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                              UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C. 20549
                                 FORM 10-Q

                                 -----------

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997   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.                                     98052 
     REDMOND, WASHINGTON                                    (ZIP CODE) 
    (ADDRESS OF PRINCIPAL 
      EXECUTIVE OFFICES) 
                                 (206) 882-2000 
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 

                                 -----------

            Securities registered pursuant to Section 12(b) of the Act:

                                    None

            Securities registered pursuant to Section 12(g) of the Act:

                      Common Stock, Par Value $.01 Per Share
                                 (TITLE OF CLASS)

     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         
                                                     --      -- 

     The number of shares of the registrant's Common Stock outstanding as of 
May 2, 1997, was 6,769,714.

     This report including exhibits consists of 14 pages.  The exhibit index 
appears on page 13.

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                        APPLIED MICROSYSTEMS CORPORATION

                              INDEX TO FORM 10-Q


                                                                          PAGE
                                                                          ----

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements:

          Consolidated Statements of Income for the three months ended
          March 31, 1997 and 1996   . . . . . . . . . . . . . . . . . . . .   3
          
          Consolidated Balance Sheets as of  March 31, 1997 and 
          December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . .   4
          
          Consolidated Statements of Cash Flows for the three months ended
          March 31, 1997 and 1996   . . . . . . . . . . . . . . . . . . . .   5
          
          Notes to Consolidated Financial Statements  . . . . . . . . . . .   6

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations . . . . . . . . . . . . . . . . . . . . . .   7


PART II   OTHER INFORMATION

          
Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .   11
          
          Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .   12
          
          Exhibit Index  . . . . . . . . . . . . . . . . . . . . . . . . .   13
          
          Exhibit 11 . . . . . . . . . . . . . . . . . . . . . . . . . . .   14



                                    -2-
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                        APPLIED MICROSYSTEMS CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME


                                             THREE MONTHS ENDED MARCH 31
                                          -------------------------------
                                                     1997       1996
                                           ----------------    ----------
                                           (IN THOUSANDS, EXCEPT PER SHARE 
                                                          AMOUNT)
                                                         (UNAUDITED)

Net sales..........................................   $8,902      8,704
Cost of sales.......................................   2,456      2,557
                                                      ------     ------
Gross profit........................................   6,446      6,147

Operating expenses:
   Sales, general and administrative...............    4,359      3,447
   Research and development........................    2,186      1,807
                                                      ------     ------
Total operating expenses...........................    6,545      5,254
                                                      ------     ------
Income from operations.............................      (99)       893

Interest income and other..........................      164        153
Interest expense...................................       (4)       (14)
                                                      ------     ------
Income before income taxes.........................       61      1,032
Income taxes.......................................       19        330
                                                      ------     ------
Net income.........................................      $42       $702
                                                      ------     ------
                                                      ------     ------
Net income per share...............................    $0.01      $0.10
Shares used in per share calculation...............    7,101      7,083


The accompanying notes are an integral part of these consolidated financial
statements.

                                    -3-

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                        APPLIED MICROSYSTEMS CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

                                               MARCH 31,       DECEMBER 31,
                                                 1997              1996
                                             -----------       ------------
                                             (UNAUDITED)
                     ASSETS

Current assets:
   Cash and cash equivalents.............     $7,626              $7,208
   Short term investments................      5,933               5,931
   Accounts receivable...................      8,863              10,261
   Inventories...........................      3,322               3,197
   Prepaid and other current assets......      1,039               1,020
                                             -------             -------
      Total current assets...............     26,783              27,617

Property and equipment, net..............      2,704               2,441
Other assets.............................        735                 766
                                             -------             -------
      Total assets.......................    $30,222             $30,824
                                             -------             -------
                                             -------             -------

      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable......................     $3,060              $2,394
   Accrued payroll.......................      1,383               1,839
   Other accrued expenses................        847               1,220
   Deferred revenue......................      2,532               2,696
   Current portion of long-term 
    obligations..........................         54                  53
                                             -------             -------
      Total current liabilities..........      7,876               8,202

Long-term obligations, less current
  portion................................          5                  15
Shareholders' equity:
   Preferred stock, par value $.01
      Authorized - 5,000,000 shares             ----                ----
   Common stock, par value $.01
      Authorized - 25,000,000 shares
      Issued - 6,725,000 and 6,634,000 shares at
      March 31, 1997 and December 31, 1996, 
       respectively......................     26,070              26,068
   Cumulative translation adjustment.....       (642)               (332)
   Accumulated deficit...................     (3,087)             (3,129)
                                             -------             -------
      Total shareholders' equity.........     22,341              22,607
                                             -------             -------
      Total liabilities and shareholders'
        equity...........................    $30,222             $30,824
                                             -------             -------
                                             -------             -------

The accompanying notes are an integral part of these consolidated financial
statements.

                                    -4-

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                        APPLIED MICROSYSTEMS CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                               THREE MONTHS ENDED MARCH 31,
                                                  1997            1996
                                               ------------    ------------
                                                      (IN THOUSANDS)
                                                        (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income..................................       $42               $702
Adjustments to reconcile net income to net 
  cash provided by operating activities:
   Depreciation and amortization............       281                281
Changes in operating assets and liabilitie
   Accounts receivable......................     1,398               (217)
   Inventories..............................      (125)                69
   Prepaid expenses.........................       (19)               (59)
   Other assets.............................         4                 16
   Deferred revenue.........................      (164)               264
   Accounts payable and accrued expenses....      (163)              (790)
                                               -------             ------
      Net cash provided by operating 
       activities ..........................     1,254                266

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of short-term investments.......        (2)            (3,936)
   Property and equipment additions.........      (517)              (344)
                                               -------             ------
      Net cash used in investing 
       activities...........................      (519)            (4,280)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Stock options exercised..................         2                  3
   Repayment of long-term obligations.......       (10)               (19)
                                               -------             ------
      Net cash used in financing 
       activities...........................        (8)               (16)

Effects of foreign exchange rate changes 
 on cash....................................      (309)               (57)
                                               -------             ------
Increase (decrease) in cash and cash
 equivalents................................       418             (4,087)
Cash and cash equivalents at beginning 
 of period..................................     7,208             12,771
                                               -------             ------
Cash and cash equivalents at end of
 period.....................................    $7,626             $8,684
                                               -------             ------
                                               -------             ------

SUPPLEMENTAL DISCLOSURES OF CASH PAID:
   Interest.................................        $4                $14
   Income taxes.............................      $281               $232


The accompanying notes are an integral part of these consolidated financial
statements.

                                    -5-

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                        APPLIED MICROSYSTEMS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

      The consolidated financial statements for the three month period ended 
March 31, 1997 and 1996 and the related footnote information are unaudited 
and have been prepared on a basis substantially consistent with the 1996 
audited consolidated financial statements.  In the opinion of management, the 
financial statements include all adjustments (consisting of only normal 
recurring adjustments) necessary for fair presentation of the results of this 
interim period.  These statements should be read in conjunction with the 
consolidated financial statements and related notes included in the Company's 
1996 Annual Report to Shareholders.  The results of operations for the three 
months ended  March 31, 1997 and 1996 are not necessarily indicative of the 
results to be expected for the entire year.

      Certain prior year amounts have been reclassified to conform to the 
current year presentation.  Such reclassifications have no effect on 
previously reported results of operations.

2. COMPUTATION OF EARNINGS PER SHARE

      Net income per share is based on the weighted average number of common 
and common equivalent shares outstanding during each period.  Common 
equivalent shares include the effect of all outstanding stock options and 
warrants.  Common equivalent shares are not included in the per share 
calculations where the effect of their inclusion would be antidilutive using 
the treasury stock method. 


     In February 1997, the Financial Accounting Standards Board issued 
Statement No. 128, Earnings per Share, which is required to be adopted on 
December 31, 1997. At that time, the Company will be required to change the 
method currently used to compute earnings per share and to restate all prior 
periods.  Under the new requirements for calculating primary earnings per 
share, the dilutive effect of stock options will be excluded.  The impact is 
expected to result in an increase in primary earnings per share for the first 
quarter ended March 31, 1996 of $0.01, while the impact of Statement 128 on 
the calculation of primary earnings per share for the first quarter ended 
March 31, 1997 and fully diluted earnings per share for these quarters is not 
expected to be material.

3. INVENTORIES

Inventories consist of:

                                               MARCH 31,       DECEMBER 31,
                                                 1997              1996
                                               ---------       ------------
                                                      (IN THOUSANDS)

Finished goods                                  $1,532            $1,282
Work in process                                     79               168
Purchased parts                                  1,711             1,747
                                                ------            ------
                                                $3,322            $3,197
                                                ------            ------
                                                ------            ------

                                    -6-

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

     Management's Discussion and Analysis of Financial Conditions and Results 
of Operations should be read in conjunction with the accompanying financial 
statements for the periods specified and the associated notes.  Further 
reference should be made to the Company's 1996 Annual Report to Shareholders.

RESULTS OF OPERATIONS

     The following table sets forth for the period indicated the percentage 
of total revenue represented by each line item in the Company's condensed 
consolidated statements of income and the percentage change from comparative 
prior period in each line item.

                                         Percent of       Period-to-Period
                                         Net Sales        Percentage Change
                                     ------------------  -------------------
                                     Three Months Ended   Three Months Ended
                                          March 31,         March 31, 1997
                                     1997          1996    Compared to 1996
                                     ---------  -------  -------------------

Net sales............................. 100.0%    100.0%          2.3%
Cost of sales.........................  27.6      29.4          (3.9)
                                       -----     -----               
Gross profit..........................  72.4      70.6           4.9

Operating expenses:
   Sales, general and administrative..  49.0      39.6          26.5
   Research and development...........  24.6      20.8          21.0
                                       -----     -----              
Total operating expenses..............  73.6      60.4          24.6
                                       -----     -----
Income from operations................  (1.2)     10.2        (111.1)
     

Interest income and other.............   1.8       1.8           7.2
Interest expense......................  ----      (0.2)        -----
                                       -----     -----  
Income before income taxes............   0.6      11.8         (94.1)
         
Income taxes..........................    .1       3.8         (94.2)
                                       -----     -----         -----
Net income............................   0.5%      8.0%        (94.0%)
                                       -----     -----
                                       -----     -----

                                    -7-

<PAGE>

NET SALES

     Net sales increased by 2.3% to $8.9 million from $8.7 million for the 
quarter ended March 31, 1997 and 1996, respectively.  These increases were 
primarily attributable to the growth in sales of  low cost debug and 
CodeTEST-TM- tools.  The increases were partially offset by a decline in unit 
sales of higher priced  debug  tools and to a lesser extent was unfavorably 
impacted by currency exchange rate fluctuations affecting international 
sales. The Company's net sales are presently derived predominantly from sales 
of software design, debugging and testing tools and to a lesser extent 
product support revenues. Product support revenues increased by  60% from the 
prior three month  period, and represented approximately 12.2% and 7.8%, 
respectively, of total sales in the quarters ended March 31, 1997 and 1996. 
The increase relates to higher revenue levels in prior quarters that the 
associated service contracts are sold against, but  recognized ratably over 
the life of each maintenance contract, typically 12 months. The Company 
generally recognizes revenues from product sales upon shipment.

     International sales expressed in U.S. dollars increased by 6.7% for the 
quarter ended March 31, 1997 over the comparable period of 1996, to 49.8% of 
net sales as compared to 47.8% of net sales in the first quarter of the prior 
year. The growth rate for international sales as expressed in U.S. dollars is 
attributable to increased unit sales, due primarily to increased sales and 
marketing efforts. The Company's sales through its foreign subsidiaries are 
generally denominated in local currencies, and as a result, fluctuations in 
currency exchange rates can have a significant effect on the Company's 
reported net sales. Had the exchange rates remained the same as in the prior 
comparable period, especially in Japan, sales would have increased an 
additional five percentage points for the quarter ended  March 31, 1997.  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, 
especially in Japan, to continue to account for a significant percentage of 
its net sales.

GROSS PROFIT

     The Company's gross profit increased to $6.5 million, or 72.4% of net 
sales, from $6.1 million, or 70.6% of net sales, in the quarters ended March 
31, 1997 and 1996, respectively.  The increases in gross profit as a 
percentage of net sales were primarily attributable to an increase in the 
percentage of net sales of newer debug and CodeTEST products that have lower 
material and labor costs, and to a lesser extent, favorable cost reductions 
on certain hardware components.  These savings were partially offset by 
declines in sales revenue due to unfavorable currency exchange rate 
fluctuations.

                                    -8-

<PAGE>

SALES, GENERAL AND ADMINISTRATIVE

     Sales, general and administrative expenses were $4.4 million or 49.0% of 
net sales, and $3.4 million, or 39.6% of net sales, for the quarter ended 
March 31, 1997 and 1996, respectively. The dollar amount increase between 
comparable periods was primarily attributable to increased 
compensation-related expenses resulting principally from increased sales 
force headcount, and to a lesser extent, increased sales commissions and 
travel related expenses.  The percentage increase between comparable periods 
was primarily attributable to lower than anticipated revenues for the quarter 
ending March 31, 1997. Sales are difficult to predict and the majority occur 
late in the quarter, at which time budgets are already committed. Sales, 
general and administrative expenses include salaries, bonuses, commissions, 
benefits, depreciation, travel and entertainment, rent, telephone, supplies 
and promotional costs.  The Company expects its sales and marketing 
expenditures to continue to increase in the future as it introduces and 
markets new products, and continues to expand 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 does hedge 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.  Although the Company 
generally plans to continue to 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. 

RESEARCH AND DEVELOPMENT

     Research and development expenses were $2.2 million, or 24.6% of net 
sales, and $1.8 million, or 20.8% of net sales, for the quarters ended March 
31, 1997 and 1996, respectively.  The 21.0%  increase in the dollar amount of 
research and development expenses was primarily attributable to increased 
compensation-related and proto-typing expenses and to a lesser extent, a 
decrease in external development funding received from third parties.  The 
percentage increase between comparable periods was primarily attributable to 
lower than anticipated revenues for the quarter ending March 31, 1997.  Sales 
are difficult to predict and the majority occur late in the quarter at which 
time budgets are already committed.  The Company intends to continue to make 
substantial investments in product development, including development of 
software design, debugging and test tools for additional embedded 
microprocessors as well as  continued advanced development in future 
directions. As a result, the Company anticipates that net research and 
development expenses are likely to increase for the foreseeable future

OTHER

     The Company's interest (net) and other income increased by $11,000 
between the comparable three month periods due primarily to an increase in 
cash and marketable securities generated from operations.

                                    -9-

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LIQUIDITY AND CAPITAL RESOURCES

     The Company requires capital principally for the financing of inventory, 
capital equipment and accounts receivable, and for investment in product 
development activities, new technologies and potential company or product 
line acquisitions. The Company's net assets changed considerably as a result 
of the initial public offering in November 1995 which resulted in net 
proceeds to the Company of $13 million.  Among other things, these proceeds 
were used to purchase short-term investments and equipment, and  pay off 
certain debts.  For the three months ended March 31, 1997 and 1996, the 
Company generated $1.3 million and $266,000, respectively, of cash from 
operations; and utilized $519,000 and $4.3 million, respectively, of cash for 
purchases of short-term investments and equipment.  As of March 31, 1997, the 
Company had working capital of $19.0 million, including $13.6 million of 
cash, cash equivalents and short-term investments

     The Company believes that its existing working capital, together with 
funds from operations and available revolving credit line, 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, however, depend 
on a number of factors, including costs associated with product development 
efforts, the success of the commercial introduction of the Company's new 
products and the acquisition of complementary businesses, products or 
technologies.  To the extent additional capital is required, the Company may 
sell additional equity, debt or convertible securities, or obtain additional 
credit facilities.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

     Statements in this report concerning sales, costs, expenses, adequacy of 
working capital and other matters which 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 delays in shipments 
of the Company's new products, declining product prices and margins, ability 
of its suppliers to provide components and assemblies, uncertain market 
acceptance of new products, growth in the marketplace in which the Company 
operates, competitive product offerings, unfavorable foreign currency 
fluctuations and adverse changes in general economic conditions in any of the 
countries in which the Company does business, and other risks set forth in 
the Company's filings with the Securities and Exchange Commission, including 
its annual report for the year ended December 31, 1996 on Form 10-K.  During 
the last twelve months, the Company's competitors have continued to make a 
variety of product announcements and offerings.  The Company continues to 
release new versions of its product lines and the successful acceptance of 
these products will be a key determinant of future growth.  The impact of any 
of these factors is difficult to predict or forecast.

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

                                    -10-

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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.

               
               11    Computation of Earnings Per Share.

     (B)       Report on Form 8-K

               The registrant did not file any reports on Form 8-K during
               the quarter ended March 31, 1997.

                                    -11-

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                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this Report to be signed 
on its behalf by the undersigned, thereunto duly authorized, in the City of 
Redmond, State of  Washington, on May  8, 1997.

                              APPLIED MICROSYSTEMS CORPORATION
                              (Registrant)

                              By  /s/     A. James Beach       
                                 ------------------------------
                                  A. James Beach
                                  VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
                                  SECRETARY AND TREASURER
                                  (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)


                                    -12-

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                                  EXHIBIT INDEX

 
 Exhibit No.                      Description                   Page No. 
 
 11             Computation of Earnings Per Share.                   14 

                                    -13-