<PAGE>

     As filed with the Securities and Exchange Commission on March 31, 2003
------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                     --------------------------------------

                                    FORM 10-K

                                   (Mark One)
                      [X] ANNUAL REPORT PURSUANT TO SECTION
                          13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the fiscal year ended December 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: 000-26020

                         APPLIED DIGITAL SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)

            MISSOURI                                      43-1641533
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                  400 ROYAL PALM WAY, SUITE 410
                       PALM BEACH, FLORIDA                33480
             (Address of principal executive offices)   (Zip code)

                                 (561) 805-8000
              (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, $.001 PAR VALUE
                                (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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

At June 30, 2002, the last business day of our most recently completed
second fiscal quarter, the aggregate market value of the voting and non-voting
common stock held by non-affiliates, based upon the closing price of our stock
on that date of $0.65 per share was approximately $172,981,598.

At March 27, 2003, 284,612,961 shares of our common stock were outstanding. The
market value of our common stock held by non-affiliates on March 27, 2003, was
$90,598,127.

Documents Incorporated by Reference: None



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                                TABLE OF CONTENTS

ITEM   DESCRIPTION                                                       PAGE

       PART I

1.     Business                                                            4
2.     Properties                                                         24
3.     Legal Proceedings                                                  25
4.     Submission of Matters to a Vote of Security Holders                26

       PART II

5.     Market for Registrant's Common Equity and Related Stockholder
       Matters                                                            27
6.     Selected Financial Data                                            29
7.     Management's Discussion and Analysis of Financial Condition
       and Results of Operations                                          32
7A.    Quantitative and Qualitative Disclosures About Market Risk         54
8.     Financial Statements and Supplementary Data                        54
9.     Changes in and Disagreements With Accountants on
       Accounting and Financial Disclosures                               54

       PART III

10.    Directors and Executive Officers of the Registrant                 57
11.    Executive Compensation                                             61
12.    Security Ownership of Certain Beneficial Owners and Management
       and Related Stockholder Matters                                    66
13.    Certain Relationships and Related Transactions                     68
14.    Controls and Procedures                                            69

       PART IV

15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K   70
       Signatures                                                         71
       Certifications                                                     72


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           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

         This Annual Report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. We intend that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performances or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements.

         Forward-looking statements include, but are not limited to:

            o   our ability to raise the required funds to repay our obligations
                to IBM Credit Corporation (IBM Credit);

            o   our growth strategies including, without limitation, our
                ability to deploy our products and services including Digital
                Angel(TM), Thermo Life(TM), VeriChip(TM) and Bio-Thermo(TM);

            o   anticipated trends in our business and demographics;

            o   the ability to hire and retain skilled personnel;

            o   relationships with and dependence on technological partners;

            o   uncertainties relating to customer plans and commitments;

            o   our ability to successfully integrate the business operations
                of acquired companies;

            o   our future profitability and liquidity;

            o   governmental export and import policies, global trade policies,
                worldwide political stability and economic growth; and

            o   regulatory, competitive or other economic influences.

         In some cases, you can identify forward-looking statements by terms
such as "may," "should," "could," "would," "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions intended to
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from estimates or forecasts
contained in the forward-looking statements. Some of these risks and
uncertainties are beyond our control. Also, these forward-looking statements
represent our estimates and assumptions only as of the date the statement was
made.

                                       3


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                                    PART I

         ITEM 1.  BUSINESS

         See "Risk Factors" beginning on page 14.

         GENERAL

         We are a Missouri corporation and were incorporated on May 11, 1993.
Our business has evolved during the past few years. We have grown significantly
through acquisitions and since 1996 we have completed 51 acquisitions. During
the last half of 2001 and during 2002 we sold or closed many of the businesses
we had acquired that we believed did not enhance our strategy of becoming an
advanced digital technology development company. We have emerged from being a
supplier of computer hardware, software and telecommunications products and
services to becoming an advanced technology company that focuses on a range of
life enhancing, personal safeguard technologies, early warning alert systems,
miniaturized power sources and security monitoring systems combined with the
comprehensive data management services required to support them. To date, we
have four such products in various stages of development. They are:

            o   Digital Angel(TM), for monitoring and tracking people and
                objects;

            o   Thermo Life(TM), a thermoelectric generator; and

            o   VeriChip(TM), an implantable radio frequency verification device
                that can be used for security, financial, personal
                identification/safety and other applications; and

            o   Bio-Thermo(TM), a temperature-sensing implantable microchip for
                use in pets, livestock and other animals.

         During the past several years, we developed a proprietary location and
monitoring system that combines advanced biosensor technology and location
technology (such as global positioning satellite (GPS)) in a watch/pager device
that communicates through proprietary software to a secure 24/7 operations
center in California. We filed an International Patent Application directed to
the system, which has been published under publication no. W/0 02/44865. The
application, which is in the name of Digital Angel Corporation, is currently
pending in several countries. This technology provides "where-you-are" and
"how-you-are" information about loved ones (particularly elderly relatives and
children), their location and their vital signs via the subscriber's computer,
personal digital assistant (PDA) or wireless telephone. We branded this
technology Digital Angel and merged the technology with a company formerly known
as Destron Fearing Corporation. Our goal was to create a new corporation
underpinned by the patented technology and complemented by the products and
services and revenues of our existing business segments. We united our existing
GPS, application service provider and animal tracking business units to form
Digital Angel Corporation, which we refer to as pre-merger Digital Angel.
Effective March 27, 2002, pre-merger Digital Angel became its own public company
through its merger into Medical Advisory Systems, Inc. (MAS) (AMEX:DOC).
Currently, we are the beneficial owner of approximately 73.91% of this new
company which has been renamed Digital Angel Corporation.

         Our wholly-owned subsidiary, Thermo Life Energy Corp., formerly
Advanced Power Solutions, Inc., will develop, market and license our product,
Thermo Life, a small thermoelectric generator powered by body heat. Thermo Life
is intended to provide a miniaturized power source for a wide range of consumer
electronic devices including attachable or implantable medical devices and
wristwatches.

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On July 9, 2002, we announced that we had achieved an important breakthrough:
3.0-volts of electrical power were successfully generated by Thermo Life in
laboratory tests. We expect to begin marketing Thermo Life during the second
half of 2003.

         We have developed a miniaturized, implantable verification chip
called VeriChip that can be used in a variety of security, financial,
personal identification/safety and other applications. On February 7, 2002,
we announced that we had created a new wholly-owned subsidiary, VeriChip
Corporation, that will develop, market and license VeriChip. About the size
of a grain of rice, each VeriChip product contains a unique verification
number. Utilizing our proprietary external radio frequency identification
(RFID) scanner, radio frequency energy passes through the skin energizing
the dormant VeriChip, which then emits a radio frequency signal transmitting
the verification number contained in the VeriChip. VeriChip technology is
produced under patent registrations #6,400,338 and #5,211,129. This
technology is owned by Digital Angel Corporation and licensed to VeriChip
under an exclusive product and technology license with a remaining term of
approximately ten years.

         On October 22, 2002, we announced that the Food and Drug Administration
(FDA) had determined that VeriChip is not a regulated medical device for
security, financial and personal identification/safety applications. The FDA
specified in its ruling that VeriChip is a regulated medical device for health
information applications when marketed to provide information to assist in the
diagnosis or treatment of injury or illness. On November 8, 2002, we received a
letter from the FDA, based upon correspondence from us to the FDA, warning us
not to market VeriChip for medical applications. We currently intend to market
and distribute the VeriChip product for security, financial and personal
identification/safety applications and, in the future, we plan to expand our
marketing and distribution efforts to health information applications of the
product, subject to any and all necessary FDA and other approvals.

         We began marketing VeriChip for security, financial and personal
identification/safety applications within the United States on October 24,
2002.

         On February 1l, 2003, we announced that we received written clearances
from the FDA and the United States Department of Agriculture to market our new
product, Bio-Thermo, for use in pets, livestock and other animals. Bio-Thermo is
our first fully integrated implantable bio-sensing microchip that can transmit a
signal containing accurate temperature readings to our proprietary RFID
scanners. With this new technology, accurate temperature readings can be
obtained by simply passing the RFID handheld scanner over the animal or by
having the animal walk through a portal scanner. We believe that Bio-Thermo and
other biosensors developed in the future, will provide vital internal
diagnostics about the health of animals more efficiently and accurately than the
invasive techniques used in the industry today.

         The majority of our operations are the result of acquisitions completed
during the last six years. Our revenues from continuing operations were $99.6
million, $156.3 million, $134.8 million, $129.1 million and $74.3 million,
respectively, in 2002, 2001, 2000, 1999 and 1998.

         BUSINESS STRATEGY

         Our business strategy is to position ourselves as an advanced
technology development company through the development and commercialization of
proprietary technology such as Digital Angel, Thermo Life, VeriChip and
Bio-Thermo.

                                       5



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         RECENT DEVELOPMENTS

         Digital Angel/MAS Merger

         On March 27, 2002, pre-merger Digital Angel merged with MAS, and MAS
changed its name to Digital Angel Corporation. Also, pursuant to the merger
agreement, we contributed all of our stock in Timely Technology Corp., our
wholly-owned subsidiary, and Signature Industries, Limited, our 85% owned
subsidiary. Prior to the merger, pre-merger Digital Angel, Timely Technology
Corp. and Signature Industries, Limited were collectively referred to as the
Advanced Wireless Group (AWG). In satisfaction of a condition to the consent to
the merger by IBM Credit, we transferred all shares of Digital Angel Corporation
common stock owned by us to a Delaware business trust, which we refer to herein
as the Digital Angel Trust, controlled by an advisory board and, as a result,
the Digital Angel Trust has legal title to approximately 73.91% of the Digital
Angel Corporation common stock. The Digital Angel Trust has voting rights with
respect to the Digital Angel Corporation common shares until we repay our
obligations to IBM Credit in full. We have retained beneficial ownership of the
shares. The Digital Angel Trust may be obligated to liquidate the shares of
Digital Angel Corporation common stock owned by it for the benefit of IBM Credit
in the event we fail to make payments, or otherwise default under our IBM Credit
Agreement as more fully discussed below.

         IBM Credit Agreement

         Our Third Amended and Restated Term Credit Agreement with IBM Credit,
which we refer to herein as the IBM Credit Agreement, contained covenants
relating to our financial position and performance, as well as the financial
position and performance of Digital Angel Corporation. On September 30, 2002, we
entered into an amendment to the IBM Credit Agreement, which revised certain
financial covenants relating to our financial performance and the financial
position and performance of Digital Angel Corporation for the quarter ended
September 30, 2002 and the fiscal year ending December 31, 2002. On November 1,
2002, we entered into another amendment to the IBM Credit Agreement, which
further revised certain covenants relating to the financial performance of
Digital Angel Corporation for the quarter ended September 30, 2002, and the
fiscal year ending December 31, 2002. At September 30, 2002, we and Digital
Angel Corporation were in compliance with the revised covenants under the IBM
Credit Agreement. At June 30, 2002, we were not in compliance with our Minimum
Cumulative Modified EBITDA debt covenant and with other provisions of the IBM
Credit Agreement and Digital Angel Corporation was not in compliance with its
Minimum Cumulative Modified EBITDA and Current Assets to Current Liabilities
debt covenants. On August 21, 2002, IBM Credit provided us with a waiver of such
noncompliance. As consideration for the waiver, we issued to IBM Credit a five
year-warrant to acquire 2.9 million shares of our common stock at $0.15 per
share, valued at approximately $1.3 million, and a five year-warrant to purchase
approximately 1.8 million shares of our wholly-owned subsidiary, VeriChip
Corporation's, common stock at $0.05 per share, valued at approximately $44
thousand. At December 31, 2002, we did not maintain compliance with the revised
financial performance covenant under the IBM Credit Agreement and Digital Angel
Corporation did not maintain compliance with certain financial covenants under
its credit agreement with its lender, Wells Fargo Business Credit, Inc. (Wells
Fargo). Well Fargo provided Digital Angel Corporation with a waiver of
non-compliance. IBM Credit did not provide a waiver.

         Under the terms of the IBM Credit Agreement we were required to repay
IBM Credit Corporation $29.8 million of the $77.2 million outstanding principal
balance currently owed to them,

                                       6


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plus $16.4 million of accrued interest and expenses (totaling approximately
$46.2 million), on or before February 28, 2003. We did not make such payment by
February 28, 2003. On March 3, 2003, IBM Credit notified us that we had until
March 6, 2003, to make the payment. We did not make the payment on March 6,
2003, as required. Our failure to comply with the payment terms imposed by the
IBM Credit Agreement and to maintain compliance with the financial performance
covenant constitute events of default under the IBM Credit Agreement. On March
7, 2003, we received a letter from IBM Credit declaring the loan in default and
indicating that IBM Credit would exercise any and/or all of its remedies.

         Term Sheet

         On March 27, 2003, we announced that we had executed a forbearance
agreement term sheet with IBM Credit. The forbearance agreement will become
effective on or about March 31, 2003. In turn, we also agreed to dismiss with
prejudice a lawsuit we filed against IBM Credit and IBM Corporation in Palm
Beach County, Florida on March 6, 2003.

         The payment provisions of the forbearance agreement term sheet are as
follows:

                  o      the Tranche A Loan, consisting of $68.0 million
                         plus accrued interest, must be repaid in full no
                         later than September 30, 2003, provided that all
                         but $3 million of the Tranche A Loan (the "Tranche
                         A Deficiency Amount") will be deemed to be paid in
                         full on such date if less than the full amount of
                         the Tranche A Loan is repaid but all of the net
                         cash proceeds of the Digital Angel Corporation
                         shares held in the Digital Angel Trust are applied
                         to the repayment of the Tranche A Loan. The Tranche
                         A Deficiency Amount (if any) must be repaid no
                         later than March 31, 2004; and

                  o      the Tranche B Loan, consisting of $9.2 million plus
                         accrued interest, must be repaid in full no later
                         than March 31, 2004. Effective March 25, 2003, the
                         Tranche B Loan will bear interest at seven percent
                         (7%) per annum.

         The Tranche A and B Loans may be purchased under the terms of the
forbearance agreement term sheet by or on our behalf as follows:

                  o      the loans and all the other obligations may be
                         purchased on or before June 30, 2003, for $30
                         million in cash;

                  o      the loans and all the other obligations may be
                         purchased on or before September 30, 2003, for $50
                         million in cash; and

                  o      the Tranche A Loan may be purchased on or before
                         September 30, 2003, for $40 million in cash with an
                         additional $10 million cash payment due on or
                         before December 31, 2003. Payment of any of these
                         amounts by the dates set forth herein will
                         constitute complete satisfaction of any and all of
                         our obligations to IBM Credit under the IBM Credit
                         Agreement.

         In addition, we have agreed under the terms of the forbearance
agreement term sheet that the Digital Angel Trust will immediately engage an
investment bank to pursue the sale of the 19,600,000 shares of Digital Angel
Corporation common stock that are currently held in the Digital Angel Trust.
All proceeds from the sale of the Digital Angel Corporation common stock will
be applied to the loans and other obligations to satisfy the Tranche A payment
provisions as discussed above, in the event that the Company has not satisfied
its purchase rights by September 30, 2003.

         The forbearance agreement term sheet also modifies other provisions
of the IBM Credit Agreement, including but not limited to, the imposition of
additional limitations on permitted expenditures.

         Provided there has not earlier occurred a "Termination Event," as
defined, at the end of the forbearance period, the provisions of the forbearance
agreement shall become

                                       7


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of no force and effect. At that time, if the repayment terms of the
forbearance agreement are not met, IBM Credit will be free to exercise and
enforce, or to take steps to exercise and enforce, all rights, powers,
privileges and remedies available to them under the IBM Credit Agreement, as a
result of the payment and covenant defaults existing on March 24, 2003. If we
are not successful in satisfying the repayment obligations under the forbearance
agreement or we do not comply with the terms of the forbearance agreement or
the IBM Credit Agreement, and IBM Credit were to enforce its rights against
the collateral securing the obligations to IBM Credit, there would be
substantial doubt that we would be able to continue operations in the normal
course of business.

         Other

         The Staff of the Securities and Exchange Commission's Southeast
Regional Office is conducting an informal inquiry concerning us. We are fully
and voluntarily cooperating with this informal inquiry. At this point, we are
unable to determine whether this informal investigation may lead to
potentially adverse action.

         As of December 31, 2002, the net book value of our goodwill was
$67.8 million. There was no impairment of goodwill upon our adoption of FAS
142 on January 1, 2002. Upon our annual review for impairment during the
fourth quarter of 2002, we recorded an impairment charge of $62.2 million
associated with our Digital Angel Corporation segment. The impairment
relates to the goodwill associated with the acquisition of MAS in March
2002, and to Digital Angel Corporation's Wireless and Monitoring segment.
Future goodwill impairment reviews may result in additional write-downs. In
addition, Digital Angel Corporation wrote down $6.4 million of property and
equipment related to software associated with its Wireless and Monitoring
segment. As of December 31, 2002, Digital Angel Corporation's Wireless and
Monitoring segment has not recorded any significant revenue from its Digital
Angel product, and therefore, it was determined that the goodwill and
software were impaired.

         On June 8, 2002, our shareholders approved an increase in the number of
common shares authorized from 345.0 million to 435.0 million. Our articles of
incorporation were amended effective December 20, 2002, to reflect the increase
in authorized shares.

         From July 12, 2002, to July 30, 2002, our common stock was traded on
the Pink Sheets under the symbol "ADSX.PK." Prior to that time, our shares were
traded on the Nasdaq National Market (NasdaqNM). Effective July 31, 2002, our
shares were relisted on the NasdaqNM under the symbol "ADSX." As a condition of
our relisting, Nasdaq advised us that we had until October 25, 2002, to regain
compliance with the minimum closing bid price requirement of at least $1.00 per
share, and, immediately following, a closing bid price of at least $1.00 per
share for a minimum of ten (10) consecutive trading days. We were unable to
satisfy the minimum closing bid price requirement by October 25, 2002, and, as a
result, effective November 12, 2002, our common stock began trading on the
SmallCap, under our existing stock symbol ADSX. To maintain our SmallCap
listing, we must continue to comply with the SmallCap's listing requirements
and, prior to October 2003, regain the minimum bid requirement of at least $1.00
per share for a minimum of ten (10) consecutive trading days.

         Effective December 10, 2002, Dennis G. Rawan joined our Board of
Directors. Mr. Rawan has extensive financial experience, having practiced as a
Certified Public Accountant and served as a Chief Financial Officer of a
publicly held company. He serves as Chairman of the Audit Committee of our
Board of Directors.

         On March 21, 2003, our Chairman of the Board of Directors and Chief
Executive Officer Richard J. Sullivan retired. Replacing him in these
positions is Scott R. Silverman, our current President and Director. Our Board
of Directors negotiated a satisfactory severance agreement with Mr. Sullivan
under which Mr. Sullivan will receive a one-time payment of 56.0 million
shares of our common stock and 10.9 million re-priced stock options. The
options surrendered had exercise prices ranging from $0.15 to $0.32 per share
and were replaced with options exercisable at $0.01 per share. Under the terms
of Mr. Sullivan's previous employment contract, we would have been obligated
to make payments up to $17 million in cash or stock to Mr. Sullivan.

         On March 21, 2003, Jerome C. Artigliere resigned from his positions
of Senior Vice President and Chief Operating Officer. Under the terms of his
severance agreement, Mr. Artigliere will receive 4.8 million shares of our
common stock and 2.3 million re-priced stock options. The options surrendered
had exercise prices ranging from $0.15 to $0.32 per share and were replaced
with options exercisable at $0.01 per share. Replacing Mr. Artigliere is Kevin
H. McLaughlin. Mr. McLaughlin has served most recently as our majority-owned
subsidiary SysComm International Corporation's Chief Executive Officer.


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         BUSINESS SEGMENTS

         As a result of the merger of pre-merger Digital Angel and MAS, which
occurred on March 27, 2002, the significant restructuring of our business during
the past year and our emergence as an advanced technology development company,
we have re-evaluated and realigned our reporting segments. Effective January 1,
2002, we currently operate in three business segments: Advanced Technology,
Digital Angel Corporation and SysComm International.

         Advanced Technology

         The business units comprising our Advanced Technology segment
represent those business units that we believe will provide the necessary
synergies, support and infrastructure to allow us to develop, promote and
fully-integrate our technology products and services. This segment specializes
in security-related data collection, value-added data intelligence and complex
data delivery systems for a wide variety of end users including commercial
operations, government agencies and consumers. VeriChip and Thermo Life
products are included in our Advanced Technology segment.

         As of December 31, 2002, 2001 and 2000, revenues from this segment
accounted for 42.1%. 28.5% and 24.0%, respectively, of our total revenues.

         Customers
         ---------

         Our Advanced Technology segment delivers products and services across a
multitude of industries, including government, insurance, utilities,
communications and high tech. Some of this segment's largest customers include
several agencies of the United States federal government and PSE&G. Other than
customary payment terms, we do not offer any financing to our customers.

         Approximately $31.3 million, or 74.7%, and $27.4 million, or 61.5%, of
our Advanced Technology segment's revenues for 2002 and 2001, respectively, were
generated by our wholly-owned subsidiary, Computer Equity Corporation.
Approximately 99.1% and 77.7% of Computer Equity Corporation's revenues during
2002 and 2001, respectively, were generated through sales to various agencies of
the United States Federal Government. Computer Equity Corporation provides
telecommunications products and services. Most of Computer Equity Corporation's
business was being performed under a contract vehicle entitled Wire and Cable
Service (WACS) that was managed by the General Services Administration (GSA).
WACS allowed Computer Equity Corporation to provide government agencies with
equipment and services for campus and building communications networks and
related infrastructure without the need to follow the full procurement process
for a new contract.

         The GSA contracting official responsible for WACS had notified Computer
Equity Corporation that the WACS contract was expiring on September 30, 2003.
Upon the expiration of WACS, no new WACS tasks can be started; however, tasks
started prior to the expiration date can be completed. Due to the nature of the
government's budget cycle, projects funded in 2003 with fiscal year 2002 and
2003 funds will be continued with an expected completion date by the end of
2004.

         In January 2003, the WACS contract was replaced with the CONNECTIONS
contract. The CONNECTIONS contract has a three-year base term and five
successive one-year renewal options and a contract ceiling of $35 billion. The
CONNECTIONS contract is similar to the WACS contract in that it will

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allow Computer Equity Corporation to provide government agencies with equipment
and services for campus and building communications networks and related
infrastructure without the need to follow the full procurement process for a
new contract.

         Competitors
         -----------

         Our Advanced Technology segment's competitors include General Dynamics,
Inc., Engineering and Professional Services, Inc., CC-ops of California,
American Systems Corporation, Nortel, Genesys, Avaya, Aestea, Metrix, People
Soft, Cap Gemini, Datalan Corp. and Plural, Inc. We have less than one percent
of the federal telecommunications market share. We believe our business to be
highly competitive, and we expect that the competitive pressures we face will
not diminish. Many of our competitors have greater financial, technological,
marketing and other resources than we do.

         Digital Angel Corporation

         Our Digital Angel Corporation segment consists of the business
operations of Digital Angel Corporation and is engaged in the business of
developing and bringing to market proprietary technologies used to identify,
locate and monitor people, animals and objects. Before March 27, 2002, the
business of Digital Angel Corporation was operated in four divisions: Animal
Tracking, Digital Angel Technology, Digital Angel Delivery System, and Radio
Communications and Other. With the acquisition of MAS on March 27, 2002,
Digital Angel Corporation re-organized into four new divisions: Animal
Applications (formerly Animal Tracking), Wireless and Monitoring (a
combination of the former Digital Angel Technology and the Digital Angel
Delivery System segments), GPS and Radio Communications (formerly Radio
Communications and Other), and Medical Systems (formerly Physician Call Center
and Other). Medical Systems represents the business activity of the newly
acquired MAS.

         As of December 31, 2002, 2001 and 2000, revenues from this segment
accounted for 33.7%, 22.9% and 16.5%, respectively, of our total revenues.

         Customers
         ---------

         During 2002, the top five customers, Schering-Plough, US Army Corps of
Engineers, Biomark, Pacific States Marine and San Bernardino County accounted
for 31.8% of Digital Angel Corporation's revenues; however, no single customer
accounted for more than 10% of revenues. During 2001, the top five customers,
Schering Plough, Merial, Pacific States Marine, San Bernardino County and the US
Army Corps of Engineers accounted for 30.6% of this segment's revenues, one of
which accounted for 10.4% of the segment's revenues.


                                       10



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         Competitors
         -----------

         The animal identification market is highly competitive. The principal
competitors in the visual identification market are AllFlex USA, Inc. and Y-Tex
Corporation and the principal competitors in the electronic identification
market are AllFlex, USA, Inc., Datamars SA and Avid Plc.

         The principal competitor for the Digital Angel product is Whereify
Wireless, Inc. We are not aware of any other competitors currently marketing
products that compete with the Digital Angel product. However, we are aware of
several potential competitors that have expressed an interest in developing and
marketing similar technologies. There is no substantial revenue from product
sales of any participant in this market.

         The principal competitors for the GPS and Radio Communications
division are Tadiran Spectralink Ltd., Smith Group of Companies, Becker Avionic
Systems, A.C.R. Electronics Inc. and Securicor Information Systems Ltd.

         Medical Systems competes in the maritime medical advice market with
a few foreign government-operated entities. Further, there are several U.S.
companies, as well as hospitals, that provide radio medical advice to ships at
sea. While we believe that we have a competitive advantage, the barriers to
entry into this market are relatively low, and there can be no assurance that
other companies will not commence operations similar to those provided by
Medical Systems and generate competition that does not now exist.

         SysComm International

         Our SysComm International segment consists of the business operations
of our 52.5% owned subsidiary, SysComm International Corporation. This segment
is a full service provider of Information Technology, or IT, solutions and
products. It specializes in tailoring its approach to the individual customer
needs. Doing business as "InfoTech," this segment provides IT consulting,
networking, procurement, deployment, integration, migration and security
services and solutions. It also provides on-going system and network maintenance
services. During 2002, this segment continued its strategy of moving away from a
product-driven systems integration business model to a customer-oriented IT
solutions-based business model. It has further developed its deliverable IT
solutions by adding new consulting and service offerings, and increasing the
number of strategic alliances with outside technical service firms and
manufacturers of high-end IT products.

         As of December 31, 2002, 2001 and 2000, revenues from this segment
accounted for 22.8%, 21.9% and 20.2%, respectively, of our total revenues.

         Customers
         ---------

         A significant percentage of SysComm International's revenue is
derived from sales to customers in educational institutions, the legal and
financial community, medical facilities, museums and New York City agencies.
Its customer base also includes retailers, manufacturers and distributors.
During 2002, five customers, Deutsche Bank, Hackensack University Medical
Center, Liberty Mutual, Morgan Stanley and Polytechnic University accounted
for 23%, 22%, 11%, 11% and 11% of SysComm International's revenues,
respectively. During 2001, two customers, Liberty Mutual and Mass Mutual Life
Insurance accounted for 40% and 31% of SysComm International's revenues,
respectively.

                                       11


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<PAGE>

         Competitors
         -----------

         SysComm International competes in a highly competitive market with IT
products and solutions providers that vary greatly in their size and technical
expertise. Its primary competitors are Manchester Technologies, Inc., AlphaNet
Solution, Inc., En Pointe Technologies, Inc. Micros-to-Mainframes, Inc. and
Pomeroy Computer Resources. Additionally, we expect SysComm International to
face further competition from new market entrants and possible alliances between
competitors in the future.

         All Other
         ---------

         Business units that were part of our continuing operations and that
were closed or sold during 2002 and 2001 are reported as All Other.

         Corporate/Eliminations
         ----------------------

         The "Corporate/Eliminations" category includes all amounts recognized
upon consolidation of our subsidiaries such as the elimination of intersegment
revenues, expenses, assets and liabilities. "Corporation/Eliminations" also
includes certain interest expense and other expenses associated with corporate
activities and functions. Included in "Corporate/Eliminations" for the year
ended December 31, 2002, is a non-cash compensation charge of $18.7 million
associated with pre-merger Digital Angel options, which were converted into
options to acquire shares of MAS in connection with the merger of pre-merger
Digital Angel and MAS.

         Prior Segments
         --------------

         Prior to January 1, 2002, our business was organized into three
segments: Applications, Services and Advanced Wireless. Prior period information
has been restated to present our reportable segments on a comparative basis.

         On February 22, 2001, our senior management approved a plan to sell
Intellesale, Inc. and all of our other non-core businesses. Our Board of
Directors approved the plan on March 1, 2001. The results of operations,
financial condition and cash flows of Intellesale and all of our other non-core
businesses have been reported as Discontinued Operations in our financial
statements and prior periods have been restated.

         GEOGRAPHIC AREAS

         Currently, we operate in two geographic areas: the United States, which
comprises the majority of our operations, and the United Kingdom. Our United
Kingdom operations consist of a company in our Digital Angel Corporation
segment. The majority of our revenues and expenses in each geographic area, both
from Continuing and Discontinued Operations, were generated in the same
currencies, except as noted below.

         Previously, we operated in Canada. Our Canadian operation was comprised
of an automotive manufacturing and engineering company, which was part of our
Discontinued Operations, and which we disposed of in January 2002. Approximately
41% and 40% of the manufacturing and engineering company's revenues were
generated in U.S. Dollars for the years ended December 31, 2001, and 2000,
respectively, while 94% and 100% of its expenses were incurred in Canadian
Dollars during the same respective periods.

         From mid-December 2000 to April 2002, we operated a United Kingdom
company in our Advanced Technology segment. Approximately 89% of this company's
revenues were generated in foreign currencies during 2002 and 2001, while
approximately 45% of its expenses were generated in foreign currencies.

         We did not incur any significant foreign currency gains or losses
during the three years ended

                                       12


<PAGE>
<PAGE>

December 31, 2002.

         WEBSITE ACCESS TO INFORMATION AND DISCLOSURE OF WEB ACCESS TO
COMPANY REPORTS

         Our website address is: http://www.adsx.com. We make available free
of charge through our website our Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after such material is
electronically filed with the SEC.


                                       13


<PAGE>
<PAGE>

         RISK FACTORS

         WE HAVE DEFAULTED ON OUR OBLIGATIONS UNDER THE IBM CREDIT AGREEMENT,
AND OUR BUSINESS OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.

         On several occasions during 2001, 2002 and 2003, we failed to comply
with the covenants and payment terms contained in our credit agreements with IBM
Credit, and, as a result, at times we were in default under those agreements. We
entered into the IBM Credit Agreement with IBM Credit, which became effective on
March 27, 2002, upon the completion of the merger between pre-merger Digital
Angel and MAS. The IBM Credit Agreement contains various financial and other
restrictive covenants that, among other things, limit our ability to borrow
additional funds and declare and pay dividends, and requires us, and Digital
Angel Corporation to, among other things, maintain various financial ratios and
comply with various other financial covenants. At June 30, 2002, we, and Digital
Angel Corporation, were not in compliance with certain of the financial ratios
contained in the IBM Credit Agreement and we were not in compliance with other
provisions of the IBM Credit Agreement. On August 21, 2002, IBM Credit provided
us with a waiver of such noncompliance. As consideration for the waiver, we
issued to IBM a five-year warrant to purchase approximately 2.9 million shares
of our common stock at $0.15 per share and a warrant to purchase 1.8 million
shares of VeriChip Corporation's common stock at $.05 per share. On September
30, 2002, we entered into an amendment to the IBM Credit Agreement, which
revised certain financial covenants relating to our performance and the
financial position and performance of Digital Angel Corporation for the quarter
ended September 30, 2002, and the year ended December 31, 2002. On November 1,
2002, we entered into another amendment to the IBM Credit Agreement, which
further revised certain covenants relating to the financial performance of
Digital Angel Corporation for the quarter ended September 30, 2002, and the year
ended December 31, 2002. At December 31, 2002, we did not maintain compliance
with the revised financial performance covenant under the IBM Credit Agreement
and Digital Angel Corporation did not maintain compliance with certain financial
covenants under its credit agreement with its lender, Wells Fargo Business
Credit, Inc. (Wells Fargo). Well Fargo provided Digital Angel Corporation with a
waiver of non-compliance. IBM Credit did not provide a waiver.

         Under the terms of the IBM Credit Agreement we were required to repay
IBM Credit Corporation $29.8 million of the $77.2 million outstanding principal
balance currently owed to them, plus $16.4 million of accrued interest and
expenses (totaling approximately $46.2 million), on or before February 28, 2003.
We did not make such payment by February 28, 2003. On March 3, 2003, IBM Credit
notified us that we had until March 6, 2003, to make the payment. We did not
make the payment on March 6, 2003, as required. Our failure to comply with the
payment terms imposed by the IBM Credit Agreement and to maintain compliance
with the financial performance covenant constitute events of default under the
IBM Credit Agreement. On March 7, 2003, we received a letter from IBM Credit
declaring the loan in default and indicating that IBM Credit would exercise any
and/or all of its remedies.

         On March 27, 2003, we announced that we had executed a forbearance
agreement term sheet with IBM Credit. The forbearance agreement becomes
effective on or about March 31, 2003 and grants us more favorable loan repayment
terms and more time in which to meet our current obligations to IBM Credit. It
contains various purchase rights for us to buy back our existing indebtedness
from IBM Credit, including a one-time payment on or before June 30, 2003 of $30
million. Payment of this amount will constitute complete satisfaction of any and
all of our obligations to IBM Credit. Provided that there has not earlier
occurred a "Termination Event," as defined, at the end of the forbearance
period,

                                       14


<PAGE>
<PAGE>

the provisions of the forbearance agreement shall become of no force and effect.
At that time, if the repayment terms of the forbearance agreement are not met,
IBM Credit shall be free to exercise and enforce, or to take steps to exercise
and enforce, all rights, powers, privileges and remedies available to them under
the IBM Credit Agreement, as a result of the payment and covenant defaults
existing on March 24, 2003. If we are not successful in satisfying the payment
obligations under the forbearance agreement or we do not comply with the terms
of the forbearance agreement or the IBM Credit Agreement, and IBM Credit were to
enforce its rights against the collateral securing the obligations to IBM
Credit, there would be substantial doubt that we would be able to continue
operations in the normal course of business.

         See the risk factor entitled "Failure to obtain additional funding
and to repay our obligations to IBM Credit will have a negative impact on our
business, financial condition and results of operations."


         FAILURE TO OBTAIN ADDITIONAL FUNDING AND TO REPAY OUR OBLIGATIONS TO
IBM CREDIT WILL HAVE A NEGATIVE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

         Our failure to comply with the payment terms imposed by the IBM Credit
Agreement constitute an event of default under the IBM Credit Agreement. We must
satisfy certain payment provisions or purchase rights under the terms of the
forbearance agreement with IBM Credit, in order to avoid having to sell the
shares of Digital Angel Corporation's common stock held in the Digital Angel
Trust. If we fail to obtain the funding required to make the payments; or to buy
the purchase rights under the forbearance agreement and IBM Credit enforces its
rights against the collateral securing our obligations to them; there would be
substantial doubt that we would be able to continue operations in the normal
course of business.

         The IBM Credit Agreement prohibits us from borrowing funds from other
lenders without IBM's approval. Accordingly, there can be no assurance that we
will have access to funds necessary to provide for our ongoing operations.
Failure to obtain additional funding will have a material adverse effect on our
business, financial condition and results of operations.

         IF WE ARE REQUIRED TO SELL THE SHARES HELD IN THE DIGITAL ANGEL TRUST,
IT WILL HAVE A NEGATIVE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         According to the terms of the trust agreement for the Digital Angel
Trust, if the amounts we owe IBM Credit are not paid when due, or if we
otherwise default under the forbearance agreement or the IBM Credit
Agreement (as more fully discussed in Note 2 to the Consolidated Financial
Statements), IBM Credit will have the right to require that the shares of
the Digital Angel Corporation common stock held in the Digital Angel Trust
be sold to provide funds to satisfy our obligations to IBM Credit.

         If we are required to sell the shares held in the Digital Angel Trust
for an amount less than our current book value, we would incur a significant
non-cash charge and our financial position and operating results would be
materially adversely effected.

         In addition, under the terms of the employment agreement dated March 8,
2002, as amended, by and between the Digital Angel Corporation and Randolph K.
Geissler (the President and Chief Executive Officer of the Digital Angel
Corporation), a "change in control" occurs under that employment

                                       15


<PAGE>
<PAGE>

agreement if any person becomes the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of
securities of the Digital Angel Corporation representing 20% or more of the
combined voting power of the then outstanding shares of common stock. Therefore,
if the Digital Angel Trust were required to sell more than approximately 5.3
million shares of the Digital Angel Corporation common stock, such sale would
constitute a change in control under the employment agreement with Mr. Geissler.
Upon the occurrence of a change in control, Mr. Geissler, at his sole option and
discretion, may terminate his employment with the Digital Angel Corporation at
any time within one year after such change in control upon 15 days' notice. In
the event of such termination, the employment agreement provides that the
Digital Angel Corporation must pay to Mr. Geissler a severance payment equal to
three times the base amount as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended ("Code") minus $1.00 (or a total of
approximately $750,000), which would be payable no later than one month after
the effective date of Mr. Geissler's termination of employment. In addition,
upon the occurrence of a change of control under the employment agreement, all
outstanding stock options held by Mr. Geissler would become fully exercisable.

         The employment agreement also provides that upon:

            o   a change of control;

            o   the termination of Mr. Geissler's employment for any reason
                other than due to his material default under the employment
                agreement; or

            o   if he ceases to be the Digital Angel Corporation's President and
                Chief Executive Officer for any reason other than termination
                due to his material default under the employment agreement,
                within 10 days of the occurrence of any such events, the Digital
                Angel Corporation is to pay to Mr. Geissler $4,000,000. Digital
                Angel Corporation may pay such amount in cash or in its common
                stock or with a combination of cash and common stock. The
                employment agreement also provides that if the $4,000,000 is
                paid in cash and stock, the amount of cash paid must be
                sufficient to cover the tax liability associated with such
                payment, and such payment shall otherwise be structured to
                maximize tax efficiencies to both the Digital Angel Corporation
                and Mr. Geissler.

         Also, effective October 30, 2002, Digital Angel Corporation entered
into a Credit and Security Agreement with Wells Fargo. The Credit and Security
Agreement provides that a "change in control" under that agreement results in a
default. A change in control is defined as either Mr. Geissler ceasing to
actively manage the Digital Angel Corporation's day-to-day business activities
or the transfer of at least 25% of the outstanding shares of Digital Angel
Corporation's. Also, if Digital Angel Corporation owes Mr. Geissler $4,000,000
under his employment agreement, the obligation would most likely result in a
breach of Digital Angel Corporation's financial covenants under the Credit and
Security Agreement. If these defaults occurred and were not waived by Wells
Fargo, and if Wells Fargo were to enforce these defaults under the terms of the
Credit and Security Agreement and related agreements, Digital Angel
Corporation's and the Company's business and financial condition would be
materially and adversely affected, and it may force Digital Angel Corporation
to cease operations.


         WE CANNOT BE CERTAIN OF FUTURE FINANCIAL RESULTS.

         We incurred losses of $113.9 million, $198.1 million and $29.2 million
from continuing operations for the years ended December 31, 2002, 2001 and 2000,
respectively. Our business plan depends on our attaining and maintaining
profitability; however, we cannot predict whether we will be profitable in the
future. Our profitability depends on many factors, including the success of our
marketing programs, the maintenance and reduction of expenses and our ability to
successfully develop and bring to market new products and technologies. As of
December 31, 2002, we reported no revenues from the sale of our VeriChip(TM),
Bio Thermo(TM) and ThermoLife(TM) products and we have had minimal sales of our
Digital Angel product. We can give no assurance that we will be able to achieve
profitable operations. In addition, if we fail to experience profits within the
time frame expected by investors, this could have a

                                       16


<PAGE>
<PAGE>

detrimental effect on the market price of our common stock and there would be
substantial doubt that we would be able to continue operations in the normal
course of business.

         OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE, AND YOU MAY BE UNABLE TO
RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU ACQUIRE THEM.

         Since January 1, 2000, the price per share of our common stock has
ranged from a high of $18.00 to a low of $0.03. The price of our common stock
has been, and may continue to be, highly volatile and subject to wide
fluctuations in response to various factors, including the following:

            o   significant changes to our business resulting from acquisitions
                and/or expansions into different product lines;

            o   quarterly fluctuations in our financial results or cash flows;

            o   changes in investor perception of us or the market for our
                products and services;

            o   changes in economic and capital market conditions for other
                companies in our market sector; and

            o   changes in general economic and market conditions.

         In addition, the stock market in general, and stocks of technology
companies in particular, have often experienced extreme price and volume
fluctuations. This volatility is often unrelated or disproportionate to the
operating performance of these companies. Broad market and industry factors
may decrease the market price of our common stock, regardless of our actual
operating performance. Declines in the market price of our common stock
could also harm employee morale and retention, our access to capital, and
other aspects of our business. If our stock price is volatile, we may be the
target of additional securities litigation, which is costly and
time-consuming to defend. Because of recent periods of volatility in the
market price of our securities, we face a heightened risk of securities
class action litigation. In March 2003, we settled a purported securities
fraud class action which was filed against us and one of our directors.
While the class action was settled in March 2003, additional litigation of
this type could result in substantial costs and a diversion of management's
attention and resources, which could significantly harm our business
operations and financial condition.

         WE MAY ISSUE PREFERRED STOCK, WHICH WILL RANK SENIOR TO THE SHARES OF
OUR COMMON STOCK AND WHICH MAY DELAY OR PREVENT A CHANGE IN CONTROL OF US.

         Preferred stock may be created and issued from time to time by our
Board of Directors, with such rights and preferences as our Board of Directors
may determine. Because of our Board of Directors' broad discretion with respect
to the creation and issuance of any series of preferred stock without
shareholder approval, our Board of Directors could adversely affect the voting
power of our common stock. The issuance of preferred stock may also have the
effect of delaying, deferring or preventing a change in control of us.

         WE WERE RECENTLY DELISTED FROM THE NASDAQNM, LISTED ON THE SMALLCAP,
AND CANNOT PROVIDE ASSURANCES THAT WE WILL BE ABLE TO MAINTAIN OUR LISTING ON
THE SMALLCAP.

         Our ability to remain listed on Nasdaq depends on our ability to
satisfy applicable Nasdaq

                                       17


<PAGE>
<PAGE>

criteria including our ability to maintain a minimum bid price of $1.00 per
share. From July 12, 2002, to July 30, 2002, our common stock was traded on the
Pink Sheets under the symbol "ADSX.PK." Prior to that time, our shares were
traded on the NasdaqNM. Effective July 31, 2002, our shares were relisted on the
NasdaqNM under the symbol "ADSX." As a condition of our relisting, NasdaqNM
advised us that we had until October 25, 2002, to regain compliance with the
minimum closing bid price requirement of at least $1.00 per share, and,
immediately following, a closing bid price of at least $1.00 per share for a
minimum of ten (10) consecutive trading days. We were unable to satisfy the
minimum closing bid price requirement by October 25, 2002, and, as a result,
effective November 12, 2002, our common stock began trading on the SmallCap,
under our existing stock symbol ADSX. To maintain our SmallCap listing, we must
continue to comply with the SmallCap's listing requirements and, prior to
October 2003, regain the minimum bid requirement of at least $1.00 per share for
a minimum of ten (10) consecutive trading days.

         WE ARE REQUIRED TO ISSUE ADDITIONAL SHARES OF COMMON STOCK IN
CONNECTION WITH SEVERANCE AGREEMENTS WITH OUR FORMER EXECUTIVE OFFICERS AND
DIRECTORS AND AS A RESULT OUR STOCK WILL BE FURTHER DILUTED.

         On March 21, 2003, Richard J. Sullivan, our former Chairman of the
Board of Directors and Chief Executive Officer retired, and Jerry C. Artigliere,
our former Senior Vice President and Chief Operating Officer resigned. Under the
terms, of Messrs. Sullivan's and Artigliere's severance agreements they will
receive shares of our common stock of 56.0 million and 4.8 million,
respectively. These shares will be issued to the respective parties on or before
December 31, 2003.

         IF WE ARE REQUIRED TO ISSUE ADDITIONAL SHARES OF COMMON STOCK IN
CONNECTION WITH PRIOR ACQUISITIONS OUR STOCK MAY BE FURTHER DILUTED.

         As of March 21, 2003, there were 284,612,961 shares of our common stock
outstanding. Since January 1, 2001, we have issued a net aggregate of
183,126,260 shares of common stock, of which 97,261,634 shares were issued in
connection with acquisitions of businesses and assets and 64,810,635 shares were
issued upon conversion of our Series C preferred stock. We have effected, and
will likely continue to effect, acquisitions or contract for services through
the issuance of common stock or our other equity securities. In addition, we
have agreed to future earnout and "price protection" provisions in prior
acquisition and other agreements, which may result in additional shares of
common stock being issued. At December 31, 2002, based upon the expected
performance of an acquired subsidiary, we are contingently liable for additional
consideration of approximately $1.9 million. Such issuances of additional
securities may be dilutive to the value of our common stock and may have a
material adverse impact on the market price of our common stock.

                                       18



<PAGE>
<PAGE>

         WE MAY ISSUE ADDITIONAL SECURITIES, WHICH WOULD DILUTE THE VALUE OF THE
SHARES OF OUR COMMON STOCK.

         Certain events over which you will have no control could result in the
issuance of additional shares of our common stock or other securities, which
could dilute the value of your shares of common stock. We may issue additional
shares of common stock or other securities:

            o   to raise additional capital;

            o   upon the exercise of outstanding options and stock purchase
                warrants or additional options and warrants issued in the
                future;

            o   in connection with loans or other capital raising transactions;
                and

            o   in connection with acquisitions of other businesses or assets.

         As of March 21, 2003, there were outstanding warrants and options to
acquire up to 41,567,858 additional shares of our common stock. If exercised,
these securities could dilute the value of the shares of common stock. In
addition, we have the authority to issue up to a total of 435,000,000 shares of
common stock and up to 5,000,000 shares of preferred stock without further
shareholder approval, including shares which could be convertible into our
common stock, subject to applicable SmallCap requirements for issuing additional
shares of stock. Were we to issue any such shares, including the shares being
offered in this prospectus, or enter into any other financing transactions, the
terms may have the effect of significantly diluting or adversely affecting the
holdings or the rights of the holders of the common stock.

         COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR REVENUE.

         Each of our business units operates in a highly competitive
environment, and we expect that competitive pressures will continue in the
future. Many of our competitors have far greater financial, technological,
marketing, personnel and other resources than us. The areas that we have
identified for continued growth and expansion are also target market segments
for some of the largest and most strongly capitalized companies in the United
States and Europe. In response to competitive pressures, we may be required to
reduce prices or increase spending in order to retain or attract customers or to
pursue new market opportunities. As a result, our revenue, gross profit and
market share may decrease, each of which could significantly harm our results of
operations. In addition, increased competition could prevent us from increasing
our market share, or cause us to lose our existing market share, either of which
would

                                       19


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<PAGE>

harm our revenues and profitability. We cannot assure you that we will have the
financial, technical, marketing and other resources required to successfully
compete against current and future competitors or that competitive pressures
faced by us will not have a material adverse effect on our business, financial
condition or results of operations.

         WE DEPEND ON OUR SMALL TEAM OF SENIOR MANAGEMENT, AND WE MAY HAVE
DIFFICULTY ATTRACTING AND RETAINING ADDITIONAL PERSONNEL.

         The success of our business depends on the continued service of our
executive officers and key personnel. Some of our employees have employment
contracts that call for bonus arrangements based on earnings. There can be no
assurance that we will be successful in retaining our key employees or that we
can attract and retain additional skilled personnel as required. The loss of the
services of any of our central management team could harm our business,
financial condition and results of operations. In addition, the operations of
any of our individual facilities could be adversely affected if the services of
the local managers should be unavailable.

         WE FACE THE RISKS THAT THE VALUE OF OUR INVENTORY MAY DECLINE BEFORE WE
SELL IT OR THAT WE MAY NOT BE ABLE TO SELL THE INVENTORY AT THE PRICES WE
ANTICIPATE.

         Our success will depend on our ability to purchase inventory at
attractive prices relative to its resale value and our ability to turn our
inventory rapidly through sales. If we pay too much or hold inventory too long,
we may be forced to sell our inventory at a discount or at a loss or write down
its value, and our business could be materially adversely affected.

         BECAUSE WE WILL NOT PAY DIVIDENDS ON OUR COMMON STOCK FOR THE
FORESEEABLE FUTURE, SHAREHOLDERS MUST RELY ON STOCK APPRECIATION FOR ANY RETURN
ON THEIR INVESTMENT IN THE COMMON STOCK.

         We have never declared or paid dividends on our common stock, and we
cannot assure you that any dividends will be paid in the foreseeable future. The
IBM Credit Agreement places restrictions on the declaration and payment of
dividends. We intend to use any earnings which we generate to finance our
operations and to repay the amounts outstanding under the IBM Credit Agreement
and, we do not anticipate paying cash dividends in the future. As a result, only
appreciation of the price of our common stock will provide a return to our
shareholders.

         WE MAY NOT PREVAIL IN ONGOING LITIGATION AND MAY BE REQUIRED TO PAY
SUBSTANTIAL DAMAGES.

         In addition to the litigation described under Legal Proceedings
beginning on page 25, we are party to various legal actions as either plaintiff
or defendant in the ordinary course of business. While we believe that the final
outcome of these proceedings will not have a material adverse effect on our
financial position, cash flows or results of operations, we cannot assure the
ultimate outcome of these actions and the estimates of the potential future
impact on our financial position, cash flows or results of operations for these
proceedings could change in the future. In addition, we will continue to incur
additional legal costs in connection with pursuing and defending such actions.

         WE CANNOT ENSURE THE VALIDITY OR PROTECTION OF OUR INTELLECTUAL
PROPERTY RIGHTS OR PATENT RIGHTS.

         Our ability to commercialize any of our products under development will
depend, in part, on our

                                      20


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<PAGE>

ability to obtain patents, enforce those patents, preserve trade secrets, and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that the patent applications licensed to or owned by us will
result in issued patents, that patent protection will be secured for any
particular technology, that any patents that have been or may be issued to us
will be valid or enforceable or that any patents will provide meaningful
protection to us. Furthermore, we do not own the VeriChip technology that is
produced under patents #6,400,338 and #5,211,129. This technology is owned by
Digital Angel Corporation and licensed to VeriChip under an exclusive product
and technology license with a remaining term of approximately ten years. We
cannot provide assurances that VeriChip Corporation will retain licensing rights
to the use of these patents beyond the licensing period or that the license will
not be terminated early.

         THERE CAN BE NO ASSURANCE THAT THE PATENTS OWNED AND LICENSED BY US, OR
ANY FUTURE PATENTS, WILL PREVENT OTHER COMPANIES FROM DEVELOPING SIMILAR OR
EQUIVALENT PRODUCTS.

         Furthermore, there can be no assurance that any of our future products
or methods will be patentable, that such products or methods will not infringe
upon the patents of third parties, or that our patents or future patents will
give us an exclusive position in the subject matter claimed by those patents. We
may be unable to avoid infringement of third party patents and may have to
obtain a license, defend an infringement action, or challenge the validity of
the patents in court. There can be no assurance that a license will be available
to us, if at all, on terms and conditions acceptable to us, or that we will
prevail in any patent litigation. Patent litigation is costly and time
consuming, and there can be no assurance that we will have or will devote
sufficient resources to pursue such litigation. If we do not obtain a license
under such patents and if we are found liable for infringement or if we are not
able to have such patents declared invalid, we may be liable for significant
money damages, may encounter significant delays in bringing products to market,
or may be precluded from participating in the manufacture, use, or sale of
products requiring such licenses.

         We also rely on trade secrets and other unpatented proprietary
information in our product development activities. To the extent that we rely on
trade secrets and unpatented know-how to maintain our competitive technological
position, there can be no assurance that others may not independently develop
the same or similar technologies. We seek to protect trade secrets and
proprietary knowledge in part through confidentiality agreements with our
employees, consultants, advisors and collaborators. Nevertheless, these
agreements may not effectively prevent disclosure of our confidential
information and may not provide us with an adequate remedy in the event of
unauthorized disclosure of such information.

         OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION.

         Some of our current or future products may be subject to government
regulation and, in some cases, pre-approval. By letter dated October 17,
2002, the FDA issued a determination that the VeriChip product is not a
medical device under Section 513(g) of the Federal Food, Drug and Cosmetic
Act with respect to the intended security, financial and personal
identification/safety applications. However, the FDA further stated in its
determination letter that with respect to the use of the VeriChip product in
health information applications, VeriChip is a medical device subject to the
FDA's jurisdiction. On November 8, 2002, we received a letter from the FDA,
based upon correspondence from us to the FDA, warning us not to market
VeriChip for medical applications. While we currently intend to market and
distribute the VeriChip product for security, financial and personal
identification/safety applications, in the future, we plan to expand our
marketing and distribution efforts to health information applications of the
product, subject to any and all necessary FDA and other approvals. There can
be no assurances that the required FDA regulatory reviews will be

                                       21


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<PAGE>

conducted in a timely manner or that regulatory approvals will be obtained. Our
future failure to comply with the applicable regulatory requirements can, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution, any of which could
have a material adverse effect on us.

         Digital Angel Corporation is subject to federal, state and local
regulation in the United States and other countries, and it cannot predict the
extent to which it may be affected by future legislative and other regulatory
developments concerning its products and markets. Digital Angel Corporation
develops, assembles and markets a broad line of electronic and visual
identification devices for the companion animal, livestock and wildlife markets.
Digital Angel Corporation's readers must and do comply with the FCC Part 15
Regulations for Electromagnetic Emissions, and the insecticide products
purchased and resold by Digital Angel Corporation have been approved by the U.S.
Environmental Protection Agency (EPA) and are produced under EPA regulations.
Sales of insecticide products are incidental to Digital Angel Corporation's
primary business and do not represent a material part of its operations or
revenues. Digital Angel Corporation's products also are subject to compliance
with foreign government agency requirements. Digital Angel Corporation's
contracts with its distributors generally require the distributor to obtain all
necessary regulatory approvals from the governments of the countries into which
they sell Digital Angel Corporation's products. However, any such approval may
be subject to significant delays. Some regulators also have the authority to
revoke approval of previously approved products for cause, to request recalls of
products and to close manufacturing plants in response to violations. Any
actions by these regulators could materially adversely affect Digital Angel
Corporation's business.

         WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FROM THE USE OF OUR
PRODUCTS.

         Manufacturing, marketing, selling, and testing our products under
development entails a risk of product liability. We could be subject to product
liability claims in the event our products or products under development fail to
perform as intended. Even unsuccessful claims could result in the expenditure of
funds in litigation and the diversion of management time and resources and could
damage our reputation and impair the marketability of our products. While we
maintain liability insurance, there can be no assurance that a successful claim
could not be made against us, that the amount of indemnification payments or
insurance would be adequate to cover the costs of defending against or paying
such a claim, or that damages payable by us would not have a material adverse
effect on our business, financial condition, and results of operations and on
the price of our common stock.

         THE THERMO LIFE TECHNOLOGY HAS NOT YET BEEN DEVELOPED FOR COMMERCIAL
DEPLOYMENT.

         The Thermo Life technology has been successfully tested in the
laboratory. Our ability to develop and commercialize products based on this
proprietary technology will depend on our ability to develop our products
internally on a timely basis. No assurances can be given as to when or if the
Thermo Life technology will be successfully marketed.

         OUR SUCCESS DEPENDS ON OUR ABILITY TO SELL INCREASING QUANTITIES OF OUR
PRODUCTS.

         Our success currently depends primarily upon our ability to
successfully market and sell increasing quantities of our products. Our ability
to successfully sell increasing quantities of our products will depend
significantly on the increasing acceptance of our products. Our failure to sell
our products would have a material adverse effect on us. Unfavorable publicity
concerning our products or technology also could have an adverse effect on our
ability to obtain regulatory approvals and to achieve acceptance by intended
users any of which would have a material adverse effect on us.

                                       22



<PAGE>
<PAGE>

         WE HAVE BEEN, AND MAY CONTINUE TO BE, ADVERSELY AFFECTED BY PAST
EVENTS.

         The events of September 11, 2001, in New York City and Washington D.C.
have, and are likely to continue to have, a negative effect on the economic
condition of the U.S. financial markets in general and on the technology sector
in particular. As a result of the current economic slowdown, which was worsened
by the events of September 11, 2001, we have experienced deteriorating sales for
certain of our businesses. This resulted in the shut down of several of our
businesses during the third and fourth quarters of 2001, which resulted in a
decrease in our revenues during 2002. Also, letters of intent that we had
received during the last half of 2001 and the first quarter of 2002 related to
the sales of certain of our businesses indicated a decline in their fair values.
As a result, we recorded asset impairment charges and increased inventory
reserves during the third and fourth quarters of 2001. In addition, based upon
our annual goodwill impairment review performed during the fourth quarter of
2002, we impaired certain goodwill and software related to Digital Angel
Corporation. If the economic condition of the U.S. financial markets in general
and of the technology sector in particular do not improve in the near term, and
if the current economic slowdown continues, we may be forced to shut down
additional businesses, causing us to incur additional charges, which could have
a material adverse effect on our business, operating results and financial
condition.

         RAW MATERIALS AND SUPPLIES

         To date, we have not been materially adversely affected by the
inability to obtain raw materials or products. Our Digital Angel Corporation
segment relies solely on a production arrangement with Raytheon Corporation
for the assembly of its patented syringe-injectable microchips, which are
used in all of our implantable electronic identification products. The loss
of, or any significant reduction in, the production could have an adverse
effect on our and Digital Angel Corporation's businesses.

         PATENTS AND TRADEMARKS

         The success of our Advanced Technology and Digital Angel Corporation
segments depend significantly on our ability to maintain patent, trademarks and
trade secret protection, to obtain future patents and licenses, and to operate
without infringing on the propriety rights of third parties. We license VeriChip
from Digital Angel Corporation under an exclusive product and technology
license, which terminates in 2013. We filed an International Patent Application
directed to the Digital Angel product, which has been published under
publication no. W/0 02/44865. The application, which is in the name of Digital
Angel Corporation, is currently pending in several countries.

         SEASONALITY

         No material portion of our business is considered to be seasonal.

         EMPLOYEES

         At March 14, 2003, we and our subsidiaries employed approximately 419
employees.

         BACKLOG

         At March 14, 2003, we and our subsidiaries had a backlog of
approximately $22.0 million. We expect all of the backlog at March 14, 2003 to
be filled in 2003 and 2004.

         COMPLIANCE WITH ENVIRONMENTAL REGULATIONS

         Federal, state, and local laws or regulations which have been enacted
or adopted regulating the

                                       23


<PAGE>
<PAGE>

discharge of materials into the environment have not had, and under present
conditions we do not foresee that they will have, a material adverse effect on
our capital expenditures, earnings, cash flows or our competitive position. We
will continue to monitor our operations with respect to potential environmental
issues, including changes in legally mandated standards.

         ITEM 2.  PROPERTIES

         Our corporate headquarters is located in Palm Beach, Florida. At
December 31, 2002, we were obligated under leases for approximately 183,549
square feet of facilities, of which 124,085 square feet was for office
facilities and 59,464 square feet was for factory and warehouse space. These
leases expire at various dates through 2042. In addition, we owned 105,777
square feet of office and manufacturing facilities, of which 69,800 square feet
was for manufacturing, factory and warehouse use and 35,977 square feet was for
office space.

         The following table sets forth our owned and leased properties by
business divisions:


<TABLE>
<CAPTION>
                                                                         FACTORY/
                                                          OFFICE        WAREHOUSE       TOTAL
                                                          ------        ---------       -----
                                                               (amounts in square feet)
<S>                                                      <C>             <C>           <C>
         Advanced Technology                              56,658          13,464        70,122
         Digital Angel Corporation                        52,258         109,800       162,058
         Syscomm International                             9,262           1,000        10,262
         All Other                                        16,900           5,000        21,900
         Corporate (1)                                    23,484              --        23,484
                                                         -------         -------       -------
         Continuing Operations                           158,562         129,264       287,826
         Discontinued Operations                           1,500              --         1,500
                                                         -------         -------       -------
                  Total                                  160,062         129,264       289,326
                                                         =======         =======       =======
</TABLE>



         The following table sets forth the principal locations of our
properties:

<TABLE>
<CAPTION>
                                                         FACTORY/
                                          OFFICE        WAREHOUSE       TOTAL
                                          ------        ---------       -----
                                                 (amounts in square feet)
<S>                                      <C>             <C>           <C>
         California                       30,957              --        30,957
         Florida                           6,307              --         6,307
         Louisiana                         1,500              --         1,500
         Maryland                         13,800           4,800        18,600
         Minnesota                        10,000          65,000        75,000
         New Hampshire                    15,856           5,464        21,320
         New Jersey (1)                   20,838           1,000        21,838
         New York                          3,254              --         3,254
         Ohio                             16,900           5,000        21,900
         Virginia                         18,500           8,000        26,500
         United Kingdom                   22,150          40,000        62,150
                                         -------         -------       -------
                  Total                  160,062         129,264       289,326
                                         =======         =======       =======

<FN>
         (1) Includes office space leased to others.
</TABLE>

                                       24


<PAGE>
<PAGE>

         ITEM 3.  LEGAL PROCEEDINGS

         We, and certain of our subsidiaries, are parties to various legal
actions as either plaintiff or defendant and accordingly, have recorded certain
reserves in our financial statements as of December 31, 2002. In our opinion,
these proceedings are not likely to have a material adverse affect on our
financial position, our cash flows or our overall trends in results. The
estimate of the potential impact on our financial position, our overall results
of operations or our cash flows for these proceedings could change in the
future.

         On August 3, 2001, Prodigy Communications, successor to FlashNet
Communications, filed suit against Intellesale in connection with a settlement
and computer purchase agreement. During December 2002, we settled with Prodigy
Communications. As a result of the settlement, during the fourth quarter of
2002, we reversed approximately $1.4 million in litigation reserves, which were
included in our Discontinued Operations.

         On January 31, 2002, Treeline, Inc. filed a complaint in the Common
Pleas Court of Cuyahoga County, Ohio against us, and one of our subsidiaries,
STR, Inc., now known as ARJANG, Inc. ("STR") and another defendant who was
formerly an executive of STR, alleging that STR breached its lease agreement
with Treeline, Inc. in connection with a facility no longer being used by us.
The complaint alleges that we, and the former executive of STR, are liable as
Guarantors of the lease for damages sustained by Treeline as a result of the
alleged breach. The plaintiff demanded monetary relief of an unspecified amount.

         During the quarter ended March 31, 2002, 510 Ryerson Road Inc. filed a
lawsuit against us and one of our subsidiaries in connection with a lease for a
facility that we vacated prior to the expiration of the lease and which is no
longer in use. The trial date, originally set for December 2002, has been
postponed and not yet re-scheduled.

         In May 2002, a purported securities fraud class action was filed
against us and one of our directors. In the following weeks, fourteen
virtually identical complaints were consolidated into a single action, In re
Applied Digital Solutions Litigation, which was filed in the United States
District Court for the Southern District of Florida. In March 2003, we entered
into a memorandum of understanding to settle the pending lawsuit. The
settlement of $56 million will be entirely covered by proceeds from insurance
and is subject to approval by the District Court and review by an independent
special litigation committee.

         In July 2002, SRZ Trading LLC filed a derivative complaint in the
Circuit Court of Cole County, Missouri against us, and several of our officers
and directors. The Missouri action was voluntarily dismissed and refiled in
federal court in the Southern District of Florida. The Florida action was
voluntarily dismissed with prejudice in February 2003.

         On September 25, 2002, The Bank of Scotland filed a complaint in the
Court of Session in Edinburgh, Scotland against us alleging that we owe them
money under the terms of an agreement dated December 18, 2000, governing the
Senior Term Loan and Overdraft Facilities ("Loan Agreement"). Under the terms
of the Loan Agreement, Caledonian Venture Holding Limited (also referred to as
Transatlantic Software Corporation) was purchased by us through the issuance
of our common stock. The complaint alleges that we are liable for a shortfall
of approximately $565,000 created under the price protection provision of the
loan.

         On May 29, 2001, Janet Silva, individually and as Guardian ad litem for
Jonathan Silva, a minor, and the Estate of Clarence William Silva, Jr.
(collectively, "Plaintiffs") filed suit against Customized

                                       25


<PAGE>
<PAGE>

Services Administrators, Incorporated (CSA), Pricesmart, Inc., Commercial Union
Insurance Company, CGU Insurance Group, and Digital Angel Corporation
(collectively, "Defendants") in the Superior Court of the State of California in
and for the County of Santa Clara. The allegations of the complaint arise from a
vacation guarantee insurance policy (the "Insurance Contract") allegedly
purchased by the Plaintiffs from the Defendants on March 6, 2000. The complaint
alleges, among other things, that the Defendants breached the Insurance
Contract, defrauded Plaintiffs, acted in bad faith, engaged in deceptive and
unlawful business practices, resulting in the wrongful death of Clarence William
Silva, Jr. (the "deceased") and the intentional infliction of emotional distress
on Plaintiffs. The complaint seeks the cost of funeral and burial expenses of
the deceased and amounts constituting the loss of financial support of the
deceased, general damages, attorney's fees and costs, and exemplary damages. CSA
has filed a cross-claim against us alleging that we should be held liable for
any liability that CSA may have to the Plaintiffs in this case. We have denied
the allegations of the complaint and the CSA cross-claim and are vigorously
contesting all aspects of this action.

         We are not subject to any environmental or formal governmental
proceedings.

         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         We did not submit any matters to a vote of security holders during the
fourth quarter of 2002.

                                       26



<PAGE>
<PAGE>


         ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                  SHAREHOLDER MATTERS

         From July 12, 2002, to July 30, 2002, our common stock was traded on
the Pink Sheets under the symbol "ADSX.PK." Prior to that time, our shares were
traded on the NasdaqNM. From July 31, 2002, to October 11, 2002, our shares were
relisted on the NasdaqNM under the symbol "ADSX." Since November 12, 2002, our
common stock has been included in the SmallCap under the symbol "ADSX."

         The following table shows, for the periods indicated, the high and low
sales prices per share of the common stock based on published financial sources.

                                                   HIGH              LOW
                                                   ----              ---
         2001
         First Quarter                             $2.97            $0.75
         Second Quarter                             1.75             0.39
         Third Quarter                              0.48             0.11
         Fourth Quarter                             0.67             0.18

         2002
         First Quarter                             $0.55            $0.28
         Second Quarter                             2.40             0.29
         Third Quarter                              0.84             0.03
         Fourth Quarter                             0.70             0.36


         HOLDERS

         As of March 21, 2003, there were approximately 2,393 holders of record
of our common stock.

         DIVIDENDS

         We have never paid cash dividends on our common stock. The decision
whether to apply legally available funds to the payment of dividends on our
common stock will be made by our Board of Directors from time to time in the
exercise of its business judgment. Our credit agreement with IBM Credit provides
that we may not declare or pay any dividend, other than dividends payable solely
in our common stock, on any shares of any class of our capital stock or any
warrants, options or rights to purchase any such capital stock, or make any
other distribution in respect of such stock or other securities, whether in
cash, property or other obligations of us.

                                       27


<PAGE>
<PAGE>

         RECENT SALES OF UNREGISTERED SECURITIES

         The following table lists all unregistered securities sold by us during
the year ended December 31, 2002, which have not previously been reported. These
shares were issued in connection with consulting services. These shares were
issued without registration in reliance upon the exemption provided by Section
4(2) of the Securities Act of 1933, as amended, or Rule 506 of Regulation D
promulgated thereunder.

<TABLE>
<CAPTION>
                                                  Aggregate                                          Number of
                                                  Amount of    Number of                               Common
      Name/Entity/Nature         Date of Sale   Consideration   Persons    Note      Issued For        Shares
--------------------------------------------------------------------------------------------------------------

<S>                              <C>               <C>             <C>       <C>      <C>           <C>
EnviroCommunications, Inc.       December, 2002    $82,000         1         1        Services         200,000
                                                                                                    ----------
Total                                                                                                  200,000
                                                                                                    ==========
<FN>
   1. Represents shares issued in connection with consulting services
      provided in connection with our VeriChip product, which transaction was
      exempt from registration pursuant to Section 4(2) of the Securities
      Act. The transaction document included an acknowledgment that the sale
      was not registered, that shares were acquired for investment and not
      for resale, and that the shares must be held until and unless
      registered or transferred in another transaction exempt from
      registration. In addition, certificates representing the shares were
      legended to indicate that they were restricted. Robert Levy, President,
      has sole voting and dispositive power with respect to the shares held
      by EnviroCommunications, Inc.
</TABLE>

                                       28


<PAGE>
<PAGE>

         ITEM 6.  SELECTED FINANCIAL DATA

         The following table of selected financial data should be read in
conjunction with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and other financial information appearing elsewhere in this Annual
Report. The Summary of Operations data set forth below for each of the years in
the three-year period ended December 31, 2002 and the Summary of Balance Sheet
Data as of December 31, 2002 and 2001 were derived from, and qualified by
reference to, our financial statements appearing elsewhere in this Annual
Report. The Summary of Operations data for the years ended December 31, 1999 and
1998 and the Summary of Balance Sheet Data as of December 31, 2000, 1999 and
1998 are derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                                       FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                           ------------------------------------------------------------
                                            2002         2001          2000         1999          1998
                                            ----         ----          ----         ----          ----
<S>                                      <C>           <C>          <C>          <C>            <C>
STATEMENT OF OPERATIONS DATA:
 Net revenue                             $  99,600     $ 156,314    $ 134,766    $ 129,064      $74,343
 Cost of goods and services sold            67,718       109,839       82,475       74,299       39,856
                                         ---------     ---------    ---------    ---------      -------
 Gross profit                               31,882        46,475       52,291       54,765       34,487
 Selling, general and administrative
  expense                                   66,450       102,316       61,996       58,960       32,120
 Research and development                    3,518         8,610        2,504           --           --
 Depreciation and amortization               4,773        28,899       11,073        6,560        2,913
 Asset impairment, restructuring and
  unusual costs                             69,382        71,719        6,383        2,550           --
 Loss (gain) on sale of subsidiary
  and assets                                  (132)        6,058         (486)     (20,075)        (733)
 Interest and other income                  (2,356)       (2,076)      (1,095)        (422)        (291)
 Interest expense                           17,524         8,555        5,901        3,478        1,070
                                         ---------     ---------    ---------    ---------      -------
 (Loss) income from continuing
  operations before provision
  for income taxes, minority interest,
  net loss on subsidiary merger
  transaction, equity in net
  loss of affiliate and extraordinary
  loss                                    (127,277)     (177,606)     (33,985)       3,714         (592)
 Provision (benefit) for income taxes          326        20,870       (5,040)       1,180          670
                                         ---------     ---------    ---------    ---------      -------
 (Loss) income from continuing
  operations before minority
  interest, net loss on subsidiary
  merger transaction, equity in net
  loss of affiliate and extraordinary
  loss                                    (127,603)     (198,476)     (28,945)       2,534       (1,262)
 Minority interest                         (18,474)         (718)         229          (46)         120
 Net loss on subsidiary merger
  transaction and stock issuances            4,485            --           --           --           --
 Equity in net loss of affiliate               291           328           --           --           --
                                         ---------     ---------    ---------    ---------      -------
 (Loss) income from continuing
  operations                              (113,905)     (198,086)     (29,174)       2,580       (1,382)
 Income (loss) from discontinued
  operations, net of income taxes               --           213      (75,702)       3,012        6,072
 Loss on disposal of discontinued
  operations, including provision
  for operating losses during
  phase-out period, net of tax
  benefit                                    1,420       (16,695)      (7,266)          --           --
                                         ---------     ---------    ---------    ---------      -------

 (Loss) income before extraordinary
  loss                                    (112,485)     (214,568)    (112,142)       5,592        4,690
 Extraordinary gain (loss), net of
  taxes                                         --         9,465           --         (160)          --
                                         ---------     ---------    ---------    ---------      -------
 Net (loss) income                        (112,485)     (205,103)    (112,142)       5,432        4,690
 Preferred stock dividends                      --        (1,147)        (191)          --          (44)
 Accretion of beneficial conversion
  feature of preferred stock                    --        (9,392)      (3,857)          --           --
                                         ---------     ---------    ---------    ---------      -------
 Net (loss) income available to
  common stockholders                    $(112,485)    $(215,642)   $(116,190)   $   5,432      $ 4,646
                                         =========     =========    =========    =========      =======

                                       29


<PAGE>
<PAGE>
<CAPTION>
                                                       FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                           ------------------------------------------------------------
                                            2002         2001          2000         1999          1998
                                            ----         ----          ----         ----          ----
<S>                                      <C>           <C>          <C>          <C>            <C>
 Net (loss) income per common
  share - basic:
    Continuing operations                $   (0.42)    $   (1.23)   $   (0.52)   $    0.06      $ (0.05)
    Discontinuing operations                    --         (0.10)       (1.30)        0.06         0.19
    Extraordinary gain (loss)                   --          0.06           --           --           --
                                         ---------     ---------    ---------    ---------      -------
      Net (loss) income per common
       share - basic                     $   (0.42)    $   (1.27)   $   (1.82)   $    0.12      $  0.14
                                         =========    ==========    =========    =========      =======

 Net (loss) income per common
  share - diluted:
    Continuing operations                $   (0.42)    $   (1.23)   $   (0.52)   $    0.05      $ (0.05)
    Discontinuing operations                    --         (0.10)       (1.30)        0.06         0.17
    Extraordinary gain (loss)                   --          0.06           --           --           --
                                         ---------     ---------    ---------    ---------      -------
      Net (loss) income per common
       share - diluted                   $   (0.42)    $   (1.27)   $   (1.82)   $    0.11      $  0.12
                                         =========     =========    =========    =========      =======

 Average common shares outstanding:
    Basic                                  269,232       170,009       63,825       46,814       32,318
    Diluted                                269,232       170,009       63,825       50,086       34,800

<CAPTION>
                                                                 AS OF DECEMBER 31,
                                           ------------------------------------------------------------
                                            2002         2001          2000         1999          1998
                                            ----         ----          ----         ----          ----
                                                             (AMOUNTS IN THOUSANDS)
<S>                                      <C>           <C>          <C>          <C>            <C>
 BALANCE SHEET DATA:
 Cash and cash equivalents               $   5,818     $   3,696    $   8,039    $   2,181      $  1,936
 Due from buyers of divested
  subsidiary                                    --         2,625           --       31,302            --
 Property and equipment                      9,822        20,185       21,368        6,649         8,933
 Goodwill                                   67,818        90,831      166,024       24,285        23,786
 Net (liabilities) assets of
  discontinued operations                   (9,368)       (9,460)       8,076       75,284        37,320
 Total assets                              117,233       167,489      319,451      186,605        71,613
 Long-term debt                              3,346         2,586       69,146       33,260         1,864
 Total debt                                 85,225        88,442       74,374       62,915        26,055
 Minority interest                          18,422         4,460        4,879        1,292         1,300
 Redeemable preferred stock and option          --         5,180       18,620           --            --
 Stockholders' (deficit) equity            (36,092)       28,119      160,562       92,936        67,560
</TABLE>

         The following table presents the impact of FAS 142 on our selected
financial data as indicated:

<TABLE>
<CAPTION>
                                                             YEAR ENDED     YEAR ENDED    YEAR ENDED
                                                            DECEMBER 31,   DECEMBER 31,  DECEMBER 31,
                                                                2001          2000          1999
                                                                ----          ----          ----
<S>                                                          <C>            <C>            <C>
(Loss) income before extraordinary (loss) gain:
(Loss) income before extraordinary (loss) gain as
 reported                                                    $(214,568)     $(112,142)     $ 5,592
Add back: Goodwill amortization                                 21,312          9,415        2,602
Add back: Equity method investment amortization                  1,161             --           --
                                                             ---------      ---------      -------
Adjusted (loss) income before extraordinary (loss) gain      $(192,095)     $(102,727)     $ 8,194
                                                             =========      =========      =======

Earnings (loss) per common share - basic
Net (loss) income per share before extraordinary (loss)
 gain - basic as reported                                    $   (1.26)     $   (1.76)     $  0.12
Goodwill amortization                                             0.12           0.15         0.05
Equity method investment amortization                             0.01             --           --
                                                             ---------      ---------      -------
Adjusted (loss) income before extraordinary (loss) gain
 per share - basic                                           $   (1.13)     $   (1.61)     $  0.17
                                                             =========      =========      =======

Earnings (loss) per share - diluted
Net (loss) income per share before extraordinary
 (loss) gain - diluted as reported                           $   (1.26)     $   (1.76)     $  0.11
Goodwill amortization                                             0.12           0.15         0.05
Equity method investment amortization                             0.01             --           --
                                                             ---------      ---------      -------
Adjusted (loss) income before extraordinary (loss) gain
 per share - diluted                                         $   (1.13)     $   (1.61)     $  0.16
                                                             =========      =========      =======
Net (loss) income available to common stockholders:
Net (loss) income available to common stockholders
 as reported                                                 $(215,642)     $(116,190)     $ 5,432

                                       30

<PAGE>
<PAGE>

Add back: Goodwill amortization                                 21,312          9,415        2,602
Add back: Equity method investment amortization                  1,161             --           --
                                                             ---------      ---------      -------
Adjusted net (loss) income                                   $(193,169)     $(106,775)     $ 8,034
                                                             =========      =========      =======

Earnings (loss) per common share - basic
Net (loss) income per share - basic, as reported             $   (1.27)     $   (1.82)     $  0.12
Goodwill amortization                                             0.12           0.15         0.05
Equity method investment amortization                             0.01             --           --
                                                             ---------      ---------      -------
Adjusted net (loss) income - basic                           $   (1.14)     $   (1.67)     $  0.17
                                                             =========      =========      =======

Earnings (loss) per share - diluted
Net (loss) income per share - diluted, as reported           $   (1.27)     $   (1.82)     $  0.11
Goodwill amortization                                             0.12           0.15         0.05
Equity method investment amortization                             0.01             --           --
                                                             ---------      ---------      -------
Adjusted net (loss) income per share - diluted               $   (1.14)     $   (1.67)     $  0.16
                                                             =========      =========      =======
</TABLE>

                                       31


<PAGE>
<PAGE>

         ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

         The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the accompanying
financial statements and related notes included in this Annual Report. Certain
statements contained herein may contain forward-looking statements - see
"Cautionary Statement Regarding Forward-Looking Information and Risk Factors."

OVERVIEW

         We are an advanced technology company that focuses on the development
of life-enhancing technology products and services. To date, we have developed
four such products:

            o   Digital Angel(TM), for monitoring and tracking people and
                objects;

            o   Thermo Life(TM), a thermoelectric generator; and

            o   VeriChip(TM), an implantable radio frequency verification device
                that can be used for security, financial, personal
                identification/safety and other applications; and

            o   Bio-Thermo(TM), a temperature-sensing implantable microchip
                for use in pets, livestock and other animals.

         As a result of the merger of pre-merger Digital Angel and MAS, which
occurred on March 27, 2002, the significant restructuring of our business during
the past year and our emergence as an advanced technology development company,
we have re-evaluated and realigned our reporting segments. Effective January 1,
2002, we currently operate in three business segments: Advanced Technology,
Digital Angel Corporation and SysComm International.

         Business units that were part of our continuing operations and that
were closed or sold during 2001 and 2002 are reported as All Other.

         The "Corporate/Eliminations" category includes all amounts recognized
upon consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses, assets and liabilities.
"Corporation/Eliminations" also includes certain interest expense and other
expenses associated with corporate activities and functions. Included in
"Corporate/Eliminations" for the year ended December 31, 2002, is a non-cash
compensation charge of $18.7 million associated with pre-merger Digital Angel
options, which were converted into options to acquire shares of MAS in
connection with the merger of pre-merger Digital Angel and MAS.

         Prior to January 1, 2002, our business was organized into three
segments: Applications, Services and Advanced Wireless. Prior period information
has been restated to present our reportable segments on a comparative basis.

         On February 22, 2001, our senior management approved a plan to sell
Intellesale, Inc. and all of our other non-core businesses. Our Board of
Directors approved the plan on March 1, 2001. The results of operations,
financial condition and cash flows of Intellesale and all of our other non-core
businesses have been reported as Discontinued Operations in our financial
statements and prior periods have been restated.

                                       32


<PAGE>
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
As such, some accounting policies have a significant impact on the amount
reported in these financial statements. The preparation of our financial
statements requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates. We believe our most
critical accounting policies include revenue recognition, software revenue
recognition, VeriChip revenue recognition, goodwill and other intangible assets,
stock-based compensation, proprietary software in development, inventory
obsolescence, and legal contingencies as explained below.

REVENUE RECOGNITION

         For programming, consulting and software licensing services and
construction contracts, we recognize revenue based on the percent complete for
fixed fee contracts, with the percent complete being calculated as either the
number of direct labor hours in the project to date divided by the estimated
total direct labor hours or based upon the completion of specific task orders.
It is our policy to record contract losses in their entirety in the period in
which such losses are foreseeable. For nonfixed fee jobs, revenue is recognized
based on the actual direct labor hours in the job times the standard billing
rate and adjusted to realizable value, if necessary. For product sales, we
recognize revenue at the time products are shipped and title has transferred,
provided that a purchase order has been received or a contract has been
executed, there are no uncertainties regarding customer acceptance, the sales
price is fixed and determinable and collectability is deemed probable. If
uncertainties regarding customer acceptance exists, revenue is recognized when
such uncertainties are resolved. Revenue from royalties is recognized when
licensed products are shipped. There are no significant post-contract support
obligations at the time of revenue recognition. Our accounting policy regarding
vendor and post-contract support obligations is based on the terms of the
customers' contract, billable upon the occurrence of the post-sale support.
Costs of goods sold are recorded as the related revenue is recognized. We do not
experience significant product returns, and therefore, management is of the
opinion that no allowance for sales returns is necessary. We have no obligation
for warranties on new hardware sales, because the warranty is provided by the
manufacturer. We do not offer a warranty policy for services to our customers.
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.

SOFTWARE REVENUE RECOGNITION

         For those arrangements where our contract calls only for the delivery
of software with no additional obligations, revenue is recognized at the time of
delivery, provided that there is a signed contract, delivery of the product has
taken place, the fee is fixed by the contract and collectability is considered
probable. For multiple element arrangements such as a contract that includes the
delivery of software and a service arrangement, revenues allocated to the sale
of the software are recognized when the software is delivered to the customer.
Revenues related to the sale of the service agreement are recognized ratably
over the term of the service agreement. A value is ascribed to each of the
elements sold. This value is based on vendor specific objective evidence of fair
value, regardless of any separate prices that may be stated in the contract.
Vendor specific objective evidence of fair value is the price charged when the
elements are sold separately. If an element is not yet being sold separately,
the fair value is the price established by management having the relevant
authority to do so. It is considered probable that the price established by
management will not change before the separate introduction of the

                                       33


<PAGE>
<PAGE>

element. If the contract includes a discount, the discount is applied to the
components of the contract which specifically apply. For those contracts where
the discount is a fixed amount for the entire contract (i.e. not specifically
identifiable with any of the contract elements), a proportionate amount of the
discount is allocated to each element of the contract based on that element's
fair value without regard to the discount. Our contracts do not include
unspecified upgrades and enhancements. For those arrangements where our
contracts to deliver software require significant production modification or
customization of the software, revenues are recognized using percentage of
completion accounting. The service element of these contracts are essential to
the functionality of other elements in the contract and are not accounted for
separately. The cost to complete and extent of progress towards completion of
these contracts can be reasonably ascertained based on the detailed tracking and
recording of labor hours expended. Progress payments on these contracts are
required and progress is measured using the efforts expended input measure.
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.

VERICHIP REVENUE RECOGNITION

Distributor Rights Fees

         As of December 31, 2002, we have not yet recognized revenue associated
with our VeriChip product. All distributor fees are recorded as deferred revenue
on our balance sheet at December 31, 2002 and included in accrued expenses. We
will recognize revenue associated with the distributor rights, product sales
and monitoring services in the future based upon the following policy:

         The nonrefundable portion of the upfront fee paid for exclusive
distributor rights will be recognized over the initial term of the distributor
agreement. The initial term will start with the first product sale under the
agreement, not the contract period itself. The formula used to calculate this
amount should be an amount equal to the percentage that each product order
represents in relation to the minimum product order quantities required by the
agreement. Until the amount of product returns can be reasonably estimated, no
revenues will be recognized until the expiration of the period of time the
distributor has to accept or reject the products as provided in their
agreements.

         If the distributor materially breaches their agreement and this breach
results in the loss of their exclusive distributor rights but not their
non-exclusive distributor rights, the balance of the non-amortized upfront fees
will continue to be recognized ratably over the remaining life of their
agreement. The formula previously described will be used to recognize these
remaining fees unless no orders are placed. If this is the case, then the
recognition of revenue from the remaining portion of non-amortized fees will be
delayed until the expiration of the contract term.

         If a contract breach results in the loss of all distributor rights and
the only way to remain a distributor is to pay an additional substantial
monetary penalty, then the remaining portion of the initial distributor fee will
be recognized as revenues in the month in which the contract requirement is
breached.

Product Sales

         Revenue from the sale of products such as microchips and scanners will
be recorded at gross with a separate display of cost of sales. Until the amount
of returns can be reasonably estimated, revenues will not be recognized until
the expiration of the period of time the distributor has to accept or reject the
products as provided in their distributor agreement. Once the amount of returns
can be reasonably estimated, revenues (net of expected returns) will be
recognized at the time of shipment and the passage of title.

                                       34


<PAGE>
<PAGE>

Since the final use of the product is unknown at the time it is shipped to the
distributor, and end users may choose from a number of non-proprietary
monitoring services or choose none at all, and the monitoring services are not
essential to the functionality of all chips, the company will not attempt to
bundle the revenue from the sale of chips with potential future revenues from a
monitoring service.

Monitoring Services

         Monitoring services will be treated as a separate earnings process from
product sales. Revenues from this service will be recognized on a straight-line
basis over the term of the service agreement.

GOODWILL AND OTHER INTANGIBLE ASSETS

         Up through 2001, we reviewed goodwill and other intangible assets
quarterly for impairment whenever events or changes in business circumstances
indicated that the remaining useful life may have warranted revision or that the
carrying amount of the long-lived asset may not have been fully recoverable.
Included in factors considered were significant customer losses, changes in
profitability due to sudden economic or competitive factors, change in
managements' strategy for the business unit, letters of intent received for the
sale of the business unit, or other factors arising in the quarterly period. We
annually performed undiscounted cash flows analyses by business unit to
determine if impairment existed. For purposes of these analyses, earnings before
interest, taxes, depreciation and amortization were used as the measure of cash
flow. When impairment was determined to exist, any related impairment loss was
calculated based on fair value. Fair value was determined based on discounted
cash flows. The discount rate utilized by us was the rate of return expected
from the market or the rate of return for a similar investment with similar
risks. We recorded goodwill impairment charges of $63.6 million and $0.8 million
during 2001 and 2000, respectively.

         On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets" (FAS 142). FAS 142
eliminates the amortization of goodwill and instead requires that goodwill be
tested for impairment at least annually. Intangible assets deemed to have
indefinite life under FAS 142, such as goodwill, are no longer amortized, but
instead reviewed at least annually for impairment. Goodwill amortization
amounted to $21.3 million during 2001. Intangible assets with finite lives are
amortized over the useful life. As part of the implementation of FAS 142, we
were required to complete a transitional impairment test of goodwill and other
intangible assets. There was no impairment of goodwill upon the adoption of FAS
142. Annually, we test our goodwill and intangible assets for impairment as a
part of our annual business planning cycle during the fourth quarter of each
fiscal year. Based upon this annual test, we recorded a goodwill impairment of
approximately $62.2 million at December 31, 2002 for goodwill associated with
our Digital Angel Corporation segment. In addition, future events such as market
conditions or operational performance of our acquired businesses could cause us
to conclude that additional impairment exists. Any resulting impairment loss
could also have a material adverse impact on our financial condition and results
of operations.

STOCK-BASED COMPENSATION

         We account for our employee stock-based compensation plans in
accordance with APB Opinion No. 25 (APB No. 25), Accounting for Stock Issued to
Employees and Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25, and the disclosure provisions of SFAS No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation. Accordingly, no
compensation cost is recognized for any of

                                       35


<PAGE>
<PAGE>

our fixed stock options granted to employees when the exercise price of each
option equals or exceeds the fair value of the underlying common stock as of the
grant date for each stock option. Changes in the terms of stock option grants,
such as extensions of the vesting period or changes in the exercise price,
result in variable accounting in accordance with APB Opinion No. 25.
Accordingly, compensation expense is measured in accordance with APB No. 25 and
recognized over the vesting period. If the modified grant is fully vested, any
additional compensation costs are recognized immediately. Under variable
accounting, changes in the underlying price of our stock may have a significant
impact to earnings. A rise in our stock price results in additional compensation
expense and a decrease in our stock price results in a reduction of reported
compensation expense. During 2001, we repriced 19.3 million stock options. As a
result, we have recorded non-cash compensation expense of $0.7 million and $5.3
million in 2002 and 2001, respectively.

         We account for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123.

PROPRIETARY SOFTWARE IN DEVELOPMENT

         In accordance with Statement of Financial Accounting Standards (FAS)
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, we have capitalized certain computer software development
costs upon the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of a detailed program
design that has been confirmed by documenting and tracing the detail program
design to product specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization is provided based on the
greater of the ratios that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product, or the
straight-line method over the estimated useful life of the product. The
estimated useful life for the straight-line method is determined to be 2 to 5
years. Future events such as market conditions, customer demand, or
technological obsolescence could cause us to conclude that the software is
impaired. The determination of the possible impairment expense requires
management to make estimates that effect our consolidated financial statements.

INVENTORY OBSOLESCENCE

         Estimates are used in determining the likelihood that inventory on hand
can be sold. Historical inventory usage and current revenue trends are
considered in estimating both obsolescence and slow-moving inventory. Inventory
is stated at lower of cost or market, determined by the first-in, first-out
method, net of any reserve for obsolete or slow-moving inventory.

LEGAL CONTINGENCIES

         We are currently involved in several legal proceedings. We have accrued
our estimate of the probable costs for the resolution of these claims. This
estimate has been developed in consultation with outside counsel handling our
defense in these matters and is based upon an analysis of potential results,
assuming a combination of litigation and settlement strategies. We do not
believe these proceedings will have a material adverse effect on our
consolidated financial position. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in our estimates.

                                       36


<PAGE>
<PAGE>

RESULTS OF CONTINUING OPERATIONS

         The following table sets forth data expressed as a percentage of total
revenue for the years indicated.

<TABLE>
<CAPTION>
                                                                          PERCENTAGE OF TOTAL REVENUE
                                                               -------------------------------------------------
                                                                     2002             2001             2000
                                                                       %                %                %
                                                               -------------------------------------------------
<S>                                                                <C>              <C>              <C>
         Product revenue                                             81.3             72.4             77.7
         Service revenue                                             18.7             27.6             22.3
                                                               -------------------------------------------------
           Total revenue                                            100.0            100.0            100.0
                                                               -------------------------------------------------
         Cost of products sold                                       58.6             55.4             51.1
         Cost of services sold                                        9.4             14.8             10.1
                                                               -------------------------------------------------
           Total cost of products and services sold                  68.0             70.3             61.2
           Gross margin                                              32.0             29.7             38.8
         Selling, general and administrative expense                 66.7             65.5             46.0
         Research and development expense                             3.5              5.5              1.9
         Interest and non-cash charges:
         Asset impairment and unusual costs                          69.7             45.9              4.7
         Depreciation and amortization                                4.8             18.5              8.2
         Loss (gain) on sales of subsidiaries and
          business assets                                            (0.1)             3.9              0.4
         Interest income                                             (2.4)            (1.3)            (0.8)
         Interest expense                                            17.6              5.5              4.4
                                                               -------------------------------------------------
         Loss before provision (benefit) for income
          taxes, minority interest and equity in net loss
          of affiliate                                             (127.8)          (113.6)           (25.2)
         Provision (benefit) for income taxes                         0.3             13.4             (3.7)
                                                               -------------------------------------------------
         Loss from continuing operations before minority
          interest and equity in net loss of affiliate             (128.1)          (127.0)           (21.5)
         Minority interest                                          (18.5)            (0.5)             0.2
         Net loss from subsidiary merger transaction,
         stock issuances and loss on sale of subsidiary
         stock                                                        4.5
         Equity in net loss of affiliate                              0.3              0.2                --
                                                               -------------------------------------------------
         Loss from continuing operations                           (114.4)          (126.7)           (21.6)
         Income (loss) from discontinued operations, net
          of income taxes                                              --              0.1            (56.2)
                                                               -------------------------------------------------
         Loss on disposal and operating income (losses)
          during the phase out period                                 1.4            (10.7)            (5.4)
                                                               -------------------------------------------------
         Loss before extraordinary gain                            (113.0)          (137.3)           (83.2)
         Extraordinary gain (loss)                                                     6.0               --
                                                               -------------------------------------------------
         Net loss                                                  (113.0)          (131.2)           (83.2)
         Preferred stock dividends                                     --             (0.7)            (0.1)
                                                               -------------------------------------------------
         Accretion of beneficial conversion feature of
          preferred stock                                              --             (6.0)            (2.9)
                                                               -------------------------------------------------
         Net loss available to common stockholders                 (113.0)          (138.0)           (86.2)
                                                               =================================================
</TABLE>

                                       37


<PAGE>
<PAGE>

REVENUE

     Revenue from continuing operations for 2002 was $99.6 million, a
decrease of $56.7 million, or 36.3%, from $156.3 million in 2001.
Revenue for 2001 represents an increase of $21.5 million, or 16.0% from
$134.8 million in 2000. The decrease in 2002 was primarily attributable
to the sale or closure of all businesses that were not cash positive or
that did not fit into our strategy of becoming an advanced technology
development company.  The increase in 2001 was primarily attributable to
the growth through acquisitions.

     Revenue for each of the continuing operating segments was:

<TABLE>
<CAPTION>
                                          2002                               2001                                2000
                            --------------------------------    --------------------------------    -------------------------------
                            PRODUCT     SERVICE       TOTAL     PRODUCT     SERVICE       TOTAL     PRODUCT     SERVICE      TOTAL
                            -------     -------       -----     -------     -------       -----     -------     -------      -----
                                                                   (AMOUNTS IN THOUSANDS)
<S>                         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>        <C>
Advanced Technology         $ 28,991    $ 12,939    $ 41,930    $ 28,123    $ 16,447    $ 44,570    $ 24,384    $  7,970   $ 32,354
Digital Angel Corporation     30,876       2,685      33,561      33,220       2,518      35,738      19,605       2,647     22,252
SysComm International         20,056       2,665      22,721      30,075       4,100      34,175      24,774       2,514     27,288
All Other                      1,013         375       1,388      21,318      19,974      41,292      35,805      16,876     52,681
Corporate                          0           0           0         411         128         539         191           0        191
                            --------    --------    --------    --------    --------    --------    --------    --------   --------
Total                       $ 80,936    $ 18,664    $ 99,600    $113,147    $ 43,167    $156,314    $104,759    $ 30,007   $134,766
                            ========    ========    ========    ========    ========    ========    ========    ========   ========
</TABLE>

     Changes during the years were:

     Our Advanced Technology's revenue decreased $2.6 million from 2001
to 2002. Product revenue increased by $0.9 million, or 3.1%, while
service revenue decreased by $3.5 million, or 21.3%. We attribute the
decreases in 2002 to reduced sales of hardware and software products and
reduced technology services.  The decrease in product revenue was
partially offset by an increase in product revenue for Computer Equity
Corporation. During 2001, this segment experienced an increase in sales
due primarily to the inclusion of twelve months of operating results for
two significant acquisitions acquired in 2000. These two significant
acquisitions include Computer Equity Corporation, acquired on June 1,
2000, and Pacific Decision Sciences Corporation, acquired on October 1,
2000.

     Our Digital Angel Corporation's revenue decreased $2.2 million, or
6.1%, from 2001 to 2002. Product revenue decreased by $2.3 million, or 7.1%,
while service revenue increased by $0.2 million, or 6.6%. We attribute the
decrease in product sales for 2002 primarily to a decrease in shipments of
visual identification tags for Canadian customers, customer inventory
adjustments and continued softness in the livestock market during 2002. We
attribute the increase in service revenue to the MAS merger in March 2002.
Revenue increased $13.5 million, or 60.8%, from 2000 to 2001. The increase
in revenue in 2001 was primarily the result of the acquisitions of Timely
Technology Corp. in April 2000 and Destron Fearing Corporation in September
2000.

     Our SysComm International's revenue decreased $11.5 million, or
33.5%, from 2001 to 2002. Product revenue decreased by $10.0 million, or
33.3%, while service revenue decreased by $1.4 million, or 35.0%. The
decrease in product and service sales was a result of an industry wide
softening in demand that existed throughout 2002. Additionally, product
sales declined as a result of a decision in April 2002, to cease selling
certain lower-margin computer hardware products and to focus on sales of
higher margin products and related technical services.  Revenue
increased $6.9 million, or 25.2%, from 2000 to 2001. Both product and
service revenue increased as a result of internal growth and the
acquisition of SysComm International Corporation.


                                     38

<PAGE>
<PAGE>

     Our All Other segment's revenue decreased $39.9 million, or 96.6%,
from 2001 to 2002. Product revenue decreased by $20.3 million, or 95.2%,
while service revenue decreased by $19.6 million, or 98.1%. Revenue
decreased $11.4 million, or 21.6%, from 2000 to 2001. The decreases in
revenue in 2002 as compared to 2001, and in 2001 as compared to 2000,
were due to the sale or closure of all of the business units comprising
this group during the last half of 2001 and the first half of 2002.

     GROSS PROFIT AND GROSS PROFIT MARGIN

     Gross profit from continuing operations for 2002 was $31.9
million, a decrease of $14.6 million, or 31.4%, from $46.5 million in
2001. Gross profit for 2001 represents a decrease of $5.8 million, or
11.1% from $52.3 million in 2000. As a percentage of revenue, the gross
profit margin was 32.0%, 29.7% and 38.8% for the years ended December
31, 2002, 2001 and 2000, respectively.

     Gross profit from continuing operations for each operating segment
was:


<TABLE>
<CAPTION>
                                          2002                                2001                                2000
                            --------------------------------    --------------------------------    -------------------------------
                            PRODUCT     SERVICE       TOTAL     PRODUCT     SERVICE       TOTAL     PRODUCT     SERVICE      TOTAL
                            -------     -------       -----     -------     -------       -----     -------     -------      -----
                                                                     (AMOUNTS IN THOUSANDS)
<S>                         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>        <C>
Advanced Technology         $  5,639    $  7,288    $ 12,927    $  6,867    $  8,593    $ 15,460    $  8,485    $  5,115   $ 13,600
Digital Angel Corporation     13,171         469      13,640      12,968         471      13,439       8,086       1,213      9,299
SysComm International          2,905       1,245       4,150       3,013       2,341       5,354       4,762       1,041      5,803
All Other                        826         339       1,165       3,218       8,465      11,683      14,336       9,062     23,398
Corporate                          0           0           0         411         128         539         191           0        191
                            --------    --------    --------    --------    --------    --------    --------    --------   --------
                            $ 22,541    $  9,341    $ 31,882    $ 26,477    $ 19,998    $ 46,475    $ 35,860    $ 16,431   $ 52,291
                            ========    ========    ========    ========    ========    ========    ========    ========   ========
</TABLE>

     Gross profit margin from continuing operations for each operating
segment was:

<TABLE>
<CAPTION>
                                            2002                               2001                                2000
                               -------------------------------    --------------------------------    ------------------------------
                               PRODUCT     SERVICE     TOTAL      PRODUCT     SERVICE      TOTAL      PRODUCT     SERVICE     TOTAL
                               -------     -------     -----      -------     -------      -----      -------     -------     -----
                                  %           %          %           %           %           %           %           %          %
                               -------     -------     -----      -------     -------      -----      -------     -------     -----
<S>                            <C>         <C>         <C>        <C>         <C>          <C>        <C>         <C>         <C>
Advanced Technology             19.5        56.3        30.8        24.4        52.2        34.7        34.8        64.2       42.0
Digital Angel Corporation       42.7        17.5        40.6        39.0        18.7        37.6        41.2        45.8       41.8
SysComm International           14.5        46.7        18.3        10.0        57.1        15.7        19.2        41.4       21.3
All Other                       81.5        90.4        83.9        15.1        42.4        28.3        40.0        53.7       44.4
Corporate                        0.0         0.0         0.0       100.0       100.0       100.0       100.0         0.0      100.0
                                27.9        50.0        32.0        23.4        46.3        29.7        34.2        54.8       38.8
</TABLE>

     Changes during the years were:

     Our Advanced Technology segment's gross profit decreased $2.5
million from 2001 to 2002, and margins decreased to 30.8% in 2002
compared to 34.7% in 2001. We attribute the decrease in gross profit and
margin primarily to the reduction in sales of higher-margin services
during 2002. Gross profit increased $1.9 million from 2000 to 2001 and
margins decreased to 34.7% in 2001 compared to 42.0% in 2000. During
2001, this segment experienced an increase in gross margin due primarily
to the inclusion of twelve months of operating results for two
significant businesses acquired in 2000. These two significant
acquisitions were Computer Equity Corporation, acquired on June 1, 2000,
and Pacific Decision Sciences Corporation, acquired on October 1, 2000.
Companies acquired in 2000 contributed $9.4 million in gross profit in
2000. Gross profit and margin percentage from existing businesses
decreased in 2000 as the poor performance of the technology sector
during the fourth quarter of 2000 resulted in lower capital spending and
increased incentives, which contributed to the decline in gross margin
percentage.

     Our Digital Angel Corporation segment's gross profit increased
$0.2 million, or 1.5%, from 2001 to 2002, and margins increase to 40.6%
from 37.6%. We attribute the increase in gross profit

                                     39

<PAGE>
<PAGE>

for 2002, to the Medical Systems segment and we attribute the increase in
gross margin to a favorable shift in the product mix. Gross profit increased
by $4.1 million, or 44.5%, from 2000 to 2001, and margins decreased to 37.6%
from 41.8%. Gross profit increased in 2001 primarily the result of the
acquisitions of Timely Technology Corp. in April 2000, and Destron Fearing
Corporation in September 2000. Gross profit margins decreased in 2001,
primarily because the businesses acquired in 2000 earn lower margin
percentages than our existing business.

     Our SysComm International segment's gross profit decreased $1.2
million, or 22.5%, from 2001 to 2002. Gross margin percentage increased
to 18.3% from 15.7% in 2001. The decrease in gross profit was primarily
due to the overall decrease in revenue resulting from the soft market in
the IT industry, while the increase in gross margin is primarily
attributable to the focus on sales of higher margin products and related
technical services during 2002.  Gross profit decreased $0.4 million, or
7.7%, from 2000 to 2001. Gross margin percentage decreased to 15.7% in
2001 compared to 21.3% in 2000.  The poor performance of the economy
and the technology sector in particular resulted in lower capital
spending and increased incentives during 2001 as compared to 2000.

     Our All Other segment's gross profit decreased by $10.5 million,
or 90.0%, from 2001 to 2002. Gross margin percentage increased to 83.9%
in 2002 compared to 28.3% in 2001. Gross profit decreased $11.7 million,
or 50.1%, from 2000 to 2001. Gross margin percentage decreased to 28.3%
in 2001 compared to 44.4% in 2000. The decrease in gross profit in 2002
and 2001 is primarily due to the sale or closure of the business units
comprising this segment during the last half of 2001 and the first half
of 2002. We attribute the increase in gross margin in 2002 to
inventory reserves of $4.3 million, which were recorded during 2001, and
to the sale and closure of business units within this group.  The
majority of the business units that were sold or closed earned lower
gross margins on average than the remaining business unit comprising the
group during the first half of 2002.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expenses from continuing operations
were $66.5 million in 2002, a decrease of $35.9 million, or 35.1%, over the
$102.3 million reported in 2001. Selling, general and administrative
expenses from continuing operations increased $40.3 million in 2001, or
65.0%, over the $62.0 million reported in 2000. As a percentage of revenue,
selling, general and administrative expenses from continuing operations have
increased to 66.5% in 2002, from 65.5% in 2001 and 46.0% in 2000.

     Selling, general and administrative expense for each of the
operating segments was:

<TABLE>
<CAPTION>
                                           2002        2001        2000
                                           ----        ----        ----
                                              (AMOUNTS IN THOUSANDS)
<S>                                      <C>         <C>         <C>
Advanced Technology                      $12,100     $ 12,273    $10,570
Digital Angel Corporation                 15,615        9,595      7,810
SysComm International                      4,171        5,451      4,075
All Other                                  1,504       28,876     23,041
Corporate (1)                             33,060       46,121     16,500
                                         -------     --------    -------
                                         $66,450     $102,316    $61,996
                                         =======     ========    =======
</TABLE>

                                     40

<PAGE>
<PAGE>
     Selling, general and administrative expense as a percentage of
revenue for each of the operating segments was:

<TABLE>
<CAPTION>
                                            2002        2001        2000
                                            ----        ----        ----
                                              %           %           %
                                              -           -           -
<S>                                        <C>          <C>         <C>
Advanced Technology                         28.9        27.5        32.7
Digital Angel Corporation                   46.4        26.8        35.1
SysComm International                       18.4        16.0        14.9
All Other                                  108.4        69.9        43.7
Corporate (1)                               33.1        29.5        12.2
                                           -----        ----        ----
                                            66.5        65.5        46.0
                                           =====        ====        ====

<FN>
(1)  Corporate's percentage has been calculated as a percentage of
     total revenue.
</TABLE>

     Changes during the years were:

     Our Advanced Technology segment's selling, general and administrative
expenses decreased $0.2 million, or 1.4%, to $12.1 million in 2002 from
$12.3 million in 2001. We attribute the decrease primarily to the reduction
in revenues and the corresponding overhead for several of the businesses
within this segment. Partially offsetting the decrease were increases in
legal and other costs associated with a lawsuit that was settled on July 15,
2002 and marketing and administrative expenses associated with our VeriChip
product launch. As a percentage of revenue, selling, general and
administrative expense decreased in 2002 as compared to 2001. Selling,
general and administrative expenses increased $1.7 million, or 16.1%, to
$12.3 million in 2001 from $10.6 million in 2000. The acquisition of
Computer Equity in June 2000 contributed $2.6 million of the increase and
$1.2 million resulted from bad debt reserves. These increases were partially
offset by staff reductions and other cost saving measures. Selling expense
decreased as a percentage of revenue in 2001 as compared to 2000, as
companies acquired in 2000 incurred less selling, general and administrative
expenses as a percentage of revenue than the existing businesses.

     Our Digital Angel Corporation segment's selling, general and
administrative expenses increased by $6.0 million, or 62.7%, to $15.6
million in 2002 from $9.6 million in 2001. As a percentage of revenue,
selling, general and administrative expenses increased to 46.4% as compared
to 26.8% in 2001. We attribute the increase in 2002, primarily to expenses
associated with the merger of pre-merger Digital Angel and MAS during the
first quarter of 2002 as well as the costs associated with the introduction
of the Digital Angel products. Selling, general and administrative expenses
increased by $1.8 million, or 23.1%, to $9.6 million in 2001 from $7.8
million in 2000. The increase in 2001 was the result of the acquisitions of
Destron Fearing Corporation and Timely Technology Corp. during 2000.

     Our SysComm International segment's selling, general and
administrative expenses decreased $1.3 million, or 23.5%, to $4.2
million in 2002 from $5.5 million in 2001. The decrease in expenses was
due to several cost savings measures taken in 2002 including the
centralization of the service and administrative operations and the
closure of two other small offices.  Also, we reduced our work force
and payments of sales commissions, both of which were related to the
decline in revenue. Selling, general and administrative expense
increased to $5.5 million in 2001 from $4.1 million in 2000. The
increase in 2001 was due to the acquisition of SysComm International
Corporation in the fourth quarter of 2000.

     Our All Other segment's selling, general and administrative
expenses decreased $27.4 million, or 94.8%, to $1.5 million in 2002 from
$28.9 million in 2001. The decrease resulted from the sale or closure of
all of the business units comprising this group during the last half of
2001 and the first half of 2002.  Selling, general and administrative
expenses increased $5.8 million, or 25.3%, to $28.9 million in 2001

                                     41

<PAGE>
<PAGE>
from $23.0 million in 2000. We attribute the increase to the acquisition
of a software provider in December 2000.

     Corporate/Eliminations selling, general and administrative
expenses decreased $13.1 million, or 28.3%, to $33.1 million in 2002 from
$46.1 million in 2001.  We attribute the decrease in 2002 primarily to
the one-time costs incurred during 2001, as more fully discussed below.
Partially offsetting the decrease were increases related to the
following three factors:

     *    Pursuant to the terms of the pre-merger Digital Angel and
          MAS merger agreement, which became effective March 27, 2002,
          options to acquire shares of pre-merger Digital Angel common
          stock were converted into options to acquire shares of MAS
          common stock. The transaction resulted in a new measurement
          date for the options and, as a result, we recorded non-cash
          compensation expense of approximately $18.7 million during
          2002. As all of the option holders were our employees or
          directors, these options were considered fixed awards under
          APB Opinion No. 25 and expense was recorded for the
          intrinsic value of the options converted;

     *    We incurred an increase in professional fees during 2002; and

     *    We incurred non-cash compensation expense of approximately
          $0.5 million associated with interest payments that were due
          on September 27, 2001 and September 27, 2002. We have chosen
          not to pay the interest and related tax gross-up.  We,
          therefore, consider such notes to be in default and have
          begun steps to foreclose on the underlying collateral (all
          of the stock) in satisfaction of the notes.  Our decision to
          take this action relates in part to the passage of the
          recent corporate reform legislation under the Sarbanes-Oxley
          Act of 2002, which, among other things, prohibits further
          extension of credit to officers and directors.

     Corporate/Eliminations selling, general and administrative
expenses increased $29.6 million, or 179.5%, to $46.1 million in 2001
from $16.5 million in 2000.  The significant increase was  primarily as
a result of an increase in bad debt reserves on notes and other
receivables of $21.9 million. The reserves were considered necessary
based upon several factors that occurred during the third and fourth
quarters of 2001. These included:

     *    A debtor declared bankruptcy, which resulted in a reserve of
          $2.5 million;

     *    A $6.2 million note receivable, plus accrued interest,
          associated with a business sold in December 2000 was deemed
          uncollectible as the debtor has experienced significant
          business interruptions to a business located in New York
          directly related to September 11, 2001;

     *    Three debtors are delinquent under required payment
          obligations resulting in a reserve of $3.4 million; and

     *    A $9.0 million note received for issuance of shares of the
          Company's common stock was deemed uncollectible based upon
          the financial condition of the debtor.

     Also contributing to the increase in 2001 were:

     *    $5.3 million of non-cash compensation expense due primarily
          to re-pricing 19.3 million stock options in September 2001.
          The re-priced options had original exercise prices ranging
          from $0.69 to $6.34 per share and were modified to change
          the exercise price to $0.15 per share.  Due to the
          modification, these options are being accounted for as
          variable options under APB Opinion No. 25 and, accordingly,
          fluctuations in

                                     42

<PAGE>
<PAGE>
          our common stock price result in increases and decreases of
          non-cash compensation expense until the options are exercised,
          forfeited or expired; and

     *    $3.6 million in litigation reserves.

     Partially offsetting the increase was a reduction in personnel
related expenses of approximately $2.0 million.

     RESEARCH AND DEVELOPMENT EXPENSE

     Research and development expense from continuing operations for
2002 was $3.5 million, a decrease of $5.1 million, or 59.1%, over the
$8.6 million reported in 2001. As a percentage of revenue, research and
development expense decreased to 3.5% in 2002 from 5.5% in 2001.

     Research and development expense for each of the operating
segments was:

<TABLE>
<CAPTION>
                                           2002        2001        2000
                                           ----        ----        ----
                                               (AMOUNTS IN THOUSANDS)
<S>                                       <C>         <C>         <C>
Advanced Technology                       $  861      $3,321      $  269
Digital Angel Corporation                  2,422       5,071       2,235
All Other                                     --         218          --
Corporate                                    235          --          --
                                          ------      ------      ------
                                          $3,518      $8,610      $2,504
                                          ======      ======      ======
</TABLE>

     Research and development expense relates primarily to the development of
our products, Digital Angel, Thermo Life, VeriChip and Bio-Thermo and to
software development costs.

     ASSET IMPAIRMENT

     Asset impairment during the years ended December 31, 2002, 2001
and 2000 was:

<TABLE>
<CAPTION>
                                           2002        2001        2000
                                           ----        ----        ----
                                             (AMOUNTS IN THOUSANDS)
<S>                                      <C>         <C>          <C>
Goodwill:
Advanced Technology                      $    --     $30,453      $   --
  Digital Angel Corporation               62,185         726          --
  All Other                                   --      32,427         818
                                         -------     -------      ------
       Total goodwill                     62,185      63,606         818
Property and equipment                     6,860       2,372          --
Investment in ATEC and Burling stock          --          --       5,565
Software and other                           337       5,741          --
                                         -------     -------      ------
                                         $69,382     $71,719      $6,383
                                         =======     =======      ======
</TABLE>

     As of December 31, 2002, the net book value of our goodwill was $67.8
million. There was no impairment of goodwill upon the adoption of FAS 142 on
January 1, 2002. Upon our annual review for impairment during the fourth
quarter of 2002, we recorded an impairment charge of $62.2 million
associated with our Digital Angel Corporation segment. The impairment
relates to the goodwill associated with the acquisition of MAS in March
2002, and to Digital Angel Corporation's Wireless and Monitoring segment.
Future goodwill impairment reviews may result in additional periodic
write-downs. In addition, Digital Angel Corporation impaired $6.4 million of
software associated with its Wireless and Monitoring segment. As of December
31, 2002, Digital Angel Corporation's Wireless and Monitoring segment has
not recorded any significant revenues from its Digital Angel product, and
therefore, it was determined that the goodwill and software were impaired.

     As a result of the economic slowdown during 2001, we experienced
deteriorating sales for certain of our businesses. In addition,
management concluded that a full transition to an advanced technology
company required the sale or closure of all units that did not fit into
our new business model or were not cash-flow positive. This resulted in
the shutdown of several of our businesses during the third and fourth
quarters of 2001 and the first quarter of 2002.  Also, letters of intent
that we had received

                                     43

<PAGE>
<PAGE>
during the last half of 2001 and the first quarter of 2002 related to
the sales of certain of our businesses indicated a decline in their fair
values. The sales of these businesses did not comprise the sale of an
entire business segment. Based upon these developments, we reassessed
our future expected operating cash flows and business valuations and at
December 31, 2001, we performed undiscounted cash flows analyses by
business unit to determine if an impairment existed. For purposes of
these analyses, earnings before interest, taxes, depreciation and
amortization were used as the measure of cash flow. When an impairment
was determined to exist, any related impairment loss was calculated
based on fair value. Fair value was determined based on discounted cash
flows. The discount rate utilized by us was the rate of return expected
from the market or the rate of return for a similar investment with
similar risks. This reassessment resulted in the asset impairments
listed above during 2001.

     As a result of the restructuring and revision to our business
model, the plan to implement an enterprise wide software system
purchased in 2000 was discontinued, and accordingly, the cost of the
software was expensed in 2002 and 2001.

     During the fourth quarter of 2000, we reviewed our goodwill and
certain other investments for impairment and concluded that certain
assets were impaired. At December 31, 2000, we recorded a charge of $6.4
million for permanent asset impairment as more fully described in our
financial statements.

     In addition to the impairments above, during 2002 and 2001, we
recorded inventory reserves of $1.4 million and $4.0 million,
respectively, and bad debt reserves of $1.3 million and $26.0 million,
respectively. The inventory reserves are included in our financial
statements in cost of products and the bad debt reserves are included in
selling, general and administrative expense.

     DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expense from continuing operations
for 2002 was $4.8 million, a decrease of $24.1 million, or 83.5%, over
the $28.9 million reported in 2001. The 2001 expense represents an
increase of $17.8 million, or 161.0% over the $11.1 million reported in
2000. As a percentage of revenue, depreciation and amortization expense
was 4.8%, 18.5% and 8.2% in 2002, 2001 and 2000, respectively.

     Under FAS 142, which we adopted on January 1, 2002, goodwill and
certain other intangible assets are no longer amortized.  We incurred
$22.5 million and $9.4 million in goodwill and equity method investment
amortization during 2001 and 2000, respectively.

     In conjunction with our review for impairment of goodwill and
other intangible assets in the fourth quarter of 2000, we reviewed the
useful lives assigned to acquisitions and, effective October 1, 2000,
changed the lives to periods ranging from 5 to 10 years, down from
periods ranging from 10 to 20 years to reflect current economic trends
associated with the nature of recent acquisitions made. This change in
the fourth quarter of 2000 increased amortization expense by $7.2
million and $3.5 million in 2001 and 2000, respectively.


                                     44

<PAGE>
<PAGE>

     Depreciation and amortization expense from continuing operations
by segments was as follows:

<TABLE>
<CAPTION>
                                           2002        2001        2000
                                           ----        ----        ----
                                              (AMOUNTS IN THOUSANDS)
<S>                                       <C>        <C>         <C>
Advanced Technology                       $  569     $ 9,088     $ 2,990
Digital Angel Corporation                  3,638      12,298       2,962
SysComm International                        261         503         176
All Other                                      9       4,768       3,366
Corporate                                    296       2,242       1,579
                                          ------     -------     -------
Total                                     $4,773     $28,899     $11,073
                                          ======     =======     =======
</TABLE>

     We attribute the decreases in 2002 primarily to a reduction in
goodwill amortization as a result of the adoption of FAS 142.  In
addition, All Other's depreciation and amortization expense decreased
due to the sale or closure of all of the business units comprising this
group during the last half of 2001 and the first half of 2002.
"Corporate / Eliminations" depreciation and amortization expense
decreased primarily as a result of the impairment and sale of software
and other corporate assets during the last half of 2001.

     The increases in 2001 as compared to 2000 reflect the increased
goodwill amortization associated with the business acquisitions during
2000, and the change in goodwill lives noted above.

     LOSS/GAIN ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS

     The gain (loss) on sale of subsidiaries and business assets was
$0.1 million, $(6.1) million, and $0.5 million for the years ended
December 31, 2002, 2001 and 2000, respectively.  The loss on the sales
of subsidiaries and business assets of $6.1 million for 2001 was due to
sales of the business assets of our wholly-owned subsidiaries as
follows:  ADS Retail Inc., Signal Processors, Limited, ACT Wireless
Corp. and our ATI Communications companies. In addition, we sold our 85%
ownership interest in Atlantic Systems, Inc.  Proceeds from the sales
were $3.5 million and were used primarily to repay debt.

     INTEREST INCOME AND EXPENSE

     Interest income was $2.4 million, $2.1 million and $1.1 million for
2002, 2001 and 2000, respectively. Interest income is earned primarily from
short-term investments and notes receivable.

     Interest expense was $17.5 million, $8.6 million and $5.9 million for
2002, 2001 and 2000, respectively. Interest expense is a function of the
level of outstanding debt and is principally associated with notes payable
and term loans.

     INCOME TAXES

     We had effective income tax (benefit) rates of 0.3%, 11.8%, and
(14.8)% in 2002, 2001 and 2000, respectively.  Differences in the
effective income tax rates from the statutory federal income tax rate
arise from goodwill amortization associated with acquisitions, state
taxes net of federal benefits and the increase or reduction of valuation
allowances related to net operating loss carryforwards and other
deferred tax assets. As of December 31, 2002, we have provided a
valuation allowance to fully reserve our net operating loss
carryforwards and our other existing net deferred tax assets. Our tax
provision for 2001 was primarily the result of an increase in the
valuation allowance due to the losses incurred during the year ended
December 31, 2001, as well as our projections of future taxable income.

     EXTRAORDINARY GAIN/LOSS

     As a result of settling certain disputes between us, the former
owners of Bostek, Inc. and an affiliate of Bostek, as more fully
discussed in Note 19 to the Consolidated Financial Statements, the
parties agreed to forgive a $9.5 million payable provided we registered
approximately 3.0 million common shares by June 15, 2001. We were
successful in meeting the June 15, 2001 deadline and, accordingly, the
extinguishment of the $9.5 million payable was recorded in June 2001 as
an extraordinary gain.

                                     45

<PAGE>
<PAGE>
     RESULTS OF DISCONTINUED OPERATIONS

     The following discloses the results of Intellesale and all other
non-core businesses comprising discontinued operations for the period
January 1 through March 1, 2001 and the years ended December 31, 2000:

<TABLE>
<CAPTION>
     DISCONTINUED INTELLESALE BUSINESS:                         JANUARY 1,          YEAR
                                                              THROUGH MARCH 1,      ENDED
                                                                   2001             2000
                                                                   ----             ----
                                                                   (amounts in thousands)
<S>                                                               <C>             <C>
Product revenue                                                   $7,965          $ 95,666
Service revenue                                                      370             6,826
                                                                  ------          --------
Total revenue                                                      8,335           102,492
Cost of products sold                                              6,974           104,396
Cost of services sold                                                 --             5,315
                                                                  ------          --------
Total cost of products and services sold                           6,974           109,711
                                                                  ------          --------
Gross profit                                                       1,361            (7,219)
Selling, general and administrative expenses                       1,602            32,772
Gain on sale of subsidiary                                            --            (5,145)
Depreciation and amortization                                        121             2,949
Interest, net                                                         --                --
Impairment of investments                                             --            46,600
(Benefit) provision for income taxes                                (151)          (13,357)
Minority interest                                                    (11)              140
                                                                  ------          --------
(Loss) income from discontinued Intellesale businesses            $ (200)         $(71,178)
                                                                  ======          ========

<CAPTION>
     DISCONTINUED NON-CORE BUSINESSES:                          JANUARY 1,           YEAR
                                                             THROUGH MARCH 1,        ENDED
                                                                   2001              2000
                                                                   ----              ----
                                                                   (amounts in thousands)
<S>                                                               <C>              <C>
Product revenue                                                   $5,074           $42,235
Service revenue                                                      476                --
                                                                  ------           -------
Total revenue                                                      5,550            42,235
Cost of products sold                                              3,525            33,428
Cost of services sold                                                259                --
                                                                  ------           -------
Total cost of products and services sold                           3,784            33,428
                                                                  ------           -------
Gross profit                                                       1,766             8,807
Selling, general and administrative expenses                         932             7,926
Loss on sale of subsidiary                                            --               528
Depreciation and amortization                                        143             1,268
Interest, net                                                         29               187
Impairment of investments                                             --             3,619
(Benefit) provision for income taxes                                 185              (257)
Minority interest                                                     64                61
                                                                  ------           -------
(Loss) income from discontinued non-core businesses               $  413           $(4,525)
                                                                  ======           =======



                                     46

<PAGE>
<PAGE>
<CAPTION>
     TOTAL DISCONTINUED OPERATIONS                  JANUARY 1,          YEAR
                                                 THROUGH MARCH 1,       ENDED
                                                      2001              2000
                                                      ----              ----
                                                      (amounts in thousands)
<S>                                                  <C>              <C>
Product revenue                                      $13,039          $137,901
Service revenue                                          846             6,826
                                                     -------          --------
Total revenue                                         13,885           144,727
Cost of products sold                                 10,499           137,824
Cost of services sold                                    259             5,315
                                                     -------          --------
Total cost of products and services sold              10,758           143,139
                                                     -------          --------
Gross profit                                           3,127             1,588
Selling, general and administrative expenses           2,534            40,697
Gain on sale of subsidiary                                --            (4,617)
Depreciation and amortization                            264             4,217
Interest, net                                             29               187
Impairment of investments                                 --            50,219
(Benefit) provision for income taxes                      34           (13,614)
Minority interest                                         53               201
                                                     -------          --------
(Loss) income from discontinued operations           $   213          $(75,702)
                                                     =======          ========
</TABLE>

     The above results do not include any allocated or common overhead
expenses.  Included in Interest, net, above are interest charges based
on the debt of one of these businesses that was repaid when the business
was sold in January 2002.

     As of March 31, 2003, we have sold or closed substantially all of
the businesses comprising Discontinued Operations. There is one
insignificant company remaining, which had revenue and net loss for the
year ended December 31, 2002 of $0.7 million and $0.2 million,
respectively. We anticipate selling this remaining company in the next
several months.  Proceeds from the sales of Discontinued Operations
companies were used to repay amounts outstanding under our credit
agreement with IBM Credit. Any additional proceeds on the sale of the
remaining business will also be used to repay debt.

     Provision for operating losses and carrying costs during the
phase-out period included the estimated loss on sale of the business
units as well as operating and other disposal costs incurred in selling
the businesses.  Carrying costs include the cancellation of facility
leases, employment contract buyouts, sales tax liabilities and reserves
for certain legal expenses related to on-going litigation.

     During 2002 and 2001, Discontinued Operations incurred a change in
estimated loss on disposal and operating losses accrued on the
measurement date of $1.4 million and $(16.7) million, respectively.  The
primary reason for the reduction in estimated losses for 2002 was due to
the settlement of litigation for an amount less than anticipated.  The
primary reasons for the excess losses in 2001 were due to inventory
write-downs of $4.5 million during the second quarter of 2001, a
decrease in estimated sales proceeds as certain of the businesses were
closed in the second and third quarters of 2001, an increase in legal
expenses related to on-going litigation, additional sales tax
liabilities and additional facility lease costs.

                                     47

<PAGE>
<PAGE>

     The business closures in 2001 were the result of a combination of
the deteriorating market conditions for the technology sector as well as
our strategic decision to reallocate funding to our core businesses. We
also increased our estimated loss on the sale of Innovative Vacuum
Solutions, Inc., which was sold during the second quarter of 2001, by
$0.2 million and on Ground Effects Ltd., which was sold in the first
quarter of 2002, by $1.2 million.

     We do not anticipate a further loss on sale of the remaining
business comprising Discontinued Operations.  However, actual losses
could differ from our estimates and any adjustments will be reflected in
our future financial statements.  During the years ended December 31,
2002, 2001 and 2000, the estimated amounts recorded were as follows:

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                            2002           2001        2000
                                                                            ----           ----        ----
                                                                                 (amounts in thousands)
<S>                                                                       <C>            <C>         <C>
Operating losses and estimated loss on the sale of business units         $   684        $13,010     $ 1,619
Carrying Costs                                                             (2,104)         3,685       6,954

Less: Benefit for income taxes                                                 --             --      (1,307)
                                                                          -------        -------     -------
                                                                          $(1,420)       $16,695     $ 7,266
                                                                          =======        =======     =======
</TABLE>

     The following table sets forth the roll forward of the liabilities
for operating losses and carrying costs from March 1, 2001, the
measurement date, through December 31, 2001.  The deductions represent
activity from March 1, 2001, the measurement date, to December 31, 2001:

<TABLE>
<CAPTION>
                                                                                         Balance,
                                         Balance,                                      December 31,
Type of Cost                          March 1, 2001        Additions     Deductions        2001
------------                          -------------        ---------     ----------        ----
<S>                                       <C>              <C>             <C>            <C>
Operating losses and
 estimated loss on sale                   $1,173           $   684         $1,857         $   --
Carrying costs (1)                         7,218            (2,104)           206          4,908
                                          ------           -------         ------         ------
Total                                     $8,391           $(1,420)        $2,063         $4,908
                                          ======           =======         ======         ======

<FN>
(1) Carrying costs at December 31, 2002, include all estimated costs to
dispose of the discontinued businesses including $2.0 million for future
lease commitments, $1.8 million for severance and employment contract
settlements, $1.0 million for sales tax liabilities and $0.1 million for
litigation settlement.
</TABLE>

     During 2000, Intellesale refocused its business model away from
the Internet segment and began concentrating on its traditional business
of asset management and brokerage services and the sale of refurbished
and new desktop and notebook computers, monitors and related components
as a wholesale, business to business supplier.  The transition resulted
in significantly reduced revenues from its Bostek business unit in the
first half of 2000 compared to substantial sales from this unit in the
second half of 2000, contributing to the decline in revenue from 1999 to
2000.  Gross profit was significantly impacted by lower margin business
in the first half of 2000 coupled with an inventory charge of $8.5
million, as discussed below.

     In the second quarter of 2000, Intellesale recorded a pre-tax
charge of $17.0 million.  Included in this charge was an inventory
reserve of $8.5 million for products Intellesale expected to sell below
cost (included in cost of goods sold), $5.5 million related to specific
accounts and other receivables, and $3.0 million related to fees and
expenses incurred in connection with Intellesale's cancelled public
offering

                                     48

<PAGE>
<PAGE>
and certain other intangible assets.  This charge reflects the segment's
decreasing revenue trend, lower quarterly gross profits and the
expansion of Intellesale's infrastructure into a major warehouse
facility. In addition, a more competitive business environment resulting
from an overall slowdown in Intellesale's business segment, and
management's attention to the Bostek operational and legal issues,
discussed above under "Legal Proceedings", contributed to the negative
results.  The impact of the loss resulted in Intellesale restructuring
its overhead and refocusing its business model away from the Internet
segment and back to its traditional business lines.  This restructuring
was completed in the fourth quarter of 2000 and during that quarter an
additional $5.5 million of inventory acquired for retail distribution
was written down to realizable value.

     LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

     As of December 31, 2002, cash and cash equivalents totaled $5.8
million, an increase of $2.1 million, or 56.8% from $3.7 million at December
31, 2001. Cash used in operating activities totaled $3.9 million, $18.0
million and $43.4 million in 2002, 2001 and 2000, respectively. In each
year, cash was used primarily to fund operating losses. By operation of the
Digital Angel Trust agreement, our share of Digital Angel Corporation's net
assets is effectively restricted. Although Digital Angel Corporation and
SysComm may pay dividends, access to these subsidiaries' funds is restricted.

     Accounts and unbilled receivables, net of allowance for doubtful
accounts, decreased by $5.4 million or 24.7% to $16.5 million at
December 31, 2002 from $21.9 million at December 31, 2001.  The decrease
was primarily as a result of the sale and closure of businesses during
2001 and 2002.  As a percentage of 2002 and 2001 revenue, accounts and
unbilled receivable were 16.6% and 14.0%, respectively.

     Inventories remained relatively stable at $6.4 million at December
31, 2002 compared to $6.2 million at December 31, 2001.

     Other current assets decreased by $1.9 million or 39.6% to $2.9 million
at December 31, 2002 from $4.8 million at December 31, 2001. This decrease
is primarily attributable to receipt of a $0.8 million tax refund in 2002 and
a decrease in prepaid expenses.

     Accounts payable decreased by $5.6 million or 36.4% to $9.8 million at
December 31, 2002 from $15.4 million at December 31, 2001. The decrease was
primarily a result of the sale and closure of businesses during the last
half of 2001 and the first half of 2002.

     Accrued interest and other expenses increased by $12.1 million or 70.3%
to $29.3 million at December 31, 2002 from $17.2 million at December 31,
2001. The increase is primarily attributable to accrued interest.

     Investing activities provided cash of $8.0 million, $2.7 million and
$18.4 million in 2002, 2001 and 2000, respectively. In 2002, cash was
provided by $3.2 million collection of notes receivables, $4.9 million of
proceeds from the sale of subsidiaries, business assets, property and
equipment, and $2.6 million was received from buyers of divested
subsidiaries. Cash was used primarily to purchase property and equipment and
to fund Discontinued Operations. In 2001, $2.8 million was used to acquire
property and equipment, offset by cash proceeds from the sale of
subsidiaries and business assets of $1.7 million, proceeds from the sale of
property and equipment of $1.3 million, collections of notes receivable of
$1.3 million and a reduction in other assets of $0.9 million. In 2000, we
collected $31.3 million from the purchaser of TigerTel included in decreases
in notes receivable and $0.9 million from the sale of assets, and realized
cash of $1.7 million for our Discontinued Operations. The sources were
partially offset by cash of $9.1 million used to acquire businesses, $8.4
million used to acquire property and equipment, and $1.0 million for other
assets.

     Financing activities (used) provided cash of ($2.8) million, $10.9
million and $30.8 million in 2001, 2000 and 1999 respectively. In 2002, cash
was used to pay

                                     49

<PAGE>
<PAGE>

$6.2 million in notes payable and long-term debt, offset by $1.7 million
provided from issuance of common shares, $1.2 million from collections of notes
receivable for shares issued, and $1.3 million provided by increases in notes
payable. In 2001, cash of $14.0 million was obtained through notes payable,
$0.6 million was provided by long-term debt and $0.7 million was provided
from the issuance of common shares. Cash was used primarily for stock
issuance costs of $0.8 million, and payments of long-term debt of $2.5
million. In 2000, $19.1 million was received from the issuance of Series C
preferred stock, $16.0 million was obtained through long-term debt, $2.2
million was obtained from net increases in notes payable and $6.1 million
was obtained through the issuance of common shares. Uses of cash in 2000
included payments of $11.6 million against long-term debt, and $0.8 million
for other financing costs.

     Debt, Covenant Compliance and Liquidity

     On March 1, 2002, we and the Digital Angel Trust, entered into the IBM
Credit Agreement with IBM Credit, which became effective on March 27, 2002,
the effective date of the merger between pre-merger Digital Angel and MAS.
The principal amount outstanding had an annual rate of 17% and matured on
February 28, 2003. If certain amounts were not repaid on or before February
28, 2003, the interest rate increased to an annual rate of 25%. On September
30, 2002, we entered into an amendment to the IBM Credit Agreement, which
revised certain financial covenants relating to our financial performance
and the financial position and performance of Digital Angel Corporation for
the quarter ended September 30, 2002 and the fiscal year ending December 31,
2002. On November 1, 2002, we entered into another amendment to the IBM
Credit Agreement, which further revised certain covenants relating to the
financial performance of Digital Angel Corporation for the quarter ended
September 30, 2002, and the fiscal year ending December 31, 2002. At
September 30, 2002, we and Digital Angel Corporation were in compliance
with the revised covenants under IBM Credit Agreement. At June 30, 2002, we
were not in compliance with our Minimum Cumulative Modified EBITDA debt
covenant and with other provisions of the IBM Credit Agreement, and Digital
Angel Corporation was not in compliance with its Minimum Cumulative Modified
EBITDA and Current Assets to Current Liabilities debt covenants. On August
21, 2002, IBM Credit provided us with a waiver of such noncompliance. As
consideration for the waiver, we issued to IBM Credit a five year-warrant to
acquire 2.9 million shares of our common stock at $0.15 per share, valued at
approximately $1.3 million, and a five year-warrant to purchase
approximately 1.8 million shares of our wholly-owned subsidiary VeriChip
Corporation's common stock at $0.05 per share, valued at approximately $44
thousand. The fair value of these warrants was included in interest expense
in 2002.

     Under the terms of the IBM Credit Agreement we were required to repay
IBM Credit Corporation $29.8 million of the $77.2 million outstanding
principal balance owed to them plus $16.4 million of accrued interest and
expenses (totaling approximately $46.2 million), on or before February 28,
2003. We did not make such payment by February 28, 2003 and on March 3, 2003,
IBM Credit notified us that we had until March 6, 2003, to make the payment.
We did not make the payment on March 6, 2003, as required. In addition, we were
not in compliance with the financial performance covenant under the IBM
Credit Agreement as of December 31, 2002. Our failure to comply with the
payment terms imposed by the IBM Credit Agreement and our failure to maintain
compliance with the financial performance covenant constitute events of
default under the IBM Credit Agreement. On March 7, 2003, we received a
letter from IBM Credit declaring the loan in default and indicating that IBM
Credit would exercise any and/or all of its remedies.

     On March 27, 2003, we announced that we had executed a forbearance
agreement term sheet with IBM Credit. The forbearance agreement becomes
effective on or about March 31, 2003 and grants us more favorable loan
repayment terms and more time in which to meet our current obligations to IBM
Credit. It contains various purchase rights for us to buy back our existing
indebtedness from IBM Credit, including a one-time payment on or before June
30, 2003 of $30 million. Payment of this amount will constitute complete
satisfaction of any and all of our obligations to IBM Credit. Provided there
has not earlier occurred a "Termination Event," as defined, at the end of


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<PAGE>
the forbearance period, the provisions of the forbearance agreement shall
become of no force and effect. At that time, if the repayment terms of the
forbearance agreement are not met, IBM Credit shall be free to exercise and
enforce, or to take steps to exercise and enforce, all rights, powers,
privileges and remedies available to them under the IBM Credit Agreement, as
a result of the payment and covenant defaults existing on March 24, 2003. If
we are not successful in satisfying the payment obligations under the
forbearance agreement or we do not comply with the terms of the forbearance
agreement or the IBM Credit Agreement, and IBM Credit were to enforce its
rights against the collateral securing the obligations to IBM Credit, there
would be substantial doubt that we would be able to continue operations in
the normal course of business.

     Sources of Liquidity

     While we anticipate that our operations will provide positive cash flow
during 2003, our operating activities did not provide positive cash flow
during 2002 and 2001. In addition, during 2003, we are required to make
substantial debt payments under the terms of the forbearance agreement term
sheet with IBM Credit. Accordingly, there can be no assurance that we will
have access to funds necessary to provide for our ongoing operations or to
make the required debt payments. Our sources of liquidity may include
proceeds from the sale of common stock and preferred shares, proceeds for
the sale of businesses, proceeds from the sale of the Digital Angel
Corporation common stock held in the Digital Angel Trust, proceeds from the
exercise of stock options and warrants, and the raising of other forms of
debt or equity through private placement or public offerings. There can be
no assurance however, that these options will be available, or if available,
on favorable terms. Our capital requirements depend on a variety of factors,
including but not limited to, repayment obligations under the IBM Credit
Agreement, the rate of increase or decrease in our existing business base;
the success, timing, and amount of investment required to bring new products
on-line; revenue growth or decline; and potential acquisitions.

     Failure to obtain additional funding, to generate positive cash flow
from operations and to comply with the payment and other provisions of the
forbearance agreement with IBM Credit will have a materially adverse effect
on our business, financial condition and results of operations.

     Contractual Obligations

     The following table shows the aggregate of our contractual cash
obligations at December 31, 2002:

<TABLE>
<CAPTION>
                                                         Less Than          1-3            4-5        After 5
Contractual Cash Obligations                  Total        1 Year          Years          Years        Years
----------------------------                  -----        ------          -----          -----        -----
                                                                  (amounts in thousands)
<S>                                         <C>            <C>             <C>            <C>         <C>
Notes payable, long-term debt and
 other long-term liabilities                $ 86,280       $81,879         $1,088         $   81      $ 3,232
Operating leases                              15,039         1,385          1,061            696       11,897
Employment contracts                           5,398         2,483          1,404            789          722
                                            --------       -------         ------         ------      -------
  Total contractual cash obligations        $106,717       $85,747         $3,553         $1,566      $15,851
                                            ========       =======         ======         ======      =======
</TABLE>

     Outlook

     We are constantly looking for ways to maximize shareholder value.
As such, we are continually seeking operational efficiencies and
synergies within our operating segment as well as evaluating
acquisitions of businesses and customer bases which complement our
operations.  These strategic initiatives may include acquisitions,
raising additional funds through debt or equity offerings, or the
divestiture of business units that are not critical to our long-term
strategy or other restructuring or


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<PAGE>

rationalization of existing operations.  We will continue to review all
alternatives to ensure maximum appreciation of our shareholders'
investments.  There can be no assurance, however, that any initiatives
will be found, or if found, that they will be on terms favorable to us.

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the FASB issued FAS No. 141, Business Combinations
and FAS No. 142, Goodwill and Other Intangible Assets. FAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill
and intangibles will be evaluated against these new criteria and may
result in certain intangibles being included in goodwill, or
alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. FAS 142 requires the use
of a non-amortization approach to account for purchased goodwill and
certain intangibles. Under a non-amortization approach, goodwill and
certain intangibles will not be amortized into results of operations,
but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the
recorded value of goodwill and certain intangibles is more than its fair
value. We adopted the provisions of each statement, which apply to
goodwill and certain intangibles acquired prior to June 30, 2001, on
January 1, 2002. The adoption of these standards had the impact of
reducing our amortization of goodwill commencing January 1, 2002. There
was no impairment of goodwill upon adoption of FAS 142.  We recorded an
impairment charge of $62.2 million based upon our annual review of our
goodwill during the fourth quarter of 2002. Future impairment reviews
may result in additional periodic write-downs.

     In August 2001, the FASB issued FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This standard supersedes
FAS 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of. This standard significantly changes the
criteria that would have to be met to classify an asset as
held-for-sale. This distinction is important because assets to be
disposed of are stated at the lower of their fair values or carrying
amounts and depreciation is no longer recognized. The new rules will
also supercede the provisions of APB Opinion 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, with regard to reporting the effects of a disposal of
a segment of a business and will require expected future operating
losses from Discontinued Operations to be displayed in Discontinued
Operations in the period in which the losses are incurred, rather than
as of the measurement date as presently required by APB 30. This
statement is effective for fiscal years beginning after December 15,
2001. We adopted this statement on January 1, 2002. The adoption of FAS
144 did not have a material impact on our operations or financial
position.

     In May 2002, the FASB issued SFAS 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS 145 eliminates Statement 4 (and Statement
64, as it amends Statement 4), which requires gains and losses from
extinguishments of debt to be aggregated and, if material, classified as
an extraordinary item, and thus, also the exception to applying Opinion
30 is eliminated as well. This statement is effective for years
beginning after May 2002, for the provisions related to the rescission of
Statements 4 and 64, and for all transactions entered into beginning May
2002, for the provision related to the amendment of Statement 13. The
adoption of FAS 145 did not have a material effect on our operations or
financial position.

     In June 2002, the FASB issued Statement No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement
requires recording costs associated with exit or disposal activities at
their fair values when a liability has been incurred. Under previous
guidance, certain exit costs were

                                     52

<PAGE>
<PAGE>

accrued upon management's commitment to an exit plan. Adoption of this
Statement is required with the beginning of fiscal year 2003. We have
not yet determined what impact the adoption of FAS 146 will have on
our operations and financial position.

     In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation.
It also amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion
No. 28, Interim Financial Reporting, to require disclosure about those
effects in interim financial information. We intend to continue to
account for stock-based compensation based on the provisions of APB
Opinion No. 25. SFAS 148's amendment of the transition and annual
disclosure provisions of SFAS 123 are effective for fiscal years ending
after December 15, 2002, and the disclosure requirements for interim
financial statements are effective for interim periods beginning after
December 15, 2002. We have adopted the disclosure provisions of SFAS 148
at December 31, 2002.

     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     With our United Kingdom subsidiary we have operations and sales in
various regions of the world. Additionally, we export and import to and
from other countries.  Our operations may therefore be subject to
volatility because of currency fluctuations, inflation and changes in
political and economic conditions in these countries. Sales and expenses
may be denominated in local currencies and may be affected as currency
fluctuations affect our product prices and operating costs or those of
our competitors.

     We presently do not use any derivative financial instruments to
hedge our exposure to adverse fluctuations in interest rates, foreign
exchange rates, fluctuations in commodity prices or other market risks,
nor do we invest in speculative financial instruments.  Borrowings under
our IBM Credit Agreement bear interest at a fixed annual interest rate.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are
in short-term investments.

     Due to the nature of our borrowings and our short-term
investments, we have concluded that there is no material market risk
exposure and, therefore, no quantitative tabular disclosures are
required.

     ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our consolidated financial statements and supplementary data
included in this Annual Report are listed in Item 15 and begin
immediately after Item 15.

     ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE

     On April 11, 2002, we notified our independent accountants,
PricewaterhouseCoopers LLP, that our Board of Directors had approved our
decision to transition our audit work to another firm and dismissed
PricewaterhouseCoopers, LLP. We had selected Grant Thornton LLP as our
new independent accountants.

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<PAGE>

     The reports of PricewaterhouseCoopers LLP on the financial
statements for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle, except that the
reports for each of the years ended December 31, 2000 and December 31,
2001 contained an explanatory paragraph expressing doubt about our
ability to continue as a going concern. In connection with its audits
for the three most recent fiscal years and through April 11, 2002,
there had been no disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of PricewaterhouseCoopers LLP would
have caused them to make reference thereto in their report on the
financial statements for such years. The following were the only
reportable events as defined under Regulation S-K Item 304(a)(1)(v).
During the two most recent fiscal years and through April 11, 2002,
PricewaterhouseCoopers LLP discussed with the Audit Committee of the
Board of Directors the following findings, all of which we agreed with
and all of which have been remedied. During the year ended December 31,
2001, one of our subsidiaries lacked evidence of customer acceptance
prior to the recognition of certain revenue and did not have proper
restrictions to vendor access within its accounts payable system.
During the year ended December 31, 2000, a second subsidiary lacked
monitoring controls over its accounts receivable and was unable to
provide certain detailed inventory listings for certain general
ledger balances. That subsidiary was part of our Discontinued
Operations and has been closed since 2001.  On April 17, 2002, we
engaged Grant Thornton LLP as our new independent accountants to audit
the financial statements for the year ending December 31, 2002. During
2000 and 2001 and in the subsequent interim period, we had not consulted
with Grant Thornton LLP on items which concerned the application of
accounting principles generally, or to a specific transaction or group
of either completed or proposed transactions, or the type of audit
opinion that might be rendered on our financial statements.

     On April 22, 2002, we filed a Current Report on Form 8-K with the
SEC to report the engagement of Grant Thornton LLP. Attached to that
report as an exhibit was a letter from PricewaterhouseCoopers LLP
addressed to the SEC stating the following: "We have read the statements
made by Applied Digital Solutions, Inc. (copy attached), which was filed
with the Commission, pursuant to Item 4 of Form 8-K, as part of the
Company's Form 8-K report dated April 11, 2002. On March 27, 2002, we
issued a report to the Audit Committee listing two material weaknesses
from prior years. Management has represented they have implemented
remedial action plans. Since we have performed no audit procedures
subsequent to the date of our report, we can not confirm the
effectiveness of these remedial actions. Otherwise, we agree with the
statements concerning our Firm in such Form 8-K."

     On May 21, 2002, we filed a Current Report on Form 8-K with the
SEC to report that, by letter dated May 14, 2002, Grant Thornton LLP
resigned as our outside auditing firm. We, and Grant Thornton, had a
disagreement on the proper accounting treatment with respect to a
non-cash item in connection with the merger of pre-merger Digital Angel
and MAS. As a result, of the nature of the disagreement as outlined
below, Grant Thornton communicated its resignation as our auditors.
Grant Thornton advised us that our proposed treatment of the non-cash
item was inconsistent with the position taken in MAS's definitive proxy
statement dated February 14, 2002, related to the merger. Grant Thornton
advised that we had not brought to Grant Thornton's attention the change
in accounting position and that it did not believe it could rely upon
future representations made by our management. Grant Thornton also
advised us that it had not completed its review of our quarterly report
on Form 10-Q for the first quarter of 2002.

     The accounting item in question (about which we, and Grant
Thornton LLP, had the disagreement) related to options that MAS was to
assume or convert into MAS options under the terms

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<PAGE>
of an Agreement and Plan of Merger, dated November 1, 2001, by and among
MAS, an MAS wholly-owned subsidiary, and pre-merger Digital Angel. On
March 27, 2002, the MAS wholly-owned subsidiary was merged with and into
pre-merger Digital Angel under the terms of the merger agreement. We
also contributed certain other subsidiaries in the merger. Pre-merger
Digital Angel, as the surviving corporation, became a wholly-owned
subsidiary of MAS, which has since been renamed Digital Angel Corporation.
Grant Thornton has also communicated by letter dated May 14, 2002, the
termination of its auditor relationship with Digital Angel Corporation.

     With respect to the dispute as to the proper accounting treatment
for these options, Grant Thornton's position was that we should
recognize in the first quarter of 2002 a one-time, non-cash,
compensation expense, in the amount of approximately $14.5 million,
under the guidance provided by Accounting Principles Board Opinion No.
25 (APB 25), as amended by FASB Interpretation No. 44 and Emerging
Issues Task Force Issue 00-23. We were of the view that the cost of the
assumed or to-be-converted options represents part of the merger
consideration and should be capitalized and reflected on our balance
sheet, consistent with accounting for the transaction as a business
combination using the purchase method of accounting, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). We stated that we
were intending to contact the staff of the SEC with respect to this
issue and that the Audit Committee of the Board of Directors was advised
of management's handling of the proposed accounting treatment for the
stock options. We also stated that we had authorized Grant Thornton to
respond fully to inquiries of the successor accountant concerning the
subject matter of the foregoing disagreement and that we were in
negotiations with a new independent accounting firm with respect to the
auditing of our financial statements.

     On May 22, 2002, we filed a Current Report on Form 8-K/A with the
SEC to include as an exhibit a letter from Grant Thornton LLP addressed
to the SEC in which Grant Thornton LLP stated the following: "We have
read Item 4 of Form 8-K/A of Applied Digital Solutions, Inc. dated May
21, 2002, and agree with the statements concerning our Firm contained
therein. As to the discussion of having contacted the SEC and of the new
accountants, we have no basis for agreeing or disagreeing with such
statements."

     On May 28, 2002, we filed a Current Report on Form 8-K to announce
that on May 23, 2002, we engaged Eisner LLP as our new independent
accountants to audit our financial statements for the fiscal year ending
December 31, 2002. During 2000 and 2001 and in the subsequent interim
period, we had not consulted with Eisner LLP on items which concerned
the application of accounting principles generally, or to a specific
transaction or group of either completed or proposed transactions, or
the type of audit opinion that might be rendered on our financial
statements, or any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.

     We also reported that due to the timing of the resignation of
Grant Thornton LLP, the interim financial statements contained in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002,
which were filed with the SEC on May 20, 2002, were not reviewed by an
independent accountant as required pursuant to Rule 10-01 (d) of
Regulation S-X, and that our new independent accountants, Eisner LLP,
would complete the SAS 71 review of the Registrant's first quarter
financial statements and we would file an amended Form 10-Q/A.

     On May 24, 2002, we filed a Current Report on Form 8-K to disclose
that we had issued a press release on May 22, 2002, stating that the
timing of Grant Thornton's resignation as our outside auditors prevented
us from filing its Form 10-Q with an auditor's review. As a result, we
received a letter from the Nasdaq staff indicating that the Form 10-Q
did not comply with Marketplace Rule 4310(c)(14), and, accordingly, that
an "E" would be added to our trading symbol. The letter indicated that
our common stock was subject to delisting unless we requested a hearing
before a Nasdaq listing qualifications panel.

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<PAGE>
<PAGE>

We informed Nasdaq that we intended to make such a request. In accordance
with applicable Marketplace Rules, the hearing request had the effect of
staying any action pending the decision of the hearing panel. In the
interim, the letter "E" was appended to our trading symbol and from July 12,
2002, to July 30, 2002, our common stock was delisted by the NasdaqNM and
was traded on the Pink Sheets under the symbol "ADSX.PK." On July 18, 2002,
we filed an amended quarterly report on Form 10-Q, which presented condensed
financial statements that had been reviewed by our independent public
accountants, Eisner LLP. As a result, the Nasdaq hearing panel temporarily
relisted our common stock effective July 31, 2002. However, we were unable
to satisfy the required minimum closing bid price requirement by October 25,
2002, and as a result, effective November 12, 2002, our common stock began
trading on the SmallCap under our existing symbol ADSX.

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                          PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The directors and executive officers of the Company are as
follows:

<TABLE>
<CAPTION>
Name                             Age        Position                                   Position Held Since
----                             ---        --------                                   -------------------
<S>                               <C>       <C>                                        <C>
Scott R. Silverman                39        Chairman of the Board, Chief Executive     March 2002 (President)
                                             Officer and President                     March 2003 (Chairman
                                                                                        and CEO)
Kevin McLaughlin                  60        Senior Vice President, Chief Operating
                                             Officer                                   March 2003
Michael E. Krawitz                33        Senior Vice President, General Counsel     December 2000
                                             Secretary                                  (appointed Secretary in
                                                                                        March 2003)
Evan C. McKeown                   44        Vice President, Chief Financial Officer    March 2002
Peter Zhou                        63        Vice President, Chief Scientist            January 2000
Arthur F. Noterman                61        Director                                   February 1997
Daniel E. Penni                   55        Director                                   March 1995
Dennis G. Rawan                   59        Director                                   December 2002
Constance K. Weaver               50        Director                                   July 1998
</TABLE>

     Following is a summary of the background and business experience
of the directors and executive officers:

     Scott R. Silverman: Mr. Silverman, age 39, has served since August
2001 as a special advisor to the Board of Directors. In March 2002, he
was appointed to the Board of Directors and named President. Mr.
Silverman's term as director expires in 2004. From September 1999 to
March 2002, Mr. Silverman operated his own private investment-banking
firm and prior to that time, from October 1996 to September 1999, he
served in various capacities for us including positions related to
business development, corporate development and legal affairs. From July
1995 to September 1996, he served as President of ATI Communications,
Inc., one of our subsidiaries. He began his career as an attorney
specializing in commercial litigation and communications law at the law
firm of Cooper Perskie in Atlantic City, New Jersey, and Philadelphia,
Pennsylvania. Mr. Silverman is a graduate of the University of
Pennsylvania and Villanova University School of Law.

     Kevin H. McLaughlin: Mr. McLaughlin, age 60, was appointed our Senior
Vice President and Chief Operating Officer in March 2003.  From April
12, 2002, Mr. McLaughlin served as a director and Chief Executive
Officer of SysComm International Corporation, our 52.5% owned
subsidiary. Prior to that time, he served as Chief Executive Officer of
Computer Equity Corporation, our wholly-owned subsidiary. Mr. McLaughlin
joined us as Vice President of Sales and Marketing in June 2000.  From
June 1995 to May 2000, he served as Senior Vice President of Sales for
SCB Computer Technology, Inc.

     Michael E. Krawitz: Mr. Krawitz, age 33, joined us as our Assistant
Vice President and General Counsel in April 1999, and was appointed Vice
President and Assistant Secretary in December 1999, Senior Vice President in
December 2000 and Secretary in March 2003. From 1994 to April 1999, Mr.
Krawitz was an attorney with Fried, Frank, Harris, Shriver & Jacobson in New
York. Mr. Krawitz earned a Bachelor of Arts degree from Cornell University
in 1991 and a juris doctorate from Harvard Law School in 1994.

     Evan C. McKeown: Mr. McKeown, age 44, joined us as our Vice
President, Chief Accounting Officer and Corporate Controller in March
2001.  He was appointed Vice President, Chief Financial Officer in March
2002.  Prior to joining us, Mr. McKeown served as Corporate Controller
at Orius

                                     57

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<PAGE>
Corporation in West Palm Beach, Florida.  From 1992 to 1999, he served
as Controller and then Chief Financial Officer of Zajac, Inc., in
Portland, Maine.  Mr. McKeown has more that 20 years experience in
accounting and financial reporting, including serving as a Tax Manager
for Ernst & Young and public accountant with Coopers & Lybrand.  He is a
graduate of the University of Maine and is a certified public
accountant.

     Peter Zhou: Dr. Zhou, age 63, joined us as Vice President and Chief
Scientist in January 2000. From 1988 to 1999, Dr. Zhou served as Vice
President, Technology for Sentry Technology Corp., and from 1985 to
1988, he served as Research Investigator for the University of
Pennsylvania's Department of Science & Engineering. Prior to that, he
was a research scientist for Max-Planck Institute, Metallforschung in
Stuttgart, Germany and a post-doctoral research fellow at the University
of Pennsylvania. Dr. Zhou has a PhD in materials science/solid state
physics from the University of Pennsylvania and a Master of Sciences
degree in physics from the Beijing University of Sciences and
Technology.

     Arthur F. Noterman: Mr. Noterman, age 61, a Chartered Life
Underwriter, has served as a director since February 1997, and serves
as a member of the Audit and Compensation Committees of the Board
of Directors. Mr. Noterman's term as director expires in 2003.
Mr. Noterman currently serves as President and director of P.M.G. Insurance
Marketing of MA Inc. Mr. Noterman is a registered NASD broker affiliated
with a Chicago, Illinois registered broker/dealer. Mr. Noterman attended
Northeastern University from 1965 to 1975 and obtained the Chartered
Life Underwriters Professional degree in 1979 from The American College,
Bryn Mawr, Pennsylvania.

     Daniel E. Penni: Mr. Penni, age 55, has served as a director since
March 1995, and is Chairman of the Compensation Committee and serves on
the Audit Committee of the Board of Directors. Mr. Penni's term as
director expires in 2005. Since March 1998, he has been an Area
Executive Vice President for Arthur J. Gallagher & Co. (NYSE:AJG). He
has worked in many sales and administrative roles in the insurance
business since 1969. He is the managing member of the Norsman Group
Northeast, LLC, a private sales and marketing company focused on
Internet-based education and marketing and serves as Treasurer and
Chairman of the Finance Committee of the Board of Trustees of the
Massachusetts College of Pharmacy and Health Sciences. Mr. Penni
graduated with a bachelor of science degree in 1969 from the School of
Management at Boston College.

     Dennis G. Rawan:  Mr. Rawan, age 59, was appointed a director
effective December 10, 2002 and serves as Chairman of the Audit
Committee of the Board of Directors.  Mr. Rawan was Chief Financial
Officer of Expo International, Inc. (Expo) from 1996 until his
retirement in 2000.  Expo provides information technology products and
services to the event industry.  For over 20 years prior to joining Expo,
Mr. Rawan was a certified public accountant (CPA) providing audit,
review, tax and financial statement preparation services for a variety
of clients.  From 1970 to 1988, while working as a CPA, Mr. Rawan taught
graduate level accounting courses at Babson College.  Mr. Rawan earned a
Bachelor of Arts degree and a Master of Business Administration degree
from Northeastern University.

     Constance K. Weaver: Ms. Weaver, age 50, was elected to the Board
of Directors in July 1998 and serves on the Compensation Committee of
the Board of Directors. Ms. Weaver's term as director expires in 2003.
Ms. Weaver is Executive Vice President, Publications and Brand
Management for AT&T Corporation (AT&T) (NYSE:T).  From 1996 to October
2002, Ms. Weaver was Vice President, Investor Relations and Financial
Communications for AT&T. From 1995 through 1996, she was Senior
Director, Investor Relations and Financial Communications for Microsoft
Corporation. From 1993 to 1995, she was Vice President, Investor
Relations, and, from 1991 to 1993, she was director of Investor
Relations for MCI Communications, Inc. She earned a Bachelor of Science
degree from the University of Maryland in 1975 and has completed post-
graduate financial management, marketing and strategic planning courses
at The Wharton School of the University of Pennsylvania, Stanford
University,

                                     58

<PAGE>
<PAGE>

 Columbia University and Imede (Switzerland).

     DIRECTORSHIPS

     Mr. Scott R. Silverman and Mr. Kevin H. McLaughlin serve on the Board
of Directors of SysComm International Corporation. No other directors or
executive officers hold directorships in any other company that has a class
of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, or subject to the requirements of Section 15(d) of the Exchange
Act or any company registered as an investment company under the Investment
Company Act of 1940.

     BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

     The Board of Directors held four meetings and acted by written
consent 32 times during 2002.

     We have standing Audit and Compensation Committees of the Board of
Directors. The members of the committees are identified in the
above-referenced descriptions.

     The Audit Committee recommends for approval by the Board of
Directors a firm of certified public accountants whose duty it is to
audit our consolidated financial statements for the fiscal year in which
they are appointed, and monitors the effectiveness of the audit effort,
our internal and financial accounting organization and controls and
financial reporting. The Audit Committee held five meetings during 2002.
The Audit Committee approves all auditor services and otherwise complies
with the provisions of the Sarbanes-Oxley Act of 2002.  The Audit Committee
members are independent as defined in Rule 4200(a)(15) of the National
Association of Securities Dealers listing standards, as applicable and
as may be modified or supplemented and as defined by the Sarbanes-Oxley Act
of 2002.

     The Compensation Committee administers our 1996 Non-Qualified
Stock Option Plan, the 1999 Flexible Stock Plan and the 1999 Employees
Stock Purchase Plan, including the review and grant of stock options to
officers and other employees under such plans, and recommends the
adoption of new plans. The Compensation Committee also reviews and
approves various other compensation policies and matters and reviews and
approves salaries and other matters relating to our executive officers.
The Compensation Committee reviews all senior corporate employees after
the end of each fiscal year to determine compensation for the subsequent
year. Particular attention is paid to each employee's contributions to
our current and future success along with their salary level as compared
to the market value of personnel with similar skills and
responsibilities. The Compensation Committee also looks at
accomplishments, which are above and beyond management's normal
expectations for their positions. The Compensation Committee met two
times and acted by written consent eight times during 2002.

                                     59

<PAGE>
<PAGE>

     COMPENSATION OF DIRECTORS

     Our non-employee directors receive a fixed quarterly fee in the
amount of $5,000 per quarter.  In addition, non-employee directors
receive a quarterly fee in the amount of $1,000 for each committee of
which they are a member.  Reasonable travel expenses are reimbursed when
incurred.  During 2002, Messrs. Noterman and Penni and Ms. Weaver each
received $28,000 in additional non-cash compensation. Individuals who
become directors are automatically granted an initial option to purchase
25,000 shares of common stock on the date they become directors.  Each
of such options is granted pursuant to our 1996 Non-Qualified Stock
Option Plan or the 1999 Flexible Stock Plan on terms and conditions
determined by the Board of Directors.  During 2002, Messrs. Noterman,
Penni and Rawan and Ms. Weaver were granted 200,000, 200,000 25,000 and
200,000 options to purchase shares of common stock, respectively.
Directors who are not also executive officers are not eligible to
participate in any of our other benefit plans.

                                60


<PAGE>
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth certain summary information
concerning the total remuneration paid in 2002 and the two prior fiscal
years to our Chief Executive Officer and our four other most highly
compensated executive officers (collectively, the "Named Executive
Officers").

<TABLE>
                                          SUMMARY COMPENSATION TABLE

<CAPTION>
                                                                                          Long-Term Compensation
                                                                                  ------------------------------------
                                              Annual Compensation                          Awards              Payouts
                                 -----------------------------------------------  -----------------------      -------
                                                                   Other Annual   Restricted   Options /        LTIP    All Other
                                                                     Compen-        Stock      SAR's(#)        Payouts    Compen-
Name and Principal Position(1)   Year    Salary ($)  Bonus ($)(2)  sation ($)(3)  Awards ($)     (4)             (#)     sation ($)
------------------------------   ----    ----------  ------------  -------------  ----------   ---------       -------  -----------
<S>                              <C>      <C>          <C>           <C>             <C>      <C>               <C>        <C>
Richard J. Sullivan (5)          2002     $450,000     $140,000      $326,841        $  --     3,200,000        $  --      $  --
   Former Chairman, CEO and      2001      450,000      448,801        57,424           --    10,675,000(9)        --         --
   Secretary                     2000      450,000      180,000       936,672           --     4,000,000           --         --

Scott R. Silverman  (6)          2002      165,577       22,030         2,563           --     1,600,000           --         --
   Chairman, CEO, President      2001          N/A          N/A           N/A          N/A           N/A          N/A        N/A
   and Director                  2000          N/A          N/A           N/A          N/A           N/A          N/A        N/A

Jerome C. Artigliere (7)         2002      178,365       22,030            --           --     1,300,000           --         --
   Former Senior Vice            2001      175,000       14,174        87,688           --     1,129,000(9)        --         --
   President, Chief Operating    2000      134,616       35,000            --           --       100,000           --         --
   Officer, Assistant Treasurer

Michael E. Krawitz (8)           2002      170,769       22,030            --           --     1,000,000           --         --
   Senior Vice President,        2001      160,000       14,174            --           --       504,000(9)        --         --
   General Counsel Secretary     2000      151,853       35,000            --           --       100,000           --         --

Peter Zhou                       2002      216,058        7,500            --           --       200,000           --         --
   Vice President, Chief         2001      212,839           --            --           --       229,000(9)        --         --
   Scientist                     2000      151,456       25,000            --           --       150,000           --         --

<FN>
---------
(1)  See "Related Party Transactions."
(2)  The amounts in the Bonus column were discretionary awards granted
     by the Compensation Committee in consideration of the
     contributions of the respective named executive officers.
(3)  Other annual compensation includes: (a) in 2002, for Richard J.
     Sullivan $296,190 related to the difference between the price used
     to determine the number of shares of common stock issued to Mr.
     Sullivan in lieu of cash compensation and the market price of
     stock at the time of issuance, an auto allowance and other
     discretionary payments, and for Mr. Silverman, an auto allowance;
     (b) in 2001, for Richard J. Sullivan, an auto allowance and other
     discretionary payments, and for Jerome C. Artigliere, $50,000 in
     moving expenses, an auto allowance and other discretionary
     payments; and (c) in 2000, for Richard J. Sullivan, $936,672 of
     other compensation representing the fair value of property
     distributed to Richard J. Sullivan, including the associated
     payment of taxes on his behalf, pursuant to his employment
     agreement.
(4)  Indicates number of securities underlying options.
(5)  Mr. Sullivan retired in March 2003.
(6)  Mr. Silverman joined us as a Director and President in March 2002. He
     assumed the positions of Chairman of the Board of Directors and Chief
     Executive Officer in March 2003.
(7)  Mr. Artigliere resigned in March 2003.
(8)  Mr. Krawitz assumed the position of Secretary in March 2003.
(9)  Includes options granted in prior years that were re-priced during
     2001 as follows: (a) for Richard J. Sullivan, 7,675,000; (b) for
     Jerome C. Artigliere, 254,000; (c) for Michael E. Krawitz,
     154,000; and (d) for Peter Zhou, 129,000.
</TABLE>


                                     61

<PAGE>
<PAGE>
     The following table contains information concerning the grant of
stock options under our 1999 Flexible Stock Plan and our 1999 Employees
Stock Purchase Plan to the Named Executive Officers during 2002:

<TABLE>
                                            OPTION GRANTS IN 2002
                                              INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                Potential Realizable Value
                                                                                                 At Assumed Rates of Stock
                                                                                               Appreciation for Option Term
-------------------------------------------------------------------------------------------- ---------------------------------
                                                     % of Total
                                                      Options
                          Number of Securities       Granted to
                           Underlying Options       Employees in    Exercise      Expiration
    Name (1)                 Granted (#)(2)             2002       Price ($/Sh)      Date               5% ($)        10% ($)
    --------              --------------------      ------------   ------------   ----------           -------        -------
<S>                          <C>                        <C>          <C>          <C>                  <C>            <C>
Richard J. Sullivan          1,200,000  (1)             11.9%        0.32  (3)    February-08          $130,666       $296,457
                             2,000,000  (1)             19.8         0.28  (3)        July-08           190,654        432,592

Scott R. Silverman           1,000,000  (1)              9.9         0.32         February-08           108,888        247,048
                               600,000  (1)              5.9         0.28             July-08            57,196        129,778

Jerome C. Artigliere           850,000  (1)              8.4         0.32  (3)    February-08            92,555        209,990
                               450,000  (1)              4.4         0.28  (3)        July-08            42,897         97,333

Michael E. Krawitz             600,000  (1)              5.9         0.32         February-08            65,333        148,229
                               400,000  (1)              4.0         0.28             July-08            38,131         86,518

Peter Zhou                     150,000  (1)              1.5         0.32         February-08            16,333         37,057
                                50,000  (1)              0.5         0.28             July-08             4,766         10,815

<FN>
---------
(1)  These options were granted under the 1999 Flexible Stock Plan at
     an exercise price equal to the fair market value of our common
     stock on the date of grant.

(2)  Table excludes options granted to the named executives by our
     subsidiaries. The table also excludes 23,669 options that were
     granted to Mr. Artigliere and 12,657 options that were granted to
     Mr. Krawitz.  These options were granted under the 1999 Employees
     Stock Purchase Plan at a price per share equal to 85% of the fair
     market value of our common stock on (i) the date on which the
     option was granted (i.e., the first business day of the offering)
     and (ii) the date on which the option was exercised (i.e., the
     last business day of the offering), whichever is less.

(3)  Mr. Sullivan's and Mr. Artigliere's options were re-priced on March 24,
     2003. The new options are exercisable at $0.01 per share. All other terms
     remain unchanged.
</TABLE>

     The terms of the 1996 Non-Qualified Stock Option Plan and the 1999
Flexible Stock Plan include change of control provisions.  Upon a change
of control, as defined in the plans, all stock options become fully
vested, exercisable or payable.

     The following table sets forth information with respect to the
Named Executive Officers concerning the exercise of options during 2002
and unexercised options held on December 31, 2002:

<TABLE>
                          AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<CAPTION>
                                                                   Number of Securities
                                                                  Underlying Unexercised         Value of Unexercised In-The-Money
                                  Exercised in 2002              Options at Year End 2002 (#)      Options at Year End 2002 ($)(2)
                         -----------------------------------    -----------------------------    ---------------------------------
                          Shares Acquired        Value
      Name               Upon Exercise (#)   Realized ($)(1)    Exercisable     Unexercisable      Exercisable      Unexercisable
---------------------    -----------------   ---------------    -----------     -------------      -----------      -------------
<S>                           <C>              <C>              <C>               <C>              <C>                 <C>
Richard J. Sullivan           646,297          $171,837         8,285,000  (3)    3,300,000  (3)   $2,154,100          $377,000
Scott R. Silverman                 --                --           325,000         1,600,000            84,500           168,000
Jerome C. Artigliere          104,577             4,049         1,029,000         1,300,000           267,540           135,000
Michael E. Krawitz             13,178               828           504,000         1,000,000           131,040           106,000
Peter Zhou                    100,000            58,000           112,333           216,667            26,787            24,333

<FN>
---------
(1)   The values realized represents the aggregate market value of the
      shares covered by the option on the date of exercise less the
      aggregate exercise price paid by the executive officer, but do not
      include deduction for taxes or other expenses associated with the
      exercise of the option or the sale of the underlying shares.
      Amounts do not include value realized upon the exercise of stock
      options issued by our subsidiaries.

(2)   The value of the unexercised in-the-money options at December 31,
      2002 assumes a fair market value of $0.43, the closing price of
      our

                                     62

<PAGE>
<PAGE>

      common stock as reported on The Nasdaq SmallCap Market on
      December 31, 2002.  The values shown are net of the option
      exercise price, but do not include deduction for taxes or other
      expenses associated with the exercise of the option or the sale of
      the underlying shares.

(3)   Includes 600,000 exercisable and 100,000 unexercisable options,
      which are owned by Mr. Sullivan's wife.
</TABLE>

      Incentive Plans

      Cash and Stock Incentive Compensation Programs.  To reward
performance, we provide our executive officers and our divisional
executive officers with additional compensation in the form of a cash
bonus and/or stock awards.  No fixed formula or weighting is applied by
the Compensation Committee to corporate performance versus individual
performance in determining these awards.  The amounts of such awards are
determined by the Compensation Committee acting in its discretion.  Such
determination, except in the case of the award for the Chairman, is made
after considering the recommendations of the Chairman and President and
such other matters as the Compensation Committee deems relevant.  The
Compensation Committee, acting in its discretion, may determine to pay a
lesser award than the maximum specified.  The amount of the total
incentive is divided between cash and stock at the discretion of the
Compensation Committee.

      Stock Options Granted under the 1996 Non-Qualified Stock Option
Plan and the 1999 Flexible Stock Plan.  The 1996 Non-Qualified Stock
Option Plan and the 1999 Flexible Stock Plan are long-term plans
designed to link rewards with shareholder value over time.  Stock
options are granted to aid in the retention of employees and to align
the interests of employees with shareholders.  The value of the stock
options to an employee increases as the price of our stock increases
above the fair market value on the grant date, and the employee must
remain in our employ for the period required for the stock option to be
exercisable, thus providing an incentive to remain in our employ.

      These Plans allow grants of stock options to all of our employees,
including executive officers.  Grants to our executive officers and to
officers of our subsidiaries are made at the discretion of the
Compensation Committee.  The Compensation Committee may also make
available a pool of options to each subsidiary to be granted at the
discretion of such subsidiary's president.

      Stock Options Granted under the 1999 Employees Stock Purchase
Plan.  The 1999 Employees Stock Purchase Plan, which is intended to
qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code, provides eligible employees with an opportunity
to accumulate, through payroll deductions, funds to be used toward the
purchase of our stock pursuant to options granted under the Plan.
Options granted in connection with an offering under the plan, permit
the option holder to purchase our stock at a price per share equal to
85% of the fair market value of the stock on (i) the date on which the
option is granted (i.e., the first business day of the offering) and
(ii) the date on which the option is exercised (i.e., the last business
day of the offering), whichever is less.  Section 423 of the Internal
Revenue Code also provides certain favorable tax consequences to the
option holder, provided that (i.e., the last business day of the
offering) the stock acquired under the plan is held for a specified
minimum period of time.

      Other than as otherwise disclosed herein, we have no plans
pursuant to which cash or non-cash compensation was paid or distributed
during the last fiscal year, or is proposed to be paid or distributed in
the future, to the individuals described above.

      COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS

       None.

                                     63

<PAGE>
<PAGE>
      EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS

      We, or our subsidiaries, entered into employment agreements with
the following Named Executive Officers:

<TABLE>
<CAPTION>
           Name                          Length                                   Commencing                Base Salary
--------------------------            -------------                         ---------------------         ---------------
<S>                                      <C>                                   <C>                         <C>
Michael E. Krawitz                       5 Years                               April 12, 1999               170,000  (1)

<FN>
---------
(1)   Salary effective March 25, 2002.
</TABLE>

      We have not entered into an employment contract with any of our other
executive officers.

      On March 21, 2003, Richard J. Sullivan retired. Scott R. Silverman has
assumed the positions of Chairman of our Board of Directors and Chief
Executive Officer is Scott R. Silverman. Under the terms of Mr. Sullivan's,
severance agreement, Mr. Sullivan will receive a one-time payment of 56.0
million shares of our common stock and 10.9 million re-priced options. The
options surrendered had exercise prices ranging from $0.15 to $0.32 per
share and were replaced with options exercisable at $0.01 per share. Under
the terms of Mr. Sullivan's employment contract, we would have been
obligated to make payments in cash or stock up to $17 million to Mr.
Sullivan.

      On March 21, 2003, Jerry C. Artigliere resigned from his positions of
Senior Vice President and Chief Operating Officer. Under the terms of his
severance agreement, Mr. Artigliere will receive 4.8 million shares of our
common stock and 2.3 million re-priced options. The options surrendered had
exercise prices ranging from $0.15 to $0.32 per share and were replaced with
options exercisable at $0.01 per share. Replacing Mr. Artigliere is Kevin H.
McLaughlin. Mr. McLaughlin has served most recently as SysComm International
Corporation's Chief Executive Officer.

      In March 1999, we entered into an employment agreement with
Michael Krawitz, Senior Vice President, General Counsel, and Assistant
Secretary.  The agreement was amended in June 1999 and in April 2000.
The agreement provides that in the event Mr. Krawitz's employment is
terminated either by us other than for "cause" or by Mr. Krawitz for
"good reason," Mr. Krawitz will continue to receive his base
compensation for the remainder of the employment term under the
agreement as if such termination had not occurred.  Upon any such
termination, the payment of any other benefits will be determined by the
Board in accordance with our plans, policies and practices.


                                     64

<PAGE>
<PAGE>


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Exchange Act requires our officers and directors
and persons who own more than 10% of our Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission and to furnish copies of all such reports to us. We believe,
based on our stock transfer records and other information available to us,
that all reports required under Section 16(a) were timely filed during 2002
except as follows: 1) A Form 4 for Mr. Richard Sullivan, our former Chairman
and Chief Executive Officer, was filed approximately two weeks late and a
Form 4 for Mr. Sullivan was amended approximately six weeks after the
initial filing date; 2) A Form 5 for Mrs. Angela Sullivan, a former
director, was filed two weeks late: 3) Form 4's for the following directors
were filed several months late: Mrs. Angela Sullivan, Mr.
Daniel Penni, Ms. Constance Weaver and Mr. Arthur Noterman.

                                     65

<PAGE>
<PAGE>

      ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT OWNERSHIP OF EQUITY SECURITIES

      The following table sets forth information regarding beneficial
ownership our common stock by each director and by each executive
officer named in the summary compensation table and by all the directors
and executive officers as a group as of March 24, 2002:

<TABLE>
<CAPTION>
                                                    Number of
                                                    Shares of                           Percent of
                                                  Common Stock                         Common Stock
                                                  Beneficially                         Beneficially
          Name of Beneficial Owner                  Owned(1)                              Owned
----------------------------------------        ---------------------               ------------------
<S>                                               <C>                                  <C>
Arthur F. Noterman                                   1,385,000                                *
Daniel E. Penni                                      1,849,065                                *
Dennis G. Rawan                                             --                                *
Constance K. Weaver                                  1,123,000                                *
Scott R. Silverman                                   1,325,000                                *
Kevin H. McLaughlin                                    369,333
Michael E. Krawitz                                   1,158,781                                *
Evan C. McKeown                                        184,170
Peter Zhou                                             302,526                                *

All directors and executive officers
 as a group (12 persons)                             8,698,480                              2.4%

<FN>
---------
*     Represents less than 1% of the issued and outstanding shares of
      our common stock.

(1)   This table includes presently exercisable stock options. The following
      directors and executive officers hold the number of exercisable
      options set forth following their respective names: Arthur F. Noterman
      - 1,064,000; Daniel E. Penni - 1,064,000; Constance K. Weaver -
      889,000; Scott R. Silverman - 1,325,000; Kevin H. McLaughlin -
      358,333; Michael E. Krawitz - 1,104,000; Evan C. McKeown - 183,334;
      Peter Zhou - 279,000; and all directors and officers as a group -
      7,204,667.
</TABLE>


                                     66

<PAGE>
<PAGE>

      PRINCIPAL STOCKHOLDERS

      Set forth in the table below is information as of March 24,
2003 with respect to persons known to us (other than the directors and
executive officers shown in the preceding table) to be the beneficial
owners of more than five percent of our issued and outstanding common
stock:

<TABLE>
<CAPTION>
                                    Number of Shares
     Name and Address              Beneficially Owned                    Percent Of Class
------------------------------   ----------------------                --------------------
<S>                              <C>                                   <C>
     Richard J. Sullivan(1)           69,633,852(2)                           19.3%

<FN>
(1)   Pursuant to the terms of Mr. Sullivan severance agreement dated March
      24, 2003, Mr. Sullivan will be issued 56.0 million shares of our
      common stock on or before December 31, 2003. These shares have been
      reflected as part of Mr. Sullivan's beneficially owned shares at March
      24, 2003.

(2)   Includes 10,885,000 stock options owned by Mr. Sullivan and 700,000
      stock options and 5,000 shares of common stock owned by Mr. Sullivan's
      wife. Also, includes 259,598 shares owned by The Bay Group and 367,177
      shares owned by Great Bay Technology, Inc. Mr. Sullivan controls The
      Bay Group and Great Bay Technology, Inc.
</TABLE>

      CHANGES IN CONTROL

      There are no arrangements known to us, including any pledge of our
securities by any person, the operation of which may at a subsequent
date result in a change in control us.

                                     67

<PAGE>
<PAGE>
      ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      INDEBTEDNESS OF MANAGEMENT AND OTHERS

      Daniel E. Penni, a member of our Board of Directors, has executed
a revolving line of credit promissory note in favor of Applied Digital
Solutions Financial Corp., our subsidiary, in the amount of $450,000.
The promissory note is payable on demand, with interest payable monthly
on the unpaid principal balance at the rate equal to one percentage
point above the base rate announced by State Street Bank and Trust
Company (which interest rate shall fluctuate contemporaneously with
changes in such base rate).  The largest amount outstanding under the
promissory note during 2002 was $420,000, and as of March 20, 2003,
$420,000 had been advanced under this note.

      Mr. Richard Sullivan, our former Chairman of the Board, Chief
Executive Officer and Secretary, has executed a promissory note in our favor
in the amount of $59,711. The promissory note is payable on demand and
interest accrues at a rate of 7.0% per annum. The largest amount outstanding
under the promissory note during 2002 was $59,711, plus accrued interest,
and on March 21, 2003, this note was paid in full.

      On September 27, 2000, the following named executive officers and
directors exercised options granted to them under our 1999 Flexible
Stock Plan to purchase shares of our common stock. Under the terms of
the grant, the named executive officers each executed and delivered a
non-recourse, interest bearing promissory note and stock pledge
agreement to us in consideration for the purchase of the shares (the
officers and directors received no cash proceeds from these loans) as
follows:

<TABLE>
<CAPTION>
Named Executive Officer          Amount               Interest Rate            Due Date
-----------------------          ------               -------------            --------
<S>                             <C>                       <C>            <C>
Michael E. Krawitz               $57,750                  6.0%           September 27, 2003
Peter Zhou                        57,750                  6.0            September 27, 2003

<CAPTION>
Directors                        Amount               Interest Rate            Due Date
---------                        ------               -------------            --------
<S>                             <C>                       <C>            <C>
Richard S. Friedland            $236,500                  6.0%           September 27, 2003
Arthur F. Noterman               236,500                  6.0            September 27, 2003
Daniel E. Penni                  236,500                  6.0            September 27, 2003
Constance K. Weaver              236,500                  6.0            September 27, 2003
</TABLE>

      In September 2000, when the loans were originated, we notified
these officers and directors that we intended to pay their annual
interest as part of their compensation expense/directors remuneration
and to provide a gross-up for the associated income taxes. Annual
interest payments were due on September 27, 2001 and September 27, 2002.
We have chosen not to pay the interest and related tax gross-up.  We,
therefore, consider such notes to be in default and are in the process
of foreclosing on the underlying collateral (all of the stock) in
satisfaction of the notes.  Our decision to take this action relates in
part to the passage of the recent corporate reform legislation under the
Sarbanes-Oxley Act of 2002, which, among other things, prohibits further
extension of credit to officers and directors.

      Marc Sherman, the former Chief Executive Officer of Intellesale,
Inc. and brother-in-law of Constance Weaver, a member of our Board of
Directors, has executed six promissory notes in the aggregate amount of
$595,000.  The promissory notes are due on demand and bear interest at
the rate of 6% per annum.  Mr. Sherman was also indebted to us under a
mortgage note with a principal balance of $825,000. During 2001, the
highest balance outstanding on the note was $345,119. The note, which
had an interest rate equal to the prime rate published by the Wall Street
Journal plus 1%, was paid in full in

                                     68

<PAGE>
<PAGE>
May 2001.  In addition, Mr. Sherman is indebted
to us under a non-interest bearing promissory note in the amount of
$200,000, the proceeds of which were used by Mr. Sherman to acquire
100,000 shares of our common stock. This note is due upon the sale of
our common stock by Mr. Sherman.

      ITEM 14.  CONTROLS AND PROCEDURES

      Evaluation of Disclosure Controls and Procedures

      During the fourth quarter, management, including the Company's
Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a - 14(c) and 15d -
14(c)).  Based on that evaluation, they have concluded that the
Company's current disclosure controls and procedures are effective in
timely providing them with material information relating to the Company
required to be disclosed in the reports the Company files or submits
under the Exchange Act.

      (b) Changes in Internal Controls

      There have not been any significant changes in the Company's
internal controls or in other factors that could significantly affect
these controls subsequent to the date of evaluation.  There were no
significant deficiencies or material weaknesses, and therefore no
corrective actions were taken.



                                     69

<PAGE>
<PAGE>
                          PART IV

          ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                    FORM 8-K

(A)(1)    THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
          LISTED BELOW ARE INCLUDED IN THIS REPORT
          Report of Management
          Reports of Independent Accountants
          Financial Statements
          Consolidated Balance Sheets
          Consolidated Statements Of Operations
          Consolidated Statements Of Preferred Stock, Common Stock and Other
           Stockholders' Equity
          Consolidated Statements Of Cash Flows
          Notes to Consolidated Financial Statements
          Financial Statement Schedule
          Schedule of Valuation and Qualifying Accounts
(A)(2)    FINANCIAL STATEMENT SCHEDULES HAVE BEEN INCLUDED IN ITEM 15(A)(1)
          ABOVE.
(A)(3)    EXHIBITS
          See Index to Exhibits filed as part of this annual report on Form
          10-K.
(B)       REPORTS ON FORM 8-K
          (i) On March 4, 2003, we filed a Current Report on Form 8-K, which
          reported the failure to make a required payment on February 28,
          2002, under the Third Amended and Restated Term Credit Agreement
          with IBM Credit LLC (formerly IBM Credit Corporation).
          (ii) On March 7, 2003, we filed a Current Report on Form 8-K,
          which reported the failure to make a required payment on March 6,
          2003, under the Third Amended and Restated Term Credit Agreement
          with IBM Credit LLC and certain litigation filed against IBM
          Credit LLC and IBM Corporation.
          (iii) On March 7, 2003, we filed a Current Report on Form 8-K,
          which reported that we had received a notice of default under the
          Third Amended and Restated Term Credit Agreement.
          (iv) On March 10, 2003, we filed a Current Report on Form 8-K
          which reported that we had settled the pending and consolidated
          shareholder class action lawsuit.
          (v) On March 27, 2003, we filed a Current Report on Form 8-K
          announcing that we had agreed to the terms of a forbearance
          agreement with IBM Credit, that Richard J. Sullivan retired
          effective March 21, 2003, and that Scott R. Silverman had assumed
          the titles of Chairman and Chief Executive Officer.

(C)       EXHIBITS - INCLUDED IN ITEM 15(A)(3) ABOVE.



                                     70

<PAGE>
<PAGE>
                                 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 Palm Beach, State of Florida, on March 31,
2002.

                                  APPLIED DIGITAL SOLUTIONS, INC.


                                  By: /s/ Scott R. Silverman
                                     -----------------------------------------
                                     (Scott R. Silverman)
                                     Chairman of the Board of Directors, Chief
                                     Executive Officer and President

      Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
                Signature                              Title                              Date
                ---------                              -----                              ----
<S>                                           <C>                                    <C>
         /s/ Scott R. Silverman               Chairman of the Board of               March 31, 2003
-------------------------------------         Directors, Chief Executive
          (Scott R. Silverman)                Officer and President
                                              (Principal Executive Officer)


          /s/ Scott R. Silverman              Director and President                 March 31, 2003
-------------------------------------
           (Scott R. Silverman)


           /s/ Evan C. McKeown                Chief Financial Officer                March 31, 2003
-------------------------------------         (Principal Financial Officer
            (Evan C. McKeown)                 and Principal Accounting
                                              Officer)


          /s/ Arthur F. Noterman              Director                               March 31, 2003
-------------------------------------
           (Arthur F. Noterman)


           /s/ Daniel E. Penni                Director                               March 31, 2003
-------------------------------------
            (Daniel E. Penni)


           /s/ Dennis G. Rawan                Director                               March 31, 2003
-------------------------------------
            (Dennis G. Rawan)


         /s/ Constance K. Weaver              Director                               March 31, 2003
-------------------------------------
          (Constance K. Weaver)
</TABLE>



                                     71

<PAGE>
<PAGE>
              APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

  CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott R. Silverman, certify that:

1. I have reviewed this annual report on Form 10-K of Applied Digital
Solutions, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

      a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within
      those entities, particularly during the period in which this
      annual report is being prepared;

      b) evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the
      filing date of this annual report (the "Evaluation Date"); and

      c) presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on
      our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's Board of Directors (or persons
performing the equivalent function):

      a) all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's
      ability to record, process, summarize and report financial data
      and have identified for the registrant's auditors any material
      weaknesses in internal controls; and

      b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's
      internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 31, 2003

/s/ Scott R. Silverman
Scott R. Silverman
Chairman, Chief Executive Officer and President

                                     72

<PAGE>
<PAGE>
              APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

  CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Evan C. McKeown, certify that:

1. I have reviewed this annual report on Form 10-K of Applied Digital
Solutions, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

      a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within
      those entities, particularly during the period in which this
      annual report is being prepared;

      b) evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the
      filing date of this annual report (the "Evaluation Date"); and

      c) presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on
      our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's Board of Directors (or persons
performing the equivalent function):

      a) all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's
      ability to record, process, summarize and report financial data
      and have identified for the registrant's auditors any material
      weaknesses in internal controls; and

      b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's
      internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 31, 2003

/s/ Evan C. McKeown
Evan C. McKeown
Vice President and Chief Financial Officer

                                     73

<PAGE>
<PAGE>

VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                               Additions
                                               -----------------------------------------------
                                               Balance at       Charged to           Valuation                 Balance at
                                               beginning         cost and            accounts                    end of
Description                                    of period         expenses            acquired     Deductions     period
-----------                                    ---------        ----------           ---------    ----------   ----------
<S>                                            <C>               <C>                 <C>          <C>            <C>
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Accounts receivable:
2002 Allowance for doubtful accounts            $ 2,581          $ 4,236               $ --         $5,554       $ 1,263
2001 Allowance for doubtful accounts              1,681            1,914                 --          1,014         2,581
2000 Allowance for doubtful accounts              1,047              823                766            955         1,681

Inventory:
2002 Allowance for excess and
obsolescence                                    $ 1,702          $   104               $ --         $  384       $ 1,422
2001 Allowance for excess and
obsolescence                                      1,500              570                 --            368         1,702
2000 Allowance for excess and
obsolescence                                        916              345                460            221         1,500

Notes receivable:
2002 Allowance for doubtful accounts            $12,671          $ 1,266               $ --         $7,270       $ 6,667
2001 Allowance for doubtful accounts                 --           12,671                 --             --        12,671
2000 Allowance for doubtful accounts                 --               --                 --             --            --

Deferred Taxes:
2002 Valuation reserve                          $66,932          $26,282               $ --         $   --       $93,214
2001 Valuation reserve                           15,850           51,082                 --             --        66,932
2000 Valuation reserve                               --           15,850                 --             --        15,850
</TABLE>


                                     74

<PAGE>
<PAGE>
List Of Exhibits
(Item 15 (c))

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------
<S>       <C>
    2.1   Agreement of Purchase and Sale dated as of June 4, 1999 by
          and among Intellesale.com, Inc., Applied Cellular
          Technology, Inc., David Romano and Eric Limont (incorporated
          by reference to Exhibit 99.1 to the registrant's Current
          Report on Form 8-K filed with the Commission on June 11,
          1999, as amended on August 12, 1999)

    2.2   Amendment No. 1 to the Agreement of Purchase and Sale, dated
          as of June 9, 1999 by and among Intellesale.com, Inc.,
          Applied Cellular Technology, Inc., David Romano and Eric
          Limont (incorporated by reference to Exhibit 99.2 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on June 11, 1999, as amended on August 12, 1999)

    2.3   Agreement and Plan of Merger, dated April 24, 2000, by and
          among the Applied Digital Solutions, Inc., Digital Angel
          Corporation and Destron Fearing Corporation (incorporated by
          reference to Exhibit 2.1 to the registrant's Current Report
          on Form 8-K filed with the Commission on May 1, 2000)

    2.4   Agreement dated as of November 28, 1999 by and between AT&T
          Canada Corp. and TigerTel, Inc. (incorporated by reference
          to Exhibit 99.1 to the registrant's Current Report on Form
          8-K filed with the Commission on December 13, 1999, as
          amended on December 22, 1999 and January 11, 2000)

    2.5   Agreement and Plan of Merger dated as of June 30, 2000 by
          and among the Applied Digital Solutions, Inc. and Compec
          Acquisition Corp. and Computer Equity Corporation and John
          G. Ballenger, Christopher J. Ballenger and Frederick M.
          Henschel (incorporated by reference to Exhibit 2 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on July 14, 2000, as amended on September 11,
          2000)

    2.6   Agreement and Plan of Merger dated as of October 18, 2000,
          by and among the Applied Digital Solutions, Inc. and PDS
          Acquisition Corp., and Pacific Decision Sciences
          Corporation, and H&K Vasa Family 1999 Limited Partnership,
          H&K Vasa Family 2000 Limited Partnership, David Dorret, and
          David Englund (incorporated by reference to Exhibit 2 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on November 1, 2000, as amended on December 29,
          2000)

    2.7   MCY Agreement dated as of October 19, 2000 by and between
          MCY.com, Inc. and Applied Digital Solutions, Inc.
          (incorporated by reference to Exhibit 2 to the registrant's
          Current Report on Form 8-K filed with the Commission on
          December 5, 2000)

    3.1   Amended and Restated Bylaws of the Company dated March 31,
          1998 (incorporated by reference to Exhibit 3.4 to the
          registrant's Quarterly Report on Form 10-Q for the Quarter
          Ended June 30, 2002 filed with the Commission on August 14,
          2002)

    3.2   Amendment to Bylaws of the Company dated April 4, 2002
          (incorporated by reference to Exhibit 3.4 to the
          registrant's Quarterly Report on Form 10-Q for the Quarter
          Ended June 30, 2002 filed with the Commission on August 14,
          2002)

    3.3   Second Restated Articles of Incorporation of the Registrant
          (incorporated herein by reference to Exhibit 4.1 to the
          registrant's Post-Effective Amendment No. 1 on Form S-1 to
          Registration Statement (Form S-3 File No. 333-64605) filed
          with the Commission on June 24, 1999)

    3.4   Amendment of Articles of Incorporation of the Registrant
          filed with the Secretary of State of the State of Missouri
          on September 5, 2000 (incorporated herein by reference to
          Exhibit 4.3 to the Registrant's Post-Effective Amendment No.
          3 on Form S-3 to Registration Statement on Form S-4 (File
          No. 333-38420-02) filed with the Commission on September 29,
          2000)

    3.5   Amendment of Second Restated Articles of Incorporation of
          the Registrant filed with the Secretary of State of Missouri
          on July 18, 2001 (incorporated herein by reference to
          Exhibit 4.3 to the Registrant's Quarterly Report on Form
          10-Q filed with the Commission on August 17, 2001)

                                     75

<PAGE>
<PAGE>

    4.1   Second Restated Articles of Incorporation, of the Registrant
          (incorporated herein by reference to Exhibit 4.1 to the
          registrant's Post-Effective Amendment No. 1 on Form S-1 to
          Registration Statement (Form S-3 File No. 333-64605) filed
          with the Commission on June 24, 1999)

    4.2   Amendment of Articles of Incorporation of the Registrant
          filed with the Secretary of State of the State of Missouri
          on September 5, 2000 (incorporated herein by reference to
          Exhibit 4.3 to the registrant's Post-Effective Amendment No.
          3 on Form S-3 to Registration Statement on Form S-4 (File
          No. 333-38420-02) filed with the Commission on September 29,
          2000)

    4.3   Amendment of Second Restated Articles of Incorporation of
          the Registrant filed with the Secretary of State of Missouri
          on July 18, 2001 (incorporated herein by reference to
          Exhibit 4.3 to the registrant's Quarterly Report on Form
          10-Q filed with the Commission on August 17, 2001)

    4.4   Third Restated Articles of Incorporation of the Registrant
          filed with the Secretary of State of Missouri on December
          20, 2002 (incorporated herein by reference to Exhibit 4.4 to
          the registrant's Registration Statement on Form S-1 (File
          No. 333-102165) filed with Commission on December 23, 2002.

    4.5   Certificate of Designation of Preferences of Series C
          Convertible Preferred Stock (incorporated herein by
          reference to Exhibit 3.1 to the registrant's Current Report
          on Form 8-K filed with the Commission on October 26, 2000)

    4.6   Amended and Restated Bylaws of the Registrant dated March
          31, 1998 (incorporated by reference to Exhibit 3.4 to the
          registrant's Quarterly Report on Form 10-Q for the Quarter
          Ended June 30, 2002 filed with the Commission on August 14,
          2002)

   10.1   1996 Non-Qualified Stock Option Plan of Applied Cellular
          Technology, Inc., as amended through June 13, 1998
          (incorporated herein by reference to Exhibit 4.1 to the
          registrant's Registration Statement on Form S-8 (File No.
          333-91999) filed with the Commission on December 2, 1999)

   10.2   Applied Digital Solutions, Inc. 1999 Employees Stock
          Purchase Plan, as amended through September 23, 1999
          (incorporated herein by reference to Exhibit 10.1 to the
          registrant's Registration Statement on Form S-8 (File No.
          333-88421) filed with the Commission on October 4, 1999)

   10.3   Applied Digital Solutions, Inc. 1999 Flexible Stock Plan
          (incorporated herein by reference to Exhibit 4.1 to the
          registrant's Registration Statement on Form S-8 (File No.
          333-92327) filed with the Commission on December 8, 1999)

   10.4   Credit Agreement between Applied Digital Solutions, Inc. and
          State Street Bank and Trust Company dated as of August 25,
          1998 (incorporated herein by reference to Exhibit 10.2 to
          the registrant's Quarterly Report on Form 10-Q filed with
          the Commission on November 16, 1998)

   10.5   First Amendment to Credit Agreement between Applied Digital
          Solutions, Inc. and State Street Bank and Trust Company
          dated as of February 4, 1999 (incorporated by reference to
          Exhibit 10.3 the registrant's Annual Report on Form 10-K
          filed with the Commission on March 31, 1999)

   10.6   Richard J. Sullivan Employment Agreement (incorporated by
          reference to Exhibit 10.8 to the registrant's Annual Report
          on Form 10-K filed with the Commission on March 30, 2000)*

   10.7   Garrett A. Sullivan Employment Agreement (incorporated by
          reference to Exhibit 10.9 to the registrant's Annual Report
          on Form 10-K filed with the Commission on March 30, 2000)*

   10.8   Letter Agreement, dated December 30, 2001, between Applied
          Digital Solutions, Inc. and Garrett A. Sullivan
          (incorporated by reference to Exhibit 10.13 to the
          registrant's Amendment to the Registration Statement on Form
          S-1 (File No. 333-75928) filed with the Commission on
          February 8, 2002)*

   10.9   Jerome C. Artigliere Employment Agreement (incorporated by
          reference to Exhibit 10.11 to the registrant's Annual Report
          on Form 10-K filed with the Commission on April 10, 2001)*

                                     76

<PAGE>
<PAGE>

  10.10   Mercedes Walton Employment Agreement (incorporated by
          reference to Exhibit 10.12 to the registrant's Annual Report
          on Form 10-K filed with the Commission on April 10, 2001)*

  10.11   David I. Beckett Employment Agreement (incorporated by
          reference to Exhibit 10.13 to the registrant's Annual Report
          on Form 10-K filed with the Commission on April 10, 2001)*

  10.12   Michael E. Krawitz Employment Agreement (incorporated by
          reference to Exhibit 10.14 to the registrant's Annual Report
          on Form 10-K filed with the Commission on April 10, 2001)*

  10.13   Dr. Peter Zhou Employment Agreement (incorporated by
          reference to Exhibit 10.19 to the registrant's Amendment to
          the Registration Statement on Form S-1 (File No. 333-75928)
          filed with the Commission on February 8, 2002)*

  10.14   Securities Purchase Agreement, dated as of October 24, 2000,
          relating to the Registrant's Series C Convertible Preferred
          Stock (incorporated by reference to Exhibit 10.1 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on October 26, 2000)

  10.15   Form of warrant to purchase common stock of the Registrant
          issued to the holders of the Series C Convertible Preferred
          Stock (incorporated by reference to Exhibit 4.1 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on October 26, 2000)

  10.16   Registration Rights Agreement between the Registrant and the
          holders of the Series C Convertible Preferred Stock
          (incorporated by reference to Exhibit 10.2 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on October 26, 2000)

  10.17   Lock-Up Agreement dated as of November 28, 1999 by and among
          AT&T Canada Corp. and Applied Digital Solutions, Inc.
          (incorporated by reference to the Exhibit 99.2 to the
          registrant's Current Report on Form 8-K filed with the
          Commission on December 13, 1999, as amended on December 22,
          1999 and January 11, 2000)

  10.18   Voting Agreement by and among Applied Digital Solutions,
          Inc. and certain security holders of Destron Fearing
          Corporation (incorporated by reference to Exhibit 10.1 to
          the registrant's Current Report on Form 8-K filed with the
          Commission on May 1, 2000)

  10.19   Third Amended and Restated Term Credit Agreement dated March
          1, 2002 among Applied Digital Solutions, Inc., Digital Angel
          Share Trust and IBM Credit Corporation (incorporated by
          reference to Exhibit 10.2 to the registrant's Current Report
          on Form 8-K filed with the Commission on March 8, 2002)

  10.20   Waiver Agreement from IBM Credit Corporation, waiving
          existing defaults under the Third Amended and Restated Term
          Credit Agreement as of June 30, 2002 (incorporated herein by
          reference to Exhibit 10.20 to the registrant's Registration
          Statement on Form S-1 (File No. 333-98799) filed with the
          Commission on August 27, 2002)

  10.21   Amendment to The Third Amended and Restated Term Credit
          Agreement dated as of September 30, 2002, amending certain
          financial covenants under the Third Amended and Restated
          Term Credit Agreement (incorporated herein by reference to
          Exhibit 10.21 to the Company's Post-Effective Amendment No.
          1 to Registration Statement on Form S-1 (File No. 333-98799)
          filed with the Commission on November 5, 2002)

  10.22   Amendment to The Third Amended and Restated Term Credit
          Agreement dated as of November 1, 2002, amending certain
          financial covenants under the Third Amended and Restated
          Term Credit Agreement (incorporated herein by reference to
          Exhibit 10.22 to the Company's Post-Effective Amendment No.
          1 to Registration Statement on Form S-1 (File No. 333-98799)
          filed with the Commission on November 5, 2002)

  10.23   Warrant Agreement between Applied Digital Solutions, Inc.
          and IBM Credit Corporation dated August 21, 2002
          (incorporated herein by reference to Exhibit 10.21 to the
          registrant's Registration Statement on Form S-1 (File No.
          333-98799) filed with the Commission on August 27, 2002)

  10.24   Warrant Agreement between VeriChip Corporation and IBM
          Credit Corporation dated August 21, 2002 (incorporated
          herein by reference to Exhibit 10.22 to the registrant's
          Registration Statement on Form S-1 (File No. 333-98799)
          filed with the Commission on August 27, 2002)

                                     77

<PAGE>
<PAGE>

  10.25   Agreement of Settlement and Release by and between Applied
          Digital Solutions, Inc. and John G. Ballenger, Christopher
          J. Ballenger and Frederick M. Henschel, dated July 17, 2002
          (incorporated herein by reference to Exhibit 10.23 to the
          registrant's Registration Statement on Form S-1 (File No.
          333-98799) filed with the Commission on August 27, 2002)

  10.26   Amendment to Agreement of Settlement and Release by and
          between Applied Digital Solutions, Inc. and John G.
          Ballenger, Christopher J. Ballenger and Frederick M.
          Henschel, dated August 23, 2002 (incorporated herein by
          reference to Exhibit 10.24 to the registrant's Registration
          Statement on Form S-1 (File No. 333-98799) filed with the
          Commission on August 27, 2002)

  10.27   Summary of Terms and Conditions setting forth the terms and
          conditions of the Forbearance Agreement among IBM Credit LLC,
          Applied Digital Solutions, Inc., Digital Angel Share Trust, and
          their applicable subsidiaries (if any) dated March 24, 2003
          (incorporated herein by reference to Exhibit 10.2 to the
          registrant's Current Report on Form 8-K filed with the Commission
          on March 27, 2002)

  10.28   Letter Agreement between Applied Digital Solutions, Inc. and R. J.
          Sullivan (incorporated herein by reference to Exhibit 10.3
          to the registrant's Current Report on Form 8-K filed with the
          Commission on March 27, 2002)

  10.29   Letter Agreement between Applied Digital Solutions, Inc. and J. C.
          Artigliere*, **

   21.1   List of Subsidiaries of Applied Digital Solutions, Inc.**

   23.1   Consent of PricewaterhouseCoopers LLP**

   23.2   Consent of Eisner LLP**

   99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

   99.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

<FN>
---------
*   Management contract or compensatory plan.
**  Filed herewith.
</TABLE>



                                     78

<PAGE>
<PAGE>

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


                       APPLIED DIGITAL SOLUTIONS, INC.
                              AND SUBSIDIARIES

                            FINANCIAL STATEMENTS

                              DECEMBER 31, 2002


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



<PAGE>
<PAGE>

                       APPLIED DIGITAL SOLUTIONS, INC.
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
CONTENTS
=============================================================================================================

<CAPTION>
                                                                                                     PAGE
         <S>                                                                                         <C>
         REPORT OF MANAGEMENT ......................................................................  F-3

         REPORTS OF INDEPENDENT ACCOUNTANTS.........................................................  F-4

         CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001...............................  F-6

         CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED
                  DECEMBER 31, 2002.................................................................  F-7

         CONSOLIDATED STATEMENTS OF PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT)
                  EQUITY FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 2002.....  F-8

         CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED
                  DECEMBER 31, 2002................................................................. F-11

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................. F-12
</TABLE>


------------------------------------------------------------------------------
                                                                      Page F-2


<PAGE>
<PAGE>

                            REPORT OF MANAGEMENT


Management is responsible for the preparation, integrity and objectivity of
the accompanying financial statements and related information. These
statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, and include amounts that
are based on our best judgments with due consideration given to materiality.

Management maintains a system of internal accounting controls. The system is
designed to provide reasonable assurance, at reasonable cost, that assets
are safeguarded and that transactions and events are recorded properly. The
internal accounting control system is augmented by appropriate reviews by
management, written policies and guidelines, careful selection and training
of qualified personnel and a written Code of Business Conduct adopted by the
Company's Board of Directors, applicable to all employees of the Company and
its subsidiaries. In our opinion, the Company's internal accounting controls
provide reasonable assurance that assets are safeguarded against material
loss from unauthorized use or disposition and that the financial records are
reliable for preparing financial statements and other data and for
maintaining accountability of assets.

Eisner LLP, the Company's independent accountants, were recommended by the
Audit Committee of the Board of Directors and selected by the Board of
Directors. Eisner LLP maintains an understanding of internal controls and
conducts such tests and other auditing procedures considered necessary in
the circumstances to express their opinion in the report that follows.

The Audit Committee of the Company's Board of Directors meets with the
independent auditors, management and internal auditors periodically to
discuss internal accounting controls and auditing and financial reporting
matters. The Committee reviews with the independent auditors, the scope and
results of the audit effort. The Committee also meets periodically with the
independent auditors and the director of internal audit without management
present to ensure that the independent auditors and the director of internal
audit have free access to the Committee.



SCOTT R. SILVERMAN                           EVAN C. MCKEOWN
Chairman of the Board of Directors,          Vice President and
Chief Executive Officer and President        Chief Financial Officer

March 31, 2003





------------------------------------------------------------------------------
                                                                      Page F-3


<PAGE>
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS


Board of Directors and Stockholders
Applied Digital Solutions, Inc.

We have audited the accompanying consolidated balance sheet of Applied
Digital Solutions, Inc. and subsidiaries (the "Company") as of December 31,
2002, and the related consolidated statements of operations, preferred
stock, common stock and other stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Applied
Digital Solutions, Inc. and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their consolidated cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has experienced
a substantial net loss, has a working capital deficit, a net capital
deficiency and was informed by a lender that the Company was in default on
its loan agreement. These matters, among others, raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

As discussed in Note 1 to the consolidated financial statements, in 2002,
the Company adopted the new standard addressing financial accounting and
reporting for goodwill subsequent to an acquisition.

In connection with our audit of the financial statements referred to above,
we audited the financial schedule of Valuation and Qualifying Accounts for
2002. In our opinion, this financial schedule, when considered in relation
to the financial statements taken as a whole, presents fairly, in all
material respects, the information stated therein.



Eisner LLP
New York, New York
March 27, 2003


------------------------------------------------------------------------------
                                                                      Page F-4


<PAGE>
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
 Shareholders of Applied Digital Solutions, Inc.

In our opinion, the consolidated financial statements as of December 31, 2001
and for the two years ended December 31, 2001 and 2000 listed in the index
appearing under Item 15(a)(1), present fairly, in all material respects, the
financial position of Applied Digital Solutions, Inc. and its subsidiaries at
December 31, 2001 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule for
the years ended December 31, 2001 and 2000 listed in the index appearing
under Item 15(a)(1) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to
the financial statements, the Company has suffered significant losses from
continuing operations and discontinued operations and was in violation of
certain covenants and payment obligations of its debt agreement at December
31, 2001. The Company amended its credit agreement on March 27, 2002. This
debt agreement requires the Company to maintain compliance with certain
covenants. In order to maintain compliance with these covenants, the Company
will be required to substantially improve its operating results in 2002. If
the Company violates these covenants in 2002, it could result in the
lender's declaration that amounts are due and immediately payable. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
discussed in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


PricewaterhouseCoopers LLP
St. Louis, Missouri
March 27, 2002, except for
Note 25 which is as of
August 23, 2002.




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                                                                      Page F-5


<PAGE>
<PAGE>

<TABLE>
                                     APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------
                                                CONSOLIDATED BALANCE SHEETS
                                             (IN THOUSANDS, EXCEPT PAR VALUE)


<CAPTION>
                                                 ASSETS                                                DECEMBER 31,
                                                                                                --------------------------
                                                                                                    2002         2001
                                                                                                --------------------------
          <S>                                                                                     <C>           <C>
          CURRENT ASSETS
              Cash and cash equivalents                                                           $   5,818     $   3,696
              Due from buyers of divested subsidiaries                                                   --         2,625
              Accounts receivable and unbilled receivables (net of allowance
                for doubtful accounts of $1,263 in 2002 and $2,581 in 2001)                          16,548        21,871
              Inventories                                                                             6,409         6,174
              Notes receivable                                                                        2,801         2,256
              Other current assets                                                                    2,920         4,786
          ----------------------------------------------------------------------------------------------------------------
          TOTAL CURRENT ASSETS                                                                       34,496        41,408

          PROPERTY AND EQUIPMENT, NET                                                                 9,822        20,185

          NOTES RECEIVABLE, NET                                                                         758         4,004

          GOODWILL, NET                                                                              67,818        90,831

          INVESTMENT IN AFFILIATE                                                                        --         6,779

          OTHER ASSETS, NET                                                                           4,339         4,282
          ----------------------------------------------------------------------------------------------------------------

                                                                                                  $ 117,233     $ 167,489
          ================================================================================================================

                             LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

          CURRENT LIABILITIES
              Notes payable and current maturities of long-term debt                              $  81,879     $  83,836
              Accounts payable                                                                        9,761        15,441
              Accrued interest                                                                       10,149         2,173
              Other accrued expenses                                                                 19,145        15,006
              Put accrual                                                                               200           200
              Net liabilities of Discontinued Operations                                              9,368         9,460
          ----------------------------------------------------------------------------------------------------------------
          TOTAL CURRENT LIABILITIES                                                                 130,502       126,116

          LONG-TERM DEBT AND NOTES PAYABLE                                                            3,346         2,586
          OTHER LONG-TERM LIABILITIES                                                                 1,055         1,028
          ----------------------------------------------------------------------------------------------------------------

          TOTAL LIABILITIES                                                                         134,903       129,730
          ----------------------------------------------------------------------------------------------------------------
          COMMITMENTS AND CONTINGENCIES
          ----------------------------------------------------------------------------------------------------------------
          MINORITY INTEREST                                                                          18,422         4,460
          ----------------------------------------------------------------------------------------------------------------
          REDEEMABLE PREFERRED STOCK OPTIONS - SERIES C                                                  --         5,180
          ----------------------------------------------------------------------------------------------------------------
          PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY
              Preferred shares: Authorized 5,000 shares in 2002 and 2001 of $10 par value;
                special voting, no shares issued or outstanding in 2002 and 2001, Class B voting,
                no shares issued or outstanding in 2002 and 2001                                         --            --
              Common shares: Authorized 435,000 shares in 2002 and 345,000 shares in 2001 of
                $.001 par value; 285,069 shares issued and 284,134 shares outstanding in 2002
                and 252,449 shares issued and 251,514 shares outstanding in 2001                        285           252
              Additional paid-in capital                                                            377,621       342,189
              Accumulated deficit                                                                  (417,066)     (304,581)
              Common stock warrants                                                                   5,650         3,293
              Treasury stock (carried at cost, 935 shares in 2002 and 2001)                          (1,777)       (1,777)
              Accumulated other comprehensive income (loss)                                              31          (747)
              Notes received for shares issued                                                         (836)      (10,510)
          ----------------------------------------------------------------------------------------------------------------
          TOTAL PREFERRED STOCK, COMMON STOCK, AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY             (36,092)       28,119
          ----------------------------------------------------------------------------------------------------------------

                                                                                                  $ 117,233     $ 167,489
          ================================================================================================================

                             See the accompanying notes to consolidated financial statements.
</TABLE>



------------------------------------------------------------------------------
                                                                      Page F-6


<PAGE>
<PAGE>

<TABLE>
                                          APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
                                               CONSOLIDATED STATEMENTS OF OPERATIONS
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                                                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                                                      -------------------------------------------
                                                                                           2002           2001          2000
                                                                                      -------------------------------------------
   <S>                                                                                  <C>            <C>           <C>
   PRODUCT REVENUE                                                                      $  80,936      $ 113,147     $ 104,759
   SERVICE REVENUE                                                                         18,664         43,167        30,007
   ------------------------------------------------------------------------------------------------------------------------------
   TOTAL REVENUE                                                                           99,600        156,314       134,766
   COSTS OF PRODUCTS SOLD                                                                  58,395         86,670        68,899
   COST OF SERVICES SOLD                                                                    9,323         23,169        13,576
   ------------------------------------------------------------------------------------------------------------------------------
   GROSS PROFIT                                                                            31,882         46,475        52,291

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSE                                             66,450        102,316        61,996
   RESEARCH AND DEVELOPMENT EXPENSE                                                         3,518          8,610         2,504

   INTEREST AND NON-CASH CHARGES:

   ASSET IMPAIRMENT                                                                        69,382         71,719         6,383
   DEPRECIATION AND AMORTIZATION                                                            4,773         28,899        11,073
   (GAIN) LOSS ON SALE OF SUBSIDIARIES AND BUSINESS ASSETS                                   (132)         6,058          (486)
   INTEREST AND OTHER INCOME                                                               (2,356)        (2,076)       (1,095)
   INTEREST EXPENSE                                                                        17,524          8,555         5,901
   ------------------------------------------------------------------------------------------------------------------------------
   LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT)
       FOR INCOME TAXES AND MINORITY INTEREST                                            (127,277)      (177,606)      (33,985)

   PROVISION (BENEFIT) FOR INCOME TAXES                                                       326         20,870        (5,040)
   ------------------------------------------------------------------------------------------------------------------------------
   LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST                              (127,603)      (198,476)      (28,945)
   MINORITY INTEREST                                                                      (18,474)          (718)          229
   NET LOSS ON SUBSIDIARY MERGER TRANSACTION, STOCK ISSUANCES AND LOSS ON SALE OF
       SUBSIDIARY STOCK                                                                     4,485             --            --
   EQUITY IN NET LOSS OF AFFILIATE                                                            291            328            --
   ------------------------------------------------------------------------------------------------------------------------------
   LOSS FROM CONTINUING OPERATIONS                                                       (113,905)      (198,086)      (29,174)
   INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
       (BENEFIT) OF $0 IN 2002, $0 IN 2001 AND $(13,614) IN 2000                               --            213       (75,702)
   CHANGE IN ESTIMATE ON LOSS ON DISPOSAL AND OPERATING
       LOSSES DURING THE PHASE OUT PERIOD                                                   1,420        (16,695)       (7,266)
   ------------------------------------------------------------------------------------------------------------------------------
   LOSS BEFORE EXTRAORDINARY GAIN                                                        (112,485)      (214,568)     (112,142)
   EXTRAORDINARY GAIN                                                                          --          9,465            --
   ------------------------------------------------------------------------------------------------------------------------------
   NET LOSS                                                                              (112,485)      (205,103)     (112,142)
   PREFERRED STOCK DIVIDENDS AND OTHER                                                         --          1,147           191
   ACCRETION OF BENEFICIAL CONVERSION FEATURE OF
       REDEEMABLE PREFERRED STOCK - SERIES C                                                   --          9,392         3,857
   ------------------------------------------------------------------------------------------------------------------------------
   NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                                            $(112,485)     $(215,642)    $(116,190)
   ==============================================================================================================================

   EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
       LOSS FROM CONTINUING OPERATIONS                                                  $   (0.42)     $   (1.23)    $    (.52)
       (LOSS) INCOME FROM DISCONTINUED OPERATIONS                                              --           (.10)        (1.30)
       EXTRAORDINARY GAIN                                                                      --            .06            --
   ------------------------------------------------------------------------------------------------------------------------------
   NET LOSS PER COMMON SHARE - BASIC AND DILUTED                                        $   (0.42)     $   (1.27)    $   (1.82)
   ==============================================================================================================================
   WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -
       BASIC AND DILUTED                                                                  269,232        170,009        63,825
   ==============================================================================================================================

   See the accompanying notes to consolidated financial statements.
</TABLE>


------------------------------------------------------------------------------
                                                                      Page F-7


<PAGE>
<PAGE>

<TABLE>
                                          APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK
                                       COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY
                                                            PAGE 1 OF 3
                                        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                           (IN THOUSANDS)

<CAPTION>
                                                                                                      RETAINED
                                            PREFERRED STOCK          COMMON STOCK        ADDITIONAL   EARNINGS
                                         ----------------------------------------------   PAID-IN   (ACCUMULATED
                                            NUMBER    AMOUNT     NUMBER        AMOUNT     CAPITAL     DEFICIT)
                                         -------------------------------------------------------------------------
<S>                                         <C>        <C>      <C>            <C>       <C>          <C>
BALANCE - DECEMBER 31, 1999                   --        $--      51,116        $  51     $  87,470    $  12,664
  (BROUGHT FORWARD)
   Net loss                                   --         --          --           --            --     (112,142)
   Comprehensive loss -
     Foreign currency translation             --         --          --           --            --           --
                                                                                                      ------------
   Total comprehensive loss                   --         --          --           --            --     (112,142)
   Issuance of warrants attached to
     redeemable preferred shares              --         --          --           --            --           --
   Accretion of beneficial conversion
     feature of redeemable preferred
     shares                                   --         --          --           --        (3,857)          --
   Dividends accrued on redeemable
     preferred stock                          --         --          --           --          (191)          --
   Beneficial conversion feature of
     redeemable preferred stock               --         --          --           --         3,857           --
   Issuance of common shares                  --         --       1,862(1)         2         4,838           --
   Issuance of common shares for
     investment in MAS                        --         --       3,123            3         7,997           --
   Issuance of common shares for
     acquisitions                             --         --      46,226           46       160,273           --
   Issuance of common stock warrants
     for acquisition                          --         --          --           --            --           --
   Warrants redeemed for common shares        --         --         736            1         2,118           --
   Notes receivable for shares issued         --         --          --           --            --           --
   Tax effect of exercise of
     nonqualified stock options               --         --          --           --         4,068           --
                                         -------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000
  (CARRIED FORWARD)                           --        $--     103,063        $ 103     $ 266,573    $ (99,478)


<CAPTION>
                                                                       ACCUMULATED
                                               COMMON                     OTHER           NOTES          TOTAL
                                                STOCK    TREASURY     COMPREHENSIVE   RECEIVED FOR   STOCKHOLDERS'
                                              WARRANTS     STOCK      (LOSS) INCOME   SHARES ISSUED     EQUITY
                                           -----------------------------------------------------------------------
<S>                                           <C>        <C>            <C>             <C>           <C>
BALANCE - DECEMBER 31, 1999                   $    --    $ (7,313)      $    64         $    --       $  92,936
  (BROUGHT FORWARD)
   Net loss                                        --          --            --              --        (112,142)
   Comprehensive loss -
     Foreign currency translation                  --          --          (793)             --            (793)
                                                                       ------------                  -------------
   Total comprehensive loss                        --          --          (793)             --        (112,935)
   Issuance of warrants attached to
     redeemable preferred shares                  627          --            --              --             627
   Accretion of beneficial conversion
     feature of redeemable preferred
     shares                                        --          --            --              --          (3,857)
   Dividends accrued on redeemable
     preferred stock                               --          --            --              --            (191)
   Beneficial conversion feature of
     redeemable preferred stock                    --          --            --              --           3,857
   Issuance of common shares                       --          --            --              --           4,840
   Issuance of common shares for
     investment in MAS                             --          --            --              --           8,000
   Issuance of common shares for
     acquisitions                                  --          --            --              --         160,319
   Issuance of common stock warrants
     for acquisition                            1,656          --            --              --           1,656
   Warrants redeemed for common shares           (877)         --            --              --           1,242
   Notes receivable for shares issued              --       4,510(2)         --          (4,510)             --
   Tax effect of exercise of
     nonqualified stock options                    --          --            --              --           4,068
                                           -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000
  (CARRIED FORWARD)                           $ 1,406    $ (2,803)      $  (729)        $(4,510)      $ 160,562

<FN>
----------------
(1)   Includes 208 shares exercised under the employee stock purchase plan and 37 shares issued for services.
(2)   Includes 1,640 shares for options exercised.

                                  See the accompanying notes to consolidated financial statements.
</TABLE>
------------------------------------------------------------------------------
                                                                      Page F-8


<PAGE>
<PAGE>

<TABLE>
                                          APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK
                                       COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY
                                                            PAGE 2 OF 3
                                        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                           (IN THOUSANDS)

<CAPTION>
                                            PREFERRED STOCK          COMMON STOCK        ADDITIONAL
                                         ----------------------------------------------   PAID-IN   (ACCUMULATED
                                            NUMBER    AMOUNT     NUMBER        AMOUNT     CAPITAL     DEFICIT)
                                         -------------------------------------------------------------------------
<S>                                         <C>       <C>        <C>           <C>       <C>         <C>
BALANCE - DECEMBER 31, 2000
  (BROUGHT FORWARD)                           --       $--       103,063       $ 103     $ 266,573   $ (99,478)
   Net loss                                   --        --            --          --            --    (205,103)
   Comprehensive loss -
     Foreign currency translation             --        --            --          --            --          --
                                                                                                   ---------------
   Total comprehensive loss                   --        --            --          --            --    (205,103)
   Conversion of redeemable
     preferred shares to common shares        --        --        64,811          65        14,485          --
   Accretion of beneficial
     conversion feature of redeemable
     preferred shares                         --        --            --          --        (9,392)         --
   Dividends accrued on redeemable
     preferred stock                          --        --            --          --          (535)         --
   Beneficial conversion feature of
     redeemable preferred stock               --        --            --          --         9,392          --
   Penalty paid by issuance of
     redeemable preferred stock               --        --            --          --          (612)         --
   Stock option repricing                     --        --            --          --         5,274          --
   Stock option discounts                     --        --            --          --           246          --
   Issuance of warrants                       --        --            --          --           115          --
   Issuance of common shares                  --        --         7,631           8         1,980          --
   Issuance of common shares for
     software license purchase                --        --         6,278           6        10,195          --
   Issuance of common shares for
     investment                               --        --         3,322           3         8,070          --
   Issuance of common shares under
     earnout, put and price
     protection provisions of
     acquisition agreements                   --        --        61,806          61        27,030          --
   Common shares repurchased                  --        --            --          --            --          --
   Note receivable for shares issued          --        --         5,538           6         9,368          --
   Note receivable charged to bad
     debt expense                             --        --            --          --            --          --
                                         -------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2001                   --       $--       252,449       $ 252     $ 342,189   $(304,581)



<CAPTION>
                                                                       ACCUMULATED
                                               COMMON                     OTHER           NOTES          TOTAL
                                                STOCK    TREASURY     COMPREHENSIVE   RECEIVED FOR   STOCKHOLDERS'
                                              WARRANTS     STOCK      (LOSS) INCOME   SHARES ISSUED     EQUITY
                                           -----------------------------------------------------------------------
<S>                                           <C>        <C>            <C>             <C>           <C>
BALANCE - DECEMBER 31, 2000
  (BROUGHT FORWARD)                            $1,406    $(2,803)        $ (729)        $ (4,510)     $ 160,562
   Net loss                                        --         --             --               --       (205,103)
   Comprehensive loss -
     Foreign currency translation                  --         --            (18)              --            (18)
                                                                       -----------                  --------------
   Total comprehensive loss                        --         --            (18)              --       (205,121)
   Conversion of redeemable
     preferred shares to common shares             --         --             --               --         14,550
   Accretion of beneficial
     conversion feature of redeemable
     preferred shares                              --         --             --               --         (9,392)
   Dividends accrued on redeemable
     preferred stock                               --         --             --               --           (535)
   Beneficial conversion feature of
     redeemable preferred stock                    --         --             --               --          9,392
   Penalty paid by issuance of
     redeemable preferred stock                    --         --             --               --           (612)
   Stock option repricing                          --         --             --               --          5,274
   Stock option discounts                          --         --             --               --            246
   Issuance of warrants                         1,887         --             --               --          2,002
   Issuance of common shares                       --         --             --               --          1,988
   Issuance of common shares for
     software license purchase                     --         --             --               --         10,201
   Issuance of common shares for
     investment                                    --         --             --               --          8,073
   Issuance of common shares under
     earnout, put and price
     protection provisions of
     acquisition agreements                        --         --             --               --         27,091
   Common shares repurchased                       --     (4,600)            --               --         (4,600)
   Note receivable for shares issued               --      5,626             --          (15,000)            --
   Note receivable charged to bad
     debt expense                                  --         --             --            9,000          9,000
                                         -------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2001                    $3,293    $(1,777)        $ (747)        $(10,510)     $  28,119

                           See the accompanying notes to consolidated financial statements.
</TABLE>

------------------------------------------------------------------------------
                                                                      Page F-9


<PAGE>
<PAGE>

<TABLE>
                                          APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK
                                       COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY
                                                            PAGE 3 OF 3
                                        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                           (IN THOUSANDS)

<CAPTION>
                                            PREFERRED STOCK          COMMON STOCK        ADDITIONAL
                                         ----------------------------------------------   PAID-IN   (ACCUMULATED
                                            NUMBER    AMOUNT     NUMBER        AMOUNT     CAPITAL     DEFICIT)
                                         -------------------------------------------------------------------------
<S>                                         <C>       <C>        <C>           <C>       <C>          <C>
BALANCE - DECEMBER 31, 2001
  (BROUGHT FORWARD)                          --        $--       252,449        $ 252     $342,189    $(304,581)
   Net loss                                  --         --            --           --           --     (112,485)
   Comprehensive loss -
     Foreign currency translation            --         --            --           --           --           --
                                                                                                    --------------
   Total comprehensive loss                  --         --            --           --           --     (112,485)
   Expiration of redeemable preferred
     stock options - Series C                --         --            --           --        5,180           --
   Allowance for notes received for
     shares issued                           --         --            --           --       (4,424)          --
   Allowance for uncollectible portion
     of note receivable                      --         --            --           --           --           --
   Collection of notes receivable
     received for shares issued              --         --            --           --           --           --
   Treasury stock transaction                --         --            --           --        1,878           --
   Retirement of treasury stock              --         --          (984)          (1)      (1,877)          --
   Shares issuable for settlement of
     liability                               --         --            --           --           63           --
   Obligation for shares issuable in
     settlement of liability                 --         --            --           --          (63)          --
   Stock option repricing                    --         --            --           --          254           --
   Stock options - Digital Angel
     Corporation                             --         --            --           --       18,800           --
   Stock options - VeriChip Corporation                                                        200           --
   Issuance of warrants                      --         --            --           --           --           --
   Issuance of warrants - Digital
     Angel Corporation                       --         --            --           --          163           --
   Issuance of warrants - VeriChip
     Corporation                             --         --            --           --           44           --
   Remeasurement of warrants -
     Digital Angel Corporation               --         --            --           --        1,066           --
   Issuance of common shares for exercise
     of stock options                        --         --         7,458            8        1,169           --
   Issuance of common shares and
     options for services, compensation
     and other                               --         --        26,146           26       12,979           --
                                         -------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2002                  --        $--       285,069        $ 285     $377,621    $(417,066)
                                         =========================================================================

<CAPTION>
                                                                       ACCUMULATED
                                               COMMON                     OTHER           NOTES          TOTAL
                                                STOCK    TREASURY     COMPREHENSIVE   RECEIVED FOR   STOCKHOLDERS'
                                              WARRANTS     STOCK      (LOSS) INCOME   SHARES ISSUED     EQUITY
                                           -----------------------------------------------------------------------
<S>                                           <C>        <C>             <C>             <C>           <C>
BALANCE - DECEMBER 31, 2001
  (BROUGHT FORWARD)                            $3,293    $(1,777)        $  (747)        $(10,510)     $  28,119
   Net loss                                        --         --              --               --       (112,485)
   Comprehensive loss -
     Foreign currency translation                  --         --             778               --            778
                                                                       ------------                   -------------
   Total comprehensive loss                        --         --             778               --       (111,707)
   Expiration of redeemable preferred
     stock options - Series C                      --         --              --               --          5,180
   Allowance for notes received for
     shares issued                                 --         --              --            4,424             --
   Allowance for uncollectible portion
     of note receivable                            --         --              --            4,094          4,094
   Collection of notes receivable
     received for shares issued                    --         --              --            1,156          1,156
   Treasury stock transaction                      --     (1,878)             --               --             --
   Retirement of treasury stock                    --      1,878              --               --             --
   Shares issuable for settlement of
     liability                                     --         --              --               --             63
   Obligation for shares issuable in
     settlement of liability                       --         --              --               --            (63)
   Stock option repricing                          --         --              --               --            254
   Stock options - Digital Angel
     Corporation                                   --         --              --               --         18,800
   Stock options - VeriChip Corporation            --         --              --               --            200
   Issuance of warrants                         2,357         --              --               --          2,357
   Issuance of warrants - Digital
     Angel Corporation                             --         --              --               --            163
   Issuance of warrants - VeriChip
     Corporation                                   --         --              --               --             44
   Remeasurement of warrants -
     Digital Angel Corporation                     --         --              --               --          1,066
   Issuance of common shares for exercise
     of stock options                              --         --              --               --          1,177
   Issuance of common shares and
     options for services, compensation
     and other                                     --         --              --               --         13,005
                                             ---------------------------------------------------------------------
BALANCE - DECEMBER 31, 2002                    $5,650    $(1,777)        $    31         $   (836)      $(36,092)
                                             =====================================================================

                         See the accompanying notes to consolidated financial statements.
</TABLE>

-------------------------------------------------------------------------------
                                                                      Page F-10


<PAGE>
<PAGE>

<TABLE>
                                  APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
---------------------------------------------------------------------------------------------------------------------
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (IN THOUSANDS)

<CAPTION>
                                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                                         --------------------------------------------
                                                                              2002            2001           2000
                                                                         --------------------------------------------
<S>                                                                        <C>            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss)                                                             $(112,485)     $(205,103)       $(112,142)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
         Asset impairment, restructuring and unusual charges                  69,382         71,719            6,383
         (Income) loss from discontinued operations                           (1,420)        16,482           82,968
         Depreciation and amortization                                         4,773         28,899           11,073
         Non-cash interest expense                                             5,770             --               --
         Deferred income taxes                                                   (69)        21,435           (3,365)
         Impairment of notes receivable                                        4,472         21,873               --
         Interest income on notes received for shares issued                    (475)            --               --
         Net loss on subsidiary merger transaction                             4,485             --               --
         Extraordinary gain                                                       --         (9,465)              --
         Minority interest                                                   (18,474)          (718)             229
         (Gain) loss on sale of subsidiaries and business assets                (132)         6,058             (486)
         Gain on sale of equipment and assets                                   (406)            --             (466)
         Non-cash compensation and administrative expenses                    20,143          5,274               --
         Equity in net loss of affiliate                                         291            328               --
         Issuance of stock for services                                        2,958             --               --
         Reserve on investments                                                   --             --               --
         Net change in operating assets and liabilities                       17,166         28,365           (5,577)
         Net cash provided by (used in) discontinued operations                  116         (3,127)         (22,035)
----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES                                         (3,905)       (17,980)         (43,418)
----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Decrease in notes receivable                                               3,155          1,299           31,457
    Received from buyers of divested subsidiaries                              2,625             --               --
    Proceeds from sale of property and equipment                               3,535          1,347              939
    Proceeds from sale of subsidiaries and business assets                     1,382          1,673            2,821
    Payments for property and equipment                                       (1,858)        (2,757)          (8,391)
    Payment for asset and business acquisition (net of
      cash balances acquired)                                                   (261)            --           (9,141)
    Decrease (increase) in other assets                                            3            944             (963)
    Net cash (used in) provided by discontinued operations                      (507)           208            1,708
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                      8,074          2,714           18,430
----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net amounts (paid) borrowed on notes payable                              (4,778)        13,981            2,234
    Proceeds on long-term debt                                                 1,287            553           15,971
    Payments for long-term debt                                               (1,422)        (2,485)         (11,553)
    Other financing costs                                                       (875)          (375)            (835)
    Issuance of common shares                                                  1,695            678            6,137
    Collection of notes receivable for shares issued                           1,156             --               --
    Issuance of preferred shares, related options and warrants                    --             --           19,056
    Proceeds from subsidiary issuance of common stock                            630            126               --
    Stock issuance costs                                                        (518)          (798)            (180)
    Net cash (used in) provided by discontinued operations                        --           (757)              16
----------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                           (2,825)        10,923           30,846
----------------------------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           1,344         (4,343)           5,858

EFFECT OF EXCHANGE RATES CHANGES ON CASH AND CASH EQUIVALENTS                    778             --               --

----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                  3,696          8,039            2,181
----------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF YEAR                                    $   5,818      $   3,696        $   8,039
======================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Income taxes paid (refunds received)                                   $    (971)     $  (2,227)       $     660
    Interest paid                                                              3,778          4,071            5,722
----------------------------------------------------------------------------------------------------------------------

                             See the accompanying notes to consolidated financial statements.
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-11



<PAGE>
<PAGE>

------------------------------------------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (IN THOUSANDS)

     1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION

         The accompanying financial statements have been prepared on a going
         concern basis and do not reflect any adjustments that might result
         from the outcome of the uncertainties described in Note 2.

         Certain items in the condensed consolidated financial statements for
         the 2001 and 2000 periods have been reclassified for comparative
         purposes.


         ORGANIZATION

         Applied Digital Solutions, Inc. and subsidiaries (the "Company"), a
         Missouri corporation, is an advanced technology development
         company. During the last half of 2001 and during 2002, the Company
         sold or closed many of the businesses the Company had acquired that
         it believed did not enhance its strategy of becoming an advanced
         digital technology development company. The Company has emerged
         from being a supplier of computer hardware, software and
         telecommunications products and services to becoming an advanced
         technology company that focuses on a range of life enhancing,
         personal safeguard technologies, early warning alert systems,
         miniaturized power sources and security monitoring systems combined
         with the comprehensive data management services required to support
         them. The Company has four such products in various stages of
         development. They are:

            o  Digital Angel(TM), for monitoring and tracking people and
               objects;

            o  Thermo Life(TM), a thermoelectric generator;

            o  VeriChip(TM), an implantable radio frequency verification device
               that can be used for security, financial, personal
               identification/safety and other applications; and

            o  Bio-Thermo(TM), a temperature-sensing implantable microchip for
               use in pets, livestock and other animals.

         BUSINESS SEGMENTS

         As a result of the merger of pre-merger Digital Angel and MAS, which
         occurred on March 27, 2002, the significant restructuring of the
         Company's business during the past year and our emergence as an
         advanced technology development company, the Company has
         re-evaluated and realigned its reporting segments. Effective January
         1, 2002, the Company currently operates in three business segments:
         Advanced Technology, Digital Angel Corporation and SysComm
         International.

         Prior to January 1, 2002, the Company was organized into three
         segments: Applications, Services and Advanced Wireless. Prior period
         information has been restated to present the Company's reportable
         segments on a comparative basis.

         Advanced Technology

         This segment specializes in security-related data collection,
         value-added data intelligence and complex data delivery systems for a
         wide variety of end users including commercial operations, government
         agencies and consumers. VeriChip and Thermo Life products are included
         in the Company's Advanced Technology segment.

------------------------------------------------------------------------------
                                                                     Page F-12



<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Digital Angel Corporation

         The Digital Angel Corporation segment consists of the business
         operations of the Company's 73.91% owned subsidiary, Digital Angel
         Corporation (AMEX:DOC). This segment is engaged in the business of
         developing and bringing to market proprietary technologies used to
         identify, locate and monitor people, animals and objects. Before
         March 27, 2002, the business of Digital Angel Corporation was
         operated in four divisions: Animal Tracking, Digital Angel
         Technology, Digital Angel Delivery System, and Radio Communications
         and Other. With the acquisition of MAS on March 27, 2002, Digital
         Angel Corporation re-organized into four new divisions: Animal
         Applications (formerly Animal Tracking), Wireless and Monitoring (a
         combination of the former Digital Angel Technology and the Digital
         Angel Delivery System segments), GPS and Radio Communications
         (formerly Radio Communications and Other), and Medical Systems
         (formerly Physician Call Center and Other). Medical Systems
         represents the business activity of the newly acquired MAS.

         SysComm International

         The SysComm International segment consists of the business operations
         of the Company's 52.5% owned subsidiary, SysComm International
         Corporation (OTC:SYCM). This segment is a full service provider of
         Information Technology, or IT, solutions and products. It specializes
         in tailoring its approach to the individual customer's needs. Doing
         business as "InfoTech," this segment provides IT consulting,
         networking, procurement, deployment, integration, migration and
         security services and solutions. It also provides on-going system and
         network maintenance services. In 2002, this segment continued its
         strategy of moving away from a product-driven systems integration
         business model to a customer-oriented IT solutions-based business
         model. It has further developed its deliverable IT solutions by adding
         new consulting and service offerings, and increasing the number of
         strategic alliances with outside technical service firms and
         manufacturers of high-end IT products.

         Business units that were part of the Company's continuing operations
         and that were closed or sold during 2001 and 2002 are reported as All
         Other.

         The "Corporate/Eliminations" category includes all amounts recognized
         upon consolidation of the Company's subsidiaries such as the
         elimination of intersegment revenues, expenses, assets and
         liabilities. "Corporation/Eliminations" also includes certain interest
         expense and other expenses associated with corporate activities and
         functions. Included in "Corporate/Eliminations" for the year ended
         December 31, 2002, is a non-cash compensation charge of $18.7 million
         associated with pre-merger Digital Angel options, which were converted
         into options to acquire shares of MAS in connection with the merger of
         pre-merger Digital Angel and MAS.

         On March 1, 2001, the Company's Board of Directors approved a plan
         to sell or close Intellesale, Inc. and all of the Company's other
         non-core businesses. The results of operations, financial condition
         and cash flows now reflect these operations as "Discontinued
         Operations" and prior periods have been restated.


         PRINCIPLES OF CONSOLIDATION

         The financial statements include the accounts of the Company and
         its wholly-owned and majority-owned subsidiaries, including Digital
         Angel Corporation and SysComm International Corporation. The
         minority interest represents outstanding voting stock of the
         subsidiaries not owned by the Company or the Digital Angel Trust
         (as defined in Note 2). All significant intercompany accounts and
         transactions have been eliminated in consolidation.

         Our majority-owned subsidiary, SysComm International Corporation
         operates on a fiscal year ending September 30. Their results of
         operations have been reflected in the Company's consolidated
         financial statements on a calendar year basis.

------------------------------------------------------------------------------
                                                                     Page F-13




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         USE OF ESTIMATES

         The preparation of the financial statements in conformity with
         accounting principles generally accepted in the United States of
         America requires management to make certain estimates and
         assumptions that affect the amounts reported in the financial
         statements and accompanying notes. Although these estimates are
         based on the knowledge of current events and actions the Company
         may undertake in the future, they may ultimately differ from actual
         results. The Company uses estimates, among others, to determine
         whether any impairment is to be recognized.

         FOREIGN CURRENCIES

         The Company's foreign subsidiaries use their local currency as their
         functional currency. Results of operations and cash flow are
         translated at average exchange rates during the period, and assets and
         liabilities are translated at end of period exchange rates.
         Translation adjustments resulting from this process are included in
         accumulated other comprehensive (loss) income in the statement of
         preferred stock, common stock and other stockholders' equity.

         Transaction gains and losses that arise from exchange rate
         fluctuations on transactions denominated in a currency other than the
         functional currency, are included in the results of operations as
         incurred. These amounts are not material to the financial statements.

         CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments purchased with an
         original maturity of three months or less to be cash equivalents.

         UNBILLED RECEIVABLES

         Unbilled receivables consist of certain direct costs and profits
         recorded in excess of amounts currently billable pursuant to
         contract provisions in connection with system installation projects
         and software licensing. Unbilled receivables included in accounts
         receivable was $0.1 million in 2002 and $0.2 million in 2001.

         INVENTORIES

         Inventories consist of raw materials, work in process and finished
         goods. The majority of the components are plastic ear tags,
         electronic microchips, electronic readers and components as well as
         products and components related to GPS search and rescue equipment.
         Inventory is valued at the lower of cost or market, determined by
         the first-in, first-out method. The Company closely monitors and
         analyzes inventory for potential obsolescence and slow-moving items
         based upon the aging of the inventory and the inventory turns by
         product. Inventory items designated as obsolete or slow-moving are
         reduced to net realizable value.

         PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost, less accumulated
         depreciation and amortization computed using straight-line and
         accelerated methods. Building and leasehold improvements are
         depreciated and amortized over periods ranging from 10 to 40 years and
         equipment is depreciated over periods ranging from 3 to 10 years.
         Repairs and maintenance, which do not extend the useful life of the
         asset, are charged to expense as incurred. Gains and losses on sales
         and retirements are reflected in income.

         GOODWILL AND OTHER INTANGIBLE ASSETS

         In conjunction with the Company's review for impairment of goodwill
         and other intangible assets in the fourth quarter of 2000, the Company
         reviewed the useful lives assigned to goodwill and, effective October
         1, 2000, changed the lives to periods ranging from 5 to 10 years, down
         from periods ranging from 10 to 20 years. The impact in 2001 and 2000
         of this change was an increase in amortization of $7.2 million and
         $3.5 million, respectively and a decrease in earnings per share of
         $0.04 and $0.05, respectively. Goodwill and other intangible assets
         are stated on the cost basis and have been amortized, principally on a
         straight-line basis, over the estimated future periods to be benefited
         (ranging from 5 to 10 years) through December 31, 2001. Prior to the
         adoption of Statement of Financial Accounting Standards No. 142,
         "Goodwill and Intangible Assets" (SFAS 142) on January 1,

------------------------------------------------------------------------------
                                                                     Page F-14



<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         2002, the Company reviewed goodwill and other intangible assets
         quarterly for impairment whenever events or changes in business
         circumstances indicated that the remaining useful life may have
         warranted revision or that the carrying amount of the long-lived asset
         may not have been fully recoverable. Included in factors considered
         were significant customer losses, changes in profitability due to
         sudden economic or competitive factors, change in managements'
         strategy for the business unit, letters of intent received for the
         sale of the business unit, or other factors arising in the quarterly
         period. The Company annually performed undiscounted cash flow
         analyses by business unit to determine if an impairment existed. For
         purposes of these analyses, earnings before interest, taxes,
         depreciation and amortization were used as the measure of cash flow.
         When an impairment was determined to exist, any related impairment
         loss was calculated based on fair value. Fair value was determined
         based on discounted cash flows. The discount rate utilized by the
         Company was the rate of return expected from the market or the rate of
         return for a similar investment with similar risks. The Company
         recorded goodwill impairment charges of $63.6 million and $0.8 million
         during 2001 and 2000, respectively. See Note 15.

         According to the provision of SFAS 142, in 2002, the Company ceased
         the amortization of goodwill and other intangible assets deemed to
         have indefinite lives. Instead, the Company is required to test
         these assets for impairment annually as part of its annual business
         planning cycle during the fourth quarter of each year. See Note 8.
         As part of the implementation of SFAS 142 on January 1, 2002, the
         Company was required to complete a transitional impairment test of
         goodwill and other intangible assets. The adoption of SFAS 142 did
         not result in an impairment charge. The annual test performed by the
         Company during the fourth quarter of 2002, resulted in an impairment
         charge of $62.2 million associated with the Company's Digital Angel
         Corporation segment.

         PROPRIETARY SOFTWARE IN DEVELOPMENT

         In accordance with Statement of Financial Accounting Standards (FAS)
         86, Accounting for the Costs of Computer Software to be Sold, Leased,
         or Otherwise Marketed, the Company has capitalized certain computer
         software development costs upon the establishment of technological
         feasibility. Technological feasibility is considered to have occurred
         upon completion of a detailed program design which has been confirmed
         by documenting and tracing the detail program design to product
         specifications and has been reviewed for high-risk development issues,
         or to the extent a detailed program design is not pursued, upon
         completion of a working model that has been confirmed by testing to be
         consistent with the product design. Amortization is provided based on
         the greater of the ratios that current gross revenues for a product
         bear to the total of current and anticipated future gross revenues for
         that product, or the straight-line method over the estimated useful
         life of the product. The estimated useful life for the straight-line
         method is determined to be 2 to 5 years.

         ADVERTISING COSTS

         The Company expenses production costs of print advertisements the
         first date the advertisements take place. Advertising expense,
         included in selling, general and administrative expenses, was $0.3
         million in 2002, $0.3 million in 2001, $0.4 million in 2000.

         REVENUE RECOGNITION

         For programming, consulting and software licensing services and
         construction contracts, the Company recognizes revenue based on the
         percent complete for fixed fee contracts, with the percent complete
         being calculated as either the number of direct labor hours in the
         project to date divided by the estimated total direct labor hours or
         based upon the completion of specific task orders. It is the Company's
         policy to record contract losses in their entirety in the period in
         which such losses are foreseeable. For nonfixed fee jobs, revenue is
         recognized based on the actual direct labor hours in the job times the
         standard billing rate and adjusted to realizable value, if necessary.
         For product sales, the Company recognizes revenue at the time products
         are shipped and title has transferred, provided that a purchase order
         has been received or a contract has been executed, there are no
         uncertainties regarding customer acceptance, the sales price is fixed
         and determinable and collectability is deemed probable. If
         uncertainties regarding customer acceptance exist, revenue is
         recognized when such uncertainties are resolved. Revenue from
         royalties is recognized when licensed products are shipped. There are
         no significant post-contract

------------------------------------------------------------------------------
                                                                     Page F-15



<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         support obligations at the time of revenue recognition. The
         Company's accounting policy regarding vendor and post-contract
         support obligations is based on the terms of the customers'
         contract, billable upon the occurrence of the post-sale support.
         Costs of goods sold are recorded as the related revenue is
         recognized. The Company does not experience significant product
         returns, and therefore, management is of the opinion that based on
         the most recent information available, no allowance for sales
         returns is necessary. The Company has no obligation for warranties
         on new hardware sales, because the warranty is provided by the
         manufacturer. The Company does not offer a warranty policy for
         services to customers.

         SOFTWARE REVENUE RECOGNITION

         For those arrangements where the Company's contract calls only for the
         delivery of software with no additional obligations, revenue is
         recognized at the time of delivery, provided that there is a signed
         contract, delivery of the product has taken place, the fee is fixed by
         the contract and collectability is considered probable. For multiple
         element arrangements such as a contract that includes the delivery of
         software and a service arrangement, revenues allocated to the sale of
         the software are recognized when the software is delivered to the
         customer. Revenues related to the sale of the service agreement are
         recognized ratably over the term of the service agreement. A value is
         ascribed to each of the elements sold. This value is based on vendor
         specific objective evidence of fair value, regardless of any separate
         prices that may be stated in the contract. Vendor specific objective
         evidence of fair value is the price charged when the elements are sold
         separately. If an element is not yet being sold separately, the fair
         value is the price established by management having the relevant
         authority to do so. It is considered probable that the price
         established by management will not change before the separate
         introduction of the element. If the contract includes a discount, the
         discount is applied to the components of the contract which
         specifically apply. For those contracts where the discount is a fixed
         amount for the entire contract (i.e. not specifically identifiable
         with any of the contract elements), a proportionate amount of the
         discount is allocated to each element of the contract based on that
         element's fair value without regard to the discount. The Company's
         contracts do not include unspecified upgrades and enhancements. For
         those arrangements where the Company's contract to deliver software
         requires significant production modification or customization of the
         software, revenues are recognized using percentage of completion
         accounting. The service element of these contracts are essential to
         the functionality of other elements in the contract and are not
         accounted for separately. The cost to complete and extent of progress
         towards completion of these contracts can be reasonably ascertained
         based on the detailed tracking and recording of labor hours expended.
         Progress payments on these contracts are required and progress is
         measured using the efforts expended input measure.

         STOCK-BASED COMPENSATION

         As permitted under SFAS No. 123, Accounting for Stock-Based
         Compensation, the Company has elected to continue to follow the
         guidance of APB Opinion No. 25 (APB No. 25), Accounting for Stock
         Issued to Employees and Financial Accounting Standards Board
         Interpretation No. 44, Accounting for Certain Transactions Involving
         Stock Compensation--an Interpretation of APB Opinion No. 25, in
         accounting for its stock-based employee compensation arrangements.
         Accordingly, no compensation cost is recognized for any of the
         Company's fixed stock options granted to employees when the exercise
         price of each option equals or exceeds the fair value of the
         underlying common stock as of the grant date for each stock option.
         Changes in the terms of stock option grants, such as extensions of
         the vesting period or changes in the exercise price, result in
         variable accounting in accordance with APB Opinion No. 25.
         Accordingly, compensation expense is measured in accordance with APB
         No. 25 and recognized over the vesting period. If the modified grant
         is fully vested, any additional compensation costs is recognized
         immediately. The Company accounts for equity instruments issued to
         non-employees in accordance with the provisions of SFAS No. 123.

         At December 31, 2002, the Company had four stock-based employee
         compensation plans, which are described more fully in Note 13 and
         the Company's subsidiaries had six stock-based employee
         compensation plans. As permitted under SFAS No. 148, Accounting for
         Stock-Based Compensation--Transition and Disclosure, which amended
         SFAS No. 123, Accounting for Stock-Based Compensation, the Company
         has elected to continue to follow the intrinsic value method in
         accounting for its stock-based employee compensation arrangement as
         defined by Accounting Principles Board Opinion ("APB") No. 25,
         Accounting for Stock Issued to Employees, and related
         interpretations including Financial Accounting Standards Board
         Interpretation No. 44, Accounting for Certain Transactions
         involving Stock Compensation, an interpretation of APB No. 25. The
         following table illustrates the effect on net loss and loss per
         share if the Company had applied the fair value recognition
         provisions of SFAS No. 123 to stock-based employee compensation for
         options granted under its plans as well as to the plans of its
         subsidiaries:



<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                           ------------------------------------------

                                                              2002             2001            2000
                                                           ---------        ---------        --------
<S>                                                        <C>           <C>           <C>
         Net loss, as reported                             $(113,961)       $(208,625)       $(33,222)
          Deduct: Total stock-based employee
          compensation expense determined under
          fair value-based method for all awards,
          net of related tax effects (1)                      (3,272)          (2,708)         (2,678)
                                                           ---------        ---------        --------

         Pro forma net loss                                $(117,233)       $(211,333)       $(35,901)

         Loss per share:
           Basic and diluted--as reported                  $  (0.42)        $   (1.23)       $  (0.52)
                                                           =========        =========        ========
           Basic and diluted--pro forma                    $  (0.44)        $   (1.24)       $  (0.56)
                                                           =========        =========        ========
<FN>
         (1) For 2002, amount includes $1.8 million of compensation expense associated with
         subsidiary options.
</TABLE>

         The weighted average per share fair values of grants made in 2002,
         2001 and 2000 for the Company's incentive plans were $0.19, $0.36
         and $0.67, respectively. The fair values of the options granted were
         estimated on the grant date using the Black-Scholes option-pricing
         model based on the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                               2002          2001        2000
                                                               ----          ----        ----
<S>                                                         <C>            <C>         <C>
         Estimated option life                              5.5 years      5 years     5 years
         Risk free interest rate                                 2.89%        4.49%       4.98%
         Expected volatility                                    76.00%       68.75%      53.32%
         Expected dividend yield                                 0.00%        0.00%       0.00%
</TABLE>

         RESEARCH AND DEVELOPMENT

         Research and development expense consists of personnel costs,
         supplies, other direct costs and indirect costs, primarily rent and
         other overhead, of developing new products and technologies and are
         charged to expense as incurred.
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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         ISSUANCE OF SHARES OF STOCK BY SUBSIDIARY

         Gains where realizable and losses on issuance of shares of stock by
         a consolidated subsidiary are reflected in the consolidated
         statement of operations.

         INCOME TAXES

         The Company accounts for income taxes under the asset and liability
         approach for the financial accounting and reporting for income taxes.
         Deferred taxes are recorded based upon the tax impact of items
         affecting financial reporting and tax filings in different periods. A
         valuation allowance is provided against net deferred tax assets where
         the Company determines realization is not currently judged to be more
         likely than not. Income taxes include U.S. and international taxes.
         The Company and its 80% or more owned U.S. subsidiaries file a
         consolidated federal income tax return.

         EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT

         Income (loss) available to common stockholders has been adjusted to
         reflect preferred stock dividends and the accretion to the redemption
         value and beneficial conversion charge associated with the Series C
         redeemable preferred stock for the purpose of calculating earnings per
         share. Basic EPS is computed by dividing income (loss) available to
         common stockholders by the weighted average number of common shares
         outstanding for the period. Diluted EPS is computed giving effect to
         all dilutive potential common shares that were outstanding during the
         period. Dilutive potential common shares consist of incremental shares
         issuable upon exercise of stock options and warrants and conversion of
         preferred stock outstanding.

         COMPREHENSIVE INCOME (LOSS)

         The Company's comprehensive accumulated other (loss) income
         consists of foreign currency translation adjustments, and is
         reported in the consolidated statements of preferred stock, common
         stock and other stockholders' equity.

         METHOD OF ACCOUNTING FOR DIGITAL ANGEL CORPORATION

         Effective March 27, 2002, the Company's 93% owned subsidiary, Digital
         Angel Corporation, which we refer to as pre-merger Digital Angel,
         merged with and into a wholly-owned subsidiary of a publicly traded
         company, Medical Advisory Systems, Inc. (MAS), and MAS changed its
         name to Digital Angel Corporation. Under the terms of the merger
         agreement, each issued and outstanding share of common stock of
         pre-merger Digital Angel (including each share issued upon exercise of
         options prior to the effective time of the merger) was cancelled and
         converted into the right to receive 0.9375 shares of MAS's common
         stock. The Company obtained 18.75 million shares of MAS common stock
         in the merger (representing approximately 61% of the shares then
         outstanding). Prior to the transaction, the Company owned 850,000
         shares of MAS, or approximately 16.7%. On December 31, 2002, the
         Company owned 19.6 million shares, or approximately 73.91% of the
         shares outstanding. Also, pursuant to the merger agreement, the
         Company contributed to MAS all of its stock in Timely Technology
         Corp., a wholly-owned subsidiary, and Signature Industries, Limited,
         an 85% owned subsidiary. Pre-merger Digital Angel, Timely Technology
         Corp. and Signature Industries, Limited were collectively referred to
         as the Advanced Wireless Group (AWG). The merger has been treated as a
         reverse acquisition for accounting purposes, with the AWG treated as
         the accounting acquirer.

         The total purchase price of the transaction was $32.0 million, which
         was comprised of the $25.0 million fair market value of MAS stock
         outstanding not held by the Company immediately preceding the merger,
         the $3.4 million estimated fair market value of MAS options and
         warrants outstanding as well as the direct costs of the acquisition of
         $3.6 million. The transaction resulted in Digital Angel Corporation
         allocating approximately $28.3 million of the purchase price to
         goodwill.

         The consolidated financial statements included in this Form 10-K
         include the accounts of Digital Angel Corporation and reflect the
         outstanding voting stock not owned by the Digital Angel Share Trust
         (the "Digital

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Angel Trust") (as defined in Note 2) as a minority ownership interest
         in Digital Angel Corporation on the balance sheet as of December 31,
         2002. Significant intercompany balances and transactions have been
         eliminated in consolidation. Digital Angel Corporation is publicly
         traded on the American Stock Exchange under the symbol DOC, with a
         closing market price per share at December 31, 2002, and March 21,
         2003, of $2.55 and $1.22, respectively.

         During 2002, the Company recorded a net loss of $0.4 million
         occasioned by the merger transaction, comprised of a loss of
         approximately $5.1 million resulting from the exercise of 1.5 million
         pre-merger Digital Angel options (representing the difference between
         the carrying amount of the Company's pro-rata share of the investment
         in pre-merger Digital Angel and the exercise price of the options) and
         a gain of approximately $4.7 million from the deemed sale of 22.85% of
         the AWG, as a result of the merger with MAS. In addition, during 2002,
         the Company recorded a loss of $4.1 million on the issuances of 1.1
         million shares of Digital Angel Corporation common stock resulting
         primarily from the exercise of stock options. The loss represents the
         difference between the carrying amount of the Company's pro-rata share
         of its investment in Digital Angel Corporation and the net proceeds
         from the issuances of the stock and other changes in the minority
         interest ownership.

         By operation of the Digital Angel Trust agreement, the Company's
         share of Digital Angel Corporation's net assets is effectively
         restricted. Although Digital Angel Corporation may pay dividends,
         the Company's access to this subsidiary's funds is restricted. The
         following condensed consolidating balance sheet data at December
         31, 2002, shows, among other things, the Company's investment in
         Digital Angel Corporation. The following consolidating financial
         data provides supplementary information about the results of
         operations and cash flows for 2002.

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                                                                     Page F-18




<PAGE>
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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
                                       CONDENSED CONSOLIDATING BALANCE SHEET DATA
                                                    DECEMBER 31, 2002
<CAPTION>
                                                         APPLIED DIGITAL    DIGITAL ANGEL      CONSOLIDATION
                                                         SOLUTIONS, INC.     CORPORATION       ELIMINATIONS    CONSOLIDATED
                                                         ------------------------------------------------------------------
                                                                                  (in thousands)
<S>                                                         <C>                <C>              <C>             <C>
Current Assets
Cash and cash equivalents                                   $  5,604           $   214          $     --        $  5,818
Accounts receivable, net                                      12,422             4,126                --          16,548
Inventories                                                    1,464             4,945                --           6,409
Notes receivable                                               2,801                --                --           2,801
Other current assets                                           1,442             1,478                --           2,920
                                                         ------------------------------------------------------------------
Total Current Assets                                          23,733            10,763                --          34,496

Property And Equipment, net                                    2,053             7,769                --           9,822
Notes Receivable, net                                            758                --                --             758
Goodwill, net                                                 20,366            47,452                --          67,818
Investment in Digital Angel Corporation                       40,656                --           (40,656)             --
Other Assets, net                                              2,525             1,814                --           4,339
                                                         ------------------------------------------------------------------
Total Assets                                                $ 90,091           $67,798          $(40,656)       $117,233
                                                         ==================================================================

Current Liabilities
Notes payable and current maturities of
  long-term debt                                            $ 81,063           $   816          $     --        $ 81,879
Accounts payable and accrued expenses                         31,209             7,846                --          39,055
Put accrual                                                      200                --                --             200
Intercompany (receivable) payable                               (462)              462                --              --
Net liabilities of Discontinued Operations                     9,368                --                --           9,368
                                                         ------------------------------------------------------------------
Total Current Liabilities                                    121,378             9,124                --         130,502
Long-Term Debt, Notes Payable and Other Liabilities            1,037             3,364                --           4,401
                                                         ------------------------------------------------------------------
Total Liabilities                                            122,415            12,488                --         134,903
Minority Interest                                              3,768               298            14,356          18,422
                                                         ------------------------------------------------------------------
Accumulated other comprehensive income (loss)                     31              (185)              185              31
Other stockholders' (deficit) equity                         (36,123)           55,197           (55,197)        (36,123)
                                                         ------------------------------------------------------------------
Total Stockholders' Deficit                                  (36,092)           55,012           (55,012)        (36,092)
                                                         ------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit                 $ 90,091           $67,798          $(40,656)       $117,233
                                                         ==================================================================
</TABLE>

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                                                                     Page F-19





<PAGE>
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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
                                   CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS DATA
                                               YEAR ENDED DECEMBER 31, 2002
<CAPTION>
                                                         APPLIED DIGITAL    DIGITAL ANGEL      CONSOLIDATION
                                                         SOLUTIONS, INC.     CORPORATION       ELIMINATIONS    CONSOLIDATED
                                                         ------------------------------------------------------------------
                                                                                  (in thousands)

<S>                                                        <C>                <C>               <C>            <C>
Product revenue                                            $  50,060          $ 30,946          $    (70)      $  80,936
Service revenue                                               15,979             2,685                --          18,664
                                                         ------------------------------------------------------------------
  Total revenue                                               66,039            33,631               (70)         99,600
Cost of products sold                                         40,690            17,705                --          58,395
Cost of services sold                                          7,107             2,216                --           9,323
                                                         ------------------------------------------------------------------
  Gross profit                                                18,242            13,710               (70)         31,882
Selling, general and administrative expenses                  32,218            34,302               (70)         66,450
Intercompany management fees                                    (193)              193                --              --
Research and development                                       1,096             2,422                --           3,518
Asset impairment                                               5,564            63,818                --          69,382
Depreciation and amortization                                  1,142             3,631                --           4,773
Gain on sale of subsidiaries and business assets                (132)               --                --            (132)
Interest and other income                                     (1,755)             (601)               --          (2,356)
Interest expense                                              17,221             2,109            (1,806)         17,524
                                                         ------------------------------------------------------------------
Loss from continuing operations before taxes,
  minority interest, loss on subsidiary stock
  issuances and sale of subsidiary stock, and
  equity in net loss of affiliate                            (36,919)          (92,164)            1,806        (127,277)
Provision for income taxes                                       326                --                --             326
                                                         ------------------------------------------------------------------
Loss from continuing operations before minority
  interest, loss on subsidiary stock issuances
  and sale of subsidiary stock and equity in net
  loss of affiliate                                          (37,245)          (92,164)            1,806        (127,603)
Minority interest                                            (18,378)              (96)               --         (18,474)
Loss on subsidiary stock issuances and sale
  of subsidiary stock                                          4,485                --                --           4,485
Equity in net loss of affiliate(1)                            90,553               291           (90,553)            291
                                                         ------------------------------------------------------------------
Loss from continuing operations                            $(113,905)         $(92,359)         $ 92,359       $(113,905)
                                                         ==================================================================
<FN>
(1) Digital Angel Corporation's separate financial statements include a
"push down" of $1.8 million of interest expense associated with the
Company's obligation to IBM Credit. Thus the equity in net loss of affiliate
on the Company's unconsolidated financial statements differs from Digital
Angel Corporation's loss by the $1.8 million.
</TABLE>

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                                                                     Page F-20





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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
                                   CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS DATA
                                               YEAR ENDED DECEMBER 31, 2002
<CAPTION>
                                                         APPLIED DIGITAL    DIGITAL ANGEL      CONSOLIDATION
                                                         SOLUTIONS, INC.     CORPORATION       ELIMINATIONS    CONSOLIDATED
                                                         ------------------------------------------------------------------
                                                                                  (in thousands)

<S>                                                         <C>               <C>                 <C>           <C>
Cash Flows From Operating Activities
    Net loss                                                $(21,932)         $(92,359)           $ 1,806       $(112,485)
  Adjustment to reconcile net loss to net cash
   used in operating activities:
    Non-cash adjustments                                       5,229            87,875             (1,806)         91,298
    Net change in operating assets and liabilities:           15,412             1,754                 --          17,166
    Net cash provided by discontinued operations                 116                --                 --             116
                                                            --------          --------            -------       ---------
Net Cash Used In Operating Activities                         (1,175)           (2,730)                --          (3,905)
                                                            --------          --------            -------       ---------

Cash Flows From Investing Activities
    Decrease in notes receivable                               3,155                --                 --           3,155
    Received from buyers of divested subsidiaries              2,625                                                2,625
    (Increase) decrease in other assets                         (105)              108                 --               3
    Proceeds from the sale of property and equipment           3,535                                   --           3,535
    Proceeds from the sale of subsidiaries and business
     assets and investments                                      357             1,025                 --           1,382
    Payment for property and equipment                          (419)           (1,439)                --          (1,858)
    Investment in subsidiaries                                  (684)               --                684              --
    Payment for asset and business acquisitions                    0              (261)                --            (261)
    Net cash used in discontinued operations                    (507)               --                 --            (507)
                                                            --------          --------            -------       ---------
Net Cash Provided By (Used In) Investing Activities            7,957              (567)               684           8,074
                                                            --------          --------            -------       ---------

Cash Flows From Financing Activities
    Net amounts borrowed (paid) on notes payable and
     line of credit                                             (569)           (4,209)                --          (4,778)
    (Payments on) proceeds from line of credit and
     long-term debt                                           (4,243)            5,530                 --           1,287
    Payments on long-term debt                                (1,379)              (43)                --          (1,422)
    Other financing costs                                       (875)               --                 --            (875)
    Issuance of common shares                                  1,695               631               (631)          1,695
    Collection of notes receivable for shares issued           1,156                --                 --           1,156
    Stock issuance costs                                        (519)               --                 --            (519)
    Subsidiary Issuance of Common Shares                           0                                  631             631
    Intercompany transactions                                      0               684               (684)             --
                                                            --------          --------            -------       ---------
Net Cash (Used In) Provided By Financing Activities           (4,734)            2,593               (684)         (2,825)
                                                            --------          --------            -------       ---------
Net Increase (Decrease) in Cash and Cash Equivalents           2,048              (704)                --           1,344
Effect of exchange rates changes on cash and cash
 equivalents                                                     456               322                 --             778
Cash and Cash Equivalents - Beginning of Period                3,100               596                 --           3,696
                                                            --------          --------            -------       ---------
Cash and Cash Equivalents - End of Period                   $  5,604          $    214            $    --       $   5,818
                                                            --------          --------            -------       ---------

</TABLE>

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         There are no restrictions on Digital Angel Corporation's ability to
         declare or pay dividends under the IBM Credit Agreement (defined in
         Note 2). All of the consolidated assets of the Company, exclusive of
         the assets of Digital Angel Corporation, are collateral under the
         IBM Credit Agreement. In addition, the shares of Digital Angel
         Corporation common stock held in the Digital Angel Trust (as
         defined in Note 2) also collateralize the amounts outstanding under
         the IBM Credit Agreement.

         IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In July 2001, the Financial Accounting Standards Board (FASB)
         issued FAS No. 141, Business Combinations and FAS No. 142, Goodwill
         and Other Intangible Assets. FAS 141 requires business combinations
         initiated after June 30, 2001 to be accounted for using the
         purchase method of accounting, and broadens the criteria for
         recording intangible assets separate from goodwill. Recorded
         goodwill and intangibles will be evaluated against these new
         criteria and may result in certain intangibles being included in
         goodwill, or alternatively, amounts initially recorded as goodwill
         may be separately identified and recognized apart from goodwill.
         FAS 142 requires the use of a non-amortization approach to account
         for purchased goodwill and certain intangibles. Under a
         non-amortization approach, goodwill and certain intangibles will
         not be amortized into results of operations, but instead would be
         reviewed for impairment and written down and charged to results of
         operations only in the periods in which the recorded value of
         goodwill and certain intangibles is more than its fair value. The
         Company adopted the provisions of each statement, which apply to
         goodwill and certain intangibles acquired prior to June 30, 2001,
         on January 1, 2002. The adoption of these standards had the impact
         of reducing the Company's amortization of goodwill commencing
         January 1, 2002.

         In August 2001, the Financial Accounting Standards Board (FASB)
         issued FAS 144, Accounting for the Impairment of Disposal of
         Long-Lived Assets. This standard supersedes FAS 121, Accounting for
         the Impairment of Long-Lived Assets to Be Disposed Of, and provides
         a single accounting model for long-lived assets to be disposed of.
         This standard significantly changes the criteria that would have to
         be met to classify an asset as held-for-sale. This distinction is
         important because assets to be disposed of are stated at the lower
         of their fair values or carrying amounts and depreciation is no
         longer recognized. The new rules will also supercede the provisions
         of APB Opinion 30, Reporting the Results of Operations--Reporting
         the Effects of Disposal of a Segment of a Business, and
         Extraordinary, Unusual and Infrequently Occurring Events and
         Transactions, with regard to reporting the effects of a disposal of
         a segment of a business and will require expected future operating
         losses from Discontinued Operations to be displayed in Discontinued
         Operations in the period in which the losses are incurred, rather
         than as of the measurement date as required by APB 30. This
         statement is effective for fiscal years beginning after December
         15, 2001. The Company adopted this statement on January 1, 2002.
         The adoption of FAS 144 did not have a material impact on the
         Company's operations or financial position.

         In May 2002, the FASB issued SFAS 145, Rescission of FASB
         Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
         and Technical Corrections. SFAS 145 eliminates Statement 4 (and
         Statement 64, as it amends Statement 4), which requires gains and
         losses from extinguishments of debt to be aggregated and, if
         material, classified as an extraordinary item, and thus, also the
         exception to applying Opinion 30 is eliminated as well. This
         statement is effective for years beginning after May 2002 for the
         provisions related to the rescission of Statements 4 and 64, and
         for all transactions entered into beginning May 2002 for the
         provision related to the amendment of Statement 13. The adoption of
         FAS 145 did not have a material effect on the Company's operations
         or financial position.

         In June 2002, the FASB issued Statement No. 146, Accounting for
         Costs Associated with Exit or Disposal Activities. This statement
         requires recording costs associated with exit or disposal
         activities at their fair values when a liability has been incurred.
         Under previous guidance, certain exit costs were accrued upon
         management's commitment to an exit plan. Adoption of this Statement
         is required with the beginning of fiscal year 2003. The Company has
         not yet determined what impact the adoption of FAS 146 will have on
         its operations and financial position.

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In December 2002, the FASB issued SFAS No. 148, Accounting for
         Stock-Based Compensation--Transition and Disclosure--an amendment
         of FASB Statement No. 123. This Statement amends SFAS No. 123,
         Accounting for Stock-Based Compensation, to provide alternative
         methods of transition for an entity that voluntarily changes to the
         fair value based method of accounting for stock-based employee
         compensation. It also amends the disclosure provisions of that
         Statement to require prominent disclosure about the effects on
         reported net income of an entity's accounting policy decisions with
         respect to stock-based employee compensation. Finally, this
         Statement amends APB Opinion No. 28, Interim Financial Reporting,
         to require disclosure about those effects in interim financial
         information. The Company intends to continue to account for
         stock-based compensation based on the provisions of APB Opinion No.
         25. SFAS 148's amendment of the transition and annual disclosure
         provisions of SFAS 123 are effective for fiscal years ending after
         December 15, 2002, and the disclosure requirements for interim
         financial statements are effective for interim periods beginning
         after December 15, 2002. The Company adopted the disclosure
         provisions of SFAS 148 on December 31, 2002.

     2.  DEBT COVENANT COMPLIANCE AND LIQUIDITY AND GOING CONCERN
         CONSIDERATIONS

         The Company generated significant net losses during 2002, 2001 and
         2000. As a result, the Company was not in compliance with certain
         financial covenants of its loan agreement as of December 31, 2002,
         2001 and 2000. Accordingly, substantial doubt exists about the
         Company's ability to continue as a going concern. The Company's
         Second Restated Term and Revolving Credit Agreement with IBM Credit
         Corporation (IBM Credit) was amended and restated on October 17,
         2000 and further amended on March 30, 2001, July 1, 2001, September
         15, 2001, November 15, 2001, December 31, 2001, January 31, 2002
         and February 27, 2002. These amendments extended the due dates of
         principal and interest payments of $4.2 million and $2.9 million,
         respectively, until April 2, 2002.

         On March 1, 2002, the Company and Digital Angel Trust, a newly
         created Delaware business trust, entered into the Third Amended and
         Restated Term Credit Agreement (the IBM Credit Agreement) with IBM
         Credit, which became effective on March 27, 2002, the effective
         date of the merger between pre-merger Digital Angel and MAS. Upon
         completion of the merger, and in satisfaction of a condition to the
         consent to the merger by IBM Credit, the Company transferred to the
         Digital Angel Trust, which is controlled by an advisory board, all
         shares of Digital Angel Corporation common stock owned by it and,
         as a result, the Digital Angel Trust has legal title to
         approximately 73.91% of the Digital Angel Corporation common stock
         at December 31, 2002. The Digital Angel Trust has voting rights
         with respect to the Digital Angel Corporation common stock until
         the Company's obligations to IBM Credit are repaid in full. The
         Company retained beneficial ownership of the shares.

         The IBM Credit Agreement contained covenants relating to the
         Company's financial position and performance, as well as the
         financial position and performance of Digital Angel Corporation. On
         September 30, 2002, the Company entered into an amendment to the IBM
         Credit Agreement, which revised certain financial covenants relating
         to its financial performance and the financial position and
         performance of Digital Angel Corporation for the quarter ended
         September 30, 2002 and the fiscal year ending December 31, 2002. On
         November 1, 2002, the Company entered into another amendment to the
         IBM Credit Agreement, which further revised certain covenants
         relating to the financial performance of Digital Angel Corporation
         for the quarter ended September 30, 2002, and the fiscal year ending
         December 31, 2002. At September 30, 2002, the Company and Digital
         Angel Corporation were in compliance with the revised covenants under
         the IBM Credit Agreement. At June 30, 2002, the Company was not in
         compliance with our Minimum Cumulative Modified EBITDA debt covenant
         and with other provisions of the IBM Credit Agreement and Digital
         Angel Corporation was not in compliance with its Minimum Cumulative
         Modified EBITDA and Current Assets to Current Liabilities debt
         covenants. On August 21, 2002, IBM Credit provided the Company with a
         waiver of such noncompliance. As consideration for the waiver, the
         Company issued to IBM Credit a five year-warrant to acquire 2.9
         million shares of its common stock at $0.15 per share, valued at
         approximately $1.3 million, and a five year-warrant to purchase
         approximately 1.8 million shares of its wholly-owned subsidiary,
         VeriChip Corporation's, common stock at $0.05 per share, valued at
         approximately $44 thousand. At December 31, 2002, the Company was not
         in compliance with the revised covenants under the IBM Credit
         Agreement. Digital Angel Corporation did not maintain compliance with
         certain financial covenants under its credit agreement with its
         lender, Wells Fargo Business Credit, Inc. (Wells Fargo). Well Fargo
         provided Digital Angel Corporation with a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         waiver of non-compliance. IBM Credit did not provide a waiver.

         Under the terms of the IBM Credit Agreement, the Company was required
         to repay IBM Credit Corporation $29.8 million of the $77.2 million
         outstanding principal balance currently owed to them, plus $16.4
         million of accrued interest and expenses (totaling approximately
         $46.2 million), on or before February 28, 2003. The Company did not
         make such payment by February 28, 2003. On March 3, 2003, IBM Credit
         notified the Company that it had until March 6, 2003, to make the
         payment. The Company did not make the payment on March 6, 2003, as
         required. The Company's failure to comply with the payment terms
         imposed by the IBM Credit Agreement and to maintain compliance with
         the financial performance covenant constitute events of default under
         the IBM Credit Agreement. On March 7, 2003, the Company received a
         letter from IBM Credit declaring the loan in default and indicating
         that IBM Credit would exercise any and/or all of its remedies.

         FORBEARANCE AGREEMENT

         On March 27, 2003, the Company announced that it had executed a
         forbearance agreement term sheet with IBM Credit. The forbearance
         agreement becomes effective on or about March 31, 2003. In turn,
         the Company has agreed to dismiss a lawsuit it had filed against
         IBM Credit and IBM Corporation in Palm Beach County, Florida on
         March 6, 2003.

         The payment provisions and purchase rights under the terms of the
         forbearance agreement term sheet are as follows:

             *  the Tranche A Loan, consisting of $68.0 million plus accrued
                interest, must be repaid in full no later than September 30,
                2003, provided that all but $3 million of the Tranche A Loan
                (the "Tranche A Deficiency Amount") will be deemed to be
                paid in full on such date if less than the full amount of
                the Tranche A Loan is repaid but all of the net cash
                proceeds of the Digital Angel Corporation shares held in the
                Digital Angel Trust are applied to the repayment of the
                Tranche A Loan. The Tranche A Deficiency Amount (if any)
                must be repaid no later than March 31, 2004; and

             *  the Tranche B Loan, consisting of $9.2 million plus accrued
                interest, must be repaid in full no later than March 31,
                2004. Effective March 25, 2003, the Tranche B Loan will bear
                interest at seven percent (7%) per annum.

         The Tranche A and B Loans may be purchased under the terms of the
         forbearance agreement term sheet by or on behalf of the Company as
         follows:

             *  the loans and all the other obligations may be purchased on
                or before June 30, 2003, for $30 million in cash;

             *  the loans and all the other obligations may be purchased on
                or before September 30, 2003, for $50 million in cash; and

             *  the Tranche A Loan may be purchased on or before September
                30, 2003, for $40 million in cash with an additional $10
                million cash payment due on or before December 31, 2003.

         Payment of the specified amounts by the dates set forth herein will
         constitute complete satisfaction of any and all of the Company's
         obligations to IBM Credit under the IBM Credit Agreement, provided
         that there has not earlier occurred a "Termination Event," as
         defined.

         In addition, the Company has agreed under the terms of the
         forbearance agreement term sheet that the Digital Angel Trust will
         immediately engage an investment bank to pursue the sale of the
         19,600,000 shares of Digital Angel Corporation common stock that are
         currently held in the Digital Angel Trust. All proceeds from the sale
         of the Digital Angel Corporation common stock will be applied to the
         loans and other obligations to satisfy the Tranche A payment
         provisions as discussed above, in the event that the Company has not
         satisfied its purchase rights by September 30, 2003.

         The forbearance agreement term sheet also modifies other provisions
         of the IBM Credit Agreement, including but not limited to, the
         imposition of additional limitations on permitted expenditures.

         At the end of the forbearance period, the provisions of the
         forbearance agreement shall become of no force and effect. At that
         time, IBM Credit will be free to exercise and enforce, or to take
         steps to exercise and enforce, all rights, powers, privileges and
         remedies available to them under the IBM Credit Agreement, as a
         result of the payment and covenant defaults existing on March 24,
         2003. If the Company is not successful in satisfying the payment
         obligations under the

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<PAGE>
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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         forbearance agreement or does not comply with the terms of the
         forbearance agreement or the IBM Credit Agreement, and IBM Credit
         were to enforce its rights against the collateral securing the
         obligations to IBM Credit, there would be substantial doubt that
         the Company would be able to continue operations in the normal
         course of business.

         The ability of the Company to continue as a going concern is
         predicated upon numerous issues including its ability to:

             *  Raise the funds necessary to satisfy its obligations to IBM
                Credit;

             *  Successfully implement its business plans, manage
                expenditures according to its budget, and generate positive
                cash flow from operations;

             *  Realize positive cash flow with respect to its investment
                in Digital Angel Corporation;

             *  Develop an effective marketing and sales strategy;

             *  Obtain the necessary approvals to expand the market for its
                VeriChip product;

             *  Complete the development of its second generation Digital
                Angel product; and

             *  Attract, motivate and/or retain key executives and
                employees.

         The Company is continually seeking operational efficiencies and
         synergies within each of its operating segments as well as
         evaluating acquisitions of businesses and customer bases which
         complement its operations. These strategic initiatives may include
         acquisitions, raising additional funds through debt or equity
         offerings, or the divesture of non-core business units that are not
         critical to the Company's long-term strategy or other
         restructurings or rationalization of existing operations. The
         Company will continue to review all alternatives to ensure maximum
         appreciation of our shareholder's investments. There can be no
         assurance, however, that any initiative will be found, or if found,
         that they will be on terms favorable to the Company.


     3.  ACQUISITIONS AND DISPOSITIONS

         On February 27, 2001, the Company acquired 16.6% of the capital
         stock of MAS, a provider of medical assistance and technical
         products and services, in a transaction valued at approximately $8.3
         million in consideration for 3.3 million shares of its common stock.
         The Company became the single largest stockholder and controlled two
         of the seven board seats. The Company accounted for this investment
         under the equity method of accounting. The excess of the purchase
         price over the net book value acquired was approximately $7.0
         million and was being amortized on a straight-line basis over five
         years. Under FAS 142, which the Company adopted on January 1, 2002,
         the goodwill embedded in the Company's equity investment in MAS is
         no longer amortized. As a result of no longer amortizing this
         goodwill, the Company's 2002 net income increased by $1.2 million.

         Effective March 27, 2002, the Company's 93% owned subsidiary,
         pre-merger Digital Angel, merged with MAS. As a result of the
         merger, the Company now owns approximately 73.91% of Digital Angel
         Corporation, as more fully discussed in Note 1.

         Unaudited pro forma results of operations for 2002 and 2001 are
         included below. Such pro forma information assumes that the merger of
         pre-merger Digital Angel and MAS had occurred as of January 1, 2001.


<TABLE>
<CAPTION>
                                                                                       (UNAUDITED)          (UNAUDITED)
                                                                                        YEAR ENDED           YEAR ENDED
                                                                                       DECEMBER 31,         DECEMBER 31,
                                                                                           2002                 2001
                                                                                           ----                 ----
<S>                                                                                     <C>                  <C>
         Net operating revenue from continuing operations                               $ 100,486            $ 161,677
         Loss from continuing operations                                                $(114,595)           $(217,472)
         Loss available to common stockholders from continuing operations               $(114,595)           $(228,011)
         Loss per common share from continuing operations - basic and diluted           $   (0.43)           $   (1.34)
</TABLE>

         DISPOSITIONS

         The gain (loss) on sale of subsidiaries and business assets was
         $0.1 million, $(6.1) million, and $0.5 million for the years ended
         December 31, 2002, 2001 and 2000, respectively. The loss on the sale
         of subsidiaries and business assets of $6.1 million for 2001 was due
         to sales of the business assets of our wholly-owned subsidiaries as
         follows: ADS Retail Inc., Signal Processors, Limited, ACT Wireless
         Corp. and our ATI Communications companies. In addition, the Company
         sold its 85% ownership interest in Atlantic Systems, Inc. Proceeds
         from the sales were $3.5 million and were used primarily to repay
         debt.

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                                                                     Page F-25




<PAGE>
<PAGE>

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         EARNOUT AND PUT AGREEMENTS

         Certain acquisition agreements included additional consideration,
         generally payable in shares of the Company's common stock,
         contingent on profits of the acquired subsidiary. Upon earning this
         additional consideration, the value is recorded as additional
         goodwill. At December 31, 2002, there is one remaining earnout
         arrangement. Assuming the current expected profits are achieved, the
         Company is contingently liable for additional consideration of
         approximately $0.5 million and $0.5 million in 2003 and 2004,
         respectively, all of which would be payable in shares of the
         Company's common stock.

         In January 2001, the Company entered into an agreement with the
         minority shareholders of Intellesale to terminate all put rights and
         employment agreements that each shareholder had with or in respect
         of Intellesale. In exchange, the Company issued an aggregate of 6.6
         million shares of the Company's common stock valued at $10.3
         million. In addition, during the years ended December 31, 2002 and
         2001, 13.6 million common shares value at $6.6 million and 27.5
         million common shares valued at $16.9 million, respectively, were
         issued to satisfy earnouts and to purchase minority interests.


     4.  INVENTORIES

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            2002         2001
                                                            ----         ----
<S>                                                      <C>           <C>
         Raw materials                                   $  1,725      $  1,474
         Work in process                                    1,447           176
         Finished goods                                     4,659         6,226
                                                         --------      --------
                                                            7,831         7,876
         Less:  Allowance for excess and obsolescence       1,422         1,702
                                                         --------      --------

                                                         $  6,409      $  6,174
                                                         ========      ========
</TABLE>

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                                                                     Page F-26




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     5.  NOTES RECEIVABLE

<TABLE>
<CAPTION>
                                                                                        2002               2001
                                                                                     ------------------------------

<S>                                                                                    <C>                <C>
         Due from purchaser of subsidiary, collateralized by pledge of rights to
         distributions from a joint venture of the purchaser and an unrelated
         entity, bears interest at the London Interbank Offered Rate plus
         1.65%, payable in quarterly installments of principal and interest
         totaling $332.                                                                $ 1,023            $ 9,073

         Due from purchaser of four subsidiaries, bears interest at 5%,
         interest payable quarterly, principal due October 2004. Allowance of
         $2,700 reflected in allowance for bad debts in 2002 and 2001.                   2,700              2,700

         Due from purchaser of subsidiary, collateralized by pledge of
         investment securities, bears interest at prime, interest payable semi-
         annually, principal due November 2004. Allowance of $2,328 reflected
         in allowance for bad debts in 2002 and 2001.                                    2,328              2,328

         Due from officers, directors and employees of the Company, unsecured,
         bear interest at varying interest rates, due on demand. Allowance of
         $200 reflected in allowance for bad debts in 2001.                                677                784

         Due from individuals and corporations, bearing interest at varying
         rates above prime, collateralized by business assets, personal
         guarantees, and securities, due various dates through July 2004.
         Allowance of $912 reflected in allowance for bad debts in 2001.                   858              1,851

         Due from purchaser of divested subsidiary, collateralized by business
         assets, bears interest at 8%, payable in monthly installments of
         principal and interest of $10, balance due in February 2006. Allowance
         of $1,266 reflected in allowance for bad debts in 2002.                         1,266              1,272

         Due from purchaser of divested subsidiary, collateralized by personal
         guarantee and securities of the purchaser, bears interest at prime
         plus 1%, payable in monthly installments of interest only through
         March 2003, and then payable in monthly installments of principal and
         interest of $11 through December 2007.                                            497                550

         Due from purchaser of divested subsidiary, collateralized, bears
         interest at 5%, payable in monthly payments of interest, and annual
         payments of principal through March 2005.                                         478                 --

         Other                                                                              26                 --

         Due from purchaser of business assets, collateralized by maker's assets,
         bears interest at 8.7% and provides for monthly payments of principal
         and interest equal to 10% of the maker's net cash revenue for each
         preceding month, balance due October 2001. Allowance of $373 reflected
         in allowance for bad debts in 2002 and 2001.                                      373                373
         ----------------------------------------------------------------------------------------------------------
                                                                                        10,226             18,931
         Less: Allowance for bad debts                                                   6,667             12,671
         Less: Current portion                                                           2,801              2,256
         ----------------------------------------------------------------------------------------------------------

                                                                                       $   758            $ 4,004
         ==========================================================================================================

         These notes receivable have been pledged as collateral under the Company's debt agreements. See Note 10.
</TABLE>


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                                                                     Page F-27




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     6.  OTHER CURRENT ASSETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                          2002            2001
                                                          ----            ----
<S>                                                     <C>             <C>
         Deferred tax asset                             $   13          $  171
         Prepaid expenses                                2,787           3,336
         Income tax refund receivable                       --             806
         Other                                             120             473
                                                        ------          ------

                                                        $2,920          $4,786
                                                        ======          ======
</TABLE>

     7.  PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         2002            2001
                                                         ----            ----

<S>                                                    <C>             <C>
         Land                                          $   611         $   956
         Building and leasehold improvements             7,770           8,351
         Equipment                                      14,505          14,387
         Software                                           94          10,001
                                                       -------         -------
                                                        22,980          33,695
         Less: Accumulated depreciation                 13,158          13,510
                                                       -------         -------

                                                       $ 9,822         $20,185
                                                       =======         =======
</TABLE>

         Included above are vehicles and equipment acquired under capital
         lease obligations in the amount of $1.0 million and $1.2 million at
         December 31, 2002 and 2001, respectively. Related accumulated
         depreciation amounted to $0.7 million and $0.7 million at December
         31, 2002 and 2001, respectively.

         Depreciation expense charged against income amounted to $4.1
         million, $4.6 million and $2.1 million for the years ended December
         31, 2002, 2001 and 2000, respectively. Accumulated depreciation
         related to disposals of property and equipment amounted to $4.0
         million and $0.6 million in 2002 and 2001, respectively.

         During 2002, the Company recorded an impairment charge of $6.4
         million to write-down certain software related to its Digital Angel
         Corporation segment.

     8.  GOODWILL

         Goodwill consists of the excess of cost over fair value of net
         tangible and identifiable intangible assets of companies purchased.
         The Company applies the principles of SFAS 141, and uses the
         purchase method of accounting for acquisitions of wholly owned and
         majority owned subsidiaries.

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        2002            2001
                                                      --------        --------
<S>                                                   <C>             <C>
         Balance                                      $123,221        $186,827
         Acquisitions and earnout payments              39,172              --
         Less goodwill impairment                      (62,185)        (63,606)
         Accumulated amortization                      (32,390)        (32,390)
                                                      --------        --------

         Carrying value                               $ 67,818        $ 90,831
                                                      ========        ========
</TABLE>

         Goodwill amortization expense, including in 2001 goodwill amortization
         associated with the Company's equity investment in MAS of $1.2
         million, amounted to $22.5 million and $7.5 million for the years
         ended December 31, 2001, 2000, respectively. Accumulated amortization
         of goodwill related to subsidiaries sold during 2001 and 2000 amounted
         to $0.1 million and $0.2 million, respectively.

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                                                                     Page F-28




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

         Effective January 1, 2002, the Company adopted SFAS 142. SFAS 142
         requires that goodwill and certain intangibles no longer be
         amortized, but instead tested for impairment at least annually. The
         Company tests its goodwill and intangible assets for impairment as
         a part of its annual business planning cycle during the fourth
         quarter of each fiscal year or earlier depending on specific
         changes in conditions surrounding the business units.

         The adoption of SFAS 142 did not result in an impairment charge,
         however, the annual test performed by the Company during the fourth
         quarter of 2002 resulted in an impairment charge of $62.2 million.
         In addition, there can be no assurance that future goodwill
         impairment tests will not result in additional impairment charges.

         The following table presents the impact of SFAS 142 on (loss)
         income before extraordinary loss (gain) and net loss and (loss)
         income before extraordinary (loss) gain per share and net loss per
         share had the standard been in effect beginning January 1, 2000:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                          2001             2000
                                                                     ---------        ---------
<S>                                                                  <C>              <C>
(Loss) income before extraordinary (loss) gain:
 (Loss) income before extraordinary (loss) gain as reported          $(214,568)       $(112,142)
 Add back: Goodwill amortization                                        21,312            9,415
 Add back: Equity method investment amortization                         1,161               --
                                                                     ---------        ---------
Adjusted (loss) income before extraordinary (loss) gain              $(192,095)       $(102,727)
                                                                     =========        =========

Earnings (loss) per common share - basic
 Net (loss) income per share before extraordinary (loss) gain -
  basic as reported                                                  $   (1.26)       $   (1.76)
 Goodwill amortization                                                    0.12             0.15
 Equity method investment amortization                                    0.01               --
                                                                     ---------        ---------
Adjusted (loss) income before extraordinary (loss) gain per
 share - basic                                                       $   (1.13)       $   (1.61)
                                                                     =========        =========

Earnings (loss) per share - diluted
 Net (loss) income per share before extraordinary (loss) gain -
  basic as reported                                                  $   (1.26)       $   (1.76)
 Goodwill amortization                                                    0.12             0.15
 Equity method investment amortization                                    0.01               --
                                                                     ---------        ---------
Adjusted (loss) income before extraordinary (loss) gain per
 share - diluted                                                     $   (1.13)       $   (1.61)
                                                                     =========        =========

Net (loss) income available to common stockholders:
 Net (loss) income available to common stockholders as reported      $(215,642)       $(116,190)
 Add back: Goodwill amortization                                        21,312            9,415
 Add back: Equity method investment amortization                         1,161               --
                                                                     ---------        ---------
Adjusted net (loss) income                                           $(193,169)       $(106,775)
                                                                     =========        =========

Earnings (loss) per common share - basic
 Net (loss) income per share - basic, as reported                    $   (1.27)       $   (1.82)
 Goodwill amortization                                                    0.12             0.15
 Equity method investment amortization                                    0.01               --
                                                                     ---------        ---------
Adjusted net (loss) income - basic                                   $   (1.14)       $   (1.67)
                                                                     =========        =========

Earnings (loss) per share - diluted
 Net (loss) income per share - diluted, as reported                  $   (1.27)       $   (1.82)
 Goodwill amortization                                                    0.12             0.15
 Equity method investment amortization                                    0.01               --
                                                                     ---------        ---------
Adjusted net (loss) income per share - diluted                       $   (1.14)       $   (1.67)
                                                                     =========        =========
</TABLE>

         The Company had entered into various earnout arrangements with the
         selling shareholders of certain acquired subsidiaries. These
         arrangements provided for additional consideration to be paid in
         future years if certain earnings levels were met. As of December 31,
         2002, the Company is obligated under one remaining earnout
         arrangement. Payments made under earnout arrangements are added to
         goodwill as earned.

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                                                                     Page F-29


<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     9.  OTHER ASSETS

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         2002            2001
                                                         ----            ----
<S>                                                    <C>             <C>
         Proprietary software                          $ 2,636         $ 2,368
         Loan acquisition costs                         10,569           3,746
         Other assets                                    2,206           1,120
                                                       -------         -------
                                                        15,411           7,234
         Less: Accumulated amortization                 12,936           5,247
                                                       -------         -------
                                                         2,475           1,987
         Other investments                                 202             771
         Deferred tax asset                              1,223             996
         Other                                             439             528
                                                       -------         -------

                                                       $ 4,339         $ 4,282
                                                       =======         =======
</TABLE>

         Amortization of other assets charged against income amounted to $6.4
         million, $1.8 million and $1.4 million for the years ended December
         31, 2002, 2001 and 2000, respectively. Accumulated amortization of
         other assets related to subsidiaries sold during 2001 amounted to
         $3.5 million.


    10.  NOTES PAYABLE AND LONG-TERM DEBT

         On May 25, 1999, the Company entered into a credit agreement with
         IBM Credit. The credit agreement was amended and restated on October
         17, 2000, and further amended on March 30, 2001. Effective July 1,
         2001, the Company and IBM Credit amended the credit agreement
         extending until October 1, 2001 the payments due on July 1, 2001,
         which the Company was unable to pay. On September 15, 2001, November
         15, 2001, December 31, 2001, January 31, 2002, and again on February
         27, 2002, the Company and IBM Credit amended the credit agreement
         further extending the payments due under the agreement until April
         2, 2002. On March 1, 2002, the Company entered into the IBM Credit
         Agreement, which became effective on March 27, 2002 as more fully
         discussed in Note 2.

         As part of the amendments and restatements to the agreements with IBM
         Credit as discussed above, the Company paid bank fees of $0.4 million
         and $0.3 million in March 2002 and April 2001, respectively, and in
         April 2001, the Company issued a five-year warrant to acquire 2.9
         million shares of common stock to IBM Credit valued at $1.9 million.
         In March 2002, the Company agreed to re-price these warrants. The
         re-priced warrants were valued at $1.0 million. In addition, as a
         result of the merger between pre-merger Digital Angel and MAS,
         warrants convertible into common stock of Digital Angel Corporation
         that were previously issued to IBM Credit were revalued using the
         Black Scholes method, resulting in additional deferred financing
         costs of $1.1 million. The bank fees and fair value of the warrants
         have been recorded as deferred financing fees and are being amortized
         over the life of the debt as interest expense. These deferred
         financing fees are being amortized through February 28, 2003, the
         maturity of the principal balance.

         At September 30, 2002, the Company and Digital Angel Corporation
         were in compliance with the revised covenants under the IBM Credit
         Agreement. At June 30, 2002, the Company was not in compliance with
         its Minimum Cumulative Modified EBITDA debt covenant and with other
         provisions of the IBM Credit Agreement and Digital Angel Corporation
         was not in compliance with the Minimum Cumulative Modified EBITDA
         and Current Assets to Current Liabilities debt covenants. On August
         21, 2002, IBM Credit provided the Company with a waiver of such
         noncompliance. As consideration for the waiver, the Company issued
         to IBM Credit a five year-warrant to acquire 2.9 million shares of
         the Company's common stock at $0.15 per share, valued at
         approximately $1.3 million, and a five year-warrant to purchase
         approximately 1.8 million shares of the Company's wholly-owned
         subsidiary, VeriChip Corporation's common stock at $0.05 per share,
         valued at approximately $44 thousand. The fair value of the warrants
         has been recorded as interest expense in 2002.

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                                                                     Page F-30




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Amounts outstanding under the IBM Credit Agreement carried interest
         at an annual rate of 17% and matured on February 28, 2003, subject
         to extensions if certain portions of principal and interest
         payments were made. Under the terms of the IBM Credit Agreement,
         the Company was required to repay IBM Credit Corporation $29.8
         million of the $77.2 million outstanding principal balance
         currently owed to them, plus $16.4 million of accrued interest and
         expenses (totaling approximately $46.2 million), on or before
         February 28, 2003. The Company did not make such payment by
         February 28, 2003. On March 3, 2003, IBM Credit notified the
         Company that it had until March 6, 2003, to make the payment. The
         Company did not make the payment on March 6, 2003, as required. The
         Company's failure to comply with the payment terms constitutes an
         event of default under the IBM Credit Agreement. On March 7, 2003,
         the Company received a letter from IBM Credit declaring the loan in
         default and indicating that IBM Credit would exercise any and/or
         all of its remedies. On March 27, 2003, the Company announced that
         it had agreed to the terms of a forbearance agreement with IBM
         Credit. The forbearance agreement, which becomes effective on or
         about March 31, 2003, allows for the forbearance of the obligations
         due under the IBM Credit Agreement, provides for more favorable
         loan repayment terms, reduces the Tranche B interest rate to 7% per
         annum and provides for purchase rights. The forbearance agreement
         is more fully describe in Note 2.


         The Company's covenants under the IBM Credit Agreement, as amended
         were as follows:

<TABLE>
<CAPTION>
         COVENANT                                              COVENANT REQUIREMENT
         --------                                              --------------------

                                                     As of the following date not less than:
<S>                                                  <C>                         <C>
         Current Assets to Current Liabilities       December 31, 2002                 .11:1

         Minimum Cumulative Modified EBITDA          December 31, 2002           $(7,648,300)
</TABLE>

         In addition, the IBM Credit Agreement contained covenants for
         Digital Angel Corporation, as follows:


<TABLE>
<CAPTION>
         COVENANT                                              COVENANT REQUIREMENT
         --------                                              --------------------

                                                     As of the following date not less than:
<S>                                                  <C>                            <C>
         Current Assets to Current Liabilities       December 31, 2002                1.09:1

         Minimum Cumulative Modified EBITDA          December 31, 2002              $732,000
</TABLE>

         The Company did not meet the Minimum Cumulative Modified EBITDA
         covenant at December 31, 2002. IBM did not provide the Company of
         a waiver of the default - See Note 2.

         The IBM Credit Agreement also contains restrictions on the
         declaration and payment of dividends.

         Amounts outstanding under the IBM Credit Agreement are collateralized
         by a security interest in substantially all of the Company's assets,
         excluding the assets of the newly merged Digital Angel and MAS. The
         shares of the Company's subsidiaries, including the MAS common stock
         held in the Digital Angel Trust, also secure the amounts outstanding
         under the IBM Credit Agreement.

         See Note 2 for a discussion of the Company's violation of payment
         obligations and the violation of a financial covenant under the IBM
         Credit Agreement.

------------------------------------------------------------------------------
                                                                     Page F-31




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    NOTES PAYABLE AND LONG-TERM DEBT CONSISTS OF THE FOLLOWING:

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                           2002               2001
                                                                                       -----------------------------
<S>                                                                                    <C>                <C>
         Term Loan - IBM Credit, collateralized by all domestic assets of the
         Company and a pledge of the stock of the Company's subsidiaries,
         bearing interest at 17% through February 28, 2003, due February 28,
         2003; currently bearing interest at 25%                                      $ 80,655           $     --

         Revolving credit line - IBM Credit, collateralized by all domestic
         assets of the Company and a pledge of the stock of the Company's
         subsidiaries, bearing interest at the 30 day London Interbank Offered
         Rate plus 3.25% in 2001, originally due in May 2002 and subsequently
         refinanced                                                                          --             61,060

         Term Loan - IBM Credit, collateralized by all domestic assets of the
         Company and a pledge of the stock of the Company's subsidiaries,
         bearing interest at the 30 day London Interbank Offered Rate plus 4.0%
         in 2001, payable in quarterly principal installments of $1,041 plus
         interest, originally due in May 2002 and subsequently refinanced                    --             21,495

         Term loans, payable in monthly or quarterly installments, bearing
         interest at rates ranging from 4% to 10%, due through April 2009                    --                 77

         SYSCOMM INTERNATIONAL CORPORATION
         Mortgage notes payable, collateralized by land and building, payable
         in monthly installments of principal and interest totaling $15,000,
         bearing interest at 7.16%, paid in full in March 2002                               --                880

         DIGITAL ANGEL CORPORATION
         Mortgage notes payable, collateralized by land and buildings, payable
         in monthly installments of principal and interest totaling $30,000,
         bearing interest at 8.18% in 2002, due through November 2010                     2,419              2,465

         Mortgage notes payable, collateralized by land and building, interest
         only payable monthly, principal amount of $910 due October 1, 2004,
         bearing interest at 12% at December 31, 2002.                                      910                 --

         DIGITAL ANGEL CORPORATION
         Line of credit, collateralized by all Digital Angel Corporation assets,
         interest payable monthly at prime plus 3%, due in October 2005(1)                  709                 --

         Notes payable - other                                                              299                 11

         Capital lease obligations                                                          233                434
         -----------------------------------------------------------------------------------------------------------
                                                                                         85,225             86,422
         Less: Current maturities                                                        81,879             83,836
         -----------------------------------------------------------------------------------------------------------

                                                                                       $  3,346           $  2,586
         ===========================================================================================================

<FN>
(1) The Digital Angel Corporation line of credit contains certain fnancial
covenants, including a monthly minimum book net worth and monthly minimum
earnings before taxes, and it limits Digital Angel Corporation's capital
expenditures during 2002 and 2003. Any breach of the financial covenants by
Digital Angel Corporation will constitute an event of default under the line
of credit. As of December 31, 2002, Digital Angel Corporation was not
in compliance with the minimum book net worth and monthly minimum earnings
before taxes covenants. Digital Angel Corporation has obtained a waiver of
these covenant violations from Wells Fargo.
</TABLE>


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                                                                     Page F-32




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



         The scheduled payments due based on maturities of long-term debt
         and amounts subject to acceleration at December 31, 2002 are as
         follows:

<TABLE>
<CAPTION>
                 YEAR                           AMOUNT
                 ----                           ------
              <S>                              <C>
                 2003                          $81,879
                 2004                            1,012
                 2005                               53
                 2006                               54
                 2007                               59
              Thereafter                         2,168
                                               -------
                                               $85,225
                                               =======
</TABLE>

         Interest expense on the long and short-term notes payable amounted
         to $17.5 million, $8.6 million, and $5.9 million for the years
         ended December 31, 2002, 2001 and 2000, respectively.

         The weighted average interest rate was 21% and 7.3% for the years
         ended December 31, 2002 and 2001, respectively.

         Certain of the Company's subsidiaries included in discontinued
         operations also have notes payable and long-term debt as follows:

<TABLE>
<CAPTION>
                                                                                           2002             2001
                                                                                     -----------------------------
<S>                                                                                    <C>              <C>
         Revolving credit line - IBM Credit, collateralized by all domestic
         assets of the Company and a pledge of the stock of the Company's
         subsidiaries, bearing interest at the base rate as announced by the
         Toronto-Dominion Bank of Canada plus 1.17% in 2000, due in May 2002.
         Amounts paid in full upon sale of the discontinued Canadian subsidiary
         in January 2002                                                               $     --         $  3,373

         Term Loan - IBM Credit, collateralized by all Canadian assets of the
         Company and a pledge of two-thirds of the stock of the Company's
         Ground Effects, Ltd. subsidiary, bearing interest at the base rate as
         announced by the Toronto-Dominion Bank of Canada plus 1.17% in 2000,
         payable in quarterly principal installments of $113 plus interest, due
         in May 2002. Amounts paid in full upon sale of the discontinued
         Canadian subsidiary in January 2002                                                 --            1,570

         Term loans, other                                                                   --               59

         Capital lease obligations                                                           26               38
         ---------------------------------------------------------------------------------------------------------
                                                                                             26            5,040
         Less: Current maturities                                                            26            5,040
         ---------------------------------------------------------------------------------------------------------

                                                                                       $     --         $     --
         =========================================================================================================
</TABLE>

         The obligations to IBM Credit noted above, were repaid in
         connection with the sale of Ground Effects, Ltd, which was sold on
         January 31, 2002.


    11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         CASH AND CASH EQUIVALENTS

         The carrying amount approximates fair value because of the short
         maturity of those instruments.

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                                                                     Page F-33




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         NOTES RECEIVABLE

         The carrying value of the notes, net of the allowance for doubtful
         accounts, approximate fair value because either the interest rates
         of the notes approximate the current rate that the Company could
         receive on a similar note, or because of the short-term nature of
         the notes.

         NOTES PAYABLE

         The carrying amount approximates fair value because of the
         short-term nature of the notes and the current rates approximate
         market rates.

         LONG-TERM DEBT

         Due to the current default and resulting Forbearance Agreement with
         respect to the IBM debt, it is not practicable to determine the
         fair value of the Company's Long-Term Debt.

         ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         The carrying amount approximates fair value.


    12.  REDEEMABLE PREFERRED SHARES - SERIES C

         On October 26, 2000, the Company issued 26,000 shares of Series C
         convertible preferred stock to a select group of institutional
         investors in a private placement. The stated value of the preferred
         stock was $1,000 per share, or an aggregate of $26.0 million, and
         the purchase price of the preferred stock and the related warrants
         and options was an aggregate of $20.0 million. The preferred stock
         was convertible into shares of the Company's common stock at
         various conversion rates.

         The proceeds upon issuance were allocated to the preferred stock,
         the warrants and the option based upon their relative fair values.
         The value assigned to the warrants and option increased the
         discount on preferred stock, as follows:

         Face value of preferred stock                      $26,000
         Discount on preferred stock                         (6,000)
         Relative fair value of warrants                       (627)
         Relative fair value of option                       (5,180)
                                                            -------

         Relative fair value of preferred shares            $14,193
                                                            =======

         For the year ended December 31, 2001, the beneficial conversion
         feature (BCF) associated with the Company's preferred stock charged
         to earnings per share was $9.4 million. The Company has
         cumulatively recorded a charge to earnings per share of $13.2
         million, since the issuance of the preferred stock. As of June 30,
         2001, the BCF was fully accreted. As of December 31, 2001, all of
         the preferred shares have been converted into shares of the
         Company's common stock.

         The BCF was recorded as a reduction in the value assigned to the
         preferred stock and an increase in additional paid-in capital. The
         Company recorded the accretion of the BCF over the period from the
         date of issuance to the earliest beneficial conversion date
         available through equity, reducing the income available to common
         stockholders and earnings per share.

         The holders of the preferred stock also received 0.8 million
         warrants to purchase up to 0.8 million shares of the Company's
         common stock. The warrants expire in October 2005. At December 31,
         2002, the exercise price was

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                                                                     Page F-34




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         $4.66 per share, subject to adjustment for various events,
         including the issuance of shares of common stock, or options or
         other rights to acquire common stock, at an issuance price lower
         than the exercise price under the warrants. The exercise price may
         be paid in cash, in shares of common stock or by surrendering
         warrants. See Note 13 for the valuation and related assumptions.

         OPTION TO ACQUIRE ADDITIONAL PREFERRED STOCK

         The investors had the option to purchase up to an additional $26.0
         million in stated value of Series C convertible preferred stock and
         warrants with an initial conversion price of $5.00 per share, for
         an aggregate purchase price of $20.0 million, at any time up to ten
         months following the effective date of the Company's registration
         statement relating to the common stock issuable on conversion of
         the initial series of the preferred stock. The additional preferred
         stock would have had the same preferences, qualifications and
         rights as the initial preferred stock. The fair value of the option
         was estimated using the Black-Scholes option pricing model with the
         following assumptions: dividend yield of 0%, expected volatility of
         .40% and a risk free interest rate of 5.5%. The investors elected
         not to exercise the option and it expired on February 24, 2002.
         Upon expiration, the value of the options was reclassified to
         Additional Paid-in-Capital.


    13.  PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY

         PREFERRED SHARES

         The Company has authorized 5 million shares of preferred stock,
         $10.00 par value, to be issued from time to time on such terms as
         is specified by the board of directors. At December 31, 2002, no
         preferred shares were issued or outstanding.

         WARRANTS

         The Company has issued warrants convertible into shares of common
         stock for consideration, as follows (in thousands, except exercise
         price):

<TABLE>
<CAPTION>
                                                                   BALANCE
         CLASS OF                                                DECEMBER 31,  EXERCISE       DATE OF           EXERCISABLE
         WARRANTS        AUTHORIZED  ISSUED EXERCISED  EXPIRED      2002        PRICE          ISSUE              PERIOD
         --------        ----------  ------ ---------  -------      ----        -----          -----              ------
<S>                        <C>      <C>      <C>         <C>        <C>       <C>          <C>                <C>
         Class P             520      520      480        40           --          3.00    September 1997     5 years
         Class S             600      600      223        --          377          2.00    April 1998         5 years
         Class U             250      250       --        --          250          8.38    November 1998      5 years
         Class V             828      828      429       399           --     .67 -3.32    September 2000     Up to 2.2 years
         Class W             800      800       --        --          800          4.66    October 2000       5 years
         Class X           2,895    2,895       --        --        2,895          0.15    April 2001         5 years
         Class Y           2,895    2,895       --        --        2,895          0.15    August 2002        5 years
                           -----    -----    -----       ---        -----
                           8,788    8,788    1,132       439        7,217
                           =====    =====    =====       ===        =====
</TABLE>

         Warrants in classes P through U were issued at the then-current
         market value of the common stock in consideration for investment
         banking services provided to the Company.

         Class V warrants were issued in connection with the merger of the
         Company's wholly owned subsidiary, Digital Angel.net, Inc. into
         Destron Fearing. These warrants were valued at $1.7 million and
         included as part of the initial purchase price.

         Class W warrants were issued in connection with the Series C
         preferred stock issuance. These warrants were valued at $0.6
         million, and were recorded as a discount on the preferred stock at
         issuance.

         Class X warrants were issued to IBM Credit Corporation in
         connection with an "Acknowledgement, Waiver and Amendment No. 1 to
         the Second Amended and Restated Term and Revolving Credit
         Agreement" with IBM Credit. The warrants were valued at $1.9
         million. The fair value of the warrants were reflected as deferred
         financing fees and were amortized as interest expense. Under the
         terms of the IBM Credit Agreement, which became effective on

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                                                                     Page F-35




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         March 27, 2002, these warrants were re-priced from an exercise price
         of $1.25 per share to an exercise price of $0.15 per share. The
         re-priced warrants were valued at $1.0 million.

         Class Y warrants were issued to IBM Credit Corporation in
         connection with the IBM Credit Agreement. The warrants were valued
         at $1.3 million. The fair value of the warrants were reflected as
         deferred financing fees and are being amortized as interest
         expense.

         The valuation of warrants utilized the following assumptions in the
         Black-Scholes model:

<TABLE>
<CAPTION>
         WARRANT SERIES        DIVIDEND YIELD        VOLATILITY       EXPECTED LIVES (YRS.)         RISK FREE RATES
         --------------        --------------        ----------       ---------------------         ---------------

<S>                                  <C>               <C>                    <C>                         <C>
         P                           0%                44.03%                 1.69                        8.5%

         S & U                       0%                43.69%                 1.69                        8.5%

         V                           0%                43.41%                 0.10                        6.4%

         W                           0%                43.41%                 1.69                        6.4%

         X (initial grant)           0%                53.32%                 5.0                         4.6%

         X (re-pricing)              0%                68.75%                 4.0                         4.4%

         Y                           0%                68.75%                 5.0                         3.3%
</TABLE>

         STOCK OPTION PLANS

         During 1996, the Company adopted a nonqualified stock option plan
         (the Option Plan). During 2000, the Company adopted a nonqualified
         Flexible Stock Plan (the Flexible Plan). With the 2000 acquisition
         of Destron Fearing, the Company acquired two additional stock
         option plans, an Employee Stock Option Plan and Nonemployee
         Director Stock Option Plan. The names of the plans were changed to
         Digital Angel.net Inc. Stock Option Plan (the Employee Plan) and
         the Digital Angel.net Inc. Nonemployee Director Stock Option Plan
         (the Director Plan).

         Under the Option Plan, options for 10 million common shares were
         authorized for issuance to certain officers and employees of the
         Company as of December 31, 2002, of which 9.8 million have been
         issued through December 31, 2002. The options may not be exercised
         until one to three years after the options have been granted, and
         are exercisable for a period of five years.

         Under the Flexible Plan, the number of shares which may be issued
         or sold, or for which options, Stock Appreciation Rights (SARs) or
         Performance Shares may be granted to certain officers and employees
         of the Company is 36.0 million as of December 31, 2002, of which
         35.9 million options have been issued through December 31, 2002.
         Some of the options may not be exercised until one to three years
         after the options have been granted, and are exercisable over a
         period of five years.

         Under the Employee Plan, the Plan authorized the grant of options
         to the employees to purchase 1.6 million shares of common stock as
         of December 31, 2002, of which 1.4 million options have been issued
         through December 31, 2002. The Plan provides for the grant of
         incentive stock options, as defined in the Internal Revenue Code,
         and non-incentive options. The Plan has been discontinued with
         respect to any future grant of options.

         Under the Director Plan, the Plan authorized the grant of options
         to the nonemployee directors to purchase shares of common stock. As
         of December 31, 2002, 0.5 million options have been granted of
         which 0.3 million options have been issued through December 31,
         2002. The Plan has been discontinued with respect to any future
         grant of options.

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                                                                     Page F-36




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         A summary of stock option activity for 2002, 2001 and 2000 is as
         follows (in thousands, except weighted average exercise price):

<TABLE>
<CAPTION>
                                                2002                   2001                    2000
                                        --------------------   --------------------   --------------------
                                                   WEIGHTED-              WEIGHTED-              WEIGHTED-
                                        NUMBER      AVERAGE    NUMBER      AVERAGE    NUMBER      AVERAGE
                                          OF       EXERCISE      OF       EXERCISE      OF       EXERCISE
                                        OPTIONS      PRICE     OPTIONS      PRICE     OPTIONS      PRICE
                                        -------    ---------   -------    ---------   -------    ---------
<S>                                     <C>        <C>         <C>        <C>         <C>         <C>
         Outstanding on January 1       30,230     $  0.76     22,457     $  2.87     12,172      $ 3.01
         Granted                        10,126         .32     12,287         .33     13,725        2.76
         Exercised                      (6,290)        .23     (2,369)        .15     (3,257)       2.89
         Forfeited                         (27)       1.09     (2,145)        .88       (183)       3.28
                                        ------     -------     ------     -------     ------      ------
         Outstanding on December 31     34,039        0.71     30,230         .76(1)  22,457        2.87
                                        ------     -------     ------     -------     ------      ------

         Exercisable on December 31     23,721        0.87     19,999         .99(1)  11,821        2.87
                                        ------     -------     ------     -------     ------      ------

         Shares available on
           December 31 for options
           that may be granted             283                  2,043                 12,878
                                        ------                 ------                 ------

<FN>
         --------
         (1) Options to acquire 19.3 million shares of the Company's common stock were re-priced during 2001.
             See Note 14.
</TABLE>

         The following table summarizes information about stock options at
         December 31, 2002 (in thousands, except weighted average exercise
         price):

<TABLE>
<CAPTION>
                                         OUTSTANDING STOCK OPTIONS                  EXERCISABLE STOCK OPTIONS
                                 ------------------------------------------         -------------------------
                                                 WEIGHTED-
                                                  AVERAGE         WEIGHTED-                         WEIGHTED-
                                                 REMAINING         AVERAGE                           AVERAGE
            RANGE OF                            CONTRACTUAL       EXERCISE                          EXERCISE
         EXERCISE PRICES         SHARES            LIFE             PRICE            SHARES            PRICE
         ---------------         ------            ----             -----            ------            -----
<S>                               <C>               <C>            <C>               <C>             <C>
         $0.01 to $1.00           27,100            4.20           $   0.24          16,986          $   0.20
         $1.01 to $2.00            1,614            4.00               1.47           1,505              1.49
         $2.01 to $3.00            4,037            2.90               2.51           4,037              2.51
         $3.01 to $4.00              791            2.60               3.53             700              3.56
         $4.01 to $5.00              307            2.20               4.45             306              4.45
         $5.01 to $8.00              190            2.50               5.59             187              5.56
                                  ------                           --------          ------          --------
         $0.01 to $8.00           34,039                           $   0.71          23,721          $   0.87
                                  ======                           ========          ======          ========
</TABLE>

         The number of options granted for the year ended December 31, 2000
         includes 1,903 stock options acquired in conjunction with the
         Destron Fearing acquisition.

         In addition to the above options, certain wholly-owned subsidiaries
         of the Company have issued options to various employees, officers
         and directors. Information pertaining to options granted by Digital
         Angel Corporation is as follows:

         During 1999, Digital Angel Corporation adopted a non-qualified
         stock option plan (the "Stock Option Plan"). In connection with the
         merger with MAS, Digital Angel Corporation assumed the options
         granted under the Stock Option Plan under its Amended and Restated
         Digital Angel Corporation Transition Stock Option Plan ("DAC Stock
         Option Plan"). As amended, the DAC Stock Option Plan provides
         11,195,000 shares of common stock for which options may be granted.
         As of December 31, 2002, options to purchase 7,816,000 shares were
         outstanding and 2,137,000 shares were available for the grant of
         options under the DAC Stock Option Plan. The options vest as
         determined by Digital Angel Corporation's Board of Directors and
         are exercisable for a period of no more than ten years.

         Under MAS's nonqualified stock option plan (the "MAS Stock Option
         Plan") options may be granted at or below the fair market value of
         the stock and have five and 10 year lives. Options granted to
         certain individuals vest ratably over three years. As of December
         31, 2002 options to purchase 1,150,000 shares were outstanding and
         233,000 shares were available for the grant of options under the
         plan. The MAS Stock Option Plan provides for 1,650,000 shares of
         common stock for which options may be granted.

         A summary of stock option activity for the aforementioned plans for
         2002 is as follows (in thousands, except weighted average exercise
         price data):

<TABLE>
<CAPTION>
                                                    2002
                                            --------------------
                                                       WEIGHTED-
                                                        AVERAGE
                                                       EXERCISE
                                             SHARES      PRICE
                                            -------    ---------
<S>                                         <C>        <C>
         Outstanding on January 1            5,148     $  0.44
         Granted                             3,910        3.39
         Assumed in MAS Acquisition          1,211        4.23
         Exercised                          (2,452)       0.25
         Forfeited                              (1)      10.00
                                            ------
         Outstanding on December 31          7,816        2.56
                                            ------

         Exercisable on December 31          3,893        1.70
                                            ======

         Shares available for grant
           on December 31                    2,370          --
                                            ======
</TABLE>

         The following table summarizes information about Digital Angel
         Corporation's stock options at December 31, 2002 (in thousands,
         except weighted average exercise price data):

<TABLE>
<CAPTION>
                                         OUTSTANDING STOCK OPTIONS                  EXERCISABLE STOCK OPTIONS
                                 ------------------------------------------         -------------------------
                                                 WEIGHTED-
                                                  AVERAGE         WEIGHTED-                         WEIGHTED-
                                                 REMAINING         AVERAGE                           AVERAGE
                                                CONTRACTUAL       EXERCISE                          EXERCISE
         RANGE OF EXERCISE       SHARES            LIFE             PRICE            SHARES            PRICE
         -----------------       ------            ----             -----            ------            -----
<S>                               <C>               <C>            <C>               <C>             <C>
         $0.01 to $2.00            2,898            7.31           $   0.60           2,898          $   0.60
         $2.01 to $4.00            4,214            9,40               3.43             304              3.90
         $4.01 to $6.00              550            8.11               4.15             550              4.15
         $6.01 to $8.00               --              --                 --              --                --
         $8.01 to $10.00             154            7.31              10.00             141             10.00
                                   -----                           --------           -----          --------
                                   7,816            8.49           $   2.56           3,893          $   1.70
                                   =====                           ========           =====          ========
</TABLE>

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<PAGE>
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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         QUALIFIED EMPLOYEE STOCK PURCHASE PLAN

         During 1999, the Company adopted a non-compensatory, qualified
         Employee Stock Purchase Plan (the Stock Purchase Plan). Under the
         Stock Purchase Plan, options are granted at an exercise price of the
         lesser of 85% of the fair market value on the date of grant or 85%
         of the fair market value on the exercise date. Under the Stock
         Purchase Plan, options for 9.0 million common shares were authorized
         for issuance to substantially all full-time employees of the
         Company, of which 2.1 million shares have been issued and exercised
         through December 31, 2002. Each participant's options to purchase
         shares will be automatically exercised for the participant on the
         exercise dates determined by the board of directors.

     14. NON-CASH COMPENSATION EXPENSE ASSOCIATED WITH OPTIONS AND NOTES
         RECEIVABLE FOR STOCK ISSUANCES

         Pursuant to the terms of the pre-merger Digital Angel and MAS
         merger agreement, effective March 27, 2002, options to acquire
         shares of pre-merger Digital Angel common stock were converted into
         options to acquire shares of MAS common stock. The transaction
         resulted in a new measurement date for the options and, as a
         result, the Company recorded a non-cash compensation expense of
         approximately $18.7 million on March 27, 2002. This charge is
         included in the condensed consolidated statement of operations in
         selling, general and administrative expenses.

         In addition, the Company incurred approximately $0.7 million and
         $5.3 million of non-cash compensation expense during 2002 and 2001,
         respectively, due primarily to re-pricing 19.3 million stock options
         during 2001. The re-priced options had original exercise prices
         ranging from $0.69 to $6.34 per share and were modified to change
         the exercise price to $0.15 per share. Due to the modification,
         these options are being accounted for as variable options under APB
         Opinion No. 25 and, accordingly, fluctuations in the Company's
         common stock price result in increases and decreases of non-cash
         compensation expense until the options are exercised, forfeited or
         expired. This non-cash charge is reflected in the condensed
         consolidated statement of operations in selling, general and
         administrative expenses.

         During 2002, the Company incurred approximately $4.1 million for
         charges to increase valuation reserves associated with the
         uncollectibility of notes receivable for stock issuances of which
         $3.8 million related to notes receivable for stock issuances to
         directors and officers held in escrow by the Company.


    15.  ASSET IMPAIRMENT

         Asset impairment during the years ended December 31, 2002, 2001 and
         2000 was:

<TABLE>
<CAPTION>
                                                          2002           2001            2000
                                                          ----           ----            ----
                                                               (AMOUNTS IN THOUSANDS)
<S>                                                     <C>           <C>              <C>
         Goodwill:
           Advanced Technology                          $    --       $30,453          $   --
           Digital Angel Corporation                     62,185           726              --
           Syscomm                                           --            --              --
           All Other                                         --        32,427             818
                                                        -------       -------           -----
                Total goodwill                           62,185        63,606             818
         Property and equipment                           6,860         2,372              --
         Investment in ATEC and Burling stock                --            --           5,565
         Software and other                                 337         5,741              --
                                                        -------       -------          ------
                                                        $69,382       $71,719          $6,383
                                                        =======       =======          ======
</TABLE>

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                                                                     Page F-38




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         As of December 31, 2002, the net book value of the Company's
         goodwill was $67.8 million. There was no impairment of goodwill
         upon the adoption of FAS 142 on January 1, 2002. However, based
         upon the Company's annual review for impairment during the fourth
         quarter of 2002, the Company recorded an impairment charge of $62.2
         million associated with its Digital Angel Corporation segment. The
         impairment relates to the goodwill associated with the acquisition
         of MAS in March 2002, and to Digital Angel Corporation's Wireless
         and Monitoring segment. Future goodwill impairment reviews may
         result in additional periodic write-downs. In addition, Digital
         Angel Corporation impaired $6.4 million of software associated with
         its Wireless and Monitoring segment. As of December 31, 2002,
         Digital Angel Corporation's Wireless and Monitoring segment has not
         recorded any significant revenues from its Digital Angel product,
         and therefore, it was determined that the goodwill and software
         were impaired.

         As a result of the economic slowdown during 2001, the Company
         experienced deteriorating sales for certain of its businesses. In
         addition, management concluded that a full transition to an
         advanced technology company required the sale or closure of all
         units that did not fit into the Company's new business model or
         were not cash-flow positive. This resulted in the shut down of
         several of its businesses during the third and fourth quarters of
         2001 and the first quarter of 2002. Also, letters of intent that
         the Company had received during the last half of 2001 and the first
         quarter of 2002 related to the sales of certain of its businesses
         indicated a decline in their fair values. The sales of these
         businesses did not comprise the sale of an entire business segment.
         Based upon these developments, the Company reassessed its future
         expected operating cash flows and business valuations and at
         December 31, 2001, the Company performed undiscounted cash flows
         analyses by business unit to determine if an impairment existed.
         For purposes of these analyses, earnings before interest, taxes,
         depreciation and amortization were used as the measure of cash
         flow. When an impairment was determined to exist, any related
         impairment loss was calculated based on fair value. Fair value was
         determined based on discounted cash flows. The discount rate
         utilized by the Company was the rate of return expected from the
         market or the rate of return for a similar investment with similar
         risks. This reassessment resulted in the asset impairments listed
         above during 2001.

         As a result of the restructuring and revision to the Company's
         business model, the plan to implement an enterprise wide software
         system purchased in 2000 was discontinued, and accordingly, the
         cost of the software was expensed in 2002 and 2001.

         In addition to the impairments above, during 2002 and 2001, the
         Company recorded inventory reserves of $1.4 million and $4.0
         million, respectively and bad debt reserves of $1.3 million and
         $25.7 million, respectively. The inventory reserves are included in
         the Company's financial statements in cost of products and the bad
         debt reserves are included in selling, general and administrative
         expense.

         During the fourth quarter of 2000, the Company reviewed its
         goodwill and certain other investments for impairment and concluded
         that certain assets were impaired. At December 31, 2000, the
         Company recorded a charge of $6.4 million for permanent impairment.
         The Company acquired a 16% interest in ATEC Group, Inc. as of
         October 27, 2000. The Company issued 2,077,150 shares of its stock
         in exchange for its investment in ATEC. As of October 27, 2000 the
         Company's investment in ATEC was valued at $7.2 million. Due to a
         continued decline in the value of ATEC's common stock from October
         27, 2000 to December 31, 2001, the Company determined its
         investment in ATEC had experienced a decline in value that was
         other than temporary. As such, the Company reduced the value of its
         investment in ATEC by $3.6 million. On March 1, 2001, the Company
         rescinded the stock purchase transaction in accordance with the
         rescission provision in the ATEC common stock purchase agreement in
         consideration of a $1.0 million termination fee which was payable
         through the issuance of the Company's common stock.


    16.  LOSS/GAIN ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS

         The gain (loss) on sale of subsidiaries and business assets
         reported in continuing operations was $0.1 million, $(6.1) million,
         and $0.5 million for the years ended December 31, 2002, 2001 and
         2000, respectively. The loss of $6.1 million for 2001 was due to
         sales of the business assets of the Company's wholly-owned
         subsidiaries as follows: ADS Retail Inc., Signal Processors,
         Limited, ACT Wireless Corp. and our ATI Communications companies.
         In addition, the Company sold its 85% ownership interest in
         Atlantic Systems, Inc. (ASI). Proceeds from the sales were $3.5
         million and were used primarily to repay debt.

         See Note 18 for a discussion of dispositions related to
         Discontinued Operations companies.

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<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    17.  INCOME TAXES

         The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
                                                            2002            2001            2000
                                                         ------------------------------------------
<S>                                                        <C>           <C>             <C>
         Current:
           United States at statutory rates                 $392         $    --         $(1,675)
           International                                       3              --              --
           Current taxes covered by net operating
             loss                                             --            (565)             --
         ------------------------------------------------------------------------------------------
           Current income tax provision (credit)             395            (565)         (1,675)
         ------------------------------------------------------------------------------------------
         Deferred:
           United States                                     (69)         21,484          (3,005)
           International                                      --             (49)           (360)
         ------------------------------------------------------------------------------------------
           Deferred income taxes provision (credit)          (69)         21,435          (3,365)
         ------------------------------------------------------------------------------------------

                                                            $326         $20,870         $(5,040)
         ==========================================================================================
</TABLE>

         The tax effects of temporary differences and carryforwards that
         give rise to significant portions of deferred tax assets and
         liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                            2002           2001
                                                                      ----------------------------
<S>                                                                     <C>             <C>
         Deferred Tax Assets:
         Liabilities and reserves                                       $  6,000        $  6,511
         Stock-based compensation                                          7,779             118
         Property and equipment                                            2,115              --
         Net operating loss carryforwards                                 80,222          67,842
         -----------------------------------------------------------------------------------------
         Gross deferred tax assets                                        96,136          74,471
         Valuation allowance                                             (93,214)        (66,932)
         -----------------------------------------------------------------------------------------
                                                                           2,922           7,539
         -----------------------------------------------------------------------------------------
         Deferred Tax Liabilities:
         Accounts receivable                                                 366             359
         Installment sales                                                 1,151           4,866
         Property and equipment                                               --             730
         Intangible assets                                                   169             417
         -----------------------------------------------------------------------------------------
                                                                           1,686           6,372
         -----------------------------------------------------------------------------------------

         Net Deferred Tax Asset                                         $  1,236        $  1,167
         =========================================================================================
</TABLE>

         The current and long-term components of the deferred tax asset are
         as follows:

<TABLE>
<CAPTION>
                                                                            2002            2001
                                                                      ----------------------------

<S>                                                                       <C>             <C>
         Current deferred tax asset                                       $   13          $  171
         Long-term deferred tax asset                                      1,223             996
         -----------------------------------------------------------------------------------------

                                                                          $1,236          $1,167
         =========================================================================================
</TABLE>

         The valuation allowance for deferred tax asset increased by $26.3
         million and $51.1 million in 2002 and 2001, respectively, due
         mainly to the generation of net operating losses. The valuation
         allowance was provided for net deferred tax assets that exceeded
         the Company's available carryback and the level of existing
         deferred tax liabilities and projected pre-tax income. The deferred
         tax asset of $1.2 million and $1.2 million at December 31, 2002 and
         2001, respectively, relates entirely to the Company's 53% interest
         in SysComm International Corporation subsidiary, which files a
         separate federal income tax return.

         The ability of the Company to utilize its net operating losses in
         future years may be limited in accordance with the provisions of
         Section 382 of the Internal Revenue Code.

------------------------------------------------------------------------------
                                                                     Page F-40


<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Approximate domestic and international loss from continuing
         operations before provision for income taxes consists of:

<TABLE>
<CAPTION>
                                               2002               2001               2000
                                           -------------------------------------------------

<S>                                         <C>                <C>                <C>
         Domestic                           $(126,764)         $(168,017)         $(32,661)
         International                           (513)            (9,589)           (1,324)
         -----------------------------------------------------------------------------------

                                            $(127,277)         $(177,606)         $(33,985)
         ===================================================================================
</TABLE>

         At December 31, 2002, the Company had aggregate net operating loss
         carryforwards of approximately $194.0 million for income tax
         purposes that expire in various amounts through 2022. Approximately
         $9.0 million of the net operating loss carryforwards were acquired
         in connection with various acquisitions and are limited as to use
         in any particular year based on Internal Revenue Code sections
         related to separate return year and change of ownership
         restrictions. Digital Angel Corporation and SysComm International
         Corporation file separate federal income tax returns. Of the
         aggregate net operating loss carryforwards, $17.0 million and $4.0
         million relate to Digital Angel Corporation and SysComm
         International Corporation, respectively. These net operating loss
         carryforwards are available to only offset future taxable income of
         those companies.

         The reconciliation of the effective tax rate with the statutory
         federal income tax benefit rate is as follows:

<TABLE>
<CAPTION>
                                                          2002           2001          2000
                                                         ------------------------------------
                                                             %              %             %
                                                         ------------------------------------

<S>                                                        <C>            <C>           <C>
         Statutory benefit rate                             34             34            34
         Nondeductible goodwill amortization/impairment    (17)           (17)           (8)
         State income taxes, net of federal benefits        --             --             7
         International tax rates different from the
           the statutory US federal rate                    --             (2)           --
         Change in deferred tax asset valuation
            Allowance                                      (20)           (30)          (16)
         Other                                               3              3            (2)
---------------------------------------------------------------------------------------------

                                                            --            (12)           15
=============================================================================================
</TABLE>

    18.  DISCONTINUED OPERATIONS

         On March 1, 2001, the Company's Board approved a plan to offer for
         sale its IntelleSale business segment and several other noncore
         businesses. Accordingly, these operating results have been
         reclassified and reported as discontinued operations for all periods
         presented. The plan of disposal anticipated that these entities would
         be sold or closed within 12 months from March 1, 2001, the defined
         "measurement date".

         As of March 31, 2003, the Company has sold or closed all of the
         businesses comprising Discontinued Operations, except one. This
         Company had revenue and net loss for the year ended December 31,
         2002 of $0.7 million and $0.2 million, respectively. The Company
         anticipates selling or closing this remaining business in the next
         several months. Proceeds from the sale of Discontinued Operations
         companies were used to repay amounts outstanding under the IBM
         Credit Agreement. Any additional proceeds on the sale of the
         remaining business will also be used to repay debt.


         The following discloses the results of the discontinued operations for
         the period January 1, 2001 to March 1, 2001 and the years ended
         December 31, 2000:

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                                                                     Page F-41




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>
                                                                                      YEAR ENDED
                                                                 JANUARY 1, 2001     DECEMBER 31,
                                                                       TO            ------------
                                                                  MARCH 1, 2001          2000
                                                                  -------------          ----
<S>                                                                  <C>              <C>
         Product revenue                                             $ 13,039         $  137,901
         Service revenue                                                  846              6,826
                                                                     --------         ----------
         Total revenue                                                 13,885            144,727
                                                                     --------         ----------
         Cost of products sold                                         10,499            137,824
         Cost of services sold                                            259              5,315
                                                                     --------         ----------
           Total cost of products and services sold                    10,758            143,139
         Gross profit                                                   3,127              1,588
         Selling, general and administrative expenses                   2,534             40,697
         Gain on sale of subsidiaries                                      --             (4,617)
         Depreciation and amortization                                    264              4,217
         Interest, net                                                     29                187
         Impairment of assets                                              --             50,219
         (Benefit) provision for income taxes                              34            (13,614)
         Minority interest                                                 53                201
                                                                     --------         ----------
           Income (loss) income from discontinued operations         $    213         $  (75,702)
                                                                     ========         ==========
</TABLE>

         The above results do not include any allocated or common overhead
         expenses. Included in Interest, net, above are interest charges
         based on the debt of one of these businesses. This debt was repaid
         when the business was sold on January 31, 2002.

         Assets and liabilities of discontinued operations are as follows at
         December 31:

<TABLE>
<CAPTION>
                                                                                           2002             2001
                                                                                           ----             ----
<S>                                                                                     <C>              <C>
         Current Assets
            Cash and cash equivalents                                                   $    66          $    --
            Accounts receivable and unbilled receivables                                    167            5,745
            Inventories                                                                      38            4,430
            Notes receivable                                                                 --               --
            Prepaid expenses and other current assets                                        --              291
                                                                                        -------          -------
         Total Current Assets                                                               271           10,466

         Property and equipment, net                                                         56            3,553
         Notes receivable                                                                    --              242
                                                                                        -------          -------
                                                                                        $   327          $14,261
                                                                                        =======          =======

         Current Liabilities
            Notes payable and current maturities of long-term debt                      $    26          $ 5,040
            Accounts payable                                                              4,189            8,670
            Accrued expenses                                                              5,334            9,610
                                                                                        -------          -------
         Total Current Liabilities                                                        9,549           23,320

         Minority interest                                                                  146              401
                                                                                        -------          -------
                                                                                          9,695           23,721
                                                                                        -------          -------

         Net (Liabilities) Assets Of Discontinued Operations                            $(9,368)         $(9,640)
                                                                                        =======          =======
</TABLE>

         Provision for operating losses and carrying costs during the
         phase-out period included the estimated loss on sale of the
         business units as well as operating and other disposal costs
         incurred in selling the businesses. Carrying costs includes the
         cancellation of facility leases, employment contract buyouts, sales
         tax liabilities and reserves for certain legal expenses related to
         on-going litigation.

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                                                                     Page F-42




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         During 2002 and 2001, Discontinued Operations incurred a change in
         estimated loss on disposal and operating losses and carrying costs
         accrued on the measurement date of $(1.4) million and $16.7
         million, respectively. The primary reason for the reduction in
         estimated losses for 2002 was due to the settlement of litigation
         for an amount less than previously anticipated. The primary reasons
         for the excess losses in 2001 were due to inventory write-downs
         during the second quarter of 2001, a decrease in estimated sales
         proceeds as certain of the businesses were closed in the second and
         third quarters of 2001, an increase is legal expenses related to
         on-going litigation, additional sales tax liabilities and
         additional facility lease costs. The business closures in 2001 were
         the result of a combination of the deteriorating market condition
         for the technology sector as well as the Company's strategic
         decision to reallocate funding to our core businesses.

         Effective May 10, 2001, the Company sold its 80% ownership interest
         in Innovative Vacuum Solutions, Inc. (IVS) for $1.4 million, or
         $0.2 million less than the estimated proceeds at December 31, 2000.
         On October 1, 2001, the Company sold 100% of the stock of its
         wholly-owned subsidiary, Hopper Manufacturing Co., Inc. (Hopper)
         and on November 29, 2001, the Company sold substantially all of the
         business assets of GDB Software Services, Inc. (GDB). The sales
         proceeds for Hopper and GDB approximated the estimated proceeds of
         $0.6 million. In addition, in November 2001, the Company ceased
         operations for all of its Intellesale companies. On January 31,
         2002, the Company sold its 85% ownership interest in its Canadian
         subsidiary, Ground Effects, Ltd. The sales proceeds were $1.6
         million plus the repayment of the Canadian portion of the IBM debt,
         which resulted in an additional loss above the estimated loss on
         the measurement date of $1.2 million. On May 23, 2002, the Company
         sold certain business assets of U.S. Electrical Products Corp. for
         $0.1 million, which resulted in an additional loss above the
         estimate loss on the measurement date of $0.2 million.

         The Company does not anticipate a further loss on sale of the
         remaining business comprising Discontinued Operations. However,
         actual losses could differ from our estimates and any adjustments
         will be reflected in the Company's future financial statements.
         During the years ended December 31, 2002, 2001 and 2000, the
         estimated amounts recorded were as follows:

<TABLE>
<CAPTION>

         --------------------------------------------------------------------------------------
                                                               YEAR ENDED DECEMBER 31,
                                                          2002            2001           2000
                                                          ----            ----           ----
                                                               (amounts in thousands)
<S>                                                    <C>             <C>            <C>
         Operating losses and estimated loss on the
           sale of business units                      $   684         $13,010        $ 1,619
         Carrying Costs                                 (2,104)          3,685          6,954
         Less: Benefit for income taxes                     --              --         (1,307)
                                                     ------------------------------------------
                                                       $(1,420)        $16,695        $ 7,266
                                                     ==========================================
</TABLE>

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                                                                     Page F-43




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The following table sets forth the roll forward of the liabilities
         for operating losses and carrying costs from December 31, 2000
         through December 31, 2002. The additions represent changes in the
         estimated loss on sale or closure and actual losses in excess of
         estimated operating losses and carrying costs during the phase out
         period:

<TABLE>
<CAPTION>
                                            BALANCE                                              BALANCE
                                          DECEMBER 31,                                         DECEMBER 31,
                TYPE OF COST                 2000            ADDITIONS      DEDUCTIONS            2001
                ------------                 ----            ---------      ----------            ----
<S>                                       <C>               <C>             <C>                <C>
         Operating losses and
            estimated loss on sale        $    1,619        $   13,010      $   13,456         $    1,173
         Carrying costs                        6,954             3,685           3,421              7,218
                                          ----------        ----------      ----------         ----------
         Total                            $    8,573        $   16,695      $   16,877         $    8,391
                                          ==========        ==========      ==========         ==========
<CAPTION>
                                            BALANCE                                              BALANCE
                                          DECEMBER 31,                                         DECEMBER 31,
                TYPE OF COST                 2001            ADDITIONS      DEDUCTIONS            2002
                ------------                 ----            ---------      ----------            ----
<S>                                       <C>               <C>             <C>                <C>
         Operating losses and
            estimated loss on sale        $    1,173        $      684      $    1,857         $       --
         Carrying costs(1)                     7,218            (2,104)            206              4,908
                                          ----------        ----------      ----------         ----------
         Total                            $    8,391        $   (1,420)     $    2,063         $    4,908
                                          ==========        ==========      ==========         ==========

         <FN>
         ----------
         (1) Carrying costs at December 31, 2002, include all estimated
         costs to dispose of the discontinued businesses including $2.0
         million for future lease commitments, $1.8 million for severance
         and employment contract settlements, $1.0 million for sales tax
         liabilities and $0.1 million for litigation settlement.
</TABLE>

         Included in Discontinued Operations for 2000 is an IntelleSale
         pre-tax charge of $17.0 million recorded in the second quarter of
         2000. This charge was comprised of an inventory reserve of $8.5
         million for products IntelleSale expected to sell below cost
         (included in cost of goods and services sold), $5.5 million related
         to specific accounts and other receivables, and $3.0 million
         related to fees and expenses incurred in connection with
         IntelleSale's cancelled initial public offering and certain other
         intangible assets.

    19.  EXTRAORDINARY GAIN (LOSS)

         The Company recorded an extraordinary gain as a result of settling
         certain disputes between the Company and the former owners of
         Bostek, Inc. and an affiliate (Bostek). As part of the settlement
         agreement, the parties agreed to forgive a $9.5 million payable and
         the former owners of Bostek agreed invest up to $6 million in
         shares of our common stock provided the Company registered
         approximately 3.0 million common shares of the Company's common
         stock by June 15, 2001. The Company was successful in meeting the
         June 15, 2001 registration deadline and, accordingly, the
         extinguishment of the $9.5 million payable was recorded in 2001 as
         an extraordinary gain.

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<PAGE>
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APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    20.  EARNINGS (LOSS) PER SHARE

         A reconciliation of the numerator and denominator of basic and
         diluted EPS is provided as follows:
<TABLE>
<CAPTION>
                                                                                   2002           2001          2000
                                                                                   ----           ----          ----
<S>                                                                            <C>            <C>            <C>
         NUMERATOR:
            Loss from continuing operations                                    $(113,905)     $(198,086)     $ (29,174)
            Preferred stock dividends                                                 --         (1,147)          (191)
            Accretion of beneficial conversion feature
               of redeemable preferred stock                                          --         (9,392)        (3,857)
                                                                               ---------      ---------      ---------

         Numerator for basic earnings per share -
            Loss from continuing operations available to common
               stockholders                                                     (113,905)      (208,625)       (33,222)
            Net income (loss) from discontinued operations available to
               common stockholders                                                 1,420        (16,482)       (82,968)
            Extraordinary gain                                                        --          9,465             --
                                                                               ---------      ---------      ---------

            Net (loss) available to common stockholders                         (112,485)      (215,642)      (116,190)

         Effect of dilutive securities:
            Preferred stock dividends                                                 --             --             --
            Accretion of beneficial conversion feature of redeemable
               preferred stock                                                        --             --             --
                                                                               ---------      ---------      ---------

         Numerator for diluted earnings per share -
            Net income (loss) available to common stockholders                 $(112,485)     $(215,642)     $(116,190)
                                                                               =========      =========      =========

         DENOMINATOR:
            Denominator for basic and diluted earnings per
               share - weighted-average shares outstanding (1)                   269,232        170,009         63,825
                                                                               ---------      ---------      ---------

         EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
            Continuing operations                                              $   (0.42)     $   (1.23)     $    (.52)
            Discontinued operations                                                   --           (.10)         (1.30)
            Extraordinary gain (loss)                                                 --           0.06             --
                                                                               =========      =========      =========
         TOTAL - BASIC AND DILUTED                                             $   (0.42)     $   (1.27)     $   (1.82)
                                                                               =========      =========      =========

         <FN>
         --------
         (1)  The weighted average shares listed below were not included in the
              computation of diluted loss per share for the year ended December
              31, 2002, 2001 and 2000 because to do so would have been
              anti-dilutive.
</TABLE>

<TABLE>
<CAPTION>
                                                    2002       2001         2000
                                                    ----       ----         ----
<S>                                               <C>       <C>            <C>
         Redeemable preferred stock                   --    140,768          617
         Warrants                                  2,950         --          301
         Employee stock options                   15,399      4,173        2,741
                                                  ------    -------        -----
                                                  18,349    144,941        3,659
                                                  ======    =======        =====
</TABLE>


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<PAGE>
<PAGE>

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    21.  COMMITMENTS AND CONTINGENCIES

         Rentals of space, vehicles, and office equipment under operating
         leases amounted to approximately $2.0 million, $3.5 million and
         $2.9 million for the years ended December 31, 2002, 2001 and 2000,
         respectively.

         The approximate minimum payments required under operating leases
         and employment contracts that have initial or remaining terms in
         excess of one year at December 31, 2002 are as follows (in
         thousands):

<TABLE>
<CAPTION>
                                                     MINIMUM        EMPLOYMENT
                     YEAR                    RENTAL PAYMENTS         CONTRACTS
                     ------------------------------------------------------------

<S>                  <C>                            <C>                <C>
                     2003                           $  1,385           $ 2,483
                     2004                              1,061             1,404
                     2005                                696               789
                     2006                                427               671
                     2007                                357                51
                     Thereafter                       11,113                --
                     ------------------------------------------------------------

                                                    $ 15,039           $ 5,398
                     ============================================================
</TABLE>

         The Company has entered into employment contracts with key officers
         and employees of the Company. The agreements are for periods
         ranging from one to five years through February 2007. Some of the
         employment contracts also call for bonus arrangements based on
         earnings of a particular subsidiary. The Company recorded $0.5
         million associated with these bonus arrangements during 2002.

         On March 24, 2003, the Company terminated its employment agreements
         with two of its executive officers. The terms of the IBM Credit
         Agreement limited the amount of salary the Company could pay these
         executive officers in cash and prevented the Company from making
         certain cash incentive and perquisite payments to these executive
         officers. These terminations are more fully discussed in Note 27.

         Effective December 31, 2001, one of the Company's directors, who
         had previously been an executive officer of the Company, retired
         and resigned from the Board of Directors. As part his termination
         agreement, the Company agreed to grant him 2.5 million shares of
         the Company's common stock the value of which was recorded as
         compensation expense in the year ended December 31, 2001.

         According to the terms of the trust agreement for the Digital Angel
         Trust, if amounts due IBM Credit by the Company are not paid when
         due, or if the Company is otherwise in default under the
         forbearance agreement or IBM Credit Agreement (as more fully
         discussed in Note 2) and the Company's obligations are accelerated,
         IBM Credit will have the right to require that the shares of the
         Digital Angel Corporation common stock held in the Digital Angel
         Trust be sold to provide funds to satisfy the obligations of the
         Company to IBM Credit.

         POSSIBLE CONSEQUENCES OF SALES OF THE DIGITAL ANGEL TRUST SHARES

         If we are required to sell the shares held in the Digital Angel
         Trust for an amount less than our current book value, we would
         incur a significant non-cash charge and our financial position and
         operating results would be materially adversely effected.

         In addition, under the terms of the employment agreement dated
         March 8, 2002, as amended, by and between the Digital Angel
         Corporation and Randolph K. Geissler (the President and Chief
         Executive Officer of the Digital Angel Corporation), a "change in
         control" occurs under that employment agreement if any person
         becomes the "beneficial owner" (as defined in Rule 13d-3 under the
         Securities Exchange Act of 1934), directly or indirectly, of
         securities of the Digital Angel Corporation representing 20% or
         more of the combined voting power of the then outstanding shares of
         common stock. Therefore, if the Digital Angel Trust were to sell
         more than approximately 5.3 million shares of the Digital Angel
         Corporation common stock, such sale would constitute a change in
         control under the employment agreement with Mr. Geissler. Upon the
         occurrence of a change in control, Mr. Geissler, at his sole option
         and discretion, may terminate his employment with the Digital Angel
         Corporation at any time within one year after such change in
         control upon 15 days' notice. In the event of such termination, the

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                                                                     Page F-46




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         employment agreement provides that the Digital Angel Corporation
         must pay to Mr. Geissler a severance payment equal to three times
         the base amount as defined in Section 280G(b)(3) of the Internal
         Revenue Code of 1986, as amended ("Code") minus $1.00 (or a total
         of approximately $750,000), which would be payable no later than
         one month after the effective date of Mr. Geissler's termination of
         employment. In addition, upon the occurrence of a change of control
         under the employment agreement, all outstanding stock options held
         by Mr. Geissler would become fully exercisable. As of December 31,
         2002, Mr. Geissler owned options to purchase 1.0 million shares for
         $3.39 per share none of which had vested, which would become
         exercisable upon the occurrence of such a change in control.

         The employment agreement also provides that upon (i) a change of
         control, (ii) the termination of Mr. Geissler's employment for any
         reason other than due to his material default under the employment
         agreement, or (iii) if he ceases to be the Digital Angel
         Corporation's President and Chief Executive Officer for any reason
         other than termination due to his material default under the
         employment agreement, within 10 days of the occurrence of any such
         events, the Digital Angel Corporation is to pay to Mr. Geissler
         $4,000,000. Digital Angel Corporation may pay such amount in cash
         or in its common stock or with a combination of cash and common
         stock. The employment agreement also provides that if the
         $4,000,000 is paid in cash and stock, the amount of cash paid must
         be sufficient to cover the tax liability associated with such
         payment, and such payment shall otherwise be structured to maximize
         tax efficiencies to both the Digital Angel Corporation and Mr.
         Geissler.

         Also, effective October 30, 2002, the Digital Angel Corporation
         entered into a Credit and Security Agreement with Wells Fargo. The
         Credit and Security Agreement provides that a "change in control"
         under that agreement results in a default. A change in control is
         defined as either Mr. Geissler ceasing to actively manage the
         Digital Angel Corporation's day-to-day business activities or the
         transfer of at least 25% of the outstanding shares of Digital Angel
         Corporation's. Also, if the Digital Angel Corporation owes Mr.
         Geissler $4,000,000 under his employment agreement, the obligation
         would most likely result in a breach of the Digital Angel
         Corporation's financial covenants under the Credit and Security
         Agreement. If these defaults occurred and were not waived by Wells
         Fargo, and if Wells Fargo were to enforce these defaults under the
         terms of the Credit and Security Agreement and related agreements,
         Digital Angel Corporation's and the Company's business and
         financial condition would be materially and adversely affected, and
         it may force the Digital Angel Corporation to cease operations.

    22.  PROFIT SHARING PLAN

         The Company has a 401(k) Plan for the benefit of eligible United
         States employees. The Company has made no contributions to the
         401(k) Plan.

         The Company's International subsidiaries operate certain defined
         contribution pension plans. The Company's expense relating to the
         plans approximated $0.1 million, $0.2 million and $0.2 million for
         the years ended December 31, 2002, 2001 and 2000, respectively.

    23.  LEGAL PROCEEDINGS

         The Company is party to various legal proceedings, and accordingly,
         has recorded $1.7 million reserves in its financial statements at
         December 31, 2002. In the opinion of management, these proceedings
         are not likely to have a material adverse affect on the financial
         position or overall trends in results of the Company. The estimate
         of potential impact on the Company's financial position, overall
         results of operations or cash flows for the above legal proceedings
         could change in the future.

         In May 2002, a class action was filed against the Company and one of
         its directors. Fourteen virtually identical complaints were
         consolidated into a single action, in re Applied Digital Solutions
         Litigation, which was filed in the United States District Court for
         the Southern District of Florida. In March 2003, the Company entered
         into a memorandum of understanding to settle the pending lawsuit. The
         settlement of $5.6 million, which is subject to various conditions is
         expected to be covered by proceeds from insurance.

    24.  SUPPLEMENTAL CASH FLOW INFORMATION

         The changes in operating assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                         ---------------------------------------------
                                                           2002              2001               2000
                                                           ----              ----               ----
<S>                                                      <C>               <C>                <C>
         (Increase) decrease in accounts receivable
            and unbilled receivables                     $ 5,350           $16,020            $(6,359)
         (Increase) decrease in inventories                 (247)            4,090                607
         Decrease in other current assets                  2,453             2,969                843
         Increase in other assets                            361             1,626                 --
         Increase (decrease) in accounts payable,
            accrued expenses and other liabilities         9,249             3,660               (668)
                                                         -------           -------            -------
                                                         $17,166           $28,365            $(5,577)
                                                         =======           =======            =======
</TABLE>


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<PAGE>
<PAGE>

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In the years ended December 31, 2002, 2001, and 2000, the Company
         had the following noncash investing and financing activities:

<TABLE>
<CAPTION>
                                                                       2002            2001          2000
                                                                       ----            ----          ----
<S>                                                                    <C>           <C>           <C>
         Assets acquired for common stock                              $--           $10,201       $168,319
         Due from buyer of divested subsidiary                          --             2,625             --
         Common stock issued for services                               --               207            125
         Assets acquired for long-term debt and capital leases          --                --          2,201
         Common stock issued upon conversion of preferred stock         --            14,550             --
</TABLE>

    25.  SEGMENT INFORMATION

         As a result of the merger of pre-merger Digital Angel and MAS, the
         significant restructuring of the Company's business during the
         first quarter of 2002 and the Company's emergence as an advanced
         technology development company, the Company has re-evaluated and
         realigned its reporting segments. On January 1, 2002, the Company
         began operating in the three business segments Advanced Technology,
         Digital Angel Corporation and SysComm International.

         Business units that were part of the Company's continuing
         operations and that were closed or sold during 2001 and 2002 are
         reported as All Other.

         The "Corporate/Eliminations" category includes all amounts
         recognized upon consolidation of the Company's subsidiaries such as
         the elimination of intersegment revenues, expenses, assets and
         liabilities. "Corporation/Eliminations" also includes certain
         interest expense and other expenses associated with corporate
         activities and functions. Included in "Corporate/Eliminations" for
         the year ended December 31, 2002, is a non-cash compensation charge
         of $18.7 million associated with pre-merger Digital Angel options,
         which were converted into options to acquire shares of MAS in
         connection with the merger of pre-merger Digital Angel and MAS.

         Prior to January 1, 2002, the Company's business units were
         organized into the three segments Applications, Services and
         Advanced Wireless. Prior period information has been restated to
         present the Company's reportable segments on a comparative basis.

         Advanced Technology, Digital Angel Corporation and SysComm
         International's product and services are as follows:

         OPERATING SEGMENT          PRINCIPAL PRODUCTS AND SERVICES
         -----------------          -------------------------------
         Advanced Technology
                                    o Call center solutions
                                    o Customer relationship management
                                    o Website design
                                    o Internet access
                                    o Software development
                                    o Cable/fiber infrastructure
                                    o Miniaturized implantable verification chip
                                    o Miniaturized power generator

         Digital Angel Corporation
                                    o  Animal Applications
                                    o  Wireless and Monitoring
                                    o  GPS and Radio Communications
                                    o  Medical Systems


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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         SysComm International
                                    o  Systems integration
                                    o  Information technology, procurement,
                                       and logistics
                                    o  Technology strategy

         The accounting policies of the operating segments are the same as
         those described in the summary of significant accounting policies,
         except that intersegment sales and transfers are generally
         accounted for as if the sales or transfers were to third parties at
         current market prices; segment data includes an allocated charge
         for the corporate headquarters costs. It is on this basis that
         management utilizes the financial information to assist in making
         internal operating decisions. The Company evaluates performance
         based on stand alone segment operating income.

<TABLE>
<CAPTION>
                                                                          2002 (IN THOUSANDS)
                                         --------------------------------------------------------------------------------------
                                          ADVANCED    DIGITAL ANGEL     SYSCOMM                     CORPORATE AND
                                         TECHNOLOGY    CORPORATION    INTERNATIONAL    ALL OTHER    ELIMINATIONS   CONSOLIDATED
                                         ----------   -------------   -------------    ---------    -------------  ------------
<S>                                        <C>          <C>              <C>            <C>           <C>            <C>
Net revenue from external customers        $41,930      $ 33,561         $22,721        $1,388        $     --       $ 99,600
Intersegment net revenue                        --            70              --            --             (70)            --
                                           -------      --------         -------        ------        --------       --------
Total revenue                              $41,930      $ 33,631         $22,721        $1,388        $    (70)      $ 99,600
                                           =======      ========         =======        ======        ========       ========

Depreciation and amortization              $   569      $  3,638         $   262        $    9        $    295       $  4,773
Asset impairment                                --        68,597              --            --             785         69,382
Interest income                                239           601              45            --           1,471          2,356
Interest expense                               422           303             184           148          16,467         17,524
Loss from continuing operations
  before provision for income taxes,
  minority interest, net loss on
  subsidiary merger transaction,
  and equity in net loss of
  affiliate (1)                               (786)      (76,439)           (422)         (320)        (49,310)      (127,277)
Goodwill, net                               18,212        47,452           2,154            --              --         67,818
Segment assets                              41,404        67,798           9,340         2,753          (4,062)       117,233
Expenditures for property and
  equipment                                    340         1,439              41            --              38          1,858

<FN>
(1) For Digital Angel Corporation, amount excludes $1.8 million of interest
    expense associated with the Company's obligation to IBM Credit and $18.7
    million of non-cash compensation expense associated with pre-merger
    Digital Angel options which were converted into options to acquire MAS
    stock, both of which have been reflected as additional expense in the
    separate financial statements of Digital Angel Corporation included in
    its Form 10-K dated December 31, 2002.

<CAPTION>
                                                                          2001 (IN THOUSANDS)
                                         --------------------------------------------------------------------------------------
                                          ADVANCED    DIGITAL ANGEL     SYSCOMM                     CORPORATE AND
                                         TECHNOLOGY    CORPORATION    INTERNATIONAL    ALL OTHER    ELIMINATIONS   CONSOLIDATED
                                         ----------   -------------   -------------    ---------    -------------  ------------
<S>                                        <C>          <C>             <C>            <C>           <C>            <C>
Net revenue from external customers        $ 44,570      $ 35,738       $34,175        $ 41,292      $    539       $ 156,314
Intersegment net revenue                        232           964            --             870        (2,066)             --
                                           --------      --------       -------        --------      --------       ---------
Total revenue                              $ 44,802      $ 36,702       $34,175        $ 42,162      $ (1,527)      $ 156,314
                                           ========      ========       =======        ========      ========       =========

Depreciation and amortization              $  9,088      $ 12,298       $   503        $  4,768      $  2,242       $  28,899
Asset impairment                             30,453           726            --          32,427         8,113          71,719
Interest and other income                        20            17            68              34         1,937           2,076
Interest expense                                216           529           325           1,465         6,020           8,555
Income (loss) from continuing
  operations before provision for
  income taxes, minority interest,
  equity in net loss of affiliate and
  extraordinary gain                        (41,493)      (16,262)       (1,322)        (71,636)      (46,893)       (177,606)
Goodwill, net                                15,379        73,095         2,357              --            --          90,831
Segment assets                               38,247       105,042        15,004           4,968         4,228         167,489
Expenditures for property and equipment         151         1,591           490           1,703        10,226          14,161


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                                                                     Page F-49




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<CAPTION>
                                                                          2000(IN THOUSANDS)
                                         --------------------------------------------------------------------------------------
                                          ADVANCED    DIGITAL ANGEL     SYSCOMM                     CORPORATE AND
                                         TECHNOLOGY    CORPORATION    INTERNATIONAL    ALL OTHER    ELIMINATIONS   CONSOLIDATED
                                         ----------   -------------   -------------    ---------    -------------  ------------
<S>                                        <C>          <C>             <C>             <C>           <C>            <C>
Net revenue from external customers        $32,354      $22,252         $27,288         $52,681       $    191       $134,766
Intersegment net revenue                        --           --              --           5,142         (5,142)            --
                                           -------      -------         -------         -------       --------       --------
Total revenue                              $32,354      $22,252         $27,288         $57,823       $ (4,951)      $134,766
                                           =======      =======         =======         =======       ========       ========

Depreciation and amortization              $ 2,990      $ 2,962         $   176         $ 3,366       $  1,579       $ 11,073
Asset impairment                                --           --              --             818          5,565          6,383
Interest and other income                     (431)           9              17              17          1,483          1,095
Interest expense                               117           98             112           1,213          4,361          5,901
Income (loss) from continuing
  operations before provision for
  income taxes and minority interest        (1,544)      (3,816)            923          (5,714)       (23,834)       (33,985)
Goodwill, net                               49,431       77,464           2,330          36,779             --        166,024
Segment assets                              77,463       95,582          16,434          68,741         53,155        311,375
Expenditures for property and equipment        155          758               7           1,183          6,288          8,391
</TABLE>


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                                                                     Page F-50




<PAGE>
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Segment assets do not include net assets of discontinued operations
         of $0 million, $0 million and $8.1 million, in 2002, 2001, and
         2000, respectively.

         Approximately $31.3 million, or 74.7%, and $27.4 million, or 61.5%,
         of the Company's Advanced Technology segment's revenue for 2002
         and 2001, respectively, were generated by its wholly-owned
         subsidiary, Computer Equity Corporation. Approximately 99.1% and
         77.7% of Computer Equity Corporation's revenue during 2002 and
         2001, respectively, were generated through sales to various
         agencies of the United States Federal Government.

         For 2002, Digital Angel Corporation's top five customers,
         Schering-Plough, US Army Corps of Engineers, Biomark, Pacific
         States Marine and San Bernardino County, accounted for 31.8% this
         segment's revenue, however, no single customer accounted for more
         than 10% of the segment's revenue. For 2001, the top five
         customers, Schering Plough, Merial, Pacific States Marine, San
         Bernardino County and the US Army Corps of Engineers accounted for
         30.6% of this segment's revenue, one of which accounted for 10.4%
         of the segment's revenue.

         For 2002, five customers, SysComm International's top five
         customers, Deutsche Bank, Hackensack University Medical Center,
         Liberty Mutual, Morgan Stanley and Polytechnic University,
         accounted for 23%, 22%, 11%, 11% and 11% of SysComm
         International's revenue, respectively. For 2001, two customers,
         Liberty Mutual and Mass Mutual Life Insurance accounted for 40% and
         31% of SysComm International's revenue, respectively.

         Sales to an individual customer did not exceed 10% of a segment's
         revenue during 2000.

         Goodwill by segment for the year ended December 31, 2002 is as
         follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31, 2002
                                         --------------------------------------------------------------------------------------
                                          ADVANCED    DIGITAL ANGEL     SYSCOMM
                                         TECHNOLOGY    CORPORATION    INTERNATIONAL    ALL OTHER      CORPORATE    CONSOLIDATED
                                         ----------   -------------   -------------    ---------      ---------    ------------
<S>                                        <C>          <C>              <C>            <C>           <C>            <C>
Balance As of January 1, 2002              $15,212      $ 72,876         $2,154          $ --           $ 589        $ 90,831
Goodwill acquired during the year            3,000        36,761             --            --              --          39,761
Other adjustment                                --*           --             --            --            (589)           (589)
Impairment Losses                               --       (62,185)            --            --              --         (62,185)
Balance as of December 31, 2002            $18,212      $ 47,452         $2,154          $ --           $  --        $ 67,818
</TABLE>

         Revenues are attributed to geographic areas based on the location
         of the assets producing the revenue. Information concerning
         principal geographic areas as of and for the years ended December
         31, was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                     UNITED
                                           UNITED STATES          CANADA            KINGDOM          CONSOLIDATED
                                       --------------------------------------------------------------------------------
<S>                                             <C>                <C>              <C>                  <C>
         2002
         Net revenue                            $ 88,190           $  --            $11,410              $ 99,600
         Long-lived tangible assets               15,379              --                855                16,234
         Deferred tax asset                        1,236              --                 --                 1,236
         --------------------------------------------------------------------------------------------------------------


         2001
         Net revenue                            $138,887           $  --            $17,427              $156,314
         Long-lived tangible assets               19,193              --                992                20,185
         Deferred tax asset                        1,167              --                 --                 1,167
         --------------------------------------------------------------------------------------------------------------


         2000
         Net revenue                            $118,849           $ 766            $15,151              $134,766
         Long-lived tangible assets               20,044              --              1,324                21,368
         Deferred tax asset (liability)           21,426            (204)               564                21,786
         --------------------------------------------------------------------------------------------------------------
</TABLE>

    26.  NASDAQ LISTING REQUIREMENTS

                  From July 12, 2002, to July 30, 2002, the Company's common
         stock was traded on the Pink Sheets under the symbol "ADSX.PK."
         Prior to that time, the Company's shares were traded on the Nasdaq
         National Market (NasdaqNM). Effective July 31, 2002, the Company's
         shares were relisted on the NasdaqNM under the symbol "ADSX." As a
         condition of the relisting, NasdaqNM advised the Company that it
         had until October 25, 2002, to regain compliance with the minimum
         closing bid price requirement of at least $1.00 per share, and,
         immediately following, a closing bid price of at least $1.00 per
         share for a minimum of ten (10) consecutive trading days. The
         Company was unable to satisfy the minimum closing bid price
         requirement by October 25, 2002, and, as a result,

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         effective November 12, 2002, the Company's common stock began trading
         on the Nasdaq SmallCap Market (SmallCap), under its existing stock
         symbol ADSX. The Company expects to have until October 2003, in which
         to regain the minimum bid requirement of at least $1.00 per share for
         a minimum of ten (10) consecutive trading days to maintain its
         SmallCap listing, providing the Company continues to comply with the
         SmallCap's other listing requirements which, as of December 31, 2002
         it was not in compliance with.

    27.  SUBSEQUENT EVENTS

         On March 21, 2003, Richard J. Sullivan retired from the Company.
         Replacing him as Chairman of the Board and Chief Executive Officer
         is Scott R. Silverman, the Company's current President and
         Director. The Company's Board of Directors negotiated a
         satisfactory severance agreement with Mr. Sullivan. Under the
         terms, Mr. Sullivan will receive a one-time payment of 56.0 shares
         of the Company's common stock, and 11.6 million re-priced stock
         options. The options surrendered had exercise prices ranging from
         $0.15 to $0.32 per share and were replaced with options exercisable
         at $0.01 per share. Under the terms of Mr. Sullivan's employment
         contract, the Company would have been obligated to make payments in
         cash or stock of up to $17 million to Mr. Sullivan.

         On March 21, 2003, Jerome C. Artigliere resigned from his positions
         of Senior Vice President and Chief Operating Officer. Under the
         terms of his severance agreement, Mr. Artigliere will receive 4.8
         million shares of the Company's common stock and 2.3 million
         re-priced stock options. The options surrendered had exercise
         prices ranging from $0.15 to $0.32 per share and were replaced with
         options exercisable at $0.01 per share. Replacing Mr. Artigliere is
         Kevin H. McLaughlin. Mr. McLaughlin has served most recently as
         SysComm International Corporation's Chief Executive Officer.

         On March 27, 2003, the Company announced that it had executed a
         forbearance agreement term sheet with IBM Credit. The forbearance
         agreement, which becomes effective on or about March 31, 2003,
         allows for the forbearance of the obligations due under the IBM
         Credit Agreement, provides for more favorable loan repayment terms,
         reduces the interest rate on the Tranche B portion of the debt to
         7% per annum and provides for purchase rights. The forbearance
         agreement term sheet is more fully describe in Note 2.

    28.  RECENT EVENT

         The staff of the Securities and Exchange Commission's Southeast
         Regional Office is conducting an informal inquiry concerning the
         Company. The Company is fully and voluntarily cooperating with this
         informal inquiry. At this point, the Company is unable to determine
         whether this informal inquiry may lead to potentially adverse
         action.

    29.  SUMMARIZED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      FIRST       SECOND        THIRD        FOURTH        FULL
                                                                     QUARTER      QUARTER      QUARTER       QUARTER       YEAR
                                                                     -------      -------      -------       -------       ----
<S>                                                                  <C>          <C>          <C>          <C>          <C>
         2002
         Total revenue                                               $ 28,219     $ 25,836     $23,903      $ 21,642     $  99,600
         Gross profit                                                   9,378        8,728       8,735         5,041        31,882
         Net loss from continuing operations (1)                      (24,692)     (19,473)     (5,751)      (63,989)     (113,905)
         Net income (loss) from discontinued operations                   687         (463)       (119)        1,315         1,420
         Basic and diluted net loss per share from Continuing
           Operations (5)                                               (0.10)       (0.07)      (0.02)        (0.23)        (0.42)
         Basic and diluted net income (loss) per share from
           Discontinued Operations (5)                                   0.01        (0.01)         --            --            --


<CAPTION>
                                                                      FIRST       SECOND        THIRD        FOURTH        FULL
                                                                     QUARTER      QUARTER      QUARTER       QUARTER       YEAR
                                                                     -------      -------      -------       -------       ----
<S>                                                                  <C>          <C>         <C>           <C>          <C>
         2001 - AS REPORTED
         Net operating revenue                                       $ 47,409     $ 39,871    $  41,366     $ 27,668     $ 156,314
         Gross profit                                                  17,348       14,311        6,522        8,294        46,475
         Net loss from Continuing Operations(2)                       (11,393)     (29,346)    (109,349)     (47,998)     (198,086)
         (Loss) income from Discontinued Operations(3)                    213      (21,789)        (748)       5,842       (16,482)
         Loss before extraordinary gain                               (11,180)     (51,135)    (110,097)     (42,156)     (214,568)
         Basic and diluted loss per share from
           Continuing Operations(5)                                     (0.13)       (0.22)       (0.56)       (0.18)        (1.23)
         Basic and diluted loss per share from
           Discontinued Operations(5)                                      --        (0.16)          --         0.02         (0.10)
         Basic and diluted income per share from
           extraordinary gain(4) (5)                                       --         0.07           --           --          0.06

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------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         2001 - ADJUSTED FOR CHANGE IN METHOD OF
             ACCOUNTING FOR GOODWILL(A)
         Net operating revenue                                       $ 47,409     $ 39,871    $   41,366     $ 27,668    $ 156,314
         Gross profit                                                  17,348       14,311         6,522        8,294       46,475
         Net loss from Continuing Operations(2)                        (5,865)     (23,221)     (103,036)     (43,491)    (175,613)
         (Loss) income from Discontinued Operations(3)                    213      (21,789)         (748)       5,842      (16,482)
         Loss before extraordinary gain                                (5,652)     (45,010)     (103,784)     (37,649)    (192,095)
         Basic and diluted loss per share from
            Continuing Operations(5)                                    (0.06)       (0.17)        (0.52)       (0.18)       (1.03)
         Basic and diluted loss per share from
            Discontinued Operations(5)                                     --        (0.16)           --         0.02        (0.10)
         Basic and diluted income per share from
            extraordinary gain(4) (5)                                      --         0.07            --           --         0.06


<FN>
      A. CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

         Effective January 1, 2002, the Company adopted Statement of
         Financial Accounting Standard No. 142 Goodwill and Other Intangible
         Assets (FAS 142). FAS 142 requires that goodwill and certain
         intangibles no longer be amortized, but instead tested for
         impairment at least annually. There was no impairment of goodwill
         upon adoption of FAS 142. The Company performed its annual review
         for impairment during the fourth quarter of 2002, which resulted in
         an impairment charge of $62.2 million in 2002. There can be no
         assurance that future goodwill impairment tests will not result in
         additional impairment charges.

     (1) First quarter of 2002 loss from Continuing Operations includes a
         non-cash compensation charge of approximately $18.7 million
         associated with pre-merger Digital Angel options. Pursuant to the
         terms of the merger of pre-merger Digital Angel and MAS, options to
         acquire pre-merger Digital Angel common stock were converted into
         options to acquire shares of MAS commons stock, which resulted in a
         new measurement date for the options. In addition, the Company
         incurred a loss on issuances of subsidiary stock of approximately
         $3.9 million. Second quarter of 2002 loss from Continuing
         Operations includes non-cash compensation expense of $6.1 million
         associated with options that were re-priced in 2001, and valuation
         reserves on notes receivable from officers and directors. Third
         quarter of 2002 loss from Continuing Operations includes a reversal
         of approximately $2.9 million of non-cash compensation expense
         associated with the options re-priced in 2001, and a reversal of
         approximately $0.9 million of bad debt reserves. Fourth quarter of
         2002 loss from Continuing Operations includes asset impairments of
         $69.4 million.

     (2) Third quarter of 2001 loss from Continuing Operations includes
         asset impairment charges of $68,764, inventory reserves of $4,261,
         loss on disposition of assets of $3,967 and non-cash compensation
         expense of $1,231. Fourth quarter of 2001 loss from Continuing
         Operations includes asset impairment charges of $2,955, loss on
         disposition of assets of $2,091 and non-cash compensation expense
         of $4,042, and bad debt reserves of $12,758.

     (3) Second quarter of 2001 loss from Discontinued Operations includes a
         change in estimate on loss on disposal and operating losses during
         the phase out period of $21,789. Third quarter of 2001 loss from
         Discontinued Operations includes a change in estimate on loss on
         disposal and operating losses during the phase out period of $748.

     (4) Second quarter extraordinary gain results from the forgiveness of
         debt associated with the Bostek acquisition. See Note 19.

     (5) Earnings per share are computed independently for each of the
         quarters presented. Therefore, the sum of the quarterly net
         earnings per share will not necessarily equal the total for the
         year.
</TABLE>

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