools, primarily from the CodeTEST product line, and increased
consulting revenues as the Company progressed under its agreement with Nintendo
to provide development kits for Nintendos next-generation gaming system.  Applied also had improved sales in 1999 of
certain lower-priced debug products, including PowerTAP, and favorable
year-over-year currency exchange rate fluctuations affecting the dollar value
of international sales.

International sales represented 41% of
net sales in 2000, compared to 38% in 1999 and 44% in 1998.  In U.S. dollars, international sales outside
of North America increased 5% in 2000, as compared to 1999.  The increase in 2000 was affected by the
Companys adoption of SAB 101, which increased 2000 revenues in Japan.  International sales decreased 22% in 1999,
as compared to 1998.  The decrease in
1999 was attributable primarily to a reduction in unit sales and average
selling price of the Companys products internationally, particularly as the
Asian economies have experienced overall weakness.

Applieds sales through its foreign
subsidiaries are generally denominated in local currencies; as a result,
fluctuations in currency exchange rates can have a significant effect on the
Company's reported net sales.  Had the
average exchange rates in 2000 remained constant from 1999, the dollar amount
of overall Company net sales would have decreased approximately the same as the
reported 3% decrease.  However, had the
average exchange rates in 1999 remained constant from 1998, the dollar amount
of overall Company sales would have decreased 13% instead of the reported 10%
decrease.  The Company is unable to
predict currency exchange rate fluctuations and anticipates that such
fluctuations will continue to affect its net sales to varying degrees in the
future.  While international sales have
fluctuated over the past three years in total and as a percentage of revenues,
the Company expects international sales to continue to account for a
significant percentage of its net sales.

(dollars in thousands)
  2000
  Percentage of Net Sales
  1999
  Percentage of Net Sales
  1998
  Percentage of Net SalesCost of sales
  $9,674
  30%
  $8,664
  26%
  $9,587
  26%Gross Profit
  $22,641
  70%
  $24,577
  74%
  $27,433
  74%Cost of sales includes materials,
labor and overhead incurred in the manufacturing of products as well as the
cost of providing professional services, performing non-recurring engineering,
and estimated warranty.  The Company
performs periodic assessments of required reserves for potential inventory
obsolescence, and corresponding adjustments to such reserves are included
within cost of sales.  The dollar
amounts of cost of sales and gross profit fluctuate based on a number of
factors, including the volume of corresponding net sales and pricing pressures.

The Companys gross profit percentage
declined in 2000, as compared to 1999 and 1998, due primarily to changes in
product mix, including lower margins in Applieds new game development tools
business.

The Company expects its gross profit
percentage to fluctuate based upon its product and service mix, geographic mix,
foreign currency fluctuations, product and patent license royalties, and
variances in volume and related absorption of overhead costs.  Sales of game development kits are expected
to be at lower margins than the Company has historically maintained, thus
adding to the potential for future fluctuations in gross profit percentages.



(dollars in thousands)
  2000
  Change From Prior Year
  1999
  Change From Prior Year
  1998Sales, general and
  administrative expenses
  $17,094
  $(1,835)
  $18,929
  $825
  $18,104(10%)
  
  5%Applieds total operating expenses
have remained flat over the past ten quarters, in the range of $7.4 to $7.7
million per quarter.  However, over that
same period of time, Applieds management team has shifted operating resources
to pursue opportunities in high-growth markets through developing new products.  That shift is reflected in the overall
decrease in sales, general and administrative expenses in 2000 as compared to
1999, with a similar increase in research and development expenses.  In December 2000, the Company announced it
had adopted a profit improvement plan that included a modest reduction in
personnel to lower the Companys overall expense run rate and better position
the Company for improved operating results.

The decrease in sales, general and
administrative expenses in 2000, as compared to 1999, was achieved primarily
through lower marketing-related expenditures. 
In the first several months of 1999, Applied incurred marketing expenses
relative to the launch of its CodeOPTIX product family, as well as other marketing
expenses to build general awareness of Applieds traditional embedded software
solutions.  Marketing expenditures in
the latter part of 1999 and throughout 2000 were at lower levels than in 1998
and early 1999, and included focused expenses for repositioning the Company
into new market areas.  The lower sales,
general and administrative expenses in 2000 were also the result of lower
personnel-related expenses.  The
Company expects its sales and marketing expenditures to increase over time as
it introduces and markets new products and services and incurs higher selling
expenses to increase net sales.

The
increase in sales, general, and administrative expenses in 1999 was due
primarily to higher marketing expenditures incurred as the Company launched its
CodeOPTIX product family, as well as certain higher personnel-related
expenditures.  The higher overall
expenses for the year were offset in part by lower
sales commissions, commensurate with lower reported revenues in 1999, as well
as certain lower consulting expenses.

When incurred, minor foreign exchange
gains and losses are included in sales, general and administrative expenses. In
order to mitigate certain intercompany risks associated with exchange rate
fluctuations, the Company at times hedges a portion of its foreign exchange
risk in Japan as it relates to the debt the Companys Japanese subsidiary owes
to the Company.  No such hedging
activities were in effect during 1999 or 2000. 
Although the Company may engage in exchange-rate hedging activities with
respect to certain exchange-rate risks, there can be no assurance that it will
do so or that any such activities will successfully protect the Company against
such risks.



(dollars in thousands)
  2000
  Change From Prior Year
  1999
  Change From Prior Year
  1998Research and developmentexpenses
  $13,101
  $1,666
  $11,435
  $997
  $10,43815%
  
  10%The increase in research and
development expenses in 2000, as compared to 1999, was primarily attributable
to increased engineering resources and correspondingly higher consulting and
compensation-related expenses.  These
increased expenses were a direct result of the Companys investment in
strategic new initiatives, such as the games development tools now offered by
the Company and enhancements to Applieds line of software analysis tools.

The increase in research and
development expenses in 1999, as compared to 1998, was primarily attributable
to increased engineering headcount and correspondingly higher compensation-related
expenses.  These increased expenses were
a direct result of the Companys investment in strategic new initiatives.

The Company believes that its
continued investment in focused research and development activities is critical
to Applieds future success, and that the Companys engineering resources
represent a competitive advantage. 
Therefore, the Company intends to continue to make substantial
investments in product development.  
Research and development expenses may also fluctuate to the extent that
Applieds engineering resources are utilized to fulfill the needs of customers
under contractual research and development arrangements.  In such cases, engineering costs are charged
to costs of goods sold.



(dollars in thousands)
  2000
  Change From 
  Prior Year
  1999
  Change From 
  Prior Year
  1998Interest income and other,
  net
  $659
  $(47)
  $706
  $(77)
  $783(7%)
  
  (10%)The Companys interest income and
other, net, decreased in 2000 in comparison to 1999, and decreased in 1999 in comparison
to 1998, due primarily to a decrease in cash available for short-term
investments.

(dollars in thousands)
  2000
  Change From Prior
  Year
  1999
  Change From Prior 
  Year
  1998Cumulative effect of change
  in accounting principle
  $(1,110)
  $(1,110)
  
  
  Applied implemented SAB 101 in the
fourth quarter of 2000, effective retroactive to January 1, 2000.  SAB 101 provides guidance related to revenue
recognition policies based on interpretations and practices followed by the
SEC.  As a result of the Companys
assessment of these new guidelines, Applied changed its revenue recognition
practices for sales in Japan to reflect revenues upon the earlier of customer
inspection and acceptance or, in the absence of notification of inspection and
acceptance, upon receipt of payment. 
Applied adopted SAB 101 under the cumulative catch-up method of
accounting, which is the manner prescribed under applicable accounting and
reporting rules.  Under these rules, the
cumulative effect of a change in accounting principle is recognized as an
additional item on the Companys statement of operations in the first quarter
of the year in which the change is made. 
Applieds adoption of this new standard resulted in a $1.1 million
cumulative adjustment increasing the Companys Q1 2000 net loss.  Revenues and expenses in each of the 2000
quarters were likewise adjusted as if the new accounting principle had been
adopted since January 1, 2000.  See Note
1 in Notes to Consolidated Financial
Statements.

Income Taxes

As of December 31, 2000 the Company
had net operating loss carryforwards of approximately $14.4 million and
research and development credit carryforwards of approximately $2.6 million for
federal income tax purposes, both of which expire in various amounts through
2020.  The utilization of some of these
carryforwards is subject to an annual limit of approximately $392,000 under
rules of the Internal Revenue Code.

Deferred income taxes reflect the net
tax effects of temporary differences between the tax basis of assets and
liabilities and the corresponding financial statement amounts.  Due to the uncertainty of the Companys
ability to utilize its net deferred tax assets, including its net operating
losses and research and development credits, a valuation allowance has been
established for financial reporting purposes equal to the amount of the net
deferred tax assets.  See Note 5 of Notes to Consolidated Financial Statements.

Quarterly Results of Operations

The Company's results of operations
have historically fluctuated significantly from quarter to quarter, and the
Company expects that such fluctuations may continue as a result of a variety of
factors.  These factors include the
following: product and price competition, fluctuating levels of internal
research and development expenses, the volume and timing of customer
development projects and orders, seasonality of customer orders, introductions
of new embedded microprocessors, announcements or introductions of new products
or technologies by the Company or its competitors, fluctuations in foreign
currency exchange rates, fluctuating levels of required investments in
marketing and distribution, price increases by the Companys suppliers,
potential parts shortages, general conditions in the Companys target markets,
and national and global economic conditions. 
Therefore, the Companys quarterly results of operations are not
necessarily indicative of results for any future period.  Moreover, a significant portion of the
Company's quarterly net sales have historically been generated from shipments
during the last few weeks of the quarter  as a result of customers placing
orders late in the quarter   thereby
adding to the potential for future fluctuations in operating performance.

Liquidity and Capital Resources

As of December 31, 2000, the Company
had $10.5 million in cash, cash equivalents, and short-term investments,
compared to $16.3 million as of December 31, 1999.  The Company requires capital primarily for the financing of
inventories and accounts receivable, sales and marketing efforts, product
development activities, and capital equipment purchases.  As a result of its operating losses, Applied
used cash of $5.4 million for operating activities in 2000, compared to $648,000
in 1999 and compared to generating $2.2 million in 1998.  The Company purchased $753,000 in equipment
during 2000, compared to purchasing $730,000 in 1999 and $1.3 million in
1998.  As of December 31, 2000, the
Company had no significant commitments with regard to capital purchases, but expects
to spend approximately $900,000 in 2001 for new capital items.  The Company also has facility and equipment
operating lease commitments totaling $1.3 million in 2001.  The Company anticipates that its annual
capital and operating lease needs will increase in the future as a function of
replacement cycles and anticipated growth of Applieds business.

The Company believes that its existing
cash, cash equivalents, and investments will provide the Company with
sufficient funds to finance its operations for at least the next 12
months.  The Company anticipates
improved operating results in 2001, which is expected to lead to future
increased working capital.  The
Company's future capital requirements will depend on a number of factors,
including required inventory levels to support new manufacturing agreements,
costs associated with sales and marketing programs, product development
efforts, the success of the commercial introduction of new products, and the
potential use of funds for strategic purposes. 
To the extent additional funds are required, the Company may sell
additional equity, debt or convertible securities, or obtain credit facilities;
however, there can be no assurance that the Company will be able to obtain such
funds or on terms that are acceptable.

Risk Factors Affecting Future
Results and Forward-Looking Statements

The
preceding Business and Managements Discussion and Analysis of Financial
Condition and Results of Operations sections, and other areas within this
document, contain forward-looking statements that involve risks and
uncertainties.  The statements in this
document that are not purely historical are forward-looking statements.  Words such as anticipates, expects,
intends, plans, believes, seeks, estimates, and similar expressions
identify forward-looking statements, but the absence of these words does not
mean the statement is not forward-looking. 
The Company cannot guarantee these statements, which are subject to
risks, uncertainties, and assumptions that are difficult to predict.  The Companys actual results may differ
materially from those anticipated due to a variety of factors, including those
set forth in the following risk factors and elsewhere in this document.  The Company will not update any forward-looking
statements due to new information, future events or otherwise.

Recent
operating losses.  The
Companys revenues have declined the past three years, and Applied incurred
corresponding operating losses in each of these years.  Applied believes that its success will
depend in large part on its ability to improve its financial performance and
long-term strategic direction, including the introduction of new products and
services.  Certain traditional products
have eroded in recent years, and the Company expects that it will need to
conceive new sources of revenues in the future.  As the Company enters new lines of business, it also expects to
encounter new competitors and different business challenges.  The Companys future success is not assured.



Rapidly
changing technology.  The
introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable.  The Companys declining
sales of its high-end debug products are indicative of this type of change in
market requirements.  The Companys
future business, financial condition and results of operations will depend upon
its ability to anticipate market demand for specific development solutions,
develop new products and features that address the increasingly sophisticated
needs of its customers, and respond to technological advances and emerging
industry standards and practices.

Manufacturing
and product ship schedules.Certain
components used in the Companys products are manufactured by a single source
or distributed through a limited number of outlets.  The Company may be unable to obtain key components in a timely
manner, in sufficient quantities, or on favorable price terms.  In addition, delays in new-product introductions
could delay the Companys expected revenue growth rates and cause its customer
base to become dissatisfied and erode. 
Certain agreements with customers require that the Company maintain
specified levels of inventory and manufacturing capacity, and the Company could
incur penalties  including cancellation of the contract  if it is unable to
maintain such inventory levels.

Design
starts.The Companys
development solutions span a wide range of microprocessors, real-time operating
systems, and development environments. 
However, a substantial decline in the number of design starts for
embedded microprocessors supported by Applied, or delays by semiconductor
manufacturers in the release of embedded microprocessors for which the Company
has developed tools, could have an adverse effect on the Companys revenues.

Relationship
with semiconductor manufacturers.The
Companys ability to provide timely new products to its customers is enhanced
by Applieds relationship with major semiconductor manufacturers. With access
to new embedded microprocessor technology, Applied is able to adapt its tools
to these new designs and make its tools available at the time the Companys
customers begin to incorporate the new microprocessors into their product
designs.  Should Applied be unable to
obtain timely access to new embedded microprocessor technology, the Companys
operating results and market share could suffer.

Industry
focus.The Companys sales
are currently derived primarily from the telecommunications and games markets,
and negative events affecting these markets could have an adverse effect on the
Companys revenues.

Contracts
with Game Console Developers.The
Company anticipates that sales of game development tools may represent 20% to
25% of net sales in 2001, and such sales are expected to be primarily to two
customers  Microsoft and Nintendo. 
Delays by Microsoft or Nintendo in launching their products to the
consumer market could have a correspondingly significant negative impact on
Applieds revenues in 2001 and beyond. 
Also, the Company is required to meet technical design requirements,
maintain manufacturing capacity and inventory levels, and otherwise meet the
needs of these customers; failure to do so could have a significant negative
effect on Applied through loss of sales and non-compliance with contractual
obligations.

Competition.  The Company has historically participated in
the embedded systems development tools market. 
This market is rapidly evolving and intensely competitive.  Applied has also entered into new markets,
such as providing development solutions to the gaming industry through its
initial agreements with Nintendo and Microsoft.  Competitors may develop and offer products and services similar
to Applieds current or planned product offerings.  Applieds business would be harmed if the Company is not able to
compete successfully against current or future competitors.

Increased
competition may result in price reductions, reduced gross margins, and loss of
market share, any of which could harm Applieds business.  The Companys competitors may be able to
devote significantly greater resources to marketing campaigns, adopt more
aggressive pricing policies and may expend substantially more resources on
product development.  If Applied is
unable to compete effectively, the Companys revenues and earnings may suffer.

Dependence
on key personnel.  The
Company believes that its future success will depend significantly on its
ability to retain and attract key personnel and skilled employees.  There is intense competition for qualified
management, engineering and sales and marketing personnel, and the Companys
failure to recruit, retain, and motivate such skilled employees could affect
the Companys ability to develop new products and increase revenues.  The Companys employees are not subject to
employee contracts and are free to leave at any time.  To date, the Company has been successful in meeting its requirements
for highly skilled sales and support personnel and research and development
engineers.  However, competition for
these personnel is intense and likely to become more so in the future.

Management
of growth.The Company seeks
to grow its business by strengthening its sales and marketing programs,
expanding its product lines, and providing development solutions to new
markets. Such growth, if achieved, would place additional burden on management
and increase the requirement to recruit and retain personnel with the right
skill sets, as well as require additional infrastructure expenditures.  The Company is unable to assure that it will
increase its revenues, nor that it will be able to expand its management and
operational infrastructure to manage such growth successfully.

Intellectual
property rights and litigation. 
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect its intellectual
property rights.  The Company also
enters into nondisclosure agreements with its employees, consultants and corporate
partners, and controls access to proprietary information.  Litigation may be necessary in order to
enforce the Companys intellectual property rights, to protect its trade
secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement.  Litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Companys business,
financial condition and results of operations. 
Although the Company is not aware of any significant third-party
intellectual property rights that would prevent the use and sale of Applied
products, the Company may unknowingly infringe the proprietary rights of
others.  Any infringement could result
in significant liability to the Company.

Product
liability.  The Companys
products and services may result in exposure to product liability claims in the
event that the Companys development solutions are deemed to pose a risk of
injury or harm.  The Company maintains
product liability insurance; however, such insurance may be inadequate for all
potential claims.

International
operations.  A significant
portion of the Companys business occurs outside of North America.  Economic difficulties or significant
fluctuations in foreign currency exchange rates in any of these regions,
particularly in Japan and Europe, could have a material adverse effect on the
Companys business.  As a result of the
Companys international operations, the Company incurs certain expenses in
foreign currencies.  The Company's
operating results are therefore subject to foreign exchange rate fluctuations,
which are difficult to predict.



Potential
fluctuations in quarterly operating results and volatility of stock price.  The Companys future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis, due to a variety of factors, some of which are outside of the Companys
control.  Any shortfall in revenue or
earnings from expected levels could have an immediate and significant adverse
effect on the trading price of the Companys common stock in any given
period.  Additionally, the Company often
does not learn of such shortfalls until late in the fiscal quarter, at which
time budgeted expenses have already been committed, which could result in an
even more immediate and adverse effect on the trading price of the Companys
common stock.  The Company participates
in a highly dynamic industry, which often results in significant volatility of
the Companys common stock price. 
Consequently, purchasing or holding of the Companys stock involves a
high degree of risk.



ITEM 7A.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Applied
develops products in the United States and sells primarily in North America, Asia
and Europe.  As a result, financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets.  Since the Companys products are generally
initially priced in U.S. Dollars and translated to local currency amounts, a
strengthening of the dollar could make the Companys products less competitive
in foreign markets.

The
Company is exposed to market risk related to changes in interest rates, which
could adversely affect the value of the Company's short-term investments.  Applied maintains a short-term investment
portfolio consisting of interest-bearing securities with an average maturity of
less than one year.  These securities
are classified as available-for-sale securities.  These interest-bearing securities are subject to interest rate
risk and will fall in value if market interest rates increase.  If market interest rates were to increase
immediately and uniformly by 10% from levels at December 31, 2000, the fair
value of the portfolio would decline by an immaterial amount.  The Company does not expect its operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates.

ITEM 8.
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

APPLIED MICROSYSTEMS CORPORATION

INDEX TO FINANCIAL STATEMENTS

Audited
Annual Financial Statements:

Report of Ernst & Young
  LLP, Independent AuditorsConsolidated
  Balance Sheets as of December 31, 2000 and 1999Consolidated Statements of
  Operations for the Years Ended December 31, 2000, 1999 and 1998Consolidated Statements of
  Shareholders Equity for the Years Ended December 31, 2000, 1999 and 1998Consolidated Statements of Cash
  Flows for the Years Ended December 31, 2000, 1999 and 1998Notes to Consolidated
  Financial StatementsREPORT
OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



Shareholders
and Board of Directors
Applied Microsystems Corporation

We have audited the accompanying
consolidated balance sheets of Applied Microsystems Corporation as of December
31, 2000 and 1999, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period
ended December 31, 2000.  Our audits
also included the financial statement schedule listed in the Index at Item
14(a).  These financial statements and
schedule are the responsibility of the Companys management.  Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Applied Microsystems Corporation at December
31, 2000 and 1999, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United
States.  Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note 1 to the
financial statements, in 2000 the Company changed its method of accounting for
revenue recognition in accordance with guidance provided in SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.



ERNST & YOUNG
LLP

Seattle,
Washington
February 2, 2001

APPLIED MICROSYSTEMS CORPORATIONCONSOLIDATED
  BALANCE SHEETSDecember 31,2000
  1999(in thousands)ASSETSCurrent assets:Cash
  and cash equivalents
  $7,956
  $5,682Securities
  available-for-sale
  2,526
  10,664Accounts
  receivable, net
  5,729
  5,848Inventories
  2,358
  2,471Prepaid
  and other current assets
  314
  501Total current assets
  18,883
  25,166Property
  and equipment, net
  2,109
  2,372Other
  assets
  461
  504Total
  assets
  $21,453
  $28,042LIABILITIES
  AND SHAREHOLDERS' EQUITYCurrent
  liabilities:Accounts
  payable
  $2,954
  $2,494Accrued
  payroll
  1,993
  1,704Other
  accrued expenses
  1,029
  1,058Deferred
  revenue
  4,654
  3,599Total
  current liabilities
  10,630
  8,855Commitments
  and contingenciesShareholders'
  equity:Preferred
  stock, $0.01 par value; 5,000,000 shares authorized; none issued and
  outstanding
  
  Common
  stock, $0.01 par value; 25,000,000 shares authorized; 6,959,000 and 6,830,000
  shares issued and outstanding at December 31, 2000 and 1999, respectively
  26,360
  25,792Accumulated
  other comprehensive income (loss)
  (879)
  48Accumulated
  deficit
  (14,658)
  (6,653)Total
  shareholders' equity
  10,823
  19,187Total
  liabilities and shareholders' equity
  $21,453
  $28,042See accompanying notes.APPLIED MICROSYSTEMS CORPORATIONCONSOLIDATED STATEMENTS OF
  OPERATIONSYear Ended December 31,2000
  1999
  1998(in thousands, except
  per-share amounts)Net
  sales
  $32,315
  $33,241
  $37,020Cost
  of sales
  9,674
  8,664
  9,587Gross
  profit
  22,641
  24,577
  27,433Operating
  expenses:Sales,
  general and administrative
  17,094
  18,929
  18,104Research
  and development
  13,101
  11,435
  10,438Total
  operating expenses
  30,195
  30,364
  28,542Loss
  from operations
  (7,554)
  (5,787)
  (1,109)Interest
  income and other, net
  659
  706
  783Loss
  before income taxes and cumulative effect of change in accounting principle
  (6,895)
  (5,081)
  (326)Income
  taxes
  
  
  19Loss
  before cumulative effect of change in accounting principle
  (6,895)
  (5,081)
  (345)Cumulative
  effect of change in accounting principle
  (1,110)
  
  Net
  loss
  $(8,005)
  $(5,081)
  $(345)Per-share
  amounts:Basic
  and diluted loss per share before cumulative effect of change in accounting
  principle
  $(1.00)
  $(0.76)
  $(0.05)Cumulative
  effect of change in accounting principle
  (0.16)
  
  Basic
  and diluted net loss per share
  $(1.16)
  $(0.76)
  $(0.05)Shares
  used in per-share calculation
  6,915
  6,727
  6,811Pro
  forma amounts, assuming the change in accounting principle was applied
  retroactively:Net
  loss
  $(6,895)
  $(4,514)
  $(245)Basic
  and diluted net loss per share
  $(1.00)
  $(0.67)
  $(0.04)See accompanying
  notes.APPLIED MICROSYSTEMS
CORPORATION

CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY



Common Stock
  Accumulated
  Accumulated
  Other
  Comprehensive
  Total
  ShareholdersShares
  Amount
  Deficit
  Income (Loss)
  Equity(in
  thousands)Balance at December 31, 1997
  6,827
  $26,387
  $(1,227)
  $(869)
  $24,291Stock options exercised
  126
  12
  
  
  12Sale of common stock to
  employees
  55
  194
  
  
  194Common stock repurchased
  (327)
  (1,210)
  
  
  (1,210)Net loss
  
  
  (345)
  
  (345)Foreign currency translation
  
     adjustment
  
  
  
  989
  989Comprehensive
  income
  
  
  
  
  644Balance at December 31, 1998
  6,681
  25,383
  (1,572)
  120
  23,931Stock options exercised
  80
  228
  
  
  228Sale of common stock to
     employees
  69
  181
  
  
  181Net loss
  
  
  (5,081)
  
  (5,081)Foreign currency translation
  adjustment
  
  
  
  (72)
  (72)Comprehensive
  loss
  
  
  
  
  (5,153)Balance at December 31, 1999
  6,830
  25,792
  (6,653)
  48
  19,187Stock options exercised
  109
  426
  
  
  426Sale of common stock to
     employees
  20
  142
  
  
  142Net loss
  
  
  (8,005)
  
  (8,005)Foreign currency translation
  
     adjustment
  
  
  
  (927)
  (927)Comprehensive
  loss
  
  
  
  
  (8,932)Balance at December 31, 2000
  6,959
  $26,360
  $(14,658)
  $(879)
  $10,823See accompanying notes.APPLIED MICROSYSTEMS CORPORATIONCONSOLIDATED STATEMENTS OF
  CASH FLOWSYear Ended December
  31,2000
  1999
  1998(in thousands)Operating activitiesNet
  loss
  $(8,005)
  $(5,081)
  $(345)Adjustments
  to reconcile net loss to net cash provided by (used in) operating activities:Depreciation
  and amortization
  1,053
  1,671
  1,219Cumulative
  effect of change in accounting principle
  1,110
  
  Net
  change in operating accounts:Accounts
  receivable
  (204)
  2,785
  (184)Inventories
  (23)
  533
  100Prepaid
  and other current assets
  181
  10
  443Other
  assets
  (21)
  9
  5Accounts
  payable and accrued expenses
  796
  (1,050)
  685Deferred
  revenue
  (276)
  475
  236Net
  cash provided by (used in) operating activities
  (5,389)
  (648)
  2,159Investing
  activitiesPurchases
  of securities available-for-sale
  (5,322)
  (14,477)
  (16,871)Maturities
  of securities available-for-sale
  13,460
  14,914
  16,115Additions
  to property and equipment
  (753)
  (730)
  (1,268)Net
  cash provided by (used in) investing activities
  7,385
  (293)
  (2,024)Financing
  activitiesSale
  of common stock to employees
  142
  181
  194Stock
  options exercised
  426
  228
  12Common
  stock repurchased
  
  
  (1,210)Payments
  on long-term obligations
  
  
  (15)Net
  cash provided by (used in) financing activities
  568
  409
  (1,019)Effects
  of foreign currency exchange rate changes on cash
  (290)
  173
  589Net
  increase (decrease) in cash and cash equivalents
  2,274
  (359)
  (295)Cash
  and cash equivalents at beginning of year
  5,682
  6,041
  6,336Cash
  and cash equivalents at end of year
  $7,956
  $5,682
  $6,041Supplemental
  disclosure of cash paid for income taxes
  $
  $
  $128See accompanying
  notes.

APPLIED
MICROSYSTEMS CORPORATION

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



1.Description of Business and Summary of Significant
Accounting Policies

Business

Applied
Microsystems Corporation (Applied or the Company) is a leader and innovator
of software tools and technologies. 
Applied develops, markets and supports a comprehensive suite of software
and hardware-enhanced development and test tools for the development of complex
embedded microprocessor-based applications. 
Applied markets its products and services primarily through its domestic
and international direct sales organizations in the United States, Japan, the
United Kingdom, Germany, and France, and through distributors in key markets
throughout the rest of the world.  The
Company also markets its products through partnerships with third-party
developers of integrated development environments and through other third-party
distribution channels.

Principles
of Consolidation

The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries: Applied Microsystems Corporation Limited, a United
Kingdom corporation; Applied Microsystems Japan Limited, a Japanese
corporation; Applied Microsystems Gmbh, a German corporation; Applied
Microsystems SARL, a French corporation; and Applied Microsystems Foreign Sales
Corporation.  All significant
intercompany accounts and transactions are eliminated in consolidation.

Cash
Equivalents

The
Company considers all highly liquid investments purchased with a remaining
maturity of three months or less at the date of purchase to be cash
equivalents.  Cash equivalents are
carried at cost, which approximates market value.

Securities
Available-for-Sale

Applieds
investment portfolio is classified as available-for-sale, and as such
securities are stated at fair value based on quoted market prices.  Interest earned on securities
available-for-sale is included in interest income.  The amortized cost of investments in this category is adjusted
for amortization of premiums and accretion of discounts to maturity.  Such amortization and accretion are included
in interest income.  Realized gains and
losses and declines in value judged to be other than temporary are also
included in interest income and other, but were insignificant for all periods
presented.  The cost of securities sold
is calculated using the specific identification method.

Fair Value
of Financial Instruments

The
Companys financial instruments consist of cash and cash equivalents,
securities available-for-sale, accounts receivable, and accounts payable.  The recorded value of these instruments
approximates their fair value due to their short maturities.

Concentrations

Applieds financial instruments that are exposed to concentrations
of credit risk consist primarily of cash, cash equivalents, securities
available-for-sale, and accounts receivable. 
The Companys investment policy limits Applieds exposure to
concentration of credit risk by limiting the amounts that may be invested in
similar investment categories.  The
Companys accounts receivable are typically unsecured and result primarily from
sales to a broad customer base primarily within the telecommunications and
video game manufacturer industries. 
Accounts receivable include amounts due from domestic and international
customers, with approximately 30% of consolidated receivables at December 31,
2000 resulting from sales in Japan. 
Applied performs on-going credit evaluations of its customers' financial
condition, limits the amount of credit when deemed necessary, and maintains
allowances for potential credit losses; historically, such losses have been
immaterial.  As a consequence,
concentrations of credit risk are limited.

The Company
pursues a strategy of using the latest high–performance hardware
components in the manufacture of its hardware-based development tools.  Certain product components are available
only from a single source or a limited number of distributors.

Inventories

Inventories
are stated at the lower of cost (first-in, first-out basis) or market.  Inventory costs include shipping and
handling expenses incurred for the purchase of raw materials.

Property and Equipment

Property
and equipment are carried at cost.  The
Company provides for depreciation and amortization using the straight-line
method for financial reporting purposes and accelerated methods for income tax
purposes.  Leasehold improvements are
amortized over the lesser of their estimated useful lives or the term of the
lease.

The
estimated useful lives of equipment for financial reporting purposes are as
follows:

Machinery and
  equipment
  3 to 5 yearsOffice furniture
  5 to 15 years

Acquired
Technology

Costs
to acquire technology are capitalized to the extent the products are
technologically feasible.  Such amounts
are included in other assets on the balance sheet.  The Company amortizes these costs over periods ranging from 5 to
10 years to match the anticipated revenue stream for the products incorporating
the acquired technology.  As of December
31, 2000 and 1999, the Company had recorded acquired technology with a net book
value of $225,000 and $270,000, respectively, and a corresponding accumulated
amortization balance of $225,000 at December 31, 2000 (after removal of fully
amortized amounts) and $583,000 at December 31, 1999.  Amortization expense was $45,000 in 2000, compared to
amortization expense of $444,000 in 1999 and $150,000 in 1998.

Research and
Development Costs

Research
and development costs are expensed as incurred.  Financial accounting standards require the capitalization of
certain software development costs after technological feasibility of the
software is established.  In the
development of the Companys new products and enhancements to existing
products, the technological feasibility of the software is not established
until substantially all product development is complete, including the
development of a working model.

Long-Lived
Assets

Applied
evaluates the recoverability of its long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.  SFAS 121 requires recognition of impairment
of long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.  Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. 
Applieds recoverability analysis may include a review of the following
factors: the undiscounted value of expected operating cash flows in relation to
its net capital investments, the estimated useful or contractual life of the
intangible asset, the contract or product supporting the intangible asset, and
in the case of purchased technology, the Company periodically reviews the
recoverability of asset values by evaluating products with respect to
technological advances, competitive products, and the needs of the Companys
customers.

Revenue
Recognition and Cumulative Effect of a Change in Accounting Principle

The
Company earns revenue on the sale of hardware and software products.  The Company also earns revenue on the sale
of services, including hardware and software support, installation, training,
and professional engineering services.

Revenue from the sale or licensing of
products is recognized when persuasive evidence of an arrangement exists,
delivery of the product has occurred, the fee is fixed or determinable, and
collectibility is probable.  If the fee
due from a customer is not fixed or determinable, revenue is recognized as
payments become due from a customer.  If
customers have inspection or acceptance rights beyond standard warranty
provisions, revenue is recognized when formal notification of inspection or
acceptance has been received from the customer.  Specifically, due to business customs in Japan and the Companys
interpretation of Japanese law, product sales are recognized when the customer
notifies the Company that it has inspected and accepted the product.  In the absence of receiving written
notification of inspection and acceptance, Applied recognizes revenue in Japan on
receipt of payment by the customer as an indication of acceptance.  When products are sold with significant
installation services, all revenue is deferred until installation is completed.  Revenue from training and contract
engineering services are generally recognized as the services are
performed.  Revenue from longer-term
agreements to perform development services is recognized under the
percentage-of-completion method, measured based on labor effort or cost incurred
to total estimated labor effort or cost (assuming other revenue recognition
criteria are met).

The
Company previously recognized revenue in Japan at the time of shipment.
Effective January 1, 2000, the Company changed its method of accounting for
product sales in Japan to recognize such revenue at the earlier of when it has
been notified by the customer that it has inspected and accepted the product or
upon receipt of payment.  The Company
believes the change in accounting principle is consistent with the guidance
provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements. 
In accordance with SAB 101, the Company recorded a non-cash charge of
$1,110,000 (or $0.16 per share, basic and diluted), to reflect the cumulative
effect of the change as of the beginning of the year.  The decrease to net loss before the cumulative effect of the
change in accounting principle as a result of the adoption of SAB 101 was
$886,000 (or $0.13 per share, basic and diluted) for the year ended December
31, 2000.  Deferred revenue at January
1, 2000 includes $1,406,000 related to goods that were shipped and previously
recognized as revenue but do not meet the new revenue recognition policy.  All of these deferred revenues were
recognized during the year ended December 31, 2000.

The
cumulative effect of the change in accounting principle includes product
revenue and cost of sales that will be recognized when customers have inspected
and accepted the products.  The pro
forma amounts shown on the statements of operations are presented as if the new
revenue recognition policy had been applied retroactively for all periods
presented.

Advertising
Expenses

Advertising
costs are expensed as incurred.  The
Company incurred $134,000 in advertising expenses in 2000, compared to  $900,000 in 1999 and $766,000 in 1998.

Foreign
Currencies

Assets
and liabilities of foreign subsidiaries are translated to U.S. dollars at the
exchange rates on the balance sheet date. 
Revenues and expenses of foreign subsidiaries are translated at the
average rates of exchange prevailing during the year.  The cumulative translation adjustments resulting from this
process are accumulated in other comprehensive income (loss).  Gains and losses on foreign currency
transactions are netted and included in other income.

The
Company may enter into foreign currency forward contracts to hedge anticipated
foreign currency transactions, primarily intercompany transactions resulting
from sales to foreign subsidiaries. 
Such forward contracts typically mature within three months.  Gains and losses on contracts that are
designated and effective as hedges of such transactions are deferred and
recognized in income in the same period as the hedged transactions.  No such contracts were outstanding at any
time during 2000 or 1999.



Basic
and Diluted Loss per Share

Basic
loss per share excludes the dilutive effects of stock options, and is computed
using the weighted-average number of common shares outstanding during the
period.  Diluted earnings (loss) per
share would be computed using the weighted-average number of common shares and
dilutive common stock equivalent shares outstanding during the period.  Because Applieds stock options are not
dilutive (due to net losses) there is no difference between basic net loss per
share and diluted net loss per share. 
For the years ended December 31, 2000, 1999, and 1998, weighted average
options to purchase 775,531, 254,070, and 239,086 shares of common stock,
respectively, were excluded from the calculation of earnings (loss) per share
because their effect was antidilutive.

Stock-Based
Compensation

Applied
has elected to follow the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for its stock options.  Because the exercise price of the Companys
common stock options equals the market price of the underlying stock on the
date of grant, no corresponding compensation expense has been recognized.  (See Note 6 for SFAS 123, Accounting for
Stock-Based Compensation, pro forma disclosures.)

Accounting
Pronouncement

In
June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities.  SFAS 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value.  Gains or losses
resulting from changes in the fair values of those derivatives would be
accounted for in current earnings unless specific hedge criteria are met.  The key criterion for hedge accounting is
that the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. 
Applied must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting, if any.  SFAS 133 will be effective for the Companys
consolidated financial statements for the fiscal year ending December 31, 2001.
The pronouncement will not affect the Companys financial statements unless the
Company in the future enters into transactions which involve the acquisition of
derivative instruments.

Use of
Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from
those estimates.

Reclassifications

Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.

2.Securities
Available-for-Sale

Securities
available-for-sale consist of the following:

December 31, 2000Gross
  GrossAmortized
  Unrealized
  UnrealizedCost
  Gains
  Losses
  Fair Value(in thousands)U.S.
  Treasury and other U.S. Government obligations
  $966
  $
  $
  $966Corporate
  debt securities
  1,559
  1
  
  1,560$2,525
  $1
  $
  $2,526

December 31, 1999Gross
  GrossAmortized
  Unrealized
  UnrealizedCost
  Gains
  Losses
  Fair Value(in thousands)U.S.
  Treasury and other U.S. Government obligations
  $5,023
  $9
  $
  $5,032Corporate
  debt securities
  5,623
  9
  
  5,632$10,646
  $18
  $
  $10,664As
of December 31, 2000, all of the Companys securities available-for-sale had
contractual maturities of less than one year. 
Expected maturities may differ from contractual maturities because
issuers may have the right to prepay obligations.

3.Balance
Sheet Information

Detailed balance sheet data is as
follows:

December 31,2000
  1999(in thousands)Accounts receivableReceivables
  $5,785
  $5,940Allowance
  for sales returns and doubtful accounts
  (56)
  (92)$5,729
  $5,848InventoriesFinished
  goods
  $794
  $557Work
  in process
  72
  60Purchased
  parts
  1,492
  1,854$2,358
  $2,471Property and equipmentMachinery
  and equipment
  $2,757
  $3,095Office
  furniture
  3,010
  2,855Total
  property and equipment
  5,767
  5,950Accumulated
  depreciation
  (3,658)
  (3,578)$2,109
  $2,3724.Commitments
and Contingencies

The
Company leases office space and equipment under noncancelable operating leases,
including certain leases that contain renewal options.  Minimum future payments as of December 31,
2000 are as follows (in thousands):

2001
  $1,2982002
  1,3622003
  1,3752004
  1,4022005
  1,396Thereafter
  2,007$8,840

Total
rent expense in 2000 was $1,430,000, as compared to rent expense of $1,393,000
in 1999 and $1,393,000 in 1998.

In
October 2000, the Company renewed the lease for its headquarters facility, with
the new lease to commence in June 2001. 
The new agreement specifies monthly rent amounts that increase annually
over the six-year term of the lease.  In
order to secure favorable lease terms, the Company agreed to maintain an
irrevocable letter of credit in favor of the lessor throughout the lease term,
which expires in May 2007.  The letter
of credit will expire annually on May 31 each year unless renewed at the
Companys option.  The letter of credit
was initially established at $325,000, and is reduced to lower levels during
the lease term if Company meets its obligations under specified lease
provisions.  To secure the letter of
credit through the initial May 2001 expiration date, the Company pledged a
$400,000 certificate of deposit with a bank, which amount is subject to
withdrawal restrictions.  The
certificate of deposit is included within the cash balance on the balance sheet
at December 31, 2000.

As
part of Applieds agreement to provide development tools for Microsofts Xbox
video game system, the Company must maintain certain levels of available
inventory, manufacturing capacity, and quality control requirements.  In addition, the Company is responsible for
reimbursing Microsoft for certain costs in the event of an epidemic failure
of its products that are incorporated into the Xbox Development Kit.  The Companys ability to meet its
requirements under the Microsoft contract, as well as meet other customer
demands, depends on availability of sufficient components at reasonable prices,
as well as many other factors.  As of
December 31, 2000, the Company had non-cancelable inventory purchase
obligations totaling approximately $470,000, due primarily to the Companys
agreement to provide Xbox development tools.

5.Income Taxes

The
provision for income taxes is as follows:

Year Ended December 31,2000
  1999
  1998(in thousands)Federal
  $
  $
  $(9)Foreign
  
  
  28$
  $
  $19The
provision for income taxes differs from the amount computed using the statutory
federal income tax rate as follows:

Year Ended December 31,2000
  1999
  1998(in thousands)Tax at U.S. statutory rate
  $(2,722)
  $(1,727)
  $(114)Foreign taxes
  
  
  28State taxes, net of federal benefit
  
  
  10Foreign losses with no tax benefit
  
  91
  132Tax credits
  (723)
  (429)
  (429)Foreign currency translation
  
  143
  375Change in deferred tax valuation
  allowance
  3,580
  1,868
  (42)Other
  (135)
  54
  59$
  $
  $19Deferred
income taxes reflect the net tax effects of temporary differences between the
tax basis of assets and liabilities and the corresponding financial statement
amounts.  Significant components of the
Companys deferred income taxes are as follows:



December 31,2000
  1999(in thousands)Deferred tax assets:Reserves for sales returns and doubtful
  accounts
  $61
  $215Accrued and other expenses
  215
  212Inventories and other
  655
  689Foreign currency translation
  153
  Net operating loss carryforwards
  4,895
  2,047Tax credit carryforwards
  2,637
  1,9148,616
  5,077Deferred tax liabilities:Depreciation
  (84)
  (87)Foreign currency
  
  (38)(84)
  (125)Valuation allowance
  (8,532)
  (4,952)Net deferred taxes
  $
  $Due
to the uncertainty of the Companys ability to generate sufficient taxable
income to realize its deferred tax assets, a valuation allowance has been
established for financial reporting purposes equal to the amount of the net
deferred tax assets.  The valuation
allowance increased $3.6 million in 2000, and increased $1.9 million in 1999.

As
of December 31, 2000, the Company had net operating loss carryforwards for
federal tax purposes of approximately $14.4 million available to offset future
taxable income.  To the extent that net
operating losses, when realized, relate to stock option deductions, the
resulting benefits will be credited to shareholders equity.  The Company also had research and
development credits of approximately $2.6 million that may be carried forward,
subject to certain limitations, to offset future tax liabilities.  The net operating loss and research and
development tax credit carryforwards expire in various amounts from 2001 to
2020.  Due to the issuance and sale of
shares of preferred stock in 1992, the Company incurred ownership changes
pursuant to applicable regulations in effect under the Internal Revenue Code of
1986, as amended.  Therefore, the
Companys use of losses incurred through the date of the ownership change will
be limited during the carryforward period to approximately $392,000 per year.

6.Shareholders
Equity

Stock
Options

The
Company has stock option plans that provide for option grants to employees,
directors, and others.  The exercise
price of options granted under these plans has been at fair market value on the
date of grant.  Options are not
transferable, and expire no later than ten years following the grant date.

Prior
to February 2000, options granted under the Applied Microsystems Corporation
1992 Performance Stock Plan (the 1992 Plan) generally were immediately exercisable,
but then subject to the Companys right to repurchase any shares of common
stock received upon exercise in the event that the optionees employment with
the Company should terminate.  Such
repurchase rights generally lapsed at a rate of 25% per year from the date of
grant.  For presentation purposes,
outstanding but unexercised options that could be exercised subject to
repurchase rights are treated as unvested. 
Beginning in February 2000, options granted under the 1992 plan are not
exercisable immediately, have no Company repurchase rights, and generally vest
in 3 to 4 years.

In
April 1999, the Company issued a nonqualified stock option to its new President
and Chief Executive Officer from a specific-purpose stock option plan.  The option was for the purchase of 215,000
shares of the Companys common stock, and was immediately exercisable; however,
the Company retained repurchase rights similar to options issued under the 1992
Plan during that period of time.

Options
granted under the Applied Microsystems Corporation Director Stock Option Plan
vest one year following grant date.

A summary of the Companys stock
option activity and related information is as follows:

Year Ended December 31,2000
  1999
  1998Options
  (000)
  Weighted-Average
  
  Exercise Price
  Options
  (000)
  Weighted-Average
  Exercise Price
  Options
  (000)
  Weighted-Average
  Exercise PriceOutstanding
  at  beginning of year
  1,381
  $3.49
  1,114
  $3.79
  864
  $3.13Granted
  448
  6.34
  642
  3.19
  525
  4.45Canceled
  (315)
  4.89
  (295)
  4.17
  (149)
  5.34Exercised
  (109)
  3.89
  (80)
  2.85
  (126)
  0.10Outstanding
  at end  of year
  1,405
  $4.05
  1,381
  $3.49
  1,114
  $3.79Vested
  options
  541
  $3.10
  360
  $3.05
  290
  $2.34Using
the Black-Scholes multiple option pricing model, the weighted average fair
value of options granted during 2000 was $5.00, compared to $2.47 in 1999 and
$3.39 in 1998.  As of December 31, 2000,
289,341 options were available for grant.

The
following table summarizes information related to outstanding and vested
options at December 31, 2000:

Outstanding
  VestedRange
  of Exercise Prices
  Shares (000)
  Weighted Average Exercise Price
  Weighted Average Remaining Term
  Shares (000)
  Weighted Average Exercise Price$0.02
  - 2.00
  120
  $0.23
  2.7
  120
  $0.232.01
  - 4.00
  645
  2.91
  7.9
  181
  2.844.01
  - 7.00
  435
  4.54
  6.9
  232
  4.367.01
  - 17.50
  205
  8.87
  9.0
  8
  15.881,405
  4.05
  7.3
  541
  3.10Pro
forma information regarding net loss and net loss per share is required by SFAS
123 and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS 123.  The fair value for these options was estimated at the date of
grant using a Black-Scholes multiple option pricing model with the following
weighted-average assumptions:

2000
  1999
  1998Annualized
  volatility factor
  1.102
  0.979
  0.947Risk-free
  interest rate
  6.2%
  5.7%
  5.0%Expected
  life of options
  4.5 years
  5.2 years
  5.4 yearsExpected
  dividend rate
  nil
  nil
  nilThe
Black-Scholes option value model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable.  In addition, option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.

For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.  The Company's pro forma information follows:

2000
  1999
  1998(in thousands, except
  per-share data)Net
  loss, as reported
  $(8,005)
  $(5,081)
  $(345)Pro
  forma net loss
  (9,963)
  (5,482)
  (883)Net
  loss per share as reported
  (1.16)
  (0.76)
  (0.05)Pro
  forma net loss per share
  (1.44)
  (0.81)
  (0.13)SFAS
123 pro forma disclosures above are not necessarily indicative of future pro
forma disclosures because of the manner in which SFAS 123 calculations are
phased in over time.

Stock
Repurchase Plan

In
1998, the Board of Directors authorized the Company to repurchase up to 500,000
shares of its common stock in an effort to offset dilution associated with
stock options issued under the Companys stock incentive programs and for
general corporate purposes.  During
1998, the Company repurchased a total of 327,000 shares for $1,210,000.  The repurchase plan was subsequently
suspended, and no further repurchases have been made.

Common Stock
Reserved

At
December 31, 2000, common stock was reserved for future issuance as follows (in
thousands):

Employee
  stock purchase plan
  294Stock
  options
  1,6941,988

Shareholder
Rights Plan

In 1998, the Company adopted a
Shareholder Rights Plan, declaring a dividend of one preferred share purchase
right (Right) for each outstanding share of the Company's common stock. The
Rights become exercisable upon the earlier of a person or group announcing (1)
an acquisition of 15% or more of the common stock of the Company or (2) the
commencement of a tender or exchange offer that would result in such person
acquiring ownership of 15% or more of the common stock of the Company.  Each Right entitles the holder to purchase
1/100th of a preferred share at an exercise price of $30.  Upon a triggering event, each holder of a
Right shall be entitled to purchase common stock that has a market value equal
to two times the exercise price of the Right. 
The Company is entitled to redeem the Rights at $0.01 each under
specified circumstances.

7.Employee
Benefits

The
Company has a retirement plan covering substantially all U.S. employees that
provides for voluntary salary deferral contributions on a pre-tax basis in
accordance with Section 401(k) of the Internal Revenue Code.  The Company provides matching contributions
based on a defined formula, and may also make discretionary contributions.  During 2000, the Company made contributions
of $234,000, as compared to contributions of $219,000 in 1999 and $192,000 in
1998.

The
Company also has an employee stock purchase plan (the ESPP) through which the
Company is authorized to issue up to 500,000 shares of common stock.  The ESPP permits eligible personnel to
purchase the Companys common stock at the lesser of 85% of fair market value
on certain
prescribed dates, as defined in the ESPP, through payroll deductions of up to
15% of their compensation, provided that no employee may purchase common stock
worth more than $25,000 in any calendar year. 
At December 31, 2000, 294,000 shares were available under the plan.

8.Product,
Geographic, and Related Information

Through
2000, the Company was engaged in a single line of business: the design,
manufacture, and distribution of development and test hardware and software
tools for embedded product manufacturers. 
No customer accounted for more than 10% of net sales in 2000 and 1998;
sales to a single customer accounted for 10% of net sales in 1999.  While the Company is focused on a single
line of business, the following table provides information concerning products
and services offered within this line of business:

Year Ended December 31,2000
  1999
  1998(in thousands)Net
  salesHardware and software debug and analysis
  tools
  $22,685
  $26,503
  $31,421Game development tools
  2,839
  
  Total product sales
  25,524
  26,503
  31,421Services
  6,791
  6,738
  5,599$32,315
  $33,241
  $37,020Cost
  of goods soldProducts
  7,827
  7,068
  8,485Services
  1,847
  1,596
  1,102$9,674
  $8,664
  $9,587

Certain
operating information by geographic area is provided in the table below, based
on the location of the Companys facilities. 
Sales are not recognized for financial statement purposes until there
has been a sale to an unaffiliated customer.

Year
  Ended December 31,2000
  1999
  1998(in
  thousands)Net salesUnited States
  $20,659
  $21,720
  $22,325Japan
  8,111
  7,820
  10,664Europe
  3,545
  3,701
  4,031$32,315
  $33,241
  $37,020Export sales to
  unaffiliated customers
  $1,611
  $1,147
  $1,597Income (loss) before income
  taxesUnited States
  $(6,675)
  $(3,867)
  $1,139Japan
  63
  (175)
  34Europe
  (818)
  (982)
  (1,037)Corporate eliminations and cumulative
  effect of change in accounting principle
  (575)
  (57)
  (462)$(8,005)
  $(5,081)
  $(326)







December 31,2000
  1999(in thousands)Long-lived assetsProperty
  and equipment, netUnited
  States
  $2,002
  $2,284Japan
  28
  41Europe
  79
  47$2,109
  $2,372Other
  assets, netUnited
  States
  $284
  $326Japan
  130
  145Europe
  47
  33$461
  $504

At
December 31, 2000, the Companys net assets in defined geographic areas were as
follows (in thousands):



United
  States
  $8,645Japan
  1,302Europe
  876$10,823

9.Quarterly
Financial Information (unaudited)

Based
on the guidance provided by the SEC in SAB 101, the Company determined that it
was preferable to recognize revenues in Japan at the time of the customer
written notification as to inspection and acceptance of the product or, in the
absence of such notification, at the time of payment.  The Companys previous revenue recognition policy was to
recognize revenue on sales to customers in Japan at the time of shipment.  The Company recorded a non-cash charge of
$1,110,000 ($0.16 per share, basic and diluted) to reflect the cumulative
effect of the accounting change as of the beginning of the fiscal year.  The Companys revenue recognition policies
are disclosed in Note 1.

The
Company has included the following information to reflect the retroactive
application of SAB 101 beginning January 1, 2000:

Quarters Ended in 2000March
  31
  June
  30
  Sept.
  30
  Dec.
  31As Previously Reported
  As
  Restated
  As Previously Reported
  As
  Restated
  As Previously Reported
  As
  Restated(in thousands, except
  per-share data)Net
  Sales
  $7,969
  $7,683
  $7,251
  $7,862
  $7,819
  $7,968
  $8,802Gross
  Profit
  5,783
  5,579
  4,801
  5,324
  5,550
  5,598
  6,140Loss
  before cumulative effect of change in accounting principle
  $(1,608)
  $(1,811)
  $(2,618)
  $(2,095)
  $(1,894)
  $(1,846)
  $(1,143)Cumulative
  effect of change in accounting principle
  
  (1,110)
  
  
  
  
  Net
  loss
  $(1,608)
  $(2,921)
  $(2,618)
  $(2,095)
  $(1,894)
  $(1,846)
  $(1,143)Basic
  and diluted loss per share before cumulative effect of change in accounting
  principle
  $(0.23)
  $(0.27)
  $(0.38)
  $(0.30)
  $(0.27)
  $(0.27)
  $(0.16)Cumulative
  effect of change in accounting principle
  
  (0.16)
  
  
  
  
  Basic
  and diluted loss per share
  $(0.23)
  $(0.43)
  $(0.38)
  $(0.30)
  $(0.27)
  $(0.27)
  $(0.16)Shares
  used in per-share calculation
  6,858
  6,858
  6,909
  6,909
  6,938
  6,938
  6,954

Summarized
quarterly financial information for 1999 is as follows:

Quarters Ended in 1999March
  31
  June
  30
  Sept.
  30
  Dec.
  31(in thousands, except
  per-share data)Net
  sales
  $8,518
  $7,435
  $8,328
  $8,960Gross
  profit
  6,472
  5,463
  5,995
  6,647Net
  Loss
  (934)
  (2,107)
  (1,423)
  (617)Basic
  and diluted loss per share
  $(0.14)
  $(0.31)
  $(0.21)
  $(0.09)Shares
  used in per-share calculation
  6,703
  6,708
  6,738
  6,752



ITEM 9.
  CHANGES IN AND DISAGREEMENTS WITH
  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.



PART III

ITEM 10.
  DIRECTORS AND EXECUTIVE OFFICERS OF
  THE REGISTRANT

The information required by this Item
is incorporated by reference to the information contained in the sections
captioned Board of Directors __Nominees for Director, Voting
Securities and Principal Holders __Section 16(a) Beneficial
Ownership Reporting Compliance, and Management Information, Compensation, and
Benefits  Executive Officers in the definitive Proxy Statement for the
Company's Annual Meeting of Shareholders scheduled to be held on May 22, 2001
(the Proxy Statement).  Such Proxy
Statement will be filed within 120 days of the Companys last fiscal year end,
December 31, 2000.

ITEM 11.
  EXECUTIVE COMPENSATION

The information required by this Item
is incorporated by reference to the information contained in the section
captioned Compensation and Benefits of the Proxy Statement.

ITEM 12.
  SECURITY OWNERSHIP OF CERTAIN
  BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item
is incorporated by reference to the information contained in the section
captioned Voting Securities and Principal Holders of the Proxy Statement.

ITEM 13.
  CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS

Not applicable.

PART IV

ITEM 14.
  EXHIBITS, FINANCIAL STATEMENT
  SCHEDULES, AND REPORTS ON FORM 8-K

(a)Index to list of documents filed as part of this
report

(1)Financial Statements -See Index to
Financial Statements at Item 8 of this report.

(2)Financial Statement Schedules

Schedule II:  Valuation and Qualifying Accounts

All
other schedules have been omitted because they were not applicable or were not
required under the applicable regulations of the Securities and Exchange
Commission.(3)Exhibits

Exhibit No.
  Description3.1 (1)
  Second
  Restated Articles of Incorporation of Registrant3.2 (1)
  Restated
  Bylaws of Registrant10.3
  (1)
  1992
  Performance Stock Plan10.4
  (1)
  1995
  Directors Stock Option Plan10.7
  (1)
  Lease
  Agreement between W.R.C. Properties, Inc. and the Registrant dated February
  27, 1989; and Amendments to Lease Agreement dated November 7, 1990, May 11,
  1992, August 18, 1993 and March 31, 199410.8
  (1)
  Third
  Amended and Restated Investment Agreement dated as of September 15, 199510.12
  (1) **
  Source
  License and Distribution Agreement between the Registrant and Microtec
  Research, Inc. dated August 1, 199410.17
  (2)
  Employment
  Agreement by and between Robert L. Deinhammer and the Registrant, dated
  January 4, 199910.18
  (3)
  Employment
  Agreement by and between Stephen J. Verleye and the Registrant, dated April
  1, 199910.19
  Lease
  Agreement between Teachers Insurance & Annuity Association of America and
  the Registrant dated October 3, 200021
  Subsidiaries
  of the Registrant23
  Consent
  of Ernst & Young LLP, Independent Auditors


(1)
  Incorporated by reference from the
  Registrant's Registration Statement on Form S-1 filed with the Securities and
  Exchange Commission on September 15, 1995 (File No. 33-97002)(2)
  Incorporated by reference from the
  Registrants March 31, 1999 Form 10-Q filed with the Securities and Exchange
  Commission(3)
  Incorporated by reference from the
  Registrants June 30, 1999 and September 30, 1999 reports on Form 10-Q filed
  with the Securities and Exchange Commission**
Confidential treatment has been granted for portions of this exhibit.(b)Reports on Form 8–K

None.SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on
March 28, 2001.

APPLIED MICROSYSTEMS CORPORATIONBy /s/ Robert C. BatemanRobert C. BatemanVice President,
  Chief Financial Officer,Corporate Secretary, and Treasurer(Principal
  Financial and Accounting Officer)Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.



Signature
  Title
  Date/s/
  Stephen J. Verleye
  President,
  Chief Executive Officer and Director (Principal Executive Officer)
  March
  28, 2001Stephen
  J. Verleye/s/
  Robert C. Bateman
  Vice
  President, Chief Financial Officer, Corporate Secretary, and Treasurer
  (Principal Financial and Accounting Officer)
  March
  28, 2001Robert
  C. Bateman/s/
  Charles H. House
  Chairman
  of the Board
  March
  28, 2001Charles
  H. House/s/
  Lary L. Evans
  Director
  March
  28, 2001Lary
  L. Evans/s/
  Elwood D. Howse, Jr.
  Director
  March
  28, 2001Elwood
  D. Howse, Jr/s/
  Anthony Miadich
  Director
  March
  28, 2001Anthony
  MiadichEXHIBIT INDEX



Exhibit
  No.
  Description3.1 (1)
  Second
  Restated Articles of Incorporation of Registrant3.2 (1)
  Restated
  Bylaws of Registrant10.3
  (1)
  1992
  Performance Stock Plan10.4
  (1)
  1995
  Directors Stock Option Plan10.7
  (1)
  Lease
  Agreement between W.R.C. Properties, Inc. and the Registrant dated February
  27, 1989; and Amendments to Lease Agreement dated November 7, 1990, May 11,
  1992, August 18, 1993 and March 31, 199410.8
  (1)
  Third
  Amended and Restated Investment Agreement dated as of September 15, 199510.12
  (1) **
  Source
  License and Distribution Agreement between the Registrant and Microtec
  Research, Inc. dated August 1, 199410.17
  (2)
  Employment
  Agreement by and between Robert L. Deinhammer and the Registrant, dated
  January 4, 199910.18
  (3)
  Employment
  Agreement by and between Stephen J. Verleye and the Registrant, dated April
  1, 199910.19
  Lease
  Agreement between Teachers Insurance & Annuity Association of America and
  the Registrant dated October 3, 200021
  Subsidiaries
  of the Registrant23
  Consent
  of Ernst & Young LLP, Independent Auditors


(1)
  Incorporated by reference from the
  Registrant's Registration Statement on Form S -1 filed with the Securities
  and Exchange Commission on September 15, 1995 (File No. 33-97002)(2)
  Incorporated by reference from the
  Registrants March 31, 1999 Form 10-Q filed with the Securities and Exchange
  Commission(3)
  Incorporated by reference from the
  Registrants June 30, 1999 and September 30, 1999 reports on Form 10-Q filed
  with the Securities and Exchange Commission**
Confidential treatment has been granted for portions of this exhibit.COL A.
  COL B.
  COL C.
  COL D.
  COL E.ADDITIONSDescription
  Balance at Beginning of Period
  (1)
  Charged to 
  Costs 
  and 
  Expenses
  (2)
  Charged to 
  Other 
  Accounts: 
  Describe
  Deductions: Describe
  Balance 
  at End of PeriodYear ended December 31, 2000:
  Deducted from asset accounts:
     Allowance for sales
  returns
        and doubtful account
  92,000
  
  34,000(B)
  (70,000)(A)
  56,000Year ended December 31, 1999:
  Deducted from asset accounts:
     Allowance for sales returns
       and doubtful accounts
  177,000
  1,000
  92,000(B)
  (178,000)(A)
  92,000Year ended December 31, 1998:
  Deducted from asset accounts:
     Allowance for sales
  returns
       and doubtful accounts
  337,000
  12,000
  (56,000)(B)
  (116,000)(A)
  177,000

(A)    
  Uncollectible accounts written off, net of recoveries, and actual
  sales returns(B)    
  Estimated future sales returns charged to revenue