##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q




---

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|[X]        |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|           |  |                                                                                         
|           |  | For the quarterly period ended March 31, 2003                                           
|           |  |                                                                                         
|           |  | 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                                                                                                                                                                            |  | 91-1074996                             
|(State of incorporation)                                                                                                                                                              |  | (I.R.S. Employer Identification Number)
|                                                                                                                                                                                     
|16770 NE 79th Street, #103, Redmond, Washington 98052
(425) 883-1606
(Address of principal executive offices, including zip code; registrants 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 o

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Common stock, $.01 par value: 7,597,303 shares outstanding as of April 15,
2003.



---

---





---

TABLE OF CONTENTS



|                            |                                                                                               |  |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                            | Item 1. Financial Statements                                                                 
|                            | CONSOLIDATED BALANCE SHEETS                                                                  
|                            | CONSOLIDATED STATEMENTS OF OPERATIONS                                                        
|                            | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                        
|                            | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   
|                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                            | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                            | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION
|                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                 
|Exhibit 99.1               
|Exhibit 99.2               



---



##### Table of Contents



APPLIED MICROSYSTEMS CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2003

INDEX

|         |  |                                                                                                      |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                      |  | Page
|         |  |                                                                                                      |  |     
|PART I:  |  | FINANCIAL INFORMATION                                                                                |  |     
|         |  |                                                                                                      |  |     
|Item 1.  |  | Financial Statements:                                                                                |  |     
|         |  |                                                                                                      |  |     
|         |  | Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002                   |  | 3   
|         |  |                                                                                                      |  |     
|         |  | Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 (unaudited) |  | 4   
|         |  |                                                                                                      |  |     
|         |  | Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 (unaudited) |  | 5   
|         |  |                                                                                                      |  |     
|         |  | Notes to Consolidated Financial Statements (unaudited)                                               |  | 6   
|         |  |                                                                                                      |  |     
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                |  | 11  
|         |  |                                                                                                      |  |     
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 25  
|         |  |                                                                                                      |  |     
|Item 4.  |  | Controls and Procedures                                                                              |  | 25  
|         |  |                                                                                                      |  |     
|PART II: |  | OTHER INFORMATION                                                                                    |  |     
|         |  |                                                                                                      |  |     
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                     |  | 26  
|         |  |                                                                                                      |  |     
|         |  | Signatures                                                                                           |  | 26  
|         |  |                                                                                                      |  |     
|         |  | Certifications                                                                                       |  | 27  

-2-



---



##### Table of Contents



PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

APPLIED MICROSYSTEMS CORPORATION




CONSOLIDATED BALANCE SHEETS

|                                                                                                                                             |                                      |   |                |       |              |   |         |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | - | -------------- | ----- | ------------ | - | ------- | ----- | 
|                                                                                                                                             |                                      |   | March 31,      |       | December 31,
|                                                                                                                                             |                                      |   | 2003           |       | 2002        
|                                                                                                                                             |                                      |   |                |       |             
|                                                                                                                                             |                                      |   | (unaudited)    |       |              |   |        
|                                                                                                                                             |                                      |   | (in thousands)
|ASSETS                                                                                                                                       |                                      |   |                |       |              |   |         |      
|Current assets:                                                                                                                              |                                      |   |                |       |              |   |         |      
|                                                                                                                                             | Cash and cash equivalents            |   | $              | 2,203 |              |   | $       | 3,600 | 
|                                                                                                                                             | Securities available-for-sale        |   |                |      |              |   |         | 299   | 
|                                                                                                                                             | Accounts receivable, net             |   |                | 2     |              |   |         | 280   | 
|                                                                                                                                             | Note receivable                      |   |                | 500   |              |   |         | 500   | 
|                                                                                                                                             | Prepaid and other current assets     |   |                | 238   |              |   |         | 449   | 
|                                                                                                                                             | Property and equipment held for sale |   |                | 84    |              |   |         | 91    | 
|                                                                                                                                             |                                      |   |                |       |              |   |         |      
|Total assets                                                                                                                                 |                                      | $ | 3,027          |       |              | $ | 5,219   |      
|                                                                                                                                             |                                      |   |                |       |              |   |         |      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                         |                                      |   |                |       |              |   |         |      
|Current liabilities:                                                                                                                         |                                      |   |                |       |              |   |         |      
|                                                                                                                                             | Accounts payable                     |   | $              | 495   |              |   | $       | 744   | 
|                                                                                                                                             | Accrued payroll                      |   |                | 348   |              |   |         | 1,143 | 
|                                                                                                                                             | Other accrued expenses               |   |                | 538   |              |   |         | 765   | 
|                                                                                                                                             | Deferred revenue                     |   |                | 325   |              |   |         | 325   | 
|                                                                                                                                             | Capital lease obligation             |   |                | 175   |              |   |         | 175   | 
|                                                                                                                                             | Notes payable                        |   |                | 187   |              |   |         | 185   | 
|                                                                                                                                             |                                      |   |                |       |              |   |         |      
|Total current liabilities                                                                                                                    |                                      |   | 2,068          |       |              |   | 3,337   |      
|Commitments and contingencies                                                                                                                |                                      |   |               |       |              |   |        |      
|Shareholders 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; 7,597,000 shares
issued and outstanding at March 31, 2003
and December 31, 2002 |                                      |   | 27,233         |       |              |   | 27,233  |      
|Accumulated deficit                                                                                                                          |                                      |   | (26,274        | )     |              |   | (25,351 | )    
|                                                                                                                                             |                                      |   |                |       |              |   |         |      
|Total shareholders equity                                                                                                                   |                                      |   | 959            |       |              |   | 1,882   |      
|                                                                                                                                             |                                      |   |                |       |              |   |         |      
|Total liabilities and shareholders equity                                                                                                   |                                      | $ | 3,027          |       |              | $ | 5,219   |      
|                                                                                                                                             |                                      |   |                |       |              |   |         |      

See accompanying notes.

-3-



---



##### Table of Contents



APPLIED MICROSYSTEMS CORPORATION




CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                     |                                   |   |                                          |     |      |   |        |       | 
|------------------------------------ | --------------------------------- | - | ---------------------------------------- | --- | ---- | - | ------ | ----- | 
|                                     |                                   |   | Three Months Ended March 31,            
|                                     |                                   |   |                                         
|                                     |                                   |   | 2003                                     |     | 2002
|                                     |                                   |   |                                          |     |     
|                                     |                                   |   | (in thousands, except per-share amounts)
|Net sales                            |                                   | $ |                                         |     |      | $ | 4,865  |      
|Cost of sales                        |                                   |   |                                         |     |      |   | 1,795  |      
|                                     |                                   |   |                                          |     |      |   |        |      
|Gross profit                         |                                   |   |                                         |     |      |   | 3,070  |      
|Operating expenses:                  |                                   |   |                                          |     |      |   |        |      
|                                     | Sales, general and administrative |   |                                          | 685 |      |   |        | 2,655 | 
|                                     | Research and development          |   |                                          | 300 |      |   |        | 1,656 | 
|                                     |                                   |   |                                          |     |      |   |        |      
|                                     | Total operating expenses          |   |                                          | 985 |      |   |        | 4,311 | 
|                                     |                                   |   |                                          |     |      |   |        |      
|Loss from operations                 |                                   |   | (985                                     | )   |      |   | (1,241 | )    
|Interest income and other, net       |                                   |   | 62                                       |     |      |   | 29     |      
|                                     |                                   |   |                                          |     |      |   |        |      
|Net loss                             |                                   | $ | (923                                     | )   |      | $ | (1,212 | )    
|                                     |                                   |   |                                          |     |      |   |        |      
|Per-share amounts:                   |                                   |   |                                          |     |      |   |        |      
|Basic and diluted loss per share     |                                   | $ | (0.12                                    | )   |      | $ | (0.17  | )    
|                                     |                                   |   |                                          |     |      |   |        |      
|Shares used in per-share calculation |                                   |   | 7,597                                    |     |      |   | 7,171  |      

See accompanying notes.

-4-



---



##### Table of Contents



APPLIED MICROSYSTEMS CORPORATION




CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |        |      |        |  
|--------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | --- | ---------------------------- | ------ | ------ | ------ | ---- | ------ | -
|                                                                            |                                             |                                                 |                                                     |     | Three Months Ended March 31,
|                                                                            |                                             |                                                 |                                                     |     |                             
|                                                                            |                                             |                                                 |                                                     |     | 2003                         |        | 2002  
|                                                                            |                                             |                                                 |                                                     |     |                              |        |       
|                                                                            |                                             |                                                 |                                                     |     | (in thousands)              
|Operating activities                                                        |                                             |                                                 |                                                     |     |                              |        |        |       
|Net loss                                                                    |                                             | $                                               | (923                                                | )   |                              | $      | (1,212 | )     
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            | Depreciation and amortization               |                                                 |                                                     | 7   |                              |        |        | 203    |     
|                                                                            | Net change in operating accounts:           |                                                 |                                                     |     |                              |        |        |        |     
|                                                                            |                                             | Accounts receivable                             |                                                     |     | 332                          |        |        |        | 740  |       
|                                                                            |                                             | Inventories                                     |                                                     |     |                             |        |        |        | 432  |       
|                                                                            |                                             | Prepaid and other assets                        |                                                     |     | 159                          |        |        |        | (84  | )     
|                                                                            |                                             | Accounts payable, accrued expenses, and accrued |                                                     |     |                              |        |        |        |      |       
|                                                                            |                                             | business restructuring                          |                                                     |     | (1,271                       | )      |        |        | (440 | )     
|                                                                            |                                             | Deferred revenue                                |                                                     |     |                             |        |        |        | (659 | )     
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            |                                             |                                                 | Net cash used in operating activities               |     |                              | (1,696 | )      |        |      | (1,020 | )
|Investing activities                                                        |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            | Purchases of securities available-for-sale  |                                                 |                                                     |    |                              |        |        | (1,979 | )   
|                                                                            | Maturities of securities available-for-sale |                                                 |                                                     | 299 |                              |        |        | 1,975  |     
|                                                                            | Additions to property and equipment         |                                                 |                                                     |    |                              |        |        | (35    | )   
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            |                                             |                                                 | Net cash provided by (used in) investing activities |     |                              | 299    |        |        |      | (39    | )
|Financing activities                                                        |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            | Sale of common stock to employees           |                                                 |                                                     |    |                              |        |        | 47     |     
|                                                                            | Payments on capital lease obligation        |                                                 |                                                     |    |                              |        |        | (11    | )   
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       
|                                                                            |                                             |                                                 | Net cash provided by financing activities           |     |                              |       |        |        |      | 36     |  
|Effects of foreign currency exchange rate changes on cash                   |                                             |                                                 |                                                    |     |                              |        | (9     | )     
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       
|Net decrease in cash and cash equivalents                                   |                                             |                                                 | (1,397                                              | )   |                              |        | (1,032 | )     
|Cash and cash equivalents at beginning of period                            |                                             |                                                 | 3,600                                               |     |                              |        | 2,971  |       
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       
|Cash and cash equivalents at end of period                                  |                                             | $                                               | 2,203                                               |     |                              | $      | 1,939  |       
|                                                                            |                                             |                                                 |                                                     |     |                              |        |        |       

See accompanying notes.

-5-



---



##### Table of Contents



APPLIED MICROSYSTEMS CORPORATION




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared by Applied Microsystems Corporation (Applied or the Company) in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and according to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments) considered necessary for a fair
presentation have been included. The balance sheet at December 31, 2002 has
been derived from the audited financial statements included in the Companys
Annual Report on Form 10-K for the year then ended. The results of operations
for the three-month period ended March 31, 2003, are not necessarily indicative
of results to be expected for the entire year ending December 31, 2003 or for
any other fiscal period. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2002.

On December 16, 2002, the Company announced that the board of directors
had unanimously decided to recommend to shareholders that Applied be
liquidated. The Company scheduled a shareholder meeting for April 30, 2003 to
consider and vote on the proposed dissolution and liquidation; however, a
quorum was not present at the meeting, and the Company adjourned the meeting
until May 22, 2003. The Companys consolidated financial statements for all
periods presented have been prepared using guidance from Emerging Issues Task
Force (EITF) 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring); therefore, certain costs that do not meet the criteria of
exit activities under EITF 94-3, or cannot be reasonably estimated, are not
accrued for as of March 31, 2003. Such costs are recognized as incurred.

2. Computation of Loss Per Share

Basic loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted loss per share is
computed using the weighted-average number of common shares and dilutive common
stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation of diluted loss per share if their
effect is antidilutive; therefore, due to the Companys net losses, basic and
diluted loss per share are determined excluding common stock equivalents. At
March 31, 2003 and March 31, 2002, options to purchase 55,000 and 1,449,000
shares of common stock, respectively, were outstanding; however, all stock
options were excluded from the calculation of loss per share in the three month
periods ended March 31, 2003 and 2002, because their effect was antidilutive.

3. Comprehensive Loss

As defined by applicable accounting and reporting standards, Applieds
comprehensive loss is comprised of net loss and the effects of current-period
translation adjustments, which are recorded directly

-6-



---



##### Table of Contents



to equity. 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 have historically been accumulated in other
comprehensive loss. As a result of the Companys sale of its embedded systems
development tools business and assets in November 2002, and the subsequent
announcement that Applied would seek corporate liquidation, the Companys
international operations were substantially closed by the end of the year. The
Company therefore recognized a charge of $593,000 in the fourth quarter of 2002
relating to the write-off of foreign currency translation adjustments that had
accumulated for these subsidiaries, and the Company had no recorded change in
translation adjustments during the quarter ended March 31, 2003. During the
first quarter of 2002, comprehensive loss amounted to $1.2 million.

4. Sale of Embedded Systems Development Tools Business and Assets

Effective November 1, 2002, the Company sold its embedded systems
development tools business and assets to Metrowerks Corporation, a wholly owned
subsidiary of Motorola, Inc. The purchase price was $3.9 million, which
included payment for certain inventories and tangible assets, as well as all
intellectual property related to the Companys embedded systems development
tools business. In addition, Metrowerks assumed certain customer warranty and
support obligations. The Company received $3.4 million at closing, with the
remaining $500,000 subject to a one-year holdback to secure certain
indemnification obligations. Certain other indemnification obligations
relating to title to the assets sold, compliance with laws, and certain matters
relating to taxes continue until the expiration of the statute of limitations
applicable to claims with respect to such matters.

As of the November 1, 2002 transaction date, the carrying amount of assets
and liabilities included in the sale transaction were as follows (in
thousands):

|                                            |                                  |   |       |     | 
|------------------------------------------- | -------------------------------- | - | ----- | --- | 
|Assets                                      |                                  |   |       |    
|                                            | Inventories                      |   | $     | 910 | 
|                                            | Prepaid and other current assets |   |       | 54  | 
|                                            | Fixed assets                     |   |       | 84  | 
|                                            |                                  |   |       |    
|                                            |                                  | $ | 1,048 |    
|                                            |                                  |   |       |    
|Liabilities  deferred revenue and warranty |                                  | $ | 1,433 |    
|                                            |                                  |   |       |    

The fourth quarter 2002 gain in the Companys sale of its embedded systems
development tools business and is summarized as follows (in thousands):

|                                            |                |   |       |       | 
|------------------------------------------- | -------------- | - | ----- | ----- | 
|Cash received at closing                    |                | $ | 3,352 |      
|Holdback note receivable                    |                |   | 500   |      
|Liabilities assumed by purchaser            |                |   | 1,433 |      
|                                            |                |   |       |      
|                                            | Total proceeds |   |       | 5,285 | 
|Carrying value of assets sold               |                |   | 1,048 |      
|Transaction and other accrued expenses, net |                |   | 654   |      
|                                            |                |   |       |      
|                                            | Gain on sale   |   | $     | 3,583 | 
|                                            |                |   |       |      

-7-



---



##### Table of Contents



5. Business Restructuring Activities

In August 2001, in response to economic uncertainty and reduced revenue
streams, Applied implemented a restructuring plan designed to reduce operating
costs. The restructuring plan included a reduction of approximately 90
full-time employees worldwide across the Companys functional organizations, or
39% of the workforce; discontinuance or reallocation of selected projects and
activities not essential to the Companys long-term goals; abandonment of
excess space at the Companys headquarters; as well as other cost reduction and
control measures. The charge for abandoned facilities related to amounts
accrued for estimated losses on lease commitments for facilities that Applied
had abandoned in connection with the August 2001 restructuring. As a result of
adopting the restructuring plan, Applied recorded a restructuring charge of
$2.3 million in the third quarter of 2001.

In May 2002, the Company announced further plans to reduce expenses
through a reduction in personnel and realignment of business objectives. The
cost reductions consisted primarily of a reduction of approximately 45
full-time employees worldwide across the Companys functional organizations, as
well as a write-off of certain assets for which the book value was deemed in
excess of net realizable value under accounting rules. As a result, the
Company recognized a charge of $602,000 for severance and related expenses and
$67,000 for asset write-offs in the second quarter of 2002. The Company also
reassessed the potential exposure for losses for the abandoned space identified
in the August 2001 restructuring in light of revised estimates of the timeframe
and terms under which a sublease could be negotiated. As a result, the Company
recognized an additional charge of $480,000 in the second quarter of 2002.

In the fourth quarter of 2002, after announcing on December 16, 2002 that
the Companys board of directors had unanimously decided to recommend to
shareholders that Applied be liquidated, Applied further recognized $906,000 in
restructuring charges associated with severance and benefits for the remaining
26 personnel. Also during the fourth quarter of 2002, the Company entered into
an agreement to terminate its headquarters facility lease by paying a lease
termination fee of approximately $1.0 million. The lease termination fee was
less than the Company had reserved for abandoned space in the accrued
restructuring reserve; therefore, Applied recognized a net benefit of $351,000
in the restructuring charge in the fourth quarter of 2002 relating to the
elimination of the reserve for abandoned space.

The restructuring charges and related activity for the three months ended
March 31, 2003 are as follows:

|                               |  |                                    |     |                    |  |                                |   |                                 |  |   |     |  |  |   |     | 
|------------------------------ |  | ---------------------------------- | --- | ------------------ |  | ------------------------------ | - | ------------------------------- |  | - | --- |  |  | - | --- | 
|                               |  | Accrued
Balance atDecember 31,2002 |     | Additional Charges |  | Amounts
Paid orChargedOff, Net |   | Accrued
Balance atMarch 31,2003
|                               |  |                                    |     |                    |  |                                |   |                                
|Severance and
related expenses |  | $                                  | 783 |                    |  | $                              |  |                                 |  | $ | 506 |  |  | $ | 277 | 
|Abandoned facilities           |  |                                    | 96  |                    |  |                                |  |                                 |  |   | 69  |  |  |   | 27  | 
|                               |  |                                    |     |                    |  |                                |   |                                 |  |   |     |  |  |   |     | 
|                               |  | $                                  | 879 |                    |  | $                              |  |                                 |  | $ | 575 |  |  | $ | 304 | 
|                               |  |                                    |     |                    |  |                                |   |                                 |  |   |     |  |  |   |     | 

-8-



---



##### Table of Contents



As of December 31, 2002, the accrued restructuring liabilities consisted
of accrued payroll of $775,000, accounts payable of $96,000, and other accrued
expenses of $8,000. As of March 31, 2003, the accrued restructuring
liabilities consisted of accrued payroll of $277,000, and accounts payable of
$27,000.

6. Acquisition of REBA Technologies, Inc.

In May 2002, the Company announced that it had completed the acquisition
of REBA Technologies, Inc. (REBA). REBAs patent-pending technology is
focused on enhancing the operation of server farms for enterprises, application
service providers and network service providers. The acquisition consideration
consisted of an aggregate of approximately 350,000 shares of the Companys
common stock, valued at $315,000, plus an aggregate principal amount of
$178,000 of promissory notes, due May 2004, and bearing interest at the rate of
6% annually. The Company did not acquire any personnel, tangible assets or
known liabilities in the transaction. As a result of the acquisition, the
Company recognized in-process research and development expenses of $621,000 in
the second quarter of 2002, representing the entire purchase price (including
transaction-related expenses).

Because Lary L. Evans was a director of the Company at the time of the
transaction and was the holder of approximately 86% of REBAs outstanding
shares, the negotiation of the terms of the acquisition was handled by an
independent committee of the Companys board of directors composed of
disinterested directors. This committee engaged an independent valuation firm
to provide a basis for negotiations, and ultimately recommended that the
transaction be approved by the Companys entire board of directors. Mr. Evans
resigned from the board of directors on December 13, 2002, and has had no
further involvement in the operations of the Company.

At closing of the transaction, 50% of the merger consideration was placed
into an escrow for the purpose of securing the indemnification obligations of
the REBA shareholders under the merger agreement. Those shares and notes will
remain in escrow for a period of three years from the closing date and until
all pending claims for indemnification, if any, have been resolved. In a
liquidation of Applied Microsystems, the Company would seek to sell the
remaining corporate assets, including the intellectual property acquired in the
REBA transaction. The sale of such intellectual property would, of necessity,
also address the terms of the escrow agreement, including payment of merger
consideration held in escrow.

7. Stock-Based Compensation

The Company has the following shareholder-approved stock option plans that
provide for option grants to employees, directors, and others: the Applied
Microsystems Corporation 1992 Performance Stock Plan (the 1992 Plan), the
Applied Microsystems 2001 Stock Option Plan (the 2001 Plan), and the Applied
Microsystems Corporation Director Stock Option Plan (the Director Plan). 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.

As a result of the Companys sale of its embedded systems development
tools business and assets in November 2002, all vesting for stock options under
the 1992 Plan and the 2001 Plan was accelerated so that all outstanding options
under these plans were fully exercisable as of the closing of the transaction.
Because all such unvested options had exercise prices substantially above the
trading price of the Companys common stock as of the closing of the
transaction, no options were exercised as a result of the accelerated vesting,
and all such options were subsequently terminated. The only options

-9-



---



##### Table of Contents



that remain outstanding as of March 31, 2003 are those granted under the
Director Plan; however, the Companys board of directors has determined that
such options will terminate effective as of the date that shareholders approve
the liquidation of the Company.

The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
its stock-based awards.

|                               |                                                                                 |   |                    |      |                    |   |       |        |  
|------------------------------ | ------------------------------------------------------------------------------- | - | ------------------ | ---- | ------------------ | - | ----- | ------ | -
|                               |                                                                                 |   | Three Months Ended |      | Three Months Ended
|                               |                                                                                 |   | March 31,          |      | March 31,         
|                               |                                                                                 |   | 2003               |      | 2002              
|                               |                                                                                 |   |                    |      |                   
|                               |                                                                                 |   | (in thousands)    
|                               | Net loss, as reported                                                           |   | $                  | (923 | )                  |   | $     | (1,212 | )
|                               | Total stock-based
compensation expense
determined under
fair-value-based method |   |                    | (34  | )                  |   |       | (115   | )
|                               |                                                                                 |   |                    |      |                    |   |       |       
|                               | Pro forma net loss                                                              |   | $                  | (957 | )                  |   | $     | (1,327 | )
|                               |                                                                                 |   |                    |      |                    |   |       |       
|Net loss per share as reported |                                                                                 | $ | (0.12              | )    |                    | $ | (0.17 | )     
|                               |                                                                                 |   |                    |      |                    |   |       |       
|Pro forma net loss per share   |                                                                                 | $ | (0.13              | )    |                    | $ | (0.18 | )     
|                               |                                                                                 |   |                    |      |                    |   |       |       

8. Recent Accounting Pronouncements

In June 2002, the FASB issued SFAS 146, Accounting for Exit or Disposal
Activities. SFAS 146 addresses issues regarding the recognition, measurement,
and reporting of costs that are associated with exit and disposal activities,
including restructuring activities. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Companys current
exit activities were initiated in 2002, and the Company is applying the
guidance of Emerging Issues Task Force (EITF) 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 is not
expected to have a material impact on the Companys financial statements
because the Company does not expect to initiative future exit activities as a
result of the Companys liquidation plan.

-10-



---



##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities laws. These forward-looking
statements include without limitation statements regarding our expectations and
beliefs about the market and industry, our goals, plans, and expectations
regarding our plans to liquidate the Company, our beliefs and expectations
regarding our remaining corporate obligations (including indemnification
obligations arising from the sale of our embedded systems development tools
business and assets in November 2002), our beliefs and expectations regarding
the timing and amount of any potential distribution to shareholders, our
beliefs regarding period-to-period results of operations, our expectations
regarding future financial results, our beliefs regarding our results of
operation and financial position, our beliefs and expectations regarding
liquidity and capital resources, and our expectations regarding the impact of
recent accounting pronouncements. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially
from those anticipated. These risks and uncertainties include, without
limitation, those identified in the section of this quarterly report on Form
10-Q entitled Certain Factors That May Affect Future Results of Operations
below, and the section of our annual report on Form 10-K for the fiscal year
ended December 31, 2002 entitled Risk Factors That May Affect Future Results.
Applied undertakes no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this quarterly
report on Form 10-Q.

The following managements discussion and analysis of financial conditions
should be read in conjunction with managements discussion and analysis of
financial condition and results of operations included in our Annual Report on
Form 10-K for the year ended December 31, 2002.

As used in this quarterly report on Form 10-Q, unless the context
otherwise requires, the terms we, us, the Company, and Applied refer to
Applied Microsystems Corporation, a Washington corporation, and its
subsidiaries.

Overview

Applied Microsystems Corporation historically created solutions to
expedite the development, test and deployment of business and safety-critical
embedded systems. We developed, marketed and supported a comprehensive suite
of software and hardware-enhanced development, test, and verification tools for
the development of complex embedded microprocessor-based applications. Using
these tools, engineers develop, test, debug, emulate and verify embedded
software found in a wide variety of products, including voice and data
communications networks, console games, avionics systems, automotive systems,
medical devices, and consumer electronics.

On November 1, 2002, we completed the sale of our embedded systems
development tools business and assets to Metrowerks Corporation, a wholly owned
subsidiary of Motorola, Inc. The purchase price was $3.9 million, which
included payment for certain inventories and tangible assets, as well as all
intellectual property related to our embedded systems development tools
business. In addition, Metrowerks assumed certain customer warranty and
support obligations. We received $3.4 million at closing, with the remaining
$500,000 subject to a one-year holdback to secure certain indemnification
obligations. Certain other indemnification obligations relating to our title
to the assets sold, compliance with laws, and certain matters relating to taxes
continue until the expiration of the statute of limitations applicable to
claims with respect to such matters.

-11-



---



##### Table of Contents



With the sale of our historical revenue-generating assets completed, we
had planned to pursue the development of new hardware and software products
through our Libra Networks division. Libra Networks was formed as a result of
our acquisition of REBA Technologies in May 2002. We planned to focus our
Libra Networks development on delivering innovative technology that improves
the way Web Services and other enterprise applications are managed in
enterprise data centers.

During the fourth quarter of 2002 we aggressively pursued funding for the
Libra Networks business. Feedback from various funding sources produced
consistent themes, including concern over Applieds capital structure as a
publicly held entity, concern over the timing and amount of Libra Networks
projected funding needs, and varying levels of interest in Libra Networks
overall market opportunity. We also noted a softening in market projections
for the adoption of InfiniBand technology in the data center, on which the
Libra Networks technology is based.

As a result, our board of directors concluded that there was a low
probability that Libra Networks could achieve timely and sufficient funding to
reasonably support its business plan. Therefore, on December 16, 2002, we
announced that our board of directors had unanimously decided to recommend to
shareholders that Applied be liquidated. Liquidation of a corporation is a
complex process, and requires a shareholder vote and presents other
complexities, with significant uncertainties surrounding the timing and amount
of any distribution to shareholders.

Since December 16, 2002, we have taken steps to reduce our expenses, to
prepare our Libra Networks assets for sale, and to prepare a proxy statement
and related materials in connection with submitting the proposal to liquidate
and dissolve Applied to our shareholders for vote at a meeting of shareholders.
We scheduled a shareholder meeting for April 30, 2003 to consider and vote on
the proposed dissolution and liquidation; however, a quorum was not present at
the meeting, and we adjourned the meeting until May 22, 2003. We have reduced
our workforce from 33 full-time personnel on December 16, 2002, to two
remaining administrative personnel and no remaining development personnel as of
April 30, 2003. In an effort to further trim expenses, in the fourth quarter
of 2002, we entered into an agreement to terminate our headquarters facilities
lease. We paid an early termination fee of approximately $1 million to
Teachers Insurance & Annuity Association of America, the landlord under the
lease, in exchange for termination of any further obligations under the lease.
In December 2002, we entered into an agreement to sublease approximately 7,200
square feet in Redmond, Washington, and took possession of the premises later
that month. On February 27, 2003, we provided notice of our intent to
terminate the sublease in Redmond as of March 31, 2003. We then secured needed
office facilities, consisting of approximately 650 square feet, in the Redmond
area on a monthly rental basis.

If shareholders approve the liquidation of Applied and the Plan of
Liquidation and Dissolution (the Plan of Dissolution), we will file articles
of dissolution with the Secretary of State of the State of Washington promptly
after the shareholder vote, and attempt to convert our remaining assets,
including our Libra Networks assets, into cash and settle our liabilities as
expeditiously as possible. Some or all of our assets may be held in a
contingency reserve for the satisfaction of certain liabilities.

On September 16, 2002, our common stock was transferred from the Nasdaq
National Market to the Nasdaq SmallCap Market. Our common stock was
involuntarily delisted from the Nasdaq SmallCap Market effective as of the
opening of business on January 3, 2003, as a result of our failure to meet the
minimum required bid price, market value of public float, and shareholders
equity requirements for continued listing on the SmallCap Market, and our
common stock has been quoted on the OTC Bulletin Board since January 3, 2003.

-12-



---



##### Table of Contents



Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our critical accounting
policies and estimates, including those related to accounting for the sale of
our embedded systems development tools assets and business in November 2002,
our plans announced December 16, 2002 to seek shareholder approval to pursue a
corporate liquidation, revenue recognition, inventories, accounting for
acquisitions such as the May 2002 REBA acquisition, and restructuring
activities. We base our estimates and our future expectations on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following accounting policies are the most critical to aid
in fully understanding and evaluating our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

Sale of embedded systems development tools assets and business. Effective
November 1, 2002, we completed the sale of our embedded systems development
tools business and assets to Metrowerks. We accounted for the sale by removing
sold assets and assumed liabilities at their corresponding carrying amounts on
the closing date, recognizing the cash proceeds, recognizing the $500,000
holdback receivable, recognizing the corresponding transaction expenses (either
as a reduction in previously capitalized transaction expenses, or as a
liability for yet-to-be-paid items), and making other transaction-related
adjustments as deemed appropriate in the circumstances. As a result, we
recognized a net gain on the transaction.

Our policies with regard to accounting and presentation are based on
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. The long-lived corporate
assets relating to the Companys embedded systems development tools business
meet the criteria of long-lived assets to be disposed of by sale, as defined in
SFAS 144. Most such assets were sold prior to the end of the year, either in
the sale to Metrowerks or through an auction held December 10, 2002 at our
former corporate headquarters facility.

Corporate liquidation. On December 16, 2002, we announced that our board
of directors had unanimously decided to recommend to shareholders that Applied
be liquidated. Our critical accounting policies with regard to this announced
plan to seek liquidation are based on guidance from Emerging Issues Task Force
(EITF) 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Therefore, as of March 31, 2003, we have accrued certain
costs relating to employee severance and related benefits, as well as other
expenses to terminate our business activities. Ongoing expenses to operate the
business during the wind-down are treated as period expenses and were not
accrued as of March 31, 2003. In June 2002, the FASB issued SFAS 146,
Accounting for Exit or Disposal Activities. SFAS 146 addresses issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities. SFAS 146 is effective for exit or disposal

-13-



---



##### Table of Contents



activities that are initiated after December 31, 2002. Our current exit
activities were initiated in 2002, and we are applying the guidance of EITF
94-3.

We also determined that, under the provisions of SFAS 144, many of our
remaining fixed assets as of the end of 2002 were impaired. We therefore
recognized an impairment loss and wrote down our fixed assets to fair value, in
accordance with SFAS 144. No further impairments were recognized in the three
months ended March 31, 2003.

Although we have announced our intent to seek corporate liquidation, such
liquidation requires that we obtain shareholder approval, which is not assured.
Therefore, our consolidated financial statements for all periods presented
have been prepared in accordance with accounting principles generally accepted
in the United States of America, and not specifically on the liquidation basis
of accounting.

Revenue recognition. We historically earned revenue on the sale of
hardware and software products. We also earned 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 was recognized when persuasive evidence of an arrangement existed,
delivery of the product had occurred, the fee was fixed or determinable, and
collectibility was probable. If the fee due from a customer was not fixed or
determinable, revenue was recognized as payments became due from a customer.
If customers had inspection or acceptance rights beyond standard warranty
provisions, revenue was recognized when formal notification of inspection or
acceptance had been received from the customer. Due to business customs in
Japan and our interpretation of Japanese law, product sales in Japan were
recognized when the customer notified us that it had inspected and accepted the
product. In the absence of receiving written notification of inspection and
acceptance, we recognized revenue in Japan on receipt of payment by the
customer as an indication of acceptance. When products were sold with
significant installation services, all revenue was deferred until installation
was completed. Revenue from training and contract engineering services was
generally recognized as the services were performed. Revenue from longer-term
agreements to perform development services was 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 were met).

Inventories. We wrote down our inventories for estimated obsolescence or
unmarketable inventories equal to the difference between cost and the estimated
net realizable value based on assumptions about future demand and market
conditions. Changes in those underlying assumptions  including the impact of
the November 2002 asset sale  also resulted in additional write-downs of
inventories. While inventories have historically been a material component of
our financial statements, we had no remaining inventories by the end of 2002
because all inventories had been sold or otherwise disposed of prior to the end
of 2002.

Acquisitions.In May 2002, we announced our acquisition of REBA
Technologies, Inc. Applied does not have a history of acquiring companies;
therefore, the accounting policies relating to acquisitions depend on the facts
and circumstances of the specific transaction. In this case, we assessed the
proper allocation of the purchase price in light of the circumstances and
determined that the entire purchase consideration be allocated to in-process
research and development, based primarily on the fact that we acquired
patent-pending technology (and we acquired no other significant tangible or
intangible assets).

Restructuring activities. In the third quarter of 2001, we implemented a
restructuring plan designed to reduce operating costs. Again in the second
quarter of 2002, we implemented further cost

-14-



---



##### Table of Contents



reductions. These restructuring plans included reductions in full-time
employees worldwide across our functional organizations; discontinuance or
reallocation of selected projects and activities not essential to our long-term
goals; abandonment of excess space at our headquarters; as well as other cost
reduction and control measures. In the fourth quarter of 2002, after
announcing plans to seek shareholder approval for corporate liquidation, we
recognized further restructuring charges associated with severance and benefits
for remaining personnel. We used estimates to establish accruals in connection
with the restructuring plans, particularly with regard to our contractual lease
obligations for abandoned facilities, and the timing and market rates that may
be available if we successfully sublease the excess space. In October 2002 we
signed a lease termination agreement with the landlord of our headquarters
facility whereby we paid an early termination fee of approximately $1 million
to the landlord in exchange for the termination of any further obligations
under the lease.

Results of Operations

|                               |                                   |   |                              |     |      |   |        |       | 
|------------------------------ | --------------------------------- | - | ---------------------------- | --- | ---- | - | ------ | ----- | 
|                               |                                   |   | Three Months Ended March 31,
|                               |                                   |   |                             
|                               |                                   |   | 2003                         |     | 2002
|                               |                                   |   |                              |     |     
|                               |                                   |   | (in thousands)              
|Net sales                      |                                   | $ |                             |     |      | $ | 4,865  |      
|Cost of sales                  |                                   |   |                             |     |      |   | 1,795  |      
|                               |                                   |   |                              |     |      |   |        |      
|Gross profit                   |                                   | $ |                             |     |      |   | 3,070  |      
|Operating expenses:            |                                   |   |                              |     |      |   |        |      
|                               | Sales, general and administrative |   |                              | 685 |      |   |        | 2,655 | 
|                               | Research and development          |   |                              | 300 |      |   |        | 1,656 | 
|                               |                                   |   |                              |     |      |   |        |      
|                               | Total operating expenses          |   |                              | 985 |      |   |        | 4,311 | 
|                               |                                   |   |                              |     |      |   |        |      
|Loss from operations           |                                   |   | (985                         | )   |      |   | (1,241 | )    
|Interest income and other, net |                                   |   | 62                           |     |      |   | 29     |      
|                               |                                   |   |                              |     |      |   |        |      
|Net loss                       |                                   | $ | (923                         | )   |      | $ | (1,212 | )    
|                               |                                   |   |                              |     |      |   |        |      

Net Sales. Prior to the November 2002 sale of our embedded systems
development tools business and assets, our revenues could be classified into
three broad categories: hardware-enhanced debugging tools, software analysis
tools, and game development systems. The following table provides revenue
information for each of these categories.

|                                  |                 |      |                    |      |                    |   |       |       | 
|--------------------------------- | --------------- | ---- | ------------------ | ---- | ------------------ | - | ----- | ----- | 
|                                  |                 |      | Three Months Ended |      | Three Months Ended
|                                  |                 |      | March 31,          |      | March 31,         
|(in thousands)                    |                 | 2003 |                    | 2002
|                                  |                 |      |                    |     
|Hardware-enhanced debugging
tools |                 | $    |                   |      |                    | $ | 1,629 |      
|Software analysis tools           |                 |      |                   |      |                    |   | 1,613 |      
|Game development systems          |                 |      |                   |      |                    |   | 1,623 |      
|                                  |                 |      |                    |      |                    |   |       |      
|                                  | Total net sales |      | $                  |     |                    |   | $     | 4,865 | 
|                                  |                 |      |                    |      |                    |   |       |      

Net sales decreased to zero in 2003 due to the sale of the Companys
embedded systems development tools business and assets in November 2002. Our
net sales formerly included product

-15-



---



##### Table of Contents



support revenues, which are included within
the aforementioned major categories of our products. These
support revenues totaled approximately $600,000 in the three months ended March
31, 2002. International sales were 28% of net sales in the first quarter of
2002.

Cost of Sales and Gross Profit. Gross profit was 63% of net sales in the
three months ended March 31, 2002. Cost of sales included 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 costs. We performed periodic assessments of required
reserves for potential inventory obsolescence, and corresponding adjustments to
such reserves were included within cost of sales.

Sales, General and Administrative Expenses. Sales, general, and
administrative expenses decreased $2.0 million, or 74%, in the three months
ended March 31, 2003, as compared to the three months ended March 31, 2002.
The decrease was primarily the result of our November 2002 sale of our embedded
systems development tools business and assets, the correspondingly
significantly lower personnel and infrastructure levels that have resulted
after the sale, and further cost-cutting relating to our Libra Networks
business and decision to seek corporate liquidation. As of April 30, 2003, we
employ two full-time administrative personnel, and we maintain 650 square feet
of office space on a monthly rental basis; however, we anticipate that we will
incur various ongoing and additional costs in the future as we implement our
plans to liquidate the corporation.

Research and Development Expenses. Research and development expenses
decreased $1.4 million, or 82%, in the three months ended March 31, 2003, as
compared to the three months ended March 31, 2002. The decrease was primarily
the result of our November 2002 sale of our embedded systems development tools
business and assets, the correspondingly significantly lower personnel and
infrastructure levels that have resulted from the sale, and further
cost-cutting relating to our Libra Networks business. During a portion of the
first quarter of 2003, we worked to complete documentation and otherwise
prepare the Libra Networks intellectual property for sale. As of April 30,
2003, we do not have a buyer for such intellectual property.

Interest Income and Other, Net. Interest income and other, net, increased
$33,000, or 114%, in the three months ended March 31, 2003, as compared to the
three months ended March 31, 2002. The amount in the first quarter of 2003
includes $50,000 relating to a patent licensing fee that had been negotiated
prior to the sale of our embedded systems development tools business and
assets, but for which payment was uncertain. We recognized the amount in the
first quarter of 2003 because we received a significant portion of the
outstanding balance. Absent the license fee, interest income and other, net,
decreased due to lower cash balances available for investment purposes.

Income Taxes

Applicable accounting standards require that we calculate an estimated
annual effective tax rate and apply such tax rate to the pre-tax operating
results of interim periods. 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 our
ability to utilize our net deferred tax assets, including our 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. Accordingly, no income tax provision or benefit is
recorded for the three-month periods ended March 31, 2003 and 2002.

-16-



---



##### Table of Contents



Liquidity and Capital Resources

As of March 31, 2003, we had $2.2 million in cash, cash equivalents, and
short-term investments compared to $3.9 million as of December 31, 2002. If
shareholders approve our plan to liquidate the Company, we would no longer
require capital for the financing of inventories and accounts receivable, sales
and marketing efforts, product development activities, and capital equipment
purchases. Rather, we would expect to use the remaining cash to wind-down
operations, satisfy our known and unknown obligations and, if cash is
available, distribute remaining amounts to shareholders. As part of the
agreement to sell our embedded systems development tools business, we agreed to
indemnify Metrowerks for specified items  $500,000 of the agreed-upon purchase
price was held back to secure certain of these indemnification obligations, and
this amount is due to be received in November 2003. Certain other
indemnification obligations relating to our title to the assets sold,
compliance with laws, and certain matters relating to taxes continue until the
expiration of the statute of limitations applicable to claims with respect to
such matters. These indemnification obligations, other known or unknown
obligations, the actual cost of meeting legal and regulatory requirements in
the United States and in other jurisdictions to liquidate Applieds legal
entities, and other factors are expected to affect the timing and/or the amount
of any distribution to shareholders.

We used cash of $1.7 million for operating activities in the first three
months of 2003, compared to using $1.0 million for operating activities in the
first three months of 2002. Investing activities provided $0.3 million in cash
in the three months ended March 31, 2003, compared to our using $39,000 for
investing activities in the three months ended March 31, 2002.

We received no funds in the first three months of 2003 from the sale of
our common stock to personnel through an employee stock purchase plan and the
exercise of employee stock options, compared to receiving $47,000 in the first
three months of 2002. We do not anticipate future funds from this source.

We believe that our existing working capital will provide us with
sufficient funds to effect an orderly liquidation, if our shareholders approve
a corporate liquidation; however, the timing and amount of any distribution to
shareholders is subject to significant uncertainty. If we are unable to effect
an orderly liquidation, we could be required to seek protection under the laws
of bankruptcy. Our stock is currently quoted on the OTC Bulletin Board, and we
do not believe we could successfully raise additional funds under our corporate
circumstances, either through a debt or equity offering.

Accounting Pronouncements

In June 2002, the FASB issued SFAS 146, Accounting for Exit or Disposal
Activities. SFAS 146 addresses issues regarding the recognition, measurement,
and reporting of costs that are associated with exit and disposal activities,
including restructuring activities. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Companys current
exit activities were initiated in 2002, and the Company is applying the
guidance of Emerging Issues Task Force (EITF) 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 is not
expected to have a material impact on the Companys financial statements
because the Company does not expect to initiative future exit activities as a
result of the Companys liquidation plan.

-17-



---



##### Table of Contents



Certain Factors That May Affect Future Results of Operations

Our 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. We will not update any forward-looking statements
due to new information, future events or otherwise.

Risks Related to the Plan of Dissolution

If our shareholders do not approve the voluntary liquidation and dissolution of
Applied, we will not have the resources to continue operations without seeking
additional capital, which we believe will be very difficult to obtain, and our
resources may diminish completely.

We have limited cash resources, and these resources continue to diminish.
We recorded a net loss of nearly $1 million and consumed $1.7 million of our
cash in operating activities during the first three months of 2003. We expect
that our cash resources will continue to diminish. If our shareholders do not
approve the Plan of Dissolution, our board of directors will determine an
appropriate course of action, which could include continuing to preserve our
Libra Networks assets and technology and continue to seek financing for our
Libra Networks business or a sale of our Libra Networks assets and technology,
using a minimum of our resources until our resources are completely depleted.
Considering our recent financial performance and the difficulty we have had in
obtaining financing, it is unlikely that we would be able to obtain additional
equity or debt financing. If we were to be unable to obtain sufficient
capital, we would deplete our available resources and would be required to
discontinue operation of our business.

We might not be able to sell certain of our assets or to receive reasonable
value from the sale of our assets.

The value that shareholders ultimately realize as a result of the sale of
our assets and the liquidation of Applied is dependent in part on the proceeds
received from the sale of the assets or other disposition of our operating
assets. Our assets include certain technology and intellectual property for
which we may not be able to find a buyer. Despite our ongoing efforts to sell
our Libra Networks assets and technology and certain other intellectual
property, we currently do not have a buyer for these assets. We may be unable
to sell certain of our assets and may not realize any value from these assets.
In addition it may be difficult to obtain a favorable return when selling our
operating assets in connection with the liquidation and dissolution of Applied.
Because we are seeking to consummate the liquidation of our operating assets
in the near to short term in order to minimize the losses associated with
operating Applied, we may not realize as much value for these assets as we
might have if we had been able to sell our business as a going concern.

We do not plan to obtain a fairness opinion with respect to the sale of
our Libra Networks technology and assets; therefore, we cannot assure
shareholders that the price we may negotiate for these assets is the best
possible price we could obtain. While we will attempt to obtain the best price
in connection with the sale of our Libra Networks technology and assets, there
can be no assurance that the value we realize from the sale of these assets
will reflect the potential future value of these assets.

The timing of liquidating payments and total value shareholders receive
upon liquidation is subject to many variables and risks, many of which will not
be known at the time of the vote.

Shareholders may receive distributions from us or a liquidating trust, as
the case may be,
the timing of which will be at the discretion of management or the trustee
or trustees, unless it is

-18-



---



##### Table of Contents



determined that any such distribution would be
inconsistent with the purposes of the Plan of Dissolution. The distribution of
our assets to shareholders may be delayed for a number of reasons, including
the risk that one or more of our creditors might seek an injunction against our
making the proposed distributions to shareholders under the terms of the Plan
of Dissolution. The value of what shareholders receive will be a product of
various factors and risks, including the proceeds received from the sale or
other disposition of our operating assets, and the amount of Applieds actual
and potential liabilities. If our liabilities prove to be higher than
anticipated, additional creditors appear, or legal action is brought against us
by creditors or others, it is possible that the planned distribution to
shareholders could be delayed or reduced, or there could be nothing remaining
available for distribution to shareholders.

Shareholders could be liable under Washington law to return some or all of the
cash they may receive from us if we do not provide for all of our liabilities
and expenses.

Washington law provides that we can dispose of any known claims against us
by providing written notice to our known creditors of the planned dissolution
of Applied, and paying or making adequate provision for the debts of the
company within the time allowed by law. However, an unpaid creditor or a
creditor that was not known to us can still, within two years of our
dissolution, bring a lawsuit against Applied and its former shareholders for
any amount unpaid. All shareholders who receive proceeds from the liquidation
may be liable to a creditor who has a valid claim that exceeds the amount
retained by us or the liquidating trust for the purpose of settling claims, up
to the amount they received in the liquidation.

We may be required to pay up to $3.3 million to Metrowerks Corporation, a Texas
corporation that is a wholly-owned subsidiary of Motorola, Inc., for potential
breaches of our representations in the asset purchase agreement dated as of
September 3, 2002.

Under the terms of the asset purchase agreement that we entered into on
September 3, 2002, we have an obligation to indemnify Metrowerks for any losses
from potential breaches of our representations or warranties that are asserted
within 12 months after the closing date of the asset sale or within the
applicable statute of limitations period for claims relating to our ownership
of our assets, payment of our taxes, and our compliance with applicable laws,
if longer. Our indemnification obligations are limited to an overall amount of
$3.3 million. Although we currently are not aware of any material breaches of
our representations or warranties, the payment of any such indemnification
obligations would decrease the amount of cash we would have available to
distribute to shareholders in the liquidation.

Risks Related to Applieds Continuing Business Operations

If the Plan of Dissolution is not approved by our shareholders, we would
face the following risks and uncertainties in connection with continuing to
pursue our Libra Networks business.

We do not have any immediate source of revenue and we expect to incur
significant losses for an indefinite period of time.

Our Libra Networks business involves the development of a new and as yet
unreleased product line with no market penetration in a highly competitive
market sector typified by rapid changes in technology and competitive products.
We do not expect our Libra Networks business to produce any revenues in the
near term, and if we were to continue pursuing the Libra Networks business, we
would expect to operate at a loss until at least 2004. We cannot predict when
or to what extent Libra Networks
might begin to produce revenues, or whether it would ever reach profitability.
If we were unable to

-19-



---



##### Table of Contents



achieve significant levels of recurring revenue from our
Libra Networks business, our losses would likely continue indefinitely. If
this were to occur the market price of our common stock could suffer as well as
our viability as a going concern.

Due to our lack of available resources, and to preserve available resources to
satisfy our liabilities, we have terminated a significant number of our
personnel and therefore have limited ability to pursue the Libra Networks
business.

Due to our lack of available resources to fully pursue the Libra Networks
business plan, we have terminated a significant number of our staff, including
Libra development personnel and senior management who would be critical to the
success of the Libra business. As of April 30, 2003, we had two remaining
administrative personnel, and no remaining development staff. Libras success
depends to a significant degree on our ability to attract and retain highly
skilled and experienced technical, managerial, sales and marketing personnel.
There can be no assurance that we would be successful in recruiting new
personnel or in retaining existing personnel. Our inability to attract
additional qualified employees would have a material adverse effect on our
business, results of operations and financial condition.

We do not have sufficient working capital to fund our Libra Networks business,
and we believe it is likely that we would be unable to obtain additional
capital. If we raise additional financing, shareholders may suffer significant
dilution.

If the Plan of Dissolution is not approved, we would need to seek a third
party investment as soon as possible in order to provide additional working
capital for our Libra Networks business. We have previously contacted more
than 30 potential funding sources, but have received overall negative feedback
from these funding sources, including concern over our capital structure as a
publicly held entity, concern over the timing and amount of our projected
funding needs, and the size and timing of our overall market opportunity.

We expect the funding climate to remain difficult, and we cannot be
certain that financing from third parties will be available on acceptable terms
to us or at all. The extent and timing of our future capital requirements
would depend upon several factors, including the rate of market acceptance of
our products, the degree of competition for our products, our ability to build
and expand an efficient indirect distribution system, and our level of
expenditures for product development, sales and marketing. If we are unable to
raise funds on acceptable terms, we may not be able to develop our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, any of which would have a material
adverse effect on our ability to establish a viable business. Further, if we
were to issue equity securities, shareholders would experience severe dilution
of their ownership percentage, and the new equity securities may have rights,
preferences or privileges senior to those of our common stock.

The emergence of InfiniBand, the switch fabric communication technology that is
planned to be incorporated in our initial Libra Networks product release, as a
worldwide standard is uncertain.

Our initial Libra Networks products are being developed using InfiniBand
architecture. We believe that InfiniBand is currently the only new Switch
Fabric technology currently available for widespread usage. In 2002, Microsoft
and Intel each announced that they will limit further investments in
InfiniBand-based products. Specifically, Intel announced that it would stop
developing host channel
adapter chips for InfiniBand; and Microsoft stated that it no longer plans to
incorporate InfiniBand into

-20-



---



##### Table of Contents



its next-generation server operating system, the
Windows.Net Server, although it will continue to assist companies offering
InfiniBand products that plug into Microsoft products. These announcements
have created doubt regarding the feasibility and likelihood of InfiniBands
acceptance as the worldwide standard for server-to-server, and
network-to-server interconnect solutions. If InfiniBand is not accepted as a
standard in the marketplace, our planned products would have to be redesigned
to operate under a different architecture, and delays in product releases and
slower revenue growth would be likely. Industry analysts have recently
published adverse revisions to their earlier projections for market adoption of
InfiniBand switch fabric technology, on which Libra Networks contemplated
products were initially to be based.

We are dependent on a single line of business that currently has no products or
revenues. We cannot predict our future results because our Libra Networks
business has no operating history.

Our only remaining line of business is the development of the Libra
Networks products and technology. We have not yet developed any products based
on this technology and consequently there are currently no revenues from this
line of business. Furthermore, we do not know whether any products will be
developed on this technology or the timing of such developments if a product is
created. Given the lack of operating history in the Libra Networks business it
is difficult to predict our future results. The Libra Networks business is
characterized by rapid technological change, new product development, a new and
unproven business model, and evolving industry standards. Shareholders should
consider the risks and uncertainties that we may encounter as a
pre-revenue-stage company in a new and rapidly evolving market. These
uncertainties include:



| |  |  | our ability to design and engineer products having the
technological features planned for the Libra Networks product line;  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | consumer demand for, and acceptance of, the Libra Networks business
products;                                               
|
| |  |  | our ability to establish relationships with OEMs, VARs, system
integrators and other channel partners needed to drive sales;
|
| |  |  | our ability to demonstrate the benefits of our products and
services to end user data center managers;                      
|
| |  |  | our unproven and evolving business model;                                                                                   
|
| |  |  | unfavorable economic conditions in the technology industry;                                                                 
|
| |  |  | decreased spending on technology due to adverse economic conditions; and                                                    
|
| |  |  | global economic conditions.                                                                                                 

Our Libra Networks technology and products are not fully developed, are
untested, and remain subject to significant uncertainty. Rapid technological
change could render our products and services obsolete.

Our Libra Networks technology and products are in the development stage
and have not been completed or proven. The market for products related to data
management is characterized by rapid technological innovation, sudden changes
in user and customer requirements and preferences, frequent new product and
service introductions and the emergence of new industry standards and
practices. Each of these characteristics could render our Libra Networks
products, intellectual property and systems obsolete. The rapid evolution of
our market requires that we improve continually the performance, features and
reliability of our products and services, particularly in response to
competitive offerings. The successful development of our products is subject
to the risks that:
-21-Table of Contents



| |  |  | any or all of our proposed products are found to be
ineffective for their intended purposes;                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the proposed products or procedures are uneconomical to
manufacture or market or do not achieve broad market acceptance;
|
| |  |  | third parties hold proprietary rights that preclude us from marketing them; or                                          
|
| |  |  | third parties market a superior or equivalent product.                                                                  

Significant undetected errors or delays in new products or releases may
affect market acceptance of our products. There can be no assurance that,
despite our testing, errors would not be found in new products or releases
after commencement of commercial shipments, resulting in loss of customers or
failure to achieve market acceptance.

In addition, our Libra Networks technology and products would need to be
compatible with a broad array of disparate technologies in order to be
interoperable with other products routinely used in corporate data centers such
as routers, switches, operating systems and systems management software. This
interoperability may depend on partnerships with third parties such as Cisco,
Dell, IBM, Sun, BEA, BMC and Microsoft. We currently do not have any
partnerships with such third parties. Without such partnerships, we would
likely not be able to achieve market acceptance or demand for our products
within our target base of customers, because our products would not operate
with many of the applications they currently use.

Our Libra Networks business would have to rely on third parties to provide
certain components and software for its products. If our vendors were to fail
to deliver their products in a reliable, timely and cost-efficient manner, our
business would suffer.

Our Libra Networks business would depend upon relationships with third
parties who may be sole source providers of key, leading-edge hardware and
software components critical for some of the products being developed by our
Libra Networks business. If these providers of exclusive proprietary
technology do not produce these components or software modules on a timely
basis or if the components or software modules do not meet our specifications
or are otherwise flawed, we may have to delay product delivery, recall or
replace unacceptable products. As a result, we could lose existing and
potential customers and any revenues that we may have at that time may decline
dramatically.

We may not be able to meet our product development objectives or market
expectations.

Our Libra Networks product development efforts are inherently difficult to
manage and keep on schedule and there can be no assurance that we would be able
to meet our development objectives or to meet market expectations. In addition
to development delays, we may experience substantial cost overruns in
completing development of our products. The technological feasibility for some
of the products that we envision is not completely established. We may be
unable, for technological or other reasons, to develop and introduce products
in a timely manner in response to changing customer requirements. Further,
there can be no assurance that while we were attempting to finish development
of our products, a competitor might not introduce similar products thus
diminishing our technological advantage, or a superior alternative to ours,
rendering our products and technologies partially or wholly obsolete, or at
least requiring substantial re-engineering in order to become commercially
acceptable. Our failure to maintain our product development schedules, avoid
cost overruns and undetected errors or introduce a product that is superior to
competing products would have a materially adverse effect on our business,
financial condition and results of operations.

-22-



---



##### Table of Contents



We may not be able to successfully compete in the highly competitive and
rapidly evolving data center management market.

The market for products that enhance the speed, capacity and efficiency of
enterprise data centers is still developing, and there can be no assurance that
our products would ever achieve market acceptance. Since we have no existing
customers with respect to the Libra Networks business, we would need to
convince enterprise corporate data center managers that have no history of
buying products from us to buy Libra Networks products, including additional
follow-on products or product updates. To the extent we do not achieve growth,
it would be difficult for us to generate meaningful revenue or to achieve
profitability.

The market for data center management products is intensely competitive,
evolving and subject to rapid technological change. The competition for Libra
Networks planned suite of products would likely come from three types of
competitors:



| |  |  | manufacturers of existing load-balancing switches, such as F5
Networks, Inc., Cisco Systems Inc., Extreme Networks, Inc., and
Foundry Networks, Inc.;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | vendors of TCP/IP-to-InfiniBand gateways, such as Voltaire,
Inc., and TopSpin Communications, Inc.; and                                              
|
| |  |  | companies offering load-balancing capabilities for Web
Services standards, such as Sarvega, Inc., DataPower Technology,
Inc. and Forum Systems, Inc. 

Some of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. We expect the intensity of competition
in this market to increase in the future. Increased competition is likely to
result in price reductions, and may result in reduced or negative margins and
difficulty in gaining market share. Any of these effects could seriously harm
our business.

We may not be successful in developing or maintaining strong distribution
channels for our Libra Networks products.

The success of the Libra Networks business depends on developing strong
OEM relationships with system vendors who are selling servers and other network
management equipment and technologies to end-users. The Libra business plan
would rely primarily on OEM relationships to initially market our Libra
Networks products, although our OEM sales would be expected to be augmented by
a direct sales force working closely with indirect channel partners such as
value-added resellers and other resellers and integrators. If we were not
successful in creating a strong national distribution channel in a timely
manner, we may not gain significant sales.

We may not be able to protect intellectual property of our Libra Networks
business against third-party infringements or claims of infringement.

Failure to protect our intellectual property rights may result in a loss
of our exclusivity or the right to use our Libra Networks technology. We rely
on patent, trade secret, trademark and copyright law to protect our Libra
Networks intellectual property. Our patent position is subject to complex
factual or legal issues that may give rise to uncertainty as to the validity,
scope and enforceability of a particular patent. Accordingly, there can be no
assurance that any patents will be issued pursuant to our current or

-23-



---



##### Table of Contents



future
patent applications or that patents issued pursuant to such applications will
not be invalidated,
circumvented or challenged. Moreover, there can be no assurance that the
rights granted under any such patents will provide competitive advantages to us
or be adequate to safeguard and maintain our proprietary rights. In addition,
effective patent, trademark, copyright and trade secret protection may be
unavailable, limited or not applied for in certain foreign countries.

Although patent applications have been filed with respect to certain
aspects of our Libra Networks technology, some of our Libra Networks
intellectual property is not covered by any patent or patent application and
includes trade secrets and other know-how that is not patentable. We also seek
to protect our proprietary intellectual property, including intellectual
property that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors rights agreements with our current
and future strategic partners and employees. We cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any
breach or that such persons or institutions will not assert rights to
intellectual property arising out of these relationships.

Some of our Libra Networks intellectual property includes technologies and
processes that may be similar to the patented technologies and processes of
third parties. If we do not adequately assure our freedom to use our Libra
Networks technology, we may have to pay others for rights to use their
intellectual property, pay damages for infringement or misappropriation or be
enjoined from using such intellectual property.

We would be dependent on third parties for manufacturing our Libra Networks
products.

We have yet to develop a manufacturing plan for Libra Networks products.
However, we would expect to rely on one or more third party manufacturers for
our manufacturing needs. We may be unable to engage a third party manufacturer
on a timely basis or on terms favorable to us which could limit our ability to
sell our products and generate revenues. Furthermore, the failure of such
third party manufacturers to deliver products to us in a timely manner or in
accordance with our quality control standards could damage our reputation and
could adversely affect our operating results.

Our common stock currently trades on the OTC Bulletin Board; if shareholders
approve our plan to dissolve and liquidate the Company, then it is likely that
we will close our transfer books and restrict transfers of our common stock 
shareholders would experience a lack of liquidity as a result.

Our common stock was transferred from the Nasdaq National Market to the
Nasdaq SmallCap Market effective as of September 16, 2002. Our common stock
was involuntarily delisted from the Nasdaq SmallCap Market effective as of the
opening of business on January 3, 2003, as a result of our failure to meet the
minimum required bid price, market value of public float, and shareholders
equity requirements of the SmallCap Market, and our common stock has been
quoted on the OTC Bulletin Board since January 3, 2003. As part of our
liquidation plan, we may close our stock transfer books and the prices of our
common stock would cease to be quoted on the OTC Bulletin Board, and
shareholders would experience a lack of liquidity as a result.

-24-



---



##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates, which
could adversely affect the value of our short-term investments. We maintain a
short-term investment portfolio consisting of interest bearing securities with
an average maturity of less than one year. Certain of these securities may be
classified as available-for-sale securities, though no such securities met
that classification as of March 31, 2003. 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 to 110% of their levels at March 31, 2003, the fair value of the
portfolio would decline by an immaterial amount. We do not expect our
operating results or cash flows to be affected to any significant degree by a
sudden change in market interest rates.




Item 4. Controls and Procedures

(a)  Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act), within 90 days of the filing date of
this report. Based on their evaluation, our principal executive officer and
principal accounting officer concluded that our disclosure controls and
procedures are effective.

(b)  There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.

-25-



---



##### Table of Contents






PART II  OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K



| | (A)  |  | The following exhibits are filed as part of this report.                                                                                                                                  
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 99.1 |  | Certification of Chief Executive Officer                                                                                                                                                  
| | 99.2 |  | Certification of Chief Financial Officer                                                                                                                                                  
|
| | (B)  |  | Reports on Form 8-K                                                                                                                                                                       
|
| |      |  | We filed a report on Form 8-K dated February 20, 2003, in which we
provided additional information on our tentative liquidation
timeframe and other measures taken to reduce our expenses.
|
| |      |  | We filed a report on Form 8-K dated April 30, 2003, in which we
disclosed that the special meeting of shareholders scheduled for
April 30, 2003 has been adjourned until May 22, 2003.    




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |  |              |  |                                               |  |                                                                                                                                                                    |  | 
|----- |  | ------------ |  | --------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|      |  |              |  | APPLIED MICROSYSTEMS CORPORATION
(Registrant)
|      |  |              |  |                                               |  |                                                                                                                                                                    |  | 
|Date: |  | May 14, 2003 |  | By:                                           |  | /s/ Robert C. Bateman                                                                                                                                              |  | 
|      |  |              |  |                                               |  |                                                                                                                                                                    |  | 
|      |  |              |  |                                               |  | Robert C. BatemanVice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Signing Officer) |  | 

-26-



---



##### Table of Contents



Section 302(a) Certifications

I, Robert C. Bateman, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Applied Microsystems
Corporation;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|Date: May 14, 2003                                                                                      
|                                                                                                        
|/s/ Robert C. Bateman

Robert C. BatemanVice President, Chief Financial Officer,
Secretary and Treasurer
|                                                                                                        

-27-



---



##### Table of Contents



I, Stephen J. Verleye, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Applied Microsystems
Corporation;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                               
|-------------------------------------------------------------------------------
|Date: May 14, 2003                                                             
|                                                                               
|/s/ Stephen J. Verleye

Stephen J. VerleyePresident and Chief Executive Officer
|                                                                               

-28-