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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q




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|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(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, 2002

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



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APPLIED MICROSYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)




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|                                    |  |                                                   
|----------------------------------- |  | --------------------------------------------------
|Washington
(State of incorporation) |  | 91-1074996
(I.R.S. Employer Identification Number)

5020 148th Avenue N.E., Redmond, Washington 98052-5172
(425) 882-2000
(Address of principal executive offices, including zip code; registrants telephone number, including area code)



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

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

Common stock, $.01 par value: 7,182,262 shares outstanding as of May 3, 2002.



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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | 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                           
|PART II  OTHER INFORMATION   
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    



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APPLIED MICROSYSTEMS CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2002

INDEX

|         |  |                                                                                          |  |     
|-------- |  | ---------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                          |  | Page
|         |  |                                                                                          |  |     
|PART I:  |  | FINANCIAL INFORMATION                                                                    |  |     
|Item 1.  |  | Financial Statements:                                                                    |  |     
|         |  | Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                   |  | 3   
|         |  | Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 |  | 4   
|         |  | Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 |  | 5   
|         |  | Notes to Consolidated Financial Statements                                               |  | 6   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations    |  | 9   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 17  
|PART II: |  | OTHER INFORMATION                                                                        |  |     
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                         |  | 18  
|         |  | Signatures                                                                               |  | 18  

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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |   |        |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------ | ------- | - | -------------- | ----- | ------------ | - | ------ |  | 
|                                               |                                                                                                                                                                          |  |                                            |         |   | March 31,      |       | December 31,
|                                               |                                                                                                                                                                          |  |                                            |         |   | 2002           |       | 2001        
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|                                               |                                                                                                                                                                          |  |                                            |         |   | (unaudited)    |       |              |   |       
|                                               |                                                                                                                                                                          |  |                                            |         |   | (in thousands)
|ASSETS                                        
|Current assets:                                |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|                                               | Cash and cash equivalents                                                                                                                                                |  | $                                          | 1,939   |   |                | $     | 2,971        |  
|                                               | Securities available-for-sale                                                                                                                                            |  |                                            | 4,001   |   |                |       | 3,997        |  
|                                               | Restricted investment                                                                                                                                                    |  |                                            | 400     |   |                |       | 400          |  
|                                               | Accounts receivable, net                                                                                                                                                 |  |                                            | 2,838   |   |                |       | 3,594        |  
|                                               | Inventories                                                                                                                                                              |  |                                            | 1,528   |   |                |       | 1,959        |  
|                                               | Prepaid and other current assets                                                                                                                                         |  |                                            | 513     |   |                |       | 429          |  
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |  
|                                               |                                                                                                                                                                          |  | Total current assets                       |         |   | 11,219         |       |              |   | 13,350 | 
|Property and equipment, net                    |                                                                                                                                                                          |  | 1,233                                      |         |   |                | 1,358 |             
|Other assets                                   |                                                                                                                                                                          |  | 271                                        |         |   |                | 316   |             
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |  
|                                               |                                                                                                                                                                          |  | Total assets                               |         | $ | 12,723         |       |              | $ | 15,024 | 
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|LIABILITIES AND SHAREHOLDERS EQUITY           |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|Current liabilities:                           |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|                                               | Accounts payable                                                                                                                                                         |  | $                                          | 1,503   |   |                | $     | 1,704        |  
|                                               | Accrued payroll                                                                                                                                                          |  |                                            | 1,061   |   |                |       | 1,178        |  
|                                               | Other accrued expenses                                                                                                                                                   |  |                                            | 1,377   |   |                |       | 1,453        |  
|                                               | Deferred revenue                                                                                                                                                         |  |                                            | 2,618   |   |                |       | 3,253        |  
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |  
|                                               |                                                                                                                                                                          |  | Total current liabilities                  |         |   | 6,559          |       |              |   | 7,588  | 
|Capital lease obligation, less current portion |                                                                                                                                                                          |  | 163                                        |         |   |                | 175   |             
|Accrued cost of business restructuring         |                                                                                                                                                                          |  | 628                                        |         |   |                | 719   |             
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |             
|                                               |                                                                                                                                                                          |  | Total long-term liabilities                |         |   | 791            |       |              |   | 894    | 
|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; 7,182,000 and 7,149,000
shares issued and outstanding at March 31, 2002
and December 31, 2001, respectively |  |                                            | 26,904  |   |                |       | 26,857       |  
|                                               | Accumulated other comprehensive loss                                                                                                                                     |  |                                            | (640    | ) |                |       | (636         | )
|                                               | Accumulated deficit                                                                                                                                                      |  |                                            | (20,891 | ) |                |       | (19,679      | )
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |  
|                                               |                                                                                                                                                                          |  | Total shareholders equity                 |         |   | 5,373          |       |              |   | 6,542  | 
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |              |  
|                                               |                                                                                                                                                                          |  | Total liabilities and shareholders equity |         | $ | 12,723         |       |              | $ | 15,024 | 
|                                               |                                                                                                                                                                          |  |                                            |         |   |                |       |             

See accompanying notes.

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APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


|                                             |                                   |   |                                          |       |      |   |        |       | 
|-------------------------------------------- | --------------------------------- | - | ---------------------------------------- | ----- | ---- | - | ------ | ----- | 
|                                             |                                   |   | Three Months Ended March 31,            
|                                             |                                   |   |                                         
|                                             |                                   |   | 2002                                     |       | 2001
|                                             |                                   |   |                                          |       |     
|                                             |                                   |   | (in thousands, except per-share amounts)
|Net sales                                    |                                   | $ | 4,865                                    |       |      | $ | 10,114 |      
|Cost of sales                                |                                   |   | 1,795                                    |       |      |   | 2,807  |      
|                                             |                                   |   |                                          |       |      |   |        |      
|Gross profit                                 |                                   |   | 3,070                                    |       |      |   | 7,307  |      
|Operating expenses:                          |                                   |   |                                          |       |      |   |        |      
|                                             | Sales, general and administrative |   |                                          | 2,655 |      |   |        | 3,884 | 
|                                             | Research and development          |   |                                          | 1,656 |      |   |        | 3,264 | 
|                                             |                                   |   |                                          |       |      |   |        |      
|                                             | Total operating expenses          |   |                                          | 4,311 |      |   |        | 7,148 | 
|                                             |                                   |   |                                          |       |      |   |        |      
|Income (loss) from operations                |                                   |   | (1,241                                   | )     |      |   | 159    |      
|Interest income and other, net               |                                   |   | 29                                       |       |      |   | 101    |      
|                                             |                                   |   |                                          |       |      |   |        |      
|Net income (loss)                            |                                   | $ | (1,212                                   | )     |      | $ | 260    |      
|                                             |                                   |   |                                          |       |      |   |        |      
|Per-share amounts:                           |                                   |   |                                          |       |      |   |        |      
|Basic income (loss) per share                |                                   | $ | (0.17                                    | )     |      | $ | 0.04   |      
|                                             |                                   |   |                                          |       |      |   |        |      
|Shares used in basic per-share calculation   |                                   |   | 7,171                                    |       |      |   | 6,990  |      
|Diluted income (loss) per share              |                                   | $ | (0.17                                    | )     |      | $ | 0.04   |      
|                                             |                                   |   |                                          |       |      |   |        |      
|Shares used in diluted per-share calculation |                                   |   | 7,171                                    |       |      |   | 7,277  |      

See accompanying notes.

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APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |        |        |        |  
|------------------------------------------------------------------------------------ | ------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------------- | ------ | ---------------------------- | ------ | ------ | ------ | ------ | ------ | -
|                                                                                     |                                             |                                                                        |                                                     |        | Three Months Ended March 31,
|                                                                                     |                                             |                                                                        |                                                     |        |                             
|                                                                                     |                                             |                                                                        |                                                     |        | 2002                         |        | 2001  
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |       
|                                                                                     |                                             |                                                                        |                                                     |        | (in thousands)              
|Operating activities                                                                 |                                             |                                                                        |                                                     |        |                              |        |        |       
|Net income (loss)                                                                    |                                             | $                                                                      | (1,212                                              | )      |                              | $      | 260    |       
|Adjustments to reconcile net income (loss) to net cash used in
operating activities: |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     | Depreciation and amortization               |                                                                        |                                                     | 203    |                              |        |        | 282    |       
|                                                                                     | Net change in operating accounts:           |                                                                        |                                                     |        |                              |        |        |        |       
|                                                                                     |                                             | Accounts receivable                                                    |                                                     |        | 740                          |        |        |        | (3,628 | )     
|                                                                                     |                                             | Inventories                                                            |                                                     |        | 432                          |        |        |        | (284   | )     
|                                                                                     |                                             | Prepaid and other assets                                               |                                                     |        | (84                          | )      |        |        | (132   | )     
|                                                                                     |                                             | Accounts payable, accrued expenses, and accrued
business restructuring |                                                     |        | (440                         | )      |        |        | (686   | )     
|                                                                                     |                                             | Deferred revenue                                                       |                                                     |        | (659                         | )      |        |        | (11    | )     
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     |                                             |                                                                        | Net cash used in operating activities               |        |                              | (1,020 | )      |        |        | (4,199 | )
|Investing activities                                                                 |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     | Purchases of securities available-for-sale  |                                                                        |                                                     | (1,979 | )                            |        |        | (1,460 | )     
|                                                                                     | Maturities of securities available-for-sale |                                                                        |                                                     | 1,975  |                              |        |        | 1,525  |       
|                                                                                     | Additions to property and equipment         |                                                                        |                                                     | (35    | )                            |        |        | (48    | )     
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     |                                             |                                                                        | Net cash provided by (used in) investing activities |        |                              | (39    | )      |        |        | 17     |  
|Financing activities                                                                 |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     | Sale of common stock to employees           |                                                                        |                                                     | 47     |                              |        |        | 151    |       
|                                                                                     | Stock options exercised                     |                                                                        |                                                     |       |                              |        |        | 36     |       
|                                                                                     | Payments on capital lease obligation        |                                                                        |                                                     | (11    | )                            |        |        |       |       
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       
|                                                                                     |                                             |                                                                        | Net cash provided by financing activities           |        |                              | 36     |        |        |        | 187    |  
|Effects of foreign currency exchange rate changes on cash                            |                                             |                                                                        | (9                                                  | )      |                              |        | (79    | )     
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       
|Net decrease in cash and cash equivalents                                            |                                             |                                                                        | (1,032                                              | )      |                              |        | (4,074 | )     
|Cash and cash equivalents at beginning of period                                     |                                             |                                                                        | 2,971                                               |        |                              |        | 7,956  |       
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       
|Cash and cash equivalents at end of period                                           |                                             | $                                                                      | 1,939                                               |        |                              | $      | 3,882  |       
|                                                                                     |                                             |                                                                        |                                                     |        |                              |        |        |       

Supplemental disclosure of non-cash activities:

During the first quarter of 2001, the Company obtained equipment under a five-year capital lease
obligation of $250,000.

See accompanying notes.

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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 generally accepted accounting principles 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 generally accepted accounting principles 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, 2001 has
been derived from the audited financial statements included in the Companys
Form 10-K for the year then ended. The results of operations for the
three-months ended March 31, 2002, are not necessarily indicative of results to
be expected for the entire year ending December 31, 2002 or for any other
fiscal period. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Form 10-K for the
year ended December 31, 2001.

2. Computation of Income (Loss) Per Share

Basic income (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 a net loss recorded in the
three months ended March 31, 2002, basic and diluted loss per share are
determined excluding common stock equivalents for that period.

3. Comprehensive Loss

As defined by applicable accounting and reporting standards, Applieds
comprehensive loss is comprised of net income (loss) and the effects of
current-period translation adjustments, which are recorded directly to equity.
During the first quarter of 2002, comprehensive loss amounted to $1.2 million,
compared to comprehensive loss of $157,000 for the first quarter of 2001.

4. Inventories

Inventories consist of the following:

|                |  |                |       |              |  |   |       | 
|--------------- |  | -------------- | ----- | ------------ |  | - | ----- | 
|                |  | March 31,      |       | December 31,
|                |  | 2002           |       | 2001        
|                |  |                |       |             
|                |  | (in thousands)
|Finished goods  |  | $              | 716   |              |  | $ | 999   | 
|Work in process |  |                | 53    |              |  |   | 55    | 
|Purchased parts |  |                | 759   |              |  |   | 905   | 
|                |  |                |       |              |  |   |       | 
|                |  | $              | 1,528 |              |  | $ | 1,959 | 
|                |  |                |       |              |  |   |       | 

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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. As a result of adopting the restructuring plan, Applied
recorded a restructuring charge of $2.3 million in the third quarter of 2001.

Restructuring charge activity during the period was as follows:

|                               |  |                |       |              |  |              |     |           |  |            |     |         |  |   |       | 
|------------------------------ |  | -------------- | ----- | ------------ |  | ------------ | --- | --------- |  | ---------- | --- | ------- |  | - | ----- | 
|                               |  | Accrued        |       |              |  |              |     |           |  |            |     | Accrued
|                               |  | Balance at     |       | Amounts Paid |  |              |     |           |  | Balance at
|                               |  | December 31,   |       | or Charged   |  | Amounts      |     | March 31,
|                               |  | 2001           |       | Off          |  | Reclassified |     | 2002     
|                               |  |                |       |              |  |              |     |          
|                               |  | (in thousands)
|Severance and related expenses |  | $              | 64    |              |  | $            | 34  |           |  | $          | 30  |         |  | $ |      | 
|Abandoned facilities           |  |                | 1,094 |              |  |              | 91  |           |  |            | (30 | )       |  |   | 1,033 | 
|                               |  |                |       |              |  |              |     |           |  |            |     |         |  |   |       | 
|                               |  | $              | 1,158 |              |  | $            | 125 |           |  | $          |    |         |  | $ | 1,033 | 
|                               |  |                |       |              |  |              |     |           |  |            |     |         |  |   |       | 

The charge for abandoned facilities relates to amounts accrued for
estimated losses on lease commitments for facilities that Applied has abandoned
in connection with the restructuring; the corresponding accrued liability will
be reduced as the Company pays its lease commitments. A portion of the accrued
restructuring liabilities in the amount of $628,000 is classified as long term
on the Companys balance sheet since it represents lease commitments that will
not be settled in the next 12 months. The remaining $405,000 accrued
restructuring liabilities are classified as other accrued expenses as of March
31, 2002.

On May 1, 2002, the Company announced further plans to reduce expenses
through a reduction in personnel and realignment of business objectives. The
cost reductions will consist primarily of a reduction of approximately 45
full-time employees worldwide. After the staff reduction, Applied will employ
a total of approximately 85 personnel. The Company is currently performing a
study to ascertain the total cost of this restructuring activity.

6. Proposed Acquisition

On April 24, 2002, the Company announced that it had entered into a
non-binding letter of intent to acquire REBA Technologies, Inc.  an Austin,
Texas-based start-up company with patent-pending technology. REBA is focused
on developing technology to enhance the operation of server farms for
enterprises, Application Server Providers and Network Service Providers. The
consideration for the proposed acquisition consists of 350,000 shares of the
Companys common stock plus a $200,000 non-interest-bearing note due two years
after the closing date. The Company would not acquire any personnel in the
transaction, and the proposed transaction remains subject to the completion of
due diligence and definitive documentation. The controlling shareholder of
REBA is Lary L. Evans, who is also on the Board of Directors of the Company.

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7. Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and specifies criteria that must be
met for intangible assets acquired in a purchase method business combination to
be recognized apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS 142. The Companys adoption of SFAS 141 did not affect the
Companys financial statements. SFAS 142 is effective for the Companys year
ending December 31, 2002, and is not expected to affect the Companys financial
statements unless the Company enters into transactions that result in
recognizing goodwill.

In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 clarifies the model to be used for
long-lived assets to be disposed of, thus providing for greater consistency
among companies, and also clarifies other implementation issues related to the
impairment and disposal of long-lived assets. SFAS 144 is effective for the
Companys consolidated financial statements for the fiscal year ending December
31, 2002. The pronouncement is not expected to materially affect the Companys
financial statements.

8. Liquidity

As of March 31, 2002, the Company had $6.3 million in cash, cash
equivalents, and short-term investments compared to $7.4 million as of December
31, 2001 (both amounts include $400,000 subject to withdrawal restrictions to
secure a letter of credit relating primarily to the Companys lease on its
headquarters facility). As a result of actions taken to reduce operating
expenses during 2001 and further reductions announced on May 1, 2002, the
Companys expenditure levels are being reduced substantially. The Company
believes that its existing working capital will provide the Company with
sufficient funds to finance its operations for at least the next 12 months.
However, any substantial inability to achieve the current business plan could
have a material adverse impact on the Companys financial position, liquidity,
or results of operations and may require the Company to further reduce its
expenditures or seek other sources of financing.

9. Reclassifications

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

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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 our cost-reduction plans, our proposed acquisition of REBA
Technologies, Inc., our intent to pursue new market and product opportunities,
our beliefs and expectations regarding future operating trends, our
expectations and beliefs about the market and industry, our goals, plans, and
expectations regarding our products and services and product development, our
intent to continue to invest resources in research and development, our beliefs
regarding the impact of our restructuring plans, our beliefs and expectations
regarding quotation of our common stock on the Nasdaq National Market and the
impact of potential delisting, our beliefs regarding period-to-period results
of operations, our expectations regarding future financial performance, our
expectations regarding international sales and our revenues, our expectations
and beliefs regarding revenue and revenue trends, our beliefs and expectations
regarding fluctuations in revenues and operating results, our expectations
regarding development costs, our beliefs and expectations 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 and revenue recognition matters. 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, 2001 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 Form 10-K for the
year ended December 31, 2001.

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 creates solutions to expedite the
development, test and deployment of business and safety-critical embedded
systems. We develop, market and support a comprehensive suite of software and
hardware-enhanced development, test, and verification tools for the development
of complex embedded microprocessor-based applications. Since our incorporation
in 1979, we have developed significant expertise in high-end microprocessors,
real-time systems, and software analysis technology  three key competencies
that position us to meet the needs of software developers. Using our 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 April 24, 2002, we announced that we had entered into a non-binding
letter of intent to acquire REBA Technologies, Inc.  an Austin, Texas-based
start-up company with patent-pending technology. REBA is focused on developing
technology to enhance the operation of server farms for enterprises,
Application Server Providers and Network Service Providers. The consideration
for the

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proposed acquisition consists of 350,000 shares of Applieds common stock plus
a $200,000 non-interest-bearing note due two years after the closing date. We
would not acquire any personnel in the transaction, and the proposed
transaction remains subject to the completion of due diligence and definitive
documentation. The controlling shareholder of REBA is Lary L. Evans, who is
also on our Board of Directors.

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 revenue recognition,
inventories, and restructuring costs. 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.

Revenue recognition. We earn revenue on the sale of hardware and software
products. We also earn revenue on the sale of services, including hardware and
software support, installation, training, and professional engineering
services. Revenue from the sale or licensing of products is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable, and collectibility is probable. If
the fee due from a customer is not fixed or determinable, revenue is recognized
as payments become due from a customer. If customers have inspection or
acceptance rights beyond standard warranty provisions, revenue is recognized
when formal notification of inspection or acceptance has been received from the
customer. Due to business customs in Japan and our interpretation of Japanese
law, product sales in Japan are recognized when the customer notifies us that
it has inspected and accepted the product. In the absence of receiving written
notification of inspection and acceptance, we recognize revenue in Japan on
receipt of payment by the customer as an indication of acceptance. When
products are sold with significant installation services, all revenue is
deferred until installation is completed. Revenue from training and contract
engineering services is generally recognized as the services are performed.
Revenue from longer-term agreements to perform development services is
recognized under the percentage-of-completion method, measured based on labor
effort or cost incurred to total estimated labor effort or cost (assuming other
revenue recognition criteria are met). Revenue results are difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause our operating results to vary significantly from quarter to quarter, and
could result in future operating losses,

Inventories. We write 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 could result in additional
write-downs of inventories.

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Restructuring costs. In the third quarter of 2001, in response to
economic uncertainty and reduced revenue streams, we implemented a
restructuring plan designed to reduce operating costs. The restructuring plan
included a reduction of approximately 90 full-time employees worldwide across
our functional organizations, or 39% of the workforce; 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. Management used estimates to establish
accruals in connection with the restructuring plan, 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. Actual costs may differ from these estimates, depending significantly
on our success in subleasing excess space under reasonable terms. On May 1,
2002, we announced further plans to reduce expenditures primarily through a
reduction in force and expect to recognize a restructuring charge in the fiscal
quarter ending June 30, 2002.

Results of Operations

Our revenues can 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 |              |             |      |           |        | Three Months
|                                  |                 |      | Ended        |              |             |      |           |        | Ended       
|                                  |                 |      | March 31,    |              | Change From |      | March 31,
|(dollars in thousands)            |                 | 2002 |              | Prior Period |             | 2001
|                                  |                 |      |              |              |             |     
|Hardware-enhanced debugging
tools |                 | $    | 1,629        |              |             | $    | (1,982    | )      |              | $ | 3,611 |       
|Software analysis tools           |                 |      | 1,613        |              |             |      | (343      | )      |              |   | 1,956 |       
|Game development systems          |                 |      | 1,623        |              |             |      | (2,924    | )      |              |   | 4,547 |       
|                                  |                 |      |              |              |             |      |           |        |              |   |       |       
|                                  | Total net sales |      | $            | 4,865        |             |      | $         | (5,249 | )            |   | $     | 10,114 | 
|                                  |                 |      |              |              |             |      |           |        |              |   |       |       
|                                  |                 |      |              |              |             |      | (52       | %)     |              |   |       |       

We earn revenue on the sale of hardware and software products. We also
earn revenue on the sale of services, including hardware and software support,
installation, training, and professional engineering services.

The overall decrease in net sales in the first quarter of 2002, as
compared to the first quarter of 2001, was attributable primarily to lower game
development systems revenues. Game development systems represent a newer
revenue source to us that was a direct result of our development initiatives
that began in early 1999 to extend our technology to meet the needs of game
developers. These initiatives led to agreements with Nintendo and Microsoft to
develop and manufacture game development tools for Nintendos GameCube and
Microsofts Xbox video gaming systems. Game development systems revenues were
particularly strong in the first half of 2001 due primarily to shipments to
Microsoft in anticipation of the November 2001 retail launch of the Xbox.
Future game development revenues are expected to vary from period to period,
and the success of our game development solutions depends significantly on the
timing of product launches for new video game consoles as well as the retail
success of the video gaming systems that we currently support.

Hardware-enhanced debug, test, and performance solutions revenues also
decreased in the first quarter of 2002, as compared to the first quarter of
2001. The decrease in these run control products was due primarily to
decreased demand from telecommunications customers, slower-than-anticipated

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unit volumes through distribution channels, and a general decline in
technology spending in the various geographies in which we do business,
particularly in Japan. Beginning in the fourth quarter of 2001, we began
entering into new agreements with third-party sales representatives to
strengthen our sales efforts through distribution channels. The decrease in
run control product revenues was also attributable to our focus on developing
products and channels for software analysis tools as customers have moved from
hardware development to software development; therefore, the Company has
invested less in developing and supporting run control products than in prior
periods.

Software analysis revenues also declined in the first quarter of 2002, as
compared to the first quarter of 2001. This decrease was due primarily to
decreased demand from telecommunications customers, lower volume of licenses
sold through third-party developers of integrated development environments, and
a general decline in technology spending in the various geographies in which we
do business, particularly in Japan and Europe.

Our net sales also include product support revenues, which are included
within the aforementioned major categories of our products. These support
revenues totaled approximately $600,000 in the first quarter of 2002, compared
to $900,000 in the first quarter of 2001. This decline was due primarily to
lower run control product sales, for which support contracts are often sold.

International sales were 28% of net sales in the first quarter of 2002, as
compared to 27% of net sales in the first quarter of 2001. In U.S. dollars,
our first quarter 2002 international revenues were lower in Japan and Europe,
than in the comparable periods in 2001, due primarily to the previously
mentioned slowdown among telecommunications customers as well as overall
unfavorable economic conditions for the sale of our products in these
geographies.

Our sales through our foreign subsidiaries are generally denominated in
local currencies. As a result, fluctuations in currency exchange rates can
have a significant effect on our reported net sales; however, exchange-rate
fluctuations did not materially impact our operating results in the first
quarter of 2002. We are unable to predict currency exchange rate fluctuations
and anticipate that such fluctuations may affect our net sales to varying
degrees in the future.

|                       |  |              |       |                   |  |           |    |                   |  |   |       |  |  |  |    |  
|---------------------- |  | ------------ | ----- | ----------------- |  | --------- | -- | ----------------- |  | - | ----- |  |  |  | -- | -
|                       |  | Three Months |       |                   |  |           |    | Three Months      |  |   |       | 
|                       |  | Ended        |       |                   |  |           |    | Ended             |  |   |       | 
|                       |  | March 31,    |       | Percentage of Net |  | March 31, |    | Percentage of Net
|(dollars in thousands) |  | 2002         |       | Sales             |  | 2001      |    | Sales            
|                       |  |              |       |                   |  |           |    |                  
|Cost of sales          |  | $            | 1,795 |                   |  |           | 37 | %                 |  | $ | 2,807 |  |  |  | 28 | %
|Gross Profit           |  | $            | 3,070 |                   |  |           | 63 | %                 |  | $ | 7,307 |  |  |  | 72 | %

Cost of sales includes materials, labor and overhead incurred in the
manufacturing of products as well as the cost of providing professional
services, performing non-recurring engineering, and estimated warranty costs.
We perform periodic assessments of required reserves for potential inventory
obsolescence, and corresponding adjustments to such reserves are included
within cost of sales. The dollar amounts of cost of sales and gross profit
fluctuate based on a number of factors, including the volume of corresponding
net sales and vendor pricing pressures.

Our gross profit percentage in the three months ended March 31, 2002 was
lower than in the comparable period in 2001 due primarily to lower production
volumes and differences in the overall sales mix between the two periods; in
particular, first quarter 2002 game development tools carried a lower

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gross margin percentage than in the first quarter of 2001 due primarily to
changes in the mix of sales and services provided to our game development
customers. Our game development tools carry an overall lower gross margin
percentage than our other product categories.

We expect our gross profit percentage to fluctuate based upon our product
and service mix, geographic mix, foreign currency fluctuations, and variances
in volume and related absorption of overhead costs.

|                                           |  |              |       |              |  |           |        |              |  |   |       | 
|------------------------------------------ |  | ------------ | ----- | ------------ |  | --------- | ------ | ------------ |  | - | ----- | 
|                                           |  | Three Months |       |              |  |           |        | Three Months
|                                           |  | Ended        |       |              |  |           |        | Ended       
|                                           |  | March 31,    |       | Change From  |  | March 31,
|(dollars in thousands)                     |  | 2002         |       | Prior Period |  | 2001     
|                                           |  |              |       |              |  |          
|Sales, general and
administrative expenses |  | $            | 2,655 |              |  | $         | (1,229 | )            |  | $ | 3,884 | 
|                                           |  |              |       |              |  |           | (32    | %)           |  |   |       | 

The decrease in sales, general and administrative expenses in the first
quarter of 2002, as compared to the first quarter of 2001, was due primarily to
our adoption of a cost-reduction plan in August 2001, which resulted in lower
personnel-related expenses and other costs. We also had lower overall
commission expenses in the first quarter of 2002 due to the decline in total
revenues.

When incurred, minor foreign exchange gains and losses are included in
sales, general and administrative expenses. In order to mitigate certain
intercompany risks associated with exchange rate fluctuations, we may choose to
hedge a portion of our foreign exchange risk. No such hedging activities were
in effect during the first three months of 2002, nor in the prior three years.
Although we may engage in exchange-rate hedging activities with respect to
certain exchange-rate risks, there can be no assurance that we will do so or
that any such activities will successfully protect us against such risks.

|                                  |  |              |       |              |  |           |        |              |  |   |       | 
|--------------------------------- |  | ------------ | ----- | ------------ |  | --------- | ------ | ------------ |  | - | ----- | 
|                                  |  | Three Months |       |              |  |           |        | Three Months
|                                  |  | Ended        |       |              |  |           |        | Ended       
|                                  |  | March 31,    |       | Change From  |  | March 31,
|(dollars in thousands)            |  | 2002         |       | Prior Period |  | 2001     
|                                  |  |              |       |              |  |          
|Research and development
expenses |  | $            | 1,656 |              |  | $         | (1,608 | )            |  | $ | 3,264 | 
|                                  |  |              |       |              |  |           | (49    | %)           |  |   |       | 

The decrease in research and development expenses in the three-month
period ended March 31, 2002, as compared to the comparable period in 2001, was
primarily due to our adoption of a cost-reduction plan in August 2001.

We believe that our continued investment in focused research and
development activities is critical to our future success. Despite an overall
reduction in resources available for research and development (as a result of
the our cost-control efforts), we intend to continue to invest in product
development, including research and development efforts related to technology
proposed to be acquired from REBA Technologies. Research and development
expenses may fluctuate to the extent that our engineering resources are
utilized to fulfill the needs of customers under contractual development
arrangements. In such cases, engineering costs are charged to costs of goods
sold.

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|                               |  |              |    |              |  |           |     |              |  |   |     | 
|------------------------------ |  | ------------ | -- | ------------ |  | --------- | --- | ------------ |  | - | --- | 
|                               |  | Three Months |    |              |  |           |     | Three Months
|                               |  | Ended        |    |              |  |           |     | Ended       
|                               |  | March 31,    |    | Change From  |  | March 31,
|(dollars in thousands)         |  | 2002         |    | Prior Period |  | 2001     
|                               |  |              |    |              |  |          
|Interest income and other,
net |  | $            | 29 |              |  | $         | (72 | )            |  | $ | 101 | 
|                               |  |              |    |              |  |           | (71 | %)           |  |   |     | 

Our interest income and other, net, decreased from the prior-year period
due primarily to a decrease in our cash available for short-term investments.

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, 2002 and 2001.

Liquidity and Capital Resources

As of March 31, 2002, we had $6.3 million in cash, cash equivalents, and
short-term investments, compared to $7.4 million as of December 31, 2001 (both
amounts include $400,000 subject to withdrawal restrictions to secure a letter
of credit relating primarily to our lease on our headquarters facility). As a
result of actions taken to reduce operating expenses during 2001 and further
reductions announced on May 1, 2002, our expenditure levels have been reduced
substantially. On May 1, 2002, we announced plans to reduce expenses through a
reduction in personnel and realignment of business objectives. The cost
reductions consist primarily of a reduction of approximately 45 full-time
employees worldwide. After the staff reduction, we will employ a total of
approximately 85 personnel. These cost-control measures are expected to reduce
quarterly operating losses, with a corresponding improvement in our ability to
conserve our capital resources.

We require capital primarily for the financing of inventories and accounts
receivable, sales and marketing efforts, product development activities,
capital equipment purchases, and to fund operating losses. We used cash of
$1.0 million for operating activities in the first three months of 2002,
compared to using $4.2 million for operating activities in the first three
months of the prior year. We used cash to purchase $35,000 in property and
equipment in the first three months of 2002, compared to purchasing $48,000 in
the first three months of 2001 (excluding an equipment purchase of $250,000 in
the period ended March 31, 2001, financed under a long-term capital lease). As
of March 31, 2002, we had no significant commitments with regard to new capital
purchases, but expect to spend approximately $250,000 in the remainder of 2002
for new capital items. We have facility and equipment operating lease
commitments totaling $1.7 million in 2002 (including amounts paid in the first
quarter of 2002), $1.5 million in 2003, $1.5 million in 2004, $1.5 million in
2005, $1.4 million in 2006, and $0.6 million thereafter. We also have
commitments under a capital lease obligation of up to $62,000 per year through
2006.

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We received funds totaling $47,000 in the three months ended March 31,
2002 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
$187,000 in the comparable period of the prior year. Receipt of such funds
depends on many factors, including factors outside our control; therefore,
these funding sources may not provide meaningful cash to us in the future.

We believe that our existing working capital will provide us with
sufficient funds to finance our operations for at least the next 12 months.
However, any substantial inability to achieve the current business plan could
have a material adverse impact on our financial position, liquidity, or results
of operations and may require us to further reduce our expenditures or seek
other sources of financing. Our future capital requirements will depend on a
number of factors, including the duration of weakness in certain customer
sectors and in international sales, costs associated with sales and marketing
programs, product development efforts, and the use of funds for strategic
purposes. To the extent additional funds are required, we may sell additional
equity, debt, or convertible securities, or obtain credit facilities; however,
there can be no assurance that we will be able to obtain such funds or on terms
that are acceptable.

Certain Factors That May Affect Future Results of Operations

Our actual results could differ materially from those anticipated or
stated or implied by forward-looking statements in this report due to a variety
of factors, including those risks and uncertainties associated with our
business which include, but are not limited to, those risk factors disclosed
below, in our most recent filings with the Securities and Exchange Commission,
and in our 2001 Annual Report on Form 10-K.

If we are unable to derive revenue from new products or services, our
revenues, operating results, earnings, or future projections may be adversely
affected and our business would be harmed.

Our revenues have declined the past three years and in the quarter ended
March 31, 2002, and we incurred corresponding operating losses in each of these
periods. We believe that our success will depend in large part on our ability
to improve our financial performance and long-term strategic direction,
including the introduction of new products and services. Revenues from certain
traditional products and markets have eroded in recent years, and we expect
that we will need to conceive new sources of revenues in the future. The
decline in revenues from traditional sources, while attributable in part to an
overall decline in worldwide technology spending, may represent a permanent
decline in demand for the type of products offered by us. On April 24, 2002,
we announced that we had entered into a non-binding letter of intent to acquire
REBA Technologies, Inc. We have historically been a developer of tools for use
by embedded systems developers, and the proposed REBA acquisition would
represent an expansion into development of hardware and software products aimed
at end-user markets  specifically, corporate data centers, in which we have
limited experience. As we enter new lines of business, we also expect to
encounter new competitors and different business challenges.

Factors that may affect our ability to improve our financial performance
include, but are not limited to:



| |  |  | our ability to integrate the proposed acquisition of REBA
Technologies, Inc. into our business and to expand into development of
hardware and software products aimed at end-user markets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the introduction or enhancement of our products or our competitors products;                                                                                                             
|
| |  |  | an increase in our operating costs;                                                                                                                                                       

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| |  |  | the impact of our restructuring plan implemented in 2001 and our
restructuring plan announced in May 2002;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | the mix of our products and services sold;                                                                
|
| |  |  | the mix of our domestic and international sales;                                                          
|
| |  |  | unfavorable economic conditions in the technology industry;                                               
|
| |  |  | decreased spending on technology due to adverse economic conditions;                                      
|
| |  |  | changes in accounting pronouncements applicable to us; and                                                
|
| |  |  | global economic conditions.                                                                               

If we are unable to derive revenue from new products or services, our
revenues, operating results, earnings, or future projections may be adversely
affected. In addition, if our operating results are below the levels expected
by investors or securities analysts, the price of our common stock is likely to
decline.

If we are unable to generate significant game development systems
revenues, our business, results of operations and financial condition will
suffer.

Our sales of game development tools accounted for 32% of total 2001
revenues, and such sales were to two customers  Microsoft and Nintendo. Our
games development systems revenues for the quarter ended March 31, 2002 were
significantly lower than the games development systems revenue for the
comparable period in 2001. Though the initial 2001 launch of Microsofts Xbox
and Nintendos Gamecube were well received by consumers, low future retail
acceptance of these game consoles could have a correspondingly significant
negative impact on our revenues in the future. Also, we must maintain
manufacturing capacity and inventory levels, and otherwise meet the needs of
these customers; failure to do so could have a significant negative effect on
us through loss of sales and potential non-compliance with contractual
obligations. In addition, sales of game development tools in the first half of
2001 immediately preceded the launch of two new game consoles and future sales
may be lower in years that do not include or immediately precede new console
game introductions. Future game development systems revenues are expected to
vary significantly from period to period, and the success of our games
development solutions may depend significantly on the timing of product
launches for new video game consoles as well as the retail success of the video
gaming systems that we currently support. If we are unable to generate
significant game development systems revenues in the future, our business,
results of operations and financial condition will suffer.

If we are unable to manage our potential growth or our cost-reduction and
restructuring plans, our competitive position, results of operations and
financial condition could suffer.

We seek to grow our business by selectively strengthening our sales and
marketing programs, focusing our product and service offerings, and potentially
providing solutions to new markets. Such growth, if achieved, would place
additional burden on our management and increase the requirement to recruit and
retain personnel with the right skill sets, as well as require additional
infrastructure expenditures. This growth also would place a significant strain
on our financial, operational, management, marketing, and sales systems and
resources, especially after our implementation of our restructuring plans that
included a significant reduction in personnel. If we are unable to effectively
manage such growth, our business, competitive position, results of operations,
and financial condition could suffer.

In August 2001, we announced and subsequently completed a restructuring
plan, including a reduction in our workforce, which affected all parts of our
organization. In May 2002, we announced further plans to reduce expenses
primarily through a reduction in personnel and a realignment of business

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objectives. The May 2002 cost reductions consist primarily of a reduction
of approximately 45 full-time employees worldwide. If we are unable to
effectively manage our cost-reduction and restructuring plans and workforce
reductions, our business operations could be subject to disruption and our
business and results of operations could suffer.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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. These securities are classified as
available-for-sale securities. These interest-bearing securities are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly to 110% of
their levels at March 31, 2002, 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.

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PART II  OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K



| | (A) |  | The following exhibits are filed as part of this report.                                                                                                                               
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | None                                                                                                                                                                                   
|
| | (B) |  | Reports on Form 8-K                                                                                                                                                                    
|
| |     |  | We did not file any reports on Form 8-K during the quarter ended
March 31, 2002.                                                                                                       
|
| |     |  | On April 24, 2002, we filed a report on Form 8-K regarding our
press release which announced that we had entered into a
non-binding letter of intent to acquire REBA Technologies, Inc.




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 10, 2002 | 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)

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