As filed with the Securities and Exchange Commission on April 10, 2001
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                     --------------------------------------

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
              (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, 2000
                                       or
           [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
        For the transition period from _______________ to _______________

                        Commission file number: 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
               incorporation or organization) Identification No.)
                               400 Royal Palm Way
                                    Suite 410
                            Palm Beach, Florida 33480
                                 (561) 366-4800
                   (Address, including zip code, and telephone
             number, including area code, of registrant's principal
                               executive offices)

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

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. [X]

At April 2, 2001, the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was approximately $206,347,412.

At April 2, 2001, 126,986,023 shares of our common stock were outstanding.

Documents Incorporated by Reference:  None


<PAGE>


                                Table of Contents

Item                               Description                              Page

                                     PART I

1.   Business                                                                  3
2.   Properties                                                               17
3.   Legal Proceedings                                                        18
4.   Submission of Matters to a Vote of Security Holders                      19

                                     PART II

5.   Market for Registrant's Common Equity and Related
       Stockholder Matters                                                    20
6.   Selected Financial Data                                                  22
7.   Management's Discussion and Analysis of Financial Condition
     and Results of Operations                                                24
7A.  Quantitative and Qualitative Disclosures About Market Risk               45
8.   Financial Statements and Supplementary Data                              45
9.   Changes in and Disagreements With Accountants on
     Accounting and Financial Disclosures                                     45

                                    PART III

10.  Directors and Executive Officers of the Registrant                       47
11.  Executive Compensation                                                   51
12.  Security Ownership of Certain Beneficial Owners and Management           58
13.  Certain Relationships and Related Transactions                           61

                                     PART IV

14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
     Signatures                                                               62


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                                     PART I

     ITEM 1.      BUSINESS

     GENERAL

     Applied Digital  Solutions,  Inc. is an information  management  technology
company. We deliver intelligent integrated information solutions through what we
call the "I3 Services  Platform."  We deliver our  solutions  through three core
business  segments,  Applications,  Services and Advanced  Wireless,  which work
together  to achieve  heightened  efficiencies  for  Applied  Digital and better
offerings for our customers.

     Our I3 Services  Platform is the next generation of CTII(TM),  or computer,
telephony  and  Internet  integration.  The  I3  Services  Platform  offers  the
following  enhancements  over CTII:

     o    For our  customers,  the I3  Services  Platform  not only allows us to
          offer integrated  media  solutions,  it allows our customers to manage
          the  information  carried  by  those  media  and to  benefit  from the
          technological progress of our Advanced Wireless division.

     o    For our sales team, the I3 Services Platform encourages  cross-selling
          of our different products and services.

     o    For our financial  performance,  the I3 Services Platform furthers our
          mission to reduce  enterprise  costs by eliminating  redundancies  and
          inefficiencies.

     The I3 Services Platform provides value by enabling our clients to collect,
organize,  analyze,  warehouse and disseminate  information.  Better information
leads  to  better  decision-making.  In  today's  ever-changing  environment  of
immediate  information,  the rigorous management of information across different
media allows our customers to react  rapidly and  intelligently  to  challenges.
More  importantly,  the I3 Services Platform allows our customers to proactively
improve their business to anticipate and stay ahead of challenges.

     In March, 2001 our board of directors  approved the sale of our Intellesale
business  segment  and all of our other  non-core  subsidiaries.  Our results of
operations,  financial  condition and cash flows now reflect these operations as
"Discontinued" and prior periods have been restated.

     We operate in three geographic  areas:  the United States,  which comprises
the majority of our operations;  Canada;  and the United  Kingdom.  Our Canadian
operations were comprised of a telecommunications  company, which we disposed of
in 1999, and an automotive  manufacturing  and engineering  company.  Our United
Kingdom  operations  are  comprised of companies  in our  Applications  segment,
described below. With the exception of a non-core  manufacturing and engineering
company in Canada,  the majority of our revenues and expenses in each geographic
area, both from continuing and  discontinued  operations,  were generated in the
same  currencies.  Approximately  40%,  34%  and  10% of the  manufacturing  and
engineering  company's  revenues  were  generated in U.S.  dollars for the years
ended December 31, 2000, 1999 and 1998, respectively, while 100% of its expenses
were incurred in Canadian dollars during the same periods.  We did not incur any
significant  foreign  currency  gains or losses  during  the three  years  ended
December 31, 2000.

     The  majority  of our  current  operations  are the result of  acquisitions
completed  during the last five years.  Our revenues from continuing  operations
were $134.8 million,  $129.1 million,  $74.3 million,  $41.6 million,  and $14.1
million  respectively,  in 2000,  1999,  1998,  1997, and 1996. Since January 1,
1996,  we have  completed  51  acquisitions,  and since  January 1, 2000 we have
completed 10 acquisitions. Management employs an acquisition committee to assess
acquisition  opportunities.  The  committee is  comprised of several  members of

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senior management on a corporate level with representation from key members from
the operating units. The committee uses various criteria including:

     o    the strategic importance to the I3 Service Platform.

     o    profitability over a selected time period.

     o    the strength of the balance sheet.

     o    the strength of the customer base, and

     o    management experience.

     We are a Missouri  corporation  and were  incorporated on May 11, 1993. Our
principal  office is  located  at 400 Royal Palm Way,  Suite  410,  Palm  Beach,
Florida 33480, and our phone number is (561) 366-4800.

     Business Segments

     Our business is currently  organized into three industry groups or business
segments:  the Applications Group, the Services Group, and the Advanced Wireless
Group.  These  three  segments  form the  nucleus  of our newly  implemented  I3
Services Platform. Each segment has, or is in the process of naming, a president
to whom a variety of operating  companies  report.  Each segment  president,  in
turn, reports to our President.

     Prior to January 2, 2001, our business was organized  into four  technology
groups or industry segments: Networking,  Internet, Applications, and Telephony.
Combined,  these  groups  formed  the  basis of the CTII  strategy  that was the
predecessor to our I3 Services  Platform.  With the arrival of our new President
and Chief Operating  Officer,  Mercedes Walton, our strategy has evolved to more
adequately  promote our product and service  offerings in the marketplace and to
more fully  integrate our business  units. In January 2001, we introduced the I3
Service Platform.  Prior years segment  information has been restated to reflect
our current business segments.

     Prior to March 1999, our business was organized into four business  groups,
or industry  segments:  the Services and  Solutions  Group  (formerly the Retail
Group), the Computer Group, the Manufacturing Group and the International Group.
Each  operating  business was conducted  through a separate  subsidiary  company
directed by its own  management  team, and each  subsidiary  company had its own
marketing and operations  support  personnel.  Each  management  team originally
reported to our President, who was responsible for overall corporate control and
coordination, as well as financial planning.

     On  February  22,  2001,  our  senior  management  approved  a plan to sell
Intellesale and all of our other non-core  businesses.  The plan was approved by
our board of directors on March 1, 2001.  The results of  operations,  financial
condition and cash flows of Intellesale and all of our other non-core businesses
are now reported as  discontinued  operations  in our financial  statements  and
prior periods have been restated See  "Management's  Discussion  and Analysis of
Financial  Condition  and  Results  of  Operations  -  Results  of  Discontinued
Operations" beginning on page 38.

     Our primary  businesses  are now organized  into three  business  segments,
segment financial information for which is more fully disclosed in our financial
statements and notes thereto:

     Applications -- Our  Applications  segment  provides  proprietary  software
applications for large retail application environments, including point of sale,
data  acquisition,  asset  management and decision  support systems and develops
programs for portable data collection  equipment,  including  wireless hand-held

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devices. We equip our customers with the necessary tools and support services to
enable  them  to  make  a  successful  transition  to  implementing   e-business
practices,  Call  Center  Solutions,  Enterprise  Resource  Planning  (ERP)  and
Customer   Relationship   Management  (CRM)  solutions,   website  design,   and
application and internet access services to customers of our other divisions. We
are  also  involved  in  the  design,   manufacture  and  support  of  satellite
communication  technology  including  satellite modems, data broadcast receivers
and  wireless   global   positioning   systems  for   commercial   and  military
applications.

     As of  December  31,  2000,  1999 and  1998,  revenues  from  this  segment
accounted for 20.9%, 21.7% and 13.7%, respectively, of our total revenues.

     Our Services segment is comprised of the following business groups:

     Telephony -- Our Telephony group implements telecommunications and Computer
Telephony Integration (CTI) solutions for e-business.  We integrate a wide range
of voice and data solutions from  communications  systems to voice over Internet
Protocol and Virtual  Private  Networking  (VPN).  We provide  complete  design,
project  management,  cable/fiber  infrastructure,   installation  and  on-going
support for the customers we support.

     Networks  -- Our  Networks group is a  professional  services  organization
dedicated to delivering  quality  e-business  services and support to our client
partners,  providing e-business  infrastructure design and deployment,  personal
and mid-range computer solutions and network  infrastructure for the development
of  local  and  wide  area  networks  as well as  site  analysis,  configuration
proposals, training and customer support services.

     As of  December  31,  2000,  1999 and  1998,  revenues  from  this  segment
accounted for 61.6%, 67.0% and 73.4%, respectively, of our total revenues.

     Advanced  Wireless  -- Our  Advanced  Wireless  segment  is  engaged in the
business of developing and bringing to market technology used to locate, monitor
and  identify  animals,  people and objects.  The  Company's  advanced  wireless
business,  Digital Angel Corporation,  has three divisions:  the existing Animal
Tracking Business,  the newly developed Digital Angel technology and the Digital
Angel Delivery System.

     The Animal Tracking Business  division uses simple technology  solutions to
track and identify animals. It focuses on cattle, hogs, fish and household pets.
The  tracking of cattle and hogs are crucial both for asset  management  and for
disease  control  and  food  safety.  Some  customers,  for  example,  the U. S.
Department of Energy, track fish, such as salmon, to locate and protect spawning
pools and to track  migratory  patterns for research and fishing  purposes.  The
Animal Tracking Business' pet identification  system is marketed in the U. S. by
Schering-Plough Pharmaceutical under the brand name Home Again(TM), in Europe by
Merial  Pharmaceutical  (Merck) and in Japan by  Dainippon  Pharmaceutical.  The
Animal Tracking  Business partners with a variety of other companies outside the
United States to market similar  products.  The Animal Tracking  Business has an
established  infrastructure  with readers placed in approximately 6,000 domestic
animal  shelters,  or an  estimated  70% of  the  market.  Approximately  10,000
veterinary clinics,  or an estimated 66% of US clinics,  use its patented system
for pet  identification.  The  principal  technologies  employed  by the  Animal
Tracking  Business  are  electronic  ear  tags,   e.Tags(TM),   and  implantable
microchips that use RF interrogation.

     The  Digital  Angel  business   division   develops  and  markets  advanced
technology to gather  location  data and local  sensory data and to  communicate
that data to a ground  station.  As of December 31, 2000,  products  were in the
development stage and none had been sold. The Digital Angel technology is

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actually the novel  combination of three  technologies:  wireless  communication
(e.g.   cellular),   sensors  (including   bio-sensors)  and  position  location
technology  (including  GPS  and  other  systems).  We plan  to  introduce  this
technology  into a variety of products to suit  different  applications  ranging
from medical monitoring to asset management.

     Following  communication  of data to the ground station,  the Digital Angel
Delivery  System (also called DADS) manages the data in an  application-specific
format. For example,  the medical applications gather bio-readings such as pulse
and  temperature,  and  communicate  that data,  along with location  data, to a
ground  station  or call  center.  If the  readings  suggest a  critical  health
situation,  emergency  aid could be  dispatched  through the services of Medical
Advisory Systems (AMEX:  DOC), a company in which we have a 16.6% interest.  For
the pet location  applications,  the location  information is available via call
center or secure Internet site. DADS' main mission is to provide:

     o    an interface to wireless access,

     o    an immediate and effective response to variable conditions,

     o    an  improved  event  decision-making,  a storage of critical  data,

     o    a secure authentication to data,

     o    an improved customer contact, and

     o    an application-specific logic for certain markets.

     As of  December  31,  2000,  1999 and  1998,  revenues  from  this  segment
accounted for 17.4%, 11.1% and 13.0%, respectively, of our total revenues.

     Growth Strategy

     Our growth  strategy is focused on internal  expansion  and growth  through
targeted, disciplined acquisitions. The key elements of our strategy include:

     Implementing our I3 Services Platform. Our ability to affectively implement
our I3 Services Platform will depend on the following:

     o    Optimizing  strategic  interrelationships  among  the core  businesses
          while  positioning  Applied Digital Solutions to deploy innovative and
          unique marketplace solutions.

     o    Launching  expanded services driven by new products,  global branding,
          strategic alliances and acquisitions.

     o    Executing the strategy as a  tightly-managed  and focused  enterprise,
          following   implementation   of  aggressive  plans  to  reduce  costs,
          streamline organizations and divest non-strategic assets.

     Deploying the Advanced  Wireless  segment's new Digital Angel  products and
services.

     Continuing  to  pursue  acquisition  opportunities.  Since  1996,  we  have
completed  51  acquisitions,  and since  January 1, 2000,  we have  completed 10
acquisitions. Our acquisition committee assesses acquisition opportunities using
a disciplined  approach  driven by both strategic fit and financial  value.  The
committee is comprised of members of senior  management  and senior  managers of
our operating units. The committee uses various criteria including the strategic

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importance  to the I3  Service  Platform,  profitability  over a  selected  time
period, the strength of the balance sheet and the strength of the customer base.

     Customers

     We  deliver  products  and  services  across  a  multitude  of  industries,
including manufacturing,  financial,  utilities, retail, health, communications,
high  tech,  insurance,  transportation  and  government.  Some  of our  largest
customers  include  several  agencies of the United States  federal  government,
Daimler  Chrysler,  Morgan Stanley,  Compucon,  Hackensack  University  Medical,
Goldman Sachs, Steve Madden,  Polo Ralph Lauren,  GAF Materials,  PC Connection,
Castle  Superstore,  Wireless  Facilities  and Toyota  Motor  Sales.  Other than
customary payment terms, we do not offer any financing to our customers.

     Competitors

     Some of our major  competitors  include  Nova  Coast,  Corp  Info,  General
Networks,  DataTransit,  Data Systems  West,  Lucent,  Convergent  Technologies,
InterTel,  Nortel,  Fujitsu,  Toshiba  Dealer,  All  Star  Communications,  Kapp
Communications,  Mitel, Prime Communications,  A-Tek, All Pro Com, STS, NSB, JDA
Software,  DataVantage,  CRS, Astea, Vantive,  Metrix, Siebel, Clarify (Nortel),
Service Systems  International,  Custom  Development,  ASP, Education  Vertical,
Reliable Cash Register,  Innovative  Computer  Systems,  Cam Data, EZ4U,  Retail
Soft, All Flex, Avid, Datamars,  Sokymat,  Cisco, Eshare,  Apropos,  Interactive
Intelligence,  Entex, Alpha Net, TransNet, MTMC and More Direct. We believe each
segment  of  our  business  is  highly  competitive,  and  we  expect  that  the
competitive  pressures we face will not diminish. As a result of our product and
service mix, management experience, time to delivery, knowledge of local markets
and customer service, we believe the assessment of our ability to compete within
these segments is excellent. However, we understand that many of our competitors
have greater financial, technological,  marketing, personnel and other resources
than we do, and, consequently,  we may not be able to compete as successfully as
those companies.

           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This document contains forward-looking  statements within the "safe harbor"
provisions of the Private Securities  Litigation Reform Act of 1995 with respect
to our  financial  condition,  results of operations  and business,  and include
statements relating to:

     o    our growth strategies  including,  without limitation,  our ability to
          deploy the  Advanced  Wireless  segments new Digital  Angel  divisions
          products and services;

     o    anticipated trends in our business and demographics;

     o    our ability to  successfully  integrate  the  business  operations  of
          recently acquired companies and successfully complete the divestitures
          of our discontinued operations;

     o    our future profitability and liquidity; and

     o    regulatory, competitive or other economic influences.

     Words such as "anticipates,"  "expects,"  "intends,"  "plans,"  "believes,"
"seeks,"  "estimates"  and similar  expressions  also  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.

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Risk Factors


     We cannot be certain of future financial results.

     We incurred a loss of $33.9 million from continuing operations for the year
ended December 31, 2000. We reported  income from continuing  operations  before
taxes of $3.7 million for the year ended December 31, 1999 which included a loss
from  continuing  operations of $16.3  million,  offset by a gain of $20 million
from the sale of our Canadian subsidiary,  TigerTel, Inc. In 1998, we reported a
loss of $0.6 million from  continuing  operations.  Our business plan depends on
our attaining and maintaining profitability;  however, we cannot predict whether
or when we  will be  profitable.  Our  profitability  depends  on many  factors,
including the success of our marketing  programs,  the maintenance and reduction
of expenses and our ability to  successfully  coordinate  the  operations of our
business  units.  If we do become  profitable,  we may not be able to sustain or
increase  profitability on a quarterly or annual basis. In addition,  if we fail
to sustain or grow our profits within the time frame expected by investors,  the
market price of our common stock may fall.

     Our stock price may continue to be volatile, and shareholders may be unable
to resell their shares at or above the price at which they 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 $0.50. The price of our common stock has been,
and may  continue to be,  highly  volatile and subject to wide  fluctuations  in
response to factors, including the following:

     o    significant   changes  to  our  business   resulting   from  continued
          acquisitions and expansions;
     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 The Nasdaq  National Market
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 share price is volatile,  we
may be the target of securities  litigation,  which is costly and time-consuming
to defend. Historically,  following periods of volatility in the market price of
a  company's  securities,  securities  class  action  litigation  has often been
initiated  against  that  company.  Litigation  of this  type  could  result  in
substantial costs and a diversion of management's attention and resources, which
would harm our business.

     We may issue  preferred  stock,  which will rank senior to our common stock
and which may delay or prevent a change in control of us.

     Our board of directors has the right to issue  additional  preferred  stock
without further  shareholder  approval,  and the holders of such preferred stock
may have  preferences  over the  holders of our common  stock as to  payments of
dividends,  liquidation  and other  matters.  As described  under  "Management's

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Discussion and Analysis of Financial  Condition and Results of Operations - 2000
and Recent  Developments  - Private  Placement  of Series C Preferred  Stock and
Related  Warrants" in Item 7 below, we issued a series of convertible  preferred
stock in October 2000,  and have granted the  purchasers the right to require us
to issue additional shares of convertible  preferred stock in the future.  These
provisions  could  delay or prevent a change in control of us or limit the price
that  investors  might be  willing to pay in the future for shares of our common
stock.

     Future sales of shares of our common stock or the  conversion  of shares of
our Series C preferred  stock into shares of our common stock could  depress the
market price of our common stock.

     As of December 31, 2000, there were 101,486,701  shares of our common stock
outstanding.  Since  January 1, 2000,  we have issued an aggregate of 53,227,078
shares of common  stock,  of which  46,846,731  shares were issued in connection
with acquisitions of businesses and assets. We have effected,  and will 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 "price
protection"  provisions  in prior  acquisition  agreements  which may  result in
additional  shares of common stock being  issued.  Such  issuances of additional
securities  may be  dilutive  to the value of our  common  stock and may have an
adverse impact on the market price of our common stock.

     Similarly,  the conversion of our Series C preferred stock and the exercise
of the related  warrants  would  result in a  substantial  number of  additional
shares being issued,  and such number would  increase if the market price of our
common stock declines. The conversion price per share of common stock into which
the Series C preferred  stock  converts,  as a percentage of then current market
value, will decrease the longer the holders of the Series C preferred stock wait
to convert their shares.  In some cases, the conversion price could be as low as
50% of the lowest  closing price of our common stock during a specified  period.
If such reduction in the conversion price occurs,  it would more than double the
number  of shares  of  common  stock  issuable  on  conversion.  For a  detailed
discussion  of the effect of market  price  declines  of our common  stock as it
relates  to  conversion  of the  Series  C  preferred  stock,  please  refer  to
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  - 2000 and  Recent  Developments  -  Private  Placement  of Series C
Preferred Stock and Related Warrants" in Item 7 below.

     Assuming a market  price per share of our common  stock of $1.47 per share,
our closing  share price on April 2, 2001,  and using the  conversion  rate most
favorable to the Series C preferred stockholders,  those holders would receive a
total of  33,768,877  shares of our common stock on  conversion  of all Series C
preferred stock and exercise of related  warrants.  The issuance of those shares
would require us to obtain shareholder  approval under Nasdaq  Rule 4460. See "-
If we are  required  to delist our  common  stock,  trading in our shares  would
decrease  and the  market  price of our  shares  would  decline"  on page 10. In
addition,  the holders of the Series C preferred  stock purchased the shares for
$20 million in the aggregate,  which  represents an effective  purchase price of
$0.59 a share,  or an approximate  60.0% discount from the assumed $1.47 closing
price.  If we are  required to issue those  shares at such  discount to the then
current market price, it would be likely to adversely affect the market price of
our common stock.

     If our preferred  stockholders exercise their option to require us to issue
more Series C preferred stock, our stock could be further diluted.

     The holders of the Series C  preferred  stock may require us to issue up to
an additional $26 million in stated value of preferred  stock,  on terms similar
to the Series C preferred stock we currently have outstanding,  for an aggregate

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purchase  price  of  $20  million,  at any  time  within  10  months  after  the
registration  statement  registering the shares  underlying the first tranche of
Series C preferred stock has been declared effective.  The additional  preferred
stock would be accompanied  by warrants to purchase up to an additional  800,000
shares of our common  stock.  If the  holders of the  Series C  preferred  stock
require us to issue the additional preferred stock and warrants,  it could cause
further dilution and adversely affect the market price of our common stock.

     We may be required to redeem the Series C preferred stock, which could harm
our financial position.

     Upon the  occurrence of events set forth in the  certificate of designation
relating to our Series C preferred stock and described below under "Management's
Discussion and Analysis of Financial  Condition and Results of Operations - 2000
and Recent  Developments-  Private  Placement  of Series C  Preferred  Stock and
Related Warrants" in Item 7, we may be required to redeem the Series C preferred
stock at a redemption  price equal to 130% of the stated value, or $34.1 million
at December 31, 2000, plus accrued dividends.  We may also be required to redeem
the Series C preferred  stock at a redemption  price equal to 130% of the stated
value,  plus  accrued  dividends,  upon a  change  of  control  or  other  major
transactions.  If we  become  obligated  to  effect  such  redemption,  it could
adversely affect our financial condition. However, the credit agreement with IBM
Credit  requires that we obtain IBM Credit's prior written  consent to make such
payments.

     If we are required to delist our common stock,  trading in our shares could
decrease and the market price of our shares could decline.

     The  holders of the Series C  preferred  stock may require us to delist our
shares of common stock from the Nasdaq National Market if specific events occur.
In  accordance  with  Nasdaq Rule 4460,  which  generally  requires  shareholder
approval for the issuance of securities  representing 20% or more of an issuer's
outstanding listed securities,  and under the terms of the agreement pursuant to
which we sold the Series C preferred stock and related warrants, we must solicit
shareholder  approval of the  issuance  of the common  stock  issuable  upon the
conversion  of the Series C  preferred  stock and the  exercise  of the  related
warrants,  at a meeting of our stockholders  which shall occur on or before June
30, 2001. If we obtain shareholder approval,  the number of shares that could be
issued upon the conversion of the Series C preferred  stock would not be limited
by the Nasdaq 20% limitation.  If we do not obtain shareholder  approval and are
not permitted to issue shares  because of  restrictions  relating to Nasdaq Rule
4460,  we may be required to pay a  substantial  penalty.  In addition,  in that
event, the holders of the Series C preferred stock may require us to voluntarily
delist our shares of common stock from the Nasdaq National Market.

     Our ability to remain listed on the Nasdaq  National Market also depends on
our  ability to satisfy  applicable  Nasdaq  criteria  including  our ability to
maintain at least $4 million in "net tangible  assets"  (defined as total assets
minus total liabilities,  goodwill and redeemable  securities) and a minimum bid
price of $1.00 per share.  At December  31, 2000,  our net tangible  assets were
below the $4 million  threshold  although,  subsequent  to December 31, 2000, we
expect to exceed such threshold. Also, the market price for our common stock has
recently been near the minimum bid price required by Nasdaq. If we are unable to
continue to satisfy these  criteria,  Nasdaq may begin  procedures to remove our
common stock from the Nasdaq National Market.

     If we are  delisted  from the Nasdaq  National  Market,  an active  trading
market for our common  stock may no longer  exist.  As a result,  trading in our
shares of common stock could decrease substantially, and the price of our shares
of common stock may decline.

                                       10
<PAGE>

     Accretion  of the discount on the Series C preferred  stock will  adversely
affect our earnings.

     We will be  required  to accrete a portion of the  discount on the Series C
preferred stock through equity, which will reduce the income available to common
stockholders  and earnings per share.  In  addition,  the value  assigned to the
warrants  issued in connection  with the Series C preferred stock and the option
to acquire additional shares of the Series C preferred stock in a second tranche
will increase the discount on that stock.

     Because the conversion rate of the Series C preferred stock is dependent on
the market price, it may encourage short sales of our common stock.

     Because of the fluctuating  conversion rates described above, investors may
engage in "short sales" of our common stock.  Selling short is a technique  used
by an investor to take  advantage  of an  anticipated  decline in the price of a
security, and a significant number of short sales can create a downward pressure
on the price of the security.  If investors  engage in short sales of our common
stock  because  of the  anticipated  effects  of our  issuance  of the  Series C
preferred stock upon conversion by the holders of the Series C preferred  stock,
this could create a further downward  pressure on the market price of our common
stock.

     Competition could reduce our market share and decrease our revenue.

     Each of our  business  units is  highly  competitive,  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 which 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,  Canada 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 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 harm
our business, financial condition or results of operations.

     Our plans call for us to grow  rapidly,  and our  inability  to manage this
growth could harm our business.

     We have rapidly and significantly expanded our operations through a program
of acquisitions we consider complementary to our lines of business and expect to
continue to do so. Since  January 1, 1996,  we have made 51  acquisitions,  and,
since January 1, 2000, we have made 10 acquisitions. This growth has placed, and
is  expected  to  continue to place,  a  significant  strain on our  managerial,
operational and financial resources and information  systems.  Failure to manage
our growth effectively will harm our business, financial condition and operating
results.  Furthermore,  we retain existing management personnel of the companies
we acquire, under the overall supervision of our senior management.  The success
of the  operations of the  businesses we acquire depend largely on the continued
efforts of existing  management.  If we are unable to retain members of existing
management of the businesses we have acquired, or may acquire in the future, our
results of operations could suffer,  and we may have  significant  difficulty in
integrating those businesses with our current operations.

                                       11
<PAGE>

     If we are unable to implement a new financial reporting system, our ability
to properly  monitor  our  operating  results may be impaired  and we may not be
capable of complying with our financial reporting obligations.

     The financial  reporting  systems  maintained by many of the  businesses we
have acquired since January 1, 1995 differ from one another and from the systems
we use on a consolidated basis. As a result, we do not properly maintain various
detailed  operating and financial  information which we are required to disclose
in accordance  with SEC Rules  5.03-2.1 and 2 of Regulation  S-X. In response to
these  limitations  and to enable us to more  quickly  integrate  the  financial
reporting  systems of  businesses  we may acquire in the  future,  we have begun
implementation  of an  enterprise-based  financial  reporting  system  which  we
believe  will  be  capable  of  properly  maintaining  the  necessary  financial
information.  We believe the implementation  will be completed in the first half
of 2001.  However,  this  implementation may not be successful in correcting the
noted deficiencies,  and we may experience similar deficiencies in the future as
we continue to expand our operations. If we are unable to establish and maintain
an  effective  financial  reporting  system,  we will not be able to timely  and
accurately account for and monitor the operations of our business, and therefore
we may not be able to properly  execute our strategic  plan,  which could have a
material  adverse  effect on our  business,  results of  operations or financial
condition.

     We have entered into put and earnout  agreements for companies that we have
acquired,  which could require us to pay additional cash or stock  consideration
to the sellers of these businesses.

     We have entered into earnout  arrangements  under which  sellers of some of
the  businesses we acquired are entitled to additional  consideration  for their
interests in the  companies  they sold to us. Under these  agreements,  assuming
that all earnout profits are achieved, we are contingently liable for additional
consideration of approximately  $29.3 million in 2001, $18.7 million in 2002 and
$2.0 million in 2004,  of which $1.0 million  would be payable in cash and $49.0
million would be payable in shares of our common stock.

     We have  entered  into put options  with the sellers of those  companies in
which we  acquired  less  than a 100%  interest.  These  options  require  us to
purchase the remaining  portion we do not own after periods ranging from four to
five years from the dates of acquisition at amounts per share generally equal to
10% to 20% of the average  annual  earnings  per share of the  acquired  company
before income taxes for,  generally,  a two-year  period ending on the effective
date of the put  multiplied by a multiple  ranging from four to five, or on some
other basis.  The  purchases  under these put options are recorded as changes in
minority interest based upon current operating results.  Based on the provisions
of the put  agreements,  at December 31, 2000,  we are  contingently  liable for
additional  consideration of approximately $1.2 million payable in shares of our
stock  Assuming an  aggregate  obligation  of $1.2 million and using the closing
price of our common stock on December  31,  2000,  we would be required to issue
approximately 1.7 million shares to the holders of the put options. In addition,
the amount of these  obligations  would increase if the earnings of the acquired
companies increases.

     In January 2001, we entered into an agreement  with Marc Sherman and Edward
Cummings to terminate  all put rights and  employment  agreements  that each had
with or in respect of Intellesale. In exchange, we issued to Messrs. Sherman and
Cummings an aggregate of 6,616,522 shares of our common stock.

     Goodwill amortization will reduce our earnings.

     As a result of the  acquisitions  we have  completed  through  December 31,
2000,  we  have  approximately  $166  million  of  goodwill,  none of  which  is
deductible for tax purposes. We currently amortize the goodwill we have recorded

                                       12
<PAGE>

over periods ranging from 5 to 10 years at the rate of approximately $24 million
per year, which reduces our net income and earnings per share. Our business plan
calls for future  acquisitions which may further increase the amount of goodwill
and annual amortization we record,  further reducing net income and earnings per
share.  As required by Statement of Financial  Accounting  Standards No. 121, we
periodically  review the amount of goodwill  we have  recorded  for  impairment,
based on expected  undiscounted  cash flows.  If we determine that an impairment
exists, our accounting  policies require us to write down the amount of goodwill
accordingly, which would also reduce our earnings.

     If we need additional capital for our ongoing operations, to fund growth or
to finance  acquisitions  and do not obtain it, we may not achieve our  business
objectives.

     We may require additional capital to fund growth of our current business as
well as to make future acquisitions. In addition, while we anticipate that funds
available from our ongoing operations and from our current credit agreement will
provide  sufficient  capital to fund our continuing  operations for at least the
next twelve  months,  if  unanticipated  events occur we may require  additional
capital for such ongoing  operations.  We may not be able to obtain capital from
outside sources.  Even if we do obtain capital from outside sources,  it may not
be on terms  favorable to us. Our current  credit  agreement with IBM Credit may
hinder our ability to raise additional debt capital.  In addition,  the terms of
the Series C preferred  stock and the sale of substantial  amounts of our common
stock  upon the  conversion  of the  Series C  preferred  stock may make it more
difficult for us to raise capital  through the sale of equity or  equity-related
securities.  If we raise additional capital by issuing equity securities,  these
securities  may have rights,  preferences  or privileges  senior to those of our
common stockholders.

     We  may be  unable  to  comply  with  restrictions  imposed  by our  credit
facility,  which could result in a default  under that  agreement,  enabling IBM
Credit to  declare  amounts  borrowed  due and  payable or  otherwise  result in
unanticipated costs.

     We entered into an amended and restated credit agreement with IBM Credit on
October 17, 2000,  which we amended on March 30, 2001,  which  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 to, among other things,  maintain  various  financial  ratios and comply with
various other financial covenants.

     At  December  31,  2000,  we failed to comply  with 2 of 3  financial  debt
covenants  contained  in  October  17,  2000  credit  agreement,  and  we  had a
collateral  shortfall.  At  December  31,  2000 we were  required  to maintain a
minimum  Tangible  Net Worth (as  defined  in the credit  agreement)  of $(11.8)
million; our actual Tangible Net Worth was $(56.8) million. In addition, we were
required  to achieve a minimum  EBITDA (as defined in the credit  agreement)  of
$6.1 million for the quarter ended  December 31, 2000; our actual EBITDA for the
quarter was $(15.1) million. Additionally, we had an Unpaid Shortfall Amount (as
defined in the credit  agreement) of $4.0 million.  This amount  represents  the
excess of advances under our revolving credit line over eligible collateral.

     Our inability to meet these  covenants was primarily as a result of charges
of $87.3  million taken during the year, of which $70.3 million were recorded in
the fourth  quarter,  consisting of impairment  charges of  approximately  $56.3
million  associated  with the  write  down of  impaired  investments  from  both
continuing and discontinued  operations,  carrying costs of  approximately  $8.5
million  related  to future  losses  and  charges  expected  to be  incurred  by
discontinued  operations,  as well as inventory,  accounts  receivable and other
charges at  Intellesale  of  approximately  $17 million in the second quarter of
2000 and approximately $5.5 million in the fourth quarter.

                                       13
<PAGE>

     On March 30,  2001,  we entered  into a waiver and  amendment to the Credit
Agreement  with IBM  Credit  and  others in which we  obtained  waivers  for the
covenant  and other  defaults  existing at December 31, 2000 and in which future
covenants were reset and other provisions amended or modified. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Debt,
Covenant  Compliance  and  Liquidity"  beginning on page 42 for a more  detailed
discussion of the credit agreement with IBM Credit.

     We cannot  assure  you that we will be able  maintain  compliance  with our
covenants  in the  future.  A failure to comply  with these  restrictions  could
constitute  a  default  under  our  credit  agreement,  allowing  IBM  Credit to
terminate its commitment to us and declare all amounts  borrowed,  together with
accrued interest and fees,  immediately due and payable.  If this were to occur,
we might  not be able to pay  these  amounts,  or we might be  forced  to seek a
further  amendment  to our credit  agreement  which  could make the terms of the
agreement more onerous for us.

     We  depend  on our  small  team  of  senior  management,  and  we may  have
difficulty attracting and retaining additional personnel.

     We depend on the continued service of our executive  officers and other key
personnel.  We have entered into employment contracts ranging for periods of one
to five years through February 2006 with our key officers and employees. Some of
these employment contracts call for bonus arrangements based on earnings.  There
can be no  assurance,  however,  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.

     We purchase and warehouse inventory,  particularly at Intellesale,  much of
which is refurbished or excess inventory of personal  computer  equipment.  As a
result,  we assume  inventory  risks and price erosion risks for these products.
These risks are  especially  significant  because  personal  computer  equipment
generally is characterized by rapid technological change and obsolescence. These
changes affect the market for  refurbished or excess  inventory  equipment.  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.  In addition, in the course
of negotiations to sell  Intellesale or any other non-core entity now classified
as discontinued, we may face pressure to sell any remaining inventory on hand at
a discount.

     Because we will not pay  dividends on our common stock for the  foreseeable
future,  stockholders  must rely on stock  appreciation  for any return on their
investment in the common stock.

     We do not have a history of paying  dividends on our common  stock,  and we
cannot assure you that any dividends will be paid in the foreseeable future. Our
current credit agreement with IBM Credit places  restrictions on the declaration
and payment of dividends  which are  described in more detail under  "Market for
Registrant's   Common  Equity  and  Related  Shareholder  Matters  -  Dividends"
contained in Item 5 below.  In addition,  we may not pay dividends on our common
stock  without  the  consent of the  holders of a majority  of the shares of the
Series C preferred  stock.  We intend to use any  earnings  which we generate to
finance  the growth of our  businesses,  and,  therefore,  we do not  anticipate

                                       14
<PAGE>

paying cash dividends in the future. As a result, only appreciation of the price
of our common stock will provide a return to our stockholders.

     Provisions in our  employment  agreements may make it difficult for a third
party to acquire us, despite the possible benefits to our stockholders.

     Our employment or other agreements with Richard Sullivan, Garrett Sullivan,
Mercedes Walton and Jerome  Artigliere and SysComm  International  Corporation's
employment  agreement with David Loppert  include  change of control  provisions
under which the employees may terminate their employment within one year after a
change of control  and are  entitled  to receive  specified  severance  payments
and/or  continued   compensation  payments  for  sixty  months.  The  employment
agreements  for Richard  Sullivan  and David  Loppert  also  provide  that these
executive officers are entitled to supplemental  compensation payments for sixty
months upon  termination of  employment,  even if there is no change in control,
unless their  employment is terminated due to a material  breach of the terms of
the employment  agreement.  Also,  the agreements for both Richard  Sullivan and
Garrett Sullivan provide for certain "triggering events," which include a change
in control,  the  termination of Richard  Sullivan's  employment  other than for
cause, or if Richard  Sullivan ceases to hold his current  positions with us for
any  reason  other  than a  material  breach  of  the  terms  of his  employment
agreement.  In that case, we would be obligated to pay, in cash and/or in stock,
$12.1 million and $3.5 million, respectively, to Richard Sullivan and to Garrett
Sullivan,  in addition to certain other  compensation.  Finally,  the employment
agreements  provide  for a gross up for excise  taxes which are payable by these
executive  officers if any payments upon a change of control are subject to such
taxes as excess parachute payments.

     Our  obligation  to make  the  payments  described  in this  section  could
adversely affect our financial  condition or could discourage other parties from
entering into transactions with us which might be treated as a change in control
or triggering event for purposes of these agreements.

     We may  not  prevail  in  ongoing  litigation  and may be  required  to pay
substantial damages.

     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.

     Digital Angel may not be able to develop products from its technology.

     Our  wholly-owned  subsidiary,  Digital Angel  Corporation  has developed a
miniature digital receiver named "Digital Angel(TM)." This technology,  which we
believe  will  be able to  send  and  receive  data  and be  located  by  global
positioning system technology to monitor at-risk patients, is not yet being sold
to customers and is still  undergoing  additional  development.  Digital Angel's
ability  to  develop  and  commercialize   products  based  on  its  proprietary
technology  will depend on its ability to develop its products  internally  on a
timely basis or to enter into  arrangements  with third parties to provide these
functions.  If  Digital  Angel  fails  to  develop  and  commercialize  products
successfully  and on a timely basis, it could have a material  adverse effect on
Digital Angel's business, operating results and financial condition.

                                       15
<PAGE>

     Digital Angel is subject to restrictions imposed by government regulation.

     Digital  Angel 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.  In addition  to the  digital  receiver
described  above,  Digital  Angel also,  following  its  acquisition  of Destron
Fearing,  develops,  assembles and markets a broad line of electronic and visual
identification devices for the companion animal, livestock and wildlife markets.
Digital Angel is required to obtain regulatory approval before marketing most of
its products.  Digital  Angel'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  have  been  approved  by  the  U.S.
Environmental Protection Agency and are produced under EPA regulations. Sales of
insecticide  products are incidental to Digital Angel's primary  business and do
not represent a material part of its  operations  or revenues.  Digital  Angel's
products  also  are  subject  to  compliance  with  foreign   government  agency
requirements.  Digital Angel'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'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's business.

     If the software we have sold to consumers has Year 2000 problems,  we could
be exposed to lawsuits.

     During 1998 and 1999,  we  identified  what we believe to be all  potential
Year 2000  problems  with any of the  software  products  we develop and market.
However,  our  management  believes  that it is not possible to  determine  with
complete  certainty that all Year 2000 problems  affecting our software products
have been  identified or corrected due to the complexity of these  products.  In
addition,  these  products  interact with other third party vendor  products and
operate on computer systems which are not under our control.  For  non-compliant
products,  we have provided and are continuing to provide  recommendations as to
how an  organization  may  address  possible  Year 2000  issues  regarding  that
product.  Software  updates are available for most,  but not all,  known issues.
Such information is the most currently available  concerning the behavior of our
products  and is  provided  "as  is"  without  warranty  of any  kind.  However,
variability of definitions of  "compliance"  with the Year 2000 and of different
combinations  of  software,  firmware and hardware has led to, and could lead to
further  lawsuits against us. The outcome of any such lawsuits and the impact on
us is not estimable at this time.

     We do not believe  that the Year 2000  problem has had or will  continue to
have a material  adverse  effect on our business,  results of operations or cash
flows. The estimate of the potential impact on our financial  position,  overall
results of  operations  or cash flows for the Year 2000 problem  could change in
the  future.  Our  ability  to  achieve  Year 2000  compliance  and the level of
incremental  costs  associated with achieving such compliance could be adversely
impacted by, among other things,  the  availability  and cost of programming and
testing  resources,  a vendor's  ability  to modify  proprietary  software,  and
unanticipated   problems  identified  in  the  ongoing  compliance  review.  The
discussion of our efforts, and management's expectations,  relating to Year 2000
compliance are forward-looking statements.

     EMPLOYEES

     At December 31, 2000, we and our subsidiaries employed  approximately 1,620
employees.

                                       16
<PAGE>

     BACKLOG

     At December  31, 2000 and 1999,  we and our  subsidiaries  had a backlog of
approximately $26.4 million and $7.5 million, respectively. We expect all of the
backlog at December 31, 2000 to be filled in 2001.

     COMPLIANCE WITH ENVIRONMENTAL REGULATIONS

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

     At  December  31,  2000,  we  leased   688,138  square  feet  of  operating
facilities,  of which 287,214  square feet is for office  facilities and 400,924
square feet is for factory and  warehouse  use.  These leases  expire at various
dates through  October 2014. In addition,  we own 145,000  square feet of office
and manufacturing facilities, of which 122,000 square feet is for manufacturing,
factory and warehouse use and 23,000 square feet is for office space.

     The following table sets forth our properties by business divisions:

<TABLE>
<CAPTION>

                                                      Factory /
                                         Office       Warehouse        Total
                                       --------------------------------------
                                               (amounts in square feet)
<S>                                     <C>             <C>           <C>
Applications                            112,350          14,054       126,404
Services -
  Telephony                              58,983          20,326        79,309
 Networks                                53,549          31,000        84,549
Advanced Wireless Services               41,111         105,000       146,111
Corporate                                 7,692               -         7,692
                                       --------------------------------------
Continuing Operations                   273,685         170,380       444,065
Discontinued Operations                  36,529         352,544       389,073
                                       --------------------------------------
         Total                          310,214         522,924       833,138
                                       ======================================
</TABLE>



                                       17


<PAGE>


     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>     <C>
Arizona                                   7,628              -          7,628
California                               47,336         52,000         99,336
Canada                                   20,300         80,926        101,226
Florida                                  26,599          2,000         28,599
Illinois                                 19,486          5,400         24,886
Louisiana                                 1,500              -          1,500
Maryland                                  7,697          3,000         10,697
Massachusetts                             2,281          4,641          6,922
Minnesota                                12,000         65,000         77,000
Missouri                                  3,500              -          3,500
New Hampshire                            19,200          5,464         24,664
New Jersey                               29,626        211,450        241,076
New York                                 16,573         30,000         46,573
Ohio                                     16,900          5,000         21,900
Pennsylvania                             13,948          7,453         21,401
Scotland                                  2,000              -          2,000
Singapore                                 1,000              -          1,000
Texas                                     1,400              -          1,400
United Kingdom                           42,590         42,590         85,330
Virginia                                 18,500          8,000         26,500
                                        --------------------------------------
         Total                          310,214        522,924        833,138
                                       ======================================
</TABLE>

     ITEM 3.      LEGAL PROCEEDINGS

     We and certain of our  subsidiaries are parties to various legal actions as
either plaintiff or defendant.  In the opinion of management,  these proceedings
will not 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 April 7, 2000, we and  Intellesale  filed a  counterclaim  against David
Romano and Eric Limont,  the former owners of Bostek,  Inc. and Micro Components
International Incorporated,  two companies acquired by Intellesale in June 1999,
in the U.S. District Court for the District of Delaware for,  generally,  breach
of contract,  breach of fiduciary duty and fraud. Messrs.  Romano and Limont had
filed their claim generally alleging that their earnout payment from Intellesale
was inadequate. In July 2000, we and Intellesale amended our counterclaim in the
U.S.  District  Court for the District of Delaware to seek  damages  for,  among
other  things,  securities  law  violations.  In  addition,  on  May  19,  2000,
Intellesale  and two of its  subsidiaries,  Bostek,  Inc.  and Micro  Components
International  Incorporated,  filed suits against  Messrs.  Romano and Limont in
Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano
and Limont amended their  complaint in the U.S.  District Court for the District
of Delaware to add a claim for $10 million for the $10 million  payment not made
to them.  As of January  16,  2001,  we,  Intellesale,  Bostek,  Inc.  and Micro
Components International Incorporated settled all claims with Messrs. Romano and
Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to

                                       18
<PAGE>

invest up to $6  million  in  shares of our  common  stock and to  indemnify  us
against various other litigation  filed against Bostek,  Inc. The purchase price
for the 2,955,665 shares of our common stock issued to Messrs.  Roman and Limont
was paid in the form of  non-recourse,  non-interest  bearing  promissory  notes
which are  collateralized  by the shares of common stock held by Messrs.  Romano
and  Limont.  The  settlement  becomes  final when the shares are  included in a
registration  statement  which must be declared  effective on or before June 15,
2001.

     We are not subject to any environmental or 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 2000.





                                       19
<PAGE>

                                     PART II

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

     Our common  stock  trades on The Nasdaq  Stock  Market(R)  under the symbol
"ADSX."  The  following  table  sets  forth the high and low sale  prices of our
common stock as reported by Nasdaq for each of the quarters  during our last two
years.

                                                High                    Low
                                                ----                    ---
     1999
     First Quarter                             $ 4.19                  $ 2.00
     Second Quarter                              3.50                    2.00
     Third Quarter                               3.38                    1.69
     Fourth Quarter                             16.00                    1.63

     2000
     First Quarter                            $ 18.00                  $ 6.50
     Second Quarter                             10.25                    2.97
     Third Quarter                               5.22                    2.59
     Fourth Quarter                              4.31                    0.50

     Holders

     As of March 25,  2001,  there  were  1,361  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. The 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. In addition,  the certificate of designation  relating to our
Series C  convertible  preferred  stock  prohibits  payment of  dividends on our
common stock without the consent of the holders of a majority of the outstanding
shares of preferred stock.

                                       20

<PAGE>

     Recent Sales of Unregistered Securities

     The following table lists all  unregistered  securities sold by the Company
between  October 1, 2000 and December 31, 2000.  These shares were issued (a) in
acquisition  transactions  to the selling  stockholders  in connection  with the
acquisition of the indicated  subsidiary or the stockholder's  minority interest
in transactions  directly  negotiated by the stockholders in connection with the
sale of their  business or  interests  to the Company and pursuant to the "price
protection"  or  "earnout"  provisions  of the  agreement  of sale,  or (b) upon
exercise of stock  options or warrants or by purchase  under our Employee  Stock
Purchase Plan.  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>
          Name/Entity/Nature         Number of      Note          Issued For          Number of
                                      Persons                                       Common Shares

--------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>   <C>                         <C>
Various                                  11           1     Employee Stock Options         168,770
Various                                 193           2         Employee Stock              20,812
                                                                Purchase Plan
Various                                   2           3            Warrants                415,685
ATEC Group, Inc.                          2           4          Acquisition             2,674,934
Caledonian Venture Holdings, Ltd.        16           4          Acquisition             4,937,497
Charlie Phillips                          1           5          Acquisition                13,333
McKinsey & Company                        1           6            Services                 37,994
Pacific Decision Sciences Corp.          22           7          Acquisition             8,568,532
SysComm International Corp.               3           4          Acquisition             1,699,715
                                                                                        ----------
         Total                                                                          18,537,272
                                                                                       ===========
----------------------
<FN>
1.   Represents  shares issued in connection with the exercise of employee stock
     options.
2.   Represents  shares issued in connection  with our employee  stock  purchase
     plan.
3.   Represents shares issued in connection with the exercise of warrants.
4.   Represents  shares  issued to the  selling  stockholders  to  acquire  such
     shareholder's  interest in the company in a transaction directly negotiated
     by the stockholders in connection with the sale of their business to us and
     exempt  from  registration  pursuant  to  Section  4(2)  of  the  Act.  The
     transaction  document included in an  acknowledgment  that the sale was not
     registered,  that the  shareholder  was acquiring the shares for investment
     and not for resale, and that the shareholder acknowledged that he must hold
     the shares until and unless  registered  or unless  transferred  in another
     transaction  exempt  from  registration.   In  addition,  the  certificates
     representing   the  shares  were   legended  to  indicate  that  they  were
     restricted.
5.   Represents shares issued in connection with the "earnout"  provision of the
     agreement  of  sale  relating  to  a  prior  private  transaction  directly
     negotiated  by the  stockholders  in  connection  with  the  sale of  their
     businesses to us, which transactions were exempt from registration pursuant
     to Section 4(2) of the Securities Act.
6.   Represents shares issued for professional services.
7.   Represents  shares  issued to the  selling  shareholders  to  acquire  such
     shareholder's  interest in the company in a transaction directly negotiated
     by the shareholders in connection with the sale of their business to us and
     exempt from  registration  pursuant to Rule 506 of Regulation D promulgated
     under the Act. The transaction document included an acknowledgment that the
     sale was not registered,  that the shareholder was acquiring the shares for
     investment and not for resale,  and that the shareholder  acknowledged that
     he must hold the  shares  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.
</FN>
</TABLE>

                                       21
<PAGE>
     ITEM 6.      SELECTED FINANCIAL DATA

     The following  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, 2000 and the Summary of Balance Sheet Data
as of December 31, 2000 and 1999 are 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, 1997 and 1996 and
the Summary of Balance  Sheet Data as of December  31,  1998,  1997 and 1996 are
derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                                              2000        1999       1998       1997       1996
                                                       ---------------------------------------------------------
                                                            (amounts in thousands except per share amounts)
<S>                                                    <C>          <C>         <C>        <C>        <C>
SUMMARY OF OPERATIONS DATA
Net  revenue                                           $  134,766   $ 129,064   $ 74,343   $ 41,616   $ 14,052
Cost of goods and services sold                            82,475      74,299     39,856     19,709      7,220
                                                       ---------------------------------------------------------
Gross profit                                               52,291      54,765     34,487     21,907      6,832
Selling, general and administrative expenses              (64,500)    (58,960)   (32,120)   (18,224)    (5,851)
Depreciation and amortization                             (11,073)     (6,560)    (2,913)    (1,219)      (618)
Restructuring and unusual costs                            (6,383)     (2,550)        --         --         --
Gain on sale of Subsidiary                                    486      20,075        733         --         --
Interest Income                                             1,095         422        291        183        121
Interest Expense                                           (5,901)     (3,478)    (1,070)      (570)      (167)
                                                       ---------------------------------------------------------
(Loss) income from continuing operations before
   provision for income taxes, minority
   interest and extraordinary loss                        (33,985)      3,714       (592)     2,077        317
(Benefit) provision for income taxes                       (5,040)      1,180        670        600         15
                                                       ---------------------------------------------------------
(Loss) income from continuing operations before
   minority interest and extraordinary loss               (28,945)      2,534     (1,262)     1,477        302
Minority interest                                             229         (46)       120        382         18
                                                       ---------------------------------------------------------
(Loss) income from continuing operations                  (29,174)      2,580     (1,382)     1,095        284
(Loss) income from discontinued operations, net
   of income taxes                                        (75,702)      3,012      6,072      1,245        402
Loss on disposal of discontinued operations,
   including provision for operating losses
   during phase-out period, net of tax benefit             (7,266)         --         --         --         --
                                                       ---------------------------------------------------------
(Loss) income before extraordinary loss                  (112,142)      5,592      4,690      2,340        686
Extraordinary loss (net of taxes of $89)                       --        (160)        --         --         --
                                                       ---------------------------------------------------------
Net (loss) income                                        (112,142)      5,432      4,690      2,340        686
Preferred stock dividends                                    (191)         --        (44)       (72)       (60)
Accretion of beneficial conversion feature
   of preferred stock                                      (3,857)         --         --         --         --
                                                       ---------------------------------------------------------
Net (loss) income available to common stockholders     $ (116,190)  $   5,432   $  4,646   $  2,268   $    626
                                                       =========================================================

                                       22
<PAGE>

                                                            2000        1999       1998       1997       1996
                                                         -------------------------------------------------------
                                                                      (amounts in thousands)

Net income (loss) per common share:
Continuing operations                                    $  (0.52)  $    0.06   $  (0.05)  $   0.08   $   0.07
Discontinued operations                                     (1.30)       0.06       0.19       0.10       0.12
                                                         -------------------------------------------------------
Total                                                    $  (1.82)  $    0.12   $   0.14   $   0.18   $   0.19
                                                         =======================================================
Average common shares outstanding:
Basic                                                      63,825      46,814     32,318     12,632      3,329
Diluted                                                    63,825      50,086     34,800     15,245      4,641


SUMMARY OF BALANCE SHEET DATA

Cash and cash equivalents                                $  8,039   $   2,181   $  1,936   $  5,957   $    718
Due from buyers of divested subsidiary                         --      31,302         --         --         --
Property and equipment                                     21,368       6,649      8,933      1,890      2,623
Goodwill                                                  166,024      24,285     23,786      8,439     13,252
Net assets of discontinued operations                       8,076      75,284     37,320     14,672      2,597
Total Assets                                              319,451     186,605    108,337     49,421     30,330
Long-term debt                                             69,146      33,260      1,864      1,010        876
Total Debt                                                 74,374      62,915     26,055      7,825      5,799
Minority interest                                           4,879       1,292      1,300        639         44
Redeemable preferred stock and option                      18,620          --         --        900     10,900
Stockholders' equity                                      160,562      92,936     67,560     36,285      8,252
</TABLE>

                                       23
<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"
in Item 1.

     RECENT DEVELOPMENTS

     Discontinued Operations

     On March 1, 2001,  our board of directors  approved the sale of Intellesale
and all of our other non-core businesses.  In order to implement our I3 Services
Platform,  we determined these businesses were not strategic or complementary to
our  redefined  core  business  segments and should be disposed.  The results of
operations of these segments have been reclassified and reported as discontinued
operations  for all periods  presented.  Our plan of disposal  anticipates  that
these entities will be disposed within 12 months from March 1, 2001, our defined
"measurement  date".  Proceeds from the sale of discontinued  operations will be
used to pay down debt.

     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
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  public  offering  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 below under  "Settlement of  Litigation",  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.

     During the fourth quarter of 2000, Intellesale refocused its business model
away from the  Internet  segment  and is now  concentrating  on its  traditional
business of technology  asset  management  and brokerage  services,  and selling
refurbished  and new  desktop  and  notebook  computers,  monitors  and  related
components as a wholesale,  business to business supplier. As a result, we wrote
down certain  inventory to  realizable  market value  resulting in an additional
charge of $5.5 million in order to quickly and effectively  liquidate  inventory
purchased for  distribution  through retail channels.  Management  believes that
this realignment,  together with cost saving  initiatives  discussed below, will
make  Intellesale  an  attractive  acquisition  candidate  for  a  strategic  or
financial buyer.

                                       24
<PAGE>

     The  following  table  sets forth the  components  of the  various  charges
recorded  in the fourth  quarter  of 2000 in  connection  with the  discontinued
operations:

<TABLE>
<CAPTION>
                                                Intellesale   All Other       Total
                                                -----------   ---------       -----
                                                       (amounts in thousands)
<S>                                              <C>         <C>        <C>
Asset impairment charges                         $ 46,600      $ 3,619      $ 50,219
Estimated operating losses and carrying
    costs during phase-out period                   8,198          375         8,573
                                                 --------      -------      --------
         Total                                   $ 54,798        3,994      $ 58,792
                                                 ========      =======      ========
</TABLE>


     Since December 31, 2000, as a result of the realignment and  reorganization
of  Intellesale's  business,  we have reduced the total number of employees from
197 employees to 125 employees as of March 30, 2001, some of whom may be rehired
as  circumstances  warrant,  resulting in annual savings of  approximately  $3.0
million.  In addition,  in January  2001,  we  terminated  or  renegotiated  the
employment agreements of several senior executives,  resulting in annual savings
of approximately  $785,000. As a result of withdrawing from the retail and "B to
C"  (business to  commerce)  e-commence  market,  we have  budgeted  significant
savings in sales,  sales support,  advertising,  warranty,  and customer support
costs.  We anticipate the annualized non personnel  savings  associated with our
withdrawal from this market to be approximately $2.2 million.

     Private Placement of Series C Preferred Stock and Related Warrants

     On October 26, 2000,  we issued $26 million in stated value of our Series C
preferred  stock,  with an initial  conversion  price of $7.56 per  share,  to a
select group of institutional  investors in a private  placement.  The aggregate
purchase price for the Series C preferred stock and the related warrants was $20
million.  The initial  conversion  price of $7.56 in stated  value per share was
reduced to $5.672 in stated value per share 91 days after issuance of the Series
C preferred stock.

     The  holders of the Series C  preferred  stock also  received  warrants  to
purchase up to an  additional  800,000  shares of our common stock over the next
five years.  The exercise  price of the warrants  issued in connection  with the
Series C preferred stock is $4.73 per share, subject to adjustment upon:

     o    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;

     o    the declaration or payment of a dividend or other  distribution on our
          common stock;

     o    issuance  of any  other  of our  securities  on a  basis  which  would
          otherwise dilute the purchase rights granted by the warrants.

     The  exercise  price may be paid in cash,  in shares of common  stock or by
surrendering other warrants.

     Option to Acquire Additional  Preferred Stock. The Series C preferred stock
investors  may provide  notice to purchase  up to an  additional  $26 million in
stated value of Series C preferred stock and warrants with an initial conversion
price of $5.00 per share, for an aggregate purchase price of $20 million, at any
time up to ten months following the effective date of the registration statement
of the common shares underlying the initial tranche of Series C preferred stock.
The  additional  Series C  preferred  stock  will  have  the  same  preferences,
qualifications  and  rights as the  initial  Series C  preferred  stock.  If the
investors  exercise their option to purchase such additional  shares of Series C
preferred stock and related  warrants,  we have agreed to register the resale of
shares  of our  common  stock  issuable  upon the  conversion  of such  Series C
preferred stock and the exercise of such warrants.

                                       25
<PAGE>

     The value of the warrants and the option were at issuance were $0.6 million
and $5.1 million, respectively.

     As of December 31, 2000,  there were 26,188.04 shares of Series C preferred
stock  outstanding and issued.  The stated value of the Series C preferred stock
is $1,000 per share, or an aggregate of $26.2 million, and the purchase price of
the Series C preferred  stock and the related  warrants  was an aggregate of $20
million. The detailed terms of the Series C preferred stock are set forth in the
certificate of designation relating to the Series C preferred stock, which is an
exhibit to this Annual Report on Form 10-K.

     The Series C preferred  stock and the option to acquire the second  tranche
of  Series C  preferred  stock  have been  reflected  in our  balance  sheets as
"Redeemable  Preferred Stock - Series C" and "Redeemable Preferred Stock Options
- Series C",  respectively,  while the warrants to acquire  shares of our common
stock have been classified as part of "Stockholders' Equity".

     Conversion;  Conversion  Rates. The Series C preferred stock is convertible
into shares of our common  stock at a price per share of our common stock (which
we refer to as the "conversion  price") of $5.672 in stated value per share. The
holders also have the option to use an "alternative  conversion price," which is
the average  closing  price for the 10 trading  days  preceding  the date of the
notice of conversion, multiplied by:

          o    140%,  where  the date of the  notice of  conversion  is prior to
               March 25, 2001;

          o    125%,  where the date of the notice of  conversion is on or after
               March 25, 2001 but prior to April 25, 2001;

          o    115%,  where the date of the notice of  conversion is on or after
               April 25, 2001 but prior to June 24, 2001; or

          o    110%,  where the date of the notice of  conversion is on or after
               June 24, 2001.

     Adjustment  of  the  Conversion   Price.   The  conversion  price  and  the
alternative  conversion price are each subject to adjustment based on any of the
following events:

          o    a stock dividend or  distribution,  stock split,  reorganization,
               recapitalization,  consideration,  merger or sale or stock option
               issuance;

          o    the  issuance  of any  security  convertible  into  shares of our
               common  stock which are based on a formula  that differs from the
               formula  described  above, in which case the holders may elect to
               substitute   such  new  formula  for  the  current   formula  for
               calculating  the  number  of  shares  into  which  the  Series  C
               preferred stock is convertible; or

          o    the  issuance  of shares of common  stock,  or  options  or other
               rights to acquire  common stock,  at a price lower than the "Base
               Price," which we define below, at which time the conversion price
               is reduced to a price  determined by  multiplying  the conversion
               price by the quotient of:

               --   the sum of

               o    the number of shares of common stock outstanding immediately
                    prior to such sale, and

               o    the  number of shares of common  stock  which the  aggregate
                    consideration  received  by us  would  purchase  at the Base
                    Price; and

               --   the number of shares of common stock outstanding immediately
                    after such sale.

                                       26
<PAGE>


The "Base Price" means either (a) the conversion price of the Series C preferred
stock or (b) the market price of our common stock at the time.

     In addition,  the conversion  price is subject to further  adjustment after
the triggering events described below under "-Redemption."

     Effect of Decline in Market Price of Our Common  Stock.  The holders of the
Series C preferred  stock have the option to convert the shares of the preferred
stock to common stock at an  alternative  conversion  rate  starting at 125% and
declining to 110% of the average closing price for the 10 trading days preceding
the date of the notice of  conversion.  In  addition,  if a  "triggering  event"
described in the  certificate  of  designation  governing the Series C preferred
stock  occurs,  the holders would be entitled to convert the stated value of the
Series C  preferred  stock at a price per share of common  stock equal to 50% of
the lowest closing price during the  occurrence of such  triggering  event.  The
following  table  illustrates  the effect that declines of 25% and 50% to $1.469
per share (our closing stock price on April 2, 2001) would have on the number of
shares of common stock issuable upon conversion of the Series C preferred stock.

<TABLE>
<CAPTION>
                                                   Shares Issuable          Shares           Shares
                                                     at Current         Issuable upon     Issuable upon
                       Conversion Rate              Market Price         25% Decline       50% Decline
                       ---------------              ------------         -----------       -----------
    <S>                                              <C>                  <C>               <C>
    125% Alternative Conversion Rate                 13,507,551           18,010,068        27,015,101
    115% Alternative Conversion Rate                 14,682,120           19,576,160        29,364,241
    110% Alternative Conversion Rate                 15,349,489           20,465,986        30,698,979
    50% "Triggering Event" Conversion Rate           33,768,877           45,025,169        67,537,754

</TABLE>

     Accretion.  The  beneficial  conversion  feature  (BCF) was computed as the
excess  of the fair  market  value  of the  Company's  common  stock  above  the
accounting  value per share of common stock at the date of  issuance.  The value
assigned to the BCF will increase the discount on the preferred  stock.  We will
be  required to accrete the  discount  on the Series C preferred  stock  through
equity.  The total  accretion is $3.8  million.  As of December  31, 2000,  $3.8
million  had  been  accreted.  The BCF  will be  recomputed  as the  alternative
conversion rates become available.

     Dividends.  The  holders of the Series C  preferred  stock are  entitled to
receive  annual  dividends  of 4% of the stated  value,  or 5.2% of the purchase
price,  payable  quarterly  in arrears  beginning on December 31, 2000 in either
cash or additional shares of Series C preferred stock.

     Redemption.  If any of the triggering  events  described  below occurs with
respect to the Series C  preferred  stock,  the holders may require us to redeem
the Series C  preferred  stock at a price per share  equal to 130% of the stated
value,  or an aggregate of $34.1  million as of December 31, 2000,  plus accrued
and unpaid  dividends.  We  require  the  written  consent of IBM Credit to such
redemption. In addition:

          o    the  holders of the Series C  preferred  stock may  require us to
               delist our common stock from The Nasdaq National Market;

          o    we must pay to each holder of Series C preferred  stock an amount
               in cash per  share  equal to 2% of the  liquidation  value of the
               Series C preferred stock,  such payments not to exceed $6 million
               in the aggregate; and

          o    during the occurrence of a triggering event, the conversion price
               per share of the Series C preferred stock would be reduced to 50%
               of the lowest  closing  price of our  common  stock  during  such
               period.

                                       27
<PAGE>

     The triggering events include:

          o    failure to have the registration statement relating to the common
               stock issuable on the conversion of the Series C preferred  stock
               declared  effective on or prior to April 21, 2001, 180 days after
               issuance of the Series C preferred stock or the suspension of the
               effectiveness of such registration statement;

          o    notice of  suspension  in trading  for a period of 5  consecutive
               trading days or 30 trading days in a 365 day period;

          o    delisting  for a  period  of 10  consecutive  trading  days or 30
               trading days in a 365 day period;

          o    failure to obtain  shareholder  approval by June 30, 2001 for the
               issuance of the common stock upon the  conversion of the Series C
               preferred stock and upon the exercise of the warrants; and

          o    defaults in payment of or acceleration of our payment obligations
               under our credit agreement;

          o    failure to deliver  shares of common stock within five days after
               conversion notice; or

          o    failure to make payment upon another triggering event.

     Significant  Transactions.  If we enter into any  transaction  involving  a
consolidation or merger, the sale of all or substantially all of our assets or a
purchase of more than 50% of our outstanding  common stock, or if we are subject
to any change in  control,  each  holder  has the right to convert  the Series C
preferred  stock into  shares of common  stock at the  lesser of the  conversion
price or the alternative conversion price described above, provided that:

          o    if the transaction  occurs before April 24, 2001, each holder has
               the right to convert at the lesser of the conversion price or the
               alternative conversion price equal to 110% of the average closing
               price of the common stock for the 10 days  immediately  preceding
               the public  announcement  of the  transaction  or the  conversion
               date; and

          o    if we are unable to deliver the shares of common  stock upon such
               conversion, we must

          o    deliver as many shares as possible, and

          o    mandatorily  redeem  the  remainder  in cash at a price per share
               equal to the  product  of (i) the  aggregate  number of shares of
               common  stock into which each share of Series C  preferred  stock
               should be  converted  and (ii) the  closing  price of the  common
               stock on the date of delivery of the conversion notice.

     In addition, if we are party to any consolidation, merger or other business
combination, we may require that all of the Series C preferred stock be redeemed
at a price per share  equal to 130% of the stated  value,  plus all  accrued but
unpaid dividends.

     Settlement of Litigation

     On April 7, 2000, we and  Intellesale  filed a  counterclaim  against David
Romano and Eric Limont,  the former owners of Bostek,  Inc. and Micro Components
International Incorporated,  two companies acquired by Intellesale in June 1999,
in the U.S. District Court for the District of Delaware for,  generally,  breach
of contract,  breach of fiduciary duty and fraud. Messrs.  Romano and Limont had

                                       28
<PAGE>

filed their claim generally alleging that their earnout payment from Intellesale
was inadequate. In July 2000, we and Intellesale amended our counterclaim in the
U.S.  District  Court for the District of Delaware to seek  damages  for,  among
other  things,  securities  law  violations.  In  addition,  on  May  19,  2000,
Intellesale  and two of its  subsidiaries,  Bostek,  Inc.  and Micro  Components
International  Incorporated,  filed suits against  Messrs.  Romano and Limont in
Superior Court of Massachusetts to recover damages. In July 2000, Messrs. Romano
and Limont amended their  complaint in the U.S.  District Court for the District
of Delaware to add a claim for $10 million for the $10 million  payment not made
to them.  As of January  16,  2001,  we,  Intellesale,  Bostek,  Inc.  and Micro
Components International Incorporated settled all claims with Messrs. Romano and
Limont. As part of the settlement agreement, Messrs. Romano and Limont agreed to
invest up to $6  million  in  shares of our  common  stock and to  indemnify  us
against various other litigation  filed against Bostek,  Inc. The purchase price
for the 2,955,665 shares of our common stock issued to Messrs.  Roman and Limont
was paid in the form of  non-recourse,  non-interest  bearing  promissory  notes
which are  collateralized  by the shares of common stock held by Messrs.  Romano
and  Limont.  The  settlement  becomes  final when the shares are  included in a
registration  statement  which must be declared  effective on or before June 15,
2001.

     Significant Acquisitions

     Computer Equity Corporation

     Effective June 1, 2000, we acquired all of the outstanding common shares of
Computer  Equity  Corporation.  The aggregate  purchase price was  approximately
$24.7 million, $15.8 million of which was paid in shares of our common stock and
$8.9  million of which was paid in cash in August,  2000.  An  additional  $10.3
million is contingent upon  achievement of certain  earnings  targets during the
two years ending June 30, 2002. Any such  additional  payments will increase the
purchase  price and result in additional  goodwill.  The total purchase price of
Computer  Equity,  including  the  liabilities  assumed,  was  allocated  to the
identifiable  assets with the remainder of $15.3  million  recorded as goodwill,
which is being amortized over 10 years.  The transaction was accounted for under
the purchase method of accounting.

     Computer  Equity is a network and  telecommunications  integration  company
providing a full spectrum of information  and networking  products and services,
which are  focused on the  federal  government  marketplace,  including  all the
branches of the U.S. military.

     Destron Fearing Acquisition

     On  September  8, 2000 we  completed  our  acquisition  of Destron  Fearing
Corporation,  through a merger of our  wholly-owned  subsidiary,  Digital  Angel
Corporation (fka Digital Angel.net Inc.),  into Destron Fearing.  As a result of
the merger,  Destron  Fearing is now our  wholly-owned  subsidiary  and has been
renamed "Digital Angel Corporation"

     In connection with the merger,  each  outstanding  share of Destron Fearing
common stock was exchanged for 1.5 shares of our common stock,  with  fractional
shares  settled in cash.  In  addition,  outstanding  options  and  warrants  to
purchase  shares of Destron  Fearing common stock were converted into a right to
purchase  that number of shares of our common  stock as the  holders  would have
been entitled to receive had they  exercised  such options or warrants  prior to
September 8, 2000 and participated in the merger. We issued 20,500,853 shares of
our common  stock in exchange  for all the  outstanding  common stock of Destron
Fearing  and will  issue up to  2,731,006  shares of our  common  stock upon the
exercise of the Destron Fearing  options and warrants.  The total purchase price
of Destron  Fearing of  approximately  $84.6 million,  including the liabilities
assumed,  was allocated to the  identifiable  assets with the remainder of $74.9

                                       29
<PAGE>

million  recorded  as  goodwill,  which is being  amortized  over 10 years.  The
transaction was accounted for under the purchase method of accounting.

     Destron Fearing has been in the animal identification  business since 1945.
For over 50 years,  Destron Fearing has developed,  manufactured  and marketed a
broad range of individual animal identification  products.  Destron Fearing owns
patents worldwide in microchip technology and is a leader in the world evolution
of radio frequency animal identification.

     Pacific Decision Sciences Corporation

     Effective   October  1,  2000,  we  acquired  Pacific   Decision   Sciences
Corporation. In the merger transaction, we issued 8,568,532 shares of our common
stock  valued at  approximately  $28.1  million.  In  addition,  for each of the
twelve-month  periods  ending  September 30, 2001 and  September  30, 2002,  the
former  stockholders  of Pacific  Decision  Sciences will be entitled to receive
earnout  payments,  payable  in  cash  or in  shares  of our  common  stock,  of
$9,662,947  plus 4.0  times  earnings  before  income  taxes,  depreciation  and
amortization, which we refer to as "EBITDA," in excess of $3,675,880, subject to
reduction  by 4.0 times the  shortfall  from the  projected  EBITDA  amount,  as
defined in the merger agreement.  Any such additional payments will increase the
purchase  price and result in additional  goodwill.  The total purchase price of
Pacific Decision Sciences,  including the liabilities  assumed, was allocated to
the  identifiable  assets  with the  remainder  of  $25.2  million  recorded  as
goodwill,  which is being amortized over 5 years.  The transaction was accounted
for under the purchase method of accounting.

     Pacific Decision Sciences is a provider of proprietary  web-based  customer
relationship  management  software.  It develops,  sells and implements software
systems  that enable  automated,  single  point of contact  delivery of customer
service.

     Other Recent Acquisitions

     In addition to Computer  Equity  Corporation,  Destron  Fearing and Pacific
Decision  Sciences,  since  January,  2000 we  have  acquired,  in  transactions
accounted for under the purchase method of accounting:

     o    100% of the  capital  stock of  Independent  Business  Consultants,  a
          network  integration  company  based in  Valley  Village,  California,
          effective as of April 1, 2000;

     o    100% of the  capital  stock of Timely  Technology  Corp.,  a  software
          developer  and  application   service  provider  based  in  Riverside,
          California, effective as of April 1, 2000;

     o    100% of the  capital  stock of P-Tech,  Inc.,  a software  development
          company based in Manchester,  New Hampshire,  effective as of April 1,
          2000;

     o    100% of the  capital  stock of  WebNet  Services,  Inc.,  an  internet
          service provider, network integrator and website developer,  effective
          as of July 1, 2000;

     o    54.7%  of the  capital  stock  of  SysComm  International  Corporation
          (OTC-BB:  SYCM), a hardware and software network integration  company,
          effective as of December 1, 2000; and

     o    100% of the  capital  stock of  Caledonian  Venture  Holdings  Limited
          (Transatlantic  Systems),  a software development company based in the
          United Kingdom, effective December 18, 2000.

                                       30
<PAGE>


     All   acquisitions   were  accounted  for  using  the  purchase  method  of
accounting.   Total  assets  acquired,  including  goodwill,  during  2000,  are
summarized as follows:

          Purchase price                                $163,604
          Net assets acquired                            (30,136)
                                                        ---------
          Goodwill                                      $133,468
                                                        =========
     Other Transactions

     In  October,   2000,  we  entered  into  transactions  with  MCY.com,  Inc.
(OTC-BB:MCYC) under which we agreed would sell to MCY a non-exclusive  perpetual
worldwide license to use our recently-acquired Net-Vu product, an Internet-based
Automatic  Contact  Distributor,  for $9 million in notes plus 615,000 shares of
MCY; and MCY would grant to us an exclusive  perpetual  license to MCY's digital
encryption and distribution systems,  including its NETrax(TM) software, for use
in various non-entertainment business-to-business applications, in consideration
for 11.8 million  shares of our common stock.  All  consideration  was placed in
escrow  pending  resolution  of certain  contingencies  which were  satisfied or
waived  on March  30,  2001 at which  time the  escrow  was  terminated  and the
transactions closed. This transaction did not result in any revenue recognition.
It will be recognized as a capital  transaction  (sale of stock) and purchase of
internal use software.

     On October 27, 2000, we acquired  approximately 16% of the capital stock of
ATEC Group,  Inc.  (AMEX:TEC),  in consideration  for shares of our common stock
valued at  approximately  $7.2 million.  Based in Commack,  New York,  ATEC is a
system integrator and provider of a full line of information technology products
and services. We determined that we would account for our investment in the ATEC
Group,  Inc. using the equity method of  accounting.  Subsequent to December 31,
2000,  we decided to dispose of this asset in  conjunction  with our decision to
sell and discontinue  entirely the operations of Intellesale.  On March 1, 2001,
we rescinded the stock purchase  transaction  in accordance  with the rescission
provision in the common stock purchase agreement in consideration for a break-up
fee of $1.0 million which we paid by issuing 448,431 shares of our common stock.
As of  December  31,  2000,  the  market  value of  ATEC's  shares  had  decline
substantially  from the market  value on October 27,  2000 when we acquired  our
investment.  We have  concluded  that the decline in our  investment in the ATEC
Group is "other than  temporary"  and, as of December 31, 2000,  we recognized a
loss of impairment in value of approximately $3.6 million,  which is included in
"Restructuring and Unusual Costs" in the accompanying financial statements.

     On  February  27, 2001 we  acquired  16.6% of the capital  stock of Medical
Advisory  Systems,  Inc.  (AMEX:  DOC),  a provider  of medical  assistance  and
technical  products and services,  in a transaction  valued at  approximately $8
million in consideration  for 3.3 million shares of our common stock. We are now
the single  largest  shareholder  and  control 2 of the 7 board  seats.  We have
determined that we will account for this  investment  using the equity method of
accounting.

     RESULTS OF CONTINUING OPERATIONS

     Revenue

     Revenue from continuing operations for 2000 was $134.8 million, an increase
of $5.7  million,  or  4.3%,  from  $129.1  million  in 1999.  Revenue  for 1999
represents an increase of $54.8 million,  or 73.8%,  from $74.3 million in 1998.
These  significant   increases  are  attributable  to  the  growth  of  existing
businesses as well as to growth through acquisitions.

                                       31
<PAGE>
     Revenue for each of the continuing operating segments was:
<TABLE>
<CAPTION>
                                            2000                           1999                        1998
                                 ----------------------------   ---------------------------  --------------------------
                                   Product  Service    Total     Product  Service    Total    Product  Service   Total
                                   -------  -------    -----     -------  -------    -----    -------  -------   -----
                                                                (amounts in thousands)
<S>                               <C>         <C>       <C>          <C>       <C>        <C>         <C>      <C>       <C>
Applications                      $ 18,525    $ 9,587   $ 28,112     $14,829   $ 13,177   $ 28,006    $ 7,306  $ 2,857   $10,163
Services -
Telephony (1)                       34,754      5,265     40,019      33,394     25,832     59,226     30,820    2,450    33,270
Networks                            34,894      8,151     43,045      19,878      7,312     27,190     18,708    2,574    21,282
                                  ---------  ---------  ---------   ---------  ---------  ---------  ------------------  --------
Total Services                      69,648     13,416     83,064      53,272     33,144     86,416     49,528    5,024    54,552
Advanced Wireless                   22,253      1,146     23,399      14,379          -     14,379      9,628        -     9,628
Corporate                              191          -        191         263          -        263          -        -         -
                                  ---------  ---------  ---------   ---------  ---------  ---------  ------------------  --------
Total                             $110,617   $ 24,149   $134,766     $82,743   $ 46,321   $129,064    $66,462  $ 7,881   $74,343
                                 ==========  =========  =========   =========  =========  =========  ==================  ========
-----------------
<FN>

(1)  Includes  TigerTel's revenue of $39.2 million and $11.6 million in 1999 and
     1998.  TigerTel  was sold on December 31,  1999.  Changes  during the years
     were:
</FN>
</TABLE>

     Revenue from our  Applications  segment  increased  $0.1  million.  Product
revenue  increased by $3.7 million,  or 25.0%,  but service revenue  declined by
$3.6  million,  or 27.2%.  The decline in service  revenue was as a result of an
internal  project to implement an enterprise based financial  reporting  system,
reducing  the amount of billable  revenue that that group could  otherwise  have
generated  if  services  were  performed  for third  parties.  Revenue  from our
Applications  segment  increased  $17.8 million,  or 175.6%,  from 1998 to 1999.
Companies  acquired in 1999 contributed all of the product and service growth in
this segment in 1999.

     Our Services  segment is divided into two business  groups - Telephony  and
Networks:

     Our Telephony group's revenue decreased $19.2 million,  or 32.4%, from 1999
to 2000.  The decrease was due to the fact that 1999  includes  $39.2 million of
revenue ($16.6 of product and $22.6 of services) from TigerTel which was sold on
December 31, 1999. Excluding TigerTel's 1999 revenue,  2000 revenue increased by
$20 million, or 100%, compared to 1999 revenue of $20 million, $18.2 million, or
91.0%, of which was contributed by companies  acquired in 2000 and $1.8 million,
or 9.0%, of which was from internal growth.  Revenue increased $26.0 million, or
78.0%, from 1998 to 1999 as a result of TigerTel's acquisition of Contour in May
1999.  TigerTel's revenue was $39.2 million, or 66.2%, of 1999 revenue and $11.6
million, or 34.9%, of 1998's revenue.

     Our Networks group's revenue  increased $15.9 million,  or 58.3%, from 1999
to 2000.  Companies acquired in 2000 contributed $9.7 million,  or 61.4%, of the
increase,  while $6.1  million,  or 38.6%,  of the  increase  was from  internal
growth.  Both product and service  revenue  increased  from internal  growth and
acquisition.  Revenue  increased  $5.9  million,  or  27.8%,  from 1998 to 1999.
Companies  acquired  in 1999  contributed  $9.2  million  of  revenue  in  1999,
representing  155.9% of 1999's revenue increase over 1998. The $3.3 million,  or
15.5%,  decline in existing  business  revenue  from 1998 to 1999  reflects  the
transition  from  lower  margin  product  business  to a higher  margin  service
business in 1999 compared to 1998.

     Revenue from our Advanced  Wireless  segment  increased  $9.0  million,  or
62.3%, from 1999 to 2000.  Companies acquired in 2000 contributed $10.4 million,
or 115.6%, of this increase, while the existing business unit's revenue declined
$1.4 million,  or 15.6%,  of the increase,  resulting from cut backs of military
spending  in the  United  Kingdom.  Revenue  from this  segment  increased  $4.8
million,  or 49.3%,  from 1998 to 1999 as improved wireless orders were received
in the United Kingdom.

                                       32
<PAGE>

     Rules 5.03-2.1 and 2 of Regulation S-X require the Company disclose cost of
both  product  and service  revenue.  The Company is unable to comply with these
rules at this time. The Company is in the process of  implementing an enterprise
based financial  reporting  system and will report product and services costs in
its March 31, 2001 interim financial statements.

     Gross Profit and Gross Profit Margin

     Gross  profit from  continuing  operations  for 2000 was $52.3  million,  a
decrease of $2.5 million,  or 4.6%, from $54.8 million in 1999. Gross profit for
1999 represents a $20.3 million, or 58.8%,  increase over 1998's gross profit of
$34.5  million.  As a percentage of revenue,  the gross profit margin was 38.8%,
42.4%  and  46.4%  for the  years  ended  December  31,  2000,  1999  and  1998,
respectively.

     Gross profit from continuing operations for each operating segment was:

<TABLE>
<CAPTION>
                                                   2000       1999       1998
                                                   ----       ----       ----
                                                     (amounts in thousands)
<S>                                               <C>        <C>        <C>
Applications                                      $16,513    $17,066    $ 6,894
Services -
  Telephony (1)                                    14,759     22,386     19,071
  Networks                                         11,073      8,635      3,863
                                                  -----------------------------
  Total Services                                   25,832     31,021     22,934
Advanced Wireless                                   9,755      6,415      4,659
Corporate                                             191        263          -
                                                  -----------------------------
                                                  $52,291    $54,765    $34,487
                                                  =============================
-----------
<FN>
(1)  Includes  TigerTel's gross profit of $14.9 million and $7.7 million in 1999
     and 1998.  TigerTel was sold on December 31, 1999. Gross profit margin from
     continuing operations for each operating segment was:
</FN>
</TABLE>


<TABLE>
<CAPTION>
                                                   2000        1999        1998
                                                   ----        ----        ----
                                                      %          %          %
<S>                                                  <C>        <C>        <C>
Applications                                         58.7       60.9       67.8
Services -
  Telephony  (1)                                     36.9       37.8       57.3
  Networks                                           25.7       31.8       18.2
                                                -------------------------------
  Total Services                                     31.1       35.9       42.0
Advanced Wireless                                    41.7       44.6       48.4
Corporate                                               -       -  -          -
                                                -------------------------------
                                                     38.8       42.4       46.4
                                                ===============================
-----------
<FN>
(1)  Includes  TigerTel's  gross  profit  margin  of 38.0% and 66.4% in 1999 and
     1998.  TigerTel  was sold on December 31,  1999.
</FN>
</TABLE>

     Changes during the years were:

     Gross profit from our Applications segment decreased $0.6 million from 1999
to 2000 and  margins  decreased  to 58.7% from 60.9% in 2000  compared  to 1999.
Companies  acquired  in 2000  contributed  $4.5  million  helping to sustain our
margin and gross profit  percentage  decline from loss of business at our United
Kingdom  locations.  Those locations  suffered from the cancellation of military
orders which were in the pipeline but did not materialize.  We also utilized the
services of our Applications segment to implement our enterprise based financial
reporting  system in 2000,  reducing the amount of billable revenue that segment
could  otherwise  have  generated if services were  performed for third parties,

                                       33
<PAGE>

further reducing gross profit.  Gross profit increased $10.2 million, or 147.5%,
from 1998 to 1999 as a result of acquisitions made in 1999. The decline in gross
margin percentage from 1998 to 1999 reflected the additional product mix offered
by this segment in 1999 compared to 1998.

     Our Services  segment is divided into two business  groups - Telephony  and
Networks:

     Our Telephony  group's gross profit declined $7.6 million,  or 34.1%,  from
1999 to 2000.  Results  from 1999  include  $14.9  million of  TigerTel's  gross
profit.  Excluding  TigerTel's  gross  profit  for  1999,  our  Telephony  group
experienced a $7.3 million,  or 97.3%,  gross profit increase from 1999 to 2000.
Of this amount, $5.3 million, or 72.6%, was generated from companies acquired in
2000 and the balance,  $2.0 million, or 27.4%, was generated by internal growth.
Gross  profits  increased  by $3.3  million,  or 17.3%,  for 1999,  but  margins
declined to 37.8% in 1999 from 57.3% in 1998.  The increase in absolute  dollars
resulted from the acquisition of Contour,  but this acquisition also contributed
significantly  lower overall gross margin.  Contour's  margins were historically
lower than those of the other entities within this group.

     Our Network  group's gross profit  increased $2.4 million,  or 28.2%,  from
1999 to 2000. Of the improvement,  $0.1 million was contributed through internal
growth and $2.3 million was  contributed  by companies  acquired in 2000.  Gross
margin  percentage  declined  to 25.7%  in 2000  from  31.8%  in 1999.  The poor
performance of the economy,  and the technology  sector in particular in the 4th
quarter of 2000  resulted in lower  capital  spending and  increased  incentives
which  contributed  to the  decline in gross  margin  percentage.  Gross  profit
increased by $4.8 million, or 123.5%, for 1999. This improvement is attributable
to the acquisitions  during the second quarter of 1999, and a small  improvement
in existing  business  margin  resulting  from the shift from  product  sales to
services.  The companies  acquired were more service oriented (e.g.,  help desk,
consulting  services)  than the only company  that made up the Networks group in
1998,   with  most   expenses   being   classified   as  selling,   general  and
administrative.

     Gross profit from our Advanced  Wireless segment increased by $3.3 million,
or 52.1%, from 1999 to 2000. Companies acquired in 2000 contributed $3.8 million
while gross margin from  internal  growth  declined  $0.5 million as a result of
lower revenue from this source.  The gross margin  percentage  declined slightly
from 44.6% in 1999 to 41.7% in 2000.  In 1999,  gross  profit  increased by $1.8
million,  or 39.1%,  over 1998 as a result of increased  wireless revenue in the
United Kingdom. Gross margin percentage declined slightly to 44.6% from 48.4%.

     Selling, General and Administrative Expense

     Selling,  general and  administrative  expenses from continuing  operations
were $64.5 million in 2000, an increase of $5.6 million, or 9.5%, over the $58.9
million  reported  in 1999.  The 1999  expense  represents  an increase of $26.8
million,  or 83.5%,  over the $32.1 million reported in 1998. As a percentage of
revenue, selling, general and administrative expenses from continuing operations
have increased to 47.9% in 2000, from 45.7% in 1999 and 43.2% in 1998.

     Starting  towards  the end of the fourth  quarter of 2000,  and  commencing
January 1, 2001, we mandated  strict and severe cost cutting  procedures  across
the organization. At the segment level, these measures include a complete review
and reduction of selling,  general and administrative  expenses by at least 10%.
At the corporate  level, we have eliminated the levels of 2000  expenditures for
bonuses,  annual corporate  meetings,  and  professional  fees and due diligence
expenses both of which were  significant  in 2000 as a result of litigation  and
aborted   acquisitions.   We  have  also  reviewed  compensation  and  benefits,
automobile,  travel  and  entertainment  expenses,   professional  fees,  office
expenses,  insurance, facility and communications costs, and corporate marketing
and branding costs and expect savings of between $2.0 and $4.0 million in 2001.

                                       34
<PAGE>


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

<TABLE>
<CAPTION>
                                             2000          1999           1998
                                           ---------- ------------- ------------
                                                  (amounts in thousands)
<S>                                        <C>           <C>           <C>
Applications                               $ 19,210      $ 14,387      $  5,381
Services -
    Telephony (1)                            11,511        20,260        17,572
    Networks                                  9,348         6,953         2,261
                                           --------      --------      --------
    Total Services                           20,859        27,213        19,833
Advanced Wireless                            10,580         6,856         3,507
Corporate                                    13,851        10,504         3,399
                                           --------      --------      --------
                                           $ 64,500      $ 58,960      $ 32,120
                                           ========      ========      ========
--------------------
<FN>
   (1)   Includes  TigerTel's  selling,  general and administrative  expenses of
         $11.4 million and $5.5 million in 1999 and 1998.
</FN>
</TABLE>

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

<TABLE>
<CAPTION>
                                              2000          1999         1998
                                              ----          ----         ----
                                               %             %            %
<S>                                           <C>           <C>          <C>
Applications                                  68.3          51.4         52.9
Services -
    Telephony (1)                             28.8          34.2         52.8
    Networks                                  21.7          25.6         10.6
                                              ----          ----         ----
    Total Services                            25.1          31.5         36.4
Advanced Wireless                             45.2          47.7         36.4
Corporate (2)                                 10.3           8.1          4.6
                                              ----          ----         ----
                                              47.9          45.7         43.2
                                              ====          ====         ====
--------------------
<FN>
(1)  Includes,  as a  percentage  of revenue,  TigerTel's  selling,  general and
     administrative expenses of 29.1% and 47.4% in 1999 and 1998.

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

Changes during the years were:

     Our Applications segment's  selling,  general and  administrative  expenses
increased $4.8 million, or 33.5%, to $19.2 million in 2000 from $14.4 million in
1999.  Companies acquired in 2000 contributed $4.0 of this increase,  while $0.8
million was  attributable  to increased  sales,  marketing and travel  expenses.
Selling, general and administrative expenses increased $9.0, or 167.4%, to $14.4
million  in  1999  from  $5.4  million  in  1998.  Companies  acquired  in  1999
contributed  $8.6 million of this increase,  while $0.4 million was attributable
to general overhead increases.

     Services -

     Our Telephony group's selling, general and administrative expenses declined
by $8.7 million, or 43.2%, to $11.5 million from $20.3 million in 1999. Included
in 1999's SG&A is $11.4  million  attributable  to TigerTel sold on December 31,
1999. Excluding TigerTel in 1999, selling,  general and administrative  expenses
increased $2.7 million, or 15.3%, to $20.3 million in 2000 from $17.6 million in
1998.  This  increase was  primarily  due to an  acquisition  made in the second
quarter of 2000  which  contributed  $2.3  million  of this  increase,  and $0.4
million  of which  was  attributable  to higher  payroll  and  insurance  costs.
Selling,  general and  administrative  expenses  increased by $2.7  million,  or
15.3%, to $20.3 million from $17.6 million in 1999.  Included in 1998's selling,
general and  administrative  expenses is $5.5 million  attributable  to TigerTel

                                       35
<PAGE>

sold  on  December  31,  1999.   Excluding   TigerTel's  selling,   general  and
administrative  expenses  of $11.4  million  in 1999 and $5.5  million  in 1998,
selling, general and administrative expenses declined $3.2, million or 26.4%, to
$8.9 million in 1999 from $12.1 million in 1998. This decrease was primarily due
to  reductions  in  headcount  and  facilities  costs as  technical  forces  and
administrative staff were cut and operations consolidated.

     Our Network group's selling,  general and administrative expenses increased
$2.4  million,  or 34.4%,  to $9.4  million in 2000,  from $7.0 million in 1999.
Increases in payroll,  commissions,  facility and general overhead, in line with
increases  in  revenue,  accounted  for  $0.9  million  of  the  increase  while
acquisitions   in  2000   contributed   $1.5  million.   Selling,   general  and
administrative  expenses  increased $4.7 million,  or 204.3%, to $7.0 million in
1999 from  $2.3  million  in 1998.  The  increase  was  attributable  to the two
acquisitions made in the second quarter of 1999 which accounted for $4.2 million
of the increase.  Those  companies  are more service  oriented and have a higher
selling, general and administrative expenses.

     Selling,  general and  administrative  expenses from our Advanced  Wireless
segment increased $3.7 million, or 54.3%, to $10.6 million in 2000 from the $6.9
million reported in 1999. Acquisitions completed throughout the year contributed
$4.7,  while $1.0 million was reduced at the one business  comprising this group
at the  beginning of 2000 in line with  reduced  revenue,  selling,  general and
administrative  expenses  increased $3.4 million,  or 97.1%,  to $6.9 million in
1999 from the $3.5 million reported in 1998. While revenue  increased 50% in the
same period, the increase was primarily as a result of sales and marketing costs
incurred in the launch of a new product in the second half of 1999, the benefits
of which are now being realized in 2000.

     Corporate  selling,  general and  administrative  expenses  increased  $3.3
million,  or 31.9%, to $13.9 million in 2000 from the $10.5 million  reported in
1999.  Increases in corporate  staff, a revised outside  directors  remuneration
program, higher insurance and professional fees all contributed to the increase.
selling,  general and administrative expenses increased $7.1 million, or 208.8%,
to $10.5  million in 1999 from the $3.4  million  reported in 1999.  Included in
1999's amount were bonuses of $5.5 million,  higher payroll and related benefits
due to increases in corporate  staff,  and  increased  facility,  insurance  and
professional fees.

     Depreciation and Amortization

     Depreciation and amortization  expense from continuing  operations for 2000
was $11.1 million,  an increase of $4.5 million,  or 68.2%, from $6.6 million in
1999. The 1999 expense represents an increase of $3.7 million,  or 127.6%,  over
the $2.9. million reported in 1998. As a percentage of revenue, depreciation and
amortization  expense  increased  to 8.2% in 2000  from 5.1% in 1999 and 3.9% in
1998. The increase,  despite higher  revenues,  is due to  significantly  higher
goodwill  amortization  resulting  from  acquisitions,   as  well  as  increased
depreciation expense in 2000 and 1999 resulting from higher capital expenditures
in both 2000 and 1999 compared to 1998.

     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, 2001,  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 $3.5 million over prior periods and decreased  earnings
per share by $.05.

                                       36
<PAGE>

     Depreciation  and amortization  expense for each of the operating  segments
was:
<TABLE>
<CAPTION>
                                                     2000           1999           1998
                                                    -------        -------       --------
                                                            (amounts in thousands)
<S>                                                 <C>            <C>            <C>
Applications                                        $ 1,075        $ 1,781        $   772
Services -
    Telephony (1)                                       551          1,547            374
    Networks                                            171            132             39
                                                    -------        -------        -------
    Total Services                                      722          1,679            413
Advanced Wireless                                       652            510            319
Corporate (including amounts incurred during
 consolidation) (2)                                   8,624          2,590          1,409
                                                    -------        -------        -------
                                                    $11,073        $ 6,560        $ 2,913
                                                    =======        =======        =======
--------------------
<FN>
(1)  Includes TigerTel's  depreciation and amortization of $1.2 million and $0.5
     million in 1999 and 1998.
(2)  Includes  consolidation  adjustments of $7,034,  $1,610 and $1,272 in 2000,
     1999 and 1998, respectively.
</FN>
</TABLE>


     The  changes  during  the  years  reflect,   in  all  segments,   increased
depreciation from increased capital expenditures in 2000 over 1999 and 1999 over
1998, except that in 1999, in our Applications segment, we recognized intangible
asset  impairment  charges which were included in 1999's  amortization  expense,
thus increasing the expense in 1999 by approximately $0.8 million.

     Corporate's  depreciation  and amortization  increased by $6.0 million,  or
230.8%,  to $8.6  million  in 2000 from $2.6  million in 1999.  The 2000  charge
reflects   additional   goodwill   amortization   on   additional   goodwill  of
approximately $133.5 million associated with companies acquired throughout 2000.

     On an annual basis, we expect goodwill amortization to be approximately $24
million.

     Restructuring and Unusual Charges

     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.

     As part of the  reorganization  of our core  business  in prior  years,  we
implemented a restructuring plan in the first quarter of 1999. The restructuring
plan included the exiting of selected lines of business  within our Services and
Applications  segments,  and the  associated  write-off of assets.  In the first
quarter  of 1999,  we  incurred  a  restructuring  charge of $2.2  million  that
included asset  impairments,  primarily software and other intangible assets, of
$1.5 million,  lease terminations of $0.5 million,  and employee  separations of
$0.2 million. In addition, during the first quarter of 1999, as part of our core
business  reorganization,  we realigned  certain  operations within our Services
segment  and  recognized  impairment  charges  and other  related  costs of $0.3
million.

     Gain on Sale of Subsidiaries

     In  November  1999,  TigerTel  received  an all  cash  bid  for  all of its
outstanding  common  shares from AT&T  Canada,  Inc.  We entered  into a lock-up
agreement with AT&T to tender the approximately 65% of the outstanding shares we
owned,  tendered our shares and, on December 30, 1999, AT&T purchased all of the

                                       37
<PAGE>

shares  tendered.  We recorded a pre-tax  gain in the fourth  quarter of 1999 of
approximately  $20.1 million and received gross proceeds of approximately  $31.3
million in January 2000.

     Interest Income and Expense

     Interest income was $1.1 million,  $0.4 million and $0.3 million, for 2000,
1999 and 1998, respectively. Interest income is earned primarily from short-term
investments and notes receivable.

     Interest expense was $5.9 million,  $3.5 million and $1.1 million for 2000,
1999 and 1998,  respectively.  Interest  expense is a  function  of the level of
outstanding  debt and is principally  associated  with  revolving  credit lines,
notes payable and term loans.

     Income Taxes

     We had  effective  income tax rates of 14.8%,  31.8% and  (113.2%) in 2000,
1999 and 1998,  respectively.  Differences in the effective income tax rate from
the  statutory  federal  income  tax rate  arise  from  non-deductible  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.

     Extraordinary Loss

     In 1999,  we retired  our line of credit  with State  Street Bank and Trust
Company and refinanced it with amounts  borrowed under the credit agreement with
IBM Credit.  Deferred  financing fees  associated with the State Street Bank and
Trust  agreement  were written off during the second  quarter of 1999. The total
amount of the  write-off  recorded  as an  extraordinary  loss was $160,  net of
income taxes.

     RESULTS OF DISCONTINUED OPERATIONS

     The following  discloses the results of Intellesale  and all other non-core
businesses comprising  discontinued  operations for the years ended December 31,
2000, 1999 and 1998:

Discontinued Intellesale business:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                -----------------------------------------
                                                                          (amounts in thousands)
                                                                   2000            1999            1998
                                                                   ----            ----            ----
<S>                                                             <C>             <C>             <C>
Product revenue                                                 $  95,666       $ 137,077       $  55,151
Service revenue                                                     6,826           5,909           5,726
                                                                -----------------------------------------
Total revenue                                                     102,492         142,986          60,877
Cost of goods and services sold                                   109,711         116,182          48,011
                                                                -----------------------------------------
Gross profit                                                       (7,219)         26,804          12,866
Selling, general and administrative expenses                       32,772          19,119           8,111
Gain on sale of subsidiary                                         (5,145)              -               -
Depreciation and amortization                                       2,949           1,725             467
Interest, net                                                           -              60             155
Impairment of investments                                          46,600               -               -
(Benefit) provision for income taxes                              (13,357)          2,452             757
Minority interest                                                     140             417              73
                                                                -----------------------------------------
(Loss) income from discontinued Intellesale businesses          $ (71,178)      $   3,031       $   3,303
                                                                =========================================
</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>

Discontinued non-core businesses:                                           Years Ended December 31,
                                                                   -----------------------------------------
                                                                             (amounts in thousands)
                                                                      2000           1999             1998
                                                                      ----           ----             ----
<S>                                                                <C>             <C>             <C>
Product revenue                                                    $  42,235       $  64,511       $  70,212
Service revenue                                                            -             180           1,649
                                                                   ---------       ---------       ---------
Total revenue                                                         42,235          64,691          71,861
Cost of goods and services sold                                       33,428          51,309          55,026
                                                                   ---------       ---------       ---------
Gross profit                                                           8,807          13,382          16,835
Selling, general and administrative expenses                           7,926          12,337          11,254
Loss on sale of subsidiary                                               528               -               -
Depreciation and amortization                                          1,268           1,402           1,121
Interest, net                                                            187             110             299
Impairment of investments                                              3,619               -               -
(Benefit) provision for income taxes                                    (257)           (472)          1,161
Minority interest                                                         61              25             231
                                                                   ----------      ----------      ---------
(Loss) income from discontinued non-core businesses                $  (4,525)      $     (20)      $   2,769
                                                                   ==========      ==========      =========
</TABLE>

<TABLE>
<CAPTION>

 Total Discontinued Operations                                              Years Ended December 31,
                                                                      -----------------------------------------
                                                                                (amounts in thousands)
                                                                         2000            1999            1998
                                                                         ----            ----            ----
<S>                                                                   <C>             <C>             <C>
Product revenue                                                       $ 137,901       $ 201,588       $ 125,363
Service revenue                                                           6,826           6,089           7,375
                                                                      ---------       ---------       ---------
Total revenue                                                           144,727         207,677         132,738
Cost of goods and services sold                                         143,139         167,491         103,037
                                                                      ---------       ---------       ---------
Gross profit                                                              1,588          40,186          29,701
Selling, general and administrative expenses                            40,697          31,456           19,365
Gain on sale of subsidiary                                               (4,617)              -               -
Depreciation and amortization                                              4,217          3,127           1,588
Interest, net                                                                187             170            454
Impairment of investments                                                50,219               -               -
(Benefit) provision for income taxes                                    (13,614)          1,980           1,918
Minority interest                                                           201             441             304
                                                                      ---------       ---------       ---------
(Loss) income from discontinued operations                            $ (75,702)      $   3,012       $   6,072
                                                                      ==========      =========       =========
</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 these
businesses  that we believe will be assumed by a purchaser  when the business is
sold.

      Intellesale  has  refocused  its  business  model  away from the  Internet
segment and is now 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.

                                       39
<PAGE>

     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 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 "Settlement of
Litigation",  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.

     Provision  for  operating  losses and carrying  costs during the  phase-out
period  include  the  estimated  loss on sale of the  business  units as well as
operating  and other  disposal  costs to be incurred in selling the  businesses.
Carrying  costs  include  the  cancellation  of facility  leases and  employment
contract buyouts. Carrying costs include the cancellation of facility leases and
employment  contract  buyouts.  We do not  anticipate  a  further  loss on sale.
Expenses of sales of the businesses and anticipated  operating  losses represent
our best  estimate  of these  items.  Actual  losses  could  differ  from  those
estimates  and  any  adjustments  will  be  reflected  in our  future  financial
statements. At December 31, 2000, the estimated amounts were as follows:

                                       Intellesale       All Other        Total
                                       -----------------------------------------
                                                 (amounts in thousands)
Operating losses                         $ 1,619          $   --        $ 1,619
Carrying Costs (1)                         6,579             375          6,954
Less: Benefit for income taxes            (1,250)            (57)        (1,307)
                                       -----------------------------------------
___________                              $ 6,948           $ 318        $ 7,266
                                       =========================================

(1)  Carrying costs include all estimated  costs to dispose of the  discontinued
     businesses  including  $4.1  million  for future  lease  commitments,  $1.6
     million for severance and employment contract settlements, and $0.9 million
     for selling costs,  including  professional fees and commissions

     LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

     As of December 31, 2000, cash and cash equivalents totaled $8.0 million, an
increase of $5.8  million,  or 263.6% from $2.2 million at December 31, 1999. We
utilize  a cash  management  system to apply  excess  cash on hand  against  our
revolving  credit  facility for which we had  availability  of $17.0  million at
December  31, 2000,  up from $6.0  million at December  31,  1999.  Cash used in
operating  activities  totaled $34.7 million,  $13.1 million and $3.9 million in
2000,  1999 and 1998,  respectively.  In all three years,  excluding  assets and
liabilities  acquired or assumed in connection with acquisitions,  cash used was
due to  increases in accounts and  unbilled  receivables,  inventories,  prepaid
assets and accounts  payable and accrued  expenses,  after adjusting for the net
income and for non-cash expenses.

     "Due from buyer of divested  subsidiary"  represents  the net  proceeds due
from AT&T  Canada,  Inc. on the sale of TigerTel,  Inc.  This amount was paid in
January,  2000, and we applied the proceeds against our domestic line of credit.
 .

     Accounts and unbilled receivables,  net of allowance for doubtful accounts,
increased by $25.1 million or 133.5% to $43.9 million in 2000 from $18.8 million
in 1999. This increase was primarily as a result of businesses acquired in 2000.
As a percentage of 2000 and 1999 revenue,  accounts and unbilled receivable were
32.6% and 14.6%, respectively.

                                       40
<PAGE>

     Inventories  increased  by $4.5  million or 57.7% to $12.3  million in 2000
from $7.8 million in 1999. This increase was primarily as a result of businesses
acquired  in  2000.  As a  percentage  of 2000  and  1999  cost of  goods  sold,
inventories were 14.9% and 10.4%, respectively.

     Other current assets  increased by $12.3 million or 332.4% to $16.0 million
in 2000 from $3.7 million in 1999.  This increase is primarily  attributable  to
increases  in the  current  portion of our  deferred  tax asset and tax  refunds
receivable.

     Accounts  payable  increased by $10.2 million or 152.2% to $16.9 million in
2000 from $6.7  million in 1999.  This  increase  was as a result of  businesses
acquired in 2000. As a percentage of 2000 and 1999 cost of goods sold,  accounts
payable were 20.5% and 9.0%, respectively.

     Accrued  expenses  increased by $11.4 million or 228.0% to $16.4 million in
2000 from $5.0  million in 1999.  The  increase is  attributable  to  additional
accrued expenses of companies acquired in 2000.

     "Due to sellers of acquired  subsidiary"  represents the deferred  purchase
price due to the  Bostek  Sellers  which,  upon  satisfaction  of  contingencies
discussed in "Settlement of Litigation" above, will be forgiven.

     Earnout and put  accruals  represent  the  estimated  earnout and  deferred
purchase price payments earned at December 31, 2000 and 1999,  respectively.  As
of March 30,  2001 all of the  amounts  payable at  December  31,  2000 had been
settled by the issuance of shares of our common stock.

     Investing  activities provided cash of $16.7 million in 2000, and used cash
of $23.1 million in 1999 and $6.9 million in 1998.  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, offset by cash of $9.1 million used to
acquire  businesses,  $8.4  million of which was spent to acquire  property  and
equipment, and $1.0 million of which was used to increase other assets. In 1999,
cash of $16.9 million was used to acquire businesses,  $3.8 million was spent to
acquire property and equipment and $2.4 million was used principally to increase
assets  such as notes  receivable  and other  assets,  while  $0.6  million  was
received  from the sale of assets.  In 1998,  cash of $1.5  million  was used to
acquire businesses, $1.0 million was spent to acquire property and equipment and
$3.7 million was used  principally to increase  assets such as notes  receivable
and other assets, while $0.4 million was received from the sale of assets.

     Cash of $30.8  million,  $40.6  million and $14.0 million  was  provided by
financing activities in 2000, 1999 and 1998 respectively. 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 $6.0  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.  In 1999,  $51.1
million was  obtained  through  long-term  debt and $5.2  million  was  obtained
through  the  issuance  of  common  shares.  Uses of cash in 1999  included  net
repayments  of $9.5 million and $3.3 million  against  long-term  debt and notes
payable,  respectively,  and $2.8 million for other  financing  costs.  In 1998,
$16.3 million was obtained  through net borrowings  under notes payable and $1.4
million was obtained through the issuance of common shares. Uses of cash in 1998
included  repayments  of $2.5  million on long-term  debt,  $0.9 million for the
redemption  of  preferred  stock and $0.3 million for the  repurchase  of common
stock.

     One of our  stated  objectives  is to  maximize  cash flow,  as  management
believes positive cash flow is an indication of financial strength. However, due

                                       41
<PAGE>

to  our   significant   growth  rate,  our  investment   needs  have  increased.
Consequently,  we may continue,  in the future,  to use cash from operations and
may continue to finance this use of cash through  financing  activities  such as
the sale of preferred or common stock and/or bank borrowing, if available.

     Debt, Covenant Compliance and Liquidity

     In August 1998,  we entered into a $20.0  million line of credit with State
Street Bank and Trust Company secured by all of our domestic assets at the prime
lending rate or at the London  Interbank  Offered  Rate, at our  discretion.  In
February  1999,  the  amount of the  credit  available  under the  facility  was
increased  to  $23.0  million.  On May 25,  1999,  we  entered  into a Term  and
Revolving  Credit  Agreement  with IBM Credit and, on May 26, 1999 we repaid the
amount due to State Street Bank and Trust Company.  On July 30, 1999, the credit
agreement with IBM Credit was amended and restated,  and it was again amended on
January 27,  2000.  On October 17, 2000,  we entered  into a Second  Amended and
Restated Term and Revolving Credit Agreement with IBM Credit which we amended on
March 30,  2001.  The credit  agreement  with IBM  Credit  provides  for:  (a) a
revolving credit line of up to $53.355 million,  subject to availability under a
borrowing base formula,  designated as follows: (i) a U.S. revolving credit line
of up to $49.500 million,  (ii) a Canadian revolving credit line of up to $3.855
million,  and (b) a term loan A of up to $25.0 million,  and (c) a Canadian term
loan C of up to $2.740 million.

     The  revolving  credit  line  may  be  used  for  general  working  capital
requirements,  capital  expenditures and certain other permitted purposes and is
payable in full on May 25, 2002. The U.S.  revolving  credit line bears interest
at the 30-day LIBOR rate plus 2.75% to 3.25% and the Canadian  revolving  credit
line bears interest at the base rate as announced by the  Toronto-Dominion  Bank
of Canada each month plus 1.17% to 1.67%.  As of December  31,  2000,  the LIBOR
rate was approximately  6.62% and approximately $46.4 million was outstanding on
the  U.S.  revolving  credit  line,  which is  included  in  long-term  debt and
approximately  $3.6 million was  outstanding  on the Canadian  revolving  credit
line, which is included in the net assets of discontinued operations.

     Term loan A, which was used to pay off State Street Bank and Trust Company,
bears  interest  at the 30-day  LIBOR rate plus 3.5% to 4.0%,  is  amortized  in
quarterly  installments  of  approximately  $1.04  million over six years and is
repayable in full on May 25, 2002.  As of December  31, 2000  approximately  $23
million was outstanding on this loan. The installment due April 1, 2001 has been
deferred and is due with the installment due July 1, 2001.

     Term loan C, which was used by our Canadian  subsidiary to pay off its bank
debt, bears interest at the base rate as announced by the Toronto-Dominion  Bank
of Canada each month plus 1.17% to 1.67%, is amortized in quarterly installments
over six years and is  repayable  in full on May 25,  2002.  As of December  31,
2000,  Toronto-Dominion's  rate was approximately  7.5% and  approximately  $2.0
million  was  outstanding  on this loan, which is included  in the net assets of
discontinued operations.

     The  credit  agreement  with IBM  Credit,  as  amended  on March 30,  2001,
contains  standard  debt  covenants  relating  to  our  financial  position  and
performance,  as  well as  restrictions  on the  declarations  and  payments  of
dividends and redemption of preferred  stock.  Those  covenants and the covenant
requirements are as follows:

             Covenant                              Covenant Requirement
             --------                              --------------------
                                       As of the following dates not less than:
                                       ----------------------------------------
(i)    Tangible Net Worth                    03/31/01          ( 57,000,000)
                                             06/30/01          ( 47,000,000)
                                             09/30/01          ( 35,000,000)

                                       42
<PAGE>

             Covenant                              Covenant Requirement
             --------                              --------------------
                                       As of the following dates not less than:
                                       ----------------------------------------
                                             12/31/01          ( 34,500,000)
                                             03/31/02          ( 20,000,000)

(ii)   Current Assets to Current
         Liabilities                         03/31/01             1.45:1.0
                                             06/30/01             0.6:1.0
                                             09/30/01             0.8:1.0
                                             12/31/01             0.8:1.0
                                             03/31/02             1.0:1.0



(iii)  Minimum Cumulative EBITDA             03/31/01          ($ 4,700,000)
                                             06/30/01           $ 5,000,000
                                             09/30/01           $ 7,000,000
                                             12/31/01           $11,000,000
                                             03/31/02           $10,000,000


     At  December  31,  2000,  we failed to comply  with 2 of 3  financial  debt
covenants contained in the credit agreement,  and we had a collateral shortfall.
At December 31, 2000 we were  required to maintain a minimum  Tangible Net Worth
(as defined in the credit agreement) of $(11.8) million; our actual Tangible Net
Worth was $(56.8)  million and we were required to achieve a minimum  EBITDA (as
defined in the credit  agreement) of $6.1 million for the quarter ended December
31, 2000; our actual EBITDA for the quarter was $(15.1)  million.  Additionally,
we had an Unpaid Shortfall  Amount (as defined in the credit  agreement) of $4.0
million.  This  amount  represents  the excess of advances  under our  revolving
credit line over eligible collateral.

     Our inability to meet these  covenants was primarily as a result of charges
of $87.3  million taken during the year, of which $70.3 million were recorded in
the fourth  quarter,  consisting of impairment  charges of  approximately  $56.3
million  associated  with the  write  down of  impaired  investments  from  both
continuing and discontinued  operations,  carrying costs of  approximately  $8.5
million  related  to future  losses  and  charges  expected  to be  incurred  by
discontinued  operations,  as well as inventory,  accounts  receivable and other
charges at  Intellesale  of  approximately  $17 million in the second quarter of
2000 and approximately $5.5 million in the fourth quarter.

     On March 8, 2001 we  notified  IBM  Credit  that as of and for the  quarter
ended  December  31,  2000 we were  not in  compliance  with the  covenants  for
Tangible Net Worth and Minimum  EBITDA and that we had a  collateral  shortfall.
IBM Credit agreed to waive such  non-compliance  and, on March 30, 2001, we, IBM
Credit and others  entered into a waiver and amendment to the credit  agreement.
In connection  therewith we agreed to pay IBM Credit a $375,000  waiver fee, and
we granted  IBM Credit a warrant to  acquire  2.9  million  shares of our common
stock and 1.2 million shares of Digital Angel Corporation's common stock.

     Our  business  plan  for 2001  anticipates  compliance  with our  covenants
throughout  the remaining  term of the credit  agreement.  Our plan  anticipates
significant  year  to year  increases  in  revenues  due to  increased  volumes,
improved  working  capital  management,  reduced  capital  spending,  successful
implementation  of  on-going  cost  savings   initiatives,   improved  operating
efficiencies, and the disposition of non-core businesses.

                                       43
<PAGE>

     We currently  expect to meet and be in compliance  throughout 2001 with the
covenants in the credit  agreement.  However,  if business  conditions are other
than as anticipated or other unforeseen events or circumstances occur, these may
impact our ability to remain in compliance with the covenants. In the absence of
waiver or  amendment  to such  financial  covenants,  such  noncompliance  would
constitute an event of default under the credit agreement,  and IBM Credit would
be entitled to accelerate  the maturity of all amounts we owe them. In the event
that such  noncompliance  appears likely, or occurs, we will seek to renegotiate
the covenants  and/or  obtain  waivers,  as required.  There can be no assurance
however that we would be successful in negotiating  such amendments or obtaining
such waivers.

     Sources of Liquidity

     Our  sources of  liquidity  include,  but are not  limited  to,  funds from
operations and funds  available under the credit  agreement with IBM Credit.  We
may be able  to use  additional  bank  borrowings,  proceeds  from  the  sale of
non-core  businesses,  proceeds  from the sale of common and  preferred  shares,
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, 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. We believe that we have the financial resources to meet our future
business requirements for at least the next twelve months.

     Outlook

     Our  objective  is to  continue  to  grow  each of our  operating  segments
internally and through acquisitions,  both domestically and abroad. Our strategy
has  been,  and  continues  to be,  to invest  in and  acquire  businesses  that
complement and add to our existing business base. We have expanded significantly
through  acquisitions  in the last  twelve  months  and  continue  to do so. Our
financial  results and cash flows are  substantially  dependent  on not only our
ability to sustain  and grow our  existing  businesses,  but to continue to grow
through acquisition. We expect to continue to pursue our acquisition strategy in
2001 and future years, but there can be no assurance that our management will be
able to continue to find, acquire,  finance and integrate high quality companies
at attractive prices.

     We are constantly looking for ways to maximize  shareholder value. As such,
we are continually seeking operational efficiencies and synergies within each of
our operating  segments 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 non-core  business units that are not critical to our long
term strategy or other restructuring or rationalization of existing  operations.
We will continue to review all  alternatives  to ensure maximum  appreciation of
our  stockholders'  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 June 1998, the Financial  Accounting  Standards  Board (FASB) issued FAS
133,  Accounting  for  Derivative  Instruments  and  Hedging  Activities,  which
provides  a  comprehensive  and  consistent  standard  for the  recognition  and
measurement of derivatives  and hedging  activities.  The statement is effective
for fiscal years  commencing  after June 15, 2000. In June 2000, the FASB issued
FAS 138,  Accounting  for Certain  Derivative  Instruments  and Certain  Hedging
Activities - an Amendment of FAS statement 133, which  addresses  implementation
issues  experienced by those  companies  that adopted FAS 133 early.  We adopted

                                       44
<PAGE>

these  statements  as of January 1, 2001 and,  because we have a minimal  use of
derivative instruments,  we do not believe that the adoption of these statements
will have any effect on our financial  condition,  results of operations or cash
flows.

     In December 1999, the SEC issued Staff  Accounting  Bulletin (SAB) No. 101,
Revenue  Recognition in Financial  Statements.  This Staff  Accounting  Bulletin
summarizes   certain  of  the  staff's  views  on  applying  Generally  Accepted
Accounting  Principles to revenue recognition in financial  statements.  On June
26, 2000,  the SEC staff issued SAB No. 101B,  which delayed the  implementation
date of SAB 101 until no later than the fourth  fiscal  quarter of fiscal  years
beginning  after  December  15, 1999.  We adopted  this  statement in the fourth
quarter  of 2000  and  such  adoption  did not  have a  material  impact  on our
financial condition, results of operations or cash flows.

     In  September  2000,  the EITF  reached a consensus  in EITF Issues  00-10,
"Accounting  for Shipping and Handling  Fees and Costs,"  agreeing that shipping
and handling fees must be classified  as revenues and  comparable  prior periods
should be restated. Further, they agreed that shipping and handling costs can be
classified  anywhere in the statement of earnings,  except they cannot be netted
against sales. If shipping and handling costs are not included in costs of goods
sold, the amount and  classification  of these expenses must be disclosed in the
footnotes to the financial  statements.  This consensus must be adopted no later
than the fourth  quarter of fiscal years  beginning  after December 15, 1999. We
adopted EITF Issue 00-10 in the fourth quarter of 2000 and such adoption did not
have a material impact on our financial condition, results of operations or cash
flows.

     ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     With our Canadian and United Kingdom  subsidiaries,  we have operations and
sales in various regions of the world. Additionally, we may 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  the  existing  credit
agreement  with IBM Credit bear  interest at the London  Interbank  Offered Rate
which is adjusted  monthly.  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 14 and begin immediately after Item 14.

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

     Not applicable.




                                       45

<PAGE>
                                    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>
  Richard J. Sullivan           62         Chairman, Chief Executive Officer, Secretary        May 1993
  Garrett A. Sullivan           66         Director, Vice Chairman                             January 2001
  Mercedes Walton               47         President, Chief Operating Officer                  January 2001
  Richard S. Friedland          50         Director                                            October 1999
  Arthur F. Noterman            59         Director                                            February 1997
  Daniel E. Penni               53         Director                                            March 1995
  Angela M. Sullivan            43         Director                                            April 1996
  Constance K. Weaver           48         Director                                            July 1998
  Jerome C. Artigliere          47         Senior Vice President, Chief Financial Officer,     December 2000
                                           Assistant Treasurer
  David I. Beckett              49         Senior Vice President, General Counsel,             December 2000
                                           Assistant Secretary
  Michael E. Krawitz            31         Senior Vice President, Assistant Secretary          December 2000
  David A. Loppert              46         Senior Vice President, Chief Executive              December 2000
                                           Officer, SysComm International Corporation
</TABLE>

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

     Richard J.  Sullivan:  Mr.  Sullivan,  age 62, was  elected to the board of
directors  and named  Chief  Executive  Officer  in May 1993.  He was  appointed
Secretary  in March  1996.  Mr.  Sullivan  is  currently  Chairman  of Great Bay
Technology, Inc. From August 1989 to December 1992, Mr. Sullivan was Chairman of
the  board  of  directors  of  Consolidated   Convenience   Systems,   Inc.,  in
Springfield,  Missouri.  He has been the  Managing  General  Partner  of The Bay
Group, a merger and acquisition firm in New Hampshire,  since February 1985. Mr.
Sullivan was  formerly  Chairman and Chief  Executive  Officer of  Manufacturing
Resources,  Inc., an MRP II software company in Boston,  Massachusetts,  and was
Chairman and CEO of Encode Technology, a "Computer-Aided Manufacturing" Company,
in Nashua,  New Hampshire  from February  1984 to August 1986.  Mr.  Sullivan is
married to Angela M. Sullivan.

     Garrett A. Sullivan:  Mr. Sullivan,  age 66, has served as Vice Chairman of
the Company since January 2001.  From March 1995 until his  appointment  to Vice
Chairman, Mr. Sullivan served as President of the Company. He was elected to the
board of  directors  in August  1995.  From March  1995 to  December  2000,  Mr.
Sullivan was  President of the Company.  He was acting  secretary of the Company
from March 1995 to March 1996 and acting Chief Financial Officer from March 1995
to February  1997.  From 1993 to 1994,  he was an  Executive  Vice  President of
Envirobusiness,  Inc.  From  1988 to 1993,  he  served  as  president  and chief
operating  officer of two companies in the electronics  and chemical  industries
which were owned by Philips North  America.  He was  previously a partner in The
Bay Group, a merger and  acquisition  firm in New Hampshire,  from 1988 to 1993.
From 1981 to 1988,  Mr.  Sullivan  was  President  of  Granada  Hospital  Group,
Burlington,  Massachusetts.  He earned a Bachelor  of Arts  degree  from  Boston
University in 1960 and an MBA from Harvard  University in 1962. Mr.  Sullivan is
not related to Richard J. Sullivan.

     Mercedes Walton:  Ms. Walton, age 47, has served as the President and Chief
Operating  Officer of the Company since January 2001. Ms. Walton was employed by
AT&T from 1976 to 2000. From January 1999 to March 2000, Ms. Walton was employed
by  AT&T as  Vice President--Corporate  Strategy and Business  Development  and,

                                       46
<PAGE>

from   March   1996   to   December   1998,   as   Business   Development   Vice
President--Corporate  Strategy.  Ms. Walton holds a Bachelor of Arts degree from
Smith  College,  a Masters of  Education  degree from Harvard  University  and a
Masters of Science degree from the  Massachusetts  Institute of Technology Sloan
School of  Business.  In  addition,  Ms.  Walton  graduated  from the  Executive
Development Program at Emory University, the Aspen Institute's Executive Program
and Northwestern  University's Kellogg School of Business Executive  Development
Program.

     Richard S. Friedland:  Mr.  Friedland,  age 50, was elected to the board of
directors in October 1999 and is Chairman of the Audit  Committee  and serves on
the  Compensation  Committee of the board of  directors  of the Company.  He was
previously  associated with General Instrument  Corporation.  During his 19-year
tenure, he held various executive positions,  including Chief Financial Officer,
President and Chief Operating Officer. In 1995, he was appointed Chairman of the
Board and Chief Executive Officer.  Mr. Friedland currently serves on the boards
of Zilog,  Inc.  and Video  Network  Communications,  Inc.,  as well as  several
development  stage  companies.  He  earned  a  Bachelor  of  Science  degree  in
Accounting  from  Ohio  State  University  in  1972  and a  Master  of  Business
Administration degree from Seton Hall University in 1985.

     Arthur F. Noterman: Mr. Noterman, age 59, a Chartered Life Underwriter, has
served  as a  Director  since  February  1997,  and  serves  on  the  Audit  and
Compensation Committees of the board of directors of the Company. An operator of
his own insurance  agency,  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 53, has served as a Director  since March
1995 and is  Chairman  of the  Compensation  Committee,  and serves on the Audit
Committees  of the board of directors of the Company.  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.

     Angela M. Sullivan:  Ms.  Sullivan,  age 43, has served as a Director since
April 1996. From 1988 to the present, Ms. Sullivan has been a partner in The Bay
Group, a private merger and acquisition firm, President of Great Bay Technology,
Inc.,  and President of Spirit  Saver,  Inc. Ms.  Sullivan  earned a Bachelor of
Science degree in Business  Administration in 1980 from Salem State College. Ms.
Sullivan is married to Richard J. Sullivan.

     Constance  K.  Weaver:  Ms.  Weaver,  age 48,  was  elected to the board of
directors in July 1998 and serves on the  Compensation  and Audit  Committees of
the board of directors of the Company.  From 1996 to the present, Ms. Weaver has
been Vice President,  Investor  Relations and Financial  Communications for AT&T
Corporation.  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. Ms. Weaver is a director of

                                       47
<PAGE>


the  National  Investor  Relations  Institute  (NIRI).  She earned a Bachelor of
Science degree from the University of Maryland in 1975.

     Jerome C. Artigliere:  Mr.  Artigliere,  age 47, joined a subsidiary of the
Company as President in January 1998,  and was appointed  Vice  President of the
Company in April 1998 and  Treasurer in December  1999.  In November  2000,  Mr.
Artigliere  was  appointed  Vice  President and Chief  Financial  Officer of the
Company,  and Senior Vice  President,  Chief  Financial  Officer  and  Assistant
Treasurer in December 2000. From 1996 to 1997, he was Regional Vice President at
General Electric Capital Corporation in Portsmouth, NH. Prior to that, from 1994
to 1996, he was State Vice President at First National Bank in Portsmouth, NH, a
commercial bank subsidiary of Peoples  Heritage Bank of Portland,  ME. He earned
an  undergraduate  degree in finance from Seton Hall  University in 1977, and an
MBA from Fairleigh Dickinson University in 1980.

     David I.  Beckett:  Mr.  Beckett,  age 49,  joined  the  Company as General
Counsel  in January  2000,  and was  appointed  Senior  Vice  President-Business
Development in December 2000.  Prior to joining the Company,  Mr. Beckett was an
attorney with Akerman, Senterfitt & Eidson in Miami, and with Pavese, Haverfield
in Ft. Myers,  Florida.  Mr. Beckett was an attorney with Shearman & Sterling in
New York from 1980 to 1984 and has more  than ten  years of  investment  banking
experience, including positions with Salomon Brothers Inc  and Gleacher & Co. in
New York.  Mr.  Beckett  earned a Bachelor  of Arts degree  from  University  of
Florida in 1974, a juris  doctorate from University of Florida College of Law in
1976 and a LL.M. from New York University School of Law in 1977.

     Michael E. Krawitz:  Mr.  Krawitz,  age 31, joined the Company as Assistant
Vice  President  and  General  Counsel in April  1999,  and was  appointed  Vice
President and Assistant  Secretary in December 1999, and Senior Vice  President,
Strategic  Initiatives  and Assistant  Secretary in December 2000.  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.

     David A. Loppert: Mr. Loppert, age 46, serves as Chief Executive Officer of
SysComm  International  Corporation,  a  subsidiary  of the Company  and,  since
December  2000,  as a Senior Vice  President  of, and prior to November 2000 was
Vice President,  Chief Financial Officer and Assistant Secretary of the Company,
which he joined in  February  1997.  From 1996 to 1997,  Mr.  Loppert  was Chief
Financial Officer of Bingo Brain, Inc. From 1994 to 1996, he was Chief Financial
Officer of both C.T.A. America, Inc., and Ricochet  International,  L.L.C. Prior
to that he was  Senior  Vice  President,  Acquisitions  and  Due  Diligence,  of
Associated Financial Corporation.  Mr. Loppert started his financial career with
Price Waterhouse in 1978, in Johannesburg,  South Africa, before moving to their
Los Angeles Office in 1980 where he rose to the position of Senior  Manager.  He
holds  Bachelor  degrees in both  Accounting  and Commerce,  as well as a Higher
Diploma  in  Accounting,   all  from  the   University  of  the   Witwatersrand,
Johannesburg.  Mr. Loppert was designated a Chartered  Accountant (South Africa)
in 1980.

     Directorships

     Ms.  Walton is a director of  CRYO-CELL  International,  Norstan,  Inc. and
Medical Advisory Systems,  Inc. Mr. Friedland  currently serves on the boards of
directors of Zilog,  Inc. and Video  Network  Communications,  Inc. Mr.  Garrett
Sullivan and Mr.  Loppert  currently  serve on the board of directors of SysComm
International Corporation.  Mr. Loppert also serves on the board of directors of
Medical  Advisory  Systems,  Inc. No other directors hold  directorships  in any
other company which has a class of securities  registered pursuant to Section 12
of the  Securities  Exchange Act of 1934, as amended (the  "Exchange  Act"),  or
subject to the requirements of Section

                                       48
<PAGE>


15(d) of the Exchange Act or any company  registered  as an  investment  company
under the Investment Company Act of 1940.

     Board Committees and Meetings

     The Company has 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 the consolidated
financial  statements  of the  Company  for the  fiscal  year in which  they are
appointed,  and monitors the  effectiveness  of the audit effort,  the Company's
internal and  financial  accounting  organization  and  controls  and  financial
reporting. The Audit Committee held three meetings during 2000.

     The  Compensation  Committee  administers the Company's 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  Company
compensation  policies and matters and reviews and  approves  salaries and other
matters  relating to the  executive  officers of the Company.  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 the current and future success of the
Company  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 once during
2000 and acted by written consent nine times.

     The board of directors  held two meetings  during 2000 and acted by written
consent 52 times during 2000.  During the year,  all  Directors  attended 75% or
more of the board of directors'  meetings and the  Committees to which they were
assigned.

     Section 16(A) Beneficial Ownership Reporting Compliance

     Section  16(a) of the Exchange  Act requires the officers and  directors of
the Company and persons who own more than 10% of the  Company's  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 the Company.
The Company believes,  based on its stock transfer records and other information
available to it, that all reports required under Section 16(a) were timely filed
during 2000.

                                       49
<PAGE>

     ITEM 11.     EXECUTIVE COMPENSATION

     The following table sets forth certain summary  information  concerning the
total  remuneration paid in 2000 and the two prior fiscal years to the Company's
Chief  Executive  Officer,  the  Company's  four other most  highly  compensated
executive  officers  and two other  individuals  for whom  disclosures  would be
required,  or is  anticipated  to be required in 2001, but for the fact that the
individuals were not serving,  or had not served,  as executive  officers of the
Company at December 31, 2000 or for the entire year then ended.

<TABLE>
<CAPTION>
                                                               Summary Compensation Table
                                                                                              Long-Term Compensation
                                                                                  -------------------------------------------
                                              Annual Compensation                       Awards                 Payouts
                                    -------------------------------------------   ---------------------  --------------------
                                                                  Other Annual    Restricted  Options/    LTIP     All Other
    Name and Principal                                            Compen-         Stocks        SAR's    Payouts   Compen-
       Position (1)           Year      Salary ($)  Bonus ($)(2)  sation ($)(3)   Awards ($)   (#)(4)      (#)     sation ($)
-----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>         <C>            <C>              <C>      <C>            <C>      <C>
Richard J. Sullivan           2000      $ 450,000   $  180,000     $ 936,672         --      4,000,000        --     $ --
  Chairman, CEO and           1999        457,500    3,000,000         9,115         --      1,000,000        --       --
    Secretary                 1998        345,833      180,000        79,882         --      1,500,000        --       --

Garrett A. Sullivan (5)       2000        165,000       90,000        27,832         --      2,000,000        --       --
  Director, Vice Chairman     1999        165,000    1,500,000         8,832         --        500,000        --       --
                              1998        144,165       90,000         8,842         --        475,000        --       --

Mercedes Walton  (6 )         2000            N/A          N/A           N/A        N/A            N/A       N/A      N/A
  President and COO           1999            N/A          N/A           N/A        N/A            N/A       N/A      N/A
                              1998            N/A          N/A           N/A        N/A            N/A       N/A      N/A

Jerome C. Artigliere (7)      2000        134,616       35,000         3,100         --        100,000        --       --
  Senior Vice President,      1999         98,726      150,000         1,938         --        100,000        --       --
    Chief Financial Officer,  1998         85,000       25,000         1,938         --         50,000        --       --
    Assistant Treasurer

David I. Beckett (8)          2000        156,055       85,000        29,418                   150,000        --      --
  Senior Vice President,      1999            N/A          N/A           N/A        N/A            N/A       N/A      N/A
    General Counsel,          1998            N/A          N/A           N/A        N/A            N/A       N/A      N/A
    Assistant Secretary

Michael E. Krawitz (9)        2000        151,853       35,000           ---         --        100,000        --       --
  Senior Vice President,      1999         94,027      150,000         1,541         --        125,000        --       --
    Assistant Secretary       1998            N/A          N/A           N/A        N/A            N/A       N/A      N/A

David A. Loppert (10)         2000        150,000       45,000        50,901         --      1,000,000        --       --
  Senior Vice President,      1999        150,000      750,000        19,775         --        250,000        --       --
    Chief Executive Officer   1998        123,537       40,000        15,925         --        285,000        --       --
    SysComm International
    Corporation
----------------------------
<FN>
(1)  See    "Employment    Contracts   and   Termination   of   Employment   and
     Change-In-Control Arrangements" below.
(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 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;  (b)in 1998, to
     Richard J.  Sullivan for  reimbursement  of taxes (c) in 2000,  to David I.
     Beckett for moving  expenses,  other  discretionary  payments,  and imputed
     interest on an interest  free loan from the  Company,  and (d) in 2000,  to
     David A. Loppert for  discretionary  payments,  tuition  reimbursement  and
     imputed interest on an interest free loan from the Company.
(4)  Indicates number of securities underlying options.
(5)  Mr. Sullivan served as President and Chief Operating Officer of the Company
     from March 1995 until January 2001.  Since January 2001,  Mr.  Sullivan has
     been serving solely as Vice Chairman.
(6)  Ms.  Walton  began her  employment  with the  Company  in  January  2001 as
     President and Chief Operating Officer.
(7)  Mr.  Artigliere  began his  employment  with a subsidiary of the Company in
     January  1998  and was appointed an officer of the Company in April,  1998.
     Mr.  Artigliere was appointed Chief Financial  Officer in November 2000 and
     Senior Vice President,  Chief Financial Officer and Assistant  Treasurer in
     December 2000.

                                       50
<PAGE>


(8)  David I.  Beckett  joined the Company in January  2000,  and was  appointed
     Senior Vice President-Business Development in December 2000.
(9)  Mr.  Krawitz  joined the Company in April 1999 , and was  appointed  Senior
     Vice President,  Strategic Operations,  and Assistant Secretary in December
     2000.
(10) Mr.  Loppert was employed as Vice  President,  Treasurer,  Chief  Financial
     Officer of the Company in February 1997. Since December 2000, he has served
     in a dual  role as  Senior  Vice  President  of the  Company  and as  Chief
     Executive Officer of SysComm International Corporation, a 55% subsidiary of
     the Company.
</FN>
</TABLE>

Option Grants in Last Fiscal Year

     The following table contains information  concerning the Company's grant of
stock  options  under  the  Company's  1999  Flexible  Stock  Plan  and the 1996
Non-Qualified Stock Option Plan to the named executive officers during 2000:

<TABLE>
<CAPTION>
                      Option Grants in the Last Fiscal Year
                                Individual Grants
--------------------------------------------------------------------------------------------------------------------
        Name               Number of            % of Total
                           Securities        Options Granted                                          Grant Date
                        Underlying Options   to Employees in      Exercise                          Present Value
                        Granted (#)(1)             2000         Price ($/Sh)   Expiration Date         ($) (2)
---------------------- ------------------------------------ --------------- -----------------   -----------------
<S>                          <C>                  <C>             <C>           <C>                 <C>
Richard J. Sullivan          3,500,000            25.5%           $ 2.75        September -06       $ 2,345,000
                               500,000             3.6              2.75        September -05           335,000
Garrett A. Sullivan          1,571,000            11.4              2.75        September -06         1,052,570
                               429,000             3.1              2.75        September -05           287,430
Mercedes Walton                     --              --                --                   --                --
Jerome C. Artigliere            79,000             0.6              2.75        September -06            52,930
                                21,000             0.2              2.75        September -05            14,070
David I. Beckett                50,000             0.4              6.34          January -06            33,500
                                79,000             0.6              2.75        September -06            52,930
                                21,000             0.2              2.75        September -05            14,070
Michael E. Krawitz              79,000             0.6              2.75        September -06            52,930
                                21,000             0.2              2.75        September -05            14,070
David A. Loppert               786,000             5.7              2.75        September -06           526,620
                               214,000             1.6              2.75        September -05           143,380
---------------
<FN>
(1)  Options granted under the 1996 Non-Qualified Stock Option Plan and the 1999
     Flexible  Stock Plan were  granted at an  exercise  price equal to the fair
     market  value of the  Company's  common  shares  on the grant  date.  These
     options are exercisable  over a five-year  period  beginning with the first
     anniversary of the grant date.
(2)  Based on the grant date  present value of $0.67 per  option share which was
     derived using the  Black-Scholes  option  pricing model in accordance  with
     rules  and  regulations  of the  Securities  Exchange  Commission  and  not
     intended to forecast  future  appreciation  of the  Company's  common share
     price.  The  Black-Scholes  model was used with the following  assumptions:
     dividend yield of 0%;  expected  volatility of 53.32%;  risk-free  interest
     rate of 4.98%; and expected lives of 5 years.
</FN>
</TABLE>

                                       51
<PAGE>


     Option Exercises and Fiscal Year-End Values

     The  following  table  sets  forth  information  with  respect to the named
executive   officers   concerning  the  exercise  of  options  during  2000  and
unexercised options held on December 31, 2000:

<TABLE>
<CAPTION>
                 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
                              Exercised in 2000            Number of Securities          Value of Unexercised In-The
                                                          Underlying Unexercised        Money Options at Year End 2000
                                                         Options at Year End 2000(#)               ($) (2)
                        ------------------------------- --------------------------------------------------------------
         Name           Shares Acquired  Value Realized
                       Upon Exercise (#)    ($)(1)       Exercisable  Unexercisable     Exercisable      Unexercisable
------------------------------------------------------- --------------------------------------------------------------
<S>                         <C>            <C>           <C>           <C>              <C>              <C>
Richard J. Sullivan         500,000        $    ---      4,185,000     7,685,000        $   ---          $   ---
Garrett A. Sullivan         461,500         300,950      1,382,500     2,953,500            ---              ---
Mercedes Walton                 ---             ---            ---           ---            ---              ---
Jerome C. Artigliere         46,000         168,888         75,000       154,000            ---              ---
David I. Beckett             21,000             ---         16,667       112,333            ---              ---
Michael E. Krawitz           71,000         610,963         75,000       154,000            ---              ---
David A. Loppert            322,400         931,260        448,600     1,384,600            ---              ---

-----------------------
<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.

(2)  The value of the  unexercised  in-the-money  options at  December  31, 2000
     assumes a fair market value of $0.688,  the closing  price of the Company's
     common  stock as reported on The Nasdaq  Stock Market on December 29, 2000.
     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.
</FN>
</TABLE>

     Compensation Pursuant to Plans

     Cash and Stock Incentive Compensation Programs. To reward performance,  the
Company provides its executive  officers and its 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.

     For 2001,  the Committee has  authorized a bonus pool of up to $1.0 million
upon the sale by the Company of at least $100 million of Company  assets  (other
than transactions in the ordinary course of business).

     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 the
Company's stock increases above the fair market value on the grant date, and the
employee  must remain in the  Company's  employ for the period  required for the
stock  option to be  exercisable,  thus  providing an incentive to remain in the
Company's employ.

                                       52
<PAGE>


     These Plans allow grants of stock  options to all employees of the Company,
including executive officers. Grants to executive officers of the Company and to
officers  of the  Company's  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 Company  stock  pursuant to
options  granted under the Plan.  Options granted in connection with an offering
under the plan,  permit the option  holder to purchase  Company 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, the Company has 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 of Directors

     Prior to the fourth quarter of 1998,  non-employee directors of the Company
received a fee of $250 per  meeting,  for their  attendance  at  meetings of the
Company's  Board of  Directors.  Beginning  in the fourth  quarter of 1998,  the
non-employee  director  compensation  was changed to fixed quarterly fees in the
amount of $5,000 per non-employee director. In addition,  non-employee directors
receive a quarterly fee in the amount of $1,000 for each committee on which they
are  a  member.   Reasonable  travel  expenses  are  reimbursed  when  incurred.
Individuals  who become  directors of the Company 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 the  Company's  1996
Non-Qualified  Stock  Option Plan or the 1999  Flexible  Stock Plan on terms and
conditions  determined by the Board of Directors.  In addition,  each of Messrs.
Friedland, Noterman, Penni and Weaver received (a) an option to purchase 400,000
shares  at  $2.75  per  share on  September  27,  2000,  86,000  of  which  were
immediately  exercised  in  consideration  for an interest  bearing note and the
balance are exercisable for a period of five years after September 27, 2001, and
(b) a bonus of $35,000.  Directors who are not also  executive  officers are not
eligible to participate in any other benefit plan of the Company.

     Compensation Committee Interlocks and Insider Participation

     None.

                                       53
<PAGE>


     Employment  Contracts and  Termination of Employment and  Change-In-Control
Arrangements

     The Company,  or its subsidiary,  has entered into an employment  agreement
with the following named executive officers:

<TABLE>
<CAPTION>

        Name                            Length            Commencing            Base Salary
---------------------------         --------------     ------------------     ---------------
<S>                                  <C>               <C>                    <C>
Richard J. Sullivan                  5 Years  (1)      March 1, 2000          $ 450,000   (2)
Garrett A. Sullivan                  5 Years  (1)      March 1, 2000            165,000
Mercedes Walton                      3 Years  (3)      January 1, 2001          300,000   (4)
Jerome C. Artigliere                 5 Years  (1)      November 22, 2000        175,000
David I. Beckett                     3 Years           January 10, 2000         160,000
Michael E. Krawitz                   5 Years           April 12, 1999           160,000   (5)
David A. Loppert                     5 Years  (1)      March 1, 2000            250,000   (6)

---------------------------
<FN>

(1)  Automatically  renewed for  successive  additional  one-year  terms on each
     anniversary.
(2)  Provides for a minimum annual bonus of $140,000.
(3)  Automatically  renews  for  successive  additional  one-year  terms on each
     anniversary commencing January 1, 2004.
(4)  Provides  for options to purchase up to 1,750,000  shares of the  Company's
     common stock at an exercise  price equal to 85% of the fair market value of
     the Company's  common stock on January 1, 2001,  as determined  pursuant to
     the  Company's  1999  Flexible  Stock  Plan,  and options to purchase up to
     300,000 shares of common stock of Digital Angel  Corporation at an exercise
     price equal to 85% of the fair market value of the  Company's  common stock
     on January 1, 2001 as determined  pursuant to the Digital Angel Corporation
     Flexible Stock Plan.
(5)  Effective April 1, 2000.
(6)  Effective  January 1,  2001,  with  SysComm  International  Corporation,  a
     subsidiary of the Company.
</FN>
</TABLE>

     In 1997, the Company  entered into  employment  agreements  with Richard J.
Sullivan,  Chairman, and Garrett A. Sullivan.  These agreements were amended and
restated effective March 1, 2000. In addition,  during 2000, the Company entered
into  employment  agreements with Mercedes  Walton and Jerome  Artigliere.  Such
employment  agreements  include certain "change of control"  provisions.  Upon a
change of control all unvested  stock options  become  immediately  exercisable.
Also, at the  employee's  option,  he or she may terminate his or her employment
under the agreement at any time within one year after such change of control. In
such event,  the Company shall pay to the employee a severance  payment equal to
the  maximum  amount  which  would not  result in such  payment  being an excess
parachute  payment as defined in the Internal  Revenue Code of 1986,  as amended
(the  "Code")  which  would be  subject  to an excise  tax.  Additionally,  upon
termination  of  employment  for any  reason  other  than for  breach  under the
agreement,  Garrett Sullivan and David Loppert shall be entitled to receive from
the Company 60 equal  monthly  payments of 8.333% of his  compensation  from the
Company over the 12-month  period for which his  compensation  was the greatest,
and Mr.  Richard  Sullivan  shall  receive 60 monthly  payments of $37,500 each.
These payments are reduced by any severance payments. Such employment agreements
also provide  that,  if any payments  from the Company are subject to the excise
tax described above, the Company will make a gross up payment in an amount which
covers the excise tax due plus the excise and income taxes  payable on the gross
up payment.  Mr.  Richard  Sullivan's  agreement  provides  that he may elect to
receive a percentage  of his salary for each  12-month  period in the  Company's
Common  Stock.  For the  twelve-month  period  commencing  January 1, 2000,  Mr.
Sullivan did not elect to receive any of his compensation in stock. In addition,
the Company agreed to transfer to Richard Sullivan certain other property valued
at  approximately  $0.5 million upon his  relocation to the Palm Beach,  Florida
area.  The Company would also be required to make a gross up payment that covers
all U.S.  federal and state income taxes payable by Mr.  Sullivan,  if any, as a
result of the transfer.

     Additionally, the agreements for both Richard Sullivan and Garrett Sullivan
provide for certain "triggering events" which include a change in control of the
Company,  the  termination  of Richard  Sullivan's  employment  other than for a
material breach of the terms of his employment agreement, or if Richard Sullivan

                                       54
<PAGE>

ceases to hold his current  positions with the Company for any reason other than
a material breach of the terms of his employment  agreement.  Within ten days of
the  occurrence  of a  triggering  event,  the Company  shall pay, in cash or in
stock,   or  in  a  combination   thereof,   $12.1  million  and  $3.5  million,
respectively, to Richard Sullivan and to Garrett Sullivan.

     In January  2001,  the Company  entered into an employment  agreement  with
Mercedes Walton, President and Chief Operating Officer. The employment agreement
includes certain "change of control"  provisions.  Upon a change of control, all
options granted to Ms. Walton immediately  become vested and exercisable.  Also,
at Ms. Walton's option,  she may terminate her employment under the agreement at
any time  within one year after such  change of  control.  In the event that Ms.
Walton's  employment is terminated by the Company other than for "cause"  within
one  year  following  a change  of  control  or in the  event  that  Ms.  Walton
terminates  her  employment  with "good reason" in  anticipation  of a change of
control,  the Company shall pay to Ms. Walton a severance payment equal to three
times the sum of Ms. Walton's base  compensation and target annual bonus,  which
amount  shall be payable to Ms.  Walton in a lump sum within  thirty days of the
date of  termination.  The  employment  agreement  also  provides  that,  if any
payments  from the  Company  are  subject to the excise tax on excess  parachute
payments, the Company will make a gross up payment in an amount which covers the
excise tax due plus the excise, income and payroll taxes payable on the gross up
payment. Additionally, upon termination of Ms. Walton's employment either by the
Company for any reason other than cause or by Ms.  Walton for good  reason,  Ms.
Walton will be entitled  to receive  her base  compensation  for the period that
commences  on the date of  termination  and  terminates  on the later of (i) the
expiration of the then effective  "employment  term" and (ii) one year following
the date of  termination  plus an amount equal to her target  annual bonus and a
pro rata portion of her annual bonus for the year of termination.

     In 1997,  the Company  entered into an employment  agreement  with David A.
Loppert,  Senior  Vice  President,   and  Chief  Executive  Officer  of  SysComm
International  Corporation.  This  agreement was amended and restated  effective
March 1, 2000,  and was  amended  again on December  14,  2000.  The  employment
agreement, as amended,  provides that Mr. Loppert is to serve as SysComm's Chief
Executive Officer and continue to serve the Company on a part-time basis (but in
no event more than 10% of Mr. Loppert's business time). The employment agreement
includes certain "change of control" provisions. Upon a change of control of the
Company, all unvested stock options become immediately exercisable. Also, at Mr.
Loppert's  option,  he may terminate his  employment  under the agreement at any
time within one year after such change of control. In such event,  SysComm shall
pay to Mr.  Loppert a severance  payment equal to the maximum  amount that would
not result in such payment being an excess  parachute  payment as defined in the
Code that would be subject to an excise tax.  Additionally,  upon termination of
employment for any reason other than for breach under the agreement, Mr. Loppert
shall be entitled to receive from SysComm 60 equal monthly payments of 8.333% of
his compensation from the Company and SysComm over the 12-month period for which
his compensation  was the greatest.  These payments are reduced by any severance
payments.  The employment agreement also provides that, if any payments from the
Company and SysComm are subject to the excise tax described above,  SysComm will
make a gross up  payment in an amount  which  covers the excise tax due plus the
excise and income taxes payable on the gross up payment.

     In November  2000,  the Company  entered into an employment  agreement with
Jerome C.  Artigliere,  Senior  Vice  President,  Chief  Financial  Officer  and
Assistant  Treasurer.  The  employment  agreement  includes  certain  "change of
control" provisions. Upon a change of control of the Company, all unvested stock
options become immediately vested exercisable. Also, at Mr. Artigliere's option,
he may terminate his employment  under the agreement at any time within one year
after such  change of  control.  In such  event,  the  Company  shall pay to Mr.

                                       55
<PAGE>


Artigliere  a  severance  payment  equal to three times Mr.  Artigliere's  "base
amount" as defined in Section 280G of the Code minus one dollar.  The employment
agreement  also  provides  that, if any payments from the Company are subject to
the excise tax on excess  parachute  payments,  the Company will make a gross up
payment in an amount  which covers the excise tax due plus the excise and income
taxes payable on the gross up payment.

     In January  2000,  the Company  entered into an employment  agreement  with
David  I.  Beckett,  Senior  Vice  President,  General  Counsel,  and  Assistant
Secretary.  The agreement provides that in the event Mr. Beckett's employment is
terminated  either by the Company  other than for "cause" or by Mr.  Beckett for
"good  reason," Mr. Beckett will continue to receive his base  compensation  and
other benefits for the remainder of the  employment  term under the agreement as
if such termination had not occurred.

     In March 1999,  the  Company  entered  into an  employment  agreement  with
Michael Krawitz,  Senior Vice President,  Strategic  Initiatives,  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 the  Company  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 the Company's plans,  policies and
practices.

                                       56
<PAGE>


     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Ownership of Equity Securities in the Company

     The following table sets forth information  regarding  beneficial ownership
of the  Company's  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 December 31, 2000:

<TABLE>
                  Name                       Aggregate Number of       Percent of Outstanding
                                             Shares Beneficially               Shares
                                                  Owned(1)
---------------------------------------      --------------------      ----------------------
<S>                                                <C>                         <C>
Richard J. Sullivan                                 6,097,724 (2)               6.0%
Garrett A. Sullivan                                 1,813,468                   1.8%
Richard S. Friedland                                  236,000                    *
Arthur F. Noterman                                    556,000                    *
Daniel E. Penni                                     1,020,065                   1.0%
Angela M. Sullivan                                  1,608,475 (2)               1.6%
Constance K. Weaver                                   379,000                    *
Mercedes Walton                                           ---                   ---
Jerome C. Artigliere                                   97,311                    *
David I. Beckett                                       37,667                    *
Michael E. Krawitz                                    100,224                    *
David A. Loppert                                      712,310                    *
All Directors and Executive Officers as            13,032,086                  12.8%
a Group (20 Persons)
-----------------------
<FN>
*    Represents  less than 1% of the  issued  and  outstanding  shares of Common
     Stock of the Company.

(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:  Richard J. Sullivan - 4,185,000;
     Garrett A. Sullivan - 1,382,500;  Richard S. Friedland - 150,000; Arthur F.
     Noterman  -  375,000;  Daniel E.  Penni -  375,000;  Angela M.  Sullivan  -
     350,000;  Constance  K.  Weaver - 285,000;  Mercedes  Walton -0;  Jerome C.
     Artigliere  - 75,000;  David I.  Beckett - 16,667;   Michael  E.  Krawitz -
     75,000;  David A.  Loppert  -  448,600;  and all  directors  and  executive
     officers as a group - 7,976,100.
(2)  Includes  259,598 shares owned by The Bay Group and 367,177 shares owned by
     Great Bay  Technology,  Inc.  The Bay Group is  controlled  by  Richard  J.
     Sullivan and Angela M. Sullivan.  Great Bay Technology,  Inc. is controlled
     by Richard J. Sullivan, Angela M. Sullivan and Stephanie Sullivan.
</FN>
</TABLE>

                                       57
<PAGE>

     The following table sets forth information  concerning warrants to purchase
shares of the Company's  common stock which are owned  beneficially by directors
and the named executive officers of the Company, individually and as a group, as
of December 31, 2000:

<TABLE>
<CAPTION>
               Name                    Class of        Number of     Percent of Class   Exercise price Per
                                       Warrants      Warrants (1)                              Share
-------------------------------      ------------    ------------    ----------------   ------------------
<S>                                    <C>              <C>                <C>                <C>
Richard J. Sullivan (2)                Class K          250,000            100%               $ 5.31
                                       Class S          376,700            100                  2.00
Garrett A. Sullivan                      ---              ---              ---                  ---
Richard S. Friedland                     ---              ---              ---                  ---
Arthur F. Noterman                       ---              ---              ---                  ---
Daniel E. Penni                          ---              ---              ---                  ---
Angela M. Sullivan (2)                 Class K          250,000            100                  5.31
                                       Class S          376,700            100                  2.00
Constance K. Weaver                      ---              ---              ---                  ---
Mercedes Walton                          ---              ---              ---                  ---
Jerome C. Artigliere                     ---              ---              ---                  ---
David I. Beckett                         ---              ---              ---                  ---
Michael E. Krawitz                       ---              ---              ---                  ---
David A. Loppert                         ---              ---              ---                  ---
All Directors and Executive
   Officers as a Group                 Class K          250,000            100                  5.31
(20 Persons)                           Class S          376,700            100                  2.00
---------------------
<FN>
(1)  Pursuant to Rule 13d-3 under the Exchange  Act,  beneficial  ownership of a
     security  consists of sole or shared voting power  (including  the power to
     vote  or  direct  the  voting)  and/or  sole  or  shared  investment  power
     (including the power to dispose or direct a disposition)  with respect to a
     security   whether   through  a   contract,   arrangement,   understanding,
     relationship  or  otherwise.   Unless  otherwise  indicated,   each  person
     indicated  above  has  sole  power  to  vote,  or  dispose  or  direct  the
     disposition  of  all  shares  beneficially  owned,  subject  to  applicable
     community property laws.

(2)  Represents  warrants  owned  by  Great  Bay  Technology,   Inc.  Great  Bay
     Technology,  Inc. is controlled by Richard J. Sullivan,  Angela M. Sullivan
     and Stephanie Sullivan.
</FN>
</TABLE>

     Principal Stockholders

     Set forth in the table below is  information  as of December  31, 2000 with
respect to persons known to the Company  (other than the directors and executive
officers shown in the preceding table) to be the beneficial  owners of more than
five percent of the Company's issued and outstanding Common Stock:

       Name and Address              Number of Shares        Percent Of Class
                                    Beneficially Owned
------------------------------      ------------------       ----------------

            None

     Changes in Control

     On October 26, 2000,  the Company issued $26 million in stated value of its
Series C preferred stock,  with an initial  conversion price of $7.56 per share,
to a  select  group of  institutional  investors  in a  private  placement.  The
conversion  price has been reduced to $5.672 in accordance  with the Certificate
of  Designation  related to the  Series C  preferred  stock.  In  addition,  the
investors have the option to convert at an "alternative conversion price", which
is a percentage of the average  closing price for the 10 trading days  preceding
the date of notice of conversion. The initial percentage was 140% of the average
closing  price and declines,  in stages,  ending at 110% on June 24, 2001. It is
currently at 125%.  Furthermore,  if a "triggering  event" occurs, as more fully
described in Item 7 under "Recent  Developments - Private Placement of  Series C
Preferred Stock and Related Warrants",  the holders would be entitled to convert
at a price  per  share  equal to 50% of the  lowest  closing  price  during  the
occurrence  of such  triggering  event.  The  investors  also have the option to
purchase up to an  additional  $26 million in stated value of Series C preferred
stock for an aggregate purchase price of $20 million, for a period of ten months
following  the  effectiveness  of  the  registration  statement  related  to the
Company's common stock into which the Series C preferred stock is convertible.

         As a result of the foregoing,  the conversion of the Series C preferred
stock into  shares of the  Company's  common  stock may cause the  issuance of a
number of shares of our common  stock  large  enough to  constitute  a change of
control.

                                       58
<PAGE>

         Based on the current market value of the Company's common stock and the
current applicable  alternative conversion price, the conversion of the Series C
preferred stock into shares of the Company's common stock would not constitute a
change of  control.  However,  should the  investors  exercise  their  option to
purchase  additional shares of Series C preferred stock, or should the Company's
stock price decline or should a triggering  event occur,  the  conversion of the
Series C preferred stock could result in a change in control of the Company.

         Except  as  discussed  above  in  relation  to  the  conversion  of the
Company's  Series C  preferred  stock,  there are no  arrangements  known to the
Company,  including any pledge by any person of  securities of the Company,  the
operation of which may at a subsequent date result in a change in control of the
Company.


     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Indebtedness of Management

     Daniel E. Penni, a member of the Company's board of directors, has executed
a revolving line of credit promissory note in favor of Applied Digital Solutions
Financial  Corp.,  a subsidiary of the Company,  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).  As of
December 31, 2000, $420,000 had been advanced under this note.

     David I.  Beckett,  the  Company's  Senior Vice  President,  has executed a
promissory  note  in  favor  of the  Company  in the  amount  of  $115,000.  The
promissory  note is due on  demand,  non-interest  bearing  and is  secured by a
mortgage on real  property.  As of December 31, 2000  $115,000 was  outstanding.
Imputed  interest is included in the "Summary  Compensation  Table" above in the
"Other Annual Compensation" column.

     David A.  Loppert,  the  Company's  Senior Vice  President,  has executed a
promissory  note  in  favor  of the  Company  in the  amount  of  $260,000.  The
promissory note is non-interest  bearing and was executed as  consideration  for
the purchase by Mr. Loppert of 100,000 shares of the Company's  Common Stock. As
of December 31, 2000 $90,000 was  outstanding.  Imputed  interest is included in
the  "Summary  Compensation  Table"  above in the  "Other  Annual  Compensation"
column.

     On September 27, 2000, the following  named  executive  officers  exercised
options granted to them under the Company's 1999 Flexible Stock Plan to purchase
shares of the Company's  common stock.  Under the terms of the grant,  the named
executive officers each executed a delivered an interest bearing promissory note
and stock pledge agreement to the Company in  consideration  for the purchase of
the shares, as follows:

Named Executive Officer          Amount       Interest Rate        Due Date
-----------------------          ------       -------------        --------
Richard J. Sullivan            $1,375,000         6.0%         September 27,2003
Garrett A. Sullivan             1,179,750         6.0          September 27,2003
Jerome C. Artigliere               57,750         6.0          September 27,2003
David I. Beckett                   57,750         6.0          September 27,2003
Michael E. Krawitz                 57,750         6.0          September 27,2003
David A. Loppert                  588,500         6.0          September 27,2003


                                       59
<PAGE>

                                     Part IV

     ITEM 14.     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 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 14(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 October 24, 2000, we filed a Current Report on Form 8-K
                      which  included a copy of the Second  Amended and Restated
                      Term and Revolving Credit Agreement dated October 17, 2000
                      between IBM Credit Corporation, the Company, and others.
               (ii)   On October 24, 2000, we filed a Current Report on Form 8-K
                      which  included a copy of the Second  Amended and Restated
                      Term and Revolving Credit Agreement dated October 17, 2000
                      between IBM Credit Corporation, the Company, and others.
               (iii)  On November 1, 2000, we filed a Current Report on Form 8-K
                      which included a copy of the Agreement and Plan of Merger,
                      dated as of October  18,  2000,  between  the  Company and
                      Pacific Decision Sciences Corporation.
               (iv)   On December 5, 2000, we filed a Current Report on Form 8-K
                      which  included  a copy  of the an  acquisition  agreement
                      between the  Company  and MCY.com  dated as of October 19,
                      2000.
               (v)    On December  29, 2000,  we filed a Current  Report on Form
                      8-K/A which amended the Form 8-K filed on November 1, 2000
                      to include  financial  statements and pro forma  financial
                      information.

(c)           Exhibits - Included in Item 14(a)(3) above.


                                       60
<PAGE>


<PAGE>

                              REPORT OF MANAGEMENT

Management is responsible for the preparation,  integrity and objectivity of the
accompanying  financial statements and related information.  The 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  monitored by a
staff of  professionally  trained internal  auditors who travel  worldwide.  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.

PricewaterhouseCoopers   LLP,  the  Company's   independent   accountants,   are
recommended  by the Audit  Committee of the Board of Directors,  selected by the
Board   of   Directors   and   ratified   by   the    Company's    shareholders.
PricewaterhouseCoopers  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,  composed  entirely of
independent  Directors  who are not  officers  of the  Company,  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.

<TABLE>
<S>                                      <C>                            <C>
RICHARD J. SULLIVAN                      MERCEDES WALTON                JEROME C. ARTIGLIERE
Chairman, Board of Directors and         President and                  Senior Vice President and
Chief Executive Officer                  Chief Operating Officer        Chief Financial Officer
</TABLE>

March 19, 2001


                                       61
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1)  present  fairly,  in all material  respects,  the
financial  position of Applied Digital  Solutions,  Inc. and its subsidiaries at
December 31, 2000 and December 31, 1999, and the results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
2000 in conformity with accounting  principles  generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index  appearing  under Item  14(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 Company has  suffered  significant  losses from  continuing  operations  and
discontinued  operations in 2000 and expects to incur a net loss from continuing
operations  for 2001 with  positive  earnings  in 2001 before  amortization  and
depreciation.  The Company was in  violation  of certain  covenants  of its debt
agreement as of December 31, 2000. As of March 30, 2001 the Company  amended its
term and revolving  credit  agreement which matures May 2002. The Company's plan
for providing  adequate liquidity during fiscal year 2001 is set forth in Note 2
to the financial statements.

/s/ PricewaterhouseCoopers LLP


PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2001
    Except as to Notes 2 and 13
    which are as of March 30, 2001


                                       62
<PAGE>
<TABLE>
                                    APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------
                                              CONSOLIDATED BALANCE SHEETS
                                            (In thousands, except par value)
<CAPTION>
                                                         ASSETS
                                                                                                      DECEMBER 31,
                                                                                                 ----------------------
                                                                                                      2000         1999
                                                                                                 ----------------------
<S>                                                                                              <C>          <C>
CURRENT ASSETS
   Cash and cash equivalents                                                                     $   8,039    $   2,181
   Due from buyer of divested subsidiary                                                                --       31,302
   Accounts receivable and unbilled receivables (net of allowance
      for doubtful accounts of $1,681 in 2000 and $1,047 in 1999)                                   43,890       18,789
   Inventories                                                                                      12,311        7,751
   Notes receivable                                                                                  5,711        2,984
   Other current assets                                                                             16,041        3,713
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                                85,992       66,720

NET ASSETS OF DISCONTINUED OPERATIONS                                                                8,076       75,284

PROPERTY AND EQUIPMENT, NET                                                                         21,368        6,649

NOTES RECEIVABLE                                                                                    12,898        3,298

GOODWILL, NET                                                                                      166,024       24,285

OTHER ASSETS                                                                                        25,093       10,369
-----------------------------------------------------------------------------------------------------------------------

                                                                                                 $ 319,451    $ 186,605
=======================================================================================================================
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Notes payable                                                                                 $     657    $  22,139
   Current maturities of long-term debt                                                              4,571        7,516
   Accounts payable                                                                                 16,945        6,707
   Accrued expenses                                                                                 16,361        5,010
   Due to sellers of acquired subsidiary                                                             9,465       15,000
   Earnout and put accruals                                                                         18,245        2,745
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                           66,244       59,117

LONG-TERM DEBT AND NOTES PAYABLE                                                                    69,146       33,260
-----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES                                                                                  135,390       92,377
-----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (SEE NOTES 2, 3, 17, AND 21)
-----------------------------------------------------------------------------------------------------------------------

MINORITY INTEREST                                                                                    4,879        1,292
-----------------------------------------------------------------------------------------------------------------------

REDEEMABLE PREFERRED STOCK - SERIES C                                                               13,440           --
-----------------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK OPTIONS - SERIES C                                                        5,180           --
----------------------------------------------------------------------------------------------------------------------

PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
   Preferred shares:
   Authorized 5,000 shares in 2000 and 1999 of $10 par value; special
      voting, no shares issued and outstanding in 2000 and 1 share issued
      and outstanding in 1999, Class B voting, no shares issued or outstanding
      in 2000 and 1 share issued and outstanding in 1999                                                --           --
   Common shares:
   Authorized 245,000 shares in 2000 and 80,000 shares in 1999 of $.001 par
      value; 103,063 shares issued and 101,487 shares outstanding in 2000
      and 51,116 shares issued and 48,260 shares outstanding in 1999                                   103           51
   Additional paid-in capital                                                                      266,573       87,470
   (Accumulated deficit) retained earnings                                                         (99,478)      12,664
   Common stock warrants                                                                             1,406           --
   Treasury stock (carried at cost, 1,216 shares in 2000, 2,856 shares in 1999)                     (2,803)      (7,313)
   Accumulated other comprehensive (loss) income                                                      (729)          64
   Notes received from shares issued                                                                (4,510)          --
-----------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY                                 160,562       92,936
-----------------------------------------------------------------------------------------------------------------------

                                                                                                 $ 319,451    $ 186,605
=======================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.

                                       63
<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,
                                                                             -------------------------------------------
                                                                                   2000             1999            1998
                                                                             -------------------------------------------
<S>                                                                          <C>               <C>             <C>
PRODUCT REVENUE                                                              $  110,617        $  82,743       $  66,462
SERVICE REVENUE                                                                  24,149           46,321           7,881
------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE                                                                   134,766          129,064          74,343

COSTS OF GOODS AND SERVICES SOLD                                                 82,475           74,299          39,856
------------------------------------------------------------------------------------------------------------------------

GROSS PROFIT                                                                     52,291           54,765          34,487

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                    (64,500)         (58,960)        (32,120)
DEPRECIATION AND AMORTIZATION                                                   (11,073)          (6,560)         (2,913)
RESTRUCTURING AND UNUSUAL COSTS                                                  (6,383)          (2,550)             --
GAIN ON SALE OF SUBSIDIARIES                                                        486           20,075             733
INTEREST INCOME                                                                   1,095              422             291
INTEREST EXPENSE                                                                 (5,901)          (3,478)         (1,070)
------------------------------------------------------------------------------------------------------------------------

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE (BENEFIT) PROVISION
   FOR INCOME TAXES AND MINORITY INTEREST                                       (33,985)           3,714            (592)
(BENEFIT) PROVISION FOR INCOME TAXES                                             (5,040)           1,180             670
------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST               (28,945)           2,534          (1,262)
MINORITY INTEREST                                                                   229              (46)            120
------------------------------------------------------------------------------------------------------------------------

(LOSS) INCOME FROM CONTINUING OPERATIONS                                        (29,174)           2,580          (1,382)
------------------------------------------------------------------------------------------------------------------------

(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES (BENEFIT)
   OF $(13,614) IN 2000, $1,980 IN 1999, AND $1,918 IN 1998                     (75,702)           3,012           6,072
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, CONSISTING
   OF $8,573 FOR OPERATING LOSSES DURING THE PHASE-OUT PERIOD,
   NET OF TAX BENEFIT OF $1,307                                                  (7,266)              --              --
------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE EXTRAORDINARY LOSS                                        (112,142)           5,592           4,690

EXTRAORDINARY LOSS (NET OF TAXES OF $89)                                             --              160              --
------------------------------------------------------------------------------------------------------------------------

NET (LOSS) INCOME                                                              (112,142)           5,432           4,690
PREFERRED STOCK DIVIDENDS                                                           191               --              44
ACCRETION OF BENEFICIAL CONVERSION FEATURE OF REDEEMABLE PREFERRED
   STOCK - SERIES C                                                               3,857
------------------------------------------------------------------------------------------------------------------------

NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS                           $ (116,190)       $   5,432       $   4,646
========================================================================================================================

EARNINGS PER COMMON SHARE - BASIC
   (LOSS) INCOME FROM CONTINUING OPERATIONS                                  $     (.52)       $     .06       $    (.05)
   (LOSS) INCOME FROM DISCONTINUED OPERATIONS                                     (1.30)             .06             .19
   EXTRAORDINARY LOSS                                                                --               --              --
------------------------------------------------------------------------------------------------------------------------

NET (LOSS) INCOME PER COMMON SHARE - BASIC                                   $    (1.82)       $     .12       $     .14
========================================================================================================================

EARNINGS PER SHARE - DILUTED
   (LOSS) INCOME FROM CONTINUING OPERATIONS                                  $     (.52)       $     .05       $    (.05)
   (LOSS) INCOME FROM DISCONTINUED OPERATIONS                                     (1.30)             .06             .17
   EXTRAORDINARY LOSS                                                                --               --              --
------------------------------------------------------------------------------------------------------------------------

NET (LOSS) INCOME PER COMMON SHARE - DILUTED                                 $    (1.82)       $     .11       $     .12
========================================================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC                     63,825           46,814          32,318
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED                   63,825           50,086          34,800
</TABLE>

--------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.

                                       64
<PAGE>

<TABLE>
                                         APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------

                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK,
                                             COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
                                                            PAGE 1 OF 2
                                        For the Years Ended December 31, 2000, 1999, and 1998
                                                           (In thousands)

<CAPTION>
                                                                                                 RETAINED
                                          PREFERRED STOCK      COMMON STOCK     ADDITIONAL       EARNINGS      COMMON
                                         ----------------- -------------------     PAID-IN   (ACCUMULATED       STOCK   TREASURY
                                           NUMBER   AMOUNT     NUMBER   AMOUNT     CAPITAL        DEFICIT)   WARRANTS      STOCK
                                         ---------------------------------------------------------------------------------------

<S>                                            <C>     <C>     <C>        <C>     <C>             <C>             <C>    <C>
BALANCE - DECEMBER 31, 1997                    --      $--     20,672     $ 21    $ 33,680        $ 2,586         $--    $    --
   Net income                                  --       --         --       --          --          4,690          --         --
   Comprehensive income -
      foreign currency translation             --       --         --       --          --             --          --         --
                                                                                                  -------
   Total comprehensive income                  --       --         --       --          --          4,690          --         --
   Issuance of common shares                   --       --         50       --         100             --          --         --
   Issuance of common shares
      for acquisitions                         --       --     12,511       12      18,770             --          --         --
   Issuance of preferred shares                --       --         --       --       6,020             --          --         --
   Conversion of preferred
      shares to common shares                  --       --      1,600        2          (2)            --          --         --
   Warrants redeemed for common shares         --       --        850        1       1,949             --          --         --
   Preferred dividends paid                    --       --         --       --          --            (44)         --         --
   Common shares repurchased                   --       --         --       --          --             --          --       (337)
--------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1998                    --       --     35,683       36      60,517          7,232          --       (337)
   Net income                                  --       --         --       --          --          5,432          --         --
   Comprehensive income
      Foreign currency translation             --       --         --       --          --             --          --         --
      Unrealized gain on securities            --       --         --       --          --             --          --         --
                                                                                                  -------
   Total comprehensive income                  --       --         --       --          --          5,432          --         --
   Issuance of common shares                   --       --      2,808        3       3,683             --          --         --
   Issuance of common shares
      for acquisitions                         --       --     11,701       11      19,016             --          --         --
   Warrants redeemed for common shares         --       --        924        1       2,429             --          --         --
   Tax effect of exercise of
      non-qualified stock options              --       --         --       --       1,825             --          --         --
   Common shares repurchased                   --       --         --       --          --             --          --     (6,976)
--------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1999
   (CARRIED FORWARD)                           --       --     51,116       51      87,470         12,664          --     (7,313)

</TABLE>
                                                                    65
<PAGE>

<TABLE>
<CAPTION>
                                            ACCUMULATED
                                                  OTHER           NOTES            TOTAL
                                          COMPREHENSIVE    RECEIVED FOR    STOCKHOLDERS'
                                            INCOME(LOSS)  SHARES ISSUED           EQUITY
                                          ----------------------------------------------

<S>                                            <C>                  <C>         <C>
BALANCE - DECEMBER 31, 1997                    $     (2)            $--         $ 36,285
   Net income                                        --              --            4,690
   Comprehensive income -
      foreign currency translation                  114              --              114
                                               --------                         --------
   Total comprehensive income                       114              --            4,804
   Issuance of common shares                         --              --              100
   Issuance of common shares
      for acquisitions                               --              --           18,782
   Issuance of preferred shares                      --              --            6,020
   Conversion of preferred
      shares to common shares                        --              --               --
   Warrants redeemed for common shares               --              --            1,950
   Preferred dividends paid                          --              --              (44)
   Common shares repurchased                         --              --             (337)
----------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1998                         112              --           67,560
   Net income                                        --              --            5,432
   Comprehensive income
      Foreign currency translation                  (36)             --              (36)
      Unrealized gain on securities                 (12)             --              (12)
                                               --------                         --------
   Total comprehensive income                       (48)             --            5,384
   Issuance of common shares                         --              --            3,686
   Issuance of common shares
      for acquisitions                               --              --           19,027
   Warrants redeemed for common shares               --              --            2,430
   Tax effect of exercise of
      non-qualified stock options                    --              --            1,825
   Common shares repurchased                         --              --           (6,976)
----------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1999
   (CARRIED FORWARD)                                 64              --           92,936
</TABLE>

--------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.


                                       66
<PAGE>

<TABLE>
                                         APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------

                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK,
                                             COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
                                                            PAGE 2 OF 2
                                        For the Years Ended December 31, 2000, 1999, and 1998
                                                           (In thousands)

<CAPTION>
                                                                                                  RETAINED
                                            PREFERRED STOCK      COMMON STOCK     ADDITIONAL      EARNINGS     COMMON
                                           ----------------- -------------------     PAID-IN  (ACCUMULATED      STOCK   TREASURY
                                             NUMBER   AMOUNT     NUMBER   AMOUNT     CAPITAL       DEFICIT)  WARRANTS      STOCK
                                           -------------------------------------------------------------------------------------

<S>                                             <C>     <C>     <C>        <C>     <C>          <C>           <C>       <C>
BALANCE - DECEMBER 31, 1999
   (BROUGHT FORWARD)                            --      $ --     51,116    $  51   $  87,470    $   12,664    $    --   $ (7,313)
   Net loss                                     --        --         --       --          --      (112,142)        --         --
   Comprehensive loss -
      Foreign currency translation              --        --         --       --          --            --         --         --
                                                                                                ----------
   Total comprehensive loss                     --        --         --       --          --      (112,142)        --         --
   Issuance of warrants attached to
      redeemable preferred shares               --        --         --       --          --            --        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                    --        --      1,862(1)     2       4,838            --         --         --
   Issuance of common shares for
      investment                                --        --      3,123        3       7,997
   Issuance of common shares for
      acquisitions                              --        --     46,226       46     160,273            --         --         --
   Issuance of common stock warrants
      for acquisition                           --        --         --       --          --            --      1,656         --
   Warrants redeemed for common shares          --        --        736        1       2,118            --       (877)        --
   Notes receivable for shares issued           --        --         --       --          --            --         --      4,510(2)
   Tax effect of exercise of non-qualified
      stock options                             --        --         --       --       4,068            --         --         --
--------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2000                     --      $ --    103,063    $ 103   $ 266,573    $  (99,478)   $ 1,406   $ (2,803)
================================================================================================================================

                                                                         67
<PAGE>


<CAPTION>
                                                 ACCUMULATED
                                                       OTHER           NOTES            TOTAL
                                               COMPREHENSIVE    RECEIVED FOR    STOCKHOLDERS'
                                                INCOME(LOSS)   SHARES ISSUED           EQUITY
                                                ---------------------------------------------

<S>                                                  <C>            <C>             <C>
BALANCE - DECEMBER 31, 1999
   (BROUGHT FORWARD)                                 $    64              --        $  92,936
   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
   Accretion of beneficial conversion
      feature of redeemable preferred
      stock                                               --              --           (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                                          --              --            8,000
   Issuance of common shares for
      acquisitions                                        --              --          160,319
   Issuance of common stock warrants
      for acquisition                                     --              --            1,656
   Warrants redeemed for common shares                    --              --            1,242
   Notes receivable for shares issued                     --          (4,510)              --
   Tax effect of exercise of non-qualified
      stock options                                       --              --            4,068
---------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 2000                          $  (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.
</FN>

</TABLE>

--------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.

                                       68
<PAGE>


<TABLE>

                                    APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------

                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (In thousands)

<CAPTION>
                                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                                               ----------------------------------------
                                                                                     2000            1999          1998
                                                                               ----------------------------------------
<S>                                                                            <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss) income                                                           $ (112,142)     $    5,432     $   4,690
   Adjustments to reconcile net (loss) income
      to net cash used in operating activities:
         Loss (income) from discontinued operations                                82,968          (3,012)       (6,072)
         Depreciation and amortization                                             11,073           6,560         2,913
         Deferred income taxes                                                    (16,639)         (1,618)          372
         Minority interest                                                            229             (46)          120
         Gain on sale of subsidiary                                                  (486)        (20,075)         (733)
         (Gain) loss on sale of assets                                               (466)            160           (48)
         Reserve on investments                                                        --           1,000            --
         Non-cash portion of restructuring cost                                     6,383           1,522            --
         Net change in operating assets and liabilities                            (5,577)         (3,046)       (5,180)
         Net cash (used in) provided by discontinued operations                    (8,761)         (1,256)        1,327
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES                                             (43,418)        (14,379)       (2,611)
-----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   (Increase) decrease in notes receivable                                         31,457            (685)       (1,202)
   Proceeds from sale of assets                                                       939             592           429
   Proceeds from sale of subsidiaries                                               2,821              --            --
   Payments for property and equipment                                             (8,391)         (3,776)       (1,008)
   Payment for asset and business acquisition (net of cash balances acquired)      (9,141)        (16,917)       (1,483)
   Increase in other assets                                                          (963)         (2,362)       (3,676)
   Net cash provided by (used in) discontinued operations                           1,708          (4,447)         (820)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                18,430         (27,595)       (7,760)
-----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net amounts borrowed (paid) on notes payable                                     2,234          (3,332)       16,346
   Proceeds on long-term debt                                                      15,971          51,143            --
   Payments for long-term debt                                                    (11,553)         (9,536)       (2,459)
   Other financing costs                                                             (835)         (2,863)           --
   Issuance of common shares                                                        5,957           5,237         1,354
   Issuance of preferred shares, related options and warrants                      19,056              --            --
   Repurchase of common stock                                                          --              --          (337)
   Redemption of preferred shares                                                      --              --          (900)
   Preferred stock dividends paid                                                      --              --           (44)
   Net cash provided by (used in) discontinued operations                              16           1,570        (7,610)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                          30,846          42,219         6,350
-----------------------------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH                                                     5,858             245        (4,021)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                       2,181           1,936         5,957
-----------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF YEAR                                        $    8,039      $    2,181     $   1,936
=======================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Income taxes paid                                                           $      660      $      226     $   1,862
   Interest paid                                                                    5,722           3,177         1,021
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.


                                       69
<PAGE>

              APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               (IN THOUSANDS)


1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ORGANIZATION

         Applied Digital  Solutions,  Inc. and subsidiaries  (the Company) is an
         information   management   technology  company.  The  Company  delivers
         Intelligent Integrated Information solutions through its "I(3) Services
         Platform."  Solutions are delivered  through three core business units,
         Applications,   Services  and  Advanced  Wireless.  The  I(3)  Services
         Platform is the next generation of CTII(TM), or computer, telephony and
         Internet  integration.  The I(3) Services  Platform  provides  value by
         enabling  our  clients to collect,  organize,  analyze,  warehouse  and
         disseminate information.

         In March 2001,  the Company's  board of directors  approved the sale of
         the  Company's  IntelleSale  business  segment and all of the Company's
         other non-core businesses.  Results of operations,  financial condition
         and  cash  flows  now  reflect  these   operations   as   "Discontinued
         Operations" and prior periods have been restated. See Note 6.

         The Company is currently organized into three segments as follows:

         APPLICATIONS - provides  proprietary  software  applications  for large
         retail  application   environments,   including  point  of  sale,  data
         acquisition, asset management and decision support systems and develops
         programs for portable data  collection  equipment,  including  wireless
         hand-held devices.  We equip our customers with the necessary tools and
         support  services to enable  them to make a  successful  transition  to
         implementing  e-business practices,  Call Center Solutions,  Enterprise
         Resource  Planning  (ERP) and Customer  Relationship  Management  (CRM)
         solutions, website design, and application and internet access services
         to  customers  of our  other  divisions.  We are also  involved  in the
         design,  manufacture and support of satellite communication  technology
         including  satellite  modems,  data  broadcast  receivers  and wireless
         global positioning systems for commercial and military applications.

         SERVICES is comprised of two business units:

             TELEPHONY - implements  telecommunications  and Computer  Telephony
             Integration  (CTI)  solutions for  e-business.  We integrate a wide
             range of voice and data  solutions from  communications  systems to
             voice over Internet Protocol and Virtual Private  Networking (VPN).
             We  provide  complete  design,   project  management,   cable/fiber
             infrastructure, installation and on-going support for the customers
             we support.

             NETWORKS - is a  professional  services  organization  dedicated to
             delivering  quality  e-business  services and support to our client
             partners,    providing   e-business   infrastructure   design   and
             deployment,  personal and mid-range  computer solutions and network
             infrastructure  for the development of local and wide area networks
             as well as site  analysis,  configuration  proposals,  training and
             customer support services.

         ADVANCED  WIRELESS - is  engaged  in the  business  of  developing  and
         bringing to market  technology  used to locate,  monitor  and  identify
         animals,  people and objects. The Company's advanced wireless business,
         Digital Angel  Corporation,  has three  segments:  the existing  Animal
         Tracking Business, the newly developed Digital Angel technology and the
         Digital Angel Delivery System.

         PRINCIPLES OF CONSOLIDATION

         The consolidated  financial  statements include the accounts of Applied
         Digital  Solutions,  Inc.  and its  wholly  owned  and  majority  owned
         subsidiaries.  All significant  intercompany  accounts and transactions
         have been eliminated upon consolidation.

         As further discussed in Note 3, the Company acquired  businesses during
         2000 and 1999 all of which have been  accounted  for under the purchase
         method of accounting.


         USE OF ESTIMATES

         The preparation of the financial statements 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.

                                       70
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         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 billable pursuant to contract  provisions
         in connection with system installation projects and software licensing.
         Unbilled  receivables  included in accounts receivable was $0.4 million
         in 2000 and $0.5 million in 1999.

         INVENTORIES

         Inventories  consist of raw  materials,  work in process  and  finished
         goods.  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  acquisitions  and  effective
         October 1, 2001,  changed  the lives to  periods  ranging  from 5 to 10
         years,  down from periods  ranging  from 10 to 20 years.  The impact in
         2000 of this change was an increase in amortization of $3.5 million and
         a decrease in earnings per share of $.05. Goodwill and other intangible
         assets are stated on the cost basis and are amortized, principally on a
         straight-line basis, over the estimated future periods to be benefitted
         (ranging from 5 to 10 years).  The Company  reviews  goodwill and other
         intangible  assets quarterly for impairment  whenever events or changes
         in business  circumstances  indicate that the remaining useful life may
         warrant  revision or that the carrying  amount of the long-lived  asset
         may not be fully recoverable.  Included in factors to be considered are
         significant  customer losses,  changes in  profitability  due to sudden
         economic or competitive  factors,  change in managements'  strategy for
         the business  unit, or other factors  arising in the quarterly  period.
         The  Company  annually  performs  undiscounted  cash flows  analyses by
         business  unit to determine if an  impairment  exists.  For purposes of
         these  analyses,  earnings before  interest,  taxes,  depreciation  and
         amortization  is used as the measure of cash flow.  If an impairment is
         determined to exist, any related impairment loss is calculated based on
         fair value.  Fair value is determined  based on discounted  cash flows.
         The discount  rate  utilized by the Company would be the rate of return
         expected from the market or the rate of return for a similar investment
         with similar risks.

                                       71
<PAGE>


APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         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 generally expenses production costs of print advertisements
         the first date the  advertisements  take  place.  Advertising  expense,
         included in  selling,  general and  administrative  expenses,  was $0.4
         million in 2000, $0.2 million in 1999 and $0.2 million in 1998.

         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 non fixed 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 in accordance with
         the  applicable  product's  shipping  terms.  Revenue from royalties is
         recognized when licensed products are shipped. There are no significant
         post-contract  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 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.

         COST OF GOODS AND SERVICES SOLD

         Rules  5.03-2.1 and 2 of  regulation  S-X require the Company  disclose
         costs of both  product  and service  revenue.  The Company is unable to
         comply with these rules at this time.  The Company is in the process of
         implementing an enterprise  based financial  reporting  system and will
         report  product  and service  costs in its March 31, 2001  consolidated
         financial statements.

                                       72
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         SOFTWARE

         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  allocated 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.

         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 PER COMMON SHARE AND COMMON SHARE EQUIVALENT

         Income  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 redeemable  preferred
         stock - series C for the  purpose of  calculating  earnings  per share.
         Basic  EPS  is  computed  by  dividing   income   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,  conversion of
         preferred stock outstanding and contingently issuable shares.

                                       73
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APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         COMPREHENSIVE INCOME

         The  Company's   comprehensive  income  consists  of  foreign  currency
         translation  adjustments  and unrealized  gains on  securities,  and is
         reported in the  consolidated  statements  of preferred  stock,  common
         stock and other stockholders' equity.

         IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
         FAS 133, Accounting for Derivative  Instruments and Hedging Activities,
         which  provides  a  comprehensive  and  consistent   standard  for  the
         recognition and measurement of derivatives and hedging activities.  The
         statement is effective for fiscal years commencing after June 15, 2000.
         In  June  2000,  the  FASB  issued  FAS  138,  Accounting  for  Certain
         Derivative Instruments and Certain Hedging Activities - an Amendment of
         FAS statement 133, which addresses implementation issues experienced by
         those  companies that adopted FAS 133 early.  The Company adopted these
         statements as of January 1, 2001 and, because of the Company's  minimal
         use of  derivative  instruments,  the Company does not believe that the
         adoption  of these  statements  will have any effect on its  results of
         operations, cash flows and financial condition.

         In December  1999, the SEC issued Staff  Accounting  Bulletin (SAB) No.
         101, Revenue Recognition in Financial Statements. This Staff Accounting
         Bulletin  summarizes certain of the staff's views on applying Generally
         Accepted  Accounting  Principles  to revenue  recognition  in financial
         statements.  On June 26, 2000, the SEC staff issued SAB No. 101B, which
         delayed  the  implementation  date of SAB 101  until no later  than the
         fourth quarter of fiscal years  beginning  after December 15, 1999. The
         Company  adopted  this  statement  in the fourth  quarter 2000 and such
         adoption  did not have a material  impact on the  Company's  results of
         operations, cash flows and financial condition.


                                       74
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APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

2.       DEBT COVENANT COMPLIANCE AND LIQUIDITY

         The Company  generated a significant loss from operations in 2000. As a
         result,  the  Company  was not in  compliance  with  certain  financial
         covenants of its loan  agreement as of December 31, 2000. The Company's
         Term and Revolving  Credit  Agreement (Debt  Agreement) with IBM Credit
         was  amended and  restated  on October 17, 2000 and further  amended on
         March 30, 2001. As of the date of the latest amendment, the Company was
         in compliance with the revised covenants.

         The Company's  Debt  Agreement  contains  certain  quarterly  financial
         covenants,  which  become more  restrictive  during  2001.  The Company
         anticipates  that  they  will  continue  to  comply  in 2001  with  the
         quarterly  financial  covenants  in the  Debt  Agreement.  Management's
         current business plans for the Company anticipates  significant year to
         year increases in revenues due to increased  volumes,  improved working
         capital management, reduced capital spending, successful implementation
         of on-going cost savings initiatives,  improved operating efficiencies,
         and the disposition of non-core businesses.

         The  Company  currently  expects  to meet the  amended  Debt  Agreement
         covenants  throughout 2001,  however,  if business conditions are other
         than as anticipated or other unseen events occur,  these may impact the
         Company's  ability to remain in compliance.  In the absence of a waiver
         or amendment to such financial  covenants,  such  non-compliance  would
         constitute  a default  under the  applicable  Debt  Agreement,  and IBM
         Credit would be entitled to accelerate the maturity of the indebtedness
         outstanding  thereunder.  In the event that such non-compliance appears
         likely,  or occurs,  the  Company  will seek IBM  Credit's  approval to
         renegotiate  financial  covenants  and/or obtain waivers,  as required.
         However,  there can be no assurance  that future  amendments or waivers
         will be obtained. See footnote 13.


                                       75
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

3.       ACQUISITIONS AND DISPOSITIONS

         The following represents acquisitions which occurred in 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                       VALUE OF
                                                                                        SHARES,
                                                                                       WARRANTS   COMMON/
                                                                                      & OPTIONS PREFERRED
                                        DATE OF  PERCENT  ACQUISITION           CASH  ISSUED OR    SHARES  GOODWILL
                                    ACQUISITION ACQUIRED        PRICE  CONSIDERATION   ISSUABLE    ISSUED  ACQUIRED
                                    -------------------------------------------------------------------------------
<S>                                    <C>          <C>     <C>             <C>        <C>         <C>     <C>
2000 ACQUISITIONS
Independent Business Consultants       04/01/00     100%    $   5,547       $    747   $  4,800       958  $  5,109
P-Tech, Inc.                           04/01/00     100%        4,830             80      4,750     1,404     4,643
Timely Technology Corp.                04/01/00     100%        1,240            375        865       215       913
Computer Equity Corporation            06/01/00     100%       24,712          8,968     15,744     4,829    15,313
WebNet Services, Inc.                  07/01/00     100%          958             58        900       268       828
Destron Fearing Corporation            09/08/00     100%       84,646          1,376     83,270    20,821    74,818
Pacific Decision Sciences
    Corporation                        10/01/00     100%       28,139            120     28,019     8,569    25,220
SysComm International Corporation      12/01/00      55%        4,975          2,221      2,754     1,700        --
Transatlantic Software Corporation     12/18/00     100%        8,561            266      8,295     4,937     6,624

1999 ACQUISITIONS
Port Consulting, Inc.                  04/01/99     100%    $   1,292       $    671   $    621       303  $    800
Hornbuckle Engineering                 04/01/99     100%        5,103          2,605      2,498       631     4,912
Lynch Marks & Associates, Inc.         04/01/99     100%        2,531            156      2,375       773     1,364
STR, Inc.                              04/01/99     100%        6,823             73      6,750     1,332     7,507
Contour Telecom Management, Inc.       05/01/99      75%        5,627          5,627         --        --     4,752
    (Divested effective 12/31/99)
Bostek, Inc. & affiliate               06/01/99     100%       27,466         27,466         --        --    24,876


<CAPTION>
                                     BUSINESS DESCRIPTION
                                     ------------------------------------------------------------------------
<S>                                  <C>
2000 ACQUISITIONS
Independent Business Consultants     Network integration company
P-Tech, Inc.                         Software development company
Timely Technology Corp.              Software developer and application service provider
Computer Equity Corporation          Communications integration company
WebNet Services, Inc.                Network integrator and website developer
Destron Fearing Corporation          Animal identification and microchip technology company
Pacific Decision Sciences
     Corporation                     Developer and implementer of customer  relationship  management software
SysComm  International  Corporation  Network and systems integrator and reseller of computer hardware
Transatlantic Software Corporation   Retail software developer

1999 ACQUISITIONS
Port Consulting, Inc.                Integrator of information technology application systems
Hornbuckle Engineering               Integrated voice and data solutions provider
Lynch Marks & Associates, Inc.       Network integration company
STR, Inc.                            Software solutions provider for retailers
Contour Telecom Management, Inc.     Provider of outsourced telecommunications management services
    (Divested effective 12/31/99)
Bostek, Inc. & affiliate             Seller of computer systems and peripherals
</TABLE>

         In each of the above transactions,  the value of the consideration paid
         by the Company was in accordance with the acquisition agreement.  Based
         on the  contractually  agreed to amounts,  the Company  calculated  the
         number of shares  issued to the  sellers as of the  closing  date.  The
         price of the  Company's  common stock used to  determine  the number of
         shares issued was either the closing price set on a fixed date or based
         on a formula as specified in the agreements.


                                       76
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         EARNOUT AND PUT AGREEMENTS

         All  acquisitions  have been accounted for using the purchase method of
         accounting and,  accordingly,  the  consolidated  financial  statements
         reflect  the results of  operations  of each  company  from the date of
         acquisition.  The costs of acquisitions  include all payments according
         to the acquisition  agreements plus costs for investment banking, legal
         and accounting services,  that were direct costs of acquiring these net
         assets.  Goodwill  resulting from these acquisitions is being amortized
         on a  straight-line  basis,  over  periods  ranging from 5 to 10 years.
         Prior to 2000,  the Company  amortized  goodwill over various lives not
         exceeding 20 years.  In the fourth quarter of 2000, the Company lowered
         the estimated lives to 5 to 10 years,  depending upon the entity.  This
         change in estimate was necessitated by the significant business changes
         initiated  in  the  fourth   quarter  of  2000.  See  Note  6.  Certain
         acquisition  agreements  include  additional  consideration  (generally
         payable in shares of the Company's common stock)  contingent on profits
         of the acquired  business.  Upon earning these additional  shares,  the
         value will be recorded as additional  goodwill.  The acquisitions above
         include  contingent shares earned upon attainment of certain profits by
         subsidiaries  through December 31, 2000. At December 31, 2000 and 1999,
         the Company  accrued $18.2 million and $2.7 million in connection  with
         earnouts and puts. Under these agreements, assuming all earnout profits
         are  achieved,  the  Company  is  contingently  liable  for  additional
         consideration of approximately  $29.3 million in 2001, $18.7 million in
         2002,  and $2.0 million in 2004, of which $1.0 million would be payable
         in cash and $49.0  million  would be payable in stock.  See Note 26 for
         unaudited  pro  forma  information  for  the  above  acquisitions  that
         occurred in 2000 and 1999.

         The Company has entered into put options with the selling  shareholders
         of various  companies  in which the Company  acquired  less than a 100%
         interest.  These options  require the Company to purchase the remaining
         portion it does not own after  periods  ranging from four to five years
         from the dates of acquisition at amounts per share  generally  equal to
         10% to 20% of the average  annual  earnings  per share of the  acquired
         company  before  income  taxes  for  the two  year  period  ending  the
         effective date of the put multiplied by a multiple ranging from four to
         five.  Based on the provisions of the put  agreements,  at December 31,
         2000, the Company is contingently  liable for additional  consideration
         of $1.2 million  payable in shares of the  Company's  common stock over
         the next two years.  The  contingent  amounts for put options  have not
         been  recorded as  liabilities  in the  financial  statements  as it is
         uncertain whether the contingencies will be met.

         There were 2.5 million and 9.4 million  shares of common  stock  issued
         during  2000 and 1999,  respectively,  related to  agreements  with the
         former majority shareholders of the Company's  subsidiaries,  primarily
         for earnouts and to purchase minority interests.

         MAJOR ACQUISITIONS

         On September 8, 2000, the Company  completed the acquisition of Destron
         Fearing  Corporation  through a merger of its wholly-owned  subsidiary,
         Digital Angel  Corporation  (formerly known as Digital Angel.net Inc.),
         into Destron Fearing  Corporation.  As a result of the merger,  Destron
         Fearing is now a  wholly-owned  subsidiary  of the Company and has been
         renamed "Digital Angel Corporation"

         In  connection  with the  merger,  each  outstanding  share of  Destron
         Fearing  common  stock was  exchanged  for 1.5 shares of the  Company's
         common  stock,  with  fractional  shares  settled in cash. In addition,
         outstanding  options and warrants to purchase shares of Destron Fearing
         common  stock were  converted  into a right to purchase  that number of
         shares of the  Company's  common  stock as the holders  would have been
         entitled to receive had they  participated  in the merger.  The Company
         issued 20.5 million  shares of its common stock in exchange for all the
         outstanding  stock of Destron  Fearing  and 0.3  million  shares of its
         common  stock as a  transaction  fee.  The Company will issue up to 2.7
         million  shares of its common  stock upon the  exercise  of the Destron
         Fearing  options  and  warrants.   The  aggregate   purchase  price  of
         approximately  $84.6 million,  including the liabilities  assumed,  was
         allocated  to the  identifiable  assets  with  the  remainder  of $74.8
         million recorded as goodwill, which is being amortized over 10 years.


                                       77
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         Effective  June 1, 2000,  the Company  acquired all of the  outstanding
         common stock of Computer  Equity  Corporation.  The aggregate  purchase
         price was approximately $24.7 million,  $15.8 million of which was paid
         in shares of the  Company's  common stock and $8.9 million of which was
         paid in cash in August, 2000. An additional $10.3 million is contingent
         upon achievement of certain earnings targets during the two years ended
         June 30, 2002. The total purchase price of Computer Equity Corporation,
         including the liabilities  assumed,  was allocated to the  identifiable
         assets with the remainder of $15.3 million recorded as goodwill,  which
         is being amortized over 10 years.

         Effective  October 1, 2000, the Company acquired all of the outstanding
         common  stock of Pacific  Decision  Sciences  Corporation  (PDSC).  The
         aggregate  purchase price was  approximately  $28.1 million,  which was
         paid in shares of the Company's common stock. In addition,  for each of
         the twelve month periods ended  September 30, 2001 and 2002, the former
         stockholders  of PDSC will be  entitled  to receive  earnout  payments,
         payable in cash or in shares of the  Company's  common  stock,  of $9.7
         million  plus 4.0 time EBITDA (as defined in the merger  agreement)  in
         excess of $3.7 million, subject to reduction by 4.0 times the shortfall
         from the projected EBITDA amount (as defined in the merger  agreement).
         The total purchase price of PDSC,  including the  liabilities  assumed,
         was  allocated to the  identifiable  assets with the remainder of $25.2
         million recorded as goodwill, which is being amortized over 5 years.

         Effective  June 1, 1999,  the Company  acquired all of the  outstanding
         common stock of Bostek,  Inc. and  affiliate  (Bostek) in a transaction
         accounted for under the purchase  method of  accounting.  The aggregate
         purchase price was approximately  $27.5 million, of which $10.2 million
         was paid in cash at  closing,  $5  million  was paid in cash in January
         2000,  $1.8  million for the 1999  earnout was paid in cash in February
         2000 and $.5 million of additional  acquisition costs paid in 2000. The
         earnout  accrual is included in other current  liabilities  at December
         31, 1999.  Upon a successful  initial public  offering of  IntelleSale,
         $9.5  million was to be payable in stock of  IntelleSale  to the former
         owners of Bostek. In the event that the initial public offering did not
         occur,  the $9.5  million  was to be payable in cash.  As the result of
         settling  certain disputes between the Company and the former owners of
         Bostek,  Inc.,  the parties  agreed to  eliminate  the  remaining  $9.5
         million  payable if the  Company  registers  approximately  3.0 million
         common shares by June 15, 2001.  The former  Bostek,  Inc.  owners have
         agreed  to  purchase   these  shares  at  the  market  price  when  the
         registration statement becomes effective.  If the Company is successful
         in  meeting  this  deadline,  the  extinguishment  of the $9.5  million
         payable  will be  recorded  as an  extraordinary  gain.  The  operating
         results of the Company  include Bostek from its  acquisition  date. The
         total purchase price of Bostek,  including the liabilities assumed, was
         allocated  to the  identifiable  assets  with  the  remainder  of $24.9
         million  recorded as goodwill which was originally being amortized over
         20 years.  See  footnote 6  regarding  discontinued  operations,  which
         includes the operations of IntelleSale and Bostek.

         See footnote 26 for the pro forma effect of the acquisitions.


                                       78
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         DISPOSITIONS

         Effective  October 31, 2000, the Company  entered into a Stock Purchase
         Agreement for the sale of all outstanding shares of common stock of its
         wholly-owned subsidiary, STC Netcom, Inc. In consideration, the Company
         received $1.0 million in cash,  and a note for $2.3 million.  The total
         proceeds  were  $3.3  million,  resulting  in a  pre-tax  loss  of $0.5
         million.  The operating results of STC Netcom, Inc. are included in the
         Company's financial statements through the date of disposition.

         Effective  December 29, 2000, the Company entered into an Agreement For
         Sale of Stock for the sale of all outstanding shares of common stock of
         its wholly-owned subsidiary,  Port Parties, Ltd. In consideration,  the
         Company  received $0.4 million in cash,  paid in January,  2001,  and a
         note for $9.3 million. The total proceeds were $9.7 million,  resulting
         in a pre-tax gain of $5.1 million, which is reflected in the results of
         discontinued  operations.  The operating results of Port Parties,  Ltd.
         are included in the Company's financial  statements through the date of
         disposition.

         Effective  October 1, 1999,  the Company  entered into a Stock Purchase
         Agreement  for the sale of all  outstanding  shares of common  stock of
         four non-core  subsidiaries.  In consideration,  the Company received a
         note for $2.5 million,  and 2.8 million shares of the Company's  stock,
         recorded as treasury stock in the amount of $7 million. No gain or loss
         was  recorded  on this  transaction,  because the  shareholders  of the
         purchaser  of  the  divested  assets  were  deemed  to  be  significant
         shareholders of the Company.  The operating  results of these companies
         are included in the Company's financial  statements through the date of
         disposition.

         Effective  December 30, 1999,  the Company sold its  approximately  4.9
         million shares in TigerTel,  Inc., its Toronto-based  telecommunication
         subsidiary. The total proceeds were $31.3 million in cash, resulting in
         a pre-tax gain of $20.1  million.  Payment of the proceeds was received
         on January 10,  2000.  The  operating  results of TigerTel are properly
         included  in the  Company's  financial  statements  through the date of
         disposition.


                                       79
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


4.       RESTRUCTURING AND UNUSUAL CHARGES

         In the first  quarter of 1999, a pre-tax  charge of $2,550 was recorded
         to cover restructuring costs of $2,236 and unusual charges of $314.

         RESTRUCTURING CHARGE

         As part of the Company's  reorganization of its core business into five
         reportable  business  groups,  the Company  implemented a restructuring
         plan in 1999. The  restructuring  plan included the exiting of selected
         lines of  business  within  the  Company's  Services  and  Applications
         business  groups,   and  the  associated   write-off  of  assets.   The
         restructuring  charge of $2,236 included asset  impairments,  primarily
         software and other intangible assets, of $1,522,  lease terminations of
         $541,  and employee  separations  of $173. The total charge reduced net
         income by $1,588.

         The following  table sets forth the  rollforward of the liabilities for
         business restructuring from January 1, 1999 through December 31, 2000:

<TABLE>
<CAPTION>
                              BALANCE                                    BALANCE                        BALANCE
                           JANUARY 1,                               DECEMBER 31,                   DECEMBER 31,
TYPE OF COST                     1999     ADDITIONS   DEDUCTIONS            1999     DEDUCTIONS            2000
---------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>          <C>               <C>            <C>            <C>
Asset impairment                 $ --       $ 1,522      $ 1,522           $  --          $  --          $   --
Lease terminations                 --           541          342             199            199          $   --
Employee separations               --           173          123              50             50          $   --
---------------------------------------------------------------------------------------------------------------

Total                            $ --       $ 2,236      $ 1,987           $ 249          $ 249          $   --
===============================================================================================================
</TABLE>

         UNUSUAL ITEMS

         During the fourth  quarter of 2000,  the Company  reviewed its goodwill
         and certain other investments for impairment and concluded that certain
         assets  were  impaired.  The  amount of the  impairment  was based upon
         estimated realizable value of the assets.  Accordingly, at December 31,
         2000,  the  Company  recorded  a charge of $6,383 for  permanent  asset
         impairment as follows:


         Investment in ATEC common stock                              $ 3,565
         Investment in Burling Instruments preferred stock              2,000
         Investment in Signal Processors, Ltd.                            818
         --------------------------------------------------------------------

                                                                      $ 6,383
         ====================================================================

         Included in discontinued operations is an IntelleSale pre-tax charge of
         $17.0 million recorded in the second quarter of 2000.  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 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  IPO  and  certain  other
         intangible assets.

         During  the  first  quarter  of  1999,  as part of the  Company's  core
         business  reorganization,  the  Company  realigned  certain  operations
         within its Services division and has recognized  impairment charges and
         other  related  costs of $314.  The total charge  reduced net income by
         $223.


                                       80
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

5.       EXTRAORDINARY LOSS

         In connection with the early retirement of the Company's line of credit
         with  State  Street  Bank  and  Trust  Company  and  its   simultaneous
         refinancing  with IBM Credit,  deferred  financing fees associated with
         the State Street Bank and Trust  agreement  were written off during the
         second quarter of 1999.  The total amount of the write-off  recorded as
         an extraordinary loss was $160, net of income taxes of $89.

6.       DISCONTINUED OPERATIONS

         On March 1, 2001, the Company's  board of directors  approved a plan to
         offer for sale its  IntelleSale  business  segment  and  several  other
         non-core  businesses.  Accordingly,  these operating  results have been
         reclassified  and reported as  discontinued  operations for all periods
         presented.  The Company expects to dispose of these  businesses  within
         the  next  twelve  months.   Cash  proceeds  will  be  used  to  reduce
         outstanding debt.

         The following discloses the results of the discontinued  operations for
         the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                 ----------------------------------------------------
                                                                2000             1999            1998
                                                 ----------------------------------------------------

<S>                                                        <C>              <C>             <C>
Product revenue                                            $ 137,901        $ 201,588       $ 125,363
Service revenue                                                6,826            6,089           7,375
                                                 ----------------------------------------------------
Total revenue                                                144,727          207,677         132,738
Cost of goods and services sold                              143,139          167,491         103,037
                                                 ----------------------------------------------------
Gross profit                                                   1,588           40,186          29,701
S,G&A                                                         40,697           31,456          19,365
Gain on sale of subsidiaries                                  (4,617)              --              --
Depreciation and amortization                                  4,217            3,127           1,588
Interest, net                                                    187              170             454
Impairment of assets                                          50,219               --              --
(Benefit) provision for income taxes                         (13,614)           1,980           1,918
Minority interest                                                201              441             304
                                                 ----------------------------------------------------
      (Loss) income from discontinued operations           $ (75,702)       $   3,012       $   6,072
                                                 ====================================================
</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 these  businesses  that the  Company  believes  will be
         assumed by a purchaser when the business is sold.


                                       81
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         Provision for operating  losses and carrying costs during the phase-out
         period  include  operating and other  disposal  costs to be incurred in
         selling the  businesses.  Carrying  costs include the  cancellation  of
         facility leases and employment  contract buyouts.  The Company does not
         anticipate a further loss on sale.  Expenses of sales of the businesses
         and anticipated  operating losses represent the Company's best estimate
         of these items.  Actual  losses could differ from those  estimates  and
         will be reflected as adjustments  in future  financial  statements.  At
         December 31, 2000, the estimated amounts were as follows:


           Operating losses                                             $ 1,619
           Carrying costs                                                 6,954
           Less: Benefit for income taxes                                (1,307)
           --------------------------------------------------------------------

                                                                         $ 7,266
           ====================================================================



         Assets and  liabilities  of  discontinued  operations are as follows at
         December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                        2000                  1999
                                                                                        ----                  ----
<S>                                                                                  <C>                    <C>
           Current Assets
              Cash and cash equivalents                                              $      --              $  2,957
              Accounts receivable and unbilled receivables                              10,290                33,381
              Inventories                                                               17,950                32,697
              Notes receivable                                                              --                   757
              Prepaid expenses and other current assets                                    336                 2,288
           ---------------------------------------------------------------------------------------------------------
           Total Current Assets                                                         28,576                72,080

           Property and equipment, net                                                   6,536                 7,237
           Notes receivable                                                                 --                    80
           Goodwill                                                                         --                37,715
           Other assets                                                                  1,212                   543
           ---------------------------------------------------------------------------------------------------------
                                                                                     $  36,324              $117,655
           =========================================================================================================

           Current Liabilities
              Notes payable                                                          $       4              $  3,072
              Current maturities of long-term debt                                         519                   522
              Accounts payable                                                          10,691                22,792
              Accrued expenses                                                          10,908                12,662
           ---------------------------------------------------------------------------------------------------------
           Total Current Liabilities                                                    22,122                39,048

           Long-term debt                                                                5,224                 2,057
           Minority interest                                                               902                 1,266
           ---------------------------------------------------------------------------------------------------------
                                                                                        28,248                42,371
           =========================================================================================================

           Net Assets Of Discontinued Operations                                     $   8,076              $ 75,284
           =========================================================================================================
</TABLE>


                                       82
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

7.       INVENTORIES
<TABLE>
<CAPTION>
                                                                                    2000               1999
                                                                                ---------------------------
<S>                                                                             <C>                 <C>
           Raw materials                                                        $  1,807            $ 2,183
           Work in process                                                           499                420
           Finished goods                                                         11,505              6,064
           ------------------------------------------------------------------------------------------------
                                                                                  13,811              8,667

           Less:  Allowance for excess and obsolescence                            1,500                916
           ------------------------------------------------------------------------------------------------

                                                                                $ 12,311            $ 7,751
           ================================================================================================
</TABLE>

8.       NOTES RECEIVABLE
<TABLE>
<CAPTION>
                                                                                    2000               1999
                                                                                ---------------------------
<S>                                                                             <C>                 <C>
           Due from purchaser of subsidiary, secured 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                                 $  9,612            $    --

           Due from purchaser of four non-core  subsidiaries,  bears interest at
           5%, interest payable quarterly, principal due
           October 2004                                                            2,500              2,531

           Due from  purchaser of  subsidiary,  secured by pledge of  investment
           securities, bears interest at prime, interest payable
           semi-annually, principal due November 2004                              2,328                 --

           Due from  purchaser  of cellular  assets,  personally  guaranteed  by
           company  owners,  bears  interest  at 6.5%,  $350 due  January  1999,
           remaining payable in monthly  installments of $25 including  interest
           starting July 1999. In 2001, the Company
           received a $900 payment on this note                                      950                950

           Due from officers, directors and employees of the Company, unsecured,
           bear interest at varying interest rates, due on
           demand                                                                  1,303              1,077

           Due from individuals and  corporations,  bear interest at rates above
           prime, secured by business assets,  personal varying guarantees,  and
           securities, due various dates through July
           2001                                                                    1,523              1,205

           Due from  purchaser of business  assets,  secured 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                                                              393                519
           ------------------------------------------------------------------------------------------------
                                                                                  18,609              6,282
           Less:  Current portion                                                  5,711              2,984
           ------------------------------------------------------------------------------------------------

                                                                                $ 12,898            $ 3,298
           ================================================================================================
</TABLE>

         These notes receivable have been pledged as collateral under the
         Company's debt agreements.  See Note 13.



                                       83
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

9.       OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                              ----------------------------
<S>                                                                           <C>                  <C>
           Deferred tax asset                                                 $ 10,001             $    --
           Prepaid expenses                                                      3,665               3,512
           Income tax refund receivable                                          1,926                  --
           Other                                                                   449                 201
           -----------------------------------------------------------------------------------------------

                                                                              $ 16,041             $ 3,713
           ===============================================================================================
</TABLE>


10.      PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                              ----------------------------

<S>                                                                           <C>                <C>
           Land                                                               $  1,379           $     664
           Building and leasehold improvements                                   8,067               2,695
           Equipment                                                            21,416              11,023
           -----------------------------------------------------------------------------------------------
                                                                                30,862              14,382
           Less:  Accumulated depreciation                                       9,494               7,733
           -----------------------------------------------------------------------------------------------

                                                                              $ 21,368           $   6,649
           ===============================================================================================
</TABLE>

         Included above are vehicles and equipment  acquired under capital lease
         obligations in the amount of $1,338 and $1,715 at December 31, 2000 and
         1999,  respectively.  Related accumulated depreciation amounted to $637
         and $626 at December 31, 2000 and 1999, respectively.

         Depreciation  charged  against  income  amounted to $2,099,  $2,062 and
         $1,159  for  the  years  ended  December  31,  2000,   1999  and  1998,
         respectively. Accumulated depreciation related to disposals of property
         and equipment amounted to $338 in 2000.


                                       84
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

11.      GOODWILL

         Goodwill consists of the excess of cost over fair value of tangible and
         identifiable  intangible  assets of  companies  purchased.  The Company
         applies the principles of Accounting  Principles  Board Opinion No. 16,
         Business  Combinations,  and uses the purchase method of accounting for
         acquisitions of wholly owned and majority owned subsidiaries.

<TABLE>
<CAPTION>
                                                                                   2000               1999
                                                                              ----------------------------

<S>                                                                           <C>                 <C>
           Original balance                                                   $ 177,219           $ 28,172
           Accumulated amortization                                             (11,195)            (3,887)
           -----------------------------------------------------------------------------------------------

           Carrying value                                                     $ 166,024           $ 24,285
           ===============================================================================================
</TABLE>

         Amortization expense amounted to $7,525,  $1,766 and $955 for the years
         ended  December 31, 2000,  1999,  and 1998,  respectively.  Accumulated
         amortization  of  goodwill  related to  subsidiaries  sold  during 2000
         amounted to $217.

         The Company has entered  into  various  earnout  arrangements  with the
         selling   shareholders   of  certain   acquired   subsidiaries.   These
         arrangements provide for additional  consideration to be paid in future
         years if certain  earnings  levels are met.  These amounts are added to
         goodwill as earned.

12.      OTHER ASSETS

<TABLE>
<CAPTION>
                                                                                   2000               1999
                                                                              ----------------------------

<S>                                                                           <C>                 <C>
           Proprietary software                                               $   9,600           $  7,270
           Loan acquisition costs                                                 3,725              2,890
           Other assets                                                             588                302
           -----------------------------------------------------------------------------------------------
                                                                                 13,913             10,462
           Less:  Accumulated amortization                                        6,930              4,332
           -----------------------------------------------------------------------------------------------
                                                                                  6,983              6,130
           Investment in preferred stock (fully impaired in 2000)                    --              2,000
           Other investments                                                      4,601                 --
           Deferred tax asset                                                    11,784              1,618
           Other                                                                  1,725                621
           -----------------------------------------------------------------------------------------------

                                                                              $  25,093           $ 10,369
           ===============================================================================================
</TABLE>

         The  Company  has  provided  a  valuation  allowance  on certain of its
         investments in preferred stock to reflect current fair market values.

         Amortization of other assets charged against income amounted to $1,449,
         $2,692 and $799 for the years ended  December 31, 2000,  1999 and 1998,
         respectively.

         Other investments  include the Company's equity interest in ATEC Group,
         Inc. which was sold subsequent to year end.


                                       85
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

13.      NOTES PAYABLE AND LONG TERM DEBT

         On May 25, 1999, the Company  entered into a Term and Revolving  Credit
         Agreement with IBM Credit (the "IBM  Agreement").  On May 26, 1999, the
         Company repaid the amount due on the previous revolving line of credit.
         The IBM  Agreement,  was amended and restated on October 17, 2000,  and
         further amended on March 30, 2001, and provides for the following:  (1)
         a revolving credit line of up to $53,335, subject to availability under
         a borrowing  base formula,  designated as follows:  (i) a USA revolving
         credit line of up to $49,500,  (ii) a Canadian revolving credit line of
         up to $3,855;  (2) Term Loan A of up to $25,000  and (3) Term Loan C of
         up to $2,740.  The previous IBM agreement  contained  provisions  for a
         Term Loan B, which was  terminated and  transferred  into the revolving
         credit line on October 17, 2000.

         The IBM  Agreement  contains  standard debt  covenants  relating to the
         financial  position  and  performance  as well as  restrictions  on the
         declarations  and payment of  dividends.  At  December  31,  2000,  the
         Company failed to comply with 2 of 3 financial debt covenants contained
         in  the  October  17,  2000  credit  agreement,  and  had a  collateral
         shortfall.  At December 31, 2000 the Company was required to maintain a
         minimum  Tangible  Net Worth (as  defined  in the credit  agreement  of
         $(11.8) million,  to achieve a minimum EBITDA (as defined in the credit
         agreement) of $6.1 million for the quarter ended  December 31, 2000 and
         to  maintain  a  minimum  current  ratio  of  1.0:1.0.  The  collateral
         shortfall  represents  the  excess  of  advances  under  the  Company's
         revolving credit line over eligible collateral.

         On March 30, 2001, the Company entered into an "Acknowledgement, Waiver
         and  Amendment  No.  1 to the  Second  Amended  and  Restated  Term and
         Revolving  Credit  Agreement"  with IBM  Credit  in which  the  Company
         obtained  waivers  for the  covenant  and other  defaults  and in which
         future covenants were reset and other  provisions  amended or modified.
         The new covenants for 2001 are as follows:

<TABLE>
<CAPTION>
           COVENANT                                                          COVENANT REQUIREMENT
                                                                --------------------------------------------
           Tangible Net Worth                                      As of the following dates not less than:
<S>                                                             <C>                               <C>
                                                                March 31, 2001                    $(57,000)
                                                                June 30, 2001                      (47,000)
                                                                September 30, 2001                 (35,000)
                                                                December 31, 2001                  (34,500)
                                                                March 31, 2002                     (20,000)

           Current Assets to Current Liabilities                March 31, 2001                    1.45:1.0
                                                                June 30, 2001                      0.6:1.0
                                                                September 30, 2001                 0.8:1.0
                                                                December 31, 2001                  0.8:1.0
                                                                March 31, 2002                     1.0:1.0

           Minimum Cumulative EBITDA                            March 31, 2001                    $ (4,700)
                                                                June 30, 2001                        5,000
                                                                September 30, 2001                   7,000
                                                                December 31, 2001                   11,000
                                                                March 31, 2002                      10,000
</TABLE>


                                       86
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         As of December 31, 2000, the outstanding balance was $74,978, including
         amounts  borrowed  by  a  discontinued  Canadian  subsidiary,  and  the
         availability   was   $20,022,   including   approximately   $1,010   of
         availability related to a discontinued Canadian subsidiary.

         The  weighted  average  interest  rate was 8.5% and 6.9% for the  years
         ended December 31, 2000 and 1999,  respectively.  The London  Interbank
         Offered  Rate and  Toronto-Dominion  Bank of Canada  interest  rates at
         December 31, 2000 were 6.6% and 7.5%, respectively.

         Notes payable consists of the following:
<TABLE>
<CAPTION>
                                                                                         2000             1999
                                                                                     -------------------------
<S>                                                                                  <C>              <C>
           Note payable - bank, collateralized by business assets of a
           subsidiary.  Interest is payable monthly at rates varying from the
           London Interbank Offered Rate plus 1.5% to 3.5% in 2000                   $    645         $    665

           Notes payable - other, unsecured, due on demand                                 12               74
           ---------------------------------------------------------------------------------------------------

                                                                                     $    657         $    739
           ===================================================================================================
</TABLE>

         Long-Term Debt consists of the following:
<TABLE>
<CAPTION>
                                                                                         2000             1999
                                                                                     -------------------------
<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 30 day London Interbank Offered
           Rate plus 2.75% in 2000, due in May 2002. (1)                             $ 46,435         $ 21,400

           Term Loan - IBM  Credit,  collateralized  by all  domestic  assets of
           Company and a pledge of the stock of the Company's subsidiaries,  the
           bearing interest at the 30 day London Interbank  Offered Rate plus in
           2000, payable in quarterly principal installments of $1,041 plus 3.5%
           interest, due in May 2002                                                   22,958           39,747

           Mortgage notes payable,  collateralized by land and building, payable
           in monthly  installments  of  principal  and interest  totaling  $35,
           bearing  interest at rates  ranging from 7.16% to 8.18% in 2000,  due
           through
           November 2010                                                                3,486              343

           Term loans, payable in monthly or quarterly installments, bearing
           interest at rates ranging from 4% to 10%, due through April 2009               297               --

           Note payable - bank,  collateralized  by business assets,  payable in
           monthly installments of principal and interest totaling $2, bearing
           interest at prime plus 2% in 1999, repaid in 2000                               --               22

           Capital lease obligations                                                      541              664
           ---------------------------------------------------------------------------------------------------
                                                                                       73,717           62,176
           Less:  Current maturities                                                    4,571            7,516
           ---------------------------------------------------------------------------------------------------

                                                                                     $ 69,146         $ 54,660
           ===================================================================================================

<FN>
         (1) The revolving credit was classified as current in 1999.
</FN>

</TABLE>


                                       87
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         The scheduled  maturities of long-term debt at December 31, 2000 are as
         follows:

<TABLE>
<CAPTION>
            YEAR                                                          AMOUNT
            --------------------------------------------------------------------

<S>                                                                     <C>
            2001                                                        $  4,571
            2002                                                          66,578
            2003                                                             112
            2004                                                              69
            2005                                                              62
            Thereafter                                                     2,325
            --------------------------------------------------------------------

                                                                        $ 73,717
            ====================================================================
</TABLE>

         Interest  expense on the long and short-term  notes payable amounted to
         $5,901,  $3,478 and $1,070 for the years ended December 31, 2000,  1999
         and 1998, respectively.

         Certain  of  the  Company's   subsidiaries   included  in  discontinued
         operations  also have notes payable and long term debt that the Company
         believes  will be assumed by the  buyers of these  subsidiaries.  Until
         these sales are  complete,  the Company is still liable for these notes
         payable and long term debt. See footnote 6.
<TABLE>
<CAPTION>
                                                                                   2000               1999
                                                                                --------------------------
<S>                                                                             <C>                <C>
           Notes payable - other                                                $     4            $    79
           ===============================================================================================

           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. (1)                      $ 3,587            $ 2,993

           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                                              2,003              2,489

           Term loans, other                                                         79                 56

           Capital lease obligations                                                 74                 34
           -----------------------------------------------------------------------------------------------
                                                                                  5,743              5,572
           Less:  Current maturities                                                519                522
           -----------------------------------------------------------------------------------------------

                                                                                $ 5,224            $ 5,050
           ===============================================================================================

<FN>
         (1) The revolving credit was classified with notes payable in 1999.
</FN>

</TABLE>


                                       88
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

14.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  methods and  assumptions  were used to estimate the fair
         value of each class of financial instruments:

         CASH AND CASH EQUIVALENTS

         The  carrying  amount  approximates  fair  value  because  of the short
         maturity of those instruments.

         NOTES RECEIVABLE

         The carrying value of the notes  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

         The carrying amount  approximates  fair value because either the stated
         interest  rates  fluctuate  with  current  market rates or the interest
         rates  approximate  the current rates at which the Company could borrow
         funds on a similar note.

         ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         The carrying amount approximates fair value.

         REDEEMABLE PREFERRED STOCK

         The accreted value approximates fair value based upon the current value
         of the  common  stock into which the  preferred  stock will  convert at
         December 31, 2000.


                                       89
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

15.      INCOME TAXES

         The  provision  for  income  taxes,  excluding  the $89 of tax  benefit
         related to the extraordinary loss in 1999, consists of:

<TABLE>
<CAPTION>
                                                                          2000             1999            1998
                                                                      -----------------------------------------
<S>                                                                   <C>               <C>             <C>
           Current:
              United States at statutory rates                        $ (1,675)         $ 2,832         $  (131)
              International                                                 --               16             930
              Current taxes covered by net operating
                 loss                                                       --               --              --
           ----------------------------------------------------------------------------------------------------
              Current income tax provision (credit)                     (1,675)           2,848             799
           ----------------------------------------------------------------------------------------------------
           Deferred:
              United States                                             (3,005)          (1,668)           (126)
              International                                               (360)              --              (3)
           ----------------------------------------------------------------------------------------------------
              Deferred income taxes provision (credit)                  (3,365)          (1,668)           (129)
           ----------------------------------------------------------------------------------------------------

                                                                      $ (5,040)         $ 1,180         $   670
           ====================================================================================================
</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>
                                                                                           2000            1999
                                                                                       ------------------------
<S>                                                                                    <C>              <C>
           Deferred Tax Assets:
              Liabilities and reserves                                                 $  4,962         $   836
              Net operating loss carryforwards                                           39,772           1,655
           ----------------------------------------------------------------------------------------------------
              Gross deferred tax assets                                                  44,734           2,491
              Valuation allowance                                                       (15,850)             --
           ----------------------------------------------------------------------------------------------------
                                                                                         28,884           2,491
           ----------------------------------------------------------------------------------------------------
           Deferred Tax Liabilities:
              Accounts receivable                                                           599              71
              Notes receivable                                                              370             361
              Installment sales                                                           4,882              --
              Property and equipment                                                        352              61
              Intangible assets                                                             895             380
           ----------------------------------------------------------------------------------------------------
                                                                                          7,098             873
           ----------------------------------------------------------------------------------------------------

           Net Deferred Tax Asset                                                      $ 21,786         $ 1,618
           ====================================================================================================
</TABLE>

         The current and  long-term  components of the deferred tax asset are as
         follows:
<TABLE>
<CAPTION>
                                                                                           2000            1999
                                                                                       ------------------------

<S>                                                                                    <C>              <C>
           Current deferred tax asset                                                  $ 10,001         $    --
           Long-term deferred tax asset                                                  11,785           1,618
           ----------------------------------------------------------------------------------------------------

                                                                                       $ 21,786         $ 1,618
           ====================================================================================================
</TABLE>

         The valuation  allowance for deferred tax asset increased by $15,850 in
         2000,  due  mainly  to the  generation  of  net  operating  losses  and
         decreased by $2,904 in 1999 due to management  determining  it was more
         likely than not the net operating loss  carryforwards  will be utilized
         in  future  periods.  The  valuation  allowance  was  provided  for net
         deferred tax assets that  exceeded the Company's  available  carryback,
         the level of existing  deferred tax liabilities  and projected  pre-tax
         income.

                                       90
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         Approximate   domestic  and   international   income  from   continuing
         operations before provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                                          2000             1999            1998
                                                                     ------------------------------------------

<S>                                                                  <C>                <C>            <C>
           Domestic                                                  $ (32,661)         $ 4,065        $ (3,178)
           International                                                (1,324)            (351)          2,586
           ----------------------------------------------------------------------------------------------------

                                                                     $ (33,985)         $ 3,714        $   (592)
           ====================================================================================================
</TABLE>

         At December 31, 2000,  the Company had  aggregate  net  operating  loss
         carryforwards  of  approximately  $99 million  for income tax  purposes
         which expire in various amounts through 2020.  Approximately $9 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.

         The reconciliation of the effective tax rate with the statutory federal
         income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                           2000         1999          1998
                                                                  ----------------------------------------
                                                                              %            %             %
                                                                  ----------------------------------------
<S>                                                                         <C>          <C>          <C>
           Statutory rate                                                    34           34            34
           Non-deductible goodwill amortization                              (8)          28           (41)
           State income taxes, net of federal benefits                        7           13           (24)
           International tax rates different from the
              the statutory US federal rate                                  --           --             9
           Change in deferred tax asset valuation
              allowance                                                     (16)         (43)          (74)
           Other                                                             (2)          --           (17)
           -----------------------------------------------------------------------------------------------

                                                                             15           32          (113)
           ===============================================================================================
</TABLE>


                                       91
<PAGE>
APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


16.      EARNINGS PER SHARE

         A reconciliation  of the numerator and denominator of basic and diluted
         EPS is provided as follows:

<TABLE>
<CAPTION>
                                                                         2000           1999             1998
                                                                   ------------------------------------------
<S>                                                                <C>              <C>              <C>
           NUMERATOR:
              Income (loss) from continuing operations             $  (29,174)      $  2,580         $ (1,382)
              Preferred stock dividends                                  (191)            --              (44)
              Accretion of beneficial conversion feature of
                 preferred stock                                       (3,857)            --               --
           --------------------------------------------------------------------------------------------------

           Numerator for basic earnings per share -
              Net income (loss) from continuing operations
                 available to common stockholders                     (33,222)         2,580           (1,426)
              Net income (loss) from discontinued operations
                 available to common stockholders                     (82,968)         3,012            6,072
              Extraordinary loss                                           --           (160)              --

              Net income (loss) available to common stockholders     (116,190)         5,432            4,646

           Effect of dilutive securities(1):
              Preferred stock dividends                                   191             --               44
              Accretion of beneficial conversion feature of
                 preferred stock                                        3,857             --               --
           --------------------------------------------------------------------------------------------------

           Numerator for diluted earnings per share -
              net income available to common stockholders          $ (112,142)      $  5,432         $  4,690
           ==================================================================================================

           DENOMINATOR:
              Denominator for basic earnings per
                 share - weighted-average shares outstanding           63,825         46,814           32,318
           --------------------------------------------------------------------------------------------------
              Effect of dilutive securities:
                 Redeemable preferred stock                                --             --               85
                 Warrants                                                  --            280              477
                 Employee stock options                                    --          2,992              266
                 Contingent stock - acquisitions                           --             --            1,654
           --------------------------------------------------------------------------------------------------
              Dilutive potential common shares                             --          3,272            2,482
           --------------------------------------------------------------------------------------------------

           Denominator for diluted earnings
              per share - adjusted weighted-average
              shares and assumed conversions                           63,825         50,086           34,800
           ==================================================================================================

           BASIC EARNINGS PER SHARE
             Continuing operations                                 $     (.52)      $    .06         $   (.05)
             Discontinued operations                               $    (1.30)      $    .06         $    .19
           --------------------------------------------------------------------------------------------------
           TOTAL - BASIC                                           $    (1.82)      $    .12         $    .14
           ==================================================================================================

           DILUTED EARNINGS PER SHARE
             Continuing operations                                 $     (.52)      $    .05         $   (.05)
             Discontinued operations                               $    (1.30)      $    .06         $    .17
           --------------------------------------------------------------------------------------------------
           TOTAL - DILUTED                                         $    (1.82)      $    .11         $    .12
           ==================================================================================================
<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, 2000 because to do so would have been anti-dilutive.
                 Redeemable preferred stock                              617
                 Warrants                                                301
                 Employee stock options                                2,741
                 Contingent stock - acquisitions                          29
                 -----------------------------------------------------------

                                                                       3,688
                 ===========================================================
</FN>
</TABLE>
          The total  number  of  potentially  dilutive  shares  including  stock
          options,  warrants and the  conversion  of  preferred  stock to common
          stock total approximately 28 million shares.

                                       92
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

17.      COMMITMENTS AND CONTINGENCIES

         Rentals of space, vehicles, and office equipment under operating leases
         amounted to approximately  $2.9 million,  $3.4 million and $2.7 million
         for the years ended December 31, 2000, 1999 and 1998, 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, 2000 are:

<TABLE>
<CAPTION>
                                                       MINIMUM                   EMPLOYMENT
           YEAR                                RENTAL PAYMENTS                    CONTRACTS
           --------------------------------------------------------------------------------

<S>                                                   <C>                          <C>
           2001                                       $  3,684                     $  8,200
           2002                                          2,956                        6,900
           2003                                          2,106                        3,700
           2004                                          1,701                        1,600
           2005                                          1,449                          900
           Thereafter                                      920                          100
           --------------------------------------------------------------------------------

                                                      $ 12,816                     $ 21,400
           ================================================================================
</TABLE>

         The Company has entered into employment contracts with key officers and
         employees of the Company. The agreements are for periods of one to five
         years through February 2006. Some of the employment contracts also call
         for bonus arrangements based on earnings of a particular subsidiary.

         The employment  agreements with five of the executive  officers include
         "change of control" provisions, under which the employees may terminate
         their  employment  within  one year after a change of  control,  and be
         entitled  to receive  specified  severance  payments  and/or  continued
         compensation  payments for sixty months. The employment agreements also
         provide  that  two  of  these   executive   officers  are  entitled  to
         supplemental compensation payments for sixty months upon termination of
         employment,  even if  there  is no  change  in  control,  unless  their
         employment is terminated  due to a material  breach of the terms of the
         employment agreement. Also, the agreements for two officers provide for
         certain "triggering events" which include a change in control. Upon the
         occurrence of a triggering  event, the Company will pay, in cash and/or
         in stock,  $12.1 million and $3.5 million,  respectively,  to these two
         officers,  in  addition to certain  other  compensation.  Finally,  the
         employment agreements provide for a gross up for excise taxes which are
         payable by these  executive  officers if any payments  upon a change of
         control are subject to such taxes as excess parachute payments.

18.      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  $215 and $286 for the years ended  December  31, 2000 and
         1999.


                                       93
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

19.      REDEEMABLE PREFERRED STOCK

         In  March  1996,  the  Company  issued  nine  thousand  8%  convertible
         preferred  shares at $100 per  share,  in  exchange  for 80% of Burling
         Instruments,  Inc. If, and to the extent,  the preferred shares had not
         been converted to common stock by the second anniversary of the initial
         issuance  of the  shares,  the  Company  was  required  to  redeem  the
         preferred shares by paying $100 per share. Each holder of the preferred
         shares had the ability to convert  their  preferred  shares into common
         shares by  dividing  the  redemption  price  ($100) by $5.75 per common
         share. The shares were redeemed in 1998.

         PREFERRED SHARES - SERIES C

         On October 26, 2000, the Company issued 26 thousand  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 is $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 is
         convertible  into shares of the Company's  common stock  initially at a
         rate of $7.56 in stated value per share,  which is reduced to $5.672 in
         stated value per share 91 days after  issuance of the preferred  stock.
         At the earlier of 90 days after the issuance of the preferred  stock or
         upon  the  effective  date  of  the  Company's  registration  statement
         relating to the common stock  issuable on the conversion of the initial
         series of preferred  stock, the holders also have the option to convert
         the  stated  value  of  the  preferred  stock  to  common  stock  at an
         alternative  conversion  rate starting at 140% and declining to 110% of
         the average closing price for the 10 trading days preceding the date of
         the notice of  conversion.  The  conversion  price and the  alternative
         conversion  price are subject to  adjustment  based on certain  events,
         including the Company's  issuance of shares of common stock, or options
         or other rights to acquire  common  stock,  at an issuance  price lower
         than the  conversion  price of the  preferred  stock,  or  issuance  of
         convertible  securities  that have a more  favorable  price  adjustment
         provision  than the  preferred  stock.  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.  The  beneficial
         conversion  feature  (BCF) was  computed  using the  excess of the fair
         market value of the Company's  common stock above the accounting  value
         per share of common stock at the date of issuance. 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
         BCF  will  be  recomputed  as the  alternate  conversion  rates  become
         available.  The holders of the preferred  stock are entitled to receive
         annual  dividends  of 4% of the stated  value (or 5.2% of the  purchase
         price) payable in either cash or additional shares of preferred stock.

         If certain  triggering  events occur in respect of the preferred stock,
         the holders may require the Company to redeem the preferred  stock at a
         price per share equal to 130% of the stated  value (or an  aggregate of
         $33.8 million) plus accrued  dividends,  as long as such  redemption is
         not prohibited under the Company's credit agreement. In addition, under
         certain  circumstances during the occurrence of a triggering event, the
         conversion  price per share of the preferred  stock would be reduced to
         50% of the lowest  closing price of the  Company's  common stock during
         such period.  In addition,  the holders of the Series C preferred stock
         may  require  the  Company to delist  its common  stock from the Nasdaq
         National  Market and pay to each holder of the Series C preferred stock
         an amount in cash per share equal to 2% of the liquidation value of the
         Series C preferred stock, such payments not to exceed $6 million in the
         aggregate.  The  triggering  events  include  (i)  failure  to have the
         registration  statement  relating to the common  stock  issuable on the
         conversion of the preferred stock declared effective on or prior to 180
         days after  issuance of the  preferred  stock or the  suspension of the
         effectiveness  of such  registration  statement,  (ii)  suspensions  in
         trading of or failure to list the common stock  issuable on  conversion
         of the preferred stock, (iii) failure to obtain shareholder approval at
         least by June 30, 2001 for the  issuance  of the common  stock upon the
         conversion  of  the  preferred  stock  and  upon  the  exercise  of the
         warrants,  (iv) change in control,  and (v) certain defaults in payment
         of or  acceleration  of the  Company's  payment  obligations  under the
         Company's credit agreement.


                                       94
<PAGE>

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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         Warrants:

         The  holders of the  preferred  stock have also  received  0.8  million
         warrants to purchase up to 0.8 million  shares of the Company's  common
         stock over the next five years.  The exercise price is $4.73 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.

         Option to Acquire Additional Preferred Stock:

         The investors may 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 will have 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%.

20.      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.

         In May 1998, in connection  with the Company's  acquisition of Commstar
         Limited,  an Ontario corporation  ("Commstar"),  the board of directors
         authorized the issuance of one share of the Company's  Preferred  Stock
         ($10.00 par value) designated as the Company's Special Voting Preferred
         Stock  (the  "Special   Preferred  Share")  to  secure  the  rights  of
         exchangeable shares issued to the sellers.  The Special Preferred Share
         was  entitled to a number of votes  equal to the number of  outstanding
         shares of Commstar not owned by the Company that could be exchanged for
         the Company's common shares. All of Commstar's exchangeable shares have
         been  exchanged  for  shares of the  Company's  Common  Stock,  and the
         Special Preferred Share was cancelled in June 2000.

         PREFERRED SHARES - CLASS B

         In June 1998, in connection  with the Company's  acquisition  of Ground
         Effects Limited, an Ontario corporation  ("Ground Effects"),  the board
         of  directors  authorized  the  issuance of one share of the  Company's
         Preferred Stock ($10.00 par value)  designated as the Company's Class B
         Voting  Preferred  Stock  (the  "Class B Special  Preferred  Share") to
         secure the rights of  exchangeable  shares  issued to the sellers.  The
         Class B Special Preferred Share was entitled to a number of votes equal
         to the number of outstanding  shares of Ground Effects not owned by the
         Company that could be exchanged for the Company's  common  shares.  All
         exchangeable shares of Ground Effects have been exchanged for shares of
         the  Company's  Common  Stock,  and the  Special  Preferred  Share  was
         cancelled in June 2000.


                                       95
<PAGE>

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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

         WARRANTS

         The Company has issued warrants convertible into shares of common stock
         for consideration, as follows (in thousands, except exercise price):

<TABLE>
<CAPTION>
           CLASS OF                                                        EXERCISE                           EXERCISABLE
           WARRANTS            AUTHORIZED      ISSUED      EXERCISED          PRICE         DATE OF ISSUE       PERIOD
           -----------------------------------------------------------------------------------------------------------------

           <S>                        <C>         <C>            <C>     <C>               <C>              <C>
           Class K                    250         250             --           5.31        September 1996       5 years
           Class L                    125         125            123           3.00          October 1996       5 years
           Class N                    800         800            800           3.00           August 1997       5 years
           Class P                    520         520            480           3.00        September 1997       5 years
           Class R                    125         125            125           3.00          October 1997       5 years
           Class S                    600         600            223           2.00            April 1998       5 years
           Class U                    250         250             --           8.38         November 1998       5 years
           Class V                    828         828            429     .67 - 3.32        September 2000       5 years
           Class W                    800         800             --           4.73          October 2000   Up to 3.6 years
                       ---------------------------------------------

                                    4,298       4,298          2,180
                       =============================================
</TABLE>

         Warrants in classes K 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 $1.66 million,  included as part
         of the initial purchase price.

         Class W warrants  were issued in connection  with the  preferred  stock
         issuance.  These  warrants  were  valued  at $627  thousand,  and  were
         recorded as a discount on the preferred stock at issuance.

         The  valuation of warrants  utilized the following  assumptions  in the
         Black-Scholes model:

<TABLE>
<CAPTION>
           WARRANT SERIES            DIVIDEND YIELD          VOLATILITY         EXPECTED LIVES            RISK FREE RATES

<S>                                        <C>                 <C>                   <C>                        <C>
           K & L                           0%                  44.03%                1.69                       8.5%

           N, P & R                        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%
</TABLE>


                                       96
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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         STOCK OPTION PLANS

         During 1996, the Company adopted a non-qualified stock option plan (the
         Option Plan). During 1999, the Company adopted a non-qualified 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 Non-employee 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.
         Non-Employee Director Stock Option Plan (the Director Plan).

         Under the Option  Plan,  options  for ten  million  common  shares were
         authorized  for  issuance  to certain  officers  and  employees  of the
         Company at December 31, 2000, 1999, and 1998 respectively, of which 9.7
         million have been issued through December 31, 2000. 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 28.4 million at December 31, 2000, of which 15.9 million
         options have been issued through December 31, 2000. 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  authorizes the grant of options to
         the  employees  to  purchase  1.6  million  shares of  common  stock at
         December  31,  2000,  of which 1.6  million  options  have been  issued
         through December 31, 2000. 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  authorizes the grant of options to
         the  non-employee  directors  to purchase  .3 million  shares of common
         stock at  December  31,  2000,  of which .3 million  options  have been
         issued through December 31, 2000. The Plan has been  discontinued  with
         respect to any future grant of options.

         A  summary  of stock  option  activity  for  2000,  1999 and 1998 is as
         follows:

<TABLE>
<CAPTION>
                                                         2000                          1999                     1998
                                                  -------------------          --------------------      ------------------
                                                            WEIGHTED-                     Weighted-               Weighted-
                                                              AVERAGE                       Average                 Average
                                                             EXERCISE                      Exercise                Exercise
                                                  SHARES        PRICE          Shares         Price      Shares       Price
                                                  -------------------------------------------------------------------------

<S>                                               <C>          <C>             <C>           <C>          <C>       <C>
           Outstanding on January 1               12,172       $ 3.01           9,105        $ 3.55       3,835     $  4.39
           Granted                                13,725         2.76           4,968          2.07       5,367        2.80
           Exercised                              (3,257)        2.89          (1,000)         2.53          --          --
           Forfeited                                (183)        3.28            (901)         3.26         (97)       4.79
           ----------------------------------------------------------------------------------------------------------------
           Outstanding on December 31             22,457         2.87          12,172          3.01       9,105        3.55
           ----------------------------------------------------------------------------------------------------------------

           Exercisable on December 31             11,821         2.87           6,663          3.56       2,885        4.48
           ----------------------------------------------------------------------------------------------------------------

           Shares available on December 31
              for options that may be granted     12,878                        1,178                       450
           ----------------------------------------------------------------------------------------------------------------
</TABLE>


                                       97
<PAGE>

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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         The  following  table  summarizes  information  about stock  options at
         December 31, 2000:

<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                266             8.40            $  .85              266          $   .85
              $1.01 to $2.00              1,563             5.50              1.71            1,413             1.68
              $2.01 to $3.00             15,133             5.20              2.56            5,575             2.25
              $3.01 to $4.00              3,248             3.60              3.56            2,638             3.58
              $4.01 to $5.00              1,279             2.20              4.45            1,184             4.43
              $5.01 to $8.00                968             4.14              5.68              745             5.53
                                  -------------                     --------------   -------------------------------
              $0.01 to $8.00             22,457                             $ 2.87           11,821           $ 2.87
                                  =============                     ==============   ===============================
</TABLE>

         The Company applies APB Opinion No. 25 and related  Interpretations  in
         accounting for all the plans.  Accordingly,  no  compensation  cost has
         been  recognized  under these plans.  Had  compensation  cost for these
         plans been  determined  based on the fair value at the grant  dates for
         awards under these plans,  consistent with the  alternative  method set
         forth  under FAS 123,  Accounting  for  Stock-Based  Compensation,  the
         Company's net income applicable to common stockholders and earnings per
         common and common  equivalent  share would have been  reduced.  The pro
         forma amounts are indicated below:

<TABLE>
<CAPTION>

                                                                               2000              1999           1998
                                                                          ------------------------------------------
<S>                                                                       <C>                <C>            <C>
           NET INCOME AVAILABLE TO COMMON
             STOCKHOLDERS
                    As reported                                           $ (33,222)         $  2,580       $ (1,426)
                    Pro forma                                             $ (35,901)         $   (314)      $ (3,664)

           EARNINGS PER COMMON SHARE - BASIC
                    As reported                                           $    (.52)         $    .06       $   (.05)
                    Pro forma                                             $    (.56)         $   (.01)      $   (.11)

           EARNINGS PER COMMON SHARE - DILUTED
                    As reported                                           $    (.52)         $    .05       $   (.05)
                    Pro forma                                             $    (.56)         $   (.01)      $   (.11)
</TABLE>

         The fair value of each option granted is estimated on the date of grant
         using  the  Black-Scholes   option-pricing  model  with  the  following
         weighted-average  assumptions  used for grants in 2000, 1999, and 1998:
         dividend  yield  of 0% for the  three  years;  expected  volatility  of
         53.32%,  43.41%, and 43.69%;  risk-free interest rate of 4.98%,  6.36%,
         and 8.5%;  and expected  lives of five years for the three  years.  The
         weighted-average  fair value of options  granted was $.67,  $1.17,  and
         $1.27  for  the  years  ended  December  31,  2000,   1999,  and  1998,
         respectively. 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.



                                       98
<PAGE>

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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         QUALIFIED EMPLOYEE STOCK PURCHASE PLAN

         During 1999,  the Company  adopted a 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 1.5
         million common shares were authorized for issuance to substantially all
         full-time  employees of the Company,  of which 168 thousand shares have
         been issued and exercised through December 31, 2000. Each participant's
         options to purchase  shares  will be  automatically  exercised  for the
         participant on the exercise dates determined by the board of directors.



21.      LEGAL PROCEEDINGS

         The Company is party to various  legal  proceedings.  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.


22.      SUPPLEMENTAL CASH FLOW INFORMATION

         The changes in operating assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                                    -----------------------------------------
                                                                         2000            1999            1998
                                                                    -----------------------------------------
<S>                                                                 <C>              <C>             <C>
           (Increase) decrease in accounts receivable
              and unbilled receivables                              $  (6,359)       $ (1,298)       $    387
           (Increase) decrease in inventories                             607           1,805          (1,233)
           (Increase) decrease in prepaid expenses                        843          (1,707)           (409)
           Decrease in accounts payable
              and accrued expenses                                       (668)         (1,846)         (3,925)
           --------------------------------------------------------------------------------------------------

                                                                    $  (5,577)       $ (3,046)       $ (5,180)
           ==================================================================================================
</TABLE>

         In the years ended  December 31, 2000,  1999, and 1998, the Company had
         the following noncash investing and financing activities:

<TABLE>
<CAPTION>
                                                                         2000            1999            1998
                                                                    ------------------------------------------

<S>                                                                 <C>              <C>             <C>
           Assets acquired for common stock                         $ 168,319        $ 19,027        $ 25,408
           Due from buyer of divested subsidiary                           --          31,302              --
           Due to shareholders of acquired subsidiary                      --          15,000              --
           Common stock issued for services                               125              --              --
           Assets acquired for long-term debt and capital leases        2,201             100           1,926
           Sale of assets for preferred stock                              --              --           3,000
           Other                                                           --              --             132
</TABLE>


                                       99
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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


23.      SEGMENT INFORMATION

         Prior to 2001, the Company's business was organized into six reportable
         business  segments.  The Company's core group comprised four technology
         groups or industry segments:  Applications,  Telephony,  Networks,  and
         Internet.  Combined,  these  groups  formed the basis of the  Company's
         Computer  Telephony  Internet  Integration (CTII) strategy that was the
         Company's business model. Beginning in 2001 the Company further refined
         its business model and strategy to more adequately  promote its product
         and services and to more fully  integrate its business  units.  Through
         this strategy, known as the I(3) Service Platform, the Company delivers
         intelligent  integrated  information  solutions through its three newly
         organized core business groups of  Applications,  Services and Advanced
         Wireless.  Additionally,  the Company's previously reported IntelleSale
         and other non-core  business  segments are now reported as discontinued
         operations.  Prior years  information  has been restated to present the
         Company's  reportable  segments into three  operating  segments,  whose
         principal products and services are as follows:

<TABLE>
<CAPTION>
          ======================================================================================================
                      OPERATING SEGMENT                                PRINCIPAL PRODUCTS AND SERVICES
          ------------------------------------------------------------------------------------------------------
<S>                                                       <C>
           Applications                                   *    Retail software applications
                                                          *    Point of sale
                                                          *    Data acquisition
                                                          *    Asset management
                                                          *    Decision support
                                                          *    Portable data collection
                                                          *    Call center solutions
                                                          *    Enterprise resource planning
                                                          *    Customer relationship management
                                                          *    Website design
                                                          *    Application and internet access
                                                          *    Global positioning systems
                                                          *    Satellite communication technology
                                                          *    Corporate enterprise access
                                                          *    Decision support
                                                          *    Voice/data technology
          ------------------------------------------------------------------------------------------------------
           Services - comprised of
                Telephony                                 *    Computer telephony integration
                                                          *    Telephone systems and services
                                                          *    Voice and data solutions
                                                          *    Voice over Internet Protocol (VOIP)
                                                          *    Virtual Private Networking
                                                          *    Project management
                                                          *    Cable/fiber infrastructure

                Networks                                  *    e-Business infrastructure design and deployment,
                                                                  services and support
                                                          *    Personal and mid-range computer solutions
                                                          *    Network infrastructures, local and wide area
                                                                  networks and
                                                               virtual private networks
                                                          *    Site analysis and configuration
                                                          *    Training and customer support services
          ------------------------------------------------------------------------------------------------------
           Advanced Wireless                              *    Animal Tracking Business
                                                          *    Digital Angel technology
                                                          *    Digital Angel Delivery System
          ------------------------------------------------------------------------------------------------------
</TABLE>


                                      100
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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


         The  "Eliminations"  category  includes  all  amounts  recognized  upon
         consolidation of the Company's  subsidiaries such as the elimination of
         intersegment  revenues,  expenses,  assets and liabilities and goodwill
         amortization expense. 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>
                                                                   2000 (IN THOUSANDS)
                                ------------------------------------------------------------------------------------------------

                                                       SERVICES
                                               ----------------------     ADVANCED       CORPORATE
                                APPLICATIONS   TELEPHONY     NETWORKS     WIRELESS        OVERHEAD   ELIMINATIONS   CONSOLIDATED
                                ------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>          <C>          <C>            <C>           <C>             <C>
Net revenue from external
  customers                         $ 28,112    $ 40,019     $ 43,045     $ 23,399       $     191     $      --       $ 134,766
Intersegment net revenue               5,142          --           --           --              --        (5,142)             --
--------------------------------------------------------------------------------------------------------------------------------

Total revenue                       $ 33,254    $ 40,019     $ 43,045     $ 23,399       $     191     $  (5,142)      $ 134,766
================================================================================================================================

Depreciation and amortization       $  1,075    $    551     $    171     $    652       $   1,590     $   7,034       $  11,073
Restructuring and unusual costs          818          --           --           --           5,565            --           6,383
Interest income                           28         135         (560)           9           8,300        (6,817)          1,095
Interest expense                         859         391          191           99          11,178        (6,817)          5,901
Income (loss) from continuing
  operations before provision
  for income taxes, minority
  interest and extraordinary
  loss                                (3,179)      2,442          803       (1,567)        (17,903)      (14,581)        (33,985)

Segment assets                        29,335      30,023       20,972       21,728       $ 411,553      (202,236)        311,375
Expenditures for property
  and equipment                          954         135          249          766           6,287            --           8,391


<CAPTION>
                                                                   1999 (IN THOUSANDS)
                                ------------------------------------------------------------------------------------------------

                                                       SERVICES
                                               ----------------------     ADVANCED       CORPORATE
                                APPLICATIONS   TELEPHONY     NETWORKS     WIRELESS        OVERHEAD   ELIMINATIONS   CONSOLIDATED
                                ------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>          <C>          <C>            <C>           <C>             <C>
Net revenue from external
  customers                         $ 28,006    $ 59,226     $ 27,190     $ 14,379       $     263     $       --      $ 129,064
Intersegment net revenue                  --          --           --           --              --             --             --
--------------------------------------------------------------------------------------------------------------------------------

Total revenue                       $ 28,006    $ 59,226     $ 27,190     $ 14,379       $     263     $       --      $ 129,064
================================================================================================================================

Depreciation and amortization       $  1,781    $  1,547     $    132     $    510       $     980     $    1,610      $   6,560
Restructuring and unusual costs          376         825           --           --           1,349             --          2,550
Interest income                           11         144           31           --           2,957         (2,721)           422
Interest expense                         463         622          126           41           4,947         (2,721)         3,478
Income (loss) from continuing
  operations before provision
  for income taxes, minority
  interest and extraordinary
  loss                                    47         220        1,456         (990)          5,833         (2,852)         3,714

Segment assets                        20,438      11,325        6,686        7,672         207,829       (142,629)       111,321
Expenditures for property
  and equipment                          673       2,177          179          231             516             --          3,776
</TABLE>



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--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)

<TABLE>
<CAPTION>
                                                                   1998 (IN THOUSANDS)
                                ------------------------------------------------------------------------------------------------

                                                       SERVICES
                                               ----------------------     ADVANCED       CORPORATE
                                APPLICATIONS   TELEPHONY     NETWORKS     WIRELESS        OVERHEAD   ELIMINATIONS   CONSOLIDATED
                                ------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>          <C>          <C>            <C>           <C>             <C>
Net revenue from external
  customers                         $ 10,163    $ 33,270     $ 21,282     $  9,628       $      --     $       --      $  74,343
Intersegment net revenue                  --          --           --           --              --             --             --
--------------------------------------------------------------------------------------------------------------------------------

Total revenue                       $ 10,163    $ 33,270     $ 21,282     $  9,628       $      --     $       --      $  74,343
================================================================================================================================

Depreciation and amortization       $    772    $    374     $     39     $    319       $     137     $    1,272      $   2,913
Interest income                           47         129           14                          686           (585)           291
Interest expense                         157         531          144           35             788           (585)         1,070
Income (loss) from continuing
  operations before provision
  for income taxes, minority
  interest and extraordinary
  loss                                   633         723        1,433          798          (3,161)        (1,018)          (592)

Segment assets                        12,594      21,989        5,528        9,633         147,518       (125,649)        71,613
Expenditures for
  property and equipment                 113         231           46           --             619             --          1,009
</TABLE>

         Segment assets do not include net assets of discontinued  operations of
         $8,076, $75,284, and $37,320, in 2000, 1999, and 1998, respectively.

         Revenues are  attributed to  geographic  areas based on the location of
         the assets  producing the revenues.  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>
           2000
           Net revenue                      $118,849        $    766        $ 15,151              $ 134,766
           Long-lived assets                  20,044              --           1,324                 21,368
           ------------------------------------------------------------------------------------------------


           1999
           Net revenue                      $ 71,423        $ 39,270        $ 18,371              $ 129,064
           Long-lived assets                   5,269              --           1,380                  6,649
           ------------------------------------------------------------------------------------------------


           1998
           Net revenue                      $ 50,041        $ 11,607        $ 12,695               $ 74,343
           Long-lived assets                   3,092           3,943           1,898                  8,933
           ------------------------------------------------------------------------------------------------
</TABLE>


                                       102
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


24.      Related Party Transactions

         In  connection  with the  acquisitions  which took  place in 1998,  the
         Company  paid a related  party  $0.6  million  for  investment  banking
         services.  These  payments  were  included  in the total cost of assets
         purchased and are being amortized over the life of the related assets.

         In 1998, the Company sold its  investment in a subsidiary  company to a
         related party for two thousand shares of preferred stock.

25.      SUBSEQUENT EVENTS

         In January 2001, the Company and its subsidiary,  IntelleSale,  settled
         claims against the former owners of Bostek,  Inc. and Micro  Components
         International   Incorporated  (Bostek  and  affiliate),  two  companies
         acquired by IntelleSale in June 1999.  The settlement  agreement  calls
         for the former  owners of Bostek and  affiliate to purchase 3.0 million
         shares of the Company's common stock. The purchase price for the shares
         was paid in the form of non-recourse,  non-interest  bearing promissory
         notes which are collateralized by the shares of common stock issued. In
         addition,  the former owners of Bostek and  affiliate  will release the
         Company  from its  liability  for the deferred  purchase  price of $9.5
         million,  upon  registration of the  aforementioned  shares by June 15,
         2001.

         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 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.

         On February 27, 2001, the Company acquired 16.6% of the capital stock
         of Medical Advisory Systems, Inc. (AMEX: DOC), a provider of medical
         assistance and technical products and services.



                                      103
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


26.      PRO FORMA INFORMATION (UNAUDITED)

         The following pro forma consolidated information of the Company for the
         years  ended   December   31,  2000  and  1999  gives   effect  to  the
         acquisitions, disclosed in Note 3, as if they were effective at January
         1, 1999.  The  statement  gives  effect to the  acquisitions  under the
         purchase method of accounting.

         The pro forma  information  may not be  indicative  of the results that
         would have actually  occurred if the acquisitions had been effective on
         the dates  indicated  or of the  results  that may be  obtained  in the
         future.  The pro forma  information  should be read in conjunction with
         the consolidated financial statements and notes thereto of the Company.

<TABLE>
<CAPTION>
                                                                                                   PRO FORMA
                                                                                                 (IN THOUSANDS)
                                                                                                  DECEMBER 31,
                                                                                            ------------------------
                                                                                                 2000           1999
                                                                                            ------------------------

<S>                                                                                         <C>            <C>
           Net operating revenue from continuing operations                                 $ 206,532      $ 288,552

           Net (loss) income from continuing operations                                       (33,457)           407

           Net (loss) income available to common stockholders from continuing operations      (37,504)           247

           Earnings (loss) per common share from continuing operations - basic                   (.40)           .01

           Earnings (loss) per common share from continuing operations - diluted                 (.40)           .01
</TABLE>


                                      104
<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)


27.      SUMMARIZED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    FIRST     SECOND       THIRD      FOURTH         FULL
                                                                  QUARTER    QUARTER     QUARTER     QUARTER         YEAR
                                                                 --------------------------------------------------------

           <S>                                                   <C>        <C>         <C>         <C>         <C>
           2000
           NET OPERATING REVENUE                                 $ 22,801   $ 33,770    $ 40,972    $ 37,223    $ 134,766
           GROSS PROFIT                                            10,062     13,958      15,757      12,514       52,291
           NET INCOME (LOSS) FROM CONTINUING OPERATIONS(1)         (3,180)    (3,053)     (2,388)    (20,553)     (29,174)
           NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS(2)        2,008    (14,675)        648     (70,949)     (82,968)
           BASIC NET INCOME (LOSS) PER SHARE FROM
              CONTINUING OPERATIONS(3)                              (0.06)     (0.06)      (0.04)      (0.27)       (0.52)
           DILUTED NET INCOME (LOSS) PER SHARE FROM
              CONTINUING OPERATIONS(3)                              (0.06)     (0.06)      (0.04)      (0.27)       (0.52)
           BASIC NET INCOME (LOSS) PER SHARE FROM
              DISCONTINUED OPERATIONS(3)                             0.04      (0.29)       0.01       (0.78)       (1.30)
           DILUTED NET INCOME (LOSS) PER SHARE FROM
              DISCONTINUED OPERATIONS(3)                             0.04      (0.29)       0.01       (0.78)       (1.30)
           --------------------------------------------------------------------------------------------------------------

           1999
           Net operating revenue                                 $ 20,789   $ 32,107    $ 38,779    $ 37,389    $ 129,064
           Gross profit                                             9,870     15,680      15,473      13,742       54,765
           Net income (loss) from continuing operations(4)         (3,089)       259      (1,271)      6,681        2,580
           Net income (loss) from discontinued operations           1,444        242       1,717        (391)       3,012
           Basic net income (loss) per share from
              continuing operations(3)                              (0.07)      0.01       (0.03)       0.14         0.06
           Diluted net income (loss) per share from
              continuing operations(3)                              (0.07)      0.01       (0.03)       0.13         0.05
           Basic net income (loss) per share from
              discontinued operations(3)                             0.04       0.01        0.04       (0.01)        0.06
           Diluted net income (loss) per share from
              discontinued operations(3)                             0.03       0.01        0.04       (0.01)        0.06
           --------------------------------------------------------------------------------------------------------------

           <FN>
                    (1)  Fourth quarter 2000 loss from continuing operations includes permanent asset impairment of $6,383.
                    (2)  Second quarter 2000 loss from discontinued operations includes a $17,000 unusual charge.
                    (3)  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.
                    (4) First quarter 1999 loss from continuing operations includes one time restructuring charges of $2,550.
           </FN>

</TABLE>


                                      105
<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:
        2000 Allowance for doubtful accounts                    $1,047       $   823        $ 766          $  955       $ 1,681
        1999 Allowance for doubtful accounts                       574           448          239             214         1,047
        1998 Allowance for doubtful accounts                       527           652          189             794           574

      Inventory:
        2000 Allowance for excess and obsolescence                 916           345          460             221         1,500
        1999 Allowance for excess and obsolescence               1,374           139            -             597           916
        1998 Allowance for excess and obsolescence                 907           716            -             249         1,374

      Deferred Taxes:
        2000 Valuation reserve                                       -        15,850            -               -        15,850
        1999 Valuation reserve                                   2,994             -            -           2,994             -
        1998 Valuation reserve                                   3,494             -            -             500         2,994

Reserves not deducted from assets:
        2000 Warranty reserve                                       50           163            -              50           163
        1999 Warranty reserve                                        -             -           50               -            50
        1998 Warranty reserve                                        -             -            -               -             -

</TABLE>


<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 April 10, 2001.

                                      APPLIED DIGITAL SOLUTIONS, INC.

                                      By:  /s/ Mercedes Walton
                                           -------------------------------------
                                           Mercedes Walton
                                           President and Chief Operating Officer


     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/ Richard J. Sullivan     Chairman of the Board of Directors,
----------------------------  Chief Executive Officer and
   (Richard J. Sullivan)      Secretary (Principal Executive         April 10, 2001

                              Officer)
    /s/ Mercedes Walton
----------------------------  President and Chief Operating
     (Mercedes Walton)        Officer (Principal Operating           April 10, 2001

                              Officer)
 /s/ Jerome C. Artigliere
----------------------------  Chief Financial Officer (Principal
  (Jerome C. Artigliere)      Financial Officer and Principal        April 10, 2001

                              Accounting Officer)
 /s/ Richard S. Friedland
----------------------------  Director
  (Richard S. Friedland)                                             April 10, 2001

  /s/ Arthur F. Noterman
----------------------------  Director
   (Arthur F. Noterman)                                              April 10, 2001

    /s/ Daniel E. Penni
----------------------------  Director
     (Daniel E. Penni)                                               April 10, 2001

  /s/ Angela M. Sullivan
----------------------------  Director
   (Angela M. Sullivan)                                              April 10, 2001

  /s/ Garrett A. Sullivan
----------------------------  Director
   (Garrett A. Sullivan)                                             April 10, 2001

  /s/ Constance K. Weaver
----------------------------  Director
   (Constance K. Weaver)                                             April 10, 2001

</TABLE>


<PAGE>

List Of Exhibits
(Item 14 (c))

   Exhibit
    Number                            Description
   -------                            -----------
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 Company'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  Company'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  Company,   Digital   Angel.net  Inc.  and  Destron  Fearing
                Corporation  (incorporated  by  reference  to Exhibit 2.1 to the
                Company'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 among AT&T Canada
                Corp. and TigerTel,  Inc.  (incorporated by reference to Exhibit
                99.1 to the Company'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  Company 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 Company'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  Company  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  Company'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 the  Company  (incorporated  by  reference  to
                Exhibit 2 to the Company's Current Report on Form 8-K filed with
                the Commission on December 5, 2000).

4.1             Second  Restated   Articles  of  Incorporation  of  the  Company
                (incorporated   herein  by  reference  to  Exhibit  4.1  to  the
                Company's  Registration Statement on Form S-1 (Form S-3 File No.
                333-64605) filed with the Commission on June 23, 1999).


<PAGE>

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

4.4             Amended and Restated  Bylaws of the Company dated March 31, 1998
                (incorporated   herein  by  reference  to  Exhibit  4.1  to  the
                Company's   Registration   Statement   on  Form  S-3  (File  No.
                333-51067) filed with the Commission on April 27, 1998).

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 Company's Registration
                Statement on Form S-8 filed with the  Commission  on December 2,
                1999 (Commission File Number 333-91999)).

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  Company'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
                Company's  Registration  Statement  on Form S-8 (File  No.  333-
                92327) filed with the Commission on December 8, 1999).

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

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

10.6            Second Amended and Restated Term and Revolving Credit Agreement,
                dated  October  17,  2000,  between  the  Company and IBM Credit
                Corporation,  and others  (incorporated  by reference to Exhibit
                99.1 to the Company's  Current Report on Form 8-K filed with the
                Commission on October 24, 2000)

10.7            Acknowledgement,  Waiver  and  Amendment  No.  1 to  the  Second
                Amended and Restated Term and Revolving  Credit  Agreement dated
                March 30, 2001  between the Company and IBM Credit  Corporation,
                and others

10.8*           Richard J. Sullivan Employment Agreement **

10.9*           Garrett A. Sullivan Employment Agreement **

10.10*          David A. Loppert Employment Agreement **

<PAGE>

10.11*          Jerome C. Artigliere Employment Agreement

10.12*          Mercedes Walton Employment Agreement

10.13*          David I. Beckett Employment Agreement

10.14*          Michael E. Krawitz Employment Agreement

10.15           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)

10.16           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)

10.17           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)

10.18           Lock-Up  Agreement  dated as of  November  28, 1999 by and among
                AT&T Canada Corp. and the Company  (incorporated by reference to
                the Exhibit  99.2 to the  Company'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).

10.19           Voting   Agreement   by  and  among  the   Company  and  certain
                securityholders of Destron Fearing Corporation  (incorporated by
                reference to Exhibit  10.1 to the  Company's  Current  Report on
                Form 8-K filed with the Commission on May 1, 2000).

21.1            List of Subsidiaries of Applied Digital Solutions, Inc.

23.1            Consent of PricewaterhouseCoopers LLP

-------

*    - Management contract or compensatory plan.
**   - Incorporated  herein by  reference  to  Exhibits  10.8,  10.9 and 10.10,
       respectively,  to the  Company's  Annual Report on Form 10-K filed with
       the Commission on March 30, 2000.