FAR 35.001 definition of applied research.

[Aero]

35.001 Definitions.
Applied research means the effort that (a) normally follows basic research, but may not be severable from the related basic research; (b) attempts to determine and exploit the potential of scientific discoveries or improvements in technology, materials, processes, methods, devices, or techniques; and (c) attempts to advance the state of the art. When being used by contractors in cost principle applications, this term does not include efforts whose principal aim is the design, development, or testing of specific items or services to be considered for sale; these efforts are within the definition of development, given below.

Development, as used in this part, means the systematic use of scientific and technical knowledge in the design, development, testing, or evaluation of a potential new product or service (or of an improvement in an existing product or service) to meet specific performance requirements or objectives. It includes the functions of design engineering, prototyping, and engineering testing; it excludes subcontracted technical effort that is for the sole purpose of developing an additional source for an existing product.

[MSimon]

Let me see if I can give an analogy.

1. Basic Research
Wah? An electric current makes a magnet needle move? We must look into this. We must measure everything.

2. Applied Research
Can we measure the flows and forces involved and maybe make a motor that will run in the lab?

3. Development
Can we make a motor that can develop 1/2 hp and will run 2,000 hours before needing attention?

4. Production
I need 10,000 1/2 hp motors a month for two years to go into something I just invented - I call it a vacuum cleaner.