As filed with the Securities and Exchange Commission on April 23, 2001
--------------------------------------------------------------------------------


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                     --------------------------------------
                               Amendment No. 2 On
                                   FORM 10-K/A


                        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, 1999
                                       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) 805-8000
               (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 March 24, 2000,  the aggregate  market value
of the voting and non-voting stock held by  non-affiliates of the registrant was
approximately $523,124,000. At March 24, 2000, 49,942,930 shares of Common Stock
were outstanding.


                                EXPLANATORY NOTE

         This  Amendment  No. 2 on Form 10-K/A  amends the  registrant's  Annual
Report  on Form  10-K  for the year  ended  December  31,  1999  filed  with the
Securities  and Exchange  Commission  on March 30, 2000, as amended by Amendment
No. 1 on Form 10-K/A filed on June 23, 2000.



<PAGE>
                                TABLE OF CONTENTS

  Item     Description                                                      Page

                                     PART I

   1.      Business                                                            3
   2.      Properties                                                         10
   3.      Legal Proceedings                                                  10
   4.      Submission of Matters to a Vote of Security Holders                11

                                     PART II

   5.      Market for Registrant's Common Equity and Related
           Stockholder Matters                                                12
   6.      Selected Financial Data                                            14
   7.      Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                     16
   7A.     Quantitative and Qualitative Disclosures About Market Risk         29
   8.      Financial Statements and Supplementary Data                        29
   9.      Changes in and Disagreements With Accountants on
                Accounting and Financial Disclosures                          29

                                    PART III

   10.     Directors and Executive Officers of the Registrant                 30
   11.     Executive Compensation                                             30
   12.     Security Ownership of Certain Beneficial Owners and Management     30
   13.     Certain Relationships and Related Transactions                     30

                                     PART IV

   14.     Exhibits, Financial Statement Schedules, and Reports on
           Form 8-K                                                           31




<PAGE>

PART I

ITEM 1.       BUSINESS

GENERAL

     Applied Digital  Solutions is an emerging leader in the  implementation  of
e-business  solutions  for the  Internet  through  Computer  Telephony  Internet
Integration (CTII) (the integration of computer,  telecom and the Internet). Our
goal is to be a single source  e-business  provider that mid-size  companies can
turn to for intelligently  connecting their business  processes via telephone or
computer,  with their  customers,  suppliers and partners to deliver the results
expected  from the  emerging  e-business  market.  Our  services  integrate  Web
front-end  applications with back-end enterprise  resources either by telephone,
computer/software   or  both.  We  provide  end-to-end   solutions  that  enable
e-business   optimization   while  powering   e-business   initiatives   through
intelligent collaboration and customer interaction.

     We optimize and integrate key e-business  processes  through  collaboration
with our four  technology  groups,  Telecommunications,  Network,  Internet  and
Applications.  Our  goal  is to  meet  the  challenge  of  the  fundamental  way
businesses  view the use of  technology.  Instead of looking at each of our four
business  groups as  distinct  and  separate,  we regard  them as  seamless  and
interrelated. The ubiquitous Internet Protocol is replacing the Circuit Switched
network, resulting in a shift from traditional use of telephones,  computers and
the Internet into one dynamic network  empowering the enterprise and eliminating
all limitations, physical, structural or geographic.

     We currently  operate in the United States,  Canada and the United Kingdom.
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.

     The  majority  of our  current  operations  are the result of  acquisitions
completed  during the last five years.  Our net  operating  revenues were $336.7
million,  $207.1  million,  $103.2  million,  $19.9  million  and  $2.3  million
respectively,  in 1999,  1998, 1997, 1996 and 1995. Since 1995 we have completed
41 acquisitions. Management analyzes each acquisition opportunity using criteria
including  profitability  over a two to three year  period,  the strength of the
acquiree's  balance sheet,  the strength of its customer base and the experience
of  its  management   team.  Since  January  1,  1999,  we  have  completed  six
acquisitions.

BUSINESS DIVISIONS

     Prior to March 1999,  our  business  was  organized  into  three,  and then
eventually,  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.  Later,  a Group Vice  President  was added and the  management  teams
reported to the Group Vice President,  who ultimately reported to our President.
The Chairman was responsible for our overall business and strategic planning.

     In March 1999,  we  announced a corporate  reorganization  at which time we
named five new divisions.  Each division is managed by a division  president who
reports to the President. Each division either has in place or is in the process
of hiring a vice president of marketing and a financial  controller.  We believe
we will attain increased operating  efficiencies through this reorganization and
believe this structure will  facilitate the cross  marketing of our products and
services. In October 1999, we disposed of the main business units comprising our
Communications  Infrastructure  division and dissolved  this group.  In December
1999, our subsidiary,  Digital Angel.net,  Inc., acquired the patent rights to a
miniature digital  transceiver,  which we named "Digital Angel(TM)." While still
in the development stage, we believe that this technology may be available for a

                                       3
<PAGE>

variety of purposes,  such as providing a tamper-proof  means of  identification
for enhanced e-business security, locating lost or missing individuals, tracking
the  location of valuable  property and  monitoring  the medical  conditions  of
at-risk patients.

     Our primary businesses,  other than IntelleSale.com,  the Non-Core Business
Group and Digital Angel, are now organized into four business divisions:

     o   Telecommunications  --  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.  On December  30,  1999,  we sold our interest in our Canadian
         subsidiary,  TigerTel,  Inc. to concentrate our efforts on our domestic
         CTI solutions.

     o   Network  --  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 computer network  infrastructure  for the development of local
         and  wide  area  networks  as  well  as  site  analysis,  configuration
         proposals, training and customer support services.

     o   Internet -- equips our customers  with the necessary  tools and support
         services to enable them to make a successful transition to implementing
         e-business  practices,  Enterprise Resource Planning (ERP) and Customer
         Relationship   Management   (CRM)   solutions,   website  design,   and
         application  and  internet  access  services to  customers of our other
         divisions.

     o   Applications  --  provides  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. It is 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, 1999, 1998 and 1997,  revenues from these four divisions
together  accounted  for  38.2%,  35.9% and  40.5%,  respectively,  of our total
revenues.

IntelleSale.com

     IntelleSale.com,  Inc.  sells  refurbished  and new computer  equipment and
related  components  online,  through  its website at  www.IntelleSale.com,  and
through other Internet companies, as well as through traditional channels, which
includes sales made by IntelleSale.com's sales force.

     As of December  31,  1999,  1998 and 1997,  revenues  from  IntelleSale.com
accounted for 42.5%, 30.3% and 40.3%, respectively, of our total revenues.

     On September 14, 1999,  IntelleSale.com filed a registration statement with
the Securities and Exchange  Commission in connection with its proposed  initial
public  offering.  In addition to  IntelleSale.com  selling primary  shares,  we
expected to sell shares of IntelleSale.com  stock as a selling  shareholder.  On
January 31, 2000,  we announced  that we were  postponing  the proposed  initial
public offering of IntelleSale.com stock due to market conditions.

                                       4
<PAGE>

The Non-Core Business Group

     This group is  comprised  of seven  individually  managed  companies  whose
businesses are as follows:

     o   Gavin-Graham Electrical Products is a custom manufacturer of electrical
         products, specializing in digital and analog panelboards, switchboards,
         motor controls and general  control  panels.  The company also provides
         custom  manufacturing  processes such as shearing,  punching,  forming,
         welding,   grinding,   painting  and  assembly  of  various   component
         structures.

     o   Ground  Effects,  Ltd.,  based  in  Windsor,  Canada,  is  a  certified
         manufacturer and tier one supplier of standard and specialized  vehicle
         accessory products to the automotive industry. The company exports over
         80% of the  products it produces to the United  States,  Mexico,  South
         America, the Far East and the Middle East.

     o   Hopper   Manufacturing  Co.,  Inc.   re-manufactures   and  distributes
         automotive parts. This primarily includes alternators,  starters, water
         pumps, distributors and smog pumps.

     o   Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures
         vacuum systems used in industry.

     o   Americom,   STC  Netcom  and  ACT  Leasing  are  all  involved  in  the
         fabrication,  installation  and maintenance of microwave,  cellular and
         digital personal communication services towers.

     As of December 31, 1999, 1998 and 1997,  revenues from this business group,
as well as the four disposed entities within our  Communications  Infrastructure
group,  accounted  for  19.2%,  34.7%  and  21.3%,  respectively,  of our  total
revenues.

     We announced our intention to divest,  in the ordinary  course of business,
these  non-core  businesses  at such  time  and on such  terms  as our  Board of
Directors determines advisable. There can be no assurance that we will divest of
any  or  all  of  these  businesses  or as  to  the  terms  of  any  divestiture
transaction.

GROWTH STRATEGY

     Our growth  strategy is focused on internal  expansion  and growth  through
acquisitions. The following are the key elements of our strategy:

     o   Become a Single Source e-Business  Solutions Provider.  We believe that
         our expertise in all four areas of our core  competency  will enable us
         to  capitalize  on the  interest  of  businesses  in  fulfilling  their
         e-business solutions through one provider.

     o   Leverage  of  Existing  Customer  Relationships.  We believe  there are
         significant  opportunities  within and  between  each of our  operating
         divisions to cross market our services to our existing client base.

     o   Profit Center Management.  While our corporate management team provides
         overall guidance,  strategic direction and administrative  support, our
         division presidents have  responsibility for the day-to-day  operations
         of their  respective  groups.  We operate each  business  division as a
         largely  autonomous  profit  center,  which  is  held  accountable  for
         achieving its financial  goals.  This approach to management  increases
         our  responsiveness to changes in the marketplace and to our customers'
         requirements and contributes to our ability to grow profitably.

     o   Acquisitions. Since 1995 we have completed 41 acquisitions.  Management
         analyzes  each  acquisition   opportunity   using  criteria   including
         profitability  over a two to three year  period,  the  strength  of the
         acquiree's  balance  sheet,  the strength of its customer  base and the
         experience of its management team.

                                       5
<PAGE>

COMPETITION

     Each  segment of our  business  is highly  competitive,  and we expect that
competitive  pressures will continue.  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.  There can be no assurance
that we will  have the  financial,  technical,  marketing  and  other  resources
required to compete successfully in this environment in the future.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

     Certain statements in this Annual Report, and the documents incorporated by
reference herein, constitute "forward-looking  statements" within the meaning of
Section  27A of  the  Securities  Act of  1933,  Section  21E of the  Securities
Exchange Act of 1934 and the Private  Securities  Litigation Reform Act of 1995.
We intend that such  forward-looking  statements  be subject to the safe harbors
created  thereby.  Such  forward-looking  statements  involve  known and unknown
risks,  uncertainties  and other  factors  which may cause our  actual  results,
performance or achievements to be materially  different from any future results,
performance  or  achievements  expressed  or  implied  by  such  forward-looking
statements.  Such factors include,  among others,  the following:  our continued
ability  to  sustain  our  growth  through  product   development  and  business
acquisitions;  the successful completion and integration of future acquisitions;
the ability to hire and retain key personnel;  the continued  development of our
technical,   manufacturing,   sales,  marketing  and  management   capabilities;
relationships  with  and  dependence  on  third-party   suppliers;   anticipated
competition;  uncertainties  relating to economic  conditions  where we operate;
uncertainties  relating to government  and  regulatory  policies;  uncertainties
relating to customer plans and commitments; rapid technological developments and
obsolescence  in the  industries  in which we  operate  and  compete;  potential
performance issues with suppliers and customers;  governmental export and import
policies;  global trade  policies;  worldwide  political  stability and economic
growth; the highly competitive environment in which we operate;  potential entry
of new,  well-capitalized  competitors into our markets;  changes in our capital
structure  and cost of capital;  and  uncertainties  inherent  in  international
operations and foreign currency  fluctuations.  The words  "believe",  "expect",
"anticipate",   "intend"   and   "plan"   and   similar   expressions   identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements,  which speak only as of the date the statement
was made.

RISK FACTORS

     In  addition  to the other  information  contained  herein,  the  following
factors should be considered in evaluating our Company and our business.

Uncertainty of Future Financial Results

     While we have been  profitable  for the last  three  fiscal  years,  future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner.  Profitability depends upon many factors,
including the success of our various  marketing  programs,  the  maintenance  or
reduction  of expense  levels and our  ability to  successfully  coordinate  the
efforts of the different segments of our business.

Future Sales of and Market for our Shares of Common Stock

     As of March  24,  2000,  there  were  49,942,930  shares  of  Common  Stock
outstanding.  In addition,  503 shares of Common Stock are reserved for issuance
in exchange for certain  exchangeable shares issued by our Canadian  subsidiary.
Since  January 1, 1999,  we have issued an  aggregate  of  17,137,887  shares of
Common Stock, of which  5,928,220  shares of Common Stock were issued as earnout
payments in  acquisitions,  3,343,131  shares  were  issued in exchange  for the
exchangeable  shares of our Canadian  subsidiary and the exchangeable  shares of
our former Canadian subsidiary,  TigerTel Services Limited,  641,297 shares were

                                       6
<PAGE>

issued to acquire  minority  interests in three  companies,  3,416,724 shares of
Common Stock were issued for acquisitions (including "price protection" shares),
2,386,790 shares have been issued upon the exercise of options, 1,241,800 shares
have been  issued  upon the  exercise  of  warrants,  112,761  shares  have been
purchased  and issued  under our Employee  Stock  Purchase  Program,  and 67,164
shares of Common Stock were issued for  services  rendered,  including  services
under employment agreements and for employee bonuses.

     Although we previously  announced  that we intend to limit the use of stock
in future acquisitions, and to focus on cash transactions, we have effected, and
will continue to effect,  acquisitions or contract for certain  services through
the  issuance  of  Common  Stock  or our  other  equity  securities,  as we have
typically  done in the past.  In  addition,  we have  agreed to  certain  "price
protection"  provisions in acquisition agreements which may result in additional
shares of common stock being issued to selling  shareholders as of the effective
date of the  registration  of the shares  such  selling  shareholder  previously
received as consideration  from us. Such issuances of additional  securities may
be dilutive of the value of the Common  Stock in certain  circumstances  and may
have an adverse impact on the market price of the Common Stock.

Competition

     Each  segment of our  business  is highly  competitive,  and we expect that
competitive  pressures will continue.  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.  There can be no assurance
that we will  have the  financial,  technical,  marketing  and  other  resources
required to compete successfully in this environment in the future.

Risks Associated with Acquisitions and Expansion

     We have engaged in a continuing program of acquisitions of other businesses
which  are  considered  to be  complementary  to our lines of  business,  and we
anticipate that such  acquisitions will continue to occur. Our total assets were
approximately  $229  million,  $124  million,  $61  million,  $33 million and $4
million as of December 31, 1999,  1998, 1997, 1996 and 1995,  respectively.  Net
operating revenue was approximately  $337 million,  $207 million,  $103 million,
$20 million and $2 million for the years ended  December 31, 1999,  1998,  1997,
1996 and 1995, respectively. Managing these dramatic changes in the scope of our
business  will present  ongoing  challenges to  management,  and there can be no
assurance that our operations as currently structured,  or as affected by future
acquisitions, will be successful.

     It is our policy to retain existing management of acquired companies, under
the overall supervision of our senior management.  The success of the operations
of these  subsidiaries  will depend, to a great extent, on the continued efforts
of the management of the acquired companies.

     We have entered into earnout  arrangements with certain sellers under which
they are  entitled  to  additional  consideration  for  their  interests  in the
companies  they sold to us. Under these  agreements,  assuming that all earnouts
are achieved, we are contingently liable for additional  consideration amounting
to  approximately  $2.7 million based on achieved  1999  results,  approximately
$12.7 million based on agreements  coming due in 2000 and achieved 2000 results,
approximately  $7.1 million based on achieved 2001 results,  approximately  $1.8
million based on achieved 2002 results and  approximately  $2 million based upon
achieved 2004 results.

     We have  entered  into  put  options  with  the  selling  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  company
before income taxes for,  generally,  a two-year  period ending on the effective

                                       7
<PAGE>

date of the put  multiplied  by a  multiple  ranging  from  four  to  five.  The
purchases  under these put options are recorded as changes in minority  interest
based upon current operating results. We have entered into agreements to acquire
for  approximately  $3.9  million,  put options in certain  subsidiaries  of our
subsidiary,  IntelleSale.com. In addition, based upon current earnings, assuming
all  other  put  options  were  exercised,   we  are  contingently   liable  for
approximately an additional $6.9 million in the next two years.


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  systems which would allow us to
disclose  separately net sales of tangible  products and revenues from services,
and the  associated  cost of  tangible  goods   sold  and the  cost of  services
provided. As a result investors evaluating our financial performance will not be
able to compute  the gross  profit or gross  profit percentage  of  product  and
service revenues individually and this information may be important and material
to an investor in evaluating our performance.

     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 and we believe we will be able to report product and service revenue
and their associated costs for all periods commencing with the interim reporting
period ended March 31, 2000. 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.




Goodwill write-off's will reduce our earnings


     As a result of the acquisitions we have done to date, we have approximately
$62.0 million of goodwill  which is currently  being  amortized over 20 years at
the rate of  approximately  $3.5 million per year,  which reduces our net income
and our earnings per share. In addition,  future  acquisitions may also increase
our existing  goodwill and the amount of annual  amortization,  further reducing
net income and  earnings  per share.  As  required  by  Statement  of  Financial
Accounting  Standards  No. 121, we will  periodically  review our  goodwill  for
impairment based on expected future  discounted cash flows. If we determine that
there is such  impairment,  we would be  required  to write  down the  amount of
goodwill accordingly, which would also reduce our earnings.


Need for Additional Capital


     We may require additional capital to fund growth of our current business as
well as to  make  future  acquisitions.  However,  we may not be able to  obtain
capital from outside sources. Even if we obtain capital from outside sources, it
may not be on terms  favorable  to us. Our  current  credit  agreement  with IBM
Credit  Corporation may hinder our ability to raise additional debt capital.  If
we raise additional capital by issuing equity  securities,  these securities may
have  rights,   preferences  or  privileges   senior  to  those  of  our  common
stockholders.

                                       8
<PAGE>

Dependence on Key Individuals

     Our future  success is highly  dependent  upon our  ability to attract  and
retain qualified key employees.  We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers.  If we  were  to lose  the  services  of any  members  of our  central
management  team, our overall  operations could be adversely  affected,  and the
operations of any of our individual  facilities  could be adversely  affected if
the services of the local managers should be  unavailable.  We have entered into
employment   contracts   with  our  key  officers  and   employees  and  certain
subsidiaries.  The  agreements  are for periods of one to ten years through June
2009. Some of the employment contracts also call for bonus arrangements based on
earnings.

Risks that the value of our inventory may decline


     We purchase and warehouse inventory, 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.

Lack of Dividends on Common Stock; Issuance of Preferred Stock

     We do not have a history of paying dividends on our Common Stock, and there
can be no assurance that such dividends will be paid in the foreseeable  future.
Pursuant  to  certain  restrictions  under our  Amended  and  Restated  Term and
Revolving   Credit  Agreement  dated  as  of  July  30,  1999  with  IBM  Credit
Corporation, there are restrictions on the declaration and payment of dividends.
We intend to use any  earnings  which may be  generated to finance the growth of
our  businesses.  Our Board of Directors has the right to authorize the issuance
of preferred stock, without further shareholder  approval,  the holders of which
may have  preferences  over the  holders  of the  Common  Stock as to payment of
dividends.

Possible Volatility of Stock Price

     Our  Common  Stock is  quoted  on the  Nasdaq  Stock  Market(R),  which has
experienced  and is likely to  experience  in the future  significant  price and
volume  fluctuations which could adversely affect the market price of our Common
Stock without regard to our operating performance.  In addition, we believe that
factors such as the significant changes to our business resulting from continued
acquisitions and expansions,  quarterly fluctuations in our financial results or
cash flows,  shortfalls in earnings or sales below expectations,  changes in the
performance of other companies in our same market sectors and the performance of
the  overall  economy  and the  financial  markets  could cause the price of our
Common  Stock to  fluctuate  substantially.  During the 12 month period prior to
March 24,  2000,  the price per share of our Common Stock has ranged from a high
of $18 to a low of $1 5/8.


Termination Payments

     Our  employment  agreements  with three of our 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 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.

                                       9
<PAGE>

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  obligations  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.

Year 2000 Compliance

     We have not experienced any significant Year 2000 related problems.  During
1998 and 1999, we  implemented a company wide program to ensure that we would be
compliant  prior to the Year 2000 failure  dates.  We experienced no problems on
either  January  1, 2000 or  February  29,  2000.  However  we  cannot  make any
assurances that unforeseen problems may not arise in the future.

     Software  Sold to  Consumers.  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,  management believes that it is not possible to
determine  with complete  certainty  that all Year 2000  problems  affecting our
software products will be 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 could lead to lawsuits
against  us.  The  outcome  of any such  lawsuits  and the  impact on us are 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  therewith,  could be adversely  impacted by, among
other things,  the availability  and cost of programming and testing  resources,
vendors' 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,  1999,   the  Company  and  its   subsidiaries   employed
approximately 1,445 employees.

BACKLOG

     At December  31,  1999,  the Company  had a backlog of  approximately  $7.5
million, all of which is expected to be filled in 2000.

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

                                       10
<PAGE>

adverse  effect  on  our  capital  expenditures,  earnings,  cash  flows  or our
competitive position. We will continue to monitor its operations with respect to
potential environmental issues, including changes in legally mandated standards.

ITEM 2.       PROPERTIES

     At December  31,  1999,  we leased  602,185  square  feet of its  operating
facilities,  of which 216,967  square feet is for office  facilities and 385,218
square feet is for  factory/warehouse  use. These leases expire at various dates
through 2009. In addition, the Company owns office and manufacturing facilities,
comprising  30,000 square feet, of which 27,000 square feet is for manufacturing
and 3,000 square feet is for office space.

     The following table sets forth our properties by business divisions:



                                                     Square Feet
                                        ----------------------------------------
                                                     Factory /
                                        Office      Warehouse             Total
                                        -------     ----------           -------
Telecommunications                       41,133         10,874            52,007
Network                                  25,270          1,800            27,070
Internet                                 17,051              -            17,051
Applications                             81,903         40,000           121,903
IntelleSale                              20,865        223,450           244,315
Non-Core                                 26,709        136,094           162,803
Corporate                                 7,036              -             7,036
                                        ----------------------------------------
                                        219,967        412,218           632,185
                                        ========================================

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

                                                     Square Feet
                                        ----------------------------------------
                                                     Factory /
                                        Office      Warehouse             Total
                                        ------      ----------            ------
Arizona                                   7,628              -             7,628
California                               26,155         54,000            80,155
Canada                                   10,000         89,926            99,926
Florida                                  26,349            550            26,899
Georgia                                   1,500              -             1,500
Illinois                                 19,486          5,400            24,886
Louisiana                                 1,500              -             1,500
Maryland                                  8,422          1,924            10,346
Massachusetts                             2,281          4,641             6,922
Minnesota                                 2,000              -             2,000
Missouri                                  3,500              -             3,500
New Hampshire                             2,688          2,000             4,688
New Jersey                               35,820        184,250           220,070
New York                                  3,240         21,000            24,240
Ohio                                     21,900              -            21,900
Pennsylvania                             13,948          8,527            22,475
Texas                                     1,400              -             1,400
United Kingdom                           32,150         40,000            72,150
                                        ----------------------------------------
                                        219,967        412,218           632,185
                                        ========================================

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

                                       11
<PAGE>

our financial position,  our overall results of operations or our cash flows for
these  proceedings  could  change  in the  future.  We are  not  subject  to any
environmental or governmental proceedings

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1999.

                                       12
<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 the Nasdaq for each of the quarters  during our last
two fiscal years.
                                                      High            Low
              1998
                First Quarter................        5 1/2           4 1/32
                Second Quarter...............        4 7/8           3 1/8
                Third Quarter ...............        3 1/2           1 9/16
                Fourth Quarter ..............        5 1/2           1 17/32
              1999
                First Quarter................        4 3/16          2
                Second Quarter...............        3 1/2           2
                Third Quarter................        3 3/8           1 11/16
                Fourth Quarter...............        16              1 5/8


Holders

     As of March 24,  2000,  there  were  1,356  holders of record of our Common
Stock.

Dividends


     Holders of our Common Stock are  entitled to receive such  dividends as may
be declared by our Board of Directors.  Other than the  distribution of warrants
pursuant to the Joint Actions by Unanimous Consent of the Board of Directors and
Shareholders  dated March 25,  1994,  since our  inception,  no dividends on our
Common Stock have ever been paid, and we do not  anticipate  that dividends will
be paid on our Common  Stock in the  foreseeable  future.  Under our Amended and
Restated Term and Revolving  Credit Agreement dated as of July 30, 1999 with IBM
Credit Corporation, 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,  we may only
declare or pay dividends on our Common Stock if our subsidiary  ACT-GFX  Canada,
Inc. is able to, and simultaneously  does, declare or pay an equivalent dividend
on its  exchangeable  shares.  Our Board of Directors has the right to authorize
the issuance of preferred  stock,  without  further  stockholder  approval,  the
holders of which may have preferences as to payment of dividends.




                                       13
<PAGE>

Recent Sales of Unregistered Securities


     The following table lists all  unregistered  securities sold by the Company
from October 1, 1999 through  December 31, 1999. These  acquisition  shares were
issued to the selling  shareholders  in connection  with the  acquisition of the
indicated  subsidiary or the  shareholder's  minority  interest in  transactions
directly  negotiated by the  shareholders  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. These shares were issued without
registration  in reliance  upon the  exemption  provided by Section  4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder,  as
detailed in the applicable footnotes below.

<TABLE>
<CAPTION>

                                                                                                    Number of
                          Number of                     Issued                                       Common
Name/Entity/Nature         Persons     Note               For                   Date Issued          Shares
------------------        ---------    ----             ------                  -----------         -----------
<S>                          <C>        <C>     <C>                        <C>                       <C>
Atlantic Systems, Inc.        1         1             Acquisition             November, 1999           119,832
STC Netcom, Inc.             20         2             Acquisition             December, 1999           400,000
Services                      1         3              Services             October - December,          2,498
                                                                                   1999
                                                                                                     ---------
     Total                                                                                             522,330
                                                                                                     =========
-----------------------------
<FN>
1.   Represents shares issued to one selling  shareholder in connection with the
     acquisition  of  Atlantic  Systems,  Inc.  Such  shares  were  issued  in a
     transaction  directly  negotiated by the shareholder in connection with the
     sale of his  business to the  Company  and were  exempt  from  registration
     pursuant to Section 4(2) of the Act.
2.   Represents shares issued to 20 selling  shareholders in connection with the
     acquisition of minority interests of such shareholders in STC Netcom,  Inc.
     Our initial  issuance of shares in connection  with our  acquisition of STC
     shares  occurred  in  1997  in a  transaction  directly  negotiated  by the
     shareholders  in connection  with the sale of their business to the Company
     and was exempt from registration pursuant to Section 4(2) of the Act.
3.   Represents  shares issued to an employee for services  under  employment or
     other such agreements.

</FN>
</TABLE>

                                       14
<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, 1999 and the  Balance  Sheet Data as of
December 31, 1999 and 1998 are derived from,  and qualified by reference to, our
audited  consolidated  financial  statements  appearing elsewhere in this Annual
Report. The Summary of Operations data for the years ended December 31, 1996 and
1995 and the  Balance  Sheet Data as of  December  31,  1997,  1996 and 1995 are
derived from audited consolidated financial statements not included herein.

<TABLE>
<CAPTION>

SUMMARY OF OPERATIONS DATA                                         Year Ended December 31,
                                                 -------------------------------------------------------------------
                                                      1999          1998          1997         1996            1995
                                                 ---------- ------------- ------------- ----------------------------
                                                            (In thousands, except per share data)
<S>                                              <C>           <C>           <C>           <C>              <C>
Net operating revenue                            $ 336,741     $ 207,081     $ 103,159     $ 19,883         $ 2,336
Cost of goods sold                                 241,790       142,893        69,408       10,524           1,186
-----------------------------------------        -------------------------------------------------------------------
Gross profit                                        94,951        64,188        33,751        9,359           1,150
Selling, general and administrative                (90,416)      (51,485)      (26,431)      (7,393)           (970)
Depreciation and amortization                       (9,687)       (4,501)       (1,874)        (712)            (11)
Restructuring and unusual costs                     (2,550)           --        (1,681)          --              --
Gain on sale of subsidiary                          20,075           733         1,827           --              --
Interest income                                        616           420           192          126             75
Interest expense                                    (3,842)       (1,653)         (978)        (200)            (15)
-----------------------------------------        -------------------------------------------------------------------

Income from continuing operations before             9,147         7,702         4,806        1,180             229
provision for income taxes, minority
interest and extraordinary loss
Provision for income taxes                           3,160         2,588         1,769          362              --
-----------------------------------------        -------------------------------------------------------------------

Income before minority interest and                  5,987         5,114         3,037          818             229
extraordinary loss
Minority interest                                      395           424           697          132              49
-----------------------------------------        -------------------------------------------------------------------
Income before extraordinary loss                     5,592         4,690         2,340          686             180
Extraordinary loss (net of taxes of $89)               160           --            --           --               --
-----------------------------------------        -------------------------------------------------------------------
Net income                                           5,432         4,690         2,340          686             180
Preferred stock dividends                               --            44            72           60              --
-----------------------------------------        -------------------------------------------------------------------
Net income available to common                   $   5,432     $   4,646     $   2,268       $  626           $ 180
stockholders
=========================================        ===================================================================
Average common shares outstanding                   46,814        32,318        12,632        3,329           1,792
Average common shares outstanding                   50,086        34,800        15,245        4,641           1,967

PER COMMON SHARE DATA
Basic                                                $0.12         $0.14         $0.18        $0.19           $0.10
Diluted                                              $0.11         $0.13         $0.15        $0.15           $0.09
Cash Dividends                                       $0.00         $0.00         $0.00        $0.00           $0.00

</TABLE>


                                       15
<PAGE>

<TABLE>
<CAPTION>

BALANCE SHEET DATA                                              As of December 31,
                                           ------------------------------------------------------------------
                                                1999          1998          1997         1996           1995
                                           ------------------------------------------------------------------
                                                                  (In thousands)
<S>                                        <C>            <C>           <C>            <C>             <C>
Cash and cash equivalents                  $   5,138      $  4,555      $  7,657       $   810         $  125
Due from buyers of divested subsidiary        31,302            --            --            --             --
Property and equipment                        13,886        15,627         5,339         2,915            138
Goodwill                                      62,000        33,430        12,787        14,528            907
Total assets                                 228,976       124,116        61,282        33,208          4,131
Long-term debt                                35,317         2,838         2,199         1,386             19
Total debt                                    68,566        27,213         7,825         5,799            352
Minority interest                              2,558         2,961         1,785           456             57
Redeemable preferred stock                        --            --           900        10,900             --
Stockholders' equity                          92,936        67,560        36,285         8,252          3,052
</TABLE>



                                       16
<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
consolidated  financial  statements  and related  notes  included in this Annual
Report.   Certain  statements  contained  herein  may  contain   forward-looking
statements - see "Forward Looking Statements and Associated Risks" in Item 1.

OUTLOOK

     Our  objective  is to  continue  to grow  each of our  operating  divisions
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 past and continue to do so. Our financial  results
and cash flows are  substantially  dependent  on not only our ability to sustain
and grow existing businesses,  but to continue to grow through  acquisition.  We
expect to continue to pursue our acquisition  strategy in 2000 and future years,
but there can be no assurance that  management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.

1999 AND RECENT DEVELOPMENTS



     The  material  acquisitions  for 1999  consisted  of  Bostek,  Inc.  and an
affiliate,  Port Consulting,  Inc., Hornbuckle Engineering,  Inc., Lynch Marks &
Associates, Inc. and STR, Inc.

     o    Our subsidiary  IntelleSale.com,  Inc. acquired Bostek, Inc. and Micro
          Components  International,  Incorporated  (collectively,  "Bostek") in
          June 1999 in order to add to the product  mix of  products  offered by
          our subsidiary, IntelleSale.com, and to expand its use of the Internet
          as a selling channel. Bostek's "open-box" computer equipment, which is
          generally  not used or only  slightly  used,  added  to  Intellesale's
          product mix because the primary type of equipment  sold by IntelleSale
          was  older  computer  equipment  that had been  used for at least  six
          months.  It also added to Intellesale's  potential market because some
          potential  customers  preferred unused products.  Finally,  it allowed
          Intellesale  to offer a variety of pricing for its  products,  because
          Intellesale's  traditional used product was very inexpensive  relative
          to brand new computer  equipment,  and "open-box" product is typically
          priced  more  than used but less  than  brand  new.  In  addition,  we
          acquired Bostek to take advantage of its  relationships  with vendors,
          for its  sales  and  earnings  and in  order  to  reduce  expenses  by
          combining the shipping, handling and warehousing functions.

     o    We acquired  Port  Consulting,  Inc.,  an  integrator  of  information
          technology  application  systems  and custom  application  development
          services  based in  Jacksonville,  Florida,  to  complete  the  Oracle
          database  functions of our Internet  strategy.  Oracle software powers
          many websites and database applications.

     o    We acquired Hornbuckle Engineering, Inc., an integrated voice and data
          solutions  provider based in Monterey,  California,  and Lynch Marks &
          Associates,  Inc.,  a network  integration  company  based in Berkley,
          California,  in order to expand the  footprint of our Network Group to
          Northern California.

     o    We  acquired  STR,  Inc.,  a  software   solutions  company  based  in
          Cleveland,  Ohio, to penetrate the retail systems software market.  In
          addition,  the retail market provides  opportunities  for our Internet
          Group to sell websites and other services to retail customers.

     In addition to the foregoing,  in May 1999, we entered into an agreement to
merge our wholly-owned  Canadian  subsidiary,  TigerTel Services  Limited,  with
Contour Telecom Management,  Inc., a Canadian company. We received, in a reverse
merger  transaction,  approximately  75%  of the  total  outstanding  shares  of
Contour's common stock.

                                       17
<PAGE>

     All   acquisitions   were  accounted  for  using  the  purchase  method  of
accounting. Total assets acquired, including goodwill, during the second quarter
of 1999, are summarized as follows:





          Purchase price                                        $40,759
          Net assets acquired                                   (5,650)
                                                               ---------
          Goodwill                                              $35,109
                                                               =========

     As part of our  reorganization  of our core business  into five  reportable
business  groups,  we implemented a  restructuring  plan in the first quarter of
1999. The restructuring  plan included the exiting of selected lines of business
within our  Telecommunications  and Application  Technology business groups, and
the associated  write-off of assets. In the first quarter of 1999, we incurred a
restructuring  charge of  $2,236  that  includes  asset  impairments,  primarily
software and other intangible assets, of $1,522, lease terminations of $541, and
employee separations of $173. In addition,  during the first quarter of 1999, as
part of our core business reorganization, we realigned certain operations within
our  Telecommunications  division and  recognized  impairment  charges and other
related costs of $314.


     In May 1999, we negotiated the early  retirement of our line of credit with
State Street Bank and Trust Company  ("State Street Debt") and its  simultaneous
refinancing  with IBM Credit  Corporation.  The IBM  Agreement,  as amended  and
restated,  provides for a revolving credit line of up to $36.1 million, and term
loans of up to $58.9 million.  Deferred financing fees associated with the State
Street Debt 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.


     On September  14, 1999,  our  subsidiary,  IntelleSale.com,  Inc.,  filed a
registration statement with the Securities and Exchange Commission in connection
with its  proposed  initial  public  offering.  In addition  to  IntelleSale.com
selling primary shares, we expected to sell shares of IntelleSale's common stock
as a selling  shareholder.  On  January  31,  2000,  we  announced  that we were
postponing the proposed  initial public offering of  IntelleSale's  common stock
due to market conditions.

     In October  1999,  we disposed of the main business  units  comprising  our
Communications   Infrastructure  division  and  dissolved  this  group.  We  had
concluded that the business units within this segment were no longer core to our
operations  and we  anticipate  that  we will  dispose  of the  remaining  three
business units that were within this segment during 2000. As  consideration  for
the sale, we received approximately 2.8 million shares of our common stock and a
note for $2.5  million.  The treasury  shares were recorded at the book value of
the divested assets which resulted in no gain being recognized.  The transaction
was  reflected at book value  because the  shareholders  of the purchaser of the
divested assets were collectively  deemed to be significant  shareholders of the
Company.  The treasury  stock was  recorded at $2.54 per share.  At December 31,
1999 and March 24, 2000, each such share had a market value of $7.50 and $10.75,
respectively.

     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 and, on December 30,  1999,  AT&T took up all of the 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, which we applied against the outstanding balance on our domestic revolving
credit line.

     In December 1999, our subsidiary,  Digital  Angel.net,  Inc.,  acquired the
patent  rights  to a  miniature  digital  transceiver,  which we named  "Digital
Angel(TM)".  While  still  in  the  development  stage,  we  believe  that  this
technology  may be  available  for a variety of  purposes,  such as  providing a
tamper-proof means of identification for enhanced e-business security,  locating
lost or missing  individuals,  tracking  the  location of valuable  property and
monitoring the medical conditions of at-risk patients.

     On March 3,  2000,  we  announced  that we had signed a letter of intent to
acquire Destron Fearing  Corporation,  a Nasdaq listed company trading under the
stock symbol "DFCO".  Destron Fearing is a leading  developer,  manufacturer and

                                       18
<PAGE>

marketer of a broad line of  electronic  and visual  identification  devices for
companion animals, livestock,  laboratory animals and wildlife. In this proposed
transaction,  we will issue shares of our Common Stock in exchange for shares of
common stock of Destron Fearing.  The approximately $130 million  transaction is
expected  to  close by  mid-June,  2000,  subject  to a  number  of  conditions,
including the execution of a definitive acquisition agreement, completion of due
diligence,  approval of both our and Destron  Fearing's  boards of directors and
shareholders, and approval of relevant government agencies. Under the agreement,
Destron Fearing would be merged into Digital Angel.net Inc.

     On March 22, 2000, we filed a shelf  registration  statement to sell,  from
time to time, up to 3 million shares of our common stock. Proceeds from the sale
will be used for general  corporate  purposes,  including  the funding of future
acquisitions.

OUR BUSINESS

     Beginning in the fourth  quarter of 1998 and  continuing  through  1999, we
reorganized  into seven operating  segments to more  effectively and efficiently
provide  integrated  communications  products  and  services  to a broad base of
customers.  In October 1999, we disposed of the main business  units  comprising
our Communications Infrastructure division and dissolved this group.


     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 our manufacturing and engineering company
in Canada,  the majority of our revenues  and expenses in each  geographic  area
were  generated  in the same  currencies.  Approximately  6%, 10% and 34% of the
manufacturing  and engineering  company's  revenues were generated in US dollars
for the years ended December 31, 1997, 1998 and 1999,  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 ending December 31, 1999.


Core Business

     Our primary businesses,  other than IntelleSale.com,  the Non-Core Business
Group, and Digital Angel, are now organized into four business divisions:

         Telecommunications  --  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. On December 30, 1999, as discussed above, we sold our interest
         in our Canadian subsidiary,  TigerTel,  Inc. to concentrate our efforts
         on our domestic CTI solutions.

         Network  --  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 computer network  infrastructure  for the development of local
         and  wide  area  networks  as  well  as  site  analysis,  configuration
         proposals, training and customer support services.


         Internet -- equips our customers  with the necessary  tools and support
         services to enable them to make a successful transition to implementing
         e-business  practices,  Enterprise Resource Planning (ERP) and Customer
         Relationship   Management   (CRM)   solutions,   website  design,   and
         application  and  Internet  access  services to  customers of our other
         divisions.


                                       19
<PAGE>

         Applications  --  provides  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. It is 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, 1999, 1998 and 1997,  revenues from these four divisions
together  accounted  for  38.2%,  35.9% and  40.5%,  respectively,  of our total
revenues.

IntelleSale.com

     IntelleSale.com,  Inc.  sells  refurbished  and new computer  equipment and
related  components  online,  through  its website at  www.IntelleSale.com,  and
through other Internet companies, as well as through traditional channels, which
includes sales made by IntelleSale.com's sales force.

     As of December  31,  1999,  1998 and 1997,  revenues  from  IntelleSale.com
accounted for 42.5%, 30.3% and 40.3%, respectively, of our total revenues.

The Non-Core Business Group

     This group is  comprised  of seven  individually  managed  companies  whose
businesses are as follows:

     o    Gavin-Graham   Electrical   Products  is  a  custom   manufacturer  of
          electrical  products,  specializing in digital and analog panelboards,
          switchboards,  motor controls and general control panels.  The company
          also  provides  custom  manufacturing   processes  such  as  shearing,
          punching, forming, welding, grinding, painting and assembly of various
          component structures.

     o    Ground  Effects,  Ltd.,  based  in  Windsor,  Canada,  is a  certified
          manufacturer and tier one supplier of standard and specialized vehicle
          accessory  products to the automotive  industry.  The company  exports
          over 80% of the  products it produces  to the United  States,  Mexico,
          South America, the Far East and the Middle East.

     o    Hopper   Manufacturing   Co.,  Inc.   remanufactures  and  distributes
          automotive parts. This primarily includes alternators, starters, water
          pumps, distributors and smog pumps.

     o    Innovative    Vacuum   Solutions,    Inc.   designs,    installs   and
          re-manufactures vacuum systems used in industry.

     o    Americom,  STC  Netcom  and  ACT  Leasing  are  all  involved  in  the
          fabrication,  installation and maintenance of microwave,  cellular and
          digital personal communication services towers.

     As of December 31, 1999, 1998 and 1997,  revenues from this business group,
as well as the four disposed entities within our  Communications  Infrastructure
group,  accounted  for  19.2%,  34.7%  and  21.3%,  respectively,  of our  total
revenues.

     We have  previously  announced  our  intention  to divest,  in the ordinary
course of business,  these non-core businesses at such time and on such terms as
the Board of Directors determines  advisable.  There can be no assurance that we
will  divest  of any  or  all of  these  businesses  or as to the  terms  of any
divestiture transaction.

                                       20
<PAGE>

RESULTS OF OPERATIONS


     The following  table  summarizes  the Company's  results of operations as a
percentage of net operating revenue for the last three years:

<TABLE>
<CAPTION>

                                                                Relationship to Net Operating Revenue
                                                                --------------------------------------
                                                                   1999            1998          1997
                                                                     %               %             %
                                                                -------- --------------- -------------
<S>                                                               <C>             <C>           <C>
Net operating revenue                                             100.0           100.0         100.0
Cost of goods sold                                                 71.8            69.0          67.3
                                                                -------- --------------- -------------
Gross margin                                                       28.2            31.0          32.7
Selling, general and administrative expenses                      (26.9)          (24.9)        (25.6)
Depreciation and amortization                                      (2.9)          -(2.2)         (1.8)
Restructuring and unusual costs                                    (0.8)              --         (1.6)
Gain on sale of subsidiary                                          6.0             0.4           1.8
Interest income                                                     0.2             0.2           0.1
Interest expense                                                   (1.1)           (0.8)         (1.0)
                                                                -------- --------------- -------------
Income before provision for income taxes, minority                  2.7             3.7           4.6
interest and extraordinary loss
Provision for income taxes                                          0.9             1.2           1.7
                                                                -------- --------------- -------------
Income before minority interest and extraordinary loss              1.8             2.5           2.9
Minority interest                                                   0.1             0.2           0.6
                                                                -------- --------------- -------------
Income before extraordinary loss                                    1.7             2.3           2.3
Extraordinary loss                                                  0.1              --            --
                                                                -------- --------------- -------------
Net income                                                          1.6             2.3           2.3
Preferred stock dividends                                            --              --           0.1
                                                                -------- --------------- -------------
Net income available to common stockholders                         1.6             2.3           2.2
                                                                ======== =============== =============
</TABLE>

COMPANY OVERVIEW


Revenue


     Revenue for 1999 was $336.7 million, an increase of $129.6 million or 62.6%
from $207.1 million in 1998.  Revenue for 1998  represents an increase of $103.9
million, or 100.7%, from $103.2 million in 1997. These significant increases are
attributable  to the growth of existing  businesses as well as to growth through
acquisitions.


     Revenue for each of the operating segments was:

         (In thousands)                    1999           1998          1997
                                       ----------- -------------- -------------
         Telecommunications 1            $ 59,225       $ 33,270      $ 32,208
         Network                           27,190         21,282            --
         Internet                           6,607             --            --
         Applications                      35,780         19,859         9,574
         IntelleSale                      142,987         60,877        39,445
         Non-Core 2                        64,689         71,793        21,932
         Corporate                            263             --            --
                                       ----------- -------------- -------------
         Consolidated                    $336,741       $207,081      $103,159
                                       =========== ============== =============
         -----------

          1    Includes TigerTel's revenue of $39.2 million and $11.6 million in
               1999 and 1998.
          2    Includes revenue from the Communications  Infrastructure group of
               companies,  the  majority  of which were  disposed  of in the 4th
               quarter of 1999.  Revenues for these disposed entities,  included
               above amounted to $21.0  million,  $32.1 million and $4.3 million
               in 1999, 1998 and 1997.

                                       21
<PAGE>
Changes during the years were:

     o    Telecommunications  revenue increased $26.0 million or 78.3% from 1998
          to 1999 as a result of TigerTel's  acquisition of Contour in May 1999.
          TigerTel's  revenue  was $39.3  million or 66.4% of 1999  revenue  and
          $11.6  million or 34.9% of 1998's  revenue.  Revenue did not  increase
          significantly from 1997 to 1998.

     o    Network  revenue  increased  $5.9  million or 27.8% from 1998 to 1999.
          Hornbuckle  Engineering,  Inc.  and  Lynch  Marks &  Associates,  both
          acquired in the second  quarter of 1999,  contributed  $9.2 million of
          revenue in 1999,  representing  43.4% of 1999's revenue  increase over
          1998.  The 15.5%  decline in existing  business  revenue  reflects the
          transition  from lower  margin  product  business  to a higher  margin
          service  business in 1999  compared to 1998.  This division was formed
          with the purchase of one company in 1998 and had no  operations  prior
          to that.

     o    Internet  revenue  increased by 100.0% for the year as a result of our
          acquisition of Port Consulting in the second quarter of 1999. Prior to
          1999 we had no significant  Internet  operations and those  operations
          reported   as   Internet   in   1998   have   been   classified   with
          Telecommunications in 1999.

     o    Applications  revenue  increased  $15.9  million or 80.2% from 1998 to
          1999.  In  1999,  this  division  includes  the  results  of  STR,  an
          acquisition completed during the second quarter of 1999, whose revenue
          of $9.9  million  represents  49.9% of the  increase,  while  existing
          businesses   contributed   30.3%  of  the  increase,   a  small,   but
          undetermined,  portion of which we believe was due to Y2K remediation.
          Revenue increased $10.3 million or 108.4% from 1997 to 1998, primarily
          from the  acquisition  of  Signature  Industries  in 1998,  whose 1998
          revenue was $9.6 million or 101.1% of the increase.

     o    IntelleSale.com's  revenue increased $82.1 million or 134.9% from 1998
          to 1999.  Bostek,  which was acquired in June 1999,  contributed $74.6
          million  or  122.5%  of the  increase  for the  year,  while  existing
          businesses contributed 12.4% of the increase.  Revenue increased $21.4
          million  or  54.3%  from  1997  to  1998,  primarily  as a  result  of
          IntelleSale's  1998  acquisitions  which  contributed $17.4 million or
          44.2% of the increase.

     o    Non-core   revenue,   which   includes   revenue   from   the   former
          Communications  Infrastructure  group,  decreased $7.1 million or 9.9%
          from 1998 to 1999.  Four  entities  in this  segment  were sold at the
          beginning  of the 4th  quarter  of 1999  and  their  revenues  are not
          included for the 4th quarter of 1999. Certain lines of business within
          this  segment  continue  to suffer  from  competition  and lost market
          share.  Revenue  increased  $49.8  million or 227.4% from 1997 to 1998
          primarily as a result of acquisitions in 1998 which  contributed $35.3
          million or 89.6% of 1998's revenue.



     Rules  5.03-2.1  and 2 of  Regulation  S-X  require the Company to disclose
product and service  revenue  and the cost of 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  revenue in its December 31, 2000 year-end  financial
statements and product and service costs in its March 31, 2001 interim financial
statements.



Gross Profit and Gross Margin Percentage


     Gross profit for 1999 was $94.9 million,  an increase of $30.8 million,  or
48.0%,  from $64.1  million in 1998.  Gross  profit for 1998  represents a $30.4
million increase, or a 90.2% increase over 1997. As a percentage of revenue, the
gross margin was 28.2%,  31.0% and 32.7% for the years ended  December 31, 1999,
1998 and 1997, respectively.

                                       22
<PAGE>

     Gross profit for each of the operating segments was:

         (In thousands)                           1999        1998        1997
                                               --------- ----------- -----------
         Telecommunications 1                   $22,384     $19,071     $16,215
         Network                                  8,635       3,863          --
         Internet                                 4,985          --          --
         Applications                            18,641      11,613       5,846
         IntelleSale                             26,383      12,871       6,243
         Non-Core 2                              13,660      16,770       5,447
         Corporate (including amounts               263          --          --
           incurred during consolidation)
                                               --------- ----------- -----------
         Consolidated                           $94,951     $64,188     $33,751
                                               ========= =========== ===========
         --------------------
     1    Includes  TigerTel's gross profit of $14.9 million and $7.7 million in
          1999 and 1998.
     2    Includes gross profit from the Communications  Infrastructure group of
          companies,  the majority of which were  disposed of in the 4th quarter
          of 1999.  Gross profit for these  disposed  entities,  included  above
          amounted to $4.3 million,  $7.4 million and $1.0 million in 1999, 1998
          and 1997.

     Gross margin percentage for each of the operating segments was:

                                                   1999        1998        1997
                                                -------- ----------- -----------
                                                    %           %           %
         Telecommunications 1                      37.8        57.3        50.3
         Network                                   31.8        18.2          --
         Internet                                  75.5          --          --
         Applications                              52.1        58.5        61.1
         IntelleSale                               18.5        21.1        15.8
         Non-Core 2                                21.1        23.4        24.8
         Corporate (including amounts                --          --          --
            incurred during consolidation)      -------- ----------- -----------
         Consolidated                              28.2        31.0        32.7
                                                ======== =========== ===========
         --------------------
     1    Includes TigerTel's gross profit margin of 38.0% and 66.4% in 1999 and
          1998.
     2    Includes  gross profit margin from the  Communications  Infrastructure
          group of companies,  the majority of which were disposed of in the 4th
          quarter of 1999.  Gross  profit  margin for these  disposed  entities,
          included above amounted to of 20.5%, 23.1% and 23.3% in 1999, 1998 and
          1997.

Changes during the years were:


     o    Telecommunications  gross  profits  increased by $3.3 million or 17.4%
          for 1999,  but  margins  declined to 37.8% in 1999 from 57.3% in 1998.
          The increase in absolute dollars was as a result of 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  division.  Gross  profits
          increased  $2.8  million or 17.3% from 1997 to 1998 as a result of the
          acquisition of TigerTel in 1998.


     o    Network's  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  are more  service  oriented  (e.g.,  help  desk,  consulting
          services)  than the only company that made up the network  division in
          1998,  with most expenses  being  classified  as selling,  general and
          administrative.  The primary reason for shifting  toward higher margin
          business  services was to better serve the needs of our customers.  As
          technology  changed,  our customers continued to rely on us for higher
          level technical services in addition to computer  products.  This move
          also fulfilled our objective to diversify and reduce our dependence on
          product  sales.  To  implement  this  shift,  we hired a  director  of

                                       23
<PAGE>

          technical  services to create new service offerings and to elevate the
          level of our technical expertise through hiring higher level technical
          personnel and training our existing technical staff. The new technical
          services  focused on designing and  implementing  higher level network
          infrastructures  for our customers.  This division was  established in
          1998.


     o    Internet was established in 1999. Gross profits and margins are higher
          in this  division as it is service  oriented and most of its operating
          costs are recorded in selling, general and administrative expense.

     o    Applications  gross profit  increased  $7.0 million or 60.3% for 1999,
          primarily due to the  acquisition  of STR, but margins  declined as we
          implemented  our  planned  exit  from a  once  highly  profitable  but
          declining modem and communications market in the United Kingdom. Gross
          profit increased $5.8 million or 98.6% from 1997 to 1998, primarily as
          a result of the acquisition of Signature in 1998.

     o    IntelleSale.com's  gross profit  increased  $13.5 million or 104.7% in
          1999 as a result of increased revenue from Bostek and internal growth,
          but our  margins  declined  to 18.5% in 1999 from  21.1% in 1998 as we
          continued  our  expansion  and  focused our  business on Internet  and
          business to business e-commerce.  We anticipate margins stabilizing in
          the future. Gross profit increased $6.6 million or 106.5% from 1997 to
          1998 as a result of 1998 acquisitions.

     o    Non-core's  gross  profit and margin  declined  due to the sale of one
          business at the beginning of 1999 and the overall poor  performance of
          the units within this division.  Gross profit declined by $3.1 million
          or 18.6% in 1999.  Gross profit increased $11.3 million or 209.3% from
          1997 to 1998, as a result of  acquisitions  in 1998 which  contributed
          $8.9 million or 164.8% of the increase.

Selling, General and Administrative Expense


     Selling, general and administrative expenses were $90.4 million in 1999, an
increase of $38.9  million or 75.5% over 1998.  The 1998 expense  represents  an
increase of $25.0 million or 94.7% over the $26.4 million reported in 1997. As a
percentage  of  revenue,  selling,  general  and  administrative  expenses  have
increased slightly to 26.9% in 1999 from 24.9% in 1998 and 25.6% in 1997.


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

        (In thousands)                               1999       1998       1997
                                                   --------   -------   --------
        Telecommunications 1                       $20,122    $17,572   $ 14,438
        Network                                      6,953      2,261         --
        Internet                                     4,270                    --
        Applications 1                              16,901      8,975      3,244
        IntelleSale                                 19,120      8,111      3,779
        Non-Core 2                                  12,546     11,167      4,350
        Corporate (including amounts                10,504      3,399        620
           incurred during consolidation) 1, 3
                                                   -------    -------    -------
        Consolidated                               $90,416    $51,485    $26,431
                                                   =======    =======    =======
        --------------------

        1      Includes (a) TigerTel's SG&A of $11.4 million and $5.5 million in
               1999 and 1998, (b) in 1999,  restructuring and unusual charges of
               $511 in  Telecommunications,  $400 in Applications  and $1,639 in
               corporate overhead, and (c) in restructuring charges of $1,681 in
               Telecommunications in 1997.
         2     Includes  SG&A  from the  Communications  Infrastructure group of
               companies,  the  majority  of which were  disposed  of in the 4th
               quarter of 1999. SG&A for these disposed entities, included above
               amounted to $4.8 million,  $4.7 million and $0.7 million in 1999,
               1998 and 1997.
        3      Corporate overhead includes an asset impairment reserve of $1,000
               in 1999.

                                       24
<PAGE>

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

                                              1999           1998          1997
                                          ---------- ------------- -------------
                                                 %             %             %
         Telecommunications 1                  34.0          52.8          44.8
         Network                               25.6          10.6            --
         Internet                              64.6          31.2            --
         Applications 1                        47.2          45.2          33.9
         IntelleSale                           13.4          13.3           9.6
         Non-Core 2                            19.4          15.6          19.8
         Corporate 3                          399.4            --            --
                                          ---------- ------------- -------------
         Consolidated 1                        26.9          24.9          25.6
                                          ========== ============= =============
         ---------------
          1   Includes, as a percentage of revenue, (a) TigerTel's SG&A of 29.3%
              and 47.4% in 1999 and 1998, (b)  restructuring and unusual charges
              in 1999 of 0.2% in Telecommunications,  0.1% in Applications,  and
              0.5% in  corporate  overhead,  and (c)  restructuring  and unusual
              charges of 1.6% in Telecommunications in 1997.
          2   Includes  SG&A  from the  Communications  Infrastructure  group of
              companies,  the  majority  of which  were  disposed  of in the 4th
              quarter  of  1999.  SG&A as a  percentage  of  revenue  for  these
              disposed entities, included above, amounted to of 22.9%, 14.6% and
              16.3% in 1999, 1998 and 1997.
          3   Corporate  overhead includes an asset impairment reserve of $1,000
              in 1999.

Changes during the years were:

     o   Telecommunications  increased  $2.6 million or 14.9% in 1999,  but as a
         percentage of revenue,  declined 18.8  percentage  points from 52.8% in
         1998 to 34.0% in 1999. The decline reflects economies in scale achieved
         through  the  merger  of  TigerTel   and  Contour  and  the   continued
         improvement  of  our  domestic   telecommunications   businesses.  SG&A
         increased  $3.1 million or 21.5% in 1998,  primarily as a result of the
         acquisition of one of the TigerTel entities.

     o   Network  increased $4.7 million or 204.3%, a significant  increase over
         1998 as a result of  acquisitions  made in the second  quarter of 1999.
         These  companies  are more  service  oriented  and  have a higher  SG&A
         expenses. There were no Network operations in 1997.

     o   Internet  commenced  operations  in 1999. As a service  provider,  this
         division has a lower cost of goods sold but higher SG&A expense.

     o   Applications  increased  $7.9  million  or  87.8%  in  1999  due  to an
         acquisition  in the second  quarter of 1999, and increased $5.7 million
         or 178.1% in 1998 as a result of the  acquisition  of  Signature.  As a
         percentage of revenue,  SG&A expense in this division has not increased
         significantly over prior periods.

     o   IntelleSale's SG&A increased $11.0 million or 135.8% in 1999, primarily
         as a result of the  acquisition of Bostek in June 1999 and the increase
         of Internet related  business and the  consolidation of operations into
         one  facility.  SG&A  increased  $4.3  million or 113.2% in 1998 due to
         acquisitions  in 1998. As a percentage  of sales,  SG&A expense in 1999
         and 1998 are almost the level.

     o   Non-core  SG&A did not increase  significantly  in dollar terms in 1999
         but increased as a percentage of sales as sales  continue to decline at
         certain  units  within this  division.  In 1998,  SG&A  increased  $6.8
         million or 154.5% as a result of acquisitions.

                                       25
<PAGE>


Depreciation and Amortization


     Depreciation  and  amortization  expense  for  1999 was  $9.7  million,  an
increase of $5.2 million, or 115.6%, from $4.5 million in 1998. The 1998 expense
represents an increase of $2.6 million or 136.8% over the $1.9 million  reported
in 1997.  As a percentage  of revenue,  depreciation  and  amortization  expense
increased  to 2.9% in 1999  from  2.2% in 1998 and 1.8% in 1997.  The  increase,
despite  substantially higher revenues,  is due to significantly higher goodwill
resulting from acquisitions,  as well as increased  depreciation expense in 1999
resulting from higher capital expenditures in 1999 compared to 1998 and 1997.


     Depreciation  and amortization  expense for each of the operating  segments
was:

         (In thousands)                                1999       1998      1997
                                                   --------- ---------- --------
         Telecommunications 1                        $1,547     $  677    $  300
         Network                                        132         39        --
         Internet                                        69         --        --
         Applications                                 2,366      1,241       459
         IntelleSale                                    529        251       108
         Non-Core 2                                   1,153        935       277
         Corporate (including amounts incurred        3,891      1,358       730
            incurred during consolidation) 3
                                                   --------- ---------- --------
         Consolidated                                $9,687     $4,501    $1,874
                                                   ========= ========== ========
         --------------------

          1    Includes TigerTel's depreciation and amortization of $1.2 million
               and $0.5 million in 1999 and 1998.
          2    Includes  depreciation and amortization  from the  Communications
               Infrastructure  group of  companies,  the  majority of which were
               disposed  of  in  the  4th  quarter  of  1999.  Depreciation  and
               amortization for these disposed entities, included above amounted
               to $4.8 million,  $4.7 million and $0.7 million in 1999, 1998 and
               1997
          3    Includes consolidation adjustments of $2,911, $1,221 and $713, in
               1999, 19998 and 1997, respectively.

Changes during the years were:

     o    Telecommunications  increased in 1999 due to TigerTel's acquisition of
          Contour in May 1999 as well as  amortization  of goodwill of companies
          acquired by TigerTel at the beginning of 1999.

     o    Network  infrastructure  increased in 1999 due to the two acquisitions
          completed in the second quarter of 1999.

     o    Application  technology increased in 1999 by $1.1 million or 91.7% due
          to the  acquisition  completed  in the  second  quarter  of  1999  and
          increases in depreciable  assets in 1999.  1998's  increase was due to
          the acquisition of Signature.

     o    IntelleSale.com increased in 1999 due to the acquisition of Bostek and
          the increase in depreciable  assets in 1999. 1998's increase over 1997
          was due to the increase in depreciable assets.

     o    Non-core both increased in 1999 due to the  acquisition of depreciable
          assets, primarily by Ground Effects, as part of its ongoing automotive
          manufacturing programs.

On an annual basis, goodwill amortization will be approximately $3.5 million.


Restructuring and Unusual Charges


     As part of the  reorganization of our core business in the first quarter of
1999, we implemented a restructuring  plan. The restructuring  plan includes the
exiting  of  selected  lines  of  business  within  our  Telecommunications  and

                                       26
<PAGE>

Applications  business  groups,  and the  associated  write-off  of assets.  The
restructuring  charge of $2,236 includes asset  impairments,  primarily software
and other intangible assets, of $1,522, lease terminations of $541, and employee
separations  of $173. In addition,  during the first quarter of 1999, as part of
our core businesses  reorganization,  we realigned certain operations within the
Telecommunications  division and recognized impairment charges and other related
costs of $314.


         In 1997,  as part of the  disposition  of  certain  assets  within  the
Telecommunications group, we incurred asset impairment and lease termination and
employee separation costs of $1,681.


Gain on Sale of Subsidiary

     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
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 $0.6 million,  $0.4 million and $0.2 million, for 1999,
1998 and 1997, respectively. Interest income is earned primarily from short-term
investments and notes receivable.


     Interest expense was $3.8 million,  $1.7 million and $1.0 million for 1999,
1998 and 1997,  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 34.5%,  33.6% and 36.8% in 1999, 1998
and 1997,  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  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 IBM Credit  Corporation.  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.


LIQUIDITY AND CAPITAL RESOURCES


     As of December 31, 1999, cash and cash equivalents totaled $5.1 million, an
increase of $0.6  million,  or 13.3% from $4.5 million at December 31, 1998.  We
utilize  a cash  management  system to apply  excess  cash on hand  against  our
revolving  credit  facility for which we had  availability  of $11.8  million at
December  31, 1999,  up from $3.8  million at December  31,  1998.  Cash used in
operating  activities  totaled $14.3  million,  $2.6 million and $3.3 million in
1999,  1998 and 1997,  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.

                                       27
<PAGE>

     "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 $17.7  million or 51.5% to $52.1 million in 1999 from $34.4 million
in 1998.  This increase was primarily  attributable  to the increased  volume of
business in 1999 over 1998, particularly in our IntelleSale division, as well as
the  increases as a result of  businesses  acquired in 1999.  As a percentage of
1999 and 1998 net operating revenue, accounts and unbilled receivable were 15.5%
and 16.6%, respectively.


     Inventories  increased by $19.8  million or 96.1% to $40.4  million in 1999
from $20.6  million in 1998.  This increase was  primarily  attributable  to the
increased  volume of business at  IntelleSale  in 1999 over 1998, as well as the
increases as a result of  businesses  acquired in 1999.  As a percentage of 1999
and 1998 cost of goods sold, inventories were 16.7% and 14.4%, respectively.


     Prepaid  expenses  and other  current  assets  increased  by 200.0% or $4.0
million to $6.0  million in 1999 from $2.0  million in 1998.  This  increase  is
attributable to the overall increase in size of the Company in 1999.


     Accounts  payable  increased by $15.7 million or 113.8% to $29.5 million in
1999 from $13.8 million in 1998. This increase was primarily attributable to the
increased  volume of business in 1999 over 1998,  as well as the  increases as a
result of businesses  acquired in 1999. As a percentage of 1999 and 1998 cost of
goods  sold,  accounts  payable  and  accrued  expenses  were  12.2%  and  9.7%,
respectively.


     Accrued  expenses  increased by $8.4  million or 91.3% to $17.6  million in
1999 from $9.2 million in 1998.  Accrued expenses include  estimated earnout and
deferred purchase price payments earned at December 31, 1999.


     "Due to  shareholders  of  acquired  subsidiary"  represents  the  deferred
purchase price due to the Bostek  sellers.  $5.0 million of this amount was paid
in January 2000. Other current liabilities decreased by $0.6 million or 18.2% to
$2.7 million in 1999 from $3.3 million in 1998.


     Investing activities used cash of $27.2 million in 1999 and $6.8 million in
1998 and provided cash of $4.2 million in 1997.  In 1999,  cash of $17.9 million
was used to acquire  businesses  and $7.0 million was spent to acquire  property
and  equipment.  $3.0 million was used  principally  to increase  assets such as
notes receivable and other assets, while $0.7 million was received from the sale
of  property  and  equipment.  In 1998,  $7.4  million was used  principally  to
increase  assets such as notes  receivable,  property  and  equipment  and other
assets,  while $0.5  million  was  received  from the sale of  assets.  In 1997,
sources of cash primarily included $4.0 million of cash acquired in acquisitions
and $2.3  million  in  proceeds  from the sale of  assets.  These  amounts  were
partially  offset by payments of $2.2  million for property  and  equipment  and
other assets.


     Cash of $42.2  million,  $6.4  million  and $6.0  million  was  provided by
financing activities in 1999, 1998 and 1997, respectively.  In 1999, $54 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 $10.9
million and $3.4 million against long-term debt and notes payable, respectively,
and $2.8 million for other financing  costs. In 1998, $13.2 million was obtained
through  borrowings  under notes payable and long-term debt and $1.4 million was
obtained  through the issuance of common  shares.  Uses of cash in 1998 included
repayments of $6.9 million on long-term debt, $0.9 million for the redemption of
preferred  stock and $0.3 million for the  repurchase of common stock.  In 1997,
$9.4 million of cash was provided  primarily though the issuance of common stock
and from long term debt proceeds.  In 1997, $3.3 million of cash was used to pay
down notes payable and long-term debt.

                                       28
<PAGE>

     One of our  stated  objectives  is to  maximize  cash flow,  as  management
believes positive cash flow is an indication of financial strength. However, due
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 common stock and/or bank borrowing, if available.


     In August,  1998,  we entered  into a $20 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 million.  On May 25, 1999, we entered into a Term and Revolving
Credit  Agreement with IBM Credit  Corporation (the "IBM Agreement") and, on May
26, 1999,  we repaid the amount due to State Street Bank and Trust  Company.  On
July 30, 1999, the IBM Agreement was amended and restated. The IBM Agreement, as
amended,  provides  for: (a) a revolving  credit line of up to $36.150  million,
designated as follows:  (i) a U.S.  revolving  credit line of up to $27 million,
(ii) a  Canadian  revolving  credit  line of up to $6.150  million,  and (iii) a
United Kingdom  revolving credit line of up to $3 million;  (b) a term loan A of
up $22 million, (c) a term loan B of up to $25 million, (d) a Canadian term loan
C of up to $6.85 million, and (e) a Canadian term loan D of up to $5.0 million.


     The  revolving  credit  line  may  be  used  for  general  working  capital
requirements,  capital  expenditures and certain other permitted  purposes.  The
U.S. revolving credit line bears interest at the 30-day LIBOR rate plus 1.75% to
1.90% depending on our leverage ratio; the Canadian  revolving credit line bears
interest at the base rate as  announced by the  Toronto-Dominion  Bank of Canada
each month (6.5% at December 31, 1999) plus 0.1707% to 0.3207%, depending on our
leverage ratio;  the UK revolving credit line bears interest at the base rate as
announced  by the  National  Westminster  Bank PLC of  England  each  month plus
1.4207% to 0.5707%,  depending upon our leverage ratio. As of December 31, 1999,
the LIBOR rate was  approximately  5.5798% and  approximately  $24.3 million was
outstanding  on the  revolving  credit  line.  In January  2000,  we applied the
proceeds from the sale of our investment in TigerTel towards the U.S.  revolving
credit line and paid it down. As of March 27, 2000,  approximately  $5.8 million
was outstanding  under the U.S.  revolving  credit line and  approximately  $3.2
million under the Canadian revolving credit line .


     Term loan A, which was used to pay off State Street Bank and Trust Company,
bears  interest at the 30-day  LIBOR rate plus 1.75% to 1.90%,  is  amortized in
quarterly  installments  over six  years and is  repayable  in full on the third
anniversary  of the closing date of the loan.  As of December 31, 1999 and March
27, 2000,  approximately  $20.2  million and $19.2  million,  respectively,  was
outstanding on this loan.


     Term loan B,  which may be used for  acquisitions,  bears  interest  at the
30-day LIBOR rate plus 1.75% to 1.90%,  is  amortized in quarterly  installments
over six years and is repayable in full on the third  anniversary of the closing
date of the loan.  As of  December  31, 1999 and March 27,  2000,  approximately
$19.5 million and $23.3 million, respectively, was outstanding on this loan.


     Term loan C, which was used by our Canadian  subsidiaries  to pay off their
bank debt, bears interest at the base rate as announced by the  Toronto-Dominion
Bank of Canada each month plus  0.1707%,  to 0.3207%,  is amortized in quarterly
installments over six years and is repayable in full on the third anniversary of
the closing date of the loan. As of December 31, 1999,  Toronto-Dominion's  rate
was approximately 6.5%. As of December 31, 1999 and March 27, 2000 approximately
$2.5 million was outstanding on this loan.

     Term loan D,  which  may be used by one of our  Canadian  subsidiaries  for
acquisitions,   bears   interest   at  the  base  rate  as   announced   by  the
Toronto-Dominion  Bank of  Canada  each  month  plus  0.1707%,  to  0.3207%,  is
amortized in quarterly  installments  over six years and is repayable in full on

                                       29
<PAGE>

the third  anniversary  of the closing date of the loan. As of December 31, 1999
no  advances  have been made under  this  facility.  In  February  2000,  it was
reallocated to Term Loan B.



     The  IBM  Agreement  contains  debt  covenants  relating  to our  financial
position  and  performance.  Pursuant  to those  covenants  we are  required  to
maintain:

     o    a current assets to current liabilities ratio greater than 1.0:1.0;

     o    a net  profit  before  tax to  revenue  percentage  on a rolling  four
          quarter basis equal to or greater than:

          --1.5%, with no losses in any  quarter,  through  the  fiscal  quarter
               ending December 31, 1999;

          --2.0%, with no losses in any quarter,  from the fiscal quarter ending
               March 31, 2000 and thereafter;

     o    a total  liabilities to tangible net worth ratio greater than zero and
          equal to or less than:

          --6.5:1.0 through the fiscal quarter ending December 31, 1999;

          --4.0:1.0  from  the  fiscal   quarter   ending  March  31,  2000  and
               thereafter;

     o    a gross cash flow to fixed  charges  ratio on a rolling  four  quarter
          basis equal to or greater than:

          --1.5:1.0 through the fiscal quarter ending December 31, 1999;

          --2.0:1.0  from  the  fiscal   quarter   ending  March  31,  2000  and
               thereafter.

     In addition,  the IBM Agreement contains covenants  restricting our ability
to, among other things:

     o    to place liens on our property;

     o    to dispose of our assets other than in the ordinary course of business
          and pursuant to other permitted dispositions;

     o    to engage in any  activities  that would  cause our  operations  to be
          materially  different  from those as conducted  them as of the date of
          the IBM Agreement;

     o    declare and pay  dividends or make other  distributions  in respect of
          our capital stock;

     o    incur indebtedness other than specific permitted indebtedness; and

     o    engage in certain activities with or make loans to, our affiliates and
          subsidiaries that are not guarantors under the IBM Agreement.

     As of  December  31,  1999,  the Company  was in  compliance  with all debt
covenants except for the following covenants, for which waivers were obtained as
described below.

     Based on the Company's  preliminary  financial  statements  for the quarter
ended June 30, 1999, the Company  determined  that the current assets to current
liabilities  ratio and the ratio of its total liabilities to tangible net worth,
as defined in the IBM  Agreement,  exceeded  the  maximums  permitted by the IBM
Agreement, as described above. The covenant violations were primarily the result
of debt resulting from our acquisitions of Bostek, STR, Micro-Age,  Monterey and
Lynch.  On June 29, 1999,  the Company and IBM Credit entered into an agreement,
wherein  the  Company   acknowledged  its  non-compliance  with  such  financial
covenants and IBM Credit agreed to waive such non-compliance. Subsequently, in a
letter from the Company to IBM Credit  Corporation,  dated August 12, 2000,  the
Company confirmed its compliance with the IBM Agreement,  as amended by the June
29, 2000  waiver,  for the period ended June 30,  1999.  Likewise,  based on the
Company's  financial  statements  for the quarter ended  September 30, 1999, the
Company  determined  that the ratio of its total  liabilities  to  tangible  net
worth, as defined in the IBM Agreement,  exceeded 6.5:1.0, the maximum permitted
by the IBM Agreement,  as described above. On November 12, 1999, the Company and

                                       30
<PAGE>

IBM Credit  entered  into an  agreement,  wherein the Company  acknowledged  its
non-compliance  with such financial covenant and IBM Credit agreed to waive such
non-compliance.

     Likewise, based on the financial statements for the year ended December 31,
1999, the Company  concluded that the ratio of its total liabilities to tangible
net worth  exceeded  the maximum  amounts  permitted  by the IBM  Agreement,  or
6.5:1.0 and 4.0:1.0 for the year ended December 31, 1999. Consequently, on March
29,  2000,  the Company and IBM Credit  entered  into an  agreement  wherein the
Company  acknowledged  its  non-compliance  with the  above-mentioned  financial
covenants and IBM Credit agreed to waive such non-compliance.  Subsequently,  in
letters from the Company to IBM Credit Corporation, dated March 31, 2000 and May
12, 2000,  the Company  confirmed  its  compliance  with the IBM  Agreement,  as
amended by the March 29, 2000 waiver, for the year ended December 31, 1999.


     We have entered into earnout  arrangements with certain sellers under which
they are  entitled  to  additional  consideration  for  their  interests  in the
companies  they sold to us. Under these  agreements,  assuming that all earnouts
are achieved, we are contingently liable for additional  consideration amounting
to  approximately  $2.7 million based on achieved  1999  results,  approximately
$12.7 million based on agreements  coming due in 2000 and achieved 2000 results,
approximately  $7.1 million based on achieved 2001 results,  approximately  $1.8
million based on achieved 2002 results and  approximately  $2 million based upon
achieved 2004 results.

     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 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.  The purchases  under these
put options are  recorded as changes in  minority  interest  based upon  current
operating results.  We have entered into agreements to acquire for approximately
$3.9  million,   put  options  in  certain   subsidiaries   of  our  subsidiary,
IntelleSale.com.  In addition,  based upon current earnings,  assuming all other
put options were exercised,  we are  contingently  liable for  approximately  an
additional $6.9 million in the next two years.


     Our  sources of  liquidity  include,  but are not  limited  to,  funds from
operations and funds  available  under the IBM Agreement.  We may be able to use
additional  bank  borrowings,  proceeds  form 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.  We believe  that our  current  cash  position,  augmented  by
financing activities, if available, will provide us with sufficient resources to
finance our working capital requirements for the foreseeable future. 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 its 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
2000 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.

                                       31
<PAGE>

     We are constantly looking for ways to maximize  stockholder 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  shareholders'  investments.  There  can be no  assurance  however  that any
initiatives will be found, or if found,  that they will be on terms favorable to
us.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In 1998, we adopted Statement of Financial  Accounting Standards (FAS) 131,
Disclosures  about  Segments of an Enterprise and Related  Information.  FAS 131
supersedes FAS 14,  Financial  Reporting for Segments of a Business  Enterprise,
replacing the "industry  segment" approach with the "management"  approach.  The
management  approach  designates  the  internal  organization  that  is  used by
management  for making  operating  decisions  and assessing  performance  as the
source of our  reportable  segments.  FAS 131 also  requires  disclosures  about
products and services,  geographic  areas, and major customers.  The adoption of
FAS 131 did not affect  results of  operations  or  financial  position  but did
affect the disclosure of segment  information  (see Note 21 to our  consolidated
financial statements).

     In  1998,  we  adopted  FAS  130,  Reporting  Comprehensive  Income,  which
establishes  standards for reporting and disclosure of comprehensive  income and
its  components.   Our   comprehensive   income  consists  of  foreign  currency
translation  adjustments  and is  reported  in the  consolidated  statements  of
stockholders' equity.

     In June 1998,  the  Financial  Accounting  Standards  Board 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.  We do not  believe  that FAS 133 will have a
material  impact  on  our  results  of  operations,  cash  flows  and  financial
condition.

     In December 1999, the SEC issued Staff Accounting Bulletin 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.  We will be required
to adopt this  statement no later than the second  quarter of 2000.  We have not
completed  the  analysis  to  determine  the  impact  of this  statement  on our
consolidated  financial  statements;  however  the impact is not  expected to be
material.

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 IBM Agreement are 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.

                                       32
<PAGE>

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.






                                       33
<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         61       Chairman, Chief Executive Officer                May 1993
Garrett A. Sullivan         65       Director, President, Chief Operating Officer     March 1995
Richard S. Friedland        49       Director                                         October 1999
Arthur F. Noterman          58       Director                                         February 1997
Daniel E. Penni             52       Director                                         March 1995
Angela M. Sullivan          42       Director                                         April 1996
Constance K. Weaver         47       Director                                         July 1998
Jerome C. Artigliere        46       Vice President, Treasurer                        April 1998
Michael E. Krawitz          30       Vice President                                   April 1999
David A. Loppert            45       Vice President, Chief Financial Officer          February 1997

</TABLE>

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

     Richard J.  Sullivan:  Mr.  Sullivan,  age 61, was  elected to the Board of
Directors,  and named Chief  Executive  Officer,  in May 1993.  He was appointed
Secretary  in March 1996.  He is a member of the  Compensation  Committee of the
Board of Directors of the Company.  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 65, has been  President  of the
Company  since March 1995.  He was elected to the Board of  Directors  in August
1995.  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.

     Richard S. Friedland:  Mr.  Friedland,  age 49, 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 Tech-Sym Corporation, 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.


                                       34
<PAGE>

     Arthur F. Noterman: Mr. Noterman, age 58, a Chartered Life Underwriter, has
served as a Director since  February 1997, and serves on the Audit  Committee 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 52, 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.,  an
insurance  agency. He has worked in many sales and  administrative  roles in the
insurance  business since 1969. He was President of the Boston Insurance Center,
Inc., an insurance  agency,  until 1988.  Mr. Penni was founder and President of
BIC  Equities,  Inc.,  a  broker/dealer  registered  with the  NASD.  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 42, has served as a Director since
April 1996 and serves on the Compensation Committee of the Board of Directors of
the Company.  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 47,  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
Primark  Corporation and 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 46, 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.  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, MA. He earned an undergraduate degree in finance from
Seton Hall University in 1977, and an MBA from Fairleigh Dickinson University in
1980.


     Michael E. Krawitz:  Mr.  Krawitz,  age 30, joined the Company as Assistant
Vice  President  and  General  Counsel in April  1999,  and was  appointed  Vice
President and Assistant Secretary in December 1999. 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  45,  joined  the  Company  as Vice
President,  Treasurer and Chief Financial Officer in February 1997. From 1996 to
1997, he 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

                                       35
<PAGE>

Witwatersrand,  Johannesburg.  Mr. Loppert was designated a Chartered Accountant
(South Africa) in 1980.

Directorships


     Ms. Weaver is a director of Primark  Corporation.  Mr. Friedland  currently
serves on the boards of Tech-Sym  Corporation,  Zilog,  Inc.  and Video  Network
Communications,  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 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 two meetings during 1999.

     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 three times
during 1999.

     The Board of  Directors  held 9 meetings  during  1999 and acted by written
consent 46 times during 1999.  During the year,  all  Directors  attended 75% or
more of the Board of Directors'  meetings and the Board 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 1999.

                                       36
<PAGE>

ITEM 11.      EXECUTIVE COMPENSATION


     The following table sets forth certain summary  information  concerning the
total  remuneration paid in 1999 and the two prior fiscal years to the Company's
Chief  Executive  Officer and the Company's  four other most highly  compensated
executive officers.

<TABLE>
<CAPTION>

                                            Summary Compensation Table
                                                                               Long-Term Compensation
                                                                         --------------------------------
                                        Annual Compensation                    Awards            Payouts
                                -------------------------------------    ----------------------  -------
                                                            Other
                                                            Annual       Restricted                             All Other
       Name and                                             Compensa-    Stock       Options/      LTIP         Compen-
Principal Position (1)    Year     Salary($)  Bonus ($)(2)  tion ($)(3)  Awards($)   SAR's (#)(4)  Payouts (#)  sation ($)
-----------------------   ----    ----------  ------------  -----------  ----------  ------------  -----------  ----------
<S>                       <C>     <C>         <C>           <C>          <C>         <C>           <C>            <C>
Richard J. Sullivan       1999    $ 457,500   $3,000,000    $   9,115       --       1,000,000        --          $  --
  Chairman, CEO and       1998    $ 345,833   $  180,000    $  79,882       --       1,500,000        --          $  --
  Secretary               1997    $ 116,669   $  140,000    $   3,623       --       1,000,000        --          $  --

Garrett A. Sullivan (5)   1999    $ 165,000   $1,500,000    $   8,832       --         500,000        --          $  --
  Director, President     1998    $ 144,165   $   90,000    $   8,842       --         475,000        --          $  --
  and COO                 1997    $ 105,499   $   75,000    $     811       --         350,000        --          $  --

Jerome C. Artigliere (6)  1999    $  98,726   $  150,000    $   1,938       --         100,000        --          $  --
  Vice President,         1998    $  85,000   $   25,000    $   1,938       --          50,000        --          $  --
    Treasurer             1997          N/A          N/A          N/A       N/A           N/A        N/A            N/A

Michael E. Krawitz (7)    1999    $  94,027   $  150,000    $   1,541       --         125,000        --          $  --
  Vice President          1998          N/A          N/A          N/A       N/A           N/A        N/A            N/A
                          1997          N/A          N/A          N/A       N/A           N/A        N/A            N/A

David A. Loppert (8)      1999    $ 150,000   $  750,000    $  19,775       --         250,000        --          $  --
  Vice President,         1998    $ 123,537   $   40,000    $  15,925       --         285,000        --          $  --
  Chief Financial Officer 1997    $  64,423   $   25,000    $     --        --         150,000        --          $  --

----------------------------
<FN>
(1)  No executive officer served pursuant to an employment  contract through the
     1996 fiscal year. See  "Employment  Contracts and Termination of Employment
     and  Change-In-Control  Arrangements"  below for  agreements  entered  into
     subsequent to December 31, 1996.
(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)  Includes,  in 1998 for  Richard J.  Sullivan,  $73,394  reimbursed  for the
     payment of taxes. Prior to June
     1997, Mr. Sullivan did not receive a salary from the Company.
(4)  Indicates number of securities underlying options.
(5)  Mr. Sullivan was Acting Chief Financial Officer until February 1997.
(6)  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.
(7)  Mr. Krawitz joined the Company in April 1999.
(8)  Mr.  Loppert was employed as Vice  President,  Treasurer,  Chief  Financial
     Officer of the Company in February 1997.
</FN>
</TABLE>

                                       37
<PAGE>
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 1999:

<TABLE>
<CAPTION>
                                              Option Grants In Last Fiscal Year

                                                      Individual Grants
                                 -------------------------------------------------------------
                                    Number of      % of Total
                                   Securities        Options
                                   Underlying      Granted to     Exercise                       Grant Date
                                     Options      Employees in      Price                      Present Value
        Name                     Granted (#)(1)        1999         ($/Sh)   Expiration Date       ($) (2)
--------------------             --------------   ------------    --------   ---------------   -------------
<S>                                <C>               <C>          <C>          <C>              <C>
Richard J. Sullivan                1,000,000         20.1%        $ 2.03           May-05       $ 1,170,000
Garrett A. Sullivan                  500,000         10.1%        $ 2.03           May-05       $   585,000
Jerome C. Artigliere                  25,000          0.5%        $ 2.76       January-05       $    29,250
                                      75,000          1.5%        $ 2.03           May-05       $    87,750
Michael E. Krawitz                    50,000          1.0%        $ 2.00         April-05       $    58,500
                                      25,000          0.5%        $ 2.03           May-05       $    29,250
                                      50,000          1.0%        $ 2.00       October-05       $    58,500
David A. Loppert                     250,000          5.0%        $ 2.03           May-05       $   292,500
---------------
<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 greater
     of the fair market value of the  Company's  common shares on the grant date
     or $2.00.  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 $1.17 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 43.41%;  risk-free  interest
     rate of 6.36%; and expected lives of 5 years.
</FN>
</TABLE>

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  1999  and
unexercised options held on December 31, 1999:

<TABLE>
<CAPTION>
                 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

                                                               Number of Securities          Value of Unexercised In-
                                                               Underlying Unexercised        The-Money Options at Year
                                 Exercised in 1999             Options at Year End 1999(#)   End 1999 ($) (2)
                           ---------------------------      ------------------------------   -------------------------
                             Shares
                          Acquired Upon        Value
        Name              Exercise (#)    Realized ($)(1)   Exercisable    Unexercisable    Exercisable     Unexercisable
--------------------      -------------   ---------------   -----------    -------------    -----------     -------------
<S>                       <C>             <C>               <C>             <C>             <C>             <C>
Richard J. Sullivan          --           $   --            3,185,000       1,000,000       $ 11,726,762    $ 5,470,000
Garrett A. Sullivan        60,000         $ 350,780           915,000         500,000       $  3,369,994    $ 2,735,000
Jerome C. Artigliere       50,000         $ 208,750              --           100,000       $       --      $   528,687
Michael E. Krawitz           --           $   --                 --           125,000       $       --      $   686,750
David A. Loppert          128,000         $ 719,581           307,000         250,000       $  1,204,850    $ 1,367,500

-----------------------
<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, 1999
     assumes a fair market value of $7.50,  the closing  price of the  Company's
     Common  Stock as reported on the Nasdaq  Stock Market on December 31, 1999.
     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>

                                       38
<PAGE>

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 2000,  the  Committee  has  authorized a bonus pool of up to $10 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.


     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.

     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,  the following
options were granted to  directors  in 1999:  Richard S.  Friedland - 125,000 at
$2.00 in October 1999 and 25,000 at $2.375 in November 1999; Arthur F. Noterman,
Daniel E. Penni and  Constance K. Weaver each - 125,000 in May 1999 at $2.03 and
25,000  each at $2.375 in  November  1999;  and Angela M.  Sullivan - 125,000 at
$2.03 in May 1999. In addition, each of Messrs.  Friedland,  Noterman, Penni and
Weaver  received  a Bonus  of  $75,000.  Directors  who are not  also  executive
officers  are not  eligible  to  participate  in any other  benefit  plan of the
Company.


                                       39
<PAGE>

Compensation Committee Interlocks and Insider Participation


     Richard J.  Sullivan,  the Chief  Executive  Officer of the  Company,  is a
member of the Compensation Committee.

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
     Jerome C. Artigliere                 3 Years        January 5, 1998             $  100,000(3)
     Michael E. Krawitz                   5 Years         April 12, 1999             $  130,000
     David A. Loppert                     5 Years(1)       March 1, 2000             $  150,000

     ---------------------------------
<FN>
(1)      Automatically renewed for successive additional one-year terms on  each
         anniversary.
(2)      Provides for a minimum annual bonus of $140,000.
(3)      Effective as of February 1, 1999.
</FN>
</TABLE>

     In 1997, the Company  entered into  employment  agreements  with Richard J.
Sullivan, Chairman; Garrett A. Sullivan,  President; and David A. Loppert, Chief
Financial Officer. These agreements were amended and restated effective March 1,
2000.  Such  employment  agreements,  as amended and restated,  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 may
terminate his  employment  under the agreement at any time within one year after
such  change of  control.  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,  each of 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 July 1, 1999, 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
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.

                                       40
<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, 1999:

                                            Aggregate Number of       Percent of
                                           Shares Beneficially       Outstanding
                  Name                          Owned (1)               Shares
      --------------------------------    -----------------------    -----------

      Richard J. Sullivan                      3,975,223(2)               8.2%
      Garrett A. Sullivan                        915,000                  1.9%
      Richard S. Friedland                            --                   *
      Arthur F. Noterman                         270,000                   *
      Daniel E. Penni                            584,065                  1.2%
      Angela M. Sullivan                         860,974(2)               1.8%
      Constance K. Weaver                        143,000                   *
      Jerome C. Artigliere                        25,000                   *
      Michael E. Krawitz                          57,200                   *
      David A. Loppert                           352,000                   *
      All Directors and Executive              7,303,655                 15.1%
      Officers as a Group (14 Persons)
      -----------------------
*    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 - 3,185,000;
     Garrett  A.  Sullivan - 915,000;  Arthur F.  Noterman - 225,000;  Daniel E.
     Penni -  225,000;  Angela M.  Sullivan  - 225,000;  Constance  K.  Weaver -
     135,000;  Jerome C. Artigliere - 25,000; Michael E. Krawitz - 50,000; David
     A. Loppert - 307,000; and all directors and executive officers as a group -
     5,380,000.

(2)  Includes  263,797 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.


                                       41
<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, 1999:

<TABLE>
<CAPTION>

                                      Class of     Number of      Percent of    Exercise Price
       Name                           Warrants     Warrants (1)      Class        Per Share
----------------------------          --------     ------------  -----------    --------------
<S>                                   <C>          <C>            <C>              <C>

Richard J. Sullivan (2)               Class K      250,000          100.0%         $ 5.31
                                      Class S      376,700          100.0%         $ 2.00
Garrett A. Sullivan                      --          --               --              --
Richard S. Friedland                     --          --               --              --
Arthur F. Noterman                       --          --               --              --
Daniel E. Penni                          --          --               --              --
Angela M. Sullivan (2)                Class K      250,000          100.0%         $ 5.31
                                      Class S      376,700          100.0%         $ 2.00
Constance K. Weaver                      --          --               --              --
Jerome C. Artigliere                     --          --               --              --
Michael E. Krawitz                       --          --               --              --
David A. Loppert                         --          --               --              --
All Directors and Executive           Class K      250,000          100.0%         $ 5.31
   Officers as a Group                Class S      376,700          100.0%         $ 2.00
   (14 Persons)
---------------------
<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 Shareholders

     Set forth in the table below is  information  as of December  31, 1999 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:

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

None


Changes in Control


     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 of control of the Company.

                                       42
<PAGE>

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Indebtedness of Management


     Garrett A. Sullivan,  the Company's President,  had executed two promissory
notes in favor of the Company; one in the amount of $75,000, bearing interest at
7% per  annum,  and one in the  amount of  $102,216.19,  which was  non-interest
bearing and was repayable  from the proceeds of the sale of any shares of Common
Stock Mr.  Sullivan  received upon  exercise of warrants or options.  Both notes
were repaid in full by Mr. Sullivan in 1999.

     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 April
10, 2000, $425,000 had been advanced under this note.

     David A. Loppert,  the Company's  Chief Financial  Officer,  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 April 10, 2000, $90,000 was outstanding.

Earnout Agreements

     The Company has entered into earnout  arrangements  with certain sellers of
companies in which the Company  acquired an interest under which the sellers are
entitled to additional  consideration  for their interests in the companies they
sold to the  Company.  Under these  agreements,  assuming  that all earnouts are
achieved,  the  Company  is  contingently  liable for  additional  consideration
amounting  to  approximately  $2.7  million  based  on  achieved  1999  results,
approximately  $12.7 million based on agreements coming due in 2000 and achieved
2000  results,  approximately  $7.1  million  based on  achieved  2001  results,
approximately  $1.8 million based on achieved 2002 results and  approximately $2
million based upon achieved 2004 results.

Put Options

     The  Company  has  entered  into  put  options  with the  sellers  of those
companies in which the Company acquired less than a 100% interest. These options
require the Company to purchase the  remaining  portion the Company 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 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.  The  Company  has  entered  into   agreements  to  acquire  for
approximately $3.9 million, put options in certain subsidiaries of the Company's
subsidiary,  IntelleSale.com. In addition, based upon current earnings, assuming
all other put options were  exercised,  the Company is  contingently  liable for
approximately an additional $6.9 million in the next two years.

Employment Agreements


     At the  time  the  Company  acquires  a  particular  company,  the  Company
generally enters into employment agreements with the key sellers/officers of the
acquired  company.  The agreements are for periods of one to ten years, and some
provide  for bonus,  or  "earnout"  arrangements  based on the  earnings  of the
subsidiary.


                                       43
<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
              On  October  5,  1999 we  filed a  Current  Report  on Form  8-K/A
              reporting an amendment to the IBM Agreement.  On December 13, 1999
              we filed a Current  Report on Form 8-K reporting AT&T Canada's bid
              for our subsidiary, TigerTel, Inc. On December 22, 1999 we filed a
              Current  Report on Form  8-K/A  which  included a copy of the AT&T
              Agreement.  On January 11, 2000 we filed a Current  Report on Form
              8-K/A reporting the completion of the transaction.

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


                                       44
<PAGE>
                           REPORT OF MANAGEMENT




Management is responsible for the preparation and integrity of the  Consolidated
Financial  Statements  appearing in our Annual Report. The financial  statements
were prepared in conformity  with United States  generally  accepted  accounting
principles  appropriate in the circumstances and,  accordingly,  include certain
amounts based on our best judgments and estimates. Financial information in this
Annual Report is consistent with that in the financial statements.

Management  is  responsible  for  maintaining  a system of  internal  accounting
controls and  procedures  to provide  reasonable  assurance,  at an  appropriate
cost/benefit   relationship,   assets  are  safeguarded  and   transactions  are
authorized,  recorded and reported  properly.  The internal  accounting  control
system is augmented by a program of internal audits and  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.

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

                                      F-1


<PAGE>
Report of Management (Continued)
--------------------------------------------------------------------------------




The independent accountants,  PricewaterhouseCoopers LLP, 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 is
engaged  to audit the  Consolidated  Financial  Statements  of  Applied  Digital
Solutions,  Inc. and subsidiaries and conduct such tests and related  procedures
as it deems necessary in conformity with auditing  standards  generally accepted
in the United States.  The opinion of the  independent  accountants,  based upon
their  audits of the  Consolidated  Financial  Statements,  is contained in this
Annual Report.




Richard J. Sullivan
Chairman, Board of Directors and
Chief Executive Officer




Garrett A. Sullivan
President and Chief Operating Officer




David A. Loppert
Vice President, and
Chief Financial Officer

March 3, 2000





                                      F-2


<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
(formerly Applied Cellular  Technology,  Inc.) at December 31, 1999 and December
31, 1998, and the results of their operations and their cash flows for the years
ended  December  31,  1999 and 1998 in  conformity  with  accounting  principles
generally  accepted in the United  States.  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,  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 the opinion expressed above.




PricewaterhouseCoopers LLP
St. Louis, Missouri
March 3, 2000



                                      F-3

<PAGE>







                   REPORT OF INDEPENDENT ACCOUNTANTS


Board of Directors and Shareholders
Applied Digital Solutions, Inc.


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and cash  flows of Applied  Digital  Solutions,  Inc.  and
subsidiaries  (formerly  Applied Cellular  Technology,  Inc.) for the year ended
December 31, 1997. We have also audited the financial  statement schedule listed
in the accompanying  index as of December 31, 1997, and for the year then ended.
These   financial   statements   and  financial   statement   schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Applied Digital Solutions, Inc. and subsidiaries for the year ended December 31,
1997, in conformity with generally accepted accounting principles.  In addition,
in our  opinion,  the  financial  statement  schedule  presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements.




Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998



                                      F-4


<PAGE>

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

<TABLE>
                                         CONSOLIDATED BALANCE SHEETS
                                      (In thousands, except par value)
<CAPTION>
                                                   ASSETS
                                                                                           DECEMBER 31,
                                                                                     ------------------------
                                                                                         1999           1998
                                                                                     ------------------------
<S>                                                                                  <C>           <C>
CURRENT ASSETS
   Cash and cash equivalents                                                         $  5,138       $  4,555
   Due from buyer of divested subsidiary                                               31,302             --
   Accounts receivable and unbilled receivables (net of allowance
      for doubtful accounts of $1,698 in 1999 and $990 in 1998)                        52,170         34,390
   Inventories                                                                         40,448         20,657
   Notes receivable                                                                     3,822          3,600
   Prepaid expenses and other current assets                                            6,001          2,042
-------------------------------------------------------------------------------------------------------------
         TOTAL CURRENT ASSETS                                                         138,881         65,244

PROPERTY AND EQUIPMENT, NET                                                            13,886         15,627

NOTES RECEIVABLE                                                                        3,297          1,445

GOODWILL, NET                                                                          62,000         33,430

OTHER ASSETS                                                                           10,912          8,370
-------------------------------------------------------------------------------------------------------------

                                                                                     $228,976       $124,116
=============================================================================================================
                                 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Notes payable                                                                     $ 25,211       $ 23,217
   Current maturities of long-term debt                                                 8,038          1,158
   Due to shareholders of acquired subsidiary                                          15,000             --
   Accounts payable                                                                    29,499         13,819
   Accrued expenses                                                                    17,672          9,251
   Other current liabilities                                                            2,745          3,312
-------------------------------------------------------------------------------------------------------------
         TOTAL CURRENT LIABILITIES                                                     98,165         50,757

LONG-TERM DEBT                                                                         35,317          2,838
-------------------------------------------------------------------------------------------------------------

         TOTAL LIABILITIES                                                            133,482         53,595
-------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (SEE NOTES 2, 15, AND 19)
-------------------------------------------------------------------------------------------------------------

MINORITY INTEREST                                                                       2,558          2,961
-------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY
   Preferred shares:
      Authorized 5,000 shares in 1999 and 1998 of $10 par value; special voting,
         issued and outstanding 1 share in 1999 and 1998, Class B voting, issued
         and outstanding 1 share in 1999 and 1998                                          --             --
   Common shares:
      Authorized 80,000 shares in 1999 and 1998,
         of $.001 par value; 51,116 shares issued and
         48,260 shares outstanding in 1999 and 35,683 shares issued
         and 35,577 shares outstanding in 1998                                             48             36
   Common and preferred additional paid-in capital                                     87,470         60,517
   Retained earnings                                                                   12,664          7,232
   Treasury stock (carried at cost, 2,856 shares in 1999, 106 shares in 1998)          (7,310)          (337)
   Accumulated other comprehensive income                                                  64            112
-------------------------------------------------------------------------------------------------------------
         TOTAL STOCKHOLDERS' EQUITY                                                    92,936         67,560
-------------------------------------------------------------------------------------------------------------

                                                                                     $228,976       $124,116
=============================================================================================================
</TABLE>


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


                                      F-5
<PAGE>

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

<TABLE>
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                            (In thousands, except per share data)
<CAPTION>
                                                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                                                     ---------------------------------------
                                                                                         1999           1998           1997
                                                                                     ---------------------------------------
<S>                                                                                  <C>            <C>            <C>
NET OPERATING REVENUE                                                                $336,741       $207,081       $103,159

COSTS OF GOODS SOLD                                                                   241,790        142,893         69,408
----------------------------------------------------------------------------------------------------------------------------

GROSS PROFIT                                                                           94,951         64,188         33,751

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                          (90,416)       (51,485)       (26,431)
DEPRECIATION AND AMORTIZATION                                                          (9,687)        (4,501)        (1,874)
RESTRUCTURING AND UNUSUAL COSTS                                                        (2,550)            --         (1,681)
GAIN ON SALE OF SUBSIDIARY                                                             20,075            733          1,827
INTEREST INCOME                                                                           616            420            192
INTEREST EXPENSE                                                                       (3,842)        (1,653)          (978)
----------------------------------------------------------------------------------------------------------------------------

INCOME BEFORE PROVISION FOR INCOME TAXES,
   MINORITY INTEREST AND EXTRAORDINARY LOSS                                             9,147          7,702          4,806
PROVISION FOR INCOME TAXES                                                              3,160          2,588          1,769
----------------------------------------------------------------------------------------------------------------------------

INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS                                  5,987          5,114          3,037
MINORITY INTEREST                                                                         395            424            697
----------------------------------------------------------------------------------------------------------------------------

INCOME BEFORE EXTRAORDINARY LOSS                                                        5,592          4,690          2,340
EXTRAORDINARY LOSS (NET OF TAXES OF $89)                                                  160             --             --
----------------------------------------------------------------------------------------------------------------------------

NET INCOME                                                                              5,432          4,690          2,340
PREFERRED STOCK DIVIDENDS                                                                  --             44             72
----------------------------------------------------------------------------------------------------------------------------

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS                                          $  5,432       $  4,646       $  2,268
============================================================================================================================

EARNINGS PER COMMON SHARE - BASIC
   INCOME BEFORE EXTRAORDINARY LOSS                                                  $    .12       $    .14       $    .18
   EXTRAORDINARY LOSS                                                                      --             --             --
----------------------------------------------------------------------------------------------------------------------------

NET INCOME PER COMMON SHARE - BASIC                                                  $    .12       $    .14       $    .18
============================================================================================================================

EARNINGS PER SHARE - DILUTED
   INCOME BEFORE EXTRAORDINARY LOSS                                                  $    .11       $    .13       $    .15
   EXTRAORDINARY LOSS                                                                      --             --             --
----------------------------------------------------------------------------------------------------------------------------

NET INCOME PER COMMON SHARE - DILUTED                                                $    .11       $    .13       $    .15
============================================================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING - BASIC                                                          46,814         32,318         12,632
============================================================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING - DILUTED                                                        50,086         34,800         15,245
============================================================================================================================
</TABLE>

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


                                       F-6
<PAGE>

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

<TABLE>
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                                          (In thousands)
<CAPTION>
                                                                                                          ACCUMULATED
                                                                                                                OTHER      TOTAL
                                        PREFERRED STOCK     COMMON STOCK   ADDITIONAL   RETAINED              COMPRE-     STOCK-
                                        ---------------    ---------------    PAID-IN   EARNINGS  TREASURY    HENSIVE   HOLDERS'
                                        NUMBER   AMOUNT    NUMBER   AMOUNT    CAPITAL   (DEFICIT)    STOCK     INCOME     EQUITY
                                        -----------------------------------------------------------------------------------------
<S>                                         <C>   <C>      <C>         <C>    <C>        <C>       <C>           <C>     <C>
BALANCE - DECEMBER 31, 1996                 --    $  --     5,799      $ 6    $ 7,928    $   318   $    --       $ --    $ 8,252
 Net income                                 --       --        --       --         --      2,340        --         --
 Comprehensive income -
  foreign currency translation              --       --        --       --         --         --        --         (2)
    Total comprehensive income              --       --        --       --         --      2,340        --         (2)     2,338
 Issuance of common shares                  --       --     1,572        2      5,534         --        --         --      5,536
 Issuance of common shares to redeem        --       --
  preferred stock                           --       --     1,354        1      2,499         --        --         --      2,500
 Issuance of common shares for
  acquisitions                              --       --     9,624       10     10,263         --        --         --     10,273
 Warrants redeemed for common shares        --       --     2,323        2      7,456         --        --         --      7,458
 Preferred stock dividends paid             --       --        --       --         --        (72)       --         --        (72)
----------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1997                 --       --    20,672       21     33,680      2,586        --         (2)    36,285
 Net income                                 --       --        --       --         --      4,690        --         --
 Comprehensive income - foreign
  currency translation                      --       --        --       --         --         --        --        114
    Total comprehensive income              --       --        --       --         --      4,690        --        114      4,804
 Issuance of common shares                  --       --        50       --        100         --        --         --        100
 Issuance of common shares for
  acquisitions                              --       --    12,511       12     18,770         --        --         --     18,782
 Issuance of preferred shares               --       --        --       --      6,020         --        --         --      6,020
 Conversion of preferred shares to
  common shares                             --       --     1,600        2         (2)        --        --         --         --
 Warrants redeemed for common shares        --       --       850        1      1,949         --        --         --      1,950
 Preferred dividends paid                   --       --        --       --         --        (44)       --         --        (44)
 Common shares repurchased                  --       --      (106)      --         --         --      (337)        --       (337)
----------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1998                 --       --    35,577       36     60,517      7,232      (337)       112     67,560
 Net income                                 --       --        --       --         --      5,432        --         --
 Comprehensive income
   Foreign currency translation             --       --        --       --         --         --        --        (36)
   Unrealized gain on securities            --       --        --       --         --         --        --        (12)
 Total comprehensive income                 --       --        --       --         --      5,432        --        (48)     5,384
 Issuance of common shares                  --       --     2,808        3      5,508         --        --         --      5,511
 Issuance of common shares for
  acquisitions                              --       --    11,701       11     19,016         --        --         --     19,027
 Warrants redeemed for common shares        --       --       924        1      2,429         --        --         --      2,430
 Common shares repurchased                  --       --    (2,750)      (3)        --         --    (6,973)        --     (6,976)
----------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1999                 --    $  --    48,260      $48    $87,470    $12,664   $(7,310)      $ 64    $92,936
==================================================================================================================================
</TABLE>

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

                                      F-7
<PAGE>

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

<TABLE>
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (In thousands)

<CAPTION>
                                                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                                                     ---------------------------------------
                                                                                         1999           1998           1997
                                                                                     ---------------------------------------
<S>                                                                                  <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                        $  5,432       $  4,690        $ 2,340
   Adjustments to reconcile net income to net cash
      used in operating activities:
         Depreciation and amortization                                                  9,687          4,501          1,874
         Minority interest                                                                395            424            697
         Gain on sale of subsidiary                                                   (20,075)          (733)        (1,827)
         (Gain) loss on sale of assets                                                    143           (140)           148
         Reserve on investments                                                         1,000             --             --
         Non-cash portion of restructuring cost                                         1,522             --             --
         Net change in operating assets and liabilities                               (12,483)       (11,352)        (6,549)
----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES                                                 (14,379)        (2,610)        (3,317)
----------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   (Increase) decrease in notes receivable                                               (413)        (2,338)           122
   Proceeds from sale of assets                                                           758            507          2,296
   Payments for property and equipment                                                 (7,024)        (1,950)          (916)
   (Payments for) proceeds from asset and business acquisitions
      (net of cash balances acquired)                                                 (17,903)            57          3,983
   Increase in other assets                                                            (2,675)        (3,118)        (1,327)
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                   (27,257)        (6,842)         4,158
----------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net amounts borrowed (paid) on notes payable                                        (3,358)        12,202         (2,847)
   Proceeds on long-term debt                                                          54,114          1,011            335
   Payments for long-term debt                                                        (10,911)        (6,936)          (494)
   Other financing costs                                                               (2,863)            --             --
   Issuance of common shares                                                            5,237          1,354          9,084
   Repurchase of common stock                                                              --           (337)            --
   Redemption of preferred shares                                                          --           (900)            --
   Preferred stock dividends paid                                                          --            (44)           (72)
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                              42,219          6,350          6,006
----------------------------------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH                                                           583         (3,102)         6,847

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                           4,555          7,657            810
----------------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF YEAR                                              $  5,138       $  4,555        $ 7,657
============================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Income taxes paid                                                                 $  1,334       $  2,430        $   964
   Interest paid                                                                        3,541          1,534          1,012
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                      F-8
<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
     emerging  leader in the  implementation  of  e-business  solutions  for the
     Internet through Computer Telephony  Internet  Integration (the integration
     of computer telecom and the Internet). The Company's goal is to be a single
     source  e-business  provider  that  mid-size  companies  can  turn  to  for
     intelligently   connecting  their  business   processes  via  telephone  or
     computer,  with their  customers,  suppliers  and  partners  to deliver the
     results expected from the emerging e-business market. The Company currently
     operates in six segments as follows:

          TELECOMMUNICATIONS    -   This   segment   is   an    implementer   of
          telecommunications  and Computer Telephony Integration (CTI) solutions
          for e-business.

          NETWORK - This segment provides e-business  infrastructure  design and
          deployment,   personal   computer  network   infrastructure   for  the
          development  of local and wide area networks as well as site analysis,
          configuration, training and customer support services.

          INTERNET - This segment equips  customers with the necessary tools and
          support  services to enable them to make a  successful  transition  to
          becoming or implementing e-business practices,  ERP and CRM solutions,
          website design and application and internet access services.

          APPLICATIONS - This segment provides software  applications  primarily
          for  large  retail   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.

          INTELLESALE.COM  - This  segment  sells  refurbished  and new computer
          equipment  and  related  components  online,  through  its  website at
          www.Intellesale.com,  and through other Internet companies, as well as
          through   traditional   channels,   which   includes   sales  made  by
          Intellesale.com's sales force.

          NON-CORE - This  segment is comprised  of seven  individually  managed
          companies  engaged  in  various  business  enterprises  including  the
          manufacturing  of  electronic  and  automotive  components,   and  the
          fabrication,  installation and maintenance of microwave,  cellular and
          digital personal communication service towers.

     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 2, the Company acquired businesses during 1999
     and 1998 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.

     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
     income in 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.


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


                                      F-9
<PAGE>

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

     CASH AND CASH EQUIVALENTS

     The  Company  considers  all highly  liquid  investments  purchased  with a
     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 $0.5 million in 1999 and
     $1.6 million in 1998.

     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.

     GOODWILL AND OTHER INTANGIBLE ASSETS


     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  benefited  (not  exceeding  20 years).  The Company  reviews
     goodwill and other  intangible  assets 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.  The Company performs undiscounted cash flows
     analyses  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.


     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  straight-line  life 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 $2.9 million in 1999,
     $0.7 million in 1998 and $0.9 million in 1997.


                                      F-10
<PAGE>

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

     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 upon shipment. 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.  However, the
     Company provides a minimum six month warranty and offers the opportunity to
     purchase an  extended  warranty  for most  refurbished  hardware  sales not
     covered by  manufacturer  warranties.  The Company has  recorded a warranty
     reserve of $0.3 million at December 31, 1999 based upon prior history.  The
     Company does not offer a warranty policy for services to customers.


     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
     agreement,  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, a proportionate amount
     of the  discount is allocated to each  element.  If the contact  includes a
     discount,  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 our 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 reasonable  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 in  accordance  with  Statement of
     Financial  Accounting  Standards  (FAS) 109,  Accounting  for Income Taxes,
     which  requires  the  asset  and  liability   approach  for  the  financial
     accounting  and reporting  for income taxes.  Income taxes include U.S. and
     international  taxes.  The  Company  and  its  U.S.   subsidiaries  file  a
     consolidated federal income tax return.

     EARNINGS PER COMMON AND COMMON SHARE EQUIVALENT

     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.

     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 stockholders' equity.


                                      F-11

<PAGE>

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


2.   ACQUISITIONS AND DISPOSITIONS

     The following represents acquisitions which occurred in 1999 and 1998:

<TABLE>
<CAPTION>


                                                                          VALUE OF          COMMON/
                                    DATE OF             ACQUIS-  CASH      SHARES   GOOD-  PREFERRED
                                    ACQUIS-   PERCENT   ITION    CONSID-  ISSUED OR WILL    SHARES
                                    ISITION  ACQUIRED   PRICE    ERTION   ISSUABLE ACQUIRED ISSUED   BUSINESS DESCRIPTION
                                   -------------------------------------------------------------------------------------------------
<S>                                <C>       <C>     <C>       <C>       <C>      <C>      <C>     <C>
1999 ACQUISITIONS
Port Consulting, Inc.              04/01/99    100%  $ 1,292   $  671  $  621   $  800     --   Integrator of information technology
                                                                                                application systems
Hornbuckle Engineering             04/01/99    100%    3,680      180   3,500    3,489    555   Integrated voice and data solutions
                                                                                                provider
Lynch Marks & Associates, Inc.     04/01/99    100%    2,526            2,526    1,404    773   Network integration company
STR, Inc.                          04/01/99    100%    3,050       50   3,000    3,734    932   Software solutions provider for
                                                                                                retailers

Contour Telecom Management, Inc.
(Divested effective 12/31/99)      06/25/99     75%    5,627    5,627      --    4,752     --   Provider of outsourced
                                                                                                telecommunications management
                                                                                                services

Bostek, Inc. & affiliate           06/01/99    100%   26,966   26,966      --   24,376     --   Seller of computer systems and
                                                                                                peripherals


1998 ACQUISITIONS
Information Products Center, Inc.  01/01/98    100%  $ 2,797      110   2,687   1,996   1,766   Network Infrastructure services
                                                                                                provider
Winward Electric (Divested
effective 10/1/99)                 01/01/98    100%    4,556      281   4,275   3,056   2,307   Full service electrical and
                                                                                                communications systems contractor
Americom Group                     04/01/98     80%      956       24     932     791     227   Provider of communications
                                                                                                infrastructure construction,
                                                                                                maintenance, installation and
                                                                                                training services
Aurora Electric, Inc. (Divested
effective 10/1/99)                 04/01/98    100%    1,897       64   1,833     405   1,098   Full service electrical and
                                                                                                communications system contractor
Blue Star Electronics              04/01/98     80%      431       10     421     430     203   Cable assembly manufacturer
Consolidated Micro Components      04/01/98    100%    1,948       73   1,875   1,944   1,042   Reseller of memory, processors and
                                                                                                mass storage devices
Data Path Technologies             04/01/98    100%    3,421       46   3,375   3,275   1,778   Seller of computer systems,
                                                                                                peripherals, components and software
GDB Software Services              04/01/98    100%    1,931       --   1,931   1,710   1,013   Provider of data processing
                                                                                                consulting services
Ground Effects, Ltd.               04/01/98     85%    2,049      227   1,822     518   1,106   Manufacturer of aluminum and steel
                                                                                                tubes
Innovative Vacuum Solutions, Inc.  04/01/98     80%    1,361        7   1,354   1,105     729   Re-manufacturer of high-end vacuum
                                                                                                pumps
Service Transport Company          04/01/98     80%       89        7      82     157      35   Transporter of computer systems and
                                                                                                electronics
Teledata Concepts, Inc.            04/01/98    100%      308       42     266     504     138   Internet and telecommunications
                                                                                                services provider
TigerTel Services, Ltd.
(Divested effective 12/31/99)      05/01/98    100%    6,500      471   6,029  11,590   3,418   Call centers, voice messaging and
                                                                                                one number dialing services provider
Signature Industries, Ltd.         06/01/98     85%    4,974      318   4,656   3,089   3,571   Manufacturer of high-grade
                                                                                                communications and safety devices
Fiscal Advantage, Inc.             10/01/98  Assets      200      200      --     175      --   Computer leasing services


<FN>
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 to
be 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.
</FN>
</TABLE>



                                      F-12

<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 services,  legal services and
     accounting  services,  that were direct  costs of acquiring  these  assets.
     Goodwill  resulting  from  these  acquisitions  is  being  amortized  on  a
     straight-line  basis,  over twenty years.  Certain  acquisition  agreements
     include  additional  consideration  contingent  on profits of the  acquired
     subsidiary.  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, 1999. Under these agreements, assuming all earnout profits are
     achieved,  the Company is contingently liable for additional  consideration
     of approximately  $12.7 million in 2000, $7.1 million in 2001, $1.8 million
     in 2002 and $2 million in 2004,  of which 6.2  million  would be payable in
     cash and 17.4 million would be payable in stock.  See Note 23 for unaudited
     pro forma information for the above  acquisitions that occurred in 1999 and
     1998.

     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 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.  In the second  quarter of 1999,  the
     Company  entered into agreements to pay $3.9 million to acquire put options
     in certain companies owned by the Company's subsidiary, Intellesale.com. In
     addition,  based on current  earnings,  assuming  all other put options are
     exercised,  the  Company  is  contingently  liable for an  additional  $6.9
     million in the next two years. The contingent  amounts for earnouts and put
     options have not been recorded as liabilities  in the financial  statements
     as it is uncertain whether the contingencies will be met.

     There were 9,441  shares of common  stock  issued  during  1999  related to
     agreements with the Company's  subsidiaries,  primarily for earnouts and to
     purchase minority interests.

     MAJOR ACQUISITION

     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  million,  of which  $10.2  million  was paid in cash at
     closing,  $5 million was paid in cash in January 2000, and $1.8 million for
     the 1999 earnout was paid in cash in February 2000. The earnout  accrual is
     included  in  other  current  liabilities  at  December  31,  1999.  Upon a
     successful initial public offering of Intellesale.com,  $10 million will be
     payable in stock of  Intellesale.com to the former owners of Bostek. In the
     event that the initial public offering does not occur, the $10 million will
     be  payable  in  cash.  An  additional  $3.2  million  is  contingent  upon
     achievement  of certain  earnings  targets.  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  $24.4  million  recorded  as
     goodwill which is being amortized over 20 years.

                                      F-13
<PAGE>

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

     DISPOSITIONS

     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 properly 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  telecommunciations 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.

     On  December  31,  1998,  the  Company  entered  into a  Purchase  and Sale
     Agreement for the sale of certain of its cellular assets. In consideration,
     the Company received one thousand shares of 6% first series preferred stock
     of the  purchaser  of the  cellular  assets in the face amount and having a
     liquidation  value of $1 million.  The first series  preferred stock may be
     redeemed at any time through  December 31,  2004.  This sale  resulted in a
     gain of $647.

     On December 31,  1998,  the Company  entered into an Agreement  for Sale of
     Stock  for  the  sale  of  its  investment  in  a  subsidiary  company.  In
     consideration,  the Company  received two  thousand  shares of 6% preferred
     stock of the  purchaser of the  subsidiary  in the face amount and having a
     liquidation value of $2 million,  due December 31, 2003. This sale resulted
     in a gain of $86.

                                      F-14
<PAGE>

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

3.   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 has  implemented a restructuring
     plan.  The  restructuring  plan  includes the exiting of selected  lines of
     business within the Company's  Telecommunications and Applications business
     groups, and the associated write-off of assets. The restructuring charge of
     $2,236 includes 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, 1999:

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

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

     Towards the end of the third  quarter of 1997,  the Company made a decision
     to exit its retail cellular operations.  During the fourth quarter of 1997,
     the Company  completed its exit strategy and incurred  costs related to the
     restructuring of these operations, including provisions for terminations of
     leases and employees and writedown of the carrying  values of inventory and
     other assets.  Costs totaling $1,681 were charged to expense in 1997 and no
     material  costs were incurred in future  periods.  All amounts were paid in
     1997.

     UNUSUAL ITEMS

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

4.   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  Corporation,  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.

                                      F-15

<PAGE>

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


5.     INVENTORIES

<TABLE>
<CAPTION>
                                                                          1999           1998
                                                                       -----------------------
            <S>                                                        <C>            <C>
            Raw materials                                              $ 4,648        $ 4,437
            Work in process                                              1,195          2,349
            Finished goods                                              35,602         15,246
            ----------------------------------------------------------------------------------
                                                                        41,445         22,032

            Less: Allowance for excess and obsolescence                    997          1,375
            ----------------------------------------------------------------------------------

                                                                       $40,448        $20,657
            ==================================================================================
</TABLE>

6.     NOTES RECEIVABLE

<TABLE>
<CAPTION>
                                                                          1999           1998
                                                                        ----------------------
            <S>                                                         <C>            <C>
            Due from purchaser of four non-core subsidiaries,
            bears interest at 5%, interest payable quarterly,
            principal due October 2004                                  $2,531         $   --

            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 1999, the Company made demand for full
            payment due to default on certain terms by the maker
            of the note                                                    950          1,300

            Due from purchaser of interconnect service business,
            forgiven in 1999 in connection with the repurchase
            of the business                                                 --          1,350

            Due from officers of subsidiaries, unsecured, bear
            interest at varying interest rates, due on demand            1,914          1,594

            Due from customer, unsecured, bears interest at the
            prime rate, due on demand; paid in 1999                         --            226

            Due from individuals and corporations, bear interest
            at varying rates above prime, secured by business
            assets, personal guarantees, and securities, due
            various dates through July 2001                              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                      519            575
            ----------------------------------------------------------------------------------
                                                                         7,119          5,045
            Less:  Current portion                                       3,822          3,600
            ----------------------------------------------------------------------------------

                                                                        $3,297         $1,445
            ==================================================================================
</TABLE>

                                      F-16

<PAGE>


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

7.   PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                    1999           1998
                                                                 -----------------------
            <S>                                                  <C>            <C>

            Land                                                 $   755        $   755
            Building and leasehold improvements                    4,662          4,097
            Equipment                                             19,418         18,021
            ----------------------------------------------------------------------------
                                                                  24,835         22,873
            Less: Accumulated depreciation and amortization       10,949          7,246
            ----------------------------------------------------------------------------

                                                                 $13,886        $15,627
            ============================================================================
</TABLE>

     Included  above are vehicles and  equipment  acquired  under  capital lease
     obligations  in the amount of $1,917 and $1,577 at  December  31,  1999 and
     1998,  respectively.  Related accumulated depreciation amounted to $723 and
     $602 at December 31, 1999 and 1998, respectively.

     Depreciation  and  amortization  charged against income amounted to $3,703,
     $2,260  and $846 for the years  ended  December  31,  1999,  1998 and 1997,
     respectively.


8.   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>
                                                                   1999          1998
                                                                ----------------------
            <S>                                                 <C>           <C>
            Original balance                                    $67,761       $35,920
            Accumulated amortization                             (5,761)       (2,490)
            --------------------------------------------------------------------------

            Carrying value                                      $62,000       $33,430
            ==========================================================================
</TABLE>

     Amortization  expense  amounted  to  $3,258,  $1,487 and $670 for the years
     ended December 31, 1999, 1998, and 1997, respectively.

     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.

                                      F-17

<PAGE>

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

9.   OTHER ASSETS

<TABLE>
<CAPTION>
                                                                    1999           1998
                                                                 -----------------------
            <S>                                                  <C>            <C>
            Proprietary software                                 $ 7,611        $ 5,979
            Loan acquisition costs                                 2,890            308
            Other assets                                             413            109
            ----------------------------------------------------------------------------
                                                                  10,914          6,396
            Less: Accumulated amortization                        (4,456)        (1,730)
            ----------------------------------------------------------------------------
                                                                   6,458          4,666
            Investment in preferred stock (net of reserve
               of $1,000 in 1999 and $0 in 1998)                   2,000          3,000
            Deferred tax asset                                     1,424             --
            Other                                                  1,030            704
            ----------------------------------------------------------------------------

                                                                 $10,912        $ 8,370
            ============================================================================
</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 $2,726,
     $754 and  $358 for the  years  ended  December  31,  1999,  1998 and  1997,
     respectively.

                                      F-18

<PAGE>

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

10.  NOTES PAYABLE

     On May 25,  1999,  the Company  entered  into a Term and  Revolving  Credit
     Agreement with IBM Credit  Corporation  (the "IBM  Agreement").  On May 26,
     1999, the Company  repaid the amount due on the previous  revolving line of
     credit.  The IBM  Agreement,  as amended on July 30, 1999  provides for the
     following:  (1) a revolving  credit line of up to  $36,150,  designated  as
     follows: (i) a USA revolving credit line of up to $27,000,  (ii) a Canadian
     revolving credit line of up to $6,150, and (iii) a United Kingdom revolving
     credit  line of up to $3,000;  (2) Term Loan A of up to  $22,000;  (3) Term
     Loan B of up to $25,000;  (4) Term Loan C of up to $6,850 and (5) Term Loan
     D of up to $5,000.

     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.  As of  December  31,  1999,  the
     outstanding balance was $66,629 and the availability was $28,371.  See Note
     11 for long-term debt of the Company under the IBM Agreement.

     The weighted  average  interest  rate was 6.9% and 8.8% for the years ended
     December 31, 1999 and 1998, respectively. The London Interbank Offered Rate
     and  Toronto-Dominion  Bank of Canada  interest  rates at December 31, 1999
     were 5.58% and 6.5%, respectively.

<TABLE>
<CAPTION>
                                                                    1999           1998
<S>                                                              <C>            <C>
            Revolving credit line - IBM Credit Corporation,
            collateralized by all domestic assets of the
            Company, bearing interest at the 30 day London
            Interbank Offered Rate plus 1.75% to 1.9%, due
            in May 2002.                                         $21,400        $    --

            Revolving credit line - IBM Credit Corporation,
            collateralized by all Canadian assets of the
            Company, bearing interest at the base rate as
            announced by the Toronto-Dominion Bank of Canada
            plus .17% to .32%, due May 2002                        2,993             --

            Notes payable - bank, collateralized by business
            assets of certain subsidiaries.  Interest is
            payable monthly at rates varying from the London
            Interbank Offered Rate plus 1.5% to 3.5% in 1999,
            and prime plus 0.5% to 2.25% in 1998.  The credit
            lines are due through December 2000                      723          5,974

            Revolving credit line - bank, collateralized by
            all assets of the Company, bearing interest at the
            prime lending rate or the London Interbank Offered
            Rate, as elected by the Company, refinanced with
            IBM Credit in May 1999                                    --         17,193

            Notes payable - other, unsecured, due on demand           95             50
            ----------------------------------------------------------------------------

                                                                 $25,211        $23,217
            ============================================================================
</TABLE>

                                      F-19


<PAGE>

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

11.  LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                    1999           1998
                                                                 ----------------------
<S>                                                              <C>            <C>
      Term Loan - IBM Credit Corporation, collateralized
      by all domestic assets of the Company bearing interest
      at the 30 day London Interbank Offered Rate plus 1.75%
      to 1.9%, payable in quarterly principal installments
      of $1,770 plus interest, due in May 2002                   $39,747        $    --

      Term Loan - IBM Credit Corporation, collateralized by
      all Canadian assets of the Company, bearing interest
      at the base rate as announced by the Toronto-Dominion
      Bank of Canada plus 0.17% to 0.32%, payable in
      quarterly principal installments of $113 plus interest,
      due May 2002                                                 2,489             --

      Notes payable - bank, collateralized by land, building
      and assets, payable in monthly installments of principal
      and interest totaling $25, bearing interest at rates
      between 8.15% and prime plus 1.5%, refinanced with IBM
      Credit Corporation in May 1999                                  --            805

      Note payable - bank, collateralized by subsidiary's
      business assets, payable in monthly principal payments
      of $62 plus interest at the prime rate plus 0.5%,
      refinanced with IBM Credit Corporation in May 1999              --          1,402

      Mortgage notes payable - bank, collateralized by
      buildings, payable in monthly installments of
      principal and interest totaling $2, bearing interest
      at prime plus 2.0% in 1999, due through April 2028             343            802

      Notes payable - finance companies and banks,
      collateralized by vehicles, payable in monthly principal
      installments of $1, bearing interest at rates ranging
      from 9.75% to 10.9% in 1999, due through December 2002          24            132

      Notes payable - bank, collateralized by business assets,
      payable in monthly installments of principal and interest
      totaling $2, bearing interest at rates ranging from 5.61%
      to prime plus 2% in 1999, due through June 2003                 54            118

      Capital lease obligations                                      698            737
      ----------------------------------------------------------------------------------
                                                                  43,355          3,996
      Less: Current maturities                                     8,038          1,158
      ----------------------------------------------------------------------------------
                                                                 $35,317        $ 2,838
      ==================================================================================
</TABLE>

     The scheduled maturities of long-term debt at December 31,
     1999 are as follows:


            YEAR                                                  AMOUNT
            -------------------------------------------------------------

            2000                                                 $ 8,038
            2001                                                   7,756
            2002                                                  26,117
            2003                                                     494
            2004                                                     472
            Thereafter                                               478
            -------------------------------------------------------------
                                                                 $43,355
            =============================================================

     Interest expense on the long and short-term notes payable  (including notes
     payable in Note 10) amounted to $3,842, $1,653 and $978 for the years ended
     December 31, 1999, 1998 and 1997, respectively.

                                      F-20


<PAGE>

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


12.  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.


13.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                  1999        1998        1997
                                                               --------------------------------
<S>                                                            <C>          <C>         <C>
      Current:
            United States at statutory rates                   $ 5,033      $1,747      $1,570
            International                                         (198)        930         533
            Current taxes covered by net operating
               loss                                                 --          --         (88)
      -----------------------------------------------------------------------------------------
            Current income tax provision                         4,835       2,677       2,015
      -----------------------------------------------------------------------------------------
      Deferred:
            United States                                       (1,553)         94        (246)
            International                                         (122)       (183)         --
      -----------------------------------------------------------------------------------------
            Deferred income taxes provision (credit)            (1,675)        (89)       (246)
      -----------------------------------------------------------------------------------------

                                                               $ 3,160      $2,588      $1,769
      =========================================================================================
</TABLE>

                                      F-21

<PAGE>

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

     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>
                                                                               1999        1998
<S>                                                                          <C>        <C>
       Deferred Tax Assets:
             Liabilities and reserves                                        $1,203     $   557
             Net operating loss carryforwards                                 1,975       3,892
       -----------------------------------------------------------------------------------------
             Gross deferred tax assets                                        3,178       4,449
             Valuation allowance                                                (15)     (2,994)
       -----------------------------------------------------------------------------------------
                                                                              3,163       1,455
       -----------------------------------------------------------------------------------------
       Deferred Tax Liabilities:
             Accounts receivable                                                118         719
             Notes receivable                                                   361         361
             Prepaid                                                            418          --
             Property and equipment                                             462          10
             Intangible assets                                                  380         365
       -----------------------------------------------------------------------------------------
                                                                              1,739       1,455
       -----------------------------------------------------------------------------------------

       Net Deferred Tax Asset                                                $1,424     $    --
       =========================================================================================
</TABLE>

     The valuation  allowance for deferred tax asset decreased by $2,979 in 1999
     and $520 in 1998 due to management  determining it was more likely than not
     the net operating loss carryforwards will be utilized in future periods.

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

<TABLE>
<CAPTION>

                                                                   1999        1998        1997
                                                                 -------------------------------
<S>                                                              <C>         <C>         <C>
       Domestic                                                  $9,599      $5,082      $3,132
       International                                               (452)      2,620       1,674
       ----------------------------------------------------------------------------------------

                                                                 $9,147      $7,702      $4,806
       ========================================================================================
</TABLE>

     At December  31,  1999,  the  Company  had  aggregate  net  operating  loss
     carryforwards of approximately  $6,300 for income tax purposes which expire
     in various amounts through 2011. The net operating loss  carryforwards were
     acquired in connection with various 1997 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.  Utilization
     of the  Company's  net  operating  loss  carryforwards  are estimated to be
     limited to approximately  $371 per year. When realized,  the tax benefit of
     the acquired net operating loss carryforwards will be recorded to income as
     there is no remaining  goodwill or other long term assets  associated  with
     these acquisitions.

                                      F-22

<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                  1999        1998        1997
                                                                  -----------------------------
                                                                     %           %           %
                                                                  -----------------------------
<S>                                                                <C>          <C>         <C>
         Statutory rate                                             34          34          34
         Non-deductible goodwill amortization                        6           5           5
         State income taxes, net of federal benefits                12           5           7
         International tax rates different from the
            the statutory US federal rate                           --          --          (3)
         Reduction of deferred tax asset valuation
            allowance                                              (16)         (6)         (5)
         Other                                                      (1)         (4)         (1)
         --------------------------------------------------------------------------------------

                                                                    35          34          37
         ======================================================================================
</TABLE>


14.  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                 1999        1998        1997
                                                               --------------------------------
<S>                                                            <C>         <C>         <C>
      NUMERATOR:
         Net income                                            $ 5,432     $ 4,690     $ 2,340
         Preferred stock dividends                                  --         (44)        (72)
      -----------------------------------------------------------------------------------------

      Numerator for basic earnings per share -
         net income available to common
         stockholders                                            5,432       4,646       2,268

      Effect of dilutive securities:
         Preferred stock dividends                                  --          44          72
      -----------------------------------------------------------------------------------------

      Numerator for diluted earnings
         per share - net income available to
         common stockholders                                   $ 5,432     $ 4,690     $ 2,340
      =========================================================================================

      DENOMINATOR:
         Denominator for basic earnings per
            share - weighted-average shares outstanding         46,814      32,318      12,632
      -----------------------------------------------------------------------------------------

         Effect of dilutive securities:
            Redeemable preferred stock                              --          85         998
            Warrants                                               280         477         779
            Employee stock options                               2,992         266         451
            Contingent stock - acquisitions                         --       1,654         385
      -----------------------------------------------------------------------------------------
         Dilutive potential common shares                        3,272       2,482       2,613
      -----------------------------------------------------------------------------------------

      Denominator For Diluted Earnings
         Per Share - adjusted weighted-
         average shares and assumed
         conversions                                            50,086      34,800      15,245
      =========================================================================================

      BASIC EARNINGS PER SHARE                                 $   .12     $   .14     $   .18
      =========================================================================================

      DILUTED EARNINGS PER SHARE                               $   .11     $   .13     $   .15
      =========================================================================================
</TABLE>

                                      F-23

<PAGE>

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

15.  COMMITMENTS AND CONTINGENCIES

     Rentals of space,  vehicles,  and office  equipment under operating  leases
     amounted to approximately  $5.2 million,  $3.9 million and $2.7 million for
     the years ended December 31, 1999, 1998 and 1997, respectively.

     The Company has entered  into  employment  contracts  with key officers and
     employees  of the  Company.  The  agreements  are for periods of one to ten
     years through June 2009.  Some of the  employment  contracts  also call for
     bonus arrangements based on earnings of a particular subsidiary.

     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, 1999 are:


                                               MINIMUM     EMPLOYMENT
         YEAR                          RENTAL PAYMENTS      CONTRACTS
         -------------------------------------------------------------
         2000                                  $ 4,085        $ 7,500
         2001                                    3,467          6,500
         2002                                    3,032          5,200
         2003                                    2,063          3,100
         2004                                    1,493          1,000
         Thereafter                              1,659            600
         -------------------------------------------------------------

                                               $15,799        $23,900
         =============================================================

     The  employment  agreements  with three 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
     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.


16.  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 $286 and $304 for the years ended December 31, 1999 and 1998.

                                      F-24


<PAGE>

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

17.  REDEEMABLE PREFERRED SHARES

     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.

     In October  1996,  the Company  issued one hundred  thousand 8%  redeemable
     preferred  shares at $100 per share as partial  consideration  for the 100%
     purchase of ATI Communications. For purposes of redemption of the preferred
     shares, each share of ACT Communications, Inc.'s common stock was valued at
     $10,000.  During 1997, the one hundred  thousand  shares of preferred stock
     were redeemed for 1.4 million shares of the Company's common stock.

18.  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").  The Special  Preferred  Share is
     entitled to a number of votes equal to the number of outstanding  shares of
     Commstar not owned by the Company that can be exchanged  for the  Company's
     common shares. The holder of the Special Preferred Share is not entitled to
     receive any dividends or participate in any  distribution  of assets to the
     stockholders  of the Company.  When all of Commstar's  exchangeable  shares
     have been  exchanged or redeemed for shares of the Company's  Common Stock,
     the Special Preferred Share will be cancelled. The Company has the right to
     call the  outstanding  exchangeable  shares with the  occurrence of various
     events including  liquidation of Commstar and at the five-year  anniversary
     date of the acquisition.  The Company initially reserved 3.4 million shares
     of its Common Stock to be  exchanged  for  exchangeable  shares held by the
     Commstar  selling  shareholders,  1.4 million of which have been  exchanged
     into shares of Common  Stock and 2.0 million are  reserved at December  31,
     1998.  On July 30,  1998,  Commstar  acquired  certain  assets from Western
     Inbound Network,  Inc., an Ontario  corporation,  in consideration  for 0.4
     million  exchangeable  shares.  The Special Preferred Share was returned to
     the Company due to the divestiture of TigerTel in 1999.

     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").  The Class B
     Special  Preferred  Share is  entitled  to a number  of votes  equal to the
     number of  outstanding  shares of Ground  Effects  not owned by the Company
     that can be exchanged for the Company's  common  shares.  The holder of the
     Class B Special Preferred Share is not entitled to receive any dividends or
     participate  in any  distribution  of  assets  to the  stockholders  of the
     Company. When all exchangeable shares of Ground Effects have been exchanged
     or redeemed for shares of the Company's Common Stock, the Special Preferred
     Share will be cancelled.  The Company has the right to call the outstanding
     exchangeable  shares  with  the  occurrence  of  various  events  including
     liquidation of Ground Effects and at the five-year  anniversary date of the
     acquisition.  The Company  has  reserved  1.1 million  shares of its Common
     Stock to be  exchanged  for  exchangeable  shares  held by  Ground  Effects
     selling  shareholders,  1.0  million  and 0.2  million  of which  have been
     exchanged  into shares of common  stock and 0.1 million and 0.9 million are
     reserved as of December 31, 1999 and 1998, respectively.

                                      F-25


<PAGE>

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

     Since the  Preferred  Shares  provide  votes for the  equivalent  number of
     common  shares that may be exchanged and the common shares may be exchanged
     at any time at the holders'  option,  for  purposes of computing  basic and
     diluted  earnings  per share  (Note 14),  the  reserved  common  shares are
     considered to be outstanding for all periods that the Preferred  Shares are
     issued.

     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       750       3.00       August 1997      5 years
      Class P                 520      520       275       3.00    September 1997      5 years
      Class R                 125      125        63       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
                       ------------------------------
                            2,670    2,670     1,434
                       ==============================

<FN>
The  warrants  were issued at  then-current  market value of the common stock in
consideration for investment banking services provided to ADSX. The warrants are
valued at $6.3 million utilizing the following  assumptions in the Black-Scholes
model:
</FN>
</TABLE>
Warrant Series    Dividend Yield    Volatility    Expected Lives  Risk Free Rate
--------------    --------------    ----------    --------------  --------------
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%




                                      F-26



<PAGE>

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

     STOCK OPTION PLAN

     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).  The Company applies APB Opinion No. 25 and
     related  Interpretations in accounting for the Option Plan and the Flexible
     Plan.  Under both Plans,  options are granted at an exercise price equal to
     fair value on the date of grant. Accordingly, no compensation cost has been
     recognized  under either Plan. Had  compensation  cost for either Plan been
     determined  based on the fair  value at the grant  dates for  awards  under
     either Plan,  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>
                                                     1999        1998        1997
                                                   -------------------------------
<S>                                                <C>         <C>         <C>
      NET INCOME AVAILABLE TO COMMON
         STOCKHOLDERS
            As reported                            $5,432      $4,646      $2,268
            Pro forma                              $2,538      $2,408      $1,614

      EARNINGS PER COMMON SHARE - BASIC
            As reported                            $  .12      $  .14      $  .18
            Pro forma                              $  .05      $  .07      $  .13

      EARNINGS PER COMMON SHARE - DILUTED
            As reported                            $  .11      $  .13      $  .15
            Pro forma                              $  .05      $  .07      $  .11
</TABLE>

     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, 1999,  1998, and 1997  respectively,  of which 9.4 million had
     been issued  through  December 31,  1999.  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  (SAR's) or Performance
     Shares may be granted to certain  officers and  employees of the Company is
     five million at December 31, 1999,  of which 4.6 million  options have been
     issued through  December 31, 1999.  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.

                                      F-27


<PAGE>

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

     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 1999,  1998,  and 1997:
     dividend  yield of 0% for the three years;  expected  volatility of 43.41%,
     43.69%,  and 44.03%;  risk-free interest rate of 6.36%, 8.5%, and 8.5%; and
     expected lives of five years for the three years. The weighted-average fair
     value of options  granted was $1.17,  $1.27,  and $1.58 for the years ended
     December 31, 1999, 1998, and 1997, respectively.  A summary of stock option
     activity for 1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                  1999               1998               1997
                                          -----------------   -----------------   ------------------
                                                  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             9,105      $3.55    3,835     $ 4.39    2,180     $ 4.40
      Granted                              4,968       2.07    5,367       2.80    2,487       4.62
      Exercised                           (1,000)      2.53       --         --     (650)      4.25
      Forfeited                             (901)      3.26      (97)      4.79     (182)      4.23
      ----------------------------------------------------------------------------------------------
      Outstanding on December 31          12,172       3.01    9,105       3.55    3,835       4.39
      ----------------------------------------------------------------------------------------------

      Exercisable on December 31           6,663       3.56    2,885       4.48      705       4.44
      ----------------------------------------------------------------------------------------------

      Shares available on December 31
         for options that may be
         granted                           1,178                 450               1,145
      ----------------------------------------------------------------------------------------------
</TABLE>

     The following table summarizes  information about stock options at December
     31, 1999:

<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                   25         5.00        $0.61             --      $  --
      $2.00 to $3.00                6,671         5.37         2.17          1,811       2.17
      $3.01 to $4.00                3,200         4.31         3.53          2,727       3.50
      $4.01 to $5.00                1,471         3.40         4.40          1,336       4.39
      $5.01 to $6.00                  805         3.99         5.52            789       5.53
                                   ------                     -----          -----------------
      $0.01 to $6.00               12,172                     $3.01          6,663      $3.56
                                   ======                     =====          =================
</TABLE>

     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 none have been issued and exercised through December 31,
     1999. Each  participant's  options to purchase shares will be automatically
     exercised for the participant on the exercise dates determined by the Board
     of Directors.

                                      F-28


<PAGE>

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

19.  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.

20.  SUPPLEMENTAL CASH FLOW INFORMATION

     The changes in operating assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                ---------------------------------
                                                    1999        1998        1997
                                                ---------------------------------
<S>                                             <C>         <C>          <C>
      Increase in accounts receivable
         and unbilled receivables               $(19,835)   $ (1,922)    $(3,992)
      Increase in inventories                    (15,624)     (4,148)       (657)
      Increase in prepaid expenses                (3,452)       (422)       (676)
      Increase in deferred tax asset              (1,344)        (89)       (121)
      Increase (decrease) in accounts payable
         and accrued expenses                     27,772      (4,771)     (1,103)
      ---------------------------------------------------------------------------

                                                $(12,483)   $(11,352)    $(6,549)
      ===========================================================================
</TABLE>


     In the years ended  December 31, 1999,  1998 and 1997,  the Company had the
     following noncash investing and financing activities:

<TABLE>
<CAPTION>
                                                     1999        1998        1997
                                                  --------------------------------
<S>                                               <C>         <C>         <C>
      Assets acquired for common stock            $19,027     $25,408     $13,485
      Due from buyer of divested subsidiary
         (Note 2)                                  31,302          --          --
      Due to shareholders of acquired
         subsidiary (Note 2)                       15,000          --          --
      Tax benefit from stock options                1,825          --         454
      Assets acquired for long-term debt and
         capital leases                               662       2,635         614
      Sale of assets for preferred stock               --       3,000          --
      Payment of debt in exchange for common
         stock                                         --          --         521
      Other                                            --         132          --
</TABLE>

                                      F-29


<PAGE>

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

21.  SEGMENT INFORMATION

     In 1998, the Company adopted FAS No. 131. Prior years  information has been
     restated  to present  the  Company's  reportable  segments.  The Company is
     organized  into  six  operating  segments,  whose  principal  products  and
     services are as follows:

<TABLE>
<CAPTION>
       =====================================================================================

         OPERATING SEGMENT                PRINCIPAL PRODUCTS AND SERVICES

       -------------------------------------------------------------------------------------
<S>                                    <C>
         Telecommunications            *  Telephone services and systems
                                       *  Computer telephony integration
                                       *  Interactive voice response
                                       *  Call centers
                                       *  Voice messaging
       -------------------------------------------------------------------------------------
         Network                       *  Computer systems
                                       *  e-Business infrastructure design and deployment
                                       *  Local and wide area networks
                                       *  Application servers
       -------------------------------------------------------------------------------------
         Internet                      *  Electronic commerce
                                       *  ERP solutions
                                       *  Intranet
                                       *  Extranet
                                       *  Wide area networks
       -------------------------------------------------------------------------------------
         Applications                  *  Global positioning systems
                                       *  Field automation
                                       *  Asset management
                                       *  Satellite communication technology
                                       *  Corporate enterprise access
                                       *  Decision support
                                       *  Voice/data technology
       -------------------------------------------------------------------------------------
         Intellesale.com               *  Sales of new and refurbished computer equipment
                                       *  Peripherals
                                       *  Components
                                       *  Business continuity services
                                       *  Consulting
                                       *  Systems integration
                                       *  Transportation
       -------------------------------------------------------------------------------------
         Non-Core                      *  Electrical components
                                       *  Control panels
                                       *  Design engineering
                                       *  Manufacturing engineering
                                       *  Automation systems
                                       *  Vacuum pumps
                                       *  Communications towers

       =====================================================================================
</TABLE>

                                      F-30

<PAGE>

APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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>
                                                                       1999 (IN THOUSANDS)
                                  ---------------------------------------------------------------------------------------------
                                     TELE-
                                  COMMUNI-                        APPLI-  INTELLE-            CORPORATE    ELIMINI-   CONSOLI-
                                   CATIONS   NETWORK  INTERNET   CATIONS  SALE.COM   NON-CORE  OVERHEAD     NATIONS      DATED
                                  ---------------------------------------------------------------------------------------------
<S>                                <C>       <C>        <C>      <C>      <C>         <C>      <C>        <C>         <C>
Net revenue from external
 customers                         $59,225   $27,190    $6,607   $35,780  $142,987    $64,689  $    263   $      --   $336,741
Intersegment net revenue                --        --        --        --     8,000         --        --      (8,000)        --
-------------------------------------------------------------------------------------------------------------------------------

Total revenue                       59,225    27,190     6,607    35,780   150,987     64,689       263      (8,000)   336,741
===============================================================================================================================

Depreciation and amortization        1,547       132        69     2,366       529      1,153       980       2,911      9,687
Interest income                        144        31        --        11       154         40     2,957      (2,721)       616
Interest expense                       622       126        43       461     1,684        438     3,189      (2,721)     3,842
Income before provision for
income taxes, minority interest
and extraordinary loss                 436     1,456       603    (1,475)    5,191       (438)    5,833      (2,459)     9,147

Segment assets                      10,237     6,686     2,900    22,475    61,508     24,054    47,863      53,253    228,976
Expenditures for property and
equipment                            2,177       179       371       533     1,459      1,789       516          --      7,024

<CAPTION>
                                                                       1998 (IN THOUSANDS)
                                  ---------------------------------------------------------------------------------------------
                                     TELE-
                                  COMMUNI-                        APPLI-  INTELLE-            CORPORATE    ELIMINI-   CONSOLI-
                                   CATIONS   NETWORK  INTERNET   CATIONS  SALE.COM   NON-CORE  OVERHEAD     NATIONS      DATED
                                  ---------------------------------------------------------------------------------------------
<S>                                <C>       <C>        <C>      <C>      <C>         <C>      <C>        <C>         <C>
Net revenue from external
 customers                         $33,270   $21,282    $   --   $19,859  $ 60,877    $71,793  $     --   $      --   $207,081
Intersegment net revenue                --        --        --        --     1,949         --        --      (1,949)        --
-------------------------------------------------------------------------------------------------------------------------------

Total revenue                       33,270    21,282        --    19,859    62,826     71,793        --      (1,949)   207,081
===============================================================================================================================

Depreciation and amortization          677        39        --     1,241       251        935       137       1,221      4,501
Interest income                        129        14        --        47        45         83       686        (584)       420
Interest expense                       531       144        --       192       340        559       471        (584)     1,653
Income before provision for
income taxes, minority interest
and extraordinary loss                 723     1,433        --     1,279     4,214      4,434    (3,161)     (1,220)     7,702

Segment assets                      21,989     5,528        --    22,849    13,595     29,274   147,518    (116,637)   124,116
Expenditures for property
and equipment                          231        46        --        73       138        788       674          --      1,950

</TABLE>


                                      F-31


<PAGE>

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

<TABLE>
<CAPTION>
                                                                       1997 (IN THOUSANDS)
                                  ---------------------------------------------------------------------------------------------
                                     TELE-
                                  COMMUNI-                        APPLI-  INTELLE-            CORPORATE    ELIMINI-   CONSOLI-
                                   CATIONS   NETWORK  INTERNET   CATIONS  SALE.COM   NON-CORE  OVERHEAD     NATIONS      DATED
                                  ---------------------------------------------------------------------------------------------
<S>                                <C>           <C>       <C>   <C>       <C>        <C>        <C>      <C>         <C>
Net revenue from external
 customers                         $32,208       $--       $--   $ 9,574   $39,445    $21,932    $   --   $     --    $103,159
Intersegment net revenue                --        --        --        --     2,127         --        --     (2,127)         --
-------------------------------------------------------------------------------------------------------------------------------

Total revenue                       32,208        --        --     9,574    41,572     21,932        --     (2,127)    103,159
===============================================================================================================================

Depreciation and amortization          300        --        --       459       108        277        17        713       1,874
Interest income                         62        --        --        26         1          7       130        (34)        192
Interest expense                       491        --        --       103       152        256         9        (33)        978
Income before provision for
income taxes, minority interest
and extraordinary loss               1,048        --        --     2,082     2,205        725      (544)      (710)      4,806

Segment assets                      12,559        --        --    77,886     8,736     12,667     3,523    (54,089)     61,282
Expenditures for property and
equipment                              118        --        --       141       364        278        15         --         916
</TABLE>


     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>
         1999
         Net revenue                    $263,074           $55,296           $18,371          $336,741
         Total assets                    205,883            11,825            11,268           228,976
         ----------------------------------------------------------------------------------------------

         1998
         Net revenue                    $172,369           $22,017           $12,695          $207,081
         Total assets                     91,458            18,137            14,521           124,116
         ----------------------------------------------------------------------------------------------

         1997
         Net revenue                    $ 96,796           $ 1,381           $ 4,982          $103,159
         Total assets                     56,177             1,254             3,851            61,282
         ----------------------------------------------------------------------------------------------
</TABLE>

                                      F-32


<PAGE>

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

22.  RELATED PARTY TRANSACTIONS

     In connection with the acquisitions  which took place in 1998 and 1997, the
     Company paid a related party, $0.6 million and $0.5 million,  respectively,
     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.

23.  PRO FORMA INFORMATION (UNAUDITED)

     The following  pro forma  consolidated  information  of the Company for the
     years ended  December 31, 1999 and 1998 gives  effect to the  acquisitions,
     disclosed  in Note 2, as if they were  effective  at January  1, 1998.  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,
                                                                            ---------------------------
                                                                                1999              1998
                                                                            ---------------------------
<S>                                                                         <C>               <C>
            Net operating revenue                                           $390,418          $323,891

            Net income                                                         5,989             6,677

            Net income available to common stockholders                        5,989             6,615

            Earnings per common share - basic                                    .13               .19

            Earnings per common share - diluted                                  .12               .18
</TABLE>

                                      F-33



<PAGE>

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


24.  SUMMARIZED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                      FIRST         SECOND          THIRD         FOURTH           FULL
                                                    QUARTER        QUARTER        QUARTER        QUARTER           YEAR
                                                    --------------------------------------------------------------------
<S>                                                 <C>            <C>           <C>            <C>            <C>
     1999
     NET OPERATING REVENUE                          $51,573        $72,955       $107,262       $104,951       $336,741
     GROSS PROFIT                                    18,397         26,283         28,666         21,605         94,951
     NET INCOME (LOSS) AVAILABLE TO
       COMMON STOCKHOLDERS (1)                      (1,645)           341            447          6,289          5,432
     BASIC NET INCOME (LOSS) PER SHARE (2)           (0.04)          0.01           0.01           0.13           0.12
     DILUTED NET INCOME (LOSS) PER SHARE (2)         (0.04)          0.01           0.01           0.12           0.11
     -------------------------------------------------------------------------------------------------------------------

     1998
     Net operating revenue                          $38,784        $53,680       $ 59,044       $ 55,573       $207,081
     Gross profit                                    10,486         17,608         18,949         17,145         64,188
     Net income available to common
       stockholders                                     597          2,351          1,654             44          4,646
     Basic net income per share (2)                   0.03           0.07           0.05             --           0.14
     Diluted net income per share (2)                 0.02           0.07           0.05             --           0.13
     -------------------------------------------------------------------------------------------------------------------

     1997
     Net operating revenue                          $18,127        $24,743       $ 29,195       $ 31,094       $103,159
     Gross profit                                     6,048          8,309         10,369          9,025         33,751
     Net income available to common
       stockholders                                     279            519          1,174            296          2,268
     Basic net income per share (2)                    0.05           0.07           0.09           0.02           0.18
     Diluted net income per share (2)                  0.04           0.06           0.08           0.01           0.15
     -------------------------------------------------------------------------------------------------------------------
<FN>
     (1)  First  quarter net loss  includes one time  restructuring  and unusual
          costs of $2,550.

     (2)  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.
</FN>
</TABLE>



                                      F-34
<PAGE>

<TABLE>
<CAPTION>

Valuation and Qualifying Accounts
(in thousands)
                                                                                 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:
        1999 Allowance for doubtful accounts                     $  990        $  718       $  480        $  490      $ 1,698
        1998 Allowance for doubtful accounts                        675         1,031          262           978          990
        1997 Allowance for doubtful accounts                        101           328          270            24          675

      Inventory:
        1999 Allowance for excess and obsolescence                1,375           220            -           598          997
        1998 Allowance for excess and obsolescence                  896           468           11             -        1,375
        1997 Allowance for excess and obsolescence                    -             -        1,108           212          896

      Investment in preferred stock:
        1999 Valuation reserve                                        -         1,000            -             -        1,000
        1998 Valuation reserve                                        -             -            -             -            -
        1997 Valuation reserve                                        -             -            -             -            -

         Reserves not deducted from assets:
        1999 Warranty reserve                                         -             -          250             -          250
        1998 Warranty reserve                                         -             -            -             -            -
        1997 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 23, 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>
                                                   Chairman of the Board of
                                                     Directors, Chief Executive
            /S/ RICHARD J. SULLIVAN                  Officer and Secretary
------------------------------------------------     (Principal Executive Officer)           April 23, 2001
             (Richard J. Sullivan)


            /S/ MERCEDES WALTON                    President and Chief Operating
------------------------------------------------     Officer (Principal Operating
             (Mercedes Walton)                       Officer)                                April 23, 2001

                                                   Chief Fiancial Officer
            /S/ JEROME C. ARTIGLIERE                 (Principal Financial
------------------------------------------------     Officer and Principal
             (Jerome C. Artigliere)                  Accounting Officer)                     April 23, 2001


            /S/ RICHARD S. FRIEDLAND               Director                                  April 23, 2001
------------------------------------------------
             (Richard S. Friedland)


             /S/ ARTHUR F. NOTERMAN                Director                                  April 23, 2001
------------------------------------------------
              (Arthur F. Noterman)


              /S/ DANIEL E. PENNI                  Director                                  April 23, 2001
------------------------------------------------
               (Daniel E. Penni)


             /S/ ANGELA M. SULLIVAN                Director                                  April 23, 2001
------------------------------------------------
              (Angela M. Sullivan)


            /S/ GARRETT A. SULLIVAN                Director
------------------------------------------------                                             April 23, 2001
             (Garrett A. Sullivan)


            /S/ CONSTANCE K. WEAVER                Director                                  April 23, 2001
------------------------------------------------
             (Constance K. Weaver)

</TABLE>


<PAGE>
LIST OF EXHIBITS
(Item 14 (c))

Exhibit
Number                                 Description
-------                                -----------

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)

4.2      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 333-11294))

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  Applied Digital  Solutions,  Inc. and State
         Street Bank and Trust Company dated as of August 25, 1998 (incorporated
         herein by reference to Exhibit 10.2 to the Company's  Quarterly  Report
         on Form 10-Q filed with the Commission on November 16, 1998 (Commission
         File Number 000-26020))

10.5     First Amendment to Credit Agreement between Applied Digital  Solutions,
         Inc.  and State Street Bank and Trust  Company  dated as of February 4,
         1999  (incorporated  by reference to Exhibit 10.3 the Company's  Annual
         Report  on Form  10-K  filed  with the  Commission  on March  31,  1999
         (Commission File Number 000-26020))

10.6     Amended and Restated Term and Revolving  Credit  Agreement,  dated July
         30, 1999, between the Company and IBM Credit Corporation  (incorporated
         by reference to Exhibit 99.1 to the Company's  Quarterly Report on Form
         10-Q filed with the  Commission  on August 16,  1999  (Commission  File
         Number 000-26020))

10.7     Amendment No. 1 to the Amended and Restated  Term and Revolving  Credit
         Agreement dated as of September 29, 1999 among the Company, and certain
         of its  affiliates,  and IBM  Credit  Corporation,  and  certain of its
         affiliates  (incorporated  herein by  reference  to  Exhibit  16 to the
         Company's  Current  Report on Form 8-K/A filed with the  Commission  on
         October 5, 1999 (Commission File Number 000-26020)



<PAGE>

10.8*    Richard J. Sullivan Employment Agreement**

10.9*    Garrett A. Sullivan Employment Agreement**

10.10*   David A. Loppert Employment Agreement**

16.1     Letter from Rubin, Brown,  Gornstein & Co., LLP ("RBG") concurring with
         the  statements  made by the Company in the Form 8-K report  concerning
         RBG's resignations as the Company's principal accountant  (incorporated
         herein by reference to Exhibit 16 to the  Company's  Current  Report on
         Form 8-K filed with the Commission on November 4, 1998 (Commission File
         Number 000-26020)

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

23.1     Consent of PricewaterhouseCoopers LLP

23.2     Consent of Rubin, Brown, Gornstein & Co. LLP



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

*        Management contract or compensatory plan.

**       Previously filed.