<PAGE>

================================================================================

                                  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, 2000

                                       or

[    ]   Transition report pursuant to section 13  or 15(d) of the Securities
         Exchange Act of 1934

                 For the transition period from ______ to ______

                         COMMISSION FILE NUMBER 0-26778

                             -----------------------

                        APPLIED MICROSYSTEMS CORPORATION
             (Exact name of registrant as specified in its charter)

                             -----------------------

       WASHINGTON                                      91-1074996
  (State of incorporation)               (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)

                             -----------------------

     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: 6,909,254 shares outstanding as of May 5, 2000.

================================================================================


<PAGE>

                        APPLIED MICROSYSTEMS CORPORATION

                                    FORM 10-Q

                          QUARTER ENDED MARCH 31, 2000

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
PART I:       FINANCIAL INFORMATION

Item 1.       Financial Statements:

              Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999........................      3

              Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999......      4

              Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999......      5

              Notes to Consolidated Financial Statements....................................................      6

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

Item 3.       Quantitative and Qualitative Disclosures About Market Risk....................................     13

PART II:      OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K..............................................................     14

              Signatures....................................................................................     15
</TABLE>


                                      -2-


<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                        APPLIED MICROSYSTEMS CORPORATION

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                      MARCH 31,          DECEMBER 31,
                                                                                        2000                 1999
                                                                                    -----------          ------------
                                                                                    (UNAUDITED)
                                                                                            (IN THOUSANDS)
<S>                                                                                 <C>                  <C>
                                   ASSETS

Current assets:
  Cash and cash equivalents.............................................            $   6,375             $   5,682
  Securities available-for-sale.........................................                6,963                10,664
  Accounts receivable, net..............................................                7,023                 5,848
  Inventories...........................................................                2,478                 2,471
  Prepaid and other current assets......................................                  560                   501
                                                                                    ---------             ---------
      Total current assets..............................................               23,399                25,166

Property and equipment, net.............................................                2,320                 2,372
Other assets............................................................                  492                   504
                                                                                    ---------             ---------
      Total assets......................................................            $  26,211             $  28,042
                                                                                    =========             =========

                    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable......................................................            $   2,634           $     2,494
  Accrued payroll.......................................................                1,656                 1,704
  Other accrued expenses................................................                1,045                 1,058
  Deferred revenue......................................................                3,251                 3,599
                                                                                    ---------             ---------
    Total current liabilities...........................................                8,586                 8,855

Shareholders' equity:
  Preferred stock, par value $.01.......................................                 --                     --
  Common stock, par value $.01..........................................               26,110                25,792
  Accumulated other comprehensive income (loss).........................                 (224)                   48
  Accumulated deficit...................................................               (8,261)               (6,653)
                                                                                    ---------             ---------
    Total shareholders' equity..........................................               17,625                19,187
                                                                                    ---------             ---------
    Total liabilities and shareholders' equity..........................            $  26,211             $  28,042
                                                                                    =========             =========
</TABLE>
                             See accompanying notes.


                                      -3-


<PAGE>

                        APPLIED MICROSYSTEMS CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED MARCH 31,
                                                                                  -------------------------------
                                                                                     2000                  1999
                                                                                  ---------             ---------
                                                                                  (IN THOUSANDS, EXCEPT PER-SHARE
                                                                                             AMOUNTS)
<S>                                                                               <C>                   <C>
Net sales..................................................................       $   7,969             $   8,518
Cost of sales..............................................................           2,186                 2,046
                                                                                  ---------             ---------
Gross profit...............................................................           5,783                 6,472

Operating expenses:
  Sales, general and administrative........................................           4,492                 4,894
  Research and development.................................................           3,081                 2,682
                                                                                  ---------             ---------
Total operating expenses...................................................           7,573                 7,576
                                                                                  ---------             ---------
Loss from operations.......................................................          (1,790)               (1,104)

Interest income and other, net.............................................             182                   170
                                                                                  ---------             ---------
Net loss...................................................................       $  (1,608)            $    (934)
                                                                                  =========             =========

Basic and diluted loss per share...........................................       $   (0.23)        $       (0.14)
Shares used in per-share calculation.......................................           6,858                 6,703
</TABLE>

                             See accompanying notes.


                                      -4-


<PAGE>

                        APPLIED MICROSYSTEMS CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED MARCH 31,
                                                                                  -------------------------------
                                                                                     2000                  1999
                                                                                  ---------             ---------
                                                                                           (IN THOUSANDS)
<S>                                                                               <C>                   <C>
OPERATING ACTIVITIES
Net loss...................................................................       $  (1,608)            $    (934)
Adjustments to reconcile net loss to net cash provided by (used in)
  operating activities:
     Depreciation and amortization.........................................             260                   298
     Net change in operating accounts:
       Accounts receivable.................................................          (1,175)                  931
       Inventories.........................................................              (7)                  401
       Prepaid and other current assets....................................             (59)                  (91)
       Other assets........................................................               2                  (112)
       Accounts payable and accrued expenses...............................              79                   (91)
       Deferred revenue....................................................            (348)                 (320)
                                                                                  ---------             ---------
         Net cash provided by (used in) operating activities...............          (2,856)                   82

INVESTING ACTIVITIES
     Purchases of securities available-for-sale............................          (1,764)               (4,979)
     Maturities and sales of securities available-for-sale.................           5,465                 4,946
     Additions to property and equipment...................................            (198)                 (290)
                                                                                  ---------             ---------
         Net cash provided by (used in) investing activities...............           3,503                  (323)

FINANCING ACTIVITIES
     Sale of common stock to employees.....................................             258                    48
     Stock options exercised...............................................              60                     1
                                                                                  ---------             ---------
         Net cash provided by financing activities.........................             318                    49

Effects of foreign exchange rate changes on cash...........................            (272)                 (706)
                                                                                  ---------             ---------
Increase (decrease) in cash and cash equivalents...........................             693                  (898)
Cash and cash equivalents at beginning of period...........................           5,682                 6,041
                                                                                  ---------             ---------
Cash and cash equivalents at end of period.................................       $   6,375             $   5,143
                                                                                  =========             =========
</TABLE>

                             See accompanying notes.


                                      -5-


<PAGE>

                        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, 1999 has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The results of operations for the
three-month period ended March 31, 2000, are not necessarily indicative of
results to be expected for the entire year ending December 31, 2000 or for any
other fiscal period. For further information, refer to the consolidated
financial statements and footnotes thereto incorporated by reference in the
Company's Form 10-K for the year ended December 31, 1999.

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 losses, basic and diluted loss per
share are the same for the quarters ended March 31, 2000 and 1999, respectively.

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 to equity. During the first
quarter of 2000, comprehensive loss amounted to $1,880,000, compared to
comprehensive loss of $1,640,000 for the first quarter of 1999.


                                      -6-


<PAGE>

4.       INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                                    MARCH 31,            DECEMBER 31,
                                                                                      2000                   1999
                                                                                   -----------           ------------
                                                                                             (IN THOUSANDS)
<S>                                                                                <C>                    <C>
Finished goods.............................................................        $       416            $      557
Work in process............................................................                 79                    60
Purchased parts............................................................              1,983                 1,854
                                                                                   -----------            ----------
                                                                                   $     2,478            $    2,471
                                                                                   ===========            ==========
</TABLE>

5.       RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the fair values of those derivatives would be
accounted for in current earnings unless specific hedge criteria are met. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
Applied must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting, if any. SFAS 133 will be effective
for the Company's consolidated financial statements for the fiscal year ending
December 31, 2001. The Company has not yet determined the impact, if any, of
adopting this Statement.

         In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." The new SAB provides guidance related to revenue
recognition based upon interpretations and practices followed by the SEC. SAB
101 is effective for the second quarter of 2000 and requires companies to report
any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation. The Company is currently evaluating the
impact, if any, SAB 101 will have on its financial position or results of
operations.


                                      -7-


<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

OVERVIEW

         Applied Microsystems Corporation ("Applied" or the "Company") is a
leader and innovator in software tools and technologies. Applied's products help
customers bring products to market faster by providing innovative tools to
develop, debug, and test products faster, more reliably, and at a lower cost.
The Company's products have historically been targeted to meet the needs of
embedded systems markets, and Applied develops, markets and supports a
comprehensive suite of software and hardware-enhanced development and test tools
for the development of complex embedded microprocessor-based applications.
Embedded systems are used extensively in the new Internet device industry,
telecommunications, internetworking, avionics, computer peripherals, office
products, medical instrumentation and industrial process control. Embedded
systems are also found in consumer markets such as the automotive and
entertainment industries. A wide variety of products use embedded systems, such
as hand-held computing devices, cellular telephones, set-top boxes, automated
teller machines, hospital patient monitors, airplane flight control systems,
automotive braking systems, modems, facsimile machines, and video games.

         The Company is pursuing development efforts to leverage its expertise
in traditional embedded systems markets to apply its development and
performance-enhancement solutions more specifically to game developers, Web
developers, and complex Internet infrastructure needs. The Company expects that
traditional embedded systems tools may become the tools of choice for creating
modern Internet applications and establishing and maintaining Internet
infrastructure because these tools are uniquely suited to creating applications
that are highly reliable. Such tools are also able to handle real-time operating
requirements and complex hardware/software integration.

RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                        THREE                         THREE MONTHS
                                     MONTHS ENDED                         ENDED
                                      MARCH 31,       CHANGE FROM       MARCH 31,
(DOLLARS IN THOUSANDS)                   2000        PRIOR PERIOD         1999
------------------------------------------------------------------------------------
<S>                                   <C>            <C>              <C>
NET SALES                               $7,969            $(549)         $8,518
                                                            (6%)
</TABLE>

         The Company generally recognizes revenues from product sales upon
shipment, unless the Company has obligations remaining under a sale or licensing
agreement, in which case revenue is deferred until earned. Revenues from sales
of product support contracts are deferred and recognized ratably over the
contract period, which is typically 12 months.

         The Company's net sales are presently derived primarily from sales of
software design, debugging, and testing solutions, as well as product support
and consulting services. Over the past few years, the Company has experienced
continuing declines in sales volumes of its higher-priced "high-end" emulator
products as the overall market demand for this type of product decreased at a
more rapid pace than anticipated. High-end emulator products accounted for less
than 5% of net sales in the first quarter of 2000, as compared to 10% of net
sales in the first quarter of 1999. High-end emulator products are expected to
continue to generate a low level of future revenues.


                                      -8-

<PAGE>

         First quarter 2000 net sales included new revenues from Applied's
development solutions for game consoles as well as increased revenues from
software analysis revenues, as compared to the first quarter of 1999.
Development solutions for game consoles represent a new revenue source for
Applied, and accounted for over 10% of first quarter 2000 net sales. These
increases in new market opportunities, however, were offset by lower overall
unit sales and decreased per-unit pricing in the Company's high-end emulator
products as well as lower overall revenues in the Company's low-end debug
products as Applied continues to transition to new higher-growth market
opportunities. The Company's net sales also include product support revenues,
which represented 14% of net sales in both the first quarter of 2000 as well as
the first quarter of 1999.

         International sales accounted for 41% of net sales in the first quarter
of 2000, as compared to 39% of net sales in the first quarter of 1999. In
comparison to the first quarter of 1999, international sales decreased 2% in the
three months ended March 31, 2000. The decrease in first-quarter 2000
international revenues is primarily the result of decreased product sales
volumes in Japan, offset in part by increased product sales volumes in Europe.

         Applied's sales through its foreign subsidiaries are generally
denominated in local currencies; as a result, fluctuations in currency exchange
rates can have a significant effect on the Company's reported net sales. The
Company is unable to predict currency exchange rate fluctuations and anticipates
that such fluctuations will continue to affect its net sales to varying degrees
in the future. The Company expects international sales to continue to account
for a significant percentage of its net sales.

<TABLE>
<CAPTION>
                             THREE                         THREE
                             MONTHS                        MONTHS
                             ENDED                         ENDED
                           MARCH 31,    PERCENTAGE OF     MARCH 31,    PERCENTAGE OF
(DOLLARS IN THOUSANDS)        2000        NET SALES         1999        NET SALES
--------------------------------------------------------------------------------------
<S>                        <C>          <C>               <C>          <C>
COST OF SALES                $2,186          27%           $2,046          24%

GROSS PROFIT                 $5,783          73%           $6,472          76%
</TABLE>

         The Company's gross profit percentage of 73% in the first quarter of
2000 was lower than the 76% reported in the first quarter of 1999 due primarily
to (i) lower unit pricing on emulator and debug products, (ii) lower comparative
margins on consulting services, and (iii) lower product licensing fees received
from third-parties in the first quarter of 2000.

         The Company expects its gross profit to fluctuate based upon its
product mix, geographic mix, product and patent license royalties, and variances
in volume and related absorption of factory overhead costs. Accordingly, there
can be no assurance that the Company will be able to sustain its recent gross
profit percentages.


                                      -9-


<PAGE>

<TABLE>
<CAPTION>
                                        THREE                         THREE MONTHS
                                     MONTHS ENDED                         ENDED
                                      MARCH 31,       CHANGE FROM       MARCH 31,
(DOLLARS IN THOUSANDS)                   2000        PRIOR PERIOD         1999
------------------------------------------------------------------------------------
<S>                                   <C>            <C>              <C>
SALES, GENERAL AND ADMINISTRATIVE
   EXPENSES                             $4,492            $(402)         $4,894
                                                            (8%)
</TABLE>

         From the first quarter of 1999 to the first quarter of 2000, Applied's
new management team has shifted its operating resources to focus on developing
new products and services. That shift is reflected in the decrease in sales,
general and administrative expenses, with a corresponding increase in research
and development expenses.

         The decrease in sales, general and administrative expenses in the first
quarter of 2000, as compared to the first quarter in 1999, was achieved
primarily through lower marketing-related expenditures. In the first several
months of 1999, Applied incurred marketing expenses relative to the launch of
its CodeOPTIX(TM) product family, as well as other marketing expenses to build
general awareness of Applied's traditional embedded software solutions.
Marketing expenditures in the latter part of 1999 and into the first quarter of
2000 were at lower levels, and included focused expenses for repositioning the
Company into new market areas. The lower first-quarter 2000 sales, general and
administrative expenses were also the result of lower sales commissions,
commensurate with the overall lower reported revenues in the period.

         The Company expects its sales and marketing expenditures to increase in
the future as it introduces and markets new products and services and expands
its sales, general and administrative organization.

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


                                     -10-


<PAGE>

<TABLE>
<CAPTION>
                                        THREE                         THREE MONTHS
                                     MONTHS ENDED                         ENDED
                                      MARCH 31,       CHANGE FROM       MARCH 31,
(DOLLARS IN THOUSANDS)                   2000        PRIOR PERIOD         1999
------------------------------------------------------------------------------------
<S>                                  <C>             <C>              <C>
RESEARCH AND DEVELOPMENT EXPENSES      $3,081              $399         $2,682
                                                             15%
</TABLE>

         The increase in research and development expenses in the first quarter
of 2000 was primarily attributable to increased engineering headcount and
correspondingly higher compensation-related expenses. These increased expenses
were a direct result of the Company's investment in strategic new initiatives.

         The Company believes that its continued investment in focused research
and development activities is critical to Applied's future success, and that the
Company's engineering resources represent a competitive advantage. Therefore,
the Company intends to continue to make substantial investments in product
development. These efforts may include development of software design, debugging
and test tools for additional embedded microprocessors as well as continued
advanced development in new products for current and new market opportunities.
As a result, the Company anticipates that research and development expenses will
increase in 2000.

<TABLE>
<CAPTION>
                                        THREE                         THREE MONTHS
                                     MONTHS ENDED                         ENDED
                                      MARCH 31,       CHANGE FROM       MARCH 31,
(DOLLARS IN THOUSANDS)                   2000        PRIOR PERIOD         1999
------------------------------------------------------------------------------------
<S>                                  <C>             <C>              <C>
INTEREST INCOME AND OTHER, NET          $182                $12          $170
                                                              7%
</TABLE>

         The Company's interest income and other, net, increased from the prior
year's first quarter - despite a decrease in the Company's cash available for
short-term investments - due primarily to higher interest rates earned on
investments.

INCOME TAXES

         Applicable accounting standards require that the Company calculate an
estimated annual effective tax rate and apply such tax rate to the pre-tax
income (loss) 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 the
Company's ability to utilize its net deferred tax assets, including its net
operating losses and research and development credits, a valuation allowance has
been established for financial reporting purposes equal to the amount of the net
deferred tax assets. Accordingly, no income tax provision or benefit is recorded
for the quarter ended March 31, 2000.


                                     -11-


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As of March 31, 2000, the Company had $13.3 million in cash, cash
equivalents, and short-term investments, compared to $16.3 million as of
December 31, 1999. Applied maintains a revolving line of credit with a
commercial bank whereby the Company may borrow up to $7.0 million at either the
bank's prime rate or LIBOR plus 1.45%. Any such amounts borrowed would be due at
the expiration of the line of credit on May 31, 2000. The line of credit is
secured by all of the Company's inventories, chattel paper, accounts receivable
and general intangible assets and includes certain financial covenants. There
were no amounts outstanding as of March 31, 2000 nor at any time during 1999,
and Applied was in compliance with all applicable financial covenants.

         The Company requires capital primarily for the financing of inventories
and accounts receivable, sales and marketing efforts, product development
activities, and capital equipment purchases. As a result of its operating loss
in the first quarter of 2000 and the timing of revenues in both the fourth
quarter of 1999 and the first quarter of 2000, Applied used cash of $2.9 million
for operating activities in the first quarter of 2000, compared to generating
$82,000 cash from operating activities in the first quarter of the prior year.
Applied's fourth quarter 1999 revenues occurred at a more even rate throughout
the quarter, whereas first quarter 2000 revenues were weighted toward the end of
the quarter; as a result, the accounts receivable balance as of December 31,
1999 was lower than traditional levels. The Company purchased $198,000 in
equipment in the first quarter of 2000, compared to purchasing $290,000 in the
first quarter of 1999.

         The Company believes that its existing working capital, together with
amounts anticipated from operations, will provide the Company with sufficient
funds to finance its operations for at least the next 12 months. The Company's
future capital requirements will depend on a number of factors, including costs
associated with sales and marketing programs, product development efforts, the
success of the commercial introduction of new Applied products, and the
potential use of funds for strategic purposes. To the extent additional funds
are required, the Company may sell additional equity, debt or convertible
securities, or obtain additional credit facilities.

IMPACT OF YEAR 2000

         In the years leading up to the Year 2000, the Company performed a
comprehensive analysis of its exposure to potential Year 2000 problems and took
necessary action to address identified problems. The Company estimates that it
spent less than $200,000 in assessing and addressing internal Year 2000 issues,
in addition to system upgrades that were made as part of standard system
maintenance. To date, Applied has not experienced any known Year 2000 issues and
has been informed by material suppliers and vendors that they have also not
experienced material Year 2000 issues. The Company will continue to monitor its
position with respect to Year 2000 issues.


                                     -12-


<PAGE>

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

         Statements in this report that are not historical facts constitute
forward-looking statements which are subject to a number of risks and
uncertainties which might cause actual results to differ materially from stated
expectations. Such risks and uncertainties include the Company's recent
operating losses, dependence on industries characterized by rapidly changing
technology, manufacturing and product ship schedules, customer design starts
utilizing environments served by Applied, relationships with semiconductor
manufacturers, Applied's focus on a few key markets, competition, dependence on
key personnel, management of expected growth, intellectual property rights and
the potential for corresponding litigation, the potential for product liability,
uncertainties surrounding international operations, potential fluctuations in
quarterly operating results, and potential continued volatility of stock price.

         For a more detailed discussion of these and other factors, please refer
to the Company's filings with the Securities and Exchange Commission, including
those set forth under the heading "Factors Affecting Future Results and
Forward-Looking Statements" in the Company's 1999 Annual Report on Form 10-K.

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


                                     -13-


<PAGE>

PART II - OTHER INFORMATION

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

         (A)      The following exhibits are filed as part of this report.

                  27       Financial Data Schedule

         (B)      Report on Form 8-K

                  The registrant did not file any reports on Form 8-K during
                  the quarter ended March 31, 2000.


                                     -14-


<PAGE>

                                   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 12, 2000           By:  /s/ Robert C. Bateman
      ------------                --------------------------------------------
                                  Robert C. Bateman
                                  VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
                                  SECRETARY AND TREASURER
                                  (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)


                                     -15-


<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
     Exhibit No.                         Description
     -----------                         -----------
     <S>                          <C>
        27                        Financial Data Schedule

</TABLE>


                                     -16-