AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2004 AND AS
 -----------------------------------------------------------------------------

          AMENDED ON MARCH 16,2004, MAY 21, 2004 AND SEPTEMBER 24, 2004
          -------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                FORM 10-K/A NO. 3

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2003

                                       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                         (I.R.S. Employer
of incorporation or organization)                     Identification No.)

                      1690 SOUTH CONGRESS AVENUE, SUITE 200
                           DELRAY BEACH, FLORIDA 33445
               (Address of principal executive offices) (Zip code)

                                 (561) 805-8000
                         (Registrant's telephone number,
                              including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

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

At June 30, 2003,  the last business day of our most recently  completed  second
fiscal quarter,  the aggregate market value of the voting and non-voting  common
stock held by non-affiliates,  based upon the closing price of our stock on that
date of $6.00 per share was approximately $210,156,950.

At March 10, 2004,  50,289,399 shares of our common stock were outstanding.  The
market value of our common stock held by  non-affiliates  on March 10, 2004, was
$170,555,604.

Documents Incorporated by Reference: None.


<PAGE>



EXPLANATORY NOTE

The Registrant hereby amends its Annual Report on Form 10-K, as amended, for the
year ended  December  31, 2003,  filed by the  Registrant  on May 21,  2004,  to
retroactively reflect its Medical Systems operations as part of its Discontinued
Operations.


                                       2

<PAGE>

                                Table of Contents

Item    Description                                                         Page

        Part I

1.      Business                                                              4

2.      Properties                                                           39

3.      Legal Proceedings                                                    40

4.      Submission of Matters to a Vote of Security Holders                  41

        Part II

5.      Market Price of the Registrant's Common Equity and Related
        Stockholder Matters                                                  42

6.      Selected Financial Data                                              44

7.      Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                         47

7a.     Quantitative and Qualitative Disclosures About Market Risk           83

8.      Financial Statements and Supplementary Data                          84

9.      Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosures                              84

9a.     Controls and Procedures                                              87

        Part III

10.     Directors and Executive Officers of the Registrant                   88

11.     Executive Compensation                                               92

12.     Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters                                    99

13.     Certain Relationships and Related Transactions                      105

14.     Principal Accountants Services and Fees                             107

        Part IV

15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K    109

        Signatures                                                          110

        Certifications


                                       3

<PAGE>

PART I

ITEM 1. BUSINESS

      See "Risk Factors" beginning on page 28.

      GENERAL

      We are a Missouri  corporation and were  incorporated on May 11, 1993. Our
business has evolved during the past few years.  We grew  significantly  through
acquisitions and since 1996 have completed 51 acquisitions. During the last half
of 2001  and  during  2002,  we sold or  closed  many of the  businesses  we had
acquired  that we believed  did not enhance our strategy of becoming an advanced
technology  development company. These companies were primarily telephone system
providers,  software developers,  software consultants,  networking integrators,
computer hardware  suppliers or were engaged in other businesses or had customer
bases that we  believed  did not  promote or  complement  our  current  business
strategy.  As of December 31, 2003,  our  business  operations  consisted of the
operations of five wholly-owned subsidiaries,  which we collectively refer to as
the Advanced Technology segment,  and two majority-owned  subsidiaries,  Digital
Angel  Corporation  (AMEX:DOC),  and InfoTech  USA,  Inc.  (OTC:IFTH)  (formerly
SysComm  International   Corporation).   As  of  December  31,  2003,  we  owned
approximately 66.9% of Digital Angel Corporation and 52.5% of InfoTech USA, Inc

      Historically we have suffered losses and have not generated  positive cash
flows from operations.  Excluding the effects of a gain on the extinguishment of
debt  of  $70.1  million,  we  incurred  a  consolidated  loss  from  continuing
operations  of $64.1  million for the year ended  December 31, 2003. We incurred
consolidated  losses  from  continuing  operations  of $89.5  million and $188.6
million, respectively, for the years ended December 31, 2002 and 2001, and as of
December  31,  2003,  we had an  accumulated  deficit  of  $413.9  million.  Our
consolidated  operating activities used cash of $11.4 million,  $3.9 million and
$18.0  million  during  2003,  2002  and  2001,   respectively.   Digital  Angel
Corporation has suffered  losses and has not generated  positive cash flows from
operations.  Digital Angel  Corporation  incurred  losses during 2003,  2002 and
2001, which are presented below. In addition, its operating activities used cash
of $4.7  million,  $2.7  million and $3.2 million  during  2003,  2002 and 2001,
respectively.

      The reduced  settlement  payment of our debt obligations to IBM Credit LLC
("IBM  Credit"),  the  conversion  to equity of our  obligations  under our 8.5%
Convertible  Exchangeable  Debentures  (the  "Debentures"),  and the sale of 3.0
million  shares of our common stock under our 3.0 million  share  offering  have
been  major  factors  mitigating  concerns  that  existed  about our  ability to
continue as a going  concern.  Our  profitability  and liquidity  depend on many
factors  including the success of our marketing  programs,  the  maintenance and
reduction  of  expenses,  and our ability to  successfully  develop and bring to
market our new products and technologies.  We have established a management plan
intending to guide us in achieving  profitability  and positive  cash flows over
the twelve months ending December 31, 2003,  however,  no assurance can be given
that such plan will be realized.  The major components of our plan are discussed
below under  "Management's  Discussion  and Analysis of Financial  Condition and
Results  of  Operations  -  Liquidity  and  Capital  Resources  from  Continuing
Operations."


                                       4
<PAGE>


      BUSINESS SEGMENTS

      As a result of (a) the merger of our 97% owned  subsidiary,  Digital Angel
Corporation,  which we  referred  to herein as  pre-merger  Digital  Angel,  and
Medical Advisory  Systems,  Inc.,  referred to herein as MAS, on March 27, 2002,
(b) the significant  restructuring of our business during 2002 and 2001, and (c)
our  emergence  as  an  advanced   technology   development   company,  we  have
re-evaluated  and realigned our  reporting  segments.  Since January 1, 2002, we
operate  in  three  business  segments:   Advanced  Technology,   Digital  Angel
Corporation and InfoTech USA, Inc., formerly SysComm International  Corporation.
Business units that were part of our continuing  operations and that were closed
or   sold   during   2002   and   2001   are   reported   as  All   Other.   The
"Corporate/Eliminations"   category   includes  all  amounts   recognized   upon
consolidation  of our  subsidiaries  such  as the  elimination  of  intersegment
revenues,  expenses,  assets  and  liabilities.   "Corporate/Eliminations"  also
includes certain  interest expense and other expenses  associated with corporate
activities and functions.

      The  percentage of our revenues  derived from each of our segments  during
2003, 2002 and 2001 was as follows:

                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------

                                                   2003        2002        2001
                                                  -----       -----       -----
REVENUE BY SEGMENT:

Advanced Technology                                48.0%       42.6%       28.5%
Digital Angel Corporation                          36.5        32.9        22.9
InfoTech USA, Inc.                                 15.5        23.1        21.9
All Other                                            --         1.4        26.4
"Corporate/Eliminations"                             --          --         0.3
                                                  -----       -----       -----
Total                                             100.0%      100.0%      100.0%
                                                  =====       =====       =====


      Our sources of revenue  consist of sales of products and services from our
three operating segments.  Our significant sources of revenue for the year ended
December 31, 2003 were as follows:

<TABLE>
<CAPTION>
SOURCES OF REVENUE:                                                                           PERCENTAGE OF
                                                                                              TOTAL REVENUE
                                                                                              -------------
<S>                                                                                         <C>
Sales of voice, data and video telecommunications networks to government agencies from
  our Advanced Technology segment                                                                       39.9%

Visual  identification  tags  and  implantable  microchips  for the  companion  animal,
  livestock,  laboratory  animal,  fish and  wildlife  markets  from our Digital  Angel
  Corporation segment                                                                                   25.8%

Sales of IT hardware and services from our InfoTech USA, Inc. segment                                   15.5%

GPS  enabled  search and rescue  equipment,  intelligent  communications  products  and
  services for telemetry,  mobile data and radio  communications from our Digital Angel
  Corporation segment                                                                                   11.1%

Other products and services                                                                              7.7%
                                                                                            ------------------
Total                                                                                                  100.0%
                                                                                            ==================
</TABLE>


                                       5
<PAGE>


      Income (loss) from continuing  operations before taxes, minority interest,
losses attributable to capital  transactions of subsidiary and equity in loss of
affiliate  from each of our segments  during 2003,  2002 and 2001 was as follows
(we  evaluate  performance  based on  stand-alone  segment  operating  income as
presented below):

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

                                                       2003          2002        2001
                                                       ----          ----        ----
<S>                                                  <C>         <C>        <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
  TAXES, MINORITY INTEREST, LOSSES ATTRIBUTABLE TO
  CAPITAL TRANSACTIONS OF SUBSIDIARY AND EQUITY IN
  LOSS OF AFFILIATE BY SEGMENT:                                    (in thousands)
                                                               --------------

Advanced Technology                                    $(108)       $(786)   $(41,493)
Digital Angel Corporation (1) (2)                     (6,271)     (45,139)    (16,262)
InfoTech USA, Inc. (3)                                (3,052)        (422)     (1,322)
All Other                                                298         (320)    (71,636)
"Corporate/Eliminations" (2) (4)                      19,441      (49,310)    (37,428)
                                                  ------------ ------------ -----------
Total                                                $10,308     $(95,977)  $(168,141)
                                                  ============ ============ ===========
</TABLE>

(1)   For  Digital  Angel  Corporation,  the loss for 2002  includes  a goodwill
      impairment  charge of $31.5  million and an impairment  charge  related to
      certain software of $6.4 million

(2)   For Digital Angel  Corporation,  the amount for 2002 excludes $1.8 million
      of interest expense associated with our previous  obligation to IBM Credit
      and  $18.7  million  of  non-cash  compensation  expense  associated  with
      pre-merger  Digital Angel  options,  which were  converted into options to
      acquire MAS stock, both of which have been reflected as additional expense
      in the separate financial statements of Digital Angel Corporation included
      in its Form 10-K dated  December 31, 2003.  These charges are reflected in
      "Corporate/Eliminations" for 2002.

(3)   For InfoTech USA, Inc.,  the loss for 2003 includes a goodwill  impairment
      charge of $2.2 million.

(4)   For "Corporate/Eliminations",  the amount for 2003 includes extinguishment
      of debt of $70.1  million,  as a result of the repayment in full of all of
      our  obligations  to IBM  Credit on June 30,  2003,  and $17.9  million of
      non-cash  compensation  expense  resulting from severance  agreements with
      certain former officers and directors.

      Advanced Technology Products

      Our  current  objective  is to become an advanced  technology  development
company  that  focuses  on  a  range  of  life  enhancing,   personal  safeguard
technologies,  early  warning  alert  systems,  miniaturized  power  sources and
security  monitoring  systems  combined with the  comprehensive  data management
services  required  to  support  them.  We have five life  enhancing  technology
products in various  stages of  development.  They are Digital  AngelTM,  Thermo
LifeTM,  VeriChipTM,  Bio-ThermoTM and Personal  Locating Device ("PLD").  As of
December 31,  2003,  we have  reported no revenues  from the sales of our Thermo
Life and PLD  products  and we have had  minimal  sales  of our  Digital  Angel,
Bio-Thermo  And  VeriChip  products.  These  products  are in various  stages of
development as follows:

      o     Digital  AngelTM  is  the  integration  and   miniaturization   into
            marketable products of three technologies:  wireless  communications
            (such as cellular),  sensors  (including  bio-sensors)  and position
            location  technology  (including global positioning  systems ("GPS")
            and  other  systems).  The  development  of  the  Digital  Angel  TM
            technology   began  in  April  1998.  The  first  Digital  Angel  TM
            technology  product, a biosensor chip linked to GPS in a watch/pager
            device,  was marketed from  November  2001 to the fourth  quarter of
            2002.  Since  then  the  Digital  Angel  TM  technology  been in the
            development  stage and we are uncertain when this technology will be
            incorporated into our products;

      o     Thermo  LifeTM is a  thermoelectric  generator.  During  the  fourth
            quarter  of  2003,  we  began  sending  samples  of  Thermo  Life to
            potential  customers.  If  and  when,  an  order  is  received,  the
            manufacturing will be original equipment manufacturing;

      o     VeriChipTM  is a  human  implantable  radio  frequency  verification
            microchip. VeriChip is currently being sold and shipped worldwide;


                                       6
<PAGE>

      o     Bio-ThermoTM is a temperature-sensing  implantable microchip for use
            in pets,  livestock and other  animals.  Bio-Thermo was developed by
            Digital Angel Corporation and is currently being sold and shipped by
            them worldwide; and

      o     PLD is an implantable GPS location  device.  The first PLD prototype
            was completed in December 2002. Since the first quarter of 2003, our
            research group has worked on  minimization  of this product  through
            alternative location technology such as wireless triangulation. This
            product currently remains in the development stage.

      Each of these technologies is more fully discussed below beginning on page
16.

      Advanced Technology Segment

      The business units comprising our Advanced  Technology  segment  represent
those  business  units that we believe  will  provide the  necessary  synergies,
support and infrastructure to allow us to develop,  promote and  fully-integrate
our technology  products and services.  This segment  specializes in voice, data
and video  telecommunications  networks,  software,  and in 2002 and 2001, other
networking  products and  services.  In  addition,  the  VeriChipTM  product has
multiple applications in security,  personal identification,  safety, healthcare
information  (subject to FDA approval) and more.  This  segment's  customer base
includes  governmental  agencies,   commercial   operations,   distributors  and
consumers.

      As of December 31, 2003,  2002 and 2001,  revenues  from this segment were
$44.6 million, $41.9 million and $44.6 million,  respectively, and accounted for
48.0%,  42.6% and 28.5%,  respectively,  of our total  revenues.  The  principal
products and services in this segment are as follows:

            o     Voice, data and video telecommunications networks;

            o     Call center and customer relationship management software;

            o     Networking products and services (in 2002 and 2001);

            o     Website design and Internet access;

            o     Miniaturized implantable verification chip (VeriChipTM);

            o     Miniaturized power generator (Thermo LifeTM); and

            o     PLD.


      Customers

      Our Advanced  Technology  segment delivers  products and services across a
multitude   of   industries,   including   government,   insurance,   utilities,
communications  and high tech. Some of this segment's  largest customers include
several  agencies  of  the  United  States  federal  government,  including  the
Departments   of   Defense,   Agriculture,    Justice,   the   Social   Security
Administration, the Veterans Administration and the United States Postal Service
and the Public  Service  Electric  & Gas of New  Jersey.  Other  than  customary
payment terms, we do not offer any financing to our customers.

      Approximately  $37.1 million, or 83.2%, $31.3 million, or 74.7%, and $27.4
million, or 61.5%, of our Advanced Technology  segment's revenues for 2003, 2002
and 2001, respectively,  were generated by our wholly-owned subsidiary, Computer
Equity  Corporation.  No other products or services  provided more than 10.0% of
the  revenues  for this segment  during 2003 and 2002.  Networking  products and
services  provided  approximately  11.0%, and customer  relationship  management
software provided  approximately  11.3% of the revenues from this segment during
2001. No other  products or services  provided more than 10% of revenues  during
2001.


                                       7
<PAGE>

      Computer Equity Corporation is a telecommunications network integrator and
a supplier to the federal government of telephone systems, data networks, video,
cable and wire  infrastructure  and  wireless  telecommunications  products  and
services.

      Approximately  99.3%,  99.1% and 77.7% of  Computer  Equity  Corporation's
revenues during 2003, 2002 and 2001, respectively,  were generated through sales
to various  agencies of the United States federal  government.  Most of Computer
Equity  Corporation's  business  was being  performed  under a contract  vehicle
entitled  Wire and  Cable  Service  ("WACS")  that was  managed  by the  General
Services  Administration  ("GSA").  WACS allowed Computer Equity  Corporation to
provide government  agencies with equipment and services for campus and building
communications  networks and related  infrastructure  without the need to follow
the full procurement process for a new contract. Upon the expiration of WACS, no
new WACS tasks can be started;  however,  tasks started prior to the  expiration
date can be  completed.  Due to the  nature of the  government's  budget  cycle,
projects  funded in 2003 with fiscal year 2002 and 2003 funds will be  continued
with an expected completion date by the end of 2004.

      In January  2003,  the WACS  contract  was replaced  with the  CONNECTIONS
contract.  Computer Equity  Corporation's  wholly owned  subsidiary,  Government
Telecommunications  Inc.  ("GTI"),  was one of seventeen  companies  awarded the
federal  government's  CONNECTIONS  contract.  The  CONNECTIONS  contract  has a
three-year base term and five successive  one-year renewal options.  The renewal
options are at the  discretion of the  government.  The government may terminate
the  CONNECTIONS  contract with or without cause.  The  CONNECTIONS  contract is
similar to the WACS contract in that it allows  Computer  Equity  Corporation to
provide government  agencies with equipment and services for campus and building
communications  networks and related  infrastructure  without the need to follow
the full procurement process for a new contract.

      As of December 31, 2003,  2002, and 2001, we have reported revenue of $0.5
million,  $0.0  million and $0.0  million,  respectively,  from the sales of our
VeriChip  product  and no  revenue  from the  sales of our  Thermo  Life and PLD
products.

      VeriChip   Corporation's   contracts  are  generally  five-year  exclusive
distribution agreements.  Upon signing an agreement with VeriChip Corporation, a
distributor  is appointed as VeriChip  Corporation's  exclusive  distributor  of
products in a given  territory.  This provides the  distributor  with  exclusive
rights to market, promote, sell and provide services for VeriChip. A distributor
must  achieve   certain   sales  quotas  in  order  to  maintain  its  exclusive
distribution  rights.  A  distributor,  with or without  cause,  may terminate a
contract   without   penalty  upon   thirty-days   written  notice  to  VeriChip
Corporation.

      Operating Strategy

      The principal  components of our Advanced  Technology  segment's operating
strategy  are to (a)  increase the volume of  government  contract  business and
leverage  government  contacts  to  enhance  sales  of our  advanced  technology
products,  (b)  develop new lines of  business  in  technologies  related to our
Computer  Equity  Corporation   business  including  access  control  and  video
surveillance  systems  and  security  networks,  (c) develop the markets for our
VeriChip,  Thermo Life and PLD products throughout the world, and (d) develop or
find  one or two new  advanced  technology  products  each  year.  Our  Advanced
Technology segment's strategy for retaining existing customers is to continue to
provide expertise in (a) project management, (b) negotiation of deliverables and
(c) development of proposals.  The segment also plans to develop and upgrade our
proprietary  software in order to meets our customers'  needs. The segment plans
to  continue to focus on  excellence  in  customer  service and to leverage  our
current business  relationships in order to retain our existing customers and to
generate new business.


                                       8
<PAGE>


      Competitors

      Our Advanced  Technology  segment's  competitors  include Booz Allen, EDS,
Mantech,  Verizon, SBC, Engineering and Professional  Services,  Inc., CC-ops of
California,  American  Systems  Corporation,  Nortel,  Genesys,  Avaya,  Aestea,
Metrix, People Soft, Cap Gemini,  Datalan Corp. and Plural, Inc. Computer Equity
Corporation  holds  less  than one  percent  of the  federal  telecommunications
contract market share.

      VeriChip   Corporation   enjoys  a  first-to-market   advantage  over  its
competitors,  as well as  licensing  rights  to  patented  technology.  VeriChip
Corporation was the first to define the various  applications of the implantable
radio frequency  identification  device ("RFID") technology in humans.  VeriChip
Corporation's  competitors  include  Texas  Instruments,  HID and  GAITS.  Texas
Instruments, HID and GAITS have greater capital resources, reputation and market
presence than VeriChip  Corporation;  however,  we believe that the intellectual
property  rights to the  implantable  human  microchips  we license from Digital
Angel Corporation may give us an advantage over our competitors.

      We believe our business to be highly  competitive,  and we expect that the
competitive  pressures we face will not diminish.  Many of our competitors  have
greater financial, technological, marketing and other resources than we do.

      Patents

      A  German  research  company,  Dunnschictht-Thermogenerator-Systemen  GmbH
("DTS"),  developed our Thermo Life product.  We acquired certain assets of DTS,
including its intellectual property in June 2003. In May 2003, we filed a patent
application in the United States in connection with our Thermo Life product. Our
goal is to secure the proprietary rights to the Thermo Life technology.  Digital
Angel  Corporation  currently  owns our  VeriChip  technology.  U.S.  Patent No.
5,211,129 is jointly owned by Digital Angel  Corporation and Hughes Aircraft and
was issued on May 18,  1993.  U.S.  Patent No.  6,400,338  was issued on June 4,
2002,  to  Destron  Fearing  Corporation  and  is now  owned  by  Digital  Angel
Corporation.  Provided all maintenance fees are paid,  Patent No. 5,211,129 will
expire on May 17,  2010,  and Patent No.  6,400,338  will  expire on January 11,
2020. VeriChip  Corporation has acquired the rights to use this technology under
an exclusive product and technology  license from Digital Angel Corporation that
will last through March 2013. Thermo Life and VeriChip are both trademarks,  and
we have applied to the United  States  Patent & Trademark  Office  ("USPTO") for
their registration.  In addition,  certain of the software products that we sell
are proprietary software, which we have developed in-house and for which we have
copyright protection. We believe that our intellectual property assets including
patents,  trademarks,  copyrights  and  trade  secrets  provide  something  of a
competitive  advantage  to us. The  intellectual  property  rights  support  our
commercial products and recognize our innovation.  In large part, the success of
the Advanced Technology segment is dependent on our proprietary  information and
technology. There is no guarantee that the steps taken by us will be adequate to
deter  misappropriation of our proprietary rights or that third parties will not
develop  substantially  similar products or technologies.  However, we intend to
seek patent  protection  when  appropriate  to maintain a competitive  edge, and
otherwise rely on (a)  regulatory-related  exclusivity to protect certain of our
products  and  technologies;  and (b) product  superiority  in order to maintain
market share.

      Digital Angel Corporation Segment

      Our Digital  Angel  Corporation  segment  develops and deploys  sensor and
communications  technologies  that  enable  rapid and  accurate  identification,
location  tracking,  and condition  monitoring of animals and high-value  mobile
assets.  Applications  for  Digital  Angel  Corporation's  products  include the
identification  and monitoring of pets, fish and livestock  through its patented
visual  identification  tags and implantable  microchips,  location tracking and
message  monitoring of vehicles and aircraft in remote locations through systems
that integrate GPS and geosynchronous satellite  communications,  and monitoring
of asset conditions such as temperature and movement, through advanced miniature
sensors.


                                       9
<PAGE>

      Before  March 27,  2002,  the business of Digital  Angel  Corporation  was
operated in four segments:  Animal Tracking,  Digital Angel Technology,  Digital
Angel Delivery System, and Radio  Communications and Other. With the acquisition
of MAS on March 27, 2002,  Digital Angel Corporation  re-organized into four new
segments:   Animal  Applications   (formerly  Animal  Tracking),   Wireless  and
Monitoring (a combination of the former Digital Angel Technology and the Digital
Angel Delivery System segments),  GPS and Radio  Communications  (formerly Radio
Communications and Other),  and Medical Systems (formerly  Physician Call Center
and Other).  With the acquisition on January 22, 2004 of OuterLink  Corporation,
referred to as  OuterLink,  Digital  Angel  Corporation  further  realigned  its
segments and effective  January 1, 2004, it began  operating in three  segments:
Animal  Applications,  GPS and Radio Communications and Medical Systems. The new
GPS  and  Radio   Communications   segment   consists   of  the  GPS  and  Radio
Communications, Wireless and Monitoring and OuterLink divisions. The acquisition
of  OuterLink  is more fully  described  on page 21. We refer to  Digital  Angel
Corporation's operations in terms of its divisions: Animal Application,  GPS and
Radio  Communications,  Wireless and Monitoring,  OuterLink and Medical Systems.
The  business  assets  associated  with the Medical  Systems  operations,  which
represented the business activity of MAS, were sold during the second quarter of
2004, and accordingly,  the financial condition,  results of operations and cash
flows of Medical  Systems have been  restated  and are now  presented as part of
Discontinued Operations.

      As of December 31, 2003,  2002 and 2001,  revenues  from this segment were
$33.9 million, $32.4 million and $35.9 million,  respectively, and accounted for
36.5%,  32.9% and 22.9%,  respectively,  of our total  revenues.  The  principal
products and services in this segment by division are as follows:

      Our Animal  Applications  division develops,  manufactures,  and markets a
broad line of  electronic  and visual  identification  devices for the companion
animal,  livestock,  laboratory animal, fish and wildlife markets worldwide. The
tracking  of  cattle  and hogs are  crucial  both for asset  management  and for
disease  control and food safety.  The  principal  technologies  employed by the
Animal Applications division are electronic ear tags and implantable  microchips
that use radio  frequency  transmission.  The Animal  Applications  division has
marketed visual identification products for livestock since the 1940s. Livestock
producers  are  currently  evaluating  electronic  identification  products  for
livestock.  Currently,  sales of visual products represent  virtually all of the
sales  to  livestock   producers.   The  Animal   Applications   division's  pet
identification  system  involves the insertion of a microchip  with  identifying
information in the animal.  Readers at animal shelters,  veterinary  clinics and
other locations can determine the animal's owner and other information. This pet
identification system is marketed in the United States by Schering-Plough Animal
Health  Corporation  under the brand name "Home  Again(TM)," in Europe by Merial
Pharmaceutical,  and  in  Japan  by  Dainippon  Pharmaceutical.   Digital  Angel
Corporation  has  distribution  agreements  with a  variety  of other  companies
outside  the  United  States  to  market  its  products.  It has an  established
infrastructure  with readers placed in  approximately  seventy  thousand  global
animal shelters and veterinary  clinics.  Over 2.0 million  companion animals in
the  United  States  have  been  enrolled  in the  database,  and more than five
thousand pet  recoveries  occur in the United  States each month.  Digital Angel
Corporation's Bio-Thermo TM product is included in this division.

      Our  Wireless  and  Monitoring  division  develops  and  markets  advanced
technology  to gather  location and local sensory data and to  communicate  that
data to an  operations  center.  This  technology,  which is  referred to as the
"Digital  Angel(TM)  technology," is the integration  and  miniaturization  into
marketable  products of three  technologies:  wireless  communications  (such as
cellular), sensors (including bio-sensors) and position location technology (GPS
and other  systems).  The  Digital  AngelTM  technology  continues  to be in the
development stage and we are uncertain when this technology will be incorporated
into our products.  The first Digital AngelTM  technology  product,  a biosensor
chip linked to GPS in a watch/pager  device,  was marketed from November 2001 to
the fourth quarter of 2002.  This  technology has not generated any  significant
revenue through December 31, 2003.


                                       10
<PAGE>

      Our  GPS  and  Radio  Communications  division  consists  of  the  design,
manufacture  and support of secure GPS enabled  search and rescue  equipment and
intelligent communications products and services for telemetry,  mobile data and
radio  communications  applications  serving commercial and military markets. In
addition, it designs,  manufactures and distributes  intrinsically safe sounders
(horn alarms) for industrial use and other electronic components.

      Customers

      Sales of the Animal  Applications  division's products were $23.9 million,
$21.0 million and $22.2 million,  respectively, and represented 70.6%, 64.7% and
60.3% of the  total  revenue  from  this  segment  during  2003,  2002 and 2001,
respectively. Sales of the GPS and Radio Communications division's products were
$10.4 million,  $10.0 million and $11.1 million,  respectively,  and represented
30.5%,  30.9% and 30.2% of this segment's  revenue  during 2003,  2002 and 2001,
respectively. During 2003, the top six customers, Schering-Plough, United States
Army Corps of Engineers,  Biomark,  Inc.,  United  States  Department of Energy,
Pacific  States  Marine  and  Merial   accounted  for  44.0%  of  Digital  Angel
Corporation's  revenues,  one of which  accounted  for  12.8%  of the  segment's
revenues. During 2002, the top seven customers,  Schering-Plough,  US Army Corps
of Engineers,  Biomark, Inc., Pacific States Marine, Merial, Animal Care Limited
and San  Bernardino  County  accounted for 39.2% of Digital Angel  Corporation's
revenues;  however,  no  single  customer  accounted  for  more  than 10% of its
revenues. During 2001, the top four customers,  Schering Plough, Merial, Pacific
States  Marine and the US Army Corps of  Engineers  accounted  for 30.4% of this
segment's revenues, one of which accounted for 10.3% of the segment's revenues.

      Digital  Angel   Corporation  has  multi-year   supply  and   distribution
agreements  with  its  customers,  which  have  varying  expiration  dates.  The
remaining  terms on the agreements  are between one and three years.  The supply
and distribution  agreements  describe products,  delivery and payment terms and
distribution territories.  The agreements generally do not have minimum purchase
requirements and can be terminated without penalty.

      As of December 31, 2003,  we have  reported  minimal  sales of our Digital
AngelTM and Bio-ThermoTM products.

      Operating Strategy

      The  principal  components  of our  Digital  Angel  Corporation  segment's
operating  strategy  are to focus on (a) animal  identification  products in the
growing livestock,  fish and wildlife  industries;  (b) food source traceability
and safety  tracking  systems;  (c)  growing  our  high-value  asset  management
business;  and (d) developing the Digital AngelTM  technology.  Our strategy for
retaining  existing  customers is to continue to develop new  products  based on
customers'  needs.  This segment will continue to provide  product  offerings to
identified  market  needs  including,  but not  limited  to,  Country  of Origin
Labeling (COOL) and food traceability  safety. This segment plans to rely on its
historical  arrangements  with  customers  and  past  performance,  as  well  as
continuous commitment to provide the services and products our customers require
to retain existing customers and to generate additional customers.


                                       11
<PAGE>


      Competitors

      The animal  identification  market is highly  competitive.  The  principal
competitors in the visual identification market are All Flex USA, Inc. and Y-Tex
Corporation  and the  principal  competitors  in the  electronic  identification
market  are  AllFlex,  USA,  Inc.,  Datamars  SA and  Avid  Plc.  Digital  Angel
Corporation  believes that its  intellectual  property rights and reputation for
high quality products are competitive advantages in this market.

      The  principal  competitor  for the  Digital  AngelTM  product  is Wherify
Wireless,  Inc. Other  competitors in this market include  National  Scientific,
Child Locate,  Pomals,  Inc.,  ACR  Electronics,  Inc.,  Airbiquity and TCS. Our
Digital  Angel  product is not  currently  available  for sale.  If and when the
Digital  Angel  product  is  available  for  sale,   Digital  Angel  Corporation
anticipates  its product  advantages will include:  (a) the device's  ability to
report the  condition  of the person  being  monitored  (subject  to any and all
required regulatory  approvals);  (b) its capability to work on all three global
satellite  messaging  frequencies being used throughout the world today; and (c)
its ability to use interactive voice response to monitor the wearer's  condition
and location.

      The principal  competitors for the GPS and Radio  Communications  division
are Boeing North American  Inc.,  General  Dynamics  Decision  Systems,  Tadiran
Spectralink  Ltd.,  Becker  Avionic  Systems,  and ACR  Electronics,  Inc.  This
division's  competitive  advantages  are:  (a)  that  it was  one  of the  first
companies to market GPS in search and rescue beacons;  (b) its search and rescue
beacons are currently being used in over forty  countries;  and (c) the barriers
to entry in this  market  place  are high due to the  technical  demands  of its
customers.

      Patents

      The Digital  Angel  product is covered  under U.S.  Patent No.  5,629,678,
which was acquired by pre-merger Digital Angel in 1999 and is under an exclusive
license to Digital Angel  Corporation.  Provided all maintenance  fees are paid,
this patent will extend until  January 10,  2015.  Additionally,  Digital  Angel
Corporation  has  filed  for  International   Patent   protection,   and  Patent
Application EP1330802 is currently pending in the European Patent Office for all
European Union member  countries.  U.S. Patent No. 6,400,338 and U.S. Patent No.
5,211,129 cover Digital Angel Corporation's  implantable  microchip  technology,
including  Bio-Thermo.  This  technology  also has patent  protection in Canada,
Brazil,  China,  Europe,  Australia  and various other  countries.  Furthermore,
Digital Angel Corporation's  visual  identification tags are covered under U. S.
Patent No.  4,741,117,  which is owned by  Digital  Angel  Corporation  and will
expire on October 23, 2006.  In addition,  there are related  patents  issued in
Canada, Brazil, Europe,  Australia and various other countries.  Patents for the
implantable  microchip  and ear tag were  filed on  various  dates over the past
fourteen  years.  The U.S.  patents  have a term of twenty years from the filing
date or seventeen years from the issue date depending upon when they were filed.
Digital  Angel  is a  registered  trademark  and an  application  for  trademark
registration  on  Bio-Thermo  is  pending.  We believe  that these  patents  and
trademarks  in the  aggregate  constitute  a  valuable  asset to  Digital  Angel
Corporation,  and that they offer  something of a competitive  advantage  and/or
barriers  to  entry in the  Animal  Applications  and  Wireless  and  Monitoring
divisions'  markets.  The  intellectual  property  rights support  Digital Angel
Corporation's  commercial products and recognize its innovation.  In large part,
the  success  of the  Digital  Angel  Corporation  segment is  dependent  on its
proprietary  information  and  technology.  There is no guarantee that the steps
taken by Digital Angel Corporation will be adequate to deter misappropriation of
its  proprietary  rights or that third  parties  will not develop  substantially
similar products or technologies.


                                       12
<PAGE>

      Ownership of Digital Angel Corporation

      As of December 31, 2003 and March 10, 2004, we owned  approximately  66.9%
and 68.5%,  respectively,  of the  outstanding  common  stock of  Digital  Angel
Corporation.  Digital Angel Corporation has outstanding options and warrants and
it has issued debt and preferred stock, which are convertible into shares of its
common  stock.  If all of the  outstanding  options and  warrants and all of the
convertible debt and preferred stock were converted into shares of Digital Angel
Corporation's  common stock,  our ownership would be less than 50%. We desire to
maintain a controlling interest in Digital Angel Corporation,  and therefore, in
the future,  we may enter into share  exchange  agreements  with  Digital  Angel
Corporation,  or we may elect to buy back a portion of the outstanding shares of
Digital Angel Corporation's common stock that we do not currently own.

      InfoTech USA, Inc. Segment (formerly SysComm International)

      Our InfoTech USA, Inc.  segment is a full service  provider of Information
Technology,  or IT,  services and  products.  It  specializes  in tailoring  its
approach to the individual  customer's needs. During 2003 and 2002, this segment
continued its strategy of moving away from a product-driven  systems integration
business model to a customer-oriented  IT strategy-based  business model. It has
further  developed  its  deliverable  IT  products  and  services  by adding new
consulting  and  service  offerings,  and  increasing  the  number of  strategic
alliances with outside  technical service firms and manufacturers of high-end IT
products.

      As of December 31, 2003,  2002 and 2001,  revenues  from this segment were
$14.5  million,  $22.7 million and $34.2 million and accounted for 15.5%,  23.1%
and 21.9%,  respectively,  of our total  revenues.  The  principal  products and
services in this segment were  computer  hardware  and  computer  services.  The
majority of InfoTech USA,  Inc.'s revenue during 2003, 2002 and 2001 was derived
from sales of computer hardware,  which provided  approximately 80.3%, 88.3% and
89.2% of InfoTech  USA,  Inc.'s  revenue in 2003,  2002 and 2001,  respectively.
InfoTech's USA, Inc.'s services consist of IT consulting,  installation, project
management,  design and deployment,  computer maintenance and other professional
services.  No single  service  accounted for more than 10% of  InfoTech's  total
revenue during 2003, 2002 and 2001.

      Customers

      A significant  percentage of InfoTech USA,  Inc.'s revenue is derived from
sales  to  customers  in  educational  institutions,  the  legal  and  financial
community, medical facilities,  museums and New York City agencies. Its customer
base also includes retailers, manufacturers and distributors. During 2003, three
customers,  GAF Material  Corporation,  Hackensack University Medical Center and
Centenary College,  accounted for 15%, 12% and 11% of its consolidated revenues,
respectively.  During 2002, five customers, Deutsche Bank, Hackensack University
Medical  Center,  Liberty  Mutual,  Morgan  Stanley and  Polytechnic  University
accounted  for 23%,  22%,  11%, 11% and 11% of InfoTech  USA,  Inc.'s  revenues,
respectively.  During 2001, two  customers,  Liberty Mutual and Mass Mutual Life
Insurance   accounted  for  40%  and  31%  of  InfoTech  USA,  Inc.'s  revenues,
respectively.

      The  majority of InfoTech  USA,  Inc.'s  revenue is from  purchase  orders
received from customers for products and/or services that are fulfilled within a
few weeks time.  Of InfoTech USA,  Inc.'s total revenue for 2003,  approximately
$1.6 million,  or 11.3%,  was related to contracts  sales.  All of InfoTech USA,
Inc.'s  contracts are hardware  maintenance  contracts that generally last for a
period of one year and are  cancelable by either party  without  penalty upon 90
days written notice.


                                       13
<PAGE>

      InfoTech USA, Inc. competes in one of the world's largest IT markets,  the
New York City  metropolitan  area. Its total market share is less than 1% and it
focuses primarily on small to medium sized businesses in a few vertical markets.
We  believe  that its small  size and its focus on few  vertical  markets  gives
InfoTech,  USA, Inc. a  competitive  advantage in three ways: 1) because it is a
relatively  small company,  it is more easily able to adapt to the needs of each
of its customers and is able to tailor its product and service delivery in a way
that serves them best; 2) being relatively small also enables InfoTech USA, Inc.
to more easily foster close long-term  relationships  with its customers  across
all levels and across all departments; and 3) focusing on a few vertical markets
gives InfoTech USA, Inc. an advantage over its competition because it has worked
in certain industries, such as education, banking and finance and insurance, for
years  and it  believes  that it  understands  the  needs  of  those  particular
industries  better than its  competition.  InfoTech  USA,  Inc. has developed an
excellent  reputation in its vertical markets and this provides it with referral
business and strong,  relevant  reference  accounts when pursuing new clients in
those industries.

      Operating Strategy

      The InfoTech USA, Inc.  segment  primarily  targets small to  medium-sized
businesses.  Its  operating  strategy  is  to  continue  to  focus  on  building
relationships  with its larger customers and searching for new  opportunities in
the Fortune 1000 market  space.  This segment  believes the area of the greatest
potential growth will continue to be the small to medium-sized customers seeking
expertise  they do not  have  within  their  organization.  InfoTech  USA,  Inc.
continues to identify  those  companies  that will fit well with its culture and
targets the vertical markets where it has previously been successful,  including
educational  institutions,  legal and financial  services,  medical  facilities,
museums and New York City agencies. Geographically,  InfoTech USA, Inc. plans to
continue to focus on the New York City metropolitan area.

      Competitors

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

      Certain of InfoTech USA,  Inc.'s  current and potential  competitors  have
greater financial,  technical,  marketing and other resources than InfoTech USA,
Inc. As a result,  they may be able to respond  more  quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the  development,  promotion  and sales of their  services than InfoTech USA,
Inc. InfoTech USA, Inc.'s ability to compete successfully depends on a number of
factors such as breadth of product and service  offerings,  sales and  marketing
efforts,  pricing, quality and reliability of services,  technical personnel and
other  support  capabilities.  InfoTech  USA,  Inc.  believes  that it currently
competes  favorably  due to its focus and expertise in network  integration  and
technical services.

      Patents

      We do not hold patents or licenses to any of the products in our InfoTech,
USA Inc. segment, nor are intellectual  property rights an important part of the
operations of this segment.


                                       14
<PAGE>


      Research Group

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

      In addition to Dr. Zhou, the Research Group includes six researchers  each
holding advanced  degrees,  one support engineer with a bachelors degree, an and
office manager.  Dr. Zhou has thirty-eight years of scientific  experience,  and
collectively,   the  Research  Group  has  over  eighty-one  years  of  research
experience.

      Research and development  expense was $6.3 million,  $4.1 million and $8.8
million  for  the  years  2003,  2002  and  2001,  respectively.   Research  and
development  expense relates  primarily to the development of our Digital Angel,
Thermo Life,  VeriChip and PLD products,  and in 2001, to software  development.
Included in research and development  expense was software  development  cost of
$0.5  million,   $0.9  million  and  $3.3  million  in  2003,   2002  and  2001,
respectively.

      Prior Segments

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

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

      GROWTH STRATEGY

      We are an advanced technology  development company that focuses on a range
of life  enhancing,  personal  safeguard  technologies,  early warning  systems,
miniature  power  sources  and  security   monitoring   systems   combined  with
comprehensive  data management  services  required to support them. Our business
strategy is to position ourselves as a leading advanced  technology  development
company through the development and commercialization of proprietary  technology
such as our Digital  AngelTM,  Thermo LifeTM,  VeriChipTM,  Bio-ThermoTM and PLD
products, all examples of what we refer to as our life enhancing technologies as
more fully discussed below.

      Our  Research  Group is  charged  with the  responsibility  of  finding or
developing one to two personal safeguard  proprietary  technologies on an annual
basis and bringing it to prototype  form within 18 to 24 months.  At that point,
each  technology is paired with a  complementary  operating  company that brings
revenue and management. Each technology hopes to be the "first of its kind," and
there are currently no businesses that compete directly with the technologies.


                                       15
<PAGE>

      The  first  of  these   technologies  was  Digital  Angel  TM;  the  first
combination  of GPS and "how you are"  (sensor)  information  sent  live  over a
wireless  network to a 24/7 call center where  information  is monitored and, if
necessary,   acted  upon.   Digital  Angel  was  paired  with  Destron   Fearing
Corporation,   a  leading  animal   tracking  and   applications   company  that
complemented  Digital Angel and brought  revenue and management  from its animal
tracking business. Digital Angel Corporation,  the post-merger corporation,  now
trades on the American  Stock  Exchange  under the Symbol  "DOC."  Digital Angel
Corporation  symbolizes our business model. Digital Angel Corporation also plans
to develop new advanced technologies and to date has developed Bio-ThermoTM.

      VeriChip,  which we believe to be the world's first implantable  microchip
for  humans,  was the next  technology  developed  by our  Research  Group.  Its
distribution  rights are licensed  from Digital  Angel  Corporation  to VeriChip
Corporation,  our wholly owned subsidiary.  VeriChip has multiple  applications,
including but not limited to, applications in security, personal identification,
safety,  healthcare information (subject to FDA approval) and more. Our strategy
is for VeriChip  Corporation  to follow a business  model  comparable to Digital
Angel  Corporation.  VeriChip  Corporation  is  planned  as our  next  "spawned"
technology company.

      With  Thermo  Life  launched  in the  fourth  quarter of 2003 as the third
product  developed by our Research  Group  (Digital Angel and VeriChip being the
first and second  products),  our business strategy will evolve over time and we
hope  to  become  a  group  of  technology  companies  underpinned  by  advanced
proprietary personal safeguard  technologies,  each complemented by an operating
company that brings revenue and management.  By maintaining a majority ownership
position in each company, we will consolidate operating results and maximize our
investment.

      Advanced Technology Products

      Our five  advanced  technology  products,  which are in various  stages of
development, are as follows:

      DIGITAL  ANGELTM is the integration  and  miniaturization  into marketable
products of three  technologies:  wireless  communications  (such as  cellular),
sensors (including  bio-sensors) and position location technology (including GPS
and other systems).  The product  communicates through proprietary software to a
secure  24/7  operations  center to provide  "where-you-are"  and  "how-you-are"
information  about loved ones  (particularly  elderly  relatives and  children),
their  location and their vital signs via the  subscriber's  computer,  personal
digital assistant or wireless telephone.

      The  development  of the Digital Angel TM technology  began in April 1998.
The first  Digital  AngelTM  technology  product,  a  watch/pager  device with a
biosensor  chip linked to GPS, was  marketed  from  November  2001 to the fourth
quarter  of 2002.  Since then the  Digital  AngelTM  technology  has been in the
development  stage to include  assisted  GPS  capabilities  to enhance  "line of
sight" issues.  We are uncertain when this technology will be incorporated  into
our products.

      THERMO  LIFETM - Our  wholly-owned  subsidiary,  Thermo Life Energy Corp.,
formerly  Advanced  Power  Solutions,  Inc.,  was formed to market our  product,
Thermo Life, a small thermoelectric  generator powered by body heat. Thermo Life
is intended to provide a miniaturized  power source for a wide range of consumer
electronic devices including  attachable or implantable  medical devices,  smoke
detectors and other heat-related sensors and wristwatches.  The Thermo Life chip
is being designed for power supplies for embedded devices or devices that attach
to the human skin.  The  temperature  difference  between the human skin and the
environmental temperature is 3-5 degrees Fahrenheit. The size of the Thermo Life
chip is 9mm x 5.2mm x 1.8mm. This cross section is designed to match the size of
a human  fingertip.  Originally,  the Thermo Life chip in this cross section and
with  this  temperature  difference  generated  1.5 volts of  electrical  power.
However,  common electrical devices and electronic chips are mostly designed for
3 volts,  therefore,  the output of the  original  Thermo  Life chip had greater
limitations as a working power supply for common electronic  devices. On July 9,
2002,  we announced  that we had been able to increase the voltage of electrical
power  generated by Thermo Life in laboratory  tests from 1.5 volts to 3.0 volts
within the same cross section and using the same  temperature  difference.  As a
result, these chips can now be used with most of the common electrical devices.


                                       16
<PAGE>

      We began submitting  samples of Thermo Life to potential  customers during
the fourth  quarter of 2003. If and when an order is received the  manufacturing
of Thermo Life will be original equipment manufacturing.

      VERICHIPTM - We have developed a  miniaturized,  implantable  verification
chip  called  VeriChip  that can be used in a variety  of  security,  financial,
personal  identification/safety and other applications.  On February 7, 2002, we
announced  that  we  had  created  a  new  wholly  owned  subsidiary,   VeriChip
Corporation,  to market and license VeriChip. About the size of a grain of rice,
each  VeriChip  product  contains a unique  verification  number.  Utilizing our
proprietary  external RFID scanner,  radio  frequency  energy passes through the
skin energizing the dormant VeriChip,  which then emits a radio frequency signal
transmitting  the  verification  number  contained  in  the  VeriChip.  VeriChip
technology is produced under patent  registrations  #6,400,338  and  #5,211,129.
This  technology is owned by Digital Angel  Corporation and licensed to VeriChip
Corporation under an exclusive  product and technology  license with a remaining
term until March 2013.

      On  October  22,  2002,  we  announced  that the FDA had  determined  that
VeriChip is not a regulated medical device for security,  financial and personal
identification/safety  applications.  The  FDA  specified  in  its  ruling  that
VeriChip is a regulated medical device for health information  applications when
marketed to provide  information  to assist in the  diagnosis  or  treatment  of
injury or illness.  We currently  intend to market and  distribute  the VeriChip
product for security, financial and personal identification/safety applications,
and we  plan  to  expand  our  marketing  and  distribution  efforts  to  health
information  applications  of the product,  subject to any and all necessary FDA
and other approvals more particularly discussed below.

      VeriChip is fully developed and we began marketing  VeriChip for security,
financial  and  personal  identification/safety  applications  within the United
States on October  24,  2002.  Examples of  personal  identification  and safety
applications are control of authorized  access to government  installations  and
private-sector buildings,  nuclear power plants, national research laboratories,
correctional facilities and sensitive transportation resources. VeriChip is able
to function as a stand-alone,  tamper-proof personal verification  technology or
it can operate in conjunction with other security  technologies such as standard
identification  badges and  advanced  biometric  devices  (for  example,  retina
scanners,  thumbprint readers or face recognition devices).  The use of VeriChip
as a means for secure access can also be extended to include a range of consumer
products such as personal  computers,  laptop  computers,  cars, cell phones and
even access into homes and apartments.

      Financial   applications   include  VeriChip  being  used  as  a  personal
verification  technology that could help prevent  fraudulent  access to banking,
especially via automated teller machines,  and credit card accounts.  VeriChip's
tamper-proof,  personal  verification  technology can provide banking and credit
card customers  with the added  protection of knowing their account could not be
accessed unless they themselves initiated and were physically present during the
transaction. VeriChip can also be used in identity theft protection.


                                       17
<PAGE>

      One of our major strategic initiatives is to obtain FDA approval to market
our  VeriChip  product for  healthcare  information  applications  in the United
States.  If we are  successful in obtaining  FDA approval  pursuant to our 510-K
application,  filed with the FDA in October 2003, we believe that the healthcare
information  applications  would expand the market for VeriChip and consequently
increase  our  VeriChip  revenues.   Examples  of  the  healthcare   information
applications for VeriChip include, among others:

            o     implanted medical device identification;

            o     emergency access to patient-supplied health information;

            o     portable   medical   records   access   including    insurance
                  information;

            o     in-hospital patient identification;

            o     medical facility connectivity via patient; and

            o     disease/treatment  management of at-risk  populations (such as
                  vaccination history).


      These  potential  medical  applications  are a very important piece of our
VeriChip  business model, and therefore,  the 510K  application  process and the
obtainment  of FDA  approval  are key  elements  in  enabling  us to achieve our
business plans for VeriChip.  Section 510(K) of the Food,  Drug and Cosmetic Act
requires  those  device  manufacturers  who must  register to notify the FDA, at
least 90 days in advance,  of their intent to market a medical  device.  This is
known as Pre-market  notification - also called PMN or 510(K). It allows the FDA
to determine  whether the device is equivalent to a device  already  placed into
one of three classifications  categories.  Thus "new" devices that have not been
classified can be properly identified.

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

      PLD  -  On  May  13,  2003,  we  announced  that  we  have  developed  and
successfully  field-tested a working prototype of, what is to our knowledge, the
first  sub-dermal  personal  location  device called PLD. The dimensions of this
initial PLD prototype are 2.5 inches in diameter by 0.5 inches in depth, roughly
the size of a pacemaker.  It is proposed that PLD be surgically implanted in the
clavicle  area of a human.  Our original PLD prototype is based on a combination
of GPS and cell wireless  technologies.  We believe that by removing the GPS and
using an alternative location technology such as wireless triangulation, we will
be able to  shrink  the  size of the  PLD.  As the  process  of  miniaturization
proceeds  in the  coming  months,  we hope to be able to shrink  the size of the
device to at least one-half and perhaps to as little as one-tenth of the current
size. The PLD is charged by an induction-based  power-recharging method which is
similar  to that  used  to  recharge  implantable  pacemakers.  This  recharging
technique  functions without requiring any physical connection between the power
source and the implant.  The exact timing of the commercial  availability of PLD
is unclear pending further technological  refinements and the procurement of any
and all required regulatory clearances.


                                       18
<PAGE>

      Market Synergies

      We  believe  that  we  have  excellent  relationships  with  our  existing
customers and we are  continually  striving to improve our products and services
in order to maintain and grow our revenues from our existing  customer  base. In
addition,  we intend to use our relationships with our existing customers to aid
in the generation of sales of our advanced technology products. For example, the
companion  animal,  livestock,  laboratory  animal,  and wildlife  customers for
Digital Angel Corporation's visual identification tags and implantable microchip
products provide a ready-made  market for its Bio-Thermo  product.  We intend to
market  VeriChip's  security and  identification  applications  to  governmental
agencies  including the agencies that are part of Computer Equity  Corporation's
customer  base.   Computer  Equity   Corporation's  key  customers  include  the
Departments  of  Defense,  Justice and  Agriculture,  the United  States  Postal
Service and the Social Security Administration.

      RECENT EVENTS

      Sale of Medical Systems' Assets

      During the three-months ended June 30, 2004,  Digital Angel  Corporation's
Board of Directors approved a plan to sell its Medical Systems operations, which
were  acquired on March 27, 2002,  and the business  assets of Medical  Systems'
were sold off effective April 19, 2004. Medical Systems represented the business
operations of MAS. The business  assets of Medical Systems were sold to MedAire,
Inc. in connection with an Asset Purchase  Agreement,  referred to as APA, dated
April 8, 2004, by and between Digital Angel Corporation and MedAire,  Inc. Under
the terms of the APA,  the  purchase  price was $0.4  million,  plus any prepaid
deposits,  the cost of certain  pharmaceutical  inventory and supplies,  and the
assumption of certain  liabilities,  reduced by any  pre-billing  to or pro-rata
prepayments by certain  customers.  The assets sold included all of the tangible
and intangible intellectual property developed for the medical services business
including  pharmaceutical  supplies  and other  inventory  items,  customer  and
supplier contracts, computer software licenses, internet website and domain name
and  mailing  lists,  but did not  include  the land and  building  used by this
operation.  The  Medical  Systems'  land and  building  were sold in a  separate
unrelated  transaction to a third party on July 31, 2004 for approximately  $1.5
million.  Medical  Systems was one of our reporting units in accordance with FAS
142. Accordingly,  the financial condition, results of operations and cash flows
of  Medical  Systems  have  been  reported  as  Discontinued  Operations  in our
financial statements, and prior periods have been restated.

      Reverse Stock Split

      On  September  10,  2003,  our  shareholders   approved  the  granting  of
discretionary  authority to our Board of Directors for a period of twelve months
to  effect a  reverse  stock  split  not to  exceed a ratio of 1-for  25,  or to
determine  not to proceed  with a reverse  stock split.  On March 12, 2004,  our
Board of  Directors  authorized  a  1-for-10  reverse  stock  split,  which  was
effectuated  on April 5, 2004. As a result of the reverse  stock split,  the par
value of our  common  stock  increased  from  $0.001  to  $0.01  per  share.  In
conjunction  with the reverse stock split,  our Board of Directors  authorized a
reduction  in the number of  authorized  shares of our  common  stock from 560.0
million to 125.0 million.  All share information  provided in this Annual Report
on Form 10-K/A has been  retroactively  adjusted  to reflect  the reverse  stock
split. Our Board of Directors approved the reverse stock split to facilitate the
continuing  listing of our common stock on the SmallCap,  and also to reduce the
number of issued and outstanding shares of our common stock, resulting, in part,
from our past  acquisitions,  the payment of debt  obligations to IBM Credit and
preferred stock and Debenture conversions.

      Share Exchange Agreement with Digital Angel Corporation

      On March 1, 2004, we exchanged shares of our common stock in consideration
for shares of the common stock of Digital Angel Corporation under the terms of a
Share Exchange  Agreement  dated August 14, 2003.  The Share Exchange  Agreement
represented  a strategic  investment  by us,  whereby we increased our ownership
interest in Digital Angel  Corporation.  As of August 14, 2003, we believed that
Digital  Angel  Corporation's  common  stock was  undervalued,  and we desire to
maintain a controlling  interest in Digital  Angel  Corporation.  Therefore,  we
consider  the  additional  investment  in  Digital  Angel  Corporation  to  be a
strategically  advantageous  undertaking.  Under the terms of the Share Exchange
Agreement,  we purchased 3.0 million new shares of Digital  Angel  Corporation's
common stock for $2.64 per share and we received a warrant to purchase up to 1.0
million shares of Digital Angel Corporation's  common stock for a period of five
years  from  February  1, 2004,  at an  exercise  price of $3.74 per share.  The
aggregate  purchase  price for the 3.0  million  shares  was $7.9  million.  The
purchase price was payable in 1.98 million shares of our common stock.


                                       19
<PAGE>

      The aggregate purchase price of $7.9 million for the 3.0 million shares of
Digital  Angel  Corporation's  common  stock was based on the  closing  price of
Digital Angel  Corporation's  common stock on June 30, 2003, of $2.64 per share.
This price was used because we and Digital Angel  Corporation felt that this was
a fair  price and  because  it  reflected  the  market  price of  Digital  Angel
Corporation's  common  stock before any impact that may have  resulted  from the
Debentures  as a result of the  Debentures  holders  potentially  hedging  their
position in Digital Angel Corporation's  common stock, and thereby affecting the
market price of Digital Angel  Corporation's  common stock.  The  Debentures are
more  fully  described  below.  Pursuant  to the  terms  of the  Share  Exchange
Agreement,  we were required to file a registration  statement covering the sale
of the 1.98  million  shares of our common  stock.  The  registration  statement
registering  the shares was declared  effective  on February  17, 2004.  Digital
Angel Corporation expects to generate cash by selling the 1.98 million shares of
our common stock.  Digital Angel  Corporation  expects that the cash  generated,
along with other  funds  available,  will be  sufficient  to meet its  projected
working capital requirements for the next 12 months.

      InfoTech USA, Inc. Segment Financing Transaction

      The InfoTech  USA,  Inc.  segment  finances its  accounts  receivable  and
inventory.  Its current financing arrangement with IBM Credit provides financing
on inventory purchases up to $1.8 million. Borrowing for purchases is based upon
75% of all  eligible  receivables  due  within  90  days  and up to  100% of all
eligible  inventories.  Interest for balances not paid within the interest  free
period provided in the arrangement accrues at prime plus 4.4%.  Borrowings under
the  financing  arrangement  were $0.8  million at December  31,  2003,  and are
reflected  in the  balance  sheet in either  accounts  payable or other  accrued
expenses.  On September 5, 2003,  InfoTech USA, Inc.  received a letter from IBM
Credit  constituting their formal notice of termination of their agreement.  The
effective date of such termination, which was originally set for March 10, 2004,
has been  extended  until April 9, 2004.  InfoTech USA, Inc. is currently in the
process of  securing  other  financing  and  expects to  replace  its  financing
arrangement prior to the termination date set by IBM Credit.  However,  there is
no assurance  that InfoTech  USA, Inc. will be able to obtain a replacement  for
its  IBM  Credit  arrangement.  See  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations - Liquidity and Capital Resources
from Continuing Operations."

      Appointments and Changes in Management

      On February 18, 2004,  Scott R.  Silverman was  appointed  Chairman of the
Board of  Directors  of  Digital  Angel  Corporation.  Effective  March 3, 2004,
Richard J.  Sullivan  resigned  from the Board of  Directors  of  Digital  Angel
Corporation.

      On November 3, 2003,  OuterLink's  then Chief Executive  Officer,  Mr. Van
Chu, was appointed Chief  Executive  Officer of Digital Angel  Corporation.  Mr.
Chu's  employment  was terminated  for cause,  effective  January 12, 2004, as a
result of Mr. Chu's failure to fulfill the  obligations of his  employment.  The
terms of Mr. Chu's termination are subject to a confidentiality agreement, dated
January 22, 2004,  among  Digital Angel  Corporation,  OuterLink and Mr. Chu. On
January 15, 2004, the Digital Angel  Corporation's  Board of Directors appointed
Kevin N.  McGrath as  President  and Chief  Executive  Officer of Digital  Angel
Corporation.  Prior to joining Digital Angel  Corporation,  Mr. McGrath spent 16
years at El Segundo,  CA-based Hughes  Electronics  Corp.,  during which time he
served as,  among other  things,  Chairman of DirecTV  Latin  America,  a Hughes
subsidiary.


                                       20
<PAGE>

      OuterLink Corporation Acquisition

      On January 22, 2004,  Digital Angel Corporation  completed the acquisition
of  OuterLink,  based in  Concord,  Massachusetts.  OuterLink  manufactures  and
markets a suite of satellite tracking systems,  operates a mobile satellite data
communications  service,  and supplies tracking software systems for mapping and
messaging.  The OuterLink "CP-2 system" provides real-time  automated  tracking,
wireless   data   transfer,   and  two-way   messaging   with  large  fleets  of
vehicles--including  utility trucks,  helicopters and fixed-wing aircraft,  long
haul trucks, service vehicles, short haul trucks, and ships. OuterLink's current
customer base includes various  branches of the Department of Homeland  Security
including the U.S. Border Patrol and U.S. Customs Service.  As consideration for
the  acquisition,  Digital Angel  Corporation  issued 0.1 million  shares of its
Series A  Preferred  Stock in  exchange  for all of the issued  and  outstanding
shares of OuterLink's  capital stock.  Approximately 20% of the shares are being
held in escrow as security for indemnified  claims. The Series A Preferred Stock
is convertible  into four million shares of Digital Angel  Corporation's  common
stock when the  volume-weighted  average  price of Digital  Angel  Corporation's
common stock equals or exceeds $4.00 per share for ten consecutive trading days.
The preferred  stockholders  have the right to designate one director to Digital
Angel Corporation's Board of Directors prior to July 22, 2004.

      OTHER DEVELOPMENTS

      Securities  Purchase  Agreements  Dated September 30, 2003 and December 2,
2003

      During 2003, we offered 3.0 million shares of our common stock in a public
offering  registered  under the Securities Act of 1933.  J.P. Carey  Securities,
Inc. acted as our placement agent for the offering.  We sold an aggregate of 2.2
million of these shares under the terms of three  separate  Securities  Purchase
Agreements  entered into on September  19,  2003,  with each of First  Investors
Holding  Co.,  Inc.,  Magellan  International  LTD and  Cranshire  Capital,  LP.
resulting in gross proceeds to us of approximately $8.0 million before deduction
of the 2.0% placement agency fee. In addition, we sold an aggregate of up to 0.8
million  of the shares  under  eight  separate  Securities  Purchase  Agreements
entered  into on December  2, 2003,  as  amended,  with each of First  Investors
Holding  Co.,  Inc.,  Magellan  International  LTD,  Elliott  Associates,  L.P.,
Islandia,  L.P.,  Midsummer  Investment,  Ltd.,  Omicron Master Trust,  Portside
Growth  and  Opportunity  Fund and  Elliott  International  L.P.,  resulting  in
aggregate gross proceeds to us of approximately $2.9 million before deduction of
the 2.0% placement agency fee. As of March 10, 2004, we have used  approximately
$4.3  million  of the total net  proceeds  of  approximately  $10.7 from the 3.0
million share offering. We intend to use the remaining net proceeds from the 3.0
million share offering for general corporate purposes (including working capital
requirements,  sales and marketing and capital expenditures).  Our liquidity and
capital   requirements  are  more  fully  discussed  below  under  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources from Continuing Operations."

      Sale of WebNet Services, Inc.

      Effective December 15, 2003, under the terms of a Stock Purchase Agreement
between us and Internet  Technologies  Group,  LLC ("ITG"),  we sold 100% of the
shares of our wholly-owned subsidiary,  WebNet Services, Inc. The purchase price
for the shares was $0.4 million, and our loss on the sale was approximately $0.3
million.  The  purchase  price is payable in twelve equal  monthly  installments
commencing  on  January  2,  2004,  under  the terms of a  non-interest  bearing
promissory note, which is  collateralized  by shares of WebNet Services,  Inc.'s
common  stock.  WebNet  Services,  Inc. was included in our Advanced  Technology
segment. The former owners of WebNet Services, Inc. are the principals of ITG.


                                       21
<PAGE>

      Payment in Full of Obligations to IBM Credit

      Our Third  Amended and  Restated  Term Credit  Agreement  (the "IBM Credit
Agreement")  with IBM  Credit  contained  covenants  relating  to our  financial
position and performance,  as well as the financial  position and performance of
Digital Angel Corporation.  At December 31, 2002, we did not maintain compliance
with the revised financial  performance covenant under the IBM Credit Agreement.
In addition,  under the terms of the IBM Credit  Agreement  we were  required to
repay IBM  Credit  $29.8  million  of the $77.2  million  outstanding  principal
balance then owed to them,  plus $16.4 million of accrued  interest and expenses
(totaling  approximately $46.2 million),  on or before February 28, 2003. We did
not make such payment by February 28, 2003,  and on March 7, 2003, we received a
notice from IBM Credit  declaring the loan in default.  Effective April 1, 2003,
we entered into a Forbearance  Agreement with IBM Credit.  In turn, we agreed to
dismiss with prejudice a lawsuit we filed against IBM Credit and IBM Corporation
in Palm  Beach  County,  Florida  on  March  6,  2003.  Under  the  terms of the
Forbearance Agreement,  we had the right to purchase all of our outstanding debt
obligations to IBM Credit,  totaling  approximately  $100.1  million  (including
accrued interest), if we paid IBM Credit $30.0 million in cash by June 30, 2003.
As of June 30, 2003, we made cash payments to IBM Credit  totaling $30.0 million
and,  thus, we have satisfied in full our debt  obligations to IBM Credit.  As a
result,  during the year ended  December  31,  2003,  we  recorded a gain on the
extinguishment of debt of approximately $70.1 million,  exclusive of the bonuses
discussed below.

      On June  30,  2003,  our  Board of  Directors  (through  the  Compensation
Committee)  approved the payment of approximately  $4.3 million in discretionary
bonus  awards.  The bonuses were awarded to  directors,  executive  officers and
other  employees in  recognition  of their efforts in achieving  the  successful
repayment  of all of our  obligations  to IBM  Credit  on June  30,  2003.  This
repayment  resulted  in our  recording a gain on the  extinguishment  of debt of
approximately  $70.1 million during 2003.  The approval of the bonuses  directly
reflected the efforts of certain  employees/directors  in satisfying  all of our
obligations  to IBM Credit,  and  accordingly,  the  approval was not subject to
further conditions, except for continuation of employment until the bonuses were
paid.  Our  Board  of  Directors,   based  on  various  factors   including  the
contribution  of  the  respective  employee/director  and  our  cash  needs  and
availability,  determined  the  allocation  of the  bonuses  among  the group of
employees/directors  and the  timing of the  payments.  Our  Board of  Directors
determined to satisfy the payment of the bonuses in cash.  The bonuses were paid
to the directors in November 2003, and to executive officers and other employees
on various dates in November 2003, December 2003 and January 2004.

      Funding for $30.0 Million Payment to IBM Credit

      Funding for the $30.0  million  payment to IBM Credit  consisted  of $17.8
million in net proceeds from the sales of an aggregate of 5.0 million  shares of
our  common  stock,  $10.0  million in net  proceeds  from the  issuance  of our
Debentures, and $2.2 million from cash on hand.

      The 5.0 million  shares of our common stock were offered on a best efforts
basis through the efforts of a placement agent J.P. Carey Securities, Inc. under
the  terms  of a  placement  agency  agreement.  We  agreed  to pay  J.P.  Carey
Securities, Inc. a 3% placement agency fee. In connection with this offering, on
May 8, 2003, May 22, 2003 and June 4, 2003, we entered into Securities  Purchase
Agreements  with Cranshire  Capital,  L.P. and Magellan  International  Ltd. The
Securities  Purchase Agreements provided for Cranshire Capital L.P. and Magellan
International  Ltd.  to  purchase an  aggregate  of 2.0  million  shares and 3.0
million shares of our common stock,  respectively,  resulting in net proceeds to
us of $17.8 million, after deduction of the 3% placement agency fee.


                                       22
<PAGE>

      Issuance of 8.5% Convertible Exchangeable Debentures

      On  June  30,  2003,  we  entered  into  the  Debenture   Agreement  ("the
Agreement")  with  certain  Purchasers,  collectively  referred to herein as the
Purchasers or the Debenture holders. In connection with the Agreement, we issued
to the  Purchasers  the  Debentures  due November 1, 2005.  Subject to the terms
under the various agreements, the Debentures were convertible into shares of our
common stock or exchangeable for shares of the Digital Angel Corporation  common
stock owned by us, or a combination  thereof, at the Purchasers' option prior to
the maturity date of November 1, 2005.  On November 12, 2003, we announced  that
we had entered into a letter  agreement with the Debentures  holders.  Under the
letter  agreement,  the Debenture  holders were required to convert a minimum of
50% of the outstanding principal amount of the Debentures,  plus all accrued and
unpaid interest, into shares of our common stock on November 12, 2003, the First
Conversion  Date,  at a conversion  price of $3.50 per share.  In addition,  the
Purchasers were required to convert any remaining  outstanding  principal amount
of the  Debentures  plus accrued  interest on or before  November 19, 2003,  the
Second  Conversion Date. The conversion price for the Second Conversion Date was
84% of the volume  weighted  average  trading  price of our common stock for the
five trading days prior to November 17, 2003,  which  average was $4.406.  As of
November  19,  2003,  the  total  principal  amount of the  Debentures  has been
converted,  and  accordingly,  our  obligations  under the Debentures  have been
satisfied  in full.  We have issued an  aggregate  of 2.8 million  shares of our
common stock in connection  with the  conversions  taking place on the First and
Second  Conversion  Dates.  In addition,  in  connection  with the exchange of a
portion of the Debentures,  we have issued an aggregate of 0.3 million shares of
the Digital Angel Corporation common stock that we owned.

      In  connection  with the  Debentures,  we have  granted to the  Purchasers
warrants (the  "Warrants")  to acquire  approximately  0.5 million shares of our
common stock, or 0.95 million shares of Digital Angel Corporation's common stock
currently  outstanding  and owned by us, or a  combination  of shares  from both
companies,  at the Purchasers'  option. The exercise prices are $5.64 and $3.178
for our common stock and Digital Angel Corporation's common stock, respectively.
The Warrants are subject to anti-dilution  provisions,  vest immediately and are
exercisable through June 30, 2007.

      The proceeds upon issuance of the Debentures were allocated as follows:


                                                               (in thousands)
                Face value of Debentures                           $10,500
                Beneficial conversion feature                       (3,120)
                Relative fair value of Warrants                     (1,387)
                                                               -------------
                Relative fair value of Debentures                  $ 5,993
                                                               =============

      The beneficial conversion feature was calculated as the difference between
the  beneficial  conversion  price  and the  fair  value  of our  common  stock,
multiplied by the number of shares into which the Debentures were convertible in
accordance with the Emerging Issues Task Force ("EITF") - 00-27.  The beneficial
conversion  feature was  recorded as a  reduction  in the value  assigned to the
Debentures   (original   issue   discount)   and  an  increase   in   additional
paid-in-capital.  The  fair  value  of the  Warrants  was  estimated  using  the
Black-Scholes  valuation  model. The value assigned to the Warrants was recorded
as a reduction in the value assigned to the Debentures (original issue discount)
and an increase in long-term liabilities. The liability for the Warrants, to the
extent potentially  settleable in shares of the Digital Angel Corporation common
stock owned by us, is being revalued at each reporting period with any resulting
increase/decrease  being recorded as an  increase/decrease  in interest expense.
During 2003,  we recorded  interest  expense of $2.0 million as a result of such
revaluation.  We will be required to record an  impairment  loss if the carrying
value of the Digital  Angel  Corporation  common stock  underlying  the Warrants
exceeds the exercise price. Should the Purchasers elect to exercise the Warrants
into  shares of the Digital  Angel  Corporation  common  stock owned by us, such
exercise may result in our recording a gain on the transaction.

      As a result of the  repayment of all of the  Debentures,  the  unamortized
balance of the original  issue  discount  and debt issue costs of  approximately
$4.2 million was recorded as interest expense during the fourth quarter of 2003.
In addition, as a result of the difference between the original conversion price
under the Agreement of $5.15 per share,  and the revised  conversion  prices per
the terms of the letter  agreement,  which averaged $3.51 per share, we recorded
additional  beneficial  conversion  feature of approximately $4.5 million during
the fourth quarter of 2003. This additional  beneficial  conversion  feature was
recorded as interest  expense  and an  increase in  additional-paid  in capital.
Thus,  during the fourth  quarter of 2003,  we  incurred  $8.7  million in total
non-cash  stock-based  interest  expense as a result of the  conversions  of the
Debentures under the terms of the letter agreement.


                                       23
<PAGE>


      In connection with the Debentures,  we incurred a placement  agency fee of
$0.4 million and we  reimbursed  one of the  Purchasers  $0.1 million for legal,
administrative,  due  diligence  and other  expenses  incurred  to  prepare  and
negotiate the transaction  documents.  We realized net proceeds of $10.0 million
from the issuance of the Debentures, after deduction of the placement agency fee
and the  transaction  costs. To date, we have not realized any proceeds from the
issuance of the Warrants, as the Warrants have not been exercised.

      In addition,  Digital Angel Corporation has granted a five-year warrant to
the Debenture holders to acquire up to 0.5 million shares of its common stock at
an exercise  price of $2.64 per share.  The warrant was issued in  consideration
for a waiver from the Debenture holders, which allowed us to register the shares
that we issued in connection  with the Share Exchange  Agreement  between us and
Digital Angel  Corporation.  The fair value of the warrant of approximately $0.8
million was determined using the Black-Scholes  valuation model and was recorded
as interest  expense during 2003. The total interest expense recorded in 2003 in
connection with the Debentures was approximately $12.7 million.

      As a result of the complete  satisfaction of all of our obligations to IBM
Credit,  we entered into an Amended and Restated Trust  Agreement dated June 30,
2003,  with the  Digital  Angel Share  Trust  ("Trust").  Under the terms of the
revised  trust  agreement,  the  Trust  retained  all of its  rights,  title and
interest in 15.0 million  shares of the Digital Angel  Corporation  common stock
owned by us in  consideration  of the  Debentures  and in order  to  secure  and
facilitate the payment of our obligations  under the Debentures.  As a result of
the  repayment in full of the  Debentures  on November  19,  2003,  we expect to
dissolve the Trust in the near future. Currently,  Scott R. Silverman, our Chief
Executive Officer, serves as the sole advisory board member to the Trust.

      SEC Informal Inquiry

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


                                       24
<PAGE>


      Severance Agreements

      On March 21, 2003, Richard J. Sullivan,  our then Chairman of the Board of
Directors and Chief Executive Officer, retired from such positions. Our Board of
Directors  negotiated a severance agreement with Richard Sullivan under which he
received a one-time payment of 5.6 million shares of our common stock. We issued
the shares to Richard Sullivan on March 1, 2004. In addition, stock options held
by him exercisable for approximately 1.1 million shares of our common stock were
re-priced.  The options  surrendered  had exercise  prices ranging from $1.50 to
$3.20 per share and were replaced with options  exercisable  at $0.10 per share.
All of the re-priced options have been exercised.  Richard Sullivan's  severance
agreement provides that the payment of shares and re-pricing of options provided
for  under  that  agreement  is in lieu of all  future  compensation  and  other
benefits  that  would  have been owed to him  under  his  employment  agreement.
Richard Sullivan's employment agreement provided for:

      o     an annual  salary of $450,000  and an annual  bonus of not less than
            $140,000 for the term of his employment  agreement (which was due to
            expire March 1, 2008, roughly five years later);

      o     supplemental  compensation  of  $2,250,000  (to be paid in 60  equal
            monthly  payments of $37,500 each), in the event of a termination of
            his  employment  for any reason other than a termination  due to his
            material default under the agreement; and

      o     a  lump  sum  payment  of  $12,105,000,  upon  the  occurrence  of a
            "Triggering  Event,"  defined  under  the  employment  agreement  to
            include a change of  control  of us or his  ceasing  to serve as our
            Chairman  of the Board or Chief  Executive  Officer  for any  reason
            other than due to his material default, with us having the option to
            pay this  amount  in cash or in shares  of our  common  stock or any
            combination of the two. In the event we opted to make any portion of
            the payment in shares of our common stock, the agreement  stipulated
            that the common stock was to be valued at the average  closing price
            of the stock on the Nasdaq  National  Market  (our stock was, at the
            time the agreement was entered into,  listed on the Nasdaq  National
            Market but has since been transferred to the SmallCap) over the last
            five business days prior to the date of the Triggering Event.

      In total,  the employment  agreement  obligated us to pay Richard Sullivan
approximately $17.3 million under, or in connection with, the termination of his
employment  agreement.  In view of our cash constraints and our need at the time
to dedicate our cash resources to satisfying our  obligations to IBM Credit,  we
commenced  negotiations  with Richard Sullivan that led to the proposed terms of
his  severance   agreement.   The  severance   agreement  required  us  to  make
approximately  $3.9 million less in payments to Richard Sullivan than would have
been owed to him under his employment agreement.

      Effective March 3, 2004,  Richard J. Sullivan  resigned from Digital Angel
Corporation's  Board of Directors,  and thus,  he no longer has any  affiliation
with us.

      On March 21, 2003,  Jerome C.  Artigliere,  our then Senior Vice President
and Chief Operating  Officer,  resigned from such positions.  Under the terms of
his severance  agreement,  Mr.  Artigliere  received  approximately  0.5 million
shares of our common stock.  We issued the shares to Mr.  Artigliere on March 1,
2004. In addition,  stock options held by him exercisable for  approximately 0.2
million shares of our common stock were re-priced.  The options  surrendered had
exercise  prices  ranging from $1.50 to $3.20 per share and were  replaced  with
options  exercisable at $0.10 per share. All of the re-priced  options have been
exercised.  Mr.  Artigliere's  severance  agreement provides that the payment of
shares and re-pricing of options provided under that agreement is in lieu of all
future  compensation  and other  benefits that would have been owed to him under
his  employment  agreement.  That  agreement  required  us to make  payments  of
approximately $1.5 million to Mr. Artigliere.


                                       25
<PAGE>

      As a result of the termination of Richard Sullivan's employment with us, a
"triggering  event"  provision in the  severance  agreement we entered into with
Garrett Sullivan,  our former Vice Chairman of the Board, (who is not related to
Richard  Sullivan)  at the time of his  ceasing  to serve  in such  capacity  in
December 2001, has been triggered. We negotiated a settlement of our obligations
under  Garrett  Sullivan's  severance  agreement  that  required  us to issue to
Garrett Sullivan approximately 0.8 million shares of our common stock. We issued
the shares, valued at $3.5 million, to Garrett Sullivan on February 17, 2004.

      Our shareholders  have approved the issuances of the common stock and have
ratified  the  re-pricing  of the  options  under  the  terms  of the  severance
agreements  with  Richard J.  Sullivan  and Jerome C.  Artigliere  and they have
approved the issuance of the common stock under the agreement  entered into with
Garrett Sullivan.  The terms of each of the severance agreements were subject to
shareholder  approval,  in accordance with applicable Nasdaq rules,  because the
agreements:  (i) were  deemed to be  compensatory  arrangements  under which our
common stock was being  acquired by officers or  directors;  and (ii) in Richard
Sullivan's case, such issuance may have resulted in his potentially holding more
than 20% of the outstanding shares of our common stock following the issuance of
the shares and exercise of options covered by his severance agreement.

      As a result of the  terminations of Messrs.  Sullivan and  Artigliere,  we
recorded  severance  expense of $18.1 million during the year ended December 31,
2003, of which $17.9 million is reflected in "Corporate/Eliminations,"  and $0.2
million is reflected in the Advanced Technology segment. The expense is included
in  our   Consolidated   Statements  of  Operations  in  selling,   general  and
administrative expense.

      GEOGRAPHIC AREAS

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

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

      From the latter part of December  2000 to April 2002, we operated a United
Kingdom company that was part of All Other.  Approximately 89% of this company's
revenues were generated in foreign  currencies during 2002, while  approximately
45% of its expenses were generated in foreign currencies.

      We did not incur any significant  foreign  currency gains or losses during
the three years ended December 31, 2003.


                                       26
<PAGE>


      Revenues are  attributed to geographic  areas based on the location of the
assets producing the revenue.  Information concerning principal geographic areas
from  continuing  operations  as of and for the years ended  December 31, was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                         UNITED
                                   UNITED STATES         KINGDOM                CONSOLIDATED
                             -----------------------------------------------------------------
<S>                                  <C>                <C>                     <C>
2003
Net revenue                           $82,625            $10,362                 $92,987
Long-lived tangible assets              7,113              1,115                   8,228
Deferred tax asset                         --                 --                      --
----------------------------------------------------------------------------------------------

2002
Net revenue                           $87,075            $11,410                 $98,485
Long-lived tangible assets              7,577                855                   8,432
Deferred tax asset                      1,236                 --                   1,236
----------------------------------------------------------------------------------------------

2001
Net revenue                          $139,060            $17,427                $156,487
Long-lived tangible assets             19,193                992                  20,185
Deferred tax asset                      1,167                 --                   1,167
----------------------------------------------------------------------------------------------
</TABLE>


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

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


                                       27
<PAGE>


      RISK FACTORS

      WE HAVE A HISTORY OF OPERATING  LOSSES AND NEGATIVE  CASH FLOWS AND WE MAY
NOT BECOME  PROFITABLE  IN THE FUTURE,  WHICH COULD  RESULT IN OUR  INABILITY TO
CONTINUE OPERATIONS IN THE NORMAL COURSE OF BUSINESS.

      Historically we have suffered losses and have not generated  positive cash
flows  from  operations.  This  raised  doubt in the past  about our  ability to
continue as a going concern. As of December 31, 2003, as a result of the reduced
settlement  payment of the our debt obligations to IBM, the conversion to equity
of our obligations  under the Debentures,  and the sale of 3.0 million shares of
our common stock under our 3.0 million  share  offering,  we have  mitigated the
substantial doubt regarding our ability to continue as a going concern.

      Excluding  a gain  on the  extinguishment  of debt of  $70.1  million,  we
incurred a net loss from  continuing  operations for the year ended December 31,
2003, of $64.1 million and we incurred net losses from continuing  operations of
$89.5 million and $188.6 million for the years ended December 31, 2002 and 2001,
respectively.  Our consolidated operating activities used cash of $11.4 million,
$3.9 million and $18.0 million during 2003, 2002 and 2001, respectively. We have
funded our operating cash  requirements,  as well as our capital  needs,  during
these  periods  with  the  proceeds  from our  investing  and/or  our  financing
activities.

      As of December 31, 2003,  we reported  minimal  revenues from the sales of
our Digital AngelTM,  VeriChip(TM) and Bio ThermoTM  products and we have had no
sales of our Thermo Life(TM) and PLD products. As of December 31, 2003, we had a
consolidated cash balance of $10.2 million,  which we believe,  along with other
sources of funds, will provide us with sufficient working capital for the twelve
months ending  December 31, 2004.  However,  beyond that time frame,  we believe
that absent  significant  improvement in the sales of these advanced  technology
products,  our business  operations are unlikely to provide sufficient cash flow
to support our operational requirements.  Our profitability and liquidity depend
on many factors including the success of our marketing programs, the maintenance
and reduction of expenses and our ability to  successfully  develop and bring to
market our new products and technologies.  Our ability to achieve  profitability
and/or generate  positive cash flows from operations is predicated upon numerous
factors with varying levels of importance as follows:

      o     First, we will attempt to successfully implement our business plans,
            manage  expenditures  according to our budget, and generate positive
            cash flow from operations;

      o     Second, we will attempt to develop an effective  marketing and sales
            strategy in order to grow our business and compete  successfully  in
            our markets;

      o     Third,  we will attempt to obtain the necessary  approvals to expand
            the  market  for the  VeriChip  product  in  order  to  improve  the
            product's salability;

      o     Fourth,  we will attempt to realize  positive cash flow with respect
            to our  investment in Digital Angel  Corporation in order to provide
            us with an appropriate return on our investment; and

      o     Finally,  we will attempt to complete the development of the Digital
            Angel and PLD products.

      If we are not  successful in managing  these  factors and achieving  these
goals,  it could  have a  material  adverse  effect on our  business,  financial
condition  and results of  operations,  which could  result in our  inability to
continue operations in the normal course of business.


                                       28
<PAGE>

      OUR FAILURE TO GENERATE  POSITIVE  CASH FLOW FROM  OPERATIONS  WILL HAVE A
SUBSTANTIAL NEGATIVE IMPACT ON OUR BUSINESS,  FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

      Our operating  activities did not provide  positive cash flow during 2003,
2002 and 2001.  Our sources of liquidity  may include  proceeds from the sale of
common  stock  and  preferred  shares,  proceeds  from the  sale of  businesses,
proceeds  from the sale of the Digital Angel  Corporation  common stock owned by
us,  proceeds  from  the  sale of our  common  stock  issued  to  Digital  Angel
Corporation  under  the  Share  Exchange   Agreement,   proceeds  from  accounts
receivable and inventory financing  arrangements,  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,  which may not be available to us
on favorable  terms.  In the future,  if we fail to generate  positive cash flow
from  operations,  it will have a  materially  adverse  effect on our  business,
financial condition and results of operations.

      WE WERE REQUIRED TO ISSUE ADDITIONAL  SHARES OF COMMON STOCK IN CONNECTION
WITH SEVERANCE  AGREEMENTS WITH OUR FORMER EXECUTIVE OFFICERS AND DIRECTORS AND,
AS A RESULT,  YOUR INVESTMENT IN OUR COMMON STOCK HAS BEEN DILUTED,  AND YOU MAY
BE  UNABLE  TO RESELL  YOUR  SHARES AT OR ABOVE THE PRICE AT WHICH YOU  ACQUIRED
THEM.

      On March 21, 2003, we entered into  severance  agreements  with Richard J.
Sullivan,  our then  Chairman  of the Board of  Directors  and  Chief  Executive
Officer,  and Jerry C.  Artigliere,  our then  Senior Vice  President  and Chief
Operating  Officer.  The severance  agreements  provided for the issuance of 5.6
million  and  approximately  0.5 million  shares of our common  stock to Richard
Sullivan and Jerome  Artigliere,  respectively.  We issued the shares to Richard
Sullivan and Jerome Artigliere on March 1, 2004. In addition, stock options held
by  Richard  Sullivan  and  Jerome   Artigliere,   which  were  exercisable  for
approximately 1.1 and 0.2 million shares of our common stock, respectively, were
re-priced.  The options  surrendered  had exercise  prices ranging from $1.50 to
$3.20 per share and were replaced with options  exercisable  at $0.10 per share,
all of which  have been  exercised.  As a result of the  termination  of Richard
Sullivan's  employment with us, a "triggering  event" provision in the severance
agreement we entered into with Garrett Sullivan, our former Vice Chairman of the
Board  (who  is not  related  to  Richard  Sullivan),  at the  time  of  Garrett
Sullivan's  ceasing  to  serve  in such  capacity  in  December  2001,  has been
triggered.   We  negotiated  a  settlement  of  our  obligations  under  Garrett
Sullivan's  severance  agreement  that  required  us to issue to him 0.8 million
shares of our common stock. We issued the shares to Garrett Sullivan on February
17,  2004.  The issuance of these  shares to our former  executive  officers and
directors,  which have been  approved by our  shareholders,  have resulted in an
increase in the total number of our shares  outstanding  and, as a result,  your
investment in our common stock has been further  diluted,  and you may be unable
to resell your shares at or above the price at which you acquired them.

      OUR STOCK PRICE HAS BEEN VOLATILE AND HAS DECREASED SIGNIFICANTLY OVER THE
PAST FEW  YEARS,  AND YOU MAY BE UNABLE TO  RESELL  YOUR  SHARES AT OR ABOVE THE
PRICE AT WHICH YOU ACQUIRED THEM.

      Since January 1, 2000,  the price per share of our common stock has ranged
from a high of $180.00 to a low of $0.30, ($18.00 and $0.03, respectively,  on a
pre-reverse stock split basis).  The price of our common stock has been, and may
continue to be,  highly  volatile and subject to wide  fluctuations.  The market
value of our common  stock has  declined  over the past few years in part due to
our operating performance.  In the future, broad market and industry factors may
decrease  the  market  price  of our  common  stock,  regardless  of our  actual
operating  performance.  Declines in the market  price of our common stock could
affect our access to  capital,  which may impact our  ability to  continue  as a
going concern.  In addition,  declines in the price of our common stock may harm
employee morale and retention, curtail investment opportunities presented to us,
and  negatively  impact  other  aspects  of our  business.  As a result of these
declines, you may be unable to resell your shares at or above the price at which
you acquired them.


                                       29
<PAGE>

      BECAUSE  OF  RECENT  PERIODS  OF  VOLATILITY  IN THE  MARKET  PRICE OF OUR
SECURITIES,  WE FACE A HEIGHTENED  RISK OF SECURITIES  CLASS ACTION  LITIGATION,
WHICH COULD SIGNIFICANTLY HARM OUR BUSINESS OPERATIONS AND FINANCIAL CONDITION.

      Because  of  recent  periods  of  volatility  in the  market  price of our
securities,  we face a heightened risk of securities class action litigation. In
March 2003, we settled,  subject to court approval, a purported securities fraud
class action, which was filed against us and one of our former directors.  While
the class action was tentatively settled in March 2003, additional litigation of
this type could  result in  substantial  costs and a diversion  of  management's
attention and resources,  which could significantly harm our business operations
and financial condition.

      WE MAY BE  REQUIRED  TO ISSUE  ADDITIONAL  SHARES OF OUR  COMMON  STOCK IN
CONNECTION WITH PRIOR AGREEMENTS, AND AS A RESULT, YOUR INVESTMENT IN OUR COMMON
STOCK MAY BE FURTHER DILUTED.

      As of March 10,  2004,  there were  50,289,399  shares of our common stock
outstanding. Since January 1, 2001, we have issued a net aggregate of 40,140,729
shares of common stock, of which

      o     9,726,163  shares were issued in  connection  with  acquisitions  of
            businesses and assets;

      o     6,481,063  shares  were  issued  upon  conversion  of our  Series  C
            Preferred Stock;

      o     2,769,960 shares were issued in connection with the Debentures;

      o     7,996,558  shares were issued in  connection  with two  best-efforts
            offerings  of our common  stock  through  the efforts of a placement
            agent J.P. Carey Securities, Inc.;

      o     6,825,000  shares were  issued in  connection  with three  severance
            agreements with our former officers and directors; and

      o     1,980,000 shares were issued to Digital Angel  Corporation under the
            terms of the Share Exchange Agreement.

      We have  effected,  and will likely  continue to effect,  acquisitions  or
contract for  services  through the issuance of common stock or our other equity
securities. Such issuances of additional securities may be dilutive to the value
of our common stock and may have a material  adverse  impact on the market price
of our common stock.

      WE  HAVE  ISSUED  AND  OUTSTANDING  A  SIGNIFICANT  NUMBER  OF  DERIVATIVE
SECURITIES  AND THE EXERCISE OF THESE OPTIONS AND WARRANTS MAY ADVERSELY  AFFECT
THE MARKET PRICE OF OUR COMMON  STOCK,  AND COULD HAVE A NEGATIVE  IMPACT ON THE
VALUE OF YOUR INVESTMENT IN OUR COMMON STOCK.

      As of March 10,  2004,  there were  outstanding  warrants  and  options to
acquire up to 3,680,455  additional shares of our common stock. In addition,  as
of March  10,  2004,  we had  757,450  additional  shares  of our  common  stock
available to be issued in the future under our stock  option  plans,  and we had
588,629  additional  shares of our common  stock  available  to be issued in the
future under our  Employee  Stock  Purchase  Plan.  The exercise of  outstanding
options and warrants and the sale in the public  market of the shares  purchased
upon exercise  could have a negative  impact on the value of your  investment in
our common stock.

      WE  HAVE  MADE  SIGNIFICANT  CHANGES  TO OUR  BUSINESS  MODEL  AND WE HAVE
EXPANDED INTO DIFFERENT  PRODUCT LINES INCLUDING NEW UNPROVEN  TECHNOLOGIES  AND
OUR NEW BUSINESS MODEL MAY NOT BE SUCCESSFUL.

      During  the  past few  years,  we have  made  significant  changes  to our
business  model as a result of a new business  strategy and the  expansion  into
different  product  lines  including new unproven  technologies  such as Digital
Angel,  VeriChip and Thermo Life. If we are not successful in  implementing  our
new business model and developing and marketing our new technology products, our
advanced  technology  products may not gain sufficient  market  acceptance to be
profitable  or otherwise be  successful  and the market price of our  securities
will most likely decrease.


                                       30
<PAGE>

      WE   RELY   HEAVILY   ON   OUR   REVENUES   DERIVED   FROM   OUR   FEDERAL
TELECOMMUNICATIONS  BUSINESS,  AND THE LOSS OF, OR A  SIGNIFICANT  REDUCTION IN,
ORDERS FROM THE UNITED STATES GOVERNMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

      Approximately  $37.1 million, or 83.2%, $31.3 million, or 74.7%, and $27.4
million,  or 61.5%, of our Advanced  Technology  segment's revenue for the years
2003,  2002  and  2001,   respectively,   were  generated  by  our  wholly-owned
subsidiary, Computer Equity Corporation. Approximately 99.3%, 99.1% and 77.7% of
Computer  Equity  Corporation's  revenue  for the  years  2003,  2002 and  2001,
respectively,  were  generated  through sales to various  agencies of the United
States   federal    government.    Computer    Equity    Corporation    provides
telecommunications  products and services and holds less than one percent of the
federal  telecommunications  market share.  Computer Equity's business is highly
competitive,  and we expect  that the  competitive  pressures  it faces will not
diminish  in  the  future.  Many  of our  competitors  have  greater  financial,
technological,  marketing  and  other  resources  than we do.  The loss of, or a
significant  reduction  in,  federal  telecommunications  orders  could  have  a
material adverse effect on our financial condition and results of operations.

      DIGITAL ANGEL CORPORATION  COMPETES WITH OTHER COMPANIES IN THE VISUAL AND
ELECTRONIC IDENTIFICATION MARKET, AND THE PRODUCTS SOLD BY ITS COMPETITORS COULD
BECOME MORE POPULAR THAN ITS  PRODUCTS OR RENDER ITS  PRODUCTS  OBSOLETE,  WHICH
COULD HAVE A MATERIAL  ADVERSE AFFECT ON OUR FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS.

      The market for visual and electronic  identification for companion animals
and livestock is highly competitive.  We believe that our principal  competitors
in the visual  identification  market for  livestock  are  AllFlex USA and Y-Tex
Corporation, and that our principal competitors in the electronic identification
market that have developed permanent electronic  identification  devices for the
companion animal market are AllFlex USA,  Datamars SA and Avid Plc. In addition,
other companies could enter this line of business in the future. Some of Digital
Angel Corporation's  competitors have substantially  greater financial and other
resources  than it does.  Digital Angel  Corporation  may not be able to compete
successfully with those competitors, and those competitors may develop or market
technologies  and products  that are more widely  accepted  than  Digital  Angel
Corporation's   products  or  that  could  render  its   products   obsolete  or
noncompetitive,  which  could have a material  adverse  affect on our  financial
condition and results of operations.

      OUR  DIGITAL  ANGEL  CORPORATION'S  ANIMAL  APPLICATIONS  DIVISION  RELIES
HEAVILY ON SALES TO  GOVERNMENT  CONTRACTORS,  AND ANY  DECLINE IN THE DEMAND BY
THESE CUSTOMERS FOR ITS PRODUCTS COULD NEGATIVELY AFFECT OUR BUSINESS.

      The principal customers for electronic identification devices for fish are
government  contractors that rely on funding from the United States  government.
Because the  contractors  rely heavily on government  funds,  any decline in the
availability  of  such  funds  could  result  in a  decreased  demand  by  these
contractors for Digital Angel Corporation's  products. Any decrease in demand by
such customers could have a material  adverse effect on our financial  condition
and results of operations.


                                       31
<PAGE>


      INFOTECH USA, INC. COMPETES IN A HIGHLY COMPETITIVE MARKET, AND IT EXPECTS
TO FACE FURTHER  COMPETITION  FROM NEW MARKET  ENTRANTS  AND POSSIBLE  ALLIANCES
BETWEEN COMPETITORS IN THE FUTURE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

      InfoTech  USA,  Inc.  competes  in a  highly  competitive  market  with IT
products and services  providers  that vary greatly in their size and  technical
expertise. Its primary competitors are Manchester  Technologies,  Inc., AlphaNet
Solution, Inc., En Pointe Technologies,  Inc.,  Micros-to-Mainframes,  Inc., and
Pomeroy Computer Resources.  Additionally,  we expect InfoTech USA, Inc. to face
further  competition  from new market  entrants and possible  alliances  between
competitors  in the future,  which could have a material  adverse  effect on our
financial condition and results of operations.

      WE DEPEND ON OUR SMALL TEAM OF SENIOR MANAGEMENT AND KEY PERSONNEL, AND WE
MAY HAVE DIFFICULTY ATTRACTING AND RETAINING ADDITIONAL PERSONNEL,  AND THE LOSS
OF THE SERVICES OF ANY ONE OF THEM COULD HARM OUR BUSINESS,  FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

      The  success  of our  business  depends  on the  continued  service of our
executive  officers  and  key  personnel.  Presently,  we have  not  experienced
problems recruiting and retaining qualified  personnel.  However, in the future,
we may not be successful  in retaining  our key  employees or in attracting  and
retaining additional skilled personnel as required.  The loss of the services of
any of our central management team could harm our business,  financial condition
and results of operations.  In addition, the operations of any of our individual
facilities  could be adversely  affected if the  services of the local  managers
should be unavailable.

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

      On December 31, 2003,  the book value of our inventory was $9.4 million as
compared to a book value of $6.4 million as of December  31, 2002.  We attribute
the increase to an increase in  work-in-process  related to government  contract
projects  and the  accumulation  of inventory by Digital  Angel  Corporation  in
anticipation  of future  sales.  Our  success  depends in part 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.

      DIGITAL  ANGEL  CORPORATION  MAY NOT HAVE  SUFFICIENT  FUNDS TO REPAY  ITS
OBLIGATIONS TO LAURUS WHEN THEY BECOME.

      Digital Angel  Corporation may not have  sufficient  funds to repay Laurus
when its debt obligations to Laurus become due. Accordingly,  it may be required
to  obtain  the  funds  necessary  to repay  these  obligations  either  through
refinancing, the issuance of additional equity or debt securities or the sale of
assets.  Digital Angel  Corporation may be unable to obtain the funds needed, if
any, to repay the  obligations  from any one or more of these  other  sources on
favorable  economic  terms or at all. If Digital Angel  Corporation is unable to
obtain  funds to repay  this  indebtedness,  it may be forced to  dispose of its
assets or take other  actions on  disadvantageous  terms,  which could result in
losses to Digital Angel  Corporation and could have a material adverse effect on
our financial condition and results of operations.


                                       32
<PAGE>


      THE  TERMS OF  DIGITAL  ANGEL  CORPORATION'S  DEBT  OBLIGATIONS  TO LAURUS
SUBJECT US TO THE RISK OF  FORECLOSURE  ON  SUBSTANTIALLY  ALL OF DIGITAL  ANGEL
CORPORATION'S ASSETS.

      To secure the payment of all  obligations  owed to Laurus,  Digital  Angel
Corporation  has  granted to Laurus a security  interest in and lien upon all of
its property  and assets,  whether  real or  personal,  tangible or  intangible,
whether now owned or hereafter acquired,  or in which it now has, or at any time
in the future may acquire,  any right,  title or interest.  The occurrence of an
event of  default  under any of its  obligations  would  subject  Digital  Angel
Corporation to foreclosure by Laurus on  substantially  all of its assets to the
extent  necessary  to repay any amounts due.  Any such  defaults  and  resulting
foreclosure would have a material adverse effect on our financial condition.

      INFOTECH USA,  INC. MAY NOT BE  SUCCESSFUL IN OBTAINING A REPLACEMENT  FOR
ITS IBM CREDIT  FACILITY,  WHICH  COULD HAVE A  MATERIAL  ADVERSE  IMPACT ON OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.

      The InfoTech  USA,  Inc.  segment  finances its  accounts  receivable  and
inventory.  Its current financing arrangement with IBM Credit provides financing
on inventory purchases up to $1.8 million. Borrowing for purchases is based upon
75% of all  eligible  receivables  due  within  90  days  and up to  100% of all
eligible inventories. Borrowings under the financing arrangement with IBM Credit
were $0.8 million at December 31, 2003. On September 5, 2003, InfoTech USA, Inc.
received  a  letter  from  IBM  Credit   constituting  their  formal  notice  of
termination of the agreement. The effective date of such termination,  which was
originally  set for March 10,  2004,  has been  extended  until  April 9,  2004.
InfoTech USA, Inc. is currently in the process of securing  other  financing and
expects to replace its financing  arrangement  prior to the termination date set
by IBM Credit.  However,  if InfoTech USA, Inc. is not successful in obtaining a
replacement for the IBM Credit  financing  arrangement,  which is needed to fund
its operations in the coming year and beyond, InfoTech USA, Inc. may not be able
to  continue in the  ordinary  course of  business,  which would have a material
adverse impact on our financial condition, results of operations and cash flows.

      THE   ISSUANCES  OF  COMMON  STOCK  TO  THIRD  PARTIES  BY  DIGITAL  ANGEL
CORPORATION GIVE RISE TO A REDUCTION OF OUR OWNERSHIP INTEREST AND MAY RESULT IN
SIGNIFICANT  LOSSES,  WHICH COULD ADVERSELY AFFECT OUR FINANCIAL  CONDITIONS AND
RESULTS OF OPERATIONS.

      Gains  where  realizable  and losses on issuance of shares of stock by our
consolidated  subsidiary,  Digital  Angel  Corporation,  are  reflected  in  our
Consolidated  Statements of  Operations.  These gains and losses result from the
difference  between the carrying  amount of the pro-rata share of our investment
in Digital  Angel  Corporation  and the net proceeds  from the  issuances of the
stock.  In the past,  the  issuances of stock to third  parties by Digital Angel
Corporation  have also given rise to losses as a result of the  reduction of our
interest ownership in Digital Angel Corporation. Future stock issuances to third
parties by Digital  Angel  Corporation,  including  upon the  exercise  of stock
options and warrants, the conversion of debt, or the conversion of Digital Angel
Corporation's  Series A Preferred  Stock issued in connection with the OuterLink
acquisition,  will further dilute our ownership percentage,  which may give rise
to  significant  losses.  If we incur  such  losses,  and/or  become  unable  to
consolidate  the  operations  of  Digital  Angel  Corporation,  it could  have a
material adverse impact on our financial condition and results of operations.

      DIGITAL ANGEL CORPORATION DEPENDS ON A SINGLE PRODUCTION  ARRANGEMENT WITH
RAYTHEON CORPORATION FOR OUR PATENTED SYRINGE-INJECTABLE  MICROCHIPS WITHOUT THE
BENEFIT  OF A  FORMAL  WRITTEN  AGREEMENT,  AND THE  LOSS OF OR ANY  SIGNIFICANT
REDUCTION IN THE PRODUCTION COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

      We rely solely on a production  arrangement with Raytheon  Corporation for
the manufacture of our patented  syringe-injectable  microchips that are used in
all of our implantable electronic  identification products, but we do not have a
formal  written  agreement  with  Raytheon.  Raytheon  utilizes our  proprietary
technology  and  our  equipment  in the  production  of  our  syringe-injectable
microchips.  The termination,  or any significant reduction,  by Raytheon of the
assembly  of our  microchips  or a  material  increase  in the price  charged by
Raytheon for the assembly of our microchips  could have an adverse effect on our
financial condition and results of operations. In addition,  Raytheon may not be
able to produce sufficient  quantities of the microchips to meet any significant
increased  demand for our products or to meet any such demand on a timely basis.
Any  inability or  unwillingness  of Raytheon to meet our demand for  microchips
would require us to utilize an alternative production arrangement and remove our
automated assembly production machinery from the Raytheon facility,  which would
be costly and could  delay  production.  Moreover,  if Raytheon  terminates  our
production  arrangement,  we cannot  ensure that the assembly of our  microchips
from another source would be on comparable or acceptable  terms.  The failure to
make such an alternative  production arrangement could have an adverse effect on
our business.


                                       33
<PAGE>

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

      In addition to the litigation described under Legal Proceedings  beginning
on page 40,  we are party to  various  legal  actions  as  either  plaintiff  or
defendant in the  ordinary  course of  business.  The ultimate  outcome of these
actions  and the  estimates  of the  potential  future  impact on our  financial
position, cash flows or results of operations for these proceedings could have a
material adverse effect on our business.  In addition, we will continue to incur
additional legal costs in connection with pursuing and defending such actions.

      OUR  INTELLECTUAL  PROPERTY  RIGHTS OR  PATENT  RIGHTS  MIGHT NOT  PROVIDE
PROTECTION AND MIGHT BE INVALID OR UNENFORCEABLE.

      Our ability to  commercialize  any of our products under  development will
depend,  in part,  on our  ability to obtain  patents,  enforce  those  patents,
preserve trade secrets, and operate without infringing on the proprietary rights
of third  parties.  The patent  applications  licensed to or owned by us may not
result  in  issued  patents,  patent  protection  may  not be  secured  for  any
particular technology, any patents that have been or may be issued to us may not
be valid or enforceable and patents issued may not provide meaningful protection
to us. Furthermore, we do not own the VeriChip technology that is produced under
patents  #6,400,338 and  #5,211,129.  This  technology is owned by Digital Angel
Corporation  and licensed to VeriChip under an exclusive  product and technology
license with a remaining term through March 2013.  VeriChip  Corporation  may be
unable  to  retain  licensing  rights  to the use of these  patents  beyond  the
licensing period or the license may be terminated early.

      OUR FAILURE TO COMPLY WITH APPLICABLE  REGULATORY  REQUIREMENTS  REGARDING
VERICHIP CAN,  AMONG OTHER THINGS,  RESULT IN FINES,  SUSPENSIONS  OF REGULATORY
APPROVALS, PRODUCT RECALLS, OPERATING RESTRICTIONS AND CRIMINAL PROSECUTION.

      Some of our  current  or future  products  may be  subject  to  government
regulation and, in some cases,  pre-approval.  By letter dated October 17, 2002,
the FDA issued a determination that the VeriChip product is not a medical device
under Section 513(g) of the Federal Food,  Drug and Cosmetic Act with respect to
its   intended   security,   financial   and   personal    identification/safety
applications.  However,  the FDA further stated in its determination letter that
with  respect  to  the  use  of  the  VeriChip  product  in  health  information
applications, VeriChip is a medical device subject to the FDA's jurisdiction. On
November 8, 2002, we received a letter from the FDA,  based upon  correspondence
from us to the FDA, warning us not to market VeriChip for medical  applications.
While we currently  intend to market and  distribute  the  VeriChip  product for
security,  financial  and personal  identification/safety  applications,  in the
future,  we plan to expand our marketing and distribution  efforts to healthcare
information  applications  of the product,  subject to any and all necessary FDA
and other approvals. Our future failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution, any
of which could have a material adverse effect on us.


                                       34
<PAGE>


      DIGITAL  ANGEL  CORPORATION  IS SUBJECT TO GOVERNMENT  REGULATION  AND ANY
ACTION ON THE PART OF REGULATORS COULD HAVE A MATERIAL ADVERSE EFFECT ON DIGITAL
ANGEL CORPORATION'S BUSINESS.

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

      CERTAIN  FACTORS  COULD  IMPAIR  DIGITAL  ANGEL  CORPORATION'S  ABILITY TO
DEVELOP AND SELL ITS PRODUCTS IN CERTAIN MARKETS.

      The electronic animal  identification market can be negatively affected by
such factors as food safety concerns,  consumer  perceptions  regarding cost and
efficacy,  international  technology standards,  national  infrastructures,  and
slaughterhouse  removal of  microchips.  The  occurrence of any of these factors
could prevent Digital Angel  Corporation from selling,  or materially impair its
ability to sell, its products in certain markets and could negatively affect our
business.

      WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FROM THE USE OF OUR PRODUCTS
THAT COULD  RESULT IN COSTS OR DAMAGES  PAYABLE BY US  ADVERSELY  EFFECTING  OUR
BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS.

      Manufacturing,   marketing,   selling,  and  testing  our  products  under
development entail a risk of product  liability.  We could be subject to product
liability claims in the event our products or products under development fail to
perform as intended. Even unsuccessful claims could result in the expenditure of
funds in litigation and the diversion of management time and resources and could
damage our reputation  and impair the  marketability  of our products.  While we
maintain  liability  insurance,  it is possible that a successful claim could be
made against us, that the amount of indemnification  payments or insurance would
not be adequate to cover the costs of defending  against or paying such a claim,
or that  damages  payable  by us would  have a  material  adverse  effect on our
business, financial condition, and results of operations.

      THE DIGITAL ANGEL AND PLD  TECHNOLOGIES  ARE NOT DEVELOPED FOR  COMMERCIAL
DEPLOYMENT AND THERE IS NO CERTAINTY THAT THEY WILL BE SUCCESSFULLY MARKETED.

      Our ability to develop  and  commercialize  products  based on the Digital
Angel and PLD proprietary technologies will depend on our ability to develop our
products internally on a timely basis. However, there is no certainty that these
technologies will be developed, and if developed, that they will be successfully
marketed.


                                       35
<PAGE>


           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

            o     our working capital requirements over the next twelve months;

            o     our  growth  strategies  including,  without  limitation,  our
                  ability to deploy our products and services  including Digital
                  AngelTM, Thermo LifeTM, VeriChipTM, Bio-ThermoTM and PLD;

            o     anticipated trends in our business and demographics;

            o     the ability to obtain regulatory agencies' approvals including
                  but not limited to FDA approval regarding VeriChip;

            o     the ability to hire and retain skilled personnel;

            o     relationships with and dependence on technological partners;

            o     uncertainties relating to customer plans and commitments;

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

            o     our future profitability and liquidity;

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

            o     regulatory, competitive or other economic influences.

      In some cases, you can identify  forward-looking  statements by terms such
as "will likely result," "are expected to," "will  continue," "is  anticipated,"
"projects,"  "target," "goal," "plans,"  "objective,"  "may," "should," "could,"
"would,"  "anticipates,"  "expects,"  "intends," "plans,"  "believes,"  "seeks,"
"estimates,"   "hopes,"   and   similar   expressions   intended   to   identify
forward-looking statements.  These forward-looking statements are not guarantees
of future  performance  and are  subject to risks and  uncertainties  that could
cause actual results to differ materially from estimates or forecasts  contained
in the  forward-looking  statements.  Some of these risks and  uncertainties are
beyond  our  control.  Also,  these  forward-looking  statements  represent  our
estimates and assumptions  only as of the date the statement was made. We do not
undertake  any  obligation  to publicly  update or correct  any  forward-looking
statements to reflect events or circumstances  that subsequently  occur or which
we hereafter become aware of.


                                       36
<PAGE>


      RAW MATERIALS AND SUPPLIES

      To date, we have not been materially  adversely  affected by the inability
to obtain raw materials or products. Our principal manufacturing  subcontractors
and suppliers by segment are as follows:

      Advanced Technology Segment

      Principal Suppliers

      Computer Equity  Corporation's  major suppliers are Anixter,  NEC America,
Inc., Graybar Electric,  Koss Comm Systems,  Inc., and Accu-Tech,  among others.
Computer  Equity  Corporation  does not enter into contracts with its suppliers.
Computer Equity  Corporation is generally  obligated to make net payments to its
suppliers within 30 days of the suppliers' invoice date.

      The VeriChip product is licensed from Digital Angel  Corporation  under an
exclusive product and technology license with a remaining term until March 2013.

      Digital Angel Corporation Segment

      Principal Suppliers

      Our  Digital  Angel  Corporation  segment  relies  solely on a  production
arrangement  with  Raytheon   Corporation  for  the  assembly  of  its  patented
syringe-injectable  microchips,  which  are  used  in  all  of  our  implantable
electronic  identification  products.  The loss of, or any significant reduction
in,  the  production  could  have an  adverse  effect on our and  Digital  Angel
Corporation's businesses.  In addition to Raytheon,  Digital Angel Corporation's
principal    suppliers   are   TSI   Molding,    Inc.,    Motorola    Ltd.,   EM
Microelectronics-Marin SA, and Elder Industries.  Digital Angel Corporation does
not have contracts or supply arrangements with these suppliers.

      InfoTech USA, Inc. Segment

      Principal Suppliers

      Over 74.7% of InfoTech USA, Inc.'s purchases during 2003 were from its top
four suppliers as follows:  Ingram,  38.3%, IBM, 17.7%, Tech Data, 9.5%, Compaq,
9.2%. InfoTech USA, Inc. does not enter into contracts with its suppliers and is
generally  obligated to make net payments to its suppliers within 30 days of the
suppliers' invoice date.

      SEASONALITY

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

      EMPLOYEES

      At March 10, 2004,  we and our  subsidiaries  employed  approximately  403
employees.

      BACKLOG

      At March 10, 2004, we and our  subsidiaries had a backlog of approximately
$34.7  million.  We expect the entire backlog at March 10, 2004, to be filled in
2004 and 2005.


                                       37
<PAGE>


      COMPLIANCE WITH ENVIRONMENTAL REGULATIONS

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

      GOVERNMENT REGULATION

      We are  subject  to  federal,  state and local  regulation  in the  United
States,  including the FDA and Federal  Communications  Commission.  We are also
subject to regulation by government entities in other countries.

      UNITED STATES REGULATION

      Advanced Technology Segment

      The FDA ruled in October 2002, that VeriChip is a regulated medical device
when marketed to provide  information to assist in the diagnosis or treatment of
injury or illness.  On October 29, 2003,  we announced  that we had  submitted a
510(k)  application to the FDA seeking the FDA's  approval to market  VeriChip's
healthcare  information  applications  in the  United  States.  If  approval  is
obtained,  we plan to market  VeriChip for healthcare  information  applications
under the name VeriMedTM.

      Digital Angel Corporation Segment

      Animal products for food producing animals have been reviewed by the FDA's
Center for  Veterinary  Medicine and the FDA has  determined  that Digital Angel
Corporation's product, as presently configured,  is unregulated.  As of December
31, 2003, Digital Angel Corporation's  products do not incorporate FDA regulated
components.  However,  any applications  directly related to medical information
will require FDA  approval.  The FCC has also  approved  certain  Digital  Angel
Corporation  products.  Digital Angel Corporations  insecticide products require
approval by the United States  Environmental  Protection Agency,  which has been
obtained.

      REGULATION ABROAD

      Our  products  are  subject  to  compliance  with  applicable   regulatory
requirements  in those  foreign  countries  where our  products  are  sold.  The
contracts we maintain with our distributors in these foreign countries generally
require the  distributor to obtain all necessary  regulatory  approvals from the
governments of the countries in which these distributors sell our products.


                                       38
<PAGE>

      ITEM 2. PROPERTIES

      As of March 15,  2004,  our  corporate  headquarters  were located in Palm
Beach,  Florida.  Since June 2004,  are  corporate  headquarters  are located in
Delray Beach,  Florida.  At March 10, 2003, we were  obligated  under leases for
approximately  163,614 square feet of  facilities,  of which 109,150 square feet
was for office  facilities  and 54,464 square feet was for factory and warehouse
space. These leases expire at various dates through 2042. In addition,  we owned
111,977  square feet of office and  manufacturing  facilities,  of which  78,800
square feet were for manufacturing,  factory and warehouse use and 33,177 square
feet was for office space.

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

<TABLE>
<CAPTION>
                                                            FACTORY/
                                                 OFFICE     WAREHOUSE          TOTAL
                                              ----------------------------------------
                                                     (amounts in square feet)
<S>                                               <C>            <C>           <C>
Advanced Technology                               56,005         13,464        69,469
Digital Angel Corporation                         41,621        114,000       155,621
InfoTech USA, Inc.                                 9,119          1,000        10,119
Corporate (1)                                     20,582             --        20,582
                                              ----------- -------------- -------------
  Total Continuing Operations                    127,327        128,464       255,791
Discontinued Operations                           15,000          4,800        19,800
                                              ----------- -------------- -------------
  Total                                          142,327        133,264       275,591
                                              =========== ============== =============
</TABLE>

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


<TABLE>
<CAPTION>
                                                                FACTORY /
                                                 OFFICE         WAREHOUSE       TOTAL
                                              ----------------------------------------
                                                        (amounts in square feet)
<S>                                               <C>                            <C>
California                                        27,649               --       27,649
Florida                                            3,894               --        3,894
Maryland                                          15,000            4,800       19,800
Massachusetts                                     10,471                        10,471
Minnesota                                          6,000           74,000       80,000
New Hampshire                                     15,856            5,464       21,320
New Jersey  (1)                                   20,838            1,000       21,838
New York                                           1,969               --        1,969
Virginia                                          18,500            8,000       26,500
United Kingdom                                    22,150           40,000       62,150
                                              ----------- ---------------- ------------
    Total                                        142,327          133,264      275,591
                                              =========== ================ ============
</TABLE>

      (1)   Includes office space leased to others.

      In June 2001, the FASB issued Statement of Financial  Accounting  Standard
No.  143,  Accounting  for Asset  Retirement  Obligations  (FAS  143),  which is
effective for fiscal years beginning after June 15, 2002. FAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair  value at the time the  obligations  are  incurred.  Upon  initial
recognition  of a  liability,  the cost  should  be  capitalized  as part of the
related  long-lived  asset and  allocated to expense over the useful life of the
asset.  We adopted FAS 143 on January 1, 2003.  Application of the new rules did
not have any impact on our financial  position and results of operations,  as we
do not currently have any legal  obligations  associated  with the retirement of
long-lived assets or leased facilities.


                                       39
<PAGE>

      ITEM 3. LEGAL PROCEEDINGS

      We, and certain of our subsidiaries,  are parties to various legal actions
as either  plaintiff or defendant  and  accordingly,  we have  recorded  certain
reserves in our  financial  statements  as of December 31, 2003. In our opinion,
these  proceedings  are not  likely  to have a  material  adverse  affect on our
financial  position,  our cash  flows or our  overall  trends  in  results.  The
estimate of the potential impact on our financial position,  our overall results
of  operations  or our cash  flows for  these  proceedings  could  change in the
future.

      On January 31, 2002, Treeline,  Inc. filed a complaint in the Common Pleas
Court of Cuyahoga  County,  Ohio against us, and one of our  subsidiaries,  STR,
Inc., now known as ARJANG,  Inc. ("STR") and another  defendant who was formerly
an  executive  of STR,  alleging  that STR  breached  its lease  agreement  with
Treeline,  Inc. in connection with a facility no longer being used by us. On May
15,  2003,  we settled  the  dispute  with  Treeline,  Inc.,  subject to certain
conditions  subsequent.  The settlement provided for the issuance of 0.1 million
shares of our common stock,  subject to price  protection  provisions  under the
settlement  agreement.  The  Securities  and  Exchange  Commission  declared our
registration  statement  registering the 0.1 million shares issued in connection
with this settlement effective on September 10, 2003.

      On March 31, 2002, 510 Ryerson Road,  Inc. filed a lawsuit  against us and
one of our  subsidiaries  in  connection  with a lease  for a  facility  that we
vacated prior to the  expiration of the lease and which is no longer in use. The
plaintiffs demanded relief in the amount of $2.0 million. We have entered into a
settlement  agreement  with the  plaintiffs  pursuant  to which we issued to the
plaintiff shares having a value of approximately $1.1 million plus interest. The
shares were issued on February 17, 2004.

      On May 20,  2002,  a purported  securities  fraud  class  action was filed
against us and one of our directors.  In the following weeks, fourteen virtually
identical  complaints  were  consolidated  into a single  action,  In re Applied
Digital  Solutions  Litigation,  which was filed in the United  States  District
Court for the  Southern  District of Florida.  In March 2003,  we entered into a
memorandum of  understanding  to settle the pending  lawsuit.  The settlement of
$5.6 million will be entirely covered by proceeds from insurance, and is subject
to approval by the District Court. In December 2003, the District Court issued a
preliminary  approval of the class action  settlement  and  directed  that Class
Members be given notice of the Settlement. The final hearing, at which the Court
will consider  whether to issue its final approval and enter final judgment,  is
set for March 19, 2004.

      On October 22, 2002,  Anat  Ebenstein,  InfoTech USA,  Inc.'s former Chief
Executive  Officer,  filed a complaint  against us and  InfoTech  USA,  Inc. and
certain  officers  and  directors  in  connection  with the  termination  of her
employment.  The  complaint  filed in the Superior  Court of New Jersey,  Mercer
County,  seeks compensatory and punitive damages of $1.0 million arising from an
alleged improper termination. The action is currently in the discovery stage. We
believe that a portion of any ultimate damages may be covered under insurance.

      On October 22, 2003, Melvin Maudlin (the  "Plaintiff"),  a former employee
at our subsidiary, Pacific Decision Sciences Corporation ("PDSC"), filed suit in
the Superior  Court of California  against PDSC,  Hark Vasa and us in connection
with  a  purported  trust  agreement  involving  PDSC  which,  according  to the
Plaintiff  provides  that he is to  receive  monthly  payments  of  $10,000  for
approximately  17 years.  The  Plaintiff  has obtained a  pre-judgment  right to
attach order in the amount of his total claim of $2.1 million,  and subsequently
obtained a purported writ of attachment of certain PDSC assets. The suit has not
materially affected PDSC's ability to operate its business but could affect such
operations  in the future.  Discovery  has not yet begun,  and no trial date has
been set. We intend to vigorously defend this suit.


                                       40
<PAGE>

      In February 2003, an action was filed in Middlesex  County  Superior Court
in the Commonwealth of Massachusetts.  Digital Angel  Corporation's  subsidiary,
OuterLink  (OuterLink  was acquired in January  2004),  as well as a significant
stockholder  of OuterLink  and a principal of the  significant  stockholder  are
named as defendants.  Such principal was a director of OuterLink.  The complaint
alleged  breach of an August 25, 1999  employment  contract.  The  plaintiff was
President and Chief Executive Officer of OuterLink from July 1999 through August
2002. The Complaint seeks damages based  principally on a contractual  severance
provision that allegedly provided for four months of compensation for every year
or fraction thereof served prior to termination. At the time of termination, the
complaint alleges that the plaintiff's salary was approximately $0.3 million per
year.   The   Defendants   answered   denying  all  liability  and  asserting  a
counterclaim.  Discovery  will be  completed  in  this  matter  shortly  and the
Defendants   intend  to   vigorously   defend  this  matter  and  pursue   their
counterclaim.  The ultimate  outcome of this  proceeding  cannot be predicted at
this time, and we are currently unable to determine the potential effect of this
litigation on our consolidated financial position,  results of operation or cash
flows.

      In  June,  2002,  eResearch   Technology,   Inc.  f/k/a  Premier  Research
Worldwide,  Ltd.  ("ERT")  commenced a proceeding in the United States  District
Court for the District of New Jersey against U.S. Bank National Association ("US
Bank") and Digital Angel Corporation.  This suit was commenced to pursue alleged
damages of approximately  $0.4 million due to the Digital Angel  Corporation and
US Bank's  alleged  failure to register  transfers of  restricted  Digital Angel
Corporation's  common stock sold by ERT in May 2002.  Digital Angel  Corporation
has agreed to indemnify US Bank for all damages and reasonable costs relating to
this litigation.  Digital Angel Corporation has asserted a counterclaim  against
ERT based on ERT's breach of a license agreement and services agreements between
the parties that resulted in the original  issuance of approximately 0.6 million
restricted  shares of  Digital  Angel  Corporation's  common  stock to ERT.  The
damages to Digital Angel Corporation  exceed $4 million and this amount does not
include the share of profits,  which Digital Angel  Corporation seeks to recover
had ERT not breached the agreements.  Further, the alleged damages sought by the
Plaintiff in this matter do not take into account  plaintiff's  duty to mitigate
damages which if discharged would have resulted in a profit to ERT. The ultimate
outcome of this proceeding cannot be predicted at this time and we are currently
unable to determine the potential  effect of this litigation on our consolidated
financial position, results of operation or cash flows.

      In  February  2004,  Electronic   Identification   Devices,  Ltd.  ("EID")
commenced a Declaratory Judgment Action against Digital Angel Corporation in the
United  States  District  Court for the Western  District of Texas.  This action
seeks a  declaration  of  patent  non-infringement  relating  to  Digital  Angel
Corporation's syringe implantable identification transponders.  Monetary damages
are not being sought. The lawsuit alleges that Plaintiff EID has developed a new
transponder  that it believes does not infringe on Digital  Angel  Corporation's
patent.  The lawsuit  acknowledges  that Digital  Angel  Corporation  obtained a
Judgment of  Infringement  and two Contempt  Orders against EID based on selling
certain  systems that infringed on Digital Angel  Corporation's  patent in 1997,
1998 and 1999.  Digital Angel Corporation has not yet answered the Complaint and
given  the very  early  stage  of this  matter,  the  ultimate  outcome  of this
proceeding cannot be predicted at this time.

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

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

      We did not submit any  matters to a vote of  security  holders  during the
fourth quarter of 2003.


                                       41
<PAGE>


                                     PART II

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

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

      The following table shows (on a post-reverse  stock split basis),  for the
periods  indicated,  the high and low sales prices per share of our common stock
based on published financial sources.


                                                         HIGH              LOW
                                                         ----              ---
2002
First Quarter                                           $   5.50        $   2.80
Second Quarter                                             24.00            2.90
Third Quarter                                               8.40            0.30
Fourth Quarter                                              7.00            3.60

2003
First Quarter                                           $   6.40        $   1.80
Second Quarter                                              6.10            3.50
Third Quarter                                               5.50            3.70
Fourth Quarter                                              5.00            2.80


      HOLDERS

      According  to the records of our  transfer  agent,  as of March 10,  2004,
there were approximately 2,661 holders of record of our common stock.

      DIVIDENDS

      We have  never  paid cash  dividends  on our common  stock.  The  decision
whether to apply  legally  available  funds to the payment of  dividends  on our
common  stock  will be made by our Board of  Directors  from time to time in the
exercise of its business judgment.


                                       42
<PAGE>


      RECENT SALES OF UNREGISTERED SECURITIES

      The following  table lists all  unregistered  securities sold by us during
the year ended December 31, 2003, which have not previously been reported. These
shares were issued in connection  with the earnout  provisions of an acquisition
agreement,  employee stock options and payment of directors'  fees. These shares
were issued  without  registration  in reliance upon the  exemption  provided by
Section  4(2)  of the  Securities  Act of  1933,  as  amended,  or  Rule  506 of
Regulation D promulgated thereunder.

<TABLE>
<CAPTION>

                                                  Aggregate                                          Number of
                                                  Amount of    Number of                               Common
      Name/Entity/Nature         Date of Sale   Consideration   Persons    Note      Issued For        Shares
-----------------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>             <C>        <C>    <C>                <C>
Steven Couture                  October 2003      $138,832         1         1    Earnout                 32,611
Jeffrey Couture                 October 2003       134,750         1         1    Earnout                 31,652
Raymond Maggi                   October 2003       134,750         1         1    Earnout                 31,652

Applied Digital
Solutions, Inc.'s
Directors, Officers and                                                           Employee stock
Employees                       November 2003           --      Various      2    options                672,000
Dan Penni                       November 2003       42,000         1         3    Services                 9,333
Art Noterman                    November 2003       39,356         1         3    Services                 8,746
Connie Weaver                   November 2003       47,778         1         3    Services                10,617
Angela Sullivan                 November 2003       10,000         1         3    Services                 2,222
Michael Zarriello               November 2003       11,034         1         3    Services                 2,452
                                                ---------------                                     -------------
  Total                                           $558,500                                               801,285
                                                ===============                                     =============
</TABLE>

      1.    Represents  shares issued to the  shareholder in connection with the
            "earnout"  provision of the  agreement  of sale  relating to a prior
            private  transaction  directly  negotiated  by  the  shareholder  in
            connection with the sale of their business to us, which  transaction
            was  exempt  from  registration  pursuant  to  Section  4(2)  of the
            Securities  Act  of  1933.  The  earnout   provision   provided  for
            post-closing   compensation   to  the   shareholder   based  on  the
            post-closing performance of the acquired company's business.

      2.    Represents  options  granted under our 2003 Flexible  Stock Plan. No
            consideration  has been received in connection with these options as
            none have been exercised.

      3.    Represents  shares  issued  in lieu of  cash  payments  for all or a
            portion  of the  director's  fees for the  second,  third and fourth
            quarters of 2001,  for the year ended December 31, 2002, and for the
            first,   second  and  third  quarters  of  2003.  The   certificates
            representing  the shares were  legended  to indicate  that they were
            restricted.


                                       43
<PAGE>


      ITEM 6. SELECTED FINANCIAL DATA

      The  following  table  of  selected  financial  data  should  be  read  in
conjunction  with our  consolidated  financial  statements  and  related  notes,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," and other financial  information appearing elsewhere in this Annual
Report.  The Summary of Operations data set forth below for each of the years in
the three-year  period ended December 31, 2003, and the Summary of Balance Sheet
Data as of December  31, 2003 and 2002,  were  derived  from,  and  qualified by
reference  to, our  financial  statements  appearing  elsewhere  in this  Annual
Report. The Summary of Operations data for the years ended December 31, 2000 and
1999,  and the Summary of Balance  Sheet Data as of December 31, 2001,  2000 and
1999, are derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                                                    FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------------------------------
                                                       2003           2002           2001           2000          1999
                                                    ---------      ---------      ---------      ---------      ---------
<S>                                            <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
                                                                  (in thousands, except per share amounts)

 Net revenue                                        $  92,987      $  98,485      $ 156,487      $ 135,007      $ 129,064
 Cost of products and services sold                    64,892         67,469        110,677         82,968         75,442
                                                    ---------      ---------      ---------      ---------      ---------
 Gross profit                                          28,095         31,016         45,810         52,039         53,622
 Selling, general and administrative                   55,880         65,681        102,316         61,996         58,960
    expense
 Research and development expense                       6,255          4,130          8,783          2,745             --
 Depreciation and amortization                          1,262          3,520         28,061         10,580          5,417
 Asset impairment restructuring and
   unusual costs                                        2,456         38,657         71,719          6,383          2,550
(Gain) loss on extinguishment of debt                 (70,064)            --         (9,465)            --            249
Loss (gain) on sales of subsidiaries and
  assets                                                  330           (132)         6,058           (486)       (20,075)
 Interest and other income                               (919)        (2,340)        (2,076)        (1,095)          (422)
 Interest expense                                      22,587         17,477          8,555          5,901          3,478
                                                    ---------      ---------      ---------      ---------      ---------

 Income (loss) from continuing
   operations before provision (benefit)
   for taxes, minority interest, losses
   attributable to capital
   transactions of subsidiary and
   equity in net loss of affiliate                     10,308        (95,977)      (168,141)       (33,985)         3,465
 Provision (benefit) for income taxes                   1,702            326         20,870         (5,040)         1,091
                                                    ---------      ---------      ---------      ---------      ---------

 Income (loss) from continuing
   operations before minority interest,
   losses attributable to capital transactions
   of subsidiary and equity in net loss of
   affiliate                                            8,606        (96,303)      (189,011)       (28,945)         2,374
 Minority interest                                     (4,132)       (11,579)          (718)           229            (46)
 Net loss on capital transactions of
   subsidiary                                             244          2,437             --             --             --
 Loss attributable to changes in minority
   interest as a result of capital transactions
   of subsidiary                                        6,535          2,048             --             --             --
 Equity in net loss of affiliate                           --            291            328             --             --
                                                    ---------      ---------      ---------      ---------      ---------

 Income (loss) from continuing operations               5,959        (89,500)      (188,621)       (29,174)         2,420
 Income (loss) from discontinued
   operations, net of income taxes                     (2,434)       (24,405)           213        (75,702)         3,012
 (Loss) income on disposal of
   discontinued operations, including
   provision for operating losses during
   phase-out period, net of income taxes                 (382)         1,420        (16,695)        (7,266)            --
                                                    ---------      ---------      ---------      ---------      ---------

 Net income (loss)                                      3,143       (112,485)      (205,103)      (112,142)         5,432
 Preferred stock dividends and other                       --             --         (1,147)          (191)            --
  Accretion of beneficial conversion
   feature of preferred stock                              --             --         (9,392)        (3,857)            --
                                                    ---------      ---------      ---------      ---------      ---------

 Net income (loss) available to common
   shareholders                                     $   3,143      $(112,485)     $(215,642)     $(116,190)     $   5,432
                                                    =========      =========      =========      =========      =========
</TABLE>


                                       44
<PAGE>


EARNINGS (LOSS) PER SHARE ADJUSTED FOR THE REVERSE STOCK SPLIT

      On March 12, 2004,  our Board of Directors  authorized a 1-for-10  reverse
stock split which was  effectuated on April 5, 2004. The reverse stock split had
the effect of reducing the number of issued and outstanding shares of our common
stock, and  accordingly,  earnings (loss) per share increased as a result of the
decrease in the weighted average shares outstanding.  The following presents our
basic and diluted  earnings  (loss) per share giving  retroactive  effect to the
reverse stock split:

<TABLE>
<CAPTION>
                                                                             FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                                         --------------------------------------------------------------------------
                                                            2003            2002            2001            2000            1999
                                                         ----------      ----------      ----------      ----------      ----------
<S>                                                      <C>             <C>             <C>             <C>             <C>
Net income (loss) per common share - basic:

   Continuing operations                                 $     0.17      $    (3.33)     $   (11.71)     $    (5.20)     $     0.52

   Discontinued operations                                    (0.08)          (0.85)          (0.97)         (13.00)           0.64
                                                         ----------      ----------      ----------      ----------      ----------

     Net income (loss) per common
       share-basic                                       $     0.09      $    (4.18)     $   (12.68)     $   (18.20)     $     1.16
                                                         ==========      ==========      ==========      ==========      ==========

Net income (loss) per common
  share - diluted:
   Continuing operations                                 $     0.16      $    (3.33)     $   (11.71)     $    (5.20)     $     0.48

   Discontinued operations                                    (0.08)          (0.85)          (0.97)         (13.00)           0.60
                                                         ----------      ----------      ----------      ----------      ----------
     Net income (loss) per common
       share-diluted                                     $     0.08      $    (4.18)     $   (12.68)     $   (18.20)     $     1.08
                                                         ==========      ==========      ==========      ==========      ==========

Average common shares outstanding:
   Basic                                                     36,178          26,923          17,001           6,382          4,681
                                                         ----------      ----------      ----------      ----------      ----------
   Diluted                                                   37,299          26,923          17,001           6,382          5,009
                                                         ----------      ----------      ----------      ----------      ----------
</TABLE>

<TABLE>
<CAPTION>
                                                                        AS OF DECEMBER 31,
                                             --------------------------------------------------------------------
                                               2003           2002            2001          2000          1999
                                             ---------      ---------      ---------      ---------     ---------
                                                                    (AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA:
<S>                                          <C>            <C>            <C>            <C>           <C>
Cash and cash equivalents                    $  10,161      $   5,809      $   3,696      $   8,039     $   2,181
Restricted cash                                    765             --             --             --            --
Due from buyers of divested subsidiary              --             --          2,625             --        31,302
Property and equipment                           8,228          8,432         20,185         21,368         6,649
Goodwill                                        63,331         65,451         90,831        166,024        24,285
Net (liabilities) assets of discontinued
operations                                      (8,294)        (6,531)        (9,460)         8,076        75,284
Total assets                                   111,931        111,156        167,489        319,451       186,605
Long-term debt                                   2,860          2,436          2,586         69,146        33,260
Total debt                                       8,086         84,265         86,422         74,374        62,915
Minority interest                               23,029         18,422          4,460          4,879         1,292
Redeemable preferred stock and option               --             --          5,180         18,620            --
Stockholders' equity (deficit)                  32,736        (36,092)        28,119        160,562        92,936
</TABLE>


                                       45
<PAGE>


      Effective  January 1, 2002, we adopted  Statement of Financial  Accounting
Standard  No. 142  Goodwill  and Other  Intangible  Assets  (FAS  142).  FAS 142
requires  that  goodwill and certain  intangibles  no longer be  amortized,  but
instead tested for impairment at least annually.

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

<TABLE>
<CAPTION>
                                                         YEAR ENDED      YEAR ENDED        YEAR ENDED
                                                         DECEMBER 31,    DECEMBER 31,     DECEMBER 31,
                                                           2001              2000             1999
                                                        -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>
Net (loss) income available to common stockholders:
Net (loss) income available to common stockholders
  as reported                                           $  (215,642)     $  (116,190)     $     5,432
Add back: Goodwill amortization                              21,312            9,415            2,602
Add back: Equity method investment amortization               1,161               --               --
                                                        -----------      -----------      -----------
Adjusted net (loss) income                              $  (193,169)     $  (106,775)     $     8,034
                                                        ===========      ===========      ===========

Earnings (loss) per common share - basic:

Net (loss) income per share - basic, as reported        $    (12.68)     $    (18.21)     $      1.16
Goodwill amortization                                          1.25             1.48             0.56
Equity method investment amortization                          0.07               --               --
                                                        -----------      -----------      -----------
Adjusted net (loss) income - basic                      $    (11.36)     $    (16.73)     $      1.72
                                                        ===========      ===========      ===========

Earnings (loss) per common share - diluted:

Net (loss) income per share - diluted, as reported      $    (12.68)     $    (18.21)     $      1.08
Goodwill amortization                                          1.25             1.48             0.52
Equity method investment amortization                          0.07               --               --
                                                        -----------      -----------      -----------
Adjusted net (loss) income per share - diluted          $    (11.36)     $    (16.73)     $      1.60
                                                        ===========      ===========      ===========
</TABLE>


      We have  adopted  Statement  of  Financial  Accounting  Standard  No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical  Corrections (FAS 145),  effective  January 1, 2003. Under FAS
145,  gains and losses on the  extinguishment  of debt are  included  as part of
continuing operations.  FAS 145 requires all periods presented to be consistent,
and, as such, gains and losses on extinguishment of debt previously  recorded as
extraordinary must be reclassified from extraordinary treatment and presented as
a component of continuing operations.


                                       46
<PAGE>


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

RESULTS OF OPERATIONS

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

OVERVIEW

      Our business has evolved during the past few years. We grew  significantly
through  acquisitions and since 1996 have completed 51 acquisitions.  During the
last half of 2001 and during 2002,  we sold or closed many of the  businesses we
had  acquired  that we  believed  did not  enhance  our  strategy of becoming an
advanced  technology   development  company.   These  companies  were  primarily
telephone  system  providers,   software   developers,   software   consultants,
networking  integrators,  computer  hardware  suppliers or were engaged in other
businesses or had customer  bases that we believed did not promote or complement
our current business strategy.  As of December 31, 2003, our business operations
consisted  of  the  operations  of  five  wholly  owned-subsidiaries,  which  we
collectively refer to as the Advanced Technology segment, and two majority-owned
subsidiaries,  Digital  Angel  Corporation  (AMEX:DOC)  and InfoTech  USA,  Inc.
(OTC:IFTH) (formerly SysComm International Corporation).

      Excluding  the  effects of a gain on the  extinguishment  of debt of $70.1
million,  we incurred a consolidated  loss from  continuing  operations of $64.1
million for the year ended  December 31, 2003. We incurred  consolidated  losses
from continuing  operations of $89.5 million and $188.6  million,  respectively,
for the years ended  December 31, 2002 and 2001, and as of December 31, 2003, we
had an  accumulative  deficit  of $413.9  million.  Our  consolidated  operating
activities  used cash of $11.4  million,  $3.9 million and $18.0 million  during
2003, 2002 and 2001,  respectively.  Digital Angel  Corporation  incurred losses
during  2003,  2002 and 2001,  which  are  presented  below.  In  addition,  its
operating  activities  used cash of $4.7 million,  $2.7 million and $3.2 million
during 2003, 2002 and 2001, respectively.

      The reduced  settlement payment of our debt obligations to IBM Credit LLC,
referred to as IBM Credit, the conversion to equity of our obligations under our
8.5% Convertible Exchangeable Debentures,  and the sale of 3.0 million shares of
our common stock under our 3.0 million share  offering,  have been major factors
mitigating  concerns  that  existed  about our  ability to  continue  as a going
concern.  Our  profitability  and liquidity depend on many factors including the
success of our marketing programs, the maintenance and reduction of expenses and
our ability to  successfully  develop and bring to market our new  products  and
technologies.  We have  established a management  plan  intending to guide us in
achieving  profitability and positive cash flows over the  twelve-months  ending
December 31, 2004. The major components of our plan are as follows:

      o     to attempt to establish a  sustainable  positive  cash flow business
            model;

      o     to attempt  to produce  additional  cash flow and  revenue  from our
            advanced  technology  products  - Digital  AngelTM,  Thermo  LifeTM,
            VeriChipTM, Bio-ThermoTM and PLD;

      o     to generate  additional  liquidity  through  divestiture of business
            units and assets that are not critical to us;

      o     to  position   Digital  Angel   Corporation  for  growth  under  the
            leadership  of  it  new  management   team  and  through   strategic
            acquisitions such as the recent OuterLink acquisition;


                                       47
<PAGE>

      o     to  generate  additional  liquidity  for Digital  Angel  Corporation
            through the Share  Exchange  Agreement  between us and Digital Angel
            Corporation;

      o     to attempt to pair VeriChip Corporation with a complementary company
            that will bring  experienced  management,  revenue and a synergistic
            customer base.

      Our   management   estimates  that  the  above  plan  can  be  effectively
implemented.

      BUSINESS SEGMENTS

      As a result of the merger of pre-merger Digital Angel and MAS on March 27,
2002, the  significant  restructuring  of our business during 2002 and 2001, and
our  emergence  as  an  advanced   technology   development   company,  we  have
re-evaluated and realigned our reporting segments. Effective January 1, 2002, we
currently operate in three business segments: Advanced Technology, Digital Angel
Corporation and InfoTech USA, Inc., formerly SysComm International  Corporation.
Business units that were part of our continuing  operations and that were closed
or   sold   during   2002   and   2001   are   reported   as  All   Other.   The
"Corporate/Eliminations"   category   includes  all  amounts   recognized   upon
consolidation  of our  subsidiaries,  such as the  elimination  of  intersegment
revenues,  expenses,  assets  and  liabilities.   "Corporate/Eliminations"  also
includes certain  interest expense and other expenses  associated with corporate
activities and functions.

      Income (loss) from continuing  operations before taxes, minority interest,
losses attributable to capital  transactions of subsidiary and equity in loss of
affiliate  from each of our segments  during 2003,  2002 and 2001 was as follows
(we  evaluate  performance  based on  stand-alone  segment  operating  income as
presented below):

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

                                                         2003         2002         2001
                                                         ----         ----         ----
<S>                                                     <C>          <C>          <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
 TAXES, MINORITY INTEREST, LOSSES ATTRIBUTABLE TO
 CAPITAL TRANSACTIONS OF SUBSIDIARY AND EQUITY IN LOSS            (IN THOUSANDS)
 OF AFFILIATE BY SEGMENT:

ADVANCED TECHNOLOGY                                     $    (108)   $    (786)   $ (41,493)
DIGITAL ANGEL CORPORATION (1) (2)                          (6,271)     (45,139)     (16,262)
INFOTECH USA, INC. (3)                                     (3,052)        (422)      (1,322)
ALL OTHER                                                     298         (320)     (71,636)
"CORPORATE/ELIMINATIONS" (2) (4)                           19,441      (49,310)     (37,428)
                                                        ---------    ---------    ---------
TOTAL                                                   $  10,308    $ (95,977)   $(168,141)
                                                        =========    =========    =========
</TABLE>

(1)   For  Digital  Angel  Corporation,  the  loss for  2002  includes  goodwill
      impairment  of $31.5 million and  impairment  of certain  software of $6.4
      million.

(2)   For Digital  Angel  Corporation,  amount for 2002 excludes $1.8 million of
      interest expense associated with our previous obligation to IBM Credit and
      $18.7 million of non-cash  compensation expense associated with pre-merger
      Digital  Angel options  which were  converted  into options to acquire MAS
      stock,  both of which have been  reflected  as  additional  expense in the
      separate financial statements of Digital Angel Corporation included in its
      Form 10-K dated  December  31,  2003.  These  expenses  are  reflected  in
      "Corporate/Eliminations" for 2002.

(3)   For InfoTech USA, Inc. the amount for 2003 includes a goodwill  impairment
      charge of $2.2 million.

(4)   For "Corporate/Eliminations",  the amount for 2003 includes extinguishment
      of debt of $70.1  million,  as a result of the repayment in full of all of
      our  obligations  to IBM  Credit on June 30,  2003,  and $17.9  million of
      non-cash  compensation  expense  resulting from severance  agreements with
      certain former officers and directors.

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


                                       48
<PAGE>

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

      Our Medical Systems operations represented the business operations of MAS,
which we  acquired on March 27,  2002.  We sold the  business  assets of Medical
Systems  during  the second  quarter of 2004,  and  accordingly,  the  financial
condition,  results of  operations  and cash flows of  Medical  Systems  are now
included as part of our Discontinued Operations in our financial statements, and
prior periods have been restated.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION

      Advanced Technology Segment Revenue Recognition

      Computer Equity Corporation Revenue Recognition

      The largest company in the Advanced  Technology segment is Computer Equity
Corporation.  This company  supplies  voice,  data and video  telecommunications
networks and related  products to government  agencies.  These products  include
voice mail, Internet cabling,  phones and telephone wiring. Services are a minor
part of the  business  and  usually  consist of small jobs such as phone  moves.
Computer Equity  Corporation also receives monthly revenues from product related
maintenance  contracts,  which  revenues  represent the smallest  portion of its
business. For product sales, we recognize revenue after the products are shipped
and title has transferred, provided that a purchase order has been received or a
contract  has been  executed,  there  are no  uncertainties  regarding  customer
acceptance,  the sales price is fixed and  determinable  and  collectability  is
deemed probable.  If uncertainties  regarding customer acceptance exist, revenue
is recognized when such uncertainties are resolved.  Hardware sales for products
that are shipped to a customer's  site and require  modification or installation
are recognized when the work is complete and accepted by the customer. We do not
experience  significant  product  returns,  and therefore,  management is of the
opinion that no allowance for sales returns is necessary.  We have no obligation
for  warranties on new hardware  sales,  because the  manufacturer  provides the
warranty.  Services  and phone  installation  jobs are  billed  and the  revenue
recognized  following  the  completion  of the work and the receipt of a written
acceptance from the customer.  Revenue from maintenance  contracts is recognized
ratably over the term of the contract.


                                       49
<PAGE>

      Other Advanced Technology Segment Companies Revenue Recognition (Excluding
VeriChip Corporation)

      The other  companies  in the  Advanced  Technology  segment  that  provide
programming,  consulting and software licensing services recognize revenue based
on the expended actual direct labor hours in the job times the standard  billing
rate and adjusted to realizable value, if necessary.  It is our policy to record
contract  losses in their  entirety  in the  period  in which  such  losses  are
foreseeable.  We do not offer a warranty  policy for services to our  customers.
Revenue from license royalties is recognized when licensed products are shipped.
There  are no  significant  post-contract  support  obligations  at the  time of
revenue  recognition.  Our accounting  policy regarding vendor and post-contract
support obligations is based on the terms of the customers'  contract,  billable
upon the occurrence of the post-sale  support.  Costs of goods sold are recorded
as the related revenue is recognized.

      For product sales, we recognize revenue after the products are shipped and
title has  transferred,  provided  that a purchase  order has been received or a
contract  has been  executed,  there  are no  uncertainties  regarding  customer
acceptance,  the sale  price is fixed and  determinable  and  collectability  is
deemed probable.  If uncertainties  regarding customer acceptance exist, revenue
is recognized when such uncertainties are resolved.  Hardware sales for products
that are shipped to a customer's  site and require  modification or installation
are recognized when the work is complete and accepted by the customer. We do not
experience  significant  product  returns,  and therefore,  management is of the
opinion that no allowance for sales returns is necessary.  We have no obligation
for  warranties  on new hardware  sales  because the  manufacturer  provides the
warranty.

      VeriChip Corporation Revenue Recognition

      VeriChip is a miniaturized,  implantable microchip for use in a variety of
identification, security and information applications. About the size of a grain
of rice, each VeriChip contains a unique verification number that can be used to
access a subscriber-supplied database providing personal related information.

      To complement the VeriChip microchip,  the VeriChip proprietary scanner is
a scanning  device that activates and reads the RFID within the  microchip.  The
scanner  emits a small  amount of radio  frequency  energy  that  energizes  the
dormant  VeriChip,  which then emits a radio  frequency  signal  containing  the
VeriChip verification number.

      VeriChip revenue is comprised of the sale of VeriChip microchips, VeriChip
scanners,  and a nominal  distributorship  fee.  Generally,  the distributorship
rights  include  the  rights to market,  promote  and sell the  product(s)  in a
specific  territory under the VeriChip name and trademarks for a specific period
of time.  We are currently  amending our  distributor  agreements  such that the
distributor strives to meet annual marketing goals, or quotas, as agreed upon by
the distributor and us, by ordering and taking delivery from us of predetermined
quantities  of product  each year through the term of the  contract.  Failure to
meet the quota shall  constitute a material  breach of the contract and the loss
of  distributorship  exclusivity  privileges  within the  territory.  To renew a
preexisting agreement,  the distributor must request so in-writing 30 days prior
to the expiration of the contract. We, at our own discretion, may then negotiate
in good faith with the distributor for a renewal of the agreement.


                                       50
<PAGE>

      Originally,  we  entered  into  distributorship   agreements  whereby  the
customer  would pay an  up-front  fee in  exchange  for the  exclusive  right to
market,  promote and sell VeriChip  products  within the agreed upon  territory.
Under this  arrangement,  the  distributorship  fee was not credited  against or
applied  towards  amounts  due  for any  products  subsequently  ordered  by the
distributor.  However, it soon became clear that there was more realizable value
via a relationship  where  distributors  could apply up-front monies in exchange
for product. We found that distributors expressed reluctance to pay fees without
receiving a tangible  product in return.  After time,  it became  clear that the
standard for entrants into comparable  non-established  marketplaces  was to not
charge  up-front  fees.  In an effort to retain our  customer  base,  management
redefined its business strategy and amended its existing  contracts to stipulate
that $1.00 of up-front money would be allocated to the distributorship  fee, and
the remaining amounts were customer deposits,  which were applied against future
purchases of VeriChip  microchips  and scanners.  The advantage to this was that
the  distributor  was able to receive a tangible  product to directly supply the
resellers,  as opposed  to  fronting  additional  money to  purchase  additional
product.

      Product Sales

      Revenue from the sale of VeriChip  microchips  and scanners is recorded at
gross with a  separate  display of cost of  products  sold.  Until the amount of
returns can be reasonably  estimated,  we do not recognize  revenues until after
the products  are shipped and title has  transferred,  provided  that a purchase
order  has  been  received  or a  contract  has  been  executed,  there  are  no
uncertainties  regarding  customer  acceptance,  the  sales  price is fixed  and
determinable,  the period of time the  distributor has to return the products as
provided  in their  distributor  agreement  has expired  and  collectability  is
reasonably  assured.  Once the amount of returns  can be  reasonably  estimated,
revenues  (net of expected  returns)  will be recognized at the time of shipment
and the passage of title, assuming there are no uncertainties regarding customer
acceptance.  If uncertainties  regarding customer acceptance exist, revenue will
not be recognized  until such  uncertainties  are  resolved.  As of December 31,
2003, VeriChip deferred product revenue was $0.2 million.

      Monitoring Services

      When offered,  monitoring services will be sold as a stand-alone  contract
and treated as a separate  earnings  process from product  sales.  Revenues from
this service will be  recognized on a  straight-line  basis over the term of the
service agreement.  Since the final use of the product is unknown at the time it
is shipped to the distributor (end users will have the option of choosing from a
number of non-proprietary monitoring services or to choose none at all), and the
monitoring services are not essential to the functionality of all chips, we will
not attempt to bundle the revenue from the sale of chips with  potential  future
revenues from a monitoring service.

      Digital Angel Corporation Segment Revenue Recognition

      For product sales,  Digital Angel  Corporation  recognizes  revenue at the
time  product is shipped  and title has  transferred,  provided  that a purchase
order  has  been  received  or a  contract  has  been  executed,  there  are  no
uncertainties  regarding  customer  acceptance,  the  sales  price is fixed  and
determinable and collectability is deemed probable.  If uncertainties  regarding
customer  acceptance  exists,  revenue is recognized when such uncertainties are
resolved. There are no significant post-contract support obligations at the time
of revenue recognition.  Digital Angel Corporation's accounting policy regarding
vendor  and post  contract  support  obligations  is  based on the  terms of the
customers' contracts,  billable upon occurrence of the post-sale support.  Costs
of goods sold are recorded as the related  revenue is recognized.  Digital Angel
Corporation  does not offer a warranty  policy for services to customers.  It is
Digital Angel  Corporation'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
multiplied  by the standard  billing rate and adjusted to realizable  value,  if
necessary.  Revenues from contracts that provide services are recognized ratably
over the term of the contract.  Fixed fee revenues  from  contracts for services
are recorded  when earned and exclude  reimbursable  costs.  Reimbursable  costs
incurred in  performing  such  services are presented on a net basis and include
transportation  and  communication  costs.  Other revenues are recognized at the
time services or goods are provided.


                                       51
<PAGE>

      InfoTech USA, Inc. Segment Revenue Recognition

      For product  sales,  InfoTech USA, Inc.  recognizes  revenue in accordance
with  the  applicable  products'  shipping  terms.  InfoTech  USA,  Inc.  has no
obligation for warranties on new product sales.  The  manufacturer  provides the
warranty.  For  consulting  and  professional   services,   InfoTech  USA,  Inc.
recognizes  revenue based on the direct labor hours  incurred times the standard
billing rate,  adjusted to realizable  value, if necessary.  Revenues from sales
contracts  involving  both  products  and  consulting  and  other  services  are
allocated to each element 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.

      All Other

      For  arrangements   where  the  contract  to  deliver  software   required
significant production,  modification or customization of the software,  revenue
was recognized using the percentage of completion  accounting in accordance with
Statement of Position  ("SOP") 97-2 and SOP 81-1.  The service  element of these
contracts was essential to the  functionality  of other elements in the contract
and could not be accounted for  separately  as allowed in SOP 97-2.  The cost to
complete  and extent of  progress  towards  completion  of these  contracts  was
reasonably  ascertained  based on the detailed  tracking  regarding  labor hours
expended  in  accordance  with SOP 97-2 and SOP 81-1.  Progress  payments on the
contracts  were  required and progress was measured  using the efforts  expended
input  measure as allowed in SOP 81-1.  As of December 31, 2001, we had sold the
business that recognized  revenue using the percentage of completion  accounting
as outlined  above.  The amount of revenue  recognized  using the  percentage of
completion method for 2001 was $6.7 million.

GOODWILL AND OTHER INTANGIBLE ASSETS

      Up through  December 31, 2001, we reviewed  goodwill and other  intangible
assets  quarterly  for  impairment   whenever  events  or  changes  in  business
circumstances  indicated  that the  remaining  useful  life  may have  warranted
revision or that the carrying  amount of the long-lived  asset may not have been
fully  recoverable.  Included in factors  considered were  significant  customer
losses,  changes in profitability due to sudden economic or competitive factors,
changes  in  management's  strategy  for the  business  unit,  letters of intent
received  for the sale of the business  unit,  or other  factors  arising in the
quarterly  period.  We annually  performed  undiscounted  cash flows analyses by
business  unit to  determine  if  impairment  existed.  For  purposes  of  these
analyses,  earnings before interest,  taxes,  depreciation and amortization were
used as the measure of cash flow. When  impairment was determined to exist,  any
related  impairment  loss was  calculated  based on fair  value.  Fair value was
determined  based on discounted cash flows and where  available,  market related
information.  The discount rate  utilized by us was the rate of return  expected
from the  market or the rate of return  for a similar  investment  with  similar
risks. We recorded goodwill impairment charges of $63.6 million during 2001.


                                       52
<PAGE>

      On January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 142,  Goodwill and  Intangible  Assets ("FAS 142").  FAS 142  eliminates the
amortization  of  goodwill  and  instead  requires  that  goodwill be tested for
impairment at least annually.  Intangible assets with finite lives are amortized
over  the  useful  life.  Other  than  goodwill,  we  currently  do not have any
intangible  assets with indefinite  lives. As part of the  implementation of FAS
142, we were required to complete a transitional impairment test of goodwill and
other intangible  assets.  There was no impairment of goodwill upon the adoption
of FAS 142. Annually,  we test our goodwill and intangible assets for impairment
as a part of our annual  business  planning  cycle during the fourth  quarter of
each fiscal year. Based upon this annual test, we incurred a goodwill impairment
charge of $2.2  million in the fourth  quarter of 2003 for  goodwill  associated
with our  InfoTech  USA,  Inc.  segment,  and we recorded a goodwill  impairment
charge $31.5 million in the fourth quarter of 2002 for goodwill  associated with
our Digital Angel Corporation  segment.  (During the fourth quarters of 2003 and
2002, we also  recorded  goodwill  impairment  charges of $2.4 million and $30.7
million,  respectively,  and during the fourth  quarter of 2003,  we incurred an
impairment charge of $0.6 million for other intangible assets, all of which were
related to our Medical Systems operations,  and all of which are now included in
our loss from Discontinued Operations). Future events, such as market conditions
or  operational  performance  of our  acquired  businesses,  could  cause  us to
conclude that additional  impairment exists. Any resulting impairment loss could
also have a material  adverse  impact on our financial  condition and results of
operations.

GAINS/LOSSES ATTRIBUTABLE TO CAPITAL TRANSACTIONS OF SUBSIDIARY

      Gains where  realizable  and losses on issuances of shares of common stock
by our consolidated subsidiary,  Digital Angel Corporation, are reflected in our
Consolidated  Statements of Operations.  We determined that such  recognition of
gains and losses on  issuances of shares of stock by Digital  Angel  Corporation
was  appropriate  since the  shares  issued  to date were not sales of  unissued
shares in a public offering,  we do not plan to reacquire the shares issued, and
the value of the  proceeds  could be  objectively  determined.  These  gains and
losses result from the  differences  between the carrying amount of the pro-rata
share of our investment in Digital Angel  Corporation  and the net proceeds from
the issuances of the stock. The issuances of stock by Digital Angel  Corporation
have  also  given  rise to losses as a result  of the  changes  in the  minority
interest ownership of Digital Angel Corporation. Future stock issuances to third
parties  by  Digital  Angel   Corporation  will  further  dilute  our  ownership
percentage and may give rise to additional  losses,  which could have a material
adverse impact on our financial condition and results of operations.

STOCK-BASED COMPENSATION

      We account for our employee  stock-based  compensation plans in accordance
with Accounting  Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25") and Financial Accounting Standards Board Interpretation
No. 44,  Accounting for Certain  Transactions  Involving Stock  Compensation--an
Interpretation of APB Opinion No. 25, and the disclosure provisions of Statement
of Financial Accounting Standard No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation.  Accordingly,  no  compensation  cost is recognized for any of our
fixed stock options  granted to employees and directors  when the exercise price
of each option equals or exceeds the fair value of the  underlying  common stock
as of the  grant  date for each  stock  option.  When  options  are  granted  to
employees  and  directors  at a price less than fair market value on the date of
the grant,  compensation  expense is calculated  based on the intrinsic value or
the difference  between the exercise price and the fair value on the date of the
grant,  and the  compensation  is  recognized  over the  vesting  period  of the
options. If the options are fully vested, the expense is recognized immediately.
Changes in the terms of stock option  grants,  such as extensions of the vesting
period or  changes in the  exercise  price,  result in  variable  accounting  in
accordance  with APB No. 25.  Accordingly,  compensation  expense is measured in
accordance  with APB No.  25 and  recognized  over the  vesting  period.  If the
modified grant is fully vested, any additional compensation costs are recognized
immediately.  Under variable accounting,  changes in the underlying price of our
stock may have a significant  impact to our earnings.  A rise in our stock price
results in  additional  compensation  expense and a decrease in our common stock
price results in a reduction of reported compensation  expense.  During 2001, we
re-priced 1.9 million stock options.  As a result, we have (recovered)  recorded
non-cash  compensation expense of $(1.3) million,  $0.7 million and $5.3 million
in 2003,  2002 and 2001,  respectively.  In addition,  on September 24, 2001, we
issued 0.4 million  options to employees and directors  with exercise  prices of
$1.50  per  share,  or $0.20 per share  less than the fair  market  value of the
underlying  common stock on the date of grant. We have  recognized  compensation
expense of $0.1 million associated with these options.  The compensation expense
was amortized over the vesting period of the options


                                       53
<PAGE>

      We account for equity  instruments  issued to  non-employees in accordance
with the provisions of FAS 123.

WARRANTS SETTLEABLE IN SHARES OF DIGITAL ANGEL CORPORATION'S  COMMON STOCK OWNED
BY US

      In connection  with the Debentures,  we granted to the Debenture  holders,
also  referred  to as the  Purchasers,  warrants  to acquire  approximately  0.5
million  shares of our common  stock,  or 0.95 million  shares of Digital  Angel
Corporation's  common  stock  currently  outstanding  and  owned  by  us,  or  a
combination  of shares  from both  companies,  at the  Purchasers'  option.  The
exercise  prices are $5.64 and $3.178 for our common stock and the Digital Angel
Corporation  common  stock  owned  by  us,  respectively.  The  Warrants  vested
immediately, are subject to anti-dilution provisions and are exercisable through
June 30, 2007.

      The value  assigned to the  Warrants  was  recorded as a reduction  in the
value assigned to the Debentures  (original  issue  discount) and an increase in
long-term liabilities. The liability for the Warrants, to the extent potentially
settleable in shares of the Digital Angel Corporation  common stock owned by us,
is being revalued at each reporting period with any resulting  increase/decrease
being recorded as an  increase/decrease  in interest expense.  During the fourth
quarter of 2003,  we recorded  interest  expense of $2.0  million as a result of
such  revaluation.  Going forward,  changes in the market price of Digital Angel
Corporation's  common  stock  will  result in  additional  charges or credits to
operations,  which charges could have a material adverse effect on our result of
operations.  We will be required to record an  impairment  loss if the  carrying
value of the Digital  Angel  Corporation  common stock  underlying  the Warrants
exceeds the exercise price. Should the Purchasers elect to exercise the Warrants
into  shares of the Digital  Angel  Corporation  common  stock owned by us, such
exercise may result in our recording a gain on the sale transaction equal to the
amount of the Warrant liability on the date of exercise.

PROPRIETARY SOFTWARE IN DEVELOPMENT

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


                                       54
<PAGE>

INVENTORY OBSOLESCENCE

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

LEGAL CONTINGENCIES

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


                                       55
<PAGE>

                        RESULTS OF CONTINUING OPERATIONS

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


<TABLE>
<CAPTION>
                                                        PERCENTAGE OF TOTAL REVENUE
                                                     ---------------------------------
                                                       2003         2002        2001
                                                         %           %            %
                                                     -------      -------      -------
<S>                                                   <C>        <C>        <C>
Product revenue                                         83.6         81.6         72.3
Service revenue                                         16.4         18.4         27.7
                                                     -------      -------      -------
  Total revenue                                        100.0        100.0        100.0
                                                     -------      -------      -------
Cost of products sold                                   64.0         59.9         55.9
Cost of services sold                                    5.8          8.6         14.8
                                                     -------      -------      -------
  Total cost of products and services sold              69.8         68.5         70.7
Gross profit                                            30.2         31.5         29.3
Selling, general and administrative expense             60.1         66.7         65.4
Research and development expense                         6.7          4.2          5.6
Gain on extinguishment of debt                         (75.3)          --         (6.0)
Asset impairment                                         2.6         39.3         45.8
Depreciation and amortization                            1.4          3.6         17.9
Loss (gain) on sales of subsidiaries and
 business assets                                         0.3         (0.1)         3.9
Interest and other income                               (1.0)        (2.4)        (1.3)
Interest expense                                        24.3         17.7          5.5
                                                     -------      -------      -------
Income (loss) from continuing operations before
 provision for income taxes, minority interest,
 losses attributable to capital transactions of
 subsidiary and equity in net loss of affiliate         11.1        (97.5)      (107.5)
Provision for income taxes                               1.8          0.3         13.3
                                                     -------      -------      -------
Income (loss) from continuing operations before
 minority interest, losses attributable to
 capital transactions of subsidiary and equity
 in net loss of affiliate                                9.3        (97.8)      (120.8)
Minority interest                                       (4.4)       (11.8)        (0.5)
Net loss on capital transactions of subsidiary           0.3          2.5           --
Loss attributable to changes in minority
 interest as a result of capital transactions of
 subsidiary                                              7.0          2.1           --
Equity in net loss of affiliate                           --          0.3          0.2
                                                     -------      -------      -------
Income (loss) from continuing operations                 6.4        (90.9)      (120.5)
Income (loss) from discontinued operations, net
 of income taxes                                        (2.6)       (24.7)         0.1
                                                     -------      -------      -------
Change in estimate on loss on disposal and
operating losses during the phase out period            (0.4)         1.4        (10.7)
                                                     -------      -------      -------
Net income (loss)                                        3.4       (114.2)      (131.1)
Preferred stock dividends and other                       --           --         (0.7)
Accretion of beneficial conversion feature of
 preferred stock                                          --           --         (6.0)
                                                     -------      -------      -------
 Net income (loss) available to common
 shareholders                                            3.4       (114.2)      (137.8)
                                                     =======      =======      =======
</TABLE>


                                       56
<PAGE>

      Our significant sources of revenue for 2003 were as follows:

<TABLE>
<CAPTION>
  Sources of Revenue:                                                                      PERCENTAGE OF
                                                                                           TOTAL REVENUE
                                                                                           -------------
<S>                                                                                 <C>
Sales of voice, data and video telecommunications networks to government agencies
  from our Advanced Technology segment                                                             39.9%

Visual  identification  tags and implantable  microchips for the companion animal,
  livestock, laboratory animal, fish and wildlife markets from our Digital
  Angel Corporation segment                                                                        25.8%

Sales of IT hardware and services from our InfoTech USA, Inc. segment                              15.5%

GPS enabled search and rescue equipment, intelligent communications products and
  services for telemetry, mobile data and radio communications from our Digital
  Angel Corporation segment                                                                        11.1%

Other products and services                                                                         7.7%
                                                                                       ------------------

  Total                                                                                           100.0%
                                                                                       ==================
</TABLE>

      Our significant sources of gross profit and gross profit margin by product
type for 2003 were as follows:

<TABLE>
<CAPTION>
Gross Profit and Gross Profit Margin by Product Type:                     GROSS PROFIT      GROSS MARGIN
                                                                         (IN THOUSANDS)      PERCENTAGE
                                                                         --------------      ----------
<S>                                                                       <C>              <C>
Sales of voice, data and video telecommunications networks to
  government agencies from our Advanced Technology segment                    $7,015           18.9%

 Visual identification tags and implantable microchips for the
  companion animal, livestock, laboratory animal, fish and wildlife
  markets from our Digital Angel Corporation segment                           9,740           40.7%

Sales of IT hardware and services from our InfoTech USA, Inc. segment          2,510           17.4%

GPS enabled search and rescue equipment, intelligent communications
  products and services for telemetry, mobile data and radio
  communications from our Digital Angel Corporation segment                    4,913           47.4%

Other products and services                                                    3,917           55.1%
                                                                        ----------------- -----------------
Total                                                                        $28,095           30.2%
                                                                        ================= =================
</TABLE>


      We hope to  continue  to grow our  revenues  and gross  profits.  We see a
possible   increase   in   revenue   from   sales  of  voice,   data  and  video
telecommunications   networks  to  government  agencies  due  to  being  awarded
additional government  contracts,  such as the CONNECTIONS contract that we were
awarded in  January  2003.  We expect  sales of visual  identification  tags and
implantable  microchips to the companion animal,  livestock,  laboratory animal,
fish  and  wildlife   markets  to  increase.   We  plan  to  expand  our  visual
identification  tags and implantable  microchip product lines with complementary
products,  such as our Bio-Thermo  product.  Also, we believe that concerns over
the safety and  traceability of animals and other food sources will increase the
markets for these  products.  With the IT market  conditions  improving  and its
continued  focus on higher-end  Intel-based  products,  we are hoping that sales
volumes for our InfoTech USA, Inc.  segment will increase during 2004.  Overall,
in the short-term our gross profit margins will most likely decrease as a result
of competitive  pressures.  However, we are hoping that our gross profit margins
will  improve  once we begin  selling  significant  quantities  of our  advanced
technology products. To date, we have not recorded any significant revenues from
our advanced technology products.


                                       57
<PAGE>

      REVENUE

      Revenue from continuing  operations for 2003 was $93.0 million, a decrease
of $5.5  million,  or  5.6%,  from  $98.5  million  in  2002.  Revenue  for 2002
represents a decrease of $58.0 million,  or 37.1%,  from $156.5 million in 2001.
The decrease in 2003 was primarily related to our InfoTech USA, Inc.'s decision,
in April  2002,  to shift  its focus to  higher-margined  products  and  related
technical services.  The decrease in 2002 was primarily attributable to the sale
or closure of all  businesses  that were not cash flow  positive or that did not
fit into our strategy of becoming an advanced technology development company.

      Revenue for each of the continuing operating segments was:

<TABLE>
<CAPTION>
                                              2003                          2002                             2001
                                -----------------------------   -----------------------------  --------------------------------
                                 PRODUCT   SERVICE      TOTAL   PRODUCT     SERVICE    TOTAL    PRODUCT    SERVICE     TOTAL
                                -----------------------------   ------------------------------  -------------------------------
                                                                    (AMOUNTS IN THOUSANDS)
<S>                              <C>       <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>
Digital Angel Corporation         32,364     1,558      33,922   30,330      2,116     32,446    33,220      2,691     35,911
InfoTech USA, Inc.                11,606     2,850      14,456   20,056      2,665     22,721    30,075      4,100     34,175

All Other                             --        --          --    1,013        375      1,388    21,318     19,974     41,292
"Corporate/Eliminations"              --        --          --       --         --         --       411        128        539
-------------------------------------------------------------------------------------------------------------------------------
                                $ 77,774   $15,213    $ 92,987 $ 80,390   $ 18,095   $ 98,485  $113,147   $ 43,340   $156,487
===============================================================================================================================
</TABLE>

      Changes during the years were:

      Our Advanced Technology segment's revenue increased $2.7 million from 2002
to 2003.  Product  revenue  increased by $4.8 million,  or 16.6%,  while service
revenue  decreased  by $2.1  million,  or 16.5%.  We  attribute  the increase in
product revenue in 2003 to increased  government contract revenues from Computer
Equity  Corporation.  These revenues were associated with the CONNECTIONS,  WACS
and various other United States government agency contracts that Computer Equity
has been awarded over the past two years.  Computer Equity Corporation's revenue
accounted for 83.2% of this segment's revenue in 2003. We attribute $0.9 million
of the  decrease  in  service  revenue  to the sale of our  computer  networking
business,  which was sold  during the fourth  quarter of 2002,  $0.9  million to
reduced  website design and Internet  access revenue  associated with our WebNet
Services,  Inc.  business  which was sold during the fourth quarter of 2003, and
reduced sales of call center and relationship software services of approximately
$0.3  million.  We expect to grow our  revenue  from this  segment as we realize
revenue  associated  with Computer  Equity  Corporation's  CONNECTIONS and other
government contracts,  and as we increase the sales of our VeriChip product. Our
Advanced Technology  segment's revenue decreased $2.6 million from 2001 to 2002.
Product  revenue  increased by $0.9  million,  or 3.1%,  while  service  revenue
decreased by $3.5  million,  or 21.3%.  We attribute  the decrease in revenue in
2002 to a soft  market  for  sales  of  networking  hardware,  call  center  and
relationship  management  software products and reduced technology  services for
all of the  businesses  in this segment,  with the exception of Computer  Equity
Corporation.  The most  significant  decrease in revenue  was from our  computer
networking  business,  which  experienced a decrease in revenue of approximately
$3.6 million. This business was sold during the fourth quarter of 2002. Computer
Equity  Corporation's  product revenue increased $3.9 million in 2002, primarily
as a result  of  additional  sales  under  its WACS  contract.  Computer  Equity
Corporation's service revenue remained relatively constant at approximately $4.8
million  in each of the  years  2002 and  2001.  Computer  Equity  Corporation's
revenue accounted for 74.7% of this segment's revenue for 2002.

                                       58
<PAGE>

      Our Digital Angel Corporation segment's revenue increased $1.5 million, or
4.5%,  from  2002 to 2003.  Product  revenue  increased  by  approximately  $2.0
million, or 6.7%, while service revenue decreased by approximately $0.6 million,
or 26.4%.  We attribute the increase in product revenue for 2003 primarily to an
increase in microchip sales to companion animal,  fish and wildlife customers of
approximately  $1.7  million  and  increased  sales  of  visual   identification
products.  Despite an increase in engineering  service revenue of  approximately
$1.0 million in 2003 as compared to 2002, our service revenue decreased in 2003,
primarily as a result of the lower revenue of approximately  $1.4 million in our
Wireless  and  Monitoring  division  due to the  cancellation  of a  significant
software  contract in February 2003.  Engineering  service  revenue results from
research  and  development  performed  for  certain  of our  fish  and  wildlife
customers. Our fish and wildlife industry customers consist of the Army Corps of
Engineers, Biomark, Inc., the Department of Energy and Pacific Marine Fisheries.
We expect that our revenues  from this segment will  increase in the future as a
result  of the  acquisition  of  OuterLink  Corporation  in  January  2004,  and
worldwide  concerns over food safety and  traceability.  Several bills proposing
the establishment of a national electronic  identification program for livestock
have  recently  been  introduced  in Congress.  We cannot  estimate the impact a
national  identification program would have on the Animal Application division's
revenue.  However,  if implemented,  we would expect the impact to be favorable.
Digital Angel Corporation  segment's  revenue  decreased $3.5 million,  or 9.6%,
from 2001 to 2002.  Product revenue  decreased by $2.9 million,  or 8.7%,  while
service revenue  decreased by $0.6 million,  or 21.4%. We attribute the decrease
in product  sales for 2002  primarily  to a decrease in the Animal  Applications
division's   shipments  of  visual   identification   tags,  which   contributed
approximately  $1.4  million  of the  decrease,  and  electronic  identification
products,  which contributed  approximately  $0.3 million of the decrease.  Also
contributing to the reduction was a decrease in the GPS and Radio  Communication
division's control product sales,  which contributed  approximately $1.1 million
of the decrease.  We attribute the decrease in service  revenue to a decrease in
revenue from the Wireless and Monitoring division of approximately $1.0 million,
which  was  partly  offset by an  increase  of  approximately  $0.4  million  of
engineering service revenue related to our Animal Applications division.

      Our InfoTech USA, Inc. segment's revenue decreased $8.3 million, or 36.4%,
from 2002 to 2003.  Product revenue decreased by $ 8.5 million,  or 42.1%, while
service revenue increased by $0.2 million, or 6.9%. We attribute the decrease in
product  revenue  to our  decision  in  April  2002  to  cease  selling  certain
lower-margin  computer  hardware products and to focus on sales of higher-margin
products and related  technical  services.  The lower-margin  computer  hardware
products were mid-range Unix based computers,  which offered little  opportunity
for adjunct sales of related higher-margined  technical services.  InfoTech USA,
Inc.'s current offering of higher-margin products and related technical services
include Intel based computers and servers, which provide InfoTech USA, Inc. with
an opportunity to provide add-on higher-margin  technical services. We attribute
the  increase  in  service  revenue in 2003 to  InfoTech  USA,  Inc.'s  focus on
providing its customers  higher-margin  technical  services.  With the IT market
conditions  improving and InfoTech USA,  Inc.'s  continued  focus on higher-end,
Intel-based products, InfoTech USA, Inc. is anticipating that sales volumes will
increase during 2004.  Revenue  decreased $11.5 million,  or 33.5%, from 2001 to
2002. Product revenue decreased $10.0 million and service revenue decreased $1.5
million.  The  decreases  in both product and service  revenue were  primarily a
result of an industry  wide  softening in demand that existed  throughout  2002.
Additionally,  product sales declined  during 2002, as a result of our change in
focus to  higher-margin  products  and related  technical  services as discussed
above.

      Our All Other's revenue  decreased $1.4 million,  or 100.0%,  from 2002 to
2003.  Revenue  decreased  $39.9  million,  or  96.6%,  from  2001 to 2002.  The
decreases  in revenue in 2003 as  compared  to 2002,  and in 2002 as compared to
2001,  were due to the sale or closure of all of the business  units  comprising
this group during the last half of 2001 and the first half of 2002.

                                       59
<PAGE>

      GROSS PROFIT AND GROSS PROFIT MARGIN

      Gross profit from  continuing  operations  for 2003 was $28.1  million,  a
decrease of $2.9 million,  or 9.4%, from $31.0 million in 2002. Gross profit for
2002  represents a decrease of $14.8  million,  or 32.3%,  from $45.8 million in
2001. As a percentage of revenue, gross profit margin was 30.2%, 31.5% and 29.3%
for the years ended December 31, 2003, 2002 and 2001, respectively.

      Gross profit from continuing operations for each operating segment was:

<TABLE>
<CAPTION>
                                              2003                          2002                             2001
                                -----------------------------   -----------------------------  --------------------------------
                                 PRODUCT   SERVICE      TOTAL   PRODUCT     SERVICE    TOTAL    PRODUCT    SERVICE     TOTAL
                                -----------------------------   ------------------------------  -------------------------------
                                                                    (AMOUNTS IN THOUSANDS)
<S>                              <C>       <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>
Advanced Technology               $4,031    $7,344    $ 11,375   $5,392    $ 7,288   $ 12,680    $6,611     $8,593   $ 15,204
Digital Angel Corporation         12,652     1,558      14,210   12,307        723     13,030    12,620        644     13,264
InfoTech USA, Inc.                 1,553       957       2,510    2,905      1,245      4,150     3,013      2,341      5,354
All Other                             --        --          --      817        339      1,156     2,984      8,465     11,449
"Corporate/Eliminations"              --        --          --       --         --         --       411        128        539
-------------------------------------------------------------------------------------------------------------------------------
                                $ 18,236   $ 9,859    $ 28,095 $ 21,421    $ 9,595   $ 31,016  $ 25,639   $ 20,171   $ 45,810
===============================================================================================================================
</TABLE>


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

<TABLE>
<CAPTION>
                                              2003                          2002                             2001
                                -----------------------------   -----------------------------  --------------------------------
                                 PRODUCT   SERVICE      TOTAL   PRODUCT     SERVICE    TOTAL    PRODUCT    SERVICE     TOTAL
                                -----------------------------   ------------------------------  -------------------------------
                                    %        %            %        %           %          %        %          %           %
                                -----------------------------   ------------------------------  -------------------------------
<S>                              <C>       <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>
Advanced Technology                 11.9      68.0        25.5     18.6       56.3       30.2      23.5       52.2       34.1
Digital Angel Corporation           39.1     100.0        41.9     40.6       34.2       40.2      38.0       23.9       36.9
InfoTech USA, Inc.                  13.4      33.6        17.4     14.5       46.7       18.3      10.0       57.1       15.7
All Other                             --        --          --     80.7       90.4       83.3      14.0       42.4       27.7
"Corporate/Eliminations"              --        --          --       --         --         --     100.0      100.0      100.0
-------------------------------------------------------------------------------------------------------------------------------
                                    23.4      64.8        30.2     26.6       53.0       31.5      22.7       46.5       29.3
================================================================================================================================
</TABLE>

      Changes during the years were:

      Our Advanced Technology segment's gross profit decreased $1.3 million from
2002 to 2003, and margins decreased to 25.5% in 2003, compared to 30.2% in 2002.
We attribute  the  decrease in gross  profit and margins in 2003  primarily to a
reduction in gross profit from Computer Equity Corporation of approximately $1.0
million, as a result of competitive pressures.  These competitive pressures have
resulted in lower  margins from the  CONNECTIONS  and other  current  government
contracts  as compared to margins  realized  under the WACS  contract.  Computer
Equity  Corporation  contributed  62.8% of the gross  profit  generated  by this
segment  during 2003. We anticipate  that Computer  Equity  Corporation's  gross
profits  will  increase in 2004,  and that its  margins  will remain at its 2003
levels of approximately 19.0% during 2004. Also contributing to the reduction in
gross profit was a reduction in gross profit of approximately  $0.4 million from
WebNet  Services,  Inc.,  which was sold  during  the  fourth  quarter  of 2003.
Partially  offsetting these decreases was gross margin from the initial sales of
our  VeriChip  product  of $0.3  million in 2003.  We hope to realize  increased
margins from sales of VeriChip during 2004.  Gross profit decreased $2.5 million
from 2001 to 2002 and margins  decreased to 30.2% in 2002,  compared to 34.1% in
2001.  We attribute  the  decrease in gross  profit and margin  primarily to the
reduction in sales of services and of higher-margin  networking  products during
2002.  Approximately $2.1 million of the decrease in gross profit was related to
the decrease in sales from our computer networking  business,  which was sold in
the fourth quarter of 2002. Computer Equity Corporation's gross profit increased
$1.1 million while its margins  remained  relatively  constant at  approximately
25.5%.  Computer  Equity  Corporation  contributed  61.8%  of the  gross  profit
generated by this segment during 2002.


                                       60
<PAGE>

      Our Digital  Angel  Corporation  segment's  gross  profit  increased  $1.2
million,  or 9.1%,  from 2002 to 2003,  and margins  increased to 41.9% in 2003,
compared to 40.2% in 2002. We attribute the increase in gross profit and margins
during  2003  primarily  to the  increase  in sales in the  Animal  Applications
division. We expect Digital Angel Corporation's gross margins to remain the same
in the future.  Gross profit  decreased by $0.2 million,  or 1.8%,  from 2001 to
2002,  and margins  increased to 40.2% from 36.9%.  We attribute the decrease in
gross  profit for 2002 to a  decrease  in gross  profit  from the  Wireless  and
Monitoring  division  as a result  of the  decrease  in sales in this  division.
Margins  increased  primarily as a result of higher margins  realized on service
revenue.

      Our InfoTech USA, Inc.  segment's gross profit decreased $1.6 million,  or
39.5%,  from 2002 to 2003, and margins  decreased to 17.4% in 2003 from 18.3% in
2002.  The  decreases  in gross  profit  and  margins  were  primarily  due to a
combination  of  competitive  pressures  forcing  product  margins  down and the
underutilization  of technicians and engineers  forcing service margins down. We
expect the service margins to improve during 2004 due to the improving IT market
conditions  and our focus on  higher-margin  products and related  services.  We
anticipate  these  factors  will  result  in a  higher  utilization  rate of our
technicians and engineers.  Gross profit decreased $1.2 million,  or 22.5%, from
2001 to 2002.  Gross margin  percentage  increased to 18.3% in 2002  compared to
15.7% in 2001.  The  decrease in gross profit was  primarily  due to the overall
decrease in revenue resulting from the soft market in the IT industry, while the
increase in gross margin was primarily attributable to the shift in our focus to
sales of  higher-margin  Intel based  products  and related  technical  services
during 2002.

      Our All Other segment's gross profit decreased by $1.2 million, or 100.0%,
from 2002 to 2003. Gross margin percentage decreased to 0.0% in 2003 compared to
83.3% in 2002.  Gross profit  decreased  $10.3 million,  or 89.9%,  from 2001 to
2002.  Gross margin  percentage was 83.3% in 2002 compared to 27.7% in 2001. The
decrease  in gross  profit in 2003 and 2002 is due to the sale or closure of all
of the business units  comprising  this segment during the last half of 2001 and
the first half of 2002.  We attribute  the higher gross profit margin in 2002 to
inventory reserves of $4.3 million,  which were recorded during 2001, and to the
sale and  closure of business  units  within  this  group.  The  majority of the
business  units that were sold or closed in 2001 earned  lower gross  margins on
average than the remaining  business unit comprising this group during the first
half of 2002.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

      Selling, general and administrative expense from continuing operations was
$55.9  million in 2003,  a decrease of $9.8  million,  or 14.9%,  over the $65.7
million  reported in 2002.  Selling,  general and  administrative  expense  from
continuing operations decreased $36.6 million in 2002, or 35.8%, from the $102.3
million  reported in 2001.  As a  percentage  of revenue,  selling,  general and
administrative  expense from  continuing  operations  has  decreased to 60.1% in
2003, from 66.7% in 2002 and 65.4% in 2001.

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


                                                2003         2002         2001
                                                ----         ----         ----
                                                     (AMOUNTS IN THOUSANDS)

Advanced Technology                            $10,166      $12,100     $ 12,273
Digital Angel Corporation                       14,875       14,846        9,595
InfoTech USA, Inc.                               3,272        4,171        5,451
All Other                                         (298)       1,504       28,876
"Corporate/Eliminations"                        27,865       33,060       46,121
--------------------------------------------------------------------------------
                                               $55,880      $65,681     $102,316
================================================================================


                                       61
<PAGE>


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

                                              2003        2002     2001
                                              ----        ----     ----
                                                %          %         %
Advanced Technology                           22.8        28.9     27.5
Digital Angel Corporation                     43.9        45.8     26.7
InfoTech USA, Inc.                            22.6        18.4     16.0
All Other                                       --       108.4     69.9
"Corporate/Eliminations" (1)                  30.0        33.6     29.5
---------------------------------------------------------------------------
                                              60.1        66.7     65.4
===========================================================================

(1)   "Corporate/Eliminations" percentage has been calculated as a percentage of
      total revenue.

      Changes during the years were:

      Our Advanced  Technology  segment's  selling,  general and  administrative
expense  decreased $1.9 million,  or 16.0%,  to $10.2 million in 2003 from $12.1
million in 2002. As a percentage of revenue, selling, general and administrative
expense  decreased to 22.8% in 2003,  as compared to 28.9% in 2002. We attribute
the  decreases  primarily to the sale of one of the  businesses  in this segment
during  the  fourth  quarter  of 2002,  which  contributed  $0.9  million of the
decrease,  and to overhead  reductions  associated  with the decrease in service
revenue  during 2003. We anticipate  that  selling,  general and  administrative
expenses  from this  segment  will  decrease in 2004  because we sold our WebNet
Services,  Inc.  business  during the fourth  quarter  of 2003,  and  because we
incurred  approximately  $1.2  million in  litigation  reserves in both 2003 and
2002,  that we do not anticipate  incurring  during 2004.  Selling,  general and
administrative expense decreased $0.2 million, or 1.4%, to $12.1 million in 2002
from $12.3 million in 2001. We attribute the decrease primarily to the reduction
in revenues and the  corresponding  overhead for the majority of the  businesses
within this segment.

      Our   Digital   Angel   Corporation   segment's   selling,   general   and
administrative  expense was $14.9 million in 2003,  compared to $14.8 million in
2002. As a percentage of revenue,  selling,  general and administrative  expense
decreased  to 43.9% as compared to 45.8% in 2002.  Digital  Angel  Corporation's
selling, general and administrative expense remained relatively constant in 2003
as compared to 2002.  One-time  costs  associated  with the merger of pre-merger
Digital  Angel  and MAS in 2002,  and  introductory  costs  associated  with the
Digital Angel  product  launch that were  incurred  during 2002,  were offset by
various  additional  expenses  that were  incurred  during 2003  including:  (a)
consulting  expenses  associated with the VeriChip product of approximately $0.7
million; (b) approximately $0.8 million of expenses related to the Digital Angel
product;  (c) the  payment of a $0.2  million  credit  termination  fee to Wells
Fargo,  Digital Angel Corporation's prior lender; and (d) additional expenses of
$0.2 million for the GPS and Radio and Communications  division.  We expect that
Digital Angel  Corporation's  selling,  general and administrative  expense will
increase in 2004 as a result of the acquisition of OuterLink.  Selling,  general
and administrative  expense increased by $5.2 million,  to $14.8 million in 2002
from $9.6 million in 2001.  The increase in 2002 relates to expenses  associated
with the merger of pre-merger  Digital Angel and MAS during the first quarter of
2002,  of  approximately  $2.1 million,  approximately  $2.5 million in expenses
associated with the Digital Angel product, which was introduced to the market in
November  2001,  and  approximately  $0.6 million of additional  commission  and
marketing expense in the GPS and Radio Communications division.


                                       62
<PAGE>

      Our InfoTech  USA,  Inc.  segment's  selling,  general and  administrative
expense  decreased  $0.9  million,  or 21.6%,  to $3.3 million in 2003 from $4.2
million in 2002. We attribute the  decreases  primarily to layoffs  during 2002,
which  contributed  approximately  $0.5  million  of the  decrease,  and to $0.3
million in costs in 2002,  which were related to a proposed merger with VeriChip
Corporation  that was aborted  during 2002.  During the current  fiscal year, as
market conditions  improve,  we believe that InfoTech USA, Inc.'s management and
administrative staff will be sufficient,  however InfoTech USA, Inc. may need to
add  additional  personnel in the sales and  technical  areas of the business as
sales volume dictates.  Selling, general and administrative expense decreased to
$4.2 million in 2002, from $5.5 million in 2001. The decrease in expense was due
to several cost savings measures taken in 2002 including the  centralization  of
the service and  administrative  operations,  and the closure of two other small
offices,  which  contributed $0.2 million of the decrease.  Also, we reduced our
work force and payments of sales commissions,  both of which were related to the
decline in revenue, which contributed $0.8 million of the decrease.

      Our All Other's selling, general and administrative expense decreased $1.8
million,  or  119.8%,  to $(0.3)  million  in 2003 from  $1.5  million  in 2002.
Selling,  general and administrative  expense decreased $27.4 million, or 94.8%,
to $1.5 million in 2002 from $28.9 million in 2001. The decreases  resulted from
the sale or closure of all of the business  units  comprising  this group during
the last half of 2001 and the first half of 2002.

      "Corporate/Eliminations"   selling,  general  and  administrative  expense
decreased $5.2 million, or 15.7%, to $27.9 million in 2003 from $33.1 million in
2002. We attribute the majority of the decrease to the following factors:

      o     we incurred a charge of  approximately  $4.3 million during 2002 for
            valuation  reserves  associated  with  notes  receivable  for  stock
            issuances  from certain  current and former  officers and directors.
            The  officers and  directors  received no cash  proceeds  from these
            loans.  In  September  2000,  when the  notes  were  originated,  we
            notified  these officers and directors that we intended to pay their
            annual  interest  as part of  their  compensation  expense/directors
            remuneration  and to provide a gross-up  for the  associated  income
            taxes.  Annual interest  payments were due on September 27, 2001 and
            September 27, 2002. We chose not to pay the interest and related tax
            gross-up. In addition, the principal amount of the notes and a final
            annual  interest  payment  became due on  September  27,  2003.  We,
            therefore, consider such notes to be in default and have begun steps
            to  foreclose  on the  underlying  collateral  (all of the stock) in
            satisfaction of the notes.  Our decision to take this action relates
            in part to the passage of the corporate reform legislation under the
            Sarbanes-Oxley  Act of 2002,  which,  among other things,  prohibits
            further extension of credit to officers and directors;

      o     we reduced  approximately  $1.3 million and  incurred  approximately
            $0.7 million in non-cash  compensation expense during 2003 and 2002,
            respectively,  due to re-pricing  1.9 million  stock options  during
            2001.  The re-priced  options had original  exercise  prices ranging
            from  $6.90 to  $63.40  per share and were  modified  to change  the
            exercise price to $1.50 per share.  Due to the  modification,  these
            options are being accounted for as variable options under APB No. 25
            and,  accordingly,  fluctuations in our common stock price result in
            increases and decreases of non-cash  compensation  expense until the
            options are exercised, forfeited or expired; and

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


                                       63
<PAGE>

      Partially offsetting these decreases were the following:

      o     we incurred  approximately $17.9 million in severance expense during
            2003, which resulted from the termination of executive  officers and
            director  during  2003,   including  $2.5  million   resulting  from
            re-pricing  stock options.  (An additional $0.2 million of severance
            expense  associated  with  these  terminations  is  included  in the
            Advanced  Technology  segment's selling,  general and administrative
            expense in 2003); and

      o     we incurred $4.3 million in bonus expense  during 2003.  The bonuses
            were awarded to directors, executive officers and other employees in
            recognition of their efforts in achieving the  successful  repayment
            of all of our  obligations to IBM Credit during 2003. As a result of
            this repayment we recorded a gain on the  extinguishment  of debt of
            approximately $70.1 million in 2003.

      "Corporate/Eliminations"  selling,  general  and  administrative  expenses
decreased $13.1 million, or 28.3% to $33.1 million in 2002 from $46.1 million in
2001. We attribute the decrease in 2002 primarily to the costs  incurred  during
2001 for bad debt reserves on notes and other  receivables  of $21.9 million (as
more fully discussed below), non-cash compensation expense of approximately $0.7
million in 2002 versus $5.3 million in 2001  resulting from the repricing of 1.9
million  stock options in September  2001,  and  litigation  reserves in 2001 of
approximately  $3.6  million.  Also  contributing  to the  decrease  in  2002 as
compared to 2001 was a reduction in legal fees of  approximately  $1.7  million.
Partially  offsetting the decrease in 2002 were increases related to the options
to acquire  shares of pre-merger  Digital Angel common stock that were converted
into shares of MAS common stock as discussed  above, the charge of approximately
$4.3 million during 2002 for valuation reserves associated with notes receivable
for stock issuances from certain current and former officers and directors,  and
an increase  in  professional  fees  associated  with  accounting  and  auditing
services during 2002 of approximately $1.2 million.

      The bad debt  reserves on notes and other  receivables  of $21.9  million,
which were  recorded  in 2001,  were  considered  necessary  based upon  several
factors  that  occurred  during the third and  fourth  quarters  of 2001.  These
included:

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

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

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

      o     A $9.0  million  note  received for issuance of shares of our common
            stock was deemed uncollectible based upon the financial condition of
            the debtor.

      We  anticipate   that   "Corporate/Eliminations"   selling,   general  and
administrative  expenses will  decrease  significantly  in the future,  as we no
longer have any  employment  contracts  with our executive  officers which could
potentially  result in large  severance  payouts  such as the amounts  that were
incurred in 2003, and we do not anticipate  incurring other one-time  charges as
noted above.


                                       64
<PAGE>

      RESEARCH AND DEVELOPMENT EXPENSE

      Research and development  expense from continuing  operations for 2003 was
$6.3 million, an increase of approximately $2.1 million, or 51.5%, over the $4.1
million  reported in 2002.  Research and  development  expense  from  continuing
operations  decreased  $4.7  million  in 2002,  or 53.0%  from the $8.8  million
reported in 2001. As a percentage of revenue,  research and development  expense
was 6.7%, 4.2% and 5.6% in 2003, 2002 and 2001, respectively.

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


                                          2003            2002         2001
                                          ----            ----         ----
                                               (AMOUNTS IN THOUSANDS)

Advanced Technology                      $ 502            $ 861      $ 3,321
Digital Angel Corporation                4,898            3,034        5,244
InfoTech USA, Inc.                          --               --           --
All Other                                   --               --          218
"Corporate/Eliminations"                   855              235          --
------------------------------------------------------------------------------
                                        $6,255           $4,130       $8,783
==============================================================================

      Research and development  expense relates  primarily to the development of
our products,  Digital Angel, Thermo Life, VeriChip,  Bio-Thermo and PLD, and in
2001,  to software  development  costs.  The  research and  development  expense
associated  with software  development  was $0.5 million,  $0.9 million and $3.3
million in 2003, 2002 and 2001,  respectively.  We anticipate that we will incur
approximately $4.0 million in research and development expense in 2004.


      ASSET IMPAIRMENT

                                             2003           2002           2001
                                           -------        -------        -------
                                                  (AMOUNTS IN THOUSANDS)

Goodwill:
  Advanced Technology                      $    --        $    --        $30,453
  Digital Angel Corporation                     --         31,460            726
  InfoTech USA, Inc.                         2,154             --             --
  All Other                                     --             --         32,427
                                           -------        -------        -------
       Total goodwill                        2,154         31,460         62,606
Property and equipment                          --          6,860          2,372
Software and other                             302            337          5,741
                                           -------        -------        -------
                                           $ 2,456        $38,657        $71,719
                                           =======        =======        =======

      As of December 31, 2003,  the net carrying value of our goodwill was $63.3
million.  There was no  impairment  of goodwill  upon the adoption of FAS 142 on
January  1, 2002.  However,  based upon our  annual  review for  impairment,  we
recorded  impairment  charges of $2.2  million  and $31.5  million in the fourth
quarters of 2003 and 2002, respectively.  The impairment charge recorded in 2003
relates to the goodwill  associated  with our InfoTech  USA, Inc.  segment.  The
impairment charge for 2002 relates to the goodwill associated with Digital Angel
Corporation's Wireless and Monitoring division.

      Methodology for Assigning Goodwill to Reporting Units:

      In accordance  with FAS 142, upon  adoption,  we were required to allocate
goodwill to our various reporting units. At January 1, 2002, our reporting units
consisted  of  the  following  (our  reporting  units  listed  below  are  those
businesses,  which have goodwill and for which discrete financial information is
available and upon which segment management makes operating decisions):

                                       65
<PAGE>

      o     Advanced Technology segment's Computer Equity Corporation;

      o     Advanced Technology segment's P-Tech., Inc.;

      o     Advanced Technology segment's Pacific Decision Sciences;

      o     Pre-merger Digital Angel Corporation's Animal Applications division;

      o     Pre-merger  Digital  Angel  Corporation's  Wireless  and  Monitoring
            division;

      o     Pre-merger Digital Angel Corporation's GPS and Radio  Communications
            division; and

      o     InfoTech USA, Inc.


      The  goodwill  assigned to our  reporting  units was based on the goodwill
resulting  from  our  acquisition  of the  reporting  unit,  with  the  goodwill
attributable to the merger of Destron Fearing Corporation,  which was a publicly
held  company  trading on the  Nasdaq  (Destron),  and  Digital  Angel.net  Inc.
(DA.net)  allocated  between  the  Animal  Applications  and  the  Wireless  and
Monitoring  reporting  units.  The merger of  Destron  and  DA.net  occurred  in
September  2000.  The goodwill  resulting from the Destron and DA.net merger was
approximately  $74.7  million,  of which $50.7  million was  allocated to Animal
Applications  and $24.0 million was allocated to Wireless and  Monitoring.  (The
Wireless and  Monitoring  reporting  unit also included the goodwill  associated
with the acquisition of Timely Technology Corp., of approximately $7.5 million).

      We believe that a portion of the goodwill  resulting  from the Destron and
DA.net  merger was due to the  synergies of the combined  companies.  There were
several  potential  benefits/synergies  of the  merger  that we  believed  would
contribute to the success of the combination. These potential benefits/synergies
included:

      o     the   acceleration  of  the   opportunities  of  the  Digital  Angel
            technology  through  the  combination  with  Destron and the current
            products  it  offers,  which  establishes  a company  with  stronger
            capabilities;

      o     the combination of DA.net and Destron, with its injectable microchip
            technology  and its current  products  in the animal  identification
            markets, provide broader product offerings for the combined company;

      o     improvement  in the  purchasing  power of the  combined  company  as
            compared to either  company  standing  alone,  resulting  in reduced
            costs;

      o     the management team of the combined  company having greater depth of
            knowledge  of the  injectable  microchip  and animal  identification
            industries and more business  experience than that of either company
            standing alone;

      o     the potential to expand the market  presence of DA.net and Destron's
            products   globally  through  a  larger  combined  sales  force  and
            geographically more extensive sales and distribution channels;

      o     the  complementary  nature of each company's product offerings as an
            extension of the offerings of the other company;

      o     increased product  diversification and penetration of each company's
            customer base;

      o     similarities in corporate culture; and

      o     the  opportunity  for  expanded  research  and  development  of  the
            combined  product   offerings,   including   potential  new  product
            offerings.


                                       66
<PAGE>

      Since  none of the assets and  liabilities  resulting  from the merger had
been assigned to the Wireless and Monitoring  reporting  unit, we determined the
allocation  of the  goodwill  between the Animal  Applications  and Wireless and
Monitoring  reporting  units based upon  guidance  provided in FAS 142.  FAS 142
states that, "the methodology used to determine the amount of goodwill to assign
to a reporting unit shall be reasonable and  supportable and shall be applied in
a consistent  manner."  Since Destron was a publicly held company at the time of
the merger, and as a result, its fair market value was readily determinable,  we
allocated to the Animal Applications reporting unit the amount of goodwill equal
to Destron's fair market value prior to our public announcement of the potential
merger,  which was approximately $50.7 million.  This resulted in our allocation
of  approximately  $24.0 million to the Wireless and Monitoring  reporting unit,
which we believed represented the fair market value of the unit at that point in
time, based on our belief in the market potential for the Digital Angel product,
coupled with the synergies of the combined companies, as discussed above.

      As of December 31, 2002, our reporting units consisted of the following:

      o     Advanced Technology segment's Computer Equity Corporation:

      o     Advanced Technology segment's P. Tech, Inc.;

      o     Advanced Technology segment's Pacific Decision Sciences;

      o     Digital Angel Corporation's Animal Applications division;

      o     Digital Angel Corporation's Wireless and Monitoring division;

      o     Digital Angel Corporation's GPS and Radio Communications division;

      o     Digital Angel Corporation's  Medical Systems division (consisting of
            the  business  operations  of MAS,  which was  acquired on March 27,
            2002, and which is now included as part of  Discontinued  Operations
            in our financial statements); and

      o     InfoTech USA, Inc.

      Our reporting  units at December 31, 2003,  were the same as our reporting
units  at  December  31,  2002,  except  for  the  exclusion  of  Digital  Angel
Corporation's  Wireless  and  Monitoring  division,  as its  goodwill  was fully
impaired at December 31, 2002, as discussed below.

      Our  methodology  for  estimating  the fair value of each  reporting  unit
during the fourth  quarters  of 2003 and 2002 was a  combination  of  impairment
testing  performed both  internally and  externally.  The tests for the P-Tech.,
Inc., and Pacific Decision  Sciences  reporting units were performed  internally
based  primarily  on  discounted  future cash flows.  The tests for the Computer
Equity  Corporation  reporting unit, the reporting units associated with Digital
Angel  Corporation  and the InfoTech USA,  Inc.  reporting  unit were  performed
externally  through the engagement of independent  valuation  professionals  who
performed  valuations  using a combination of comparable  company and discounted
cash flow  analyses.  The InfoTech  USA, Inc.  reporting  unit has a fiscal year
ending on September 30, and therefore,  these tests were performed  during their
fiscal 2003 and 2002  fourth  quarters.  If the fair value of a  reporting  unit
exceeded its carrying value, then no further testing was required.  However,  if
the  carrying  value  of a  reporting  unit  exceeded  its fair  value,  then an
impairment charge was recorded.


                                       67
<PAGE>

      We engaged  an  independent  valuation  firm to review  and  evaluate  the
goodwill of Digital Angel Corporation,  as reflected on our books as of December
31, 2003 and 2002.  Independently,  the valuation  firm reviewed the goodwill of
the various reporting units (Animal Applications,  Wireless and Monitoring,  GPS
and Radio  Communications  and Medical  Systems) at the request of Digital Angel
Corporation.  Digital  Angel  Corporation's  management  compiled  the cash flow
forecasts,  growth  rates,  gross  margin,  fixed and variable  cost  structure,
depreciation  and  amortization  expenses,  corporate  overhead,  tax rates, and
capital expenditures,  among other data and assumptions related to the financial
projections  upon which the valuation  reports were based.  The valuation firm's
methodology  including residual or terminal  enterprise values were based on the
following factors: risk free rate of 10 years; current leverage (E/V); leveraged
beta - Bloomberg; unleveraged beta; risk premium; cost of equity; after-tax cost
of debt;  and weighted  average  cost of capital.  These  variables  generated a
discount rate  calculation.  The assumptions  used in the  determination of fair
value using discounted cash flows were as follows:

      o     Cash  flows  were  generated  for 5 years,  which  was the  expected
            recovery period for the goodwill;

      o     Earnings before interest,  taxes, depreciation and amortization were
            used as the measure of cash flow; and

      o     Discount  rates  ranging  from 15% to 20% were used.  The rates were
            determined based on the risk free rate of the 10-year U.S.  Treasury
            Bond plus a market risk premium of 7.5%. (The discount rate utilized
            by us was the rate of return expected from the market or the rate of
            return for a similar investment with similar risks).

      Residual or Terminal Enterprise Value Calculation:

      The independent valuation firm was engaged by Digital Angel Corporation to
perform a company comparable analysis utilizing financial and market information
on publicly traded  companies that are considered to be generally  comparable to
the Animal Applications,  Wireless and Monitoring,  GPS and Radio Communications
and Medical  Systems  reporting  units.  Each analysis  provided a benchmark for
determining  the terminal  values for each  business  unit to be utilized in its
discounted  cash flow  analysis.  The  analysis  generated  a multiple  for each
reporting unit,  which was  incorporated  into the  appropriate  business unit's
discounted cash flow model.

      The analyses for 2002 indicated that all of the goodwill  associated  with
Digital Angel  Corporation's  Wireless and Monitoring  division of approximately
$31.5 million was impaired,  as discussed below.  (During the fourth quarters of
2003 and 2002,  we also  impaired  $2.4  million and $30.7  million of goodwill,
respectively,  associated  with  Digital  Angel  Corporation's  Medical  Systems
operations  as more fully  discussed  below  under the  Results of  Discontinued
Operations section).

      On November 26, 2001,  we launched  the Digital  Angel  product and during
2002,  we marketed the product  extensively.  Despite our  aggressive  marketing
campaign,  the Digital  Angel  product did not achieve our  forecasted  revenues
during 2002.  Sales of the Digital Angel product were affected,  in part, by the
lack of GPS tracking capabilities within buildings.  We are currently working on
the  development  of the  Digital  Angel  technology  to  include  assisted  GPS
capabilities  to enhance  these "line of sight"  issues.  Neither we nor Digital
Angel  Corporation had a historical track record of achieving  forecasts for new
or existing technology  products.  The Digital Angel watch/pager was expected to
be the primary revenue driver for the Digital Angel  Corporation's  Wireless and
Monitoring  division.  In addition to the "line of sight issues," the poor sales
are partly  explained by an  overestimation  of consumer demand as a result of a
challenging  economic  environment (i.e.  consumers considered the Digital Angel
watch/pager to be a discretionary luxury item), and an uncertain marketplace (we
overestimated  consumer  demand  for an  innovative  and  new  technology  to be
introduced  into the consumer  marketplace).  As of December  31, 2002,  Digital
Angel  Corporation's  Wireless  and  Monitoring  segment  had not  recorded  any
significant revenues from its Digital Angel product, and it had not achieved the
revenue projections used as the basis for our impairment tests upon the adoption
of FAS 142 on January 1, 2002.  At December  31,  2002,  the market value of our
investment in Digital Angel  Corporation  was  approximately  $50.0 million.  In
consideration of these factors, the newness of the Digital Angel Technology, the
operating  history  of  Digital  Angel  Corporation,  the  challenging  economic
environment and uncertainties in the marketplace along with the independent fair
value measurement  valuations  performed by the independent  professionals,  and
other  valuations  performed,  we concluded  that future cash flows from certain
operations  would not be  sufficient  to  recover  all of the $31.5  million  of
goodwill  associated  with Digital Angel  Corporation's  Wireless and Monitoring
division.  Accordingly,  this amount was recorded as an impairment charge during
the fourth quarter of 2002.

                                       68
<PAGE>

      Our InfoTech USA, Inc. segment operates on a September 30 fiscal year end.
As part of InfoTech USA, Inc.'s fiscal year end planning  cycle,  its management
engaged an  independent  valuation firm to review and evaluate their goodwill of
approximately  $2.2 million.  The goodwill  resulted from prior  acquisitions by
InfoTech USA, Inc. The  methodology  used by the  independent  valuation firm to
evaluate  InfoTech USA,  Inc.'s goodwill was the same as discussed above for the
evaluations associated with Digital Angel Corporation.  Based on the evaluation,
InfoTech  USA,  Inc.'s  goodwill  was not  impaired as of  September  30,  2003.
However,  InfoTech USA, Inc. has not achieved its projected  operating  results,
and it has not returned to profitability (InfoTech USA, Inc. has incurred losses
for the past several  years).  Also,  the market value of InfoTech  USA,  Inc.'s
common  stock,   even  after  adjustment  for  its  limited  public  float,  was
significantly  less at  December  31,  2003 than its book  value.  In  addition,
certain third parties had  expressed  interest in purchasing  InfoTech USA, Inc.
for amounts  less than our  carrying  value.  As a result of these  factors,  we
believe that the full value of InfoTech USA,  Inc.'s  goodwill of  approximately
$2.2 million was impaired as of December 31, 2003.

      Future goodwill  impairment  reviews may result in additional write downs.
Such determination  involves the use of estimates and assumptions,  which may be
difficult to accurately measure or value.

      In addition,  in the fourth  quarter of 2002,  Digital  Angel  Corporation
impaired $6.4 million of software  associated  with its Wireless and  Monitoring
segment.  The write off related to an exclusive license to a digital  encryption
and  distribution  software  system.  The charge is included in the Consolidated
Statements of Operations under the caption Asset Impairment.

      As  a  result  of  the  economic  slowdown  during  2001,  we  experienced
deteriorating  sales for  certain of our  businesses.  In  addition,  management
concluded that a full transition to an advanced  technology  development company
required the sale or closure of all units that did not fit into our new business
model or were not cash flow  positive.  This resulted in the shutdown of several
of our  businesses  during the third and fourth  quarters  of 2001 and the first
quarter of 2002.  Also,  letters of intent that we had received  during the last
half of 2001 and the first quarter of 2002 related to the sale of certain of our
businesses  indicated  a  decline  in  their  fair  values.  The  sale of  these
businesses did not comprise the sale of an entire business  segment.  Based upon
these  developments,  we reassessed our future expected operating cash flows and
business  valuations  and at December 31, 2001, we performed  undiscounted  cash
flow  analyses by business  unit to  determine  if an  impairment  existed.  For
purposes of these analyses,  earnings before interest,  taxes,  depreciation and
amortization  were used as the  measure of cash  flow.  When an  impairment  was
determined to exist,  any related  impairment loss was calculated  based on fair
value.  Fair value was determined  based on discounted cash flows.  The discount
rate utilized by us was the rate of return  expected from the market or the rate
of  return  for a similar  investment  with  similar  risks.  This  reassessment
resulted in the asset impairments listed above during 2001. The assumptions used
in our determination of fair value using discounted cash flows were as follows:

      o     Cash flows were  generated  for periods  ranging  from 5 to 10 years
            based on the expected  life of the  business'  goodwill;

                                       69
<PAGE>

      o     Earnings before interest,  taxes, depreciation and amortization were
            used as the measure of cash flow; and

      o     A discount rate of 12.0% was used. The rate was determined  based on
            the risk free rate of the 10 year U.S.  Treasury  Bond plus a market
            risk premium of 7%.

      As a result of the  restructuring  and revision to our business model, the
plan to implement  an  enterprise  wide  software  system  purchased in 2000 was
discontinued  during  the third  quarter of 2001,  at which time the  associated
software costs were fully written off and the computer hardware was written down
to its estimated net realizable  value.  During 2002, the remaining value of the
equipment,  which was no longer deemed saleable,  of approximately  $0.5 million
was written off.

      Depreciation and Amortization

      Depreciation and amortization expense from continuing  operations for 2003
was $1.3 million,  a decrease of $2.3 million,  or 64.1%,  over the $3.5 million
reported in 2002. The 2002 expense  represents a decrease of $24.5  million,  or
87.5%,  over the $28.1  million  reported in 2001.  As a percentage  of revenue,
depreciation and amortization expense was 1.4%, 3.6% and 17.9% in 2003, 2002 and
2001,  respectively.  Depreciation and  amortization  expense related to cost of
products sold is included in gross profit above.

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

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

                                            2003            2002         2001
                                            ----            ----         ----
                                               (AMOUNTS IN THOUSANDS)

Advanced Technology                        $ 231           $ 322       $8,832
Digital Angel Corporation                    618           2,641       11,950
InfoTech USA, Inc.                           213             261          503
All Other                                     --              --        4,534
"Corporate/Eliminations"                     200             296        2,242
------------------------------------------------------------------------------
                                          $1,262          $3,520      $28,061
==============================================================================


      Advanced  Technology  segment's   depreciation  and  amortization  expense
decreased $0.1 million,  or 28.5%, to $0.2 million in 2003, from $0.3 million in
2002. We attribute the decrease to fully depreciating certain assets during 2002
and 2003,  our  decision  in 2002 to limit our  expenditures  for  property  and
equipment,  and the sale of one of the business units within this segment during
the fourth  quarter of 2002. In 2004, we expect  depreciation  and  amortization
expense to decrease  slightly  due to the sale of WebNet  Services,  Inc. in the
fourth quarter of 2003.  Depreciation  and amortization  expense  decreased $8.5
million, or 96.3% in 2002 as compared to 2001. We attribute the decrease in 2002
primarily to a reduction in goodwill amortization as a result of the adoption of
FAS 142.

                                       70
<PAGE>


      Digital Angel Corporation segment's  depreciation and amortization expense
decreased $2.0 million,  or 76.6%, to $0.6 million in 2003, from $2.6 million in
2002.  We attribute  the decrease  primarily  to the  exclusion of  depreciation
expense for a digital  encryption and  distribution  software system license for
which Digital Angel Corporation  recorded an impairment charge during the fourth
quarter of 2002.  In  connection  with this system,  Digital  Angel  Corporation
incurred  approximately $2.0 million of depreciation  expense in 2002. We expect
that Digital Angel  Corporation's  depreciation  and  amortization  expense will
remain at its current level during 2004.  Depreciation and amortization  expense
decreased  $9.3 million,  or 77.9% in 2002 as compared to 2001. We attribute the
decrease in 2002 primarily to a reduction in goodwill  amortization  as a result
of the adoption of FAS 142.

      InfoTech  USA,  Inc.  segment's   depreciation  and  amortization  expense
decreased  slightly in 2003,  as compared to 2002.  We  attribute  the  decrease
primarily to the sale of the Shirley, New York facility during the first quarter
of 2002,  and to fully  depreciating  certain  assets  during 2002 and 2003.  We
expect that InfoTech USA,  Inc.'s  depreciation  and  amortization  expense will
decrease in 2004 as a result of fully  depreciating  certain assets during 2003.
Depreciation and amortization  expense decreased $0.2 million, or 48.1% in 2002,
as compared to 2001. We attribute the decrease in 2002  primarily to a reduction
in goodwill amortization as a result of the adoption of FAS 142.

      All Other's  depreciation and amortization  expense  decreased in 2002, as
compared  to  2001,  primarily  as a result  of the  adoption  of FAS 142.  Also
contributing  to the  decrease  was the sale or closure  of all of the  business
units  comprising  this group during the last half of 2001 and the first half of
2002.

      "Corporate/Eliminations"  depreciation and amortization  expense decreased
$0.1 million,  or 32.4%,  to $0.2 million in 2003, from $0.3 million in 2002. We
attribute the decrease  primarily to our decision to limit our  expenditures for
property and equipment and to fully depreciating  certain assets during 2002 and
2003. We expect  depreciation and amortization  expense to remain at its current
level during 2004. Depreciation and amortization expense decreased $1.9 million,
or 86.8%,  in 2002 as compared to 2001.  The decrease is primarily the result of
the impairment and sale of software and other  corporate  assets during the last
half of 2001.

      LOSS/GAIN ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS

      The loss  (gain) on sales of  subsidiaries  and  business  assets was $0.3
million,  $(0.1) million and $6.1 million for the years ended December 31, 2003,
2002 and 2001, respectively.  The loss on the sales of subsidiaries and business
assets  of $0.3  million  for 2003  resulted  from the sale of our  wholly-owned
subsidiary,  WebNet  Services  Inc. The loss of $6.1 million for 2001 was due to
the sale of our 85% ownership interest in Atlantic Systems,  Inc., and the sales
of the business assets of our wholly-owned  subsidiaries as follows:  ADS Retail
Inc., Signal Processors,  Limited, ACT Wireless Corp. and our ATI Communications
companies.  Proceeds  from  the 2001  sales  were  $3.5  million  and were  used
primarily to repay debt.

      INTEREST AND OTHER INCOME

      Interest and Other Income was $0.9 million,  $2.3 million and $2.1 million
for 2003, 2002 and 2001, respectively.  Interest income is earned primarily from
short-term investments and notes receivable.

      INTEREST EXPENSE

      Interest  expense was $22.6  million,  $17.5  million and $8.6 million for
2003, 2002 and 2001,  respectively.  Interest expense is a function of the level
of outstanding debt. The interest expense associated with the Debentures and the
IBM Credit Agreement was $12.7 million and $8.8 million,  respectively, in 2003.
Interest expense  associated with the IBM Credit Agreement was $16.9 million and
$8.4 million in 2002 and 2001, respectively.


                                       71
<PAGE>

      Due to the  repayments  of all of our  obligations  to IBM  Credit and the
conversion of all of the Debentures during 2003, we anticipate that our interest
expense will be significantly lower during 2004.  However,  our interest expense
will vary as a result of  increases  and/or  decreases  in the  market  price of
Digital Angel Corporation's  common stock. This is a result of the Warrants that
we issued to the Debenture  holders.  The  liability  for the  Warrants,  to the
extent potentially  settleable in shares of the Digital Angel Corporation common
stock owned by us, is required to be revalued at each reporting  period with any
resulting  increase/(decrease)  being  charged/(credited)  to  operations  as an
increase/(decrease)  in interest expense.  During the fourth quarter of 2003, we
recorded interest expense of $2.0 million as a result of such revaluation.  As a
result of such  revaluation,  the  exercise  of the  Warrants  by the  Debenture
holders into shares of the Digital  Angel  Corporation  common stock owned by us
may result in our recording a gain on the transaction.

      INCOME TAXES

      We had effective  income tax rates of 16.5%,  0.3% and 11.8% in 2003, 2002
and 2001,  respectively.  Differences in the effective income tax rates from the
statutory  federal income tax rate arise from goodwill  amortization  associated
with  acquisitions,  state  taxes net of federal  benefits  and the  increase or
reduction of valuation  allowances  related to net operating loss carry forwards
and other  deferred tax assets.  Our tax  provision  for 2003 was  primarily the
result of an increase in the valuation  allowance  associated with InfoTech USA,
Inc.'s  deferred tax assets of  approximately  $1.6 million.  As of December 31,
2003, we have provided a valuation  allowance to fully reserve our net operating
loss carry  forwards and our other  existing  net  deferred tax assets.  Our tax
provision  for 2001 was  primarily  the result of an increase  in the  valuation
allowance due to the losses incurred during the year ended December 31, 2001, as
well as our projections of future taxable income.

      NET LOSS ON CAPITAL  TRANSACTIONS  OF SUBSIDIARY AND LOSS  ATTRIBUTABLE TO
CHANGES IN MINORITY INTEREST AS A RESULT OF CAPITAL TRANSACTIONS OF SUBSIDIARY

      Gains where  realizable  and losses on the  issuance of shares of stock by
our consolidated  subsidiary,  Digital Angel  Corporation,  are reflected in the
Consolidated  Statements of Operations.  We determined that such  recognition of
gains and losses on  issuances of shares of stock by Digital  Angel  Corporation
was  appropriate  since the  shares  issued  to date were not sales of  unissued
shares  in a  public  offering,  since we do not plan to  reacquire  the  shares
issued,  and the value of the proceeds could be objectively  determined.  During
2003, we recorded a loss of $0.2 million on the issuances of 2.3 million  shares
of Digital Angel Corporation's common stock resulting from the exercise of stock
options.  During 2002,  we recorded a net loss of $2.4  million,  comprised of a
loss of  approximately  $5.1 million  resulting from the exercise of 1.5 million
pre-merger  Digital Angel options, a gain of approximately $4.7 million from the
deemed sale of 22.85% of the AWG, as a result of the merger with MAS, and a loss
of $2.0  million  on the  issuances  of 1.1  million  shares  of  Digital  Angel
Corporation's  common  stock  resulting  primarily  from the  exercise  of stock
options.  The  losses  on  the  issuances  of  common  stock  by  Digital  Angel
Corporation represent the difference between the carrying amount of the pro-rata
share of our investment in Digital Angel Corporation,  and the net proceeds from
the  issuances of the stock.  In addition,  during 2003 and 2002,  we recorded a
loss of $6.5 million and $2.0 million, respectively,  attributable to changes in
our minority interest  ownership of Digital Angel Corporation as a result of the
stock  issuances.  We anticipate  that in the future we will continue to realize
gains and losses on the issuances of stock by Digital Angel Corporation.


                                       72
<PAGE>


      RESULTS OF DISCONTINUED OPERATIONS

      During the three-months ended June 30, 2004,  Digital Angel  Corporation's
Board of Directors approved a plan to sell its Medical Systems operations, which
were acquired on March 27, 2002, and the business assets of Medical Systems were
sold  effective  April  19,  2004.  Medical  Systems  represented  the  business
operations of MAS. On March 31, 2002,  our 93% owned  subsidiary,  Digital Angel
Corporation,  which were refer to as pre-merger  Digital Angel,  merged with MAS
and MAS  changed its name to Digital  Angel  Corporation.  The  Medical  Systems
business activities consisted of a staff of logistics specialists and physicians
who provided medical  assistance  services and interactive  medical  information
services  to  people  traveling   anywhere  in  the  world.   Services  included
coordination  of  medical  care,   provision  of  general  medical  information,
physician  consultation,   translation  assistance,  claims  handling  and  cost
containment on behalf of assistance  companies,  insurance companies and managed
care  organizations.  It also offered medical training  services to the maritime
industry,  and sold a variety  of kits  containing  pharmaceutical  and  medical
supplies to its  maritime  and  airline  customers  through  its  pharmaceutical
warehouse facility located in Owings, Maryland. The land and building associated
with Medical Systems' operations were sold in a separate transaction on July 31,
2004.

      Medical Systems was one of our reporting units in accordance with FAS 142.
Accordingly,  the financial  condition,  results of operations and cash flows of
Medical Systems have been reported as  Discontinued  Operations in our financial
statements,  and prior periods have been restated.  The following  discloses the
operating losses from  Discontinued  Operations for the years ended December 31,
2003 and 2002, which consist of the losses attributable to Medical Systems:


                                                YEAR ENDED    YEAR ENDED
                                               DECEMBER 31,  DECEMBER 31,
                                                --------      --------
                                                 (AMOUNTS IN THOUSANDS)

                                                  2003          2002
                                                --------      --------
Product revenue                                 $    875      $    546
Service revenue                                    1,405         1,181
                                                --------      --------
  Total revenue                                    2,280         1,727
Cost of products sold                                383           270
Cost of services sold                              1,172           823
                                                --------      --------
Total cost of products and services sold           1,555         1,093
                                                --------      --------

  Gross profit                                       725           634
Selling, general and administrative expense          776           769
Asset impairment                                   2,986        30,725
Depreciation and amortization                        492           409
Interest and other income                           (196)          (16)
Interest expense                                     149            47
Minority interest                                 (1,048)       (6,895)
                                                --------      --------
  Loss from Discontinued Operations             $ (2,434)     $(24,405)
                                                ========      ========


      The  above  results  do not  include  any  allocated  or  common  overhead
expenses.  We have not  provided  a  benefit  for  income  taxes  on the  losses
attributable to Medical Systems.  We do not anticipate Medical Systems incurring
additional  losses in the  future.  However,  in  accordance  with FAS 144,  any
additional  operating  losses or changes in the values of assets or  liabilities
will be reflected in our financial statements as incurred.


                                       73
<PAGE>

      The asset  impairments for Medical Systems  consisted of the impairment of
goodwill of  approximately  $2.4  million  and $30.7  million as a result of our
annual  impairment  tests performed during the fourth quarters of 2003 and 2002,
respectively.  In addition,  during the fourth  quarter of 2003,  we incurred an
impairment  charge of  approximately  $0.6 million  related to Medical  Systems'
intangible assets.

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

      The following  discloses the income from  Discontinued  Operations for the
period January 1 through March 1, 2001, the measurement date. The income for the
period  January 1 through March 1, 2001 consists of the income  attributable  to
our Intellesale and all other non-core businesses:


                                                          January 1, through
                                                            March 1, 2001
                                                        (amounts in thousands)

Product revenue                                                  $13,039
Service revenue                                                      846
                                                              -----------
Total revenue                                                     13,885
Cost of products sold (exclusive
of depreciation  and  amortization
shown separately below)                                           10,499
Cost of services sold                                                259
                                                              -----------
Total cost of products and
services sold (exclusive of
depreciation and amortization shown separately below)             10,758
                                                              -----------
Selling, general and administrative expense                        2,534
Depreciation and amortization                                        264
Interest, net                                                         29
Provision for income taxes                                            34
Minority interest                                                     53
                                                              -----------
  Income from Discontinued Operations                              $ 213
                                                              ===========


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

      We have  sold or  closed  all of the  businesses  comprising  Discontinued
Operations.  Proceeds from the sales of our  Discontinued  Operations  companies
were used primarily to repay outstanding debt.

      We accounted for the Intellesale segment and our other non-core businesses
as Discontinued  Operations in accordance with Accounting  Principles  Board 30,
Reporting  the  Results of  Operations-Reporting  the  Effects of  Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and  Transactions  ("APB 30"). APB 30, of which  portions  related to the
accounting for discontinued operations have been superceded by the provisions of
FAS  144,  required  that we  accrue  estimates  for  future  operating  losses,
gains/losses on sale, costs to dispose and carrying costs of these businesses at
the time the businesses were discontinued. Accordingly, at December 31, 2000, we
recorded  a  provision  for  operating  losses  and  carrying  costs  during the
phase-out  period for our  Intellesale and other non-core  businesses  including
estimated  disposal  costs to be incurred in selling  the  businesses.  Carrying
costs  consisted  primarily of  cancellation  of facility and equipment  leases,
legal settlements, employment contract buyouts and sales tax liabilities.


                                       74
<PAGE>

      During 2003, 2002 and 2001,  Discontinued  Operations incurred an increase
(decrease)  in estimated  loss on disposal and operating  losses  accrued on the
measurement   date  of  $0.4  million,   $(1.4)   million  and  $16.7   million,
respectively.  The primary reasons for the increase in estimated losses for 2003
were an increase in estimated  facility  cancellation  costs of $0.2 million and
the  operations  of the one remaining  business unit in this segment,  which was
sold in July 2003. The primary  reason for the decrease in estimated  losses for
2002 was the settlement of litigation for an amount less than  anticipated.  The
primary  reasons for the  increase in estimated  losses for 2001 were  inventory
write-downs of $4.5 million,  a decrease in estimated  sales proceeds as certain
of the  businesses  were  closed in the second and third  quarters  of 2001,  an
increase in legal expenses related to ongoing  litigation,  additional sales tax
liabilities and additional  facility lease costs. The business  closures in 2001
were the result of a combination of the deteriorating  market conditions for the
technology sector as well as our strategic decision to reallocate funding to our
core businesses.  We also increased our estimated loss on the sale of Innovative
Vacuum  Solutions,  Inc.,  which was sold during the second  quarter of 2001, by
$0.2 million, and on Ground Effects Ltd., which was sold in the first quarter of
2002, by $1.2 million.

      We do not anticipate any future losses related to Discontinued  Operations
as a result of changes in carrying  costs.  However,  actual losses could differ
from our estimates and any adjustments will be reflected in our future financial
statements.  During  the years  ended  December  31,  2003,  2002 and 2001,  the
estimated amounts recorded were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                               YEAR ENDED DECEMBER 31,
                                                                           2003         2002        2001
                                                                           ----         ----        ----
                                                                               (amounts in thousands)
<S>                                                                        <C>            <C>     <C>
Operating losses and estimated loss on the sale of business units          $205           $684    $13,010
Carrying Costs                                                              177         (2,104)     3,685
Less: (Provision) benefit for income taxes                                   --             --         --
                                                                    -----------------------------------------
                                                                           $382        $(1,420)   $16,695
                                                                    =========================================
</TABLE>

      The following  table sets forth the  rollforward  of the  liabilities  for
operating losses and carrying costs from December 31, 2001, through December 31,
2003 (amounts in thousands):

<TABLE>
<CAPTION>
                                       Balance,
                                     December 31,                                              Balance
Type of Cost                             2001            Additions         Deductions     December 31, 2002
---------------------------------- ----------------- ------------------- --------------- --------------------
<S>                                    <C>              <C>               <C>             <C>
Operating losses and estimated
  loss on sale                         $ 1,173               $684             $1,857             $  --
Carrying costs                           7,218             (2,104)               206             4,908
                                   ----------------- ------------------- --------------- --------------------
Total                                  $ 8,391            $(1,420)            $2,063           $ 4,908
                                   ================= =================== =============== ====================

                                       Balance,
                                     December 31,                                              Balance
Type of Cost                             2002            Additions         Deductions     December 31, 2003
---------------------------------- ----------------- ------------------- --------------- --------------------
Operating losses and estimated
  loss on sale                           $  --                $205              $205             $  --
Carrying costs (1)                       4,908                 177               172             4,913
                                   ----------------- ------------------- --------------- --------------------
Total                                  $ 4,908                $382              $377            $4,913
                                   ================= =================== =============== ====================
</TABLE>

(1)   Carrying  costs at  December  31,  2003,  include all  estimated  costs to
      dispose of the  discontinued  businesses  including $2.2 million for lease
      commitments,   $1.7  million  for   severance  and   employment   contract
      settlements and $1.0 million for sales tax liabilities.

                                       75
<PAGE>

      LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

      As of December 31, 2003, cash and cash equivalents  totaled $10.2 million,
an increase of $4.4 million,  or 75.9%,  from $5.8 million at December 31, 2002.
Cash used in operating activities totaled $11.4 million,  $3.9 million and $18.0
million  in 2003,  2002 and  2001,  respectively.  In each  year,  cash was used
primarily to fund operating losses.  In addition,  Digital Angel Corporation had
$0.8 million of  restricted  cash at December 31, 2003.  Although  Digital Angel
Corporation  and InfoTech USA, Inc. may pay dividends,  since we do not own 100%
of these subsidiaries, access to their funds is limited.

      Accounts and unbilled receivables, net of allowance for doubtful accounts,
decreased $2.0 million,  or 12.4%,  to $14.1 million at December 31, 2003,  from
$16.1 million at December 31, 2002.  The decrease was due primarily to increased
collections  during the fourth quarter of 2003. As a percentage of 2003 and 2002
revenue, accounts and unbilled receivable were 15.1% and 16.3%, respectively.

      Inventories  increased to $9.4  million at December 31, 2003,  compared to
$6.4  million at December 31, 2002.  We attribute  the increase  primarily to an
increase in  work-in-process  related to  government  contract  projects and the
accumulation of inventory by Digital Angel Corporation in anticipation of future
sales.

      Accounts  payable  increased $4.1 million,  or 43.2%,  to $13.6 million at
December  31, 2003,  from $9.5  million at December  31, 2002.  The increase was
primarily a result of the timing of vendor payments.

      Accrued  interest and other accrued  expenses  decreased $4.8 million,  or
17.6%, to $22.5 million at December 31, 2003, from $27.3 million at December 31,
2002. The decrease is primarily attributable to a reduction in accrued interest,
as we fully satisfied all of our debt obligations to IBM Credit during 2003. The
decrease was partially offset by an accrual for bonuses at December 31, 2003.

      Investing activities provided cash of $0.6 million,  $8.1 million and $2.7
million in 2003, 2002 and 2001, respectively.  In 2003, cash of $1.8 million was
provided by collection of notes  receivables,  and cash of $1.4 million was used
to purchase  property and equipment.  In 2002, cash of $3.2 million was provided
by collection of notes  receivables,  $4.9 million of proceeds was received from
the sale of subsidiaries,  business assets and property and equipment,  and $2.6
million  was  received  from  buyers  of  divested  subsidiaries.  Cash was used
primarily  to  purchase   property  and  equipment  and  to  fund   Discontinued
Operations.  In 2001,  $2.8 million was used to acquire  property and equipment,
offset by cash proceeds  from the sale of  subsidiaries  and business  assets of
$1.7 million,  proceeds from the sale of property and equipment of $1.3 million,
collections of notes  receivable of $1.3 million and a reduction in other assets
of $0.9 million.

      Financing activities provided (used) cash of $15.0 million, $(2.8) million
and $10.9 million in 2003, 2002 and 2001,  respectively.  In 2003, cash of $29.9
million was  provided by the  issuance of common  stock,  and $12.0  million was
provided by long-term  debt.  Cash of $27.7  million was used to repay debt.  In
2002,  cash was used to pay $6.1 million in notes  payable and  long-term  debt,
offset by $1.7 million  provided  from issuance of common  shares,  $1.2 million
from collections of notes receivable for shares issued, $0.4 million provided by
increases  in  notes  payable,   and  $0.7  million   provided  by  Discontinued
Operations.  In 2001, cash of $14.0 million was obtained  through notes payable,
$0.6 million was provided by long-term  debt and $0.7 million was provided  from
the issuance of common shares.  Cash was used primarily for stock issuance costs
of $0.8 million, and payments of long-term debt of $2.5 million.


                                       76
<PAGE>

      DEBT, COVENANT COMPLIANCE AND LIQUIDITY

      On March 1, 2002,  we and the Digital  Angel Share Trust  entered into the
IBM Credit Agreement with IBM Credit,  which became effective on March 27, 2002,
the effective  date of the merger between  pre-merger  Digital Angel and MAS. At
December  31,  2002,  we  failed  to  maintain  compliance  with  the  financial
performance covenant under the IBM Credit Agreement.

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

      Effective April 1, 2003, we entered into a Forbearance  Agreement with IBM
Credit.  Under  the  terms of the  Forbearance  Agreement,  we had the  right to
purchase  all of our  outstanding  debt  obligations  to  IBM  Credit,  totaling
approximately $100.1 million (including accrued interest), if we paid IBM Credit
$30.0  million  in cash by June 30,  2003.  As of June 30,  2003,  we made  cash
payments to IBM Credit  totaling  $30.0 million and,  thus, we have satisfied in
full our debt obligations to IBM Credit.  As a result, we recorded a gain on the
extinguishment of debt of approximately $70.1 million in 2003.

      Funding for the $30.0  million  payment to IBM Credit  consisted  of $17.8
million in net proceeds from the sales of an aggregate of 5.0 million  shares of
our  common  stock,  $10.0  million in net  proceeds  from the  issuance  of the
Debentures, and $2.2 million from cash on hand.

      The 5.0 million shares of our common stock were purchased under Securities
Purchase  Agreements entered into on May 8, 2003, May 22, 2003 and June 4, 2003,
with  Cranshire  Capital,  L.P. and Magellan  International  Ltd. The Securities
Purchase   Agreements   provided  for   Cranshire   Capital  L.P.  and  Magellan
International  Ltd.  to  purchase an  aggregate  of 2.0  million  shares and 3.0
million shares of our common stock, respectively.  The purchases resulted in net
proceeds to us of $17.8 million,  after deduction of the 3% fee to our placement
agent, J.P. Carey Securities, Inc

      On June 30, 2003,  we issued our $10.5  million  principal  amount of 8.5%
Convertible  Exchangeable  Debentures (the  "Debentures").  Subject to the terms
under the various  related  agreements,  the Debentures  were  convertible  into
shares of our  common  stock or  exchangeable  for shares of the  Digital  Angel
Corporation  common stock owned by us, or a  combination  thereof at any time at
the option of the  Debenture  holders,  through the maturity date of November 1,
2005.  On  November  12,  2003,  we  announced  that we had  entered in a letter
agreement with the Debenture  holders.  Under the terms of the letter agreement,
the  Debenture  holders  were  required  to  convert  a  minimum  of  50% of the
outstanding  principal  amount of the  Debentures  plus all  accrued  and unpaid
interest into shares of our common stock on November 12, 2003. In addition,  per
the terms of the letter  agreement,  the  Debenture  holders  were  required  to
convert  any  remaining  outstanding  principal  amount of the  Debentures  plus
accrued  interest on or before  November 19, 2003. As of November 19, 2003,  the
total principal  amount of the Debentures was converted,  and  accordingly,  our
obligations  under the Debentures have been satisfied in full. Net proceeds from
the issuance of the Debentures were $10.0 million.


                                       77
<PAGE>


      We have recently offered up to 3.0 million shares of our common stock in a
public  offering  registered  under  the  Securities  Act of  1933.  J.P.  Carey
Securities,  Inc. acted as our placement agent for the offering. An aggregate of
2.2  million  of these  shares  were  sold  under  the  terms of three  separate
securities  purchase agreements entered into on September 19, 2003, with each of
First  Investors  Holding Co., Inc.,  Magellan  International  LTD and Cranshire
Capital,  LP.,  resulting in gross proceeds to us of approximately  $8.0 million
before deduction of the 2.0% placement agency fee. In addition,  an aggregate of
0.8  million of the shares were sold under eight  separate  securities  purchase
agreements  entered  into on  December 2, 2003,  as amended,  with each of First
Investors Holding Co., Inc.,  Magellan  International  LTD, Elliott  Associates,
L.P., Islandia, L.P., Midsummer Investment, Ltd., Omicron Master Trust, Portside
Growth and Opportunity  Fund and Elliott  International  L.P., which resulted in
aggregate gross proceeds to us of approximately $2.9 million before deduction of
the 2.0% placement agency fee. To date, we have used  approximately $4.3 million
of the net proceeds  from the 3.0 million share  offering.  We intend to use the
remaining net proceeds for general corporate purposes (including working capital
requirements, sales and marketing and capital expenditures).

      On August 28,  2003,  Digital  Angel  Corporation  entered into a Security
Agreement  with Laurus  under which it may borrow from Laurus the lesser of $5.0
million or an amount that is determined  based on  percentages  of Digital Angel
Corporation's  eligible  accounts  receivable and inventory as prescribed by the
terms of the Security Agreement. The terms of the Security Agreement, as well as
the terms of a $2.0 million  two-year  secured  convertible note between Digital
Angel Corporation and Laurus, are fully described in Note 11 to our Consolidated
Financial  Statements.  Digital Angel  Corporation  had  availability  under the
Security Agreement of $0.2 million at December 31, 2003.

      The InfoTech  USA,  Inc.  segment  finances its  accounts  receivable  and
inventory.  Its current financing arrangement with IBM Credit provides financing
on inventory purchases up to $1.8 million. Borrowing for purchases is based upon
75% of all  eligible  receivables  due  within  90  days  and up to  100% of all
eligible  inventories.  Interest for balances not paid within the interest  free
period  provided  for in the  agreement  accrues at prime plus 4.4%.  Borrowings
under the  financing  arrangement  with IBM Credit were $0.8 million at December
31, 2003. On September 5, 2003,  InfoTech  USA, Inc.  received a letter from IBM
Credit  constituting  their formal notice of termination  of the agreement.  The
effective date of such termination, which was originally set for March 10, 2004,
has been  extended to April 9, 2004.  InfoTech  USA,  Inc. is  currently  in the
process of  securing  other  financing  and  expects  to replace  the IBM Credit
financing arrangement prior to the termination date set by IBM Credit.  InfoTech
USA, Inc. believes that its present financing  arrangement with IBM Credit,  its
current cash position, the expected replacement of the IBM Credit agreement, and
the repayment by us of our $1.0 million loan from InfoTech,  USA, Inc., which is
due in June 2004, will provide  InfoTech USA, Inc. with  sufficient  capital for
the next twelve  months.  However,  if InfoTech USA,  Inc. is not  successful in
obtaining  a  replacement  for the IBM Credit  financing  arrangement,  which is
needed to fund its  operations  in the coming year and  beyond,  it could have a
material  adverse impact on our financial  condition,  results of operations and
cash flows.

      The reduced  settlement payment of our debt obligations to IBM Credit, the
conversion to equity of our obligations  under the  Debentures,  and the sale of
3.0 million  shares of our common  stock under our 3.0 million  share  offering,
have been major  factors  mitigating  concerns that existed about our ability to
continue as a going concern. The repayment of all of our debt obligations to IBM
Credit,  the repayment of all of our obligations  under the Debentures,  and the
sale of 3.0  million  shares of our common  stock under our share  offering,  as
discussed above,  contributed to our ability to continue as a going concern. Our
future  profitability and liquidity depend on many factors including the success
of our marketing  programs,  the  maintenance  and reduction of expenses and our
ability  to  successfully  develop  and bring to  market  our new  products  and
technologies. Our ability to achieve profitability and/or generate positive cash
flows from  operations  in the future is predicated  upon numerous  factors with
varying levels of importance as follows:


                                       78
<PAGE>


      o     First, we must attempt to successfully implement our business plans,
            manage  expenditures  according to our budget, and generate positive
            cash flow from operations;

      o     Second, we must attempt to develop an effective  marketing and sales
            strategy in order to grow our business and compete  successfully  in
            our markets;

      o     Third,  we must attempt to obtain the necessary  approvals to expand
            the  market  for the  VeriChip  product  in  order  to  improve  the
            product's salability;

      o     Fourth,  we must attempt to realize  positive cash flow with respect
            to our  investment in Digital Angel  Corporation in order to provide
            us with an appropriate return on our investment; and

      o     Finally,  we must attempt to complete the development of the Digital
            Angel and PLD products.

      We  have   established  a  management  plan  to  assist  us  in  achieving
profitability and positive cash flows over the twelve-months ending December 31,
2004. The major components of our plan are as follows:

      o     To attempt to establish a  sustainable  positive  cash flow business
            model;

      o     To attempt  to produce  additional  cash flow and  revenue  from our
            advanced  technology  products  - Digital  AngelTM,  Thermo  LifeTM,
            VeriChipTM, Bio-ThermoTM and PLD;

      o     To generate  additional  liquidity  through  divestiture of business
            units and assets that are not critical to us;

      o     To  position   Digital  Angel   Corporation  for  growth  under  the
            leadership  of  it  new  management   team  and  through   strategic
            acquisitions such as the recent OuterLink acquisition;

      o     To  generate  additional  liquidity  for Digital  Angel  Corporation
            through the Share  Exchange  Agreement  between us and Digital Angel
            Corporation: and

      o     To attempt to pair VeriChip Corporation with a complementary company
            that will bring  experienced  management,  revenue and a synergistic
            customer base.

      Our   management   estimates  that  the  above  plan  can  be  effectively
implemented.  As of December  31,  2003,  we had a working  capital  deficiency.
However a significant  portion of the past due  liabilities  associated with the
Discontinued Operations and All Other business units have not been guaranteed by
us and/or we do not intend to repay  such  liabilities  in cash  during the next
twelve months.  Therefore,  notwithstanding our working capital  deficiency,  we
believe  that  with  our  current  cash  position,  our  expectation  about  the
achievement  of our  management  plan,  and the  reliance on our  various  other
sources of liquidity as discussed below, that we should have sufficient  working
capital to satisfy our needs over the next twelve months.


                                       79
<PAGE>


      We  believe  that we will be able  to  generate  sufficient  revenues  and
related cash flow in the next twelve months from the Advanced Technology segment
to  cover  the  operating  expenses  of this  segment  as well as our  corporate
overhead  (exclusive of the corporate  overhead of Digital Angel Corporation and
InfoTech USA, Inc.).  The primary source of revenue for the Advanced  Technology
segment is  Computer  Equity  Corporation.  For 2003,  the  Advanced  Technology
segment reported gross revenue of $44.6 million. Of this amount, Computer Equity
Corporation represented $37.1 million, or 83.2% of the total revenue. The future
revenue outlook for Computer Equity  Corporation is expected to be positive.  In
January 2003, Computer Equity  Corporation's  wholly owned subsidiary,  GTI, was
one  of  seventeen  companies  awarded  the  federal  government's   CONNECTIONS
contract,  which replaced the previous WACS contract.  The CONNECTIONS  contract
has a three-year base term and five successive  one-year  renewal  options.  The
CONNECTIONS  contract  is  similar  to the WACS  contract  in that it will allow
Computer Equity  Corporation to provide  government  agencies with equipment and
services   for  campus  and   building   communications   networks  and  related
infrastructure without the need to follow the full procurement process for a new
contract.  During  2004 and beyond,  our focus will be to  generate  significant
revenue and cash flow from our advanced technology products.  We hope to realize
positive cash flow in the next twelve  months and beyond as these  products gain
customer acceptance and awareness throughout the world.

      As  of  December  31,   2003,   the   Advanced   Technology   segment  and
"Corporate/Eliminations"  had a combined cash balance of $8.6 million,  InfoTech
USA, Inc. had a cash balance of $0.7 million,  and Digital Angel Corporation had
a cash balance of $1.7 million,  including  restricted cash of $0.8 million. The
specific  components and the approximate amount of funds that we anticipate that
we will need to continue operating for the next twelve months are as follows:

      o     To fund operations  (excluding  research and development) - none, as
            we expect to achieve cash flow from operations exclusive of research
            and development expense;

      o     To fund research and development - $4.0 million;

      o     To fund capital expenditures - $1.5 million; and

      o     To fund principal debt payments - $6.3 million.

      The  nature of our  business  is such that it does not  require a material
cash outlay for capital  expenditures,  and we have no plans to make significant
investments in capital expenditures for the next twelve months. We estimate that
our  Advanced  Technology  segment's  capital  expenditures  for  2004  will  be
approximately   $0.5   million,   that  Digital  Angel   Corporation's   capital
expenditures for 2004 will be approximately  $1.0 million and that InfoTech USA,
Inc.'s capital  expenditures for the next twelve months will be de minimus.  For
2004, we  anticipate  the cash outlay for our research and  development  efforts
relating to our advanced  technology products to be approximate $1.0 million and
that  Digital  Angel   Corporation's  cash  outlay  for  such  efforts  will  be
approximately $3.0 million. InfoTech USA, Inc. does not currently incur research
and development expense.


                                       80
<PAGE>


      Contractual Obligations

      The  following  table  shows  the  aggregate  of  our   contractual   cash
obligations as of December 31, 2003:

<TABLE>
<CAPTION>
Contractual Cash Obligations                   Total    Less Than     1-3 Years    4-5 Years    After 5
                                                          1 Year                                 Years
--------------------------------------------------------------------------------------------------------
                                                               (amounts in thousands)
--------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>          <C>         <C>
NOTES PAYABLE, LONG-TERM DEBT AND OTHER
   LONG-TERM LIABILITIES                       $9,228      $6,255      $   745      $   123      $2,105
OPERATING LEASES                               13,158       1,345        1,516        1,163       9,134
EMPLOYMENT RELATED CONTRACTS                    2,675       1,660        1,015           --          --
                                              -------     -------      -------      -------     -------
  TOTAL CONTRACTUAL CASH OBLIGATIONS          $25,061     $ 9,260      $ 3,276      $ 1,286     $11,239
                                              =======     =======      =======      =======     =======
</TABLE>


      Sources of Liquidity

      Our  sources of  liquidity  may include  proceeds  from the sale of common
stock and preferred shares, proceeds from the sale of businesses,  proceeds from
the sale of the Digital  Angel  Corporation  common stock owned by us,  proceeds
from the sale of our common stock issued to Digital Angel  Corporation under the
Share  Exchange  Agreement,  proceeds  from the  exercise  of stock  options and
warrants,   proceeds  from   accounts   receivable   and   inventory   financing
arrangements,  and the raising of other forms of debt or equity through  private
placement or public offerings.  However, these options may not be available,  or
if  available,  they may not be on  favorable  terms.  Our capital  requirements
depend on a variety  of  factors,  including  but not  limited  to,  the rate of
increase or decrease in our existing  business  base, the success,  timing,  and
amount of investment  required to bring new products on-line,  revenue growth or
decline, and potential acquisitions. Failure to generate positive cash flow from
operations  will have a materially  adverse  effect on our  business,  financial
condition and results of operations.

      Outlook

      We are constantly looking for ways to maximize shareholder value. As such,
we are continually  seeking  operational  efficiencies  and synergies within 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 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. However, initiatives may not be found, or if found, they may not be
on terms favorable to us.


                                       81
<PAGE>


      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

      In June  2001,  the  FASB  issued  SFAS  No.  143,  Accounting  for  Asset
Retirement  Obligations  (FAS No.  143),  which was  effective  for fiscal years
beginning after June 15, 2002. FAS No. 143 requires legal obligations associated
with the retirement of long-lived assets to be recognized at their fair value at
the time the obligations are incurred.  Upon initial recognition of a liability,
that cost  should be  capitalized  as part of the related  long-lived  asset and
allocated to expense  over the useful life of the asset.  We adopted FAS No. 143
on January 1, 2003.  Application of the new rules did not have any impact on our
financial  position and results of  operations,  as we do not currently have any
legal obligations  associated with the retirement of long-lived assets or leased
facilities.

      In May 2002, the FASB issued SFAS 145,  Rescission of FASB  Statements No.
4, 44, and 64,  Amendment of FASB  Statement No. 13, and  Technical  Corrections
(FAS No.  145).  FAS No. 145  eliminates  Statement 4 (and  Statement  64, as it
amends  Statement 4), which  requires gains and losses from  extinguishments  of
debt to be aggregated  and, if material,  classified as an  extraordinary  item.
Also,  the exception to applying  Opinion 30 is  eliminated.  This  statement is
effective for years beginning  after May 2002 for the provisions  related to the
rescission  of  Statements  4 and  64,  and for all  transactions  entered  into
beginning May 2002 for the  provision  related to the amendment of Statement 13.
The adoption of FAS No. 145 had the effect of reducing our loss from  continuing
operations and eliminating an extraordinary gain as previously  reported for the
year ended December 31, 2001.

      In June 2002, the FASB issued SFAS 146,  Accounting  for Costs  Associated
with  Exit or  Disposal  Activities  (FAS  No.  146).  This  statement  requires
recording costs associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance,  certain exit costs
were  accrued upon  management's  commitment  to an exit plan.  Adoption of this
Statement  was required  with the beginning of fiscal year 2003. We adopted this
statement  on  January  1, 2003.  The  adoption  of FAS No. 146 did not have any
impact on our  operations  or  financial  position.  We have  recorded the costs
associated  with our Medical Systems  operations,  which were disposed of during
the  three-months  ended June 30, 2004, in accordance with the provisions of FAS
No. 146.

      Effective  January 1, 2003,  we adopted the  recognition  and  measurement
provisions of FASB Interpretation No. 45, Guarantor's  Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others ("Interpretation 45"). This interpretation  elaborates on the disclosures
to be made by a guarantor in interim and annual  financial  statements about the
obligations  under certain  guarantees.  Interpretation 45 also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation  undertaken in issuing the  guarantee.  The
initial  recognition and initial  measurement  provisions of this interpretation
are  applicable on a prospective  basis to guarantees  issued or modified  after
December 31, 2002.  We do not  currently  provide  significant  guarantees  on a
routine basis. As a result, this interpretation has not had a material impact on
our financial statements.

      In January 2003, the FASB issued  Interpretation No. 46,  Consolidation of
Variable  Interest  Entities--an  Interpretation of ARB No. 51 ("FIN 46"), which
addresses  consolidation  of  variable  interest  entities.  FIN 46 expands  the
criteria for  consideration  in determining  whether a variable  interest entity
should  be   consolidated   by  a  business   entity,   and  requires   existing
unconsolidated  variable interest  entities (which include,  but are not limited
to,  Special  Purpose  Entities,  or SPEs) to be  consolidated  by their primary
beneficiaries  if the entities do not  effectively  disperse risks among parties
involved.  On October 9, 2003,  the FASB issued  Staff  Position  No. 46-6 which
deferred the effective  date for applying the provisions of FIN 46 for interests
held by public  entities in variable  interest  entities or  potential  variable
interest  entities  created  before  February 1, 2003. On December 24, 2003, the
FASB  issued  a  revision  to FIN 46.  Under  the  revised  interpretation,  the
effective  date was  delayed  to periods  ending  after  March 15,  2004 for all
variable  interest  entities,  other than SPEs.  The  adoption  of FIN 46 is not
expected to have an impact on our financial condition,  results of operations or
cash flows.


                                       82
<PAGE>


      In May 2003,  the FASB issued SFAS No. 149,  Amendment of Statement 133 on
Derivative  Instruments and Hedging Activities (FAS No. 149). FAS No. 149 amends
and  clarifies   accounting  for  derivative   instruments,   including  certain
derivative  instruments embedded in other contracts,  and for hedging activities
under FAS No.  133.  FAS No. 149 is  effective  for  contracts  entered  into or
modified after June 30, 2003,  and for hedging  relationships  designated  after
June 30,  2003.  The  adoption  of FAS No.  149 did not have any  impact  on our
current financial position or our results of operations.

      In May 2003, the FASB issued SFAS 150,  Accounting  for Certain  Financial
Instruments with  Characteristics  of Both Liabilities and Equity (FAS No. 150).
FAS No. 150  establishes  standards  for how an issuer  classifies  and measures
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those instruments were previously classified as equity. FAS No. 150 is effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise is effective at the  beginning of the first interim  period  beginning
after June 15, 2003. It is to be implemented by reporting the cumulative  effect
of a change in accounting principle for financial instruments created before the
issuance  date of the  statement  and still  existing  at the  beginning  of the
interim  period of  adoption.  Restatement  is not  permitted.  We  adopted  the
provisions  of FAS No. 150 effective  July 1, 2003.  The adoption of FAS No. 150
did not have any impact on our financial position or results of operations.

      ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      With our United Kingdom subsidiary we have operations and sales in various
regions  of the  world.  Additionally,  we export  and  import to and from other
countries.  Our  operations  may therefore be subject to  volatility  because of
currency   fluctuations,   inflation  and  changes  in  political  and  economic
conditions  in these  countries.  Sales and  expenses are  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.  As of December 31, 2003, our debt consisted
of Digital Angel Corporation's  borrowing under its loan agreements with Laurus,
mortgages and capitalized  leases with fixed implicit  interest  rates.  Digital
Angel  Corporation's  borrowings  under its loan  agreements  with  Laurus  bear
interest  at prime  plus  1.75% to prime  plus  2.75%.  Our  interest  income is
sensitive to changes in the general level of U.S.  interest rates,  particularly
since the majority of our investments are short-term.

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


                                       83
<PAGE>


      The  table  below  presents  the  principal  amount  and  weighted-average
interest rate for our debt portfolio:

                                                              Carrying Value at
Dollars in Millions                                           December 31, 2003
-------------------------------------------------------------------------------
  Total notes payable and long-term debt                            $9.0 (1)
  Notes payable bearing interest at fixed interest rates            $3.4 (1)
  Weighted-average interest rate during 2003                        50% (2)


(1)   Amount  includes $0.9 million of debt  associated with our Medical Systems
      operations, which is included as part of our Discontinued Operations.

(2)   The weighted-average  interest rate during 2003 was significantly impacted
      by non-cash  interest expense  associated with the Debentures,  which were
      fully repaid as of November 19, 2003. The total interest  expense  related
      to the Debentures during 2003 was $12.7 million.

      The table below presents a sensitivity analysis of fluctuations in foreign
currency exchange rates:

<TABLE>
<CAPTION>
                                                                 For the Year Ended
                                                                 December 31, 2003
         ----------------------------------------------------------------------------
<S>                                                             <C>
         Exchange Rate Sensitivity:

         Net foreign currency gains recorded
           in our Consolidated Statements of Operations             De minimus

         Foreign currency translation adjustments included
           in Other Comprehensive Income                            $0.2 million
</TABLE>

      A 10% change in the applicable  foreign  exchange rates would result in an
increase or decrease in our foreign  currency  gains and losses and  translation
adjustments of a de minimus amount.

      ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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


                                       84
<PAGE>


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

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

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

      The accounting  item in question  (about which we, and Grant Thornton LLP,
had the disagreement)  related to options that MAS was to assume or convert into
MAS options under the terms of an Agreement and Plan of Merger,  dated  November
1, 2001,  by and among  MAS,  an MAS  wholly-owned  subsidiary,  and  pre-merger
Digital  Angel.  On March 27, 2002, the MAS  wholly-owned  subsidiary was merged
with and into pre-merger  Digital Angel under the terms of the merger agreement.
We also contributed certain other subsidiaries in the merger. Pre-merger Digital
Angel, as the surviving  corporation,  became a wholly-owned  subsidiary of MAS,
which has since been renamed Digital Angel Corporation.  Grant Thornton has also
communicated  by letter  dated May 14,  2002,  the  termination  of its  auditor
relationship with Digital Angel Corporation.


                                       85
<PAGE>


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

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

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

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

      On May 24, 2002, we filed a Current Report on Form 8-K to disclose that we
had issued a press  release on May 22,  2002,  stating  that the timing of Grant
Thornton's resignation as our outside auditors prevented us from filing its Form
10-Q with an auditor's review. As a result, we received a letter from the Nasdaq
staff  indicating  that  the Form  10-Q did not  comply  with  Marketplace  Rule
4310(c)(14), and, accordingly, that an "E" would be added to our trading symbol.
The letter  indicated  that our common stock was subject to delisting  unless we
requested a hearing before a Nasdaq listing  qualifications  panel.  We informed
Nasdaq that we intended to make such a request.  In accordance  with  applicable
Marketplace  Rules,  the  hearing  request  had the effect of staying any action
pending the decision of the hearing  panel.  In the interim,  the letter "E" was
appended to our trading  symbol and from July 12, 2002,  to July 30,  2002,  our
common  stock was  delisted  by the Nasdaq NM and was traded on the Pink  Sheets
under the symbol  "ADSX.PK."  On July 18,  2002,  we filed an amended  quarterly
report on Form 10-Q,  which presented  condensed  financial  statements that had
been reviewed by our independent  public  accountants,  Eisner LLP. As a result,
the Nasdaq hearing panel  temporarily  relisted our common stock  effective July
31, 2002.  However,  we were unable to satisfy the required  minimum closing bid
price requirement by October 25, 2002, and as a result,  effective  November 12,
2002, our common stock began trading on the SmallCap  under our existing  symbol
ADSX.


                                       86
<PAGE>


ITEM 9A. CONTROLS AND PROCEDURES

      Evaluation of Disclosure Controls and Procedures

      (a) The Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the  effectiveness of the Company's  disclosure  controls
and  procedures  (as  defined in  Exchange  Act Rules  240.13a - 15(e) and 15d -
15(e))  as of the end of the  period  ended  December  31,  2003.  Based on that
evaluation,  they have  concluded  that the  Company's  disclosure  controls and
procedures  as of the end of the period  covered by this report are effective in
timely providing them with material information relating to the Company required
to be disclosed in the reports the Company  files or submits  under the Exchange
Act.

      (b) Internal Control Over Financial Reporting

      There have not been any changes in the  Company's  internal  controls over
financial  reporting  identified in connection  with an evaluation  thereof that
occurred  during  the  Company's  fourth  fiscal  quarter  that have  materially
affected,  or are reasonable likely to materially affect the Company's  internal
control over  financial  reporting.  There were no significant  deficiencies  or
material weaknesses, and therefore no corrective actions were taken.


                                       87
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Our directors and executive officers are:

<TABLE>
<CAPTION>
            NAME                AGE                          POSITION                                  POSITION HELD SINCE
----------------------------- --------- ---------------------------------------------------- ---------------------------------------
<S>                           <C>      <C>                                                  <C>
Scott R. Silverman              40     Chairman of the Board and Chief Executive Officer    (March 2003 - Chairman and CEO)

Kevin H. McLaughlin             61     President and Chief Operating Officer                (March 2003 - Chief Operating Officer)
                                                                                            (May 2003 - President)

Michael E. Krawitz              34     Executive Vice President, General Counsel and        (April 1999 - General Counsel) (March
                                       Secretary                                            2003 - Secretary) (April 2003 -
                                                                                            Executive Vice President)

Evan C. McKeown                 45     Senior Vice President and Chief Financial Officer    (March 2002 - Chief Financial Officer)
                                                                                            (March 2003 - Senior Vice President)

Peter Y. Zhou                   64     Vice President and Chief Scientist                   (January 2000 - Vice President and
                                                                                            Chief Scientist)

J. Michael Norris               57     Director                                             January 2004

Daniel E. Penni                 56     Director                                             March 1995

Dennis G. Rawan                 60     Director                                             December 2002

Constance K. Weaver             51     Director                                             July 1998

Michael S. Zarriello            54     Director                                             May 2003
</TABLE>

      Scott R. Silverman:  Mr. Silverman, age 40, previously served since August
2001 as a special  advisor  to the Board of  Directors.  In March  2002,  he was
appointed to the Board of Directors and named  President.  In March 2003, he was
appointed Chairman of the Board and Chief Executive Officer. From September 1999
to March 2002, Mr. Silverman  operated his own private  investment-banking  firm
and prior to that  time,  from  October  1996 to  September  1999,  he served in
various capacities for us including  positions related to business  development,
corporate  development  and legal affairs.  From July 1995 to September 1996, he
served as President of ATI  Communications,  Inc., one of our  subsidiaries.  He
began his  career as an  attorney  specializing  in  commercial  litigation  and
communications  law at the law firm of Cooper  Perskie  in  Atlantic  City,  New
Jersey,  and  Philadelphia,  Pennsylvania.  Mr.  Silverman  is a graduate of the
University of Pennsylvania and Villanova University School of Law.


                                       88
<PAGE>


      Kevin H.  McLaughlin:  Mr.  McLaughlin,  age 61, was  appointed  our Chief
Operating Officer in March 2003 and President in May 2003. From April 2002 until
the present,  Mr.  McLaughlin  has served as a director,  and from April 2002 to
March 2003, Mr.  McLaughlin  served as Chief Executive  Officer of InfoTech USA,
Inc.,  our  52.5%  owned  subsidiary.  Prior to that  time,  he  served as Chief
Executive Officer of Computer Equity Corporation,  our wholly-owned  subsidiary.
Mr.  McLaughlin joined us as Vice President of Sales and Marketing in June 2000.
From June 1995 to May 2000, he served as Senior Vice  President of Sales for SCB
Computer Technology, Inc.

      Michael E.  Krawitz:  Mr.  Krawitz,  age 34,  joined us as Assistant  Vice
President and General  Counsel in April 1999,  and was appointed  Vice President
and  Assistant  Secretary in December  1999,  Senior Vice  President in December
2000,  Secretary in March 2003 and Executive Vice President in April 2003.  From
1994 to April  1999,  Mr.  Krawitz was an attorney  with Fried,  Frank,  Harris,
Shriver & Jacobson  in New York.  Mr.  Krawitz  earned a Bachelor of Arts degree
from Cornell University in 1991 and a juris doctorate from Harvard Law School in
1994.

      Evan C. McKeown: Mr. McKeown,  age 45, joined us as Vice President,  Chief
Accounting Officer and Corporate Controller in March 2001. He was appointed Vice
President,  Chief  Financial  Officer in March 2002 and Senior Vice President in
March 2003.  Prior to joining us, Mr. McKeown served as Corporate  Controller at
Orius Corporation in West Palm Beach,  Florida.  From 1992 to 1999, he served as
Controller and then Chief Financial Officer of Zajac, Inc., in Portland,  Maine.
Mr.  McKeown  has more that 20 years  experience  in  accounting  and  financial
reporting,  including  serving  as a Tax  Manager  for Ernst & Young and  public
accountant  with Coopers & Lybrand.  He is a graduate of the University of Maine
and is a certified public accountant.

      Peter  Zhou:  Dr.  Zhou,  age 64,  joined us as Vice  President  and Chief
Scientist in January 2000. From 1988 to 1999, Dr. Zhou served as Vice President,
Technology  for Sentry  Technology  Corp.,  and from 1985 to 1988,  he served as
Research Investigator for the University of Pennsylvania's Department of Science
&  Engineering.  Prior to  that,  he was a  research  scientist  for  Max-Planck
Institute,  Metallforschung in Stuttgart,  Germany and a post-doctoral  research
fellow  at the  University  of  Pennsylvania.  Dr.  Zhou has a PhD in  materials
science/solid  state physics from the University of Pennsylvania and a Master of
Sciences  degree  in  physics  from  the  Beijing  University  of  Sciences  and
Technology.

      J. Michael Norris: Mr. Norris, age 57, was appointed a director on January
12,  2004,  and serves as an  independent  member of the Audit  Committee of the
Board of  Directors.  Mr.  Norris  served as the  Chairman  and Chief  Executive
Officer of Next Level  Communications  before it was acquired by Motorola in the
spring of 2003.  Prior to joining Next Level  Communications,  Mr.  Norris was a
Senior Vice President and General Manager of the Network  Management Group where
he was  responsible  for Motorola's  global  Cellular  Operating Joint Ventures,
International  Satellite  Gateway  Operations and Wireless Resale Operations for
approximately10   years.   Mr.   Norris  holds  a   bachelor's   degree  with  a
specialization  in  economics  and a master's  degree with a  specialization  in
finance, from Rollins College, Winter Park, Florida.

      Daniel E. Penni:  Mr. Penni,  age 56, has served as a director since March
1995,  and is Chairman  of the  Compensation  Committee  and serves on the Audit
Committee  of the  Board of  Directors.  Currently,  he is an Area  Senior  Vice
President for Arthur J. Gallagher & Co. (NYSE:AJG), and previously,  since March
1998, he has held several positions  including Area Executive Vice President for
Arthur J. Gallagher & Co.. He has worked in many sales and administrative  roles
in the insurance  business since 1969. He is the managing  member of the Norsman
Group  Northeast,  LLC,  a  private  sales  and  marketing  company  focused  on
Internet-based  education  and marketing and serves as Treasurer and Chairman of
the Finance Committee of the Board of Trustees of the  Massachusetts  College of
Pharmacy and Health  Sciences.  Mr. Penni  graduated  with a Bachelor of Science
degree in 1969 from the School of Management at Boston College.


                                       89
<PAGE>


      Dennis G. Rawan:  Mr. Rawan,  age 60, was  appointed a director  effective
December 10, 2002, and serves as Chairman of the Audit Committee of the Board of
Directors.  Mr. Rawan was Chief Financial  Officer of Expo  International,  Inc.
(Expo)  from 1996  until  his  retirement  in 2000.  Expo  provides  information
technology products and services to the event industry.  For over 20 years prior
to joining Expo, Mr. Rawan was a certified  public  accountant  (CPA)  providing
audit, review, tax and financial statement preparation services for a variety of
clients.  From 1970 to 1988,  while working as a CPA, Mr. Rawan taught  graduate
level accounting courses at Babson College.  Mr. Rawan earned a Bachelor of Arts
degree  and  a  Master  of  Business  Administration  degree  from  Northeastern
University.

      Constance K. Weaver:  Ms.  Weaver,  age 51, was elected a director in July
1998, and serves on the  Compensation  Committee of the Board of Directors.  Ms.
Weaver is Executive Vice President,  Public Relations,  Marketing Communications
and Brand Management for AT&T Corporation (AT&T) (NYSE:T).  From 1996 to October
2002,  Ms.  Weaver  was  Vice  President,   Investor   Relations  and  Financial
Communications  for AT&T.  From 1995  through  1996,  she was  Senior  Director,
Investor Relations and Financial Communications for Microsoft Corporation.  From
1993 to 1995,  she was Vice  President,  Investor  Relations,  and, from 1991 to
1993, she was Director of Investor  Relations for MCI  Communications,  Inc. She
earned a Bachelor of Science  degree from the University of Maryland in 1975 and
has  completed  post-graduate  financial  management,  marketing  and  strategic
planning  courses  at The  Wharton  School of the  University  of  Pennsylvania,
Stanford University, Columbia University and Imede (Switzerland).

      Michael S.  Zarriello:  Mr.  Zarriello,  age 54, was  appointed a director
effective  May 9,  2003,  and  serves  on the  Audit  Committee  of the Board of
Directors.  Mr.  Zarriello  has served as a member of the board of  directors of
Digital Angel  Corporation  since September  2003, and he currently  serves as a
member of the  Compensation  Committee of Digital Angel  Corporation's  board of
directors.  He has served as Senior Vice President and Chief  Financial  Officer
for  Rural/Metro  Corporation  in  Scottsdale,  Arizona  since  July  2003.  Mr.
Zarriello  was  a  Senior  Managing   Director  of  Jesup  &  Lamont  Securities
Corporation and President of Jesup & Lamont  Merchant  Partners LLC from 1998 to
2003.  From 1989 to 1997, Mr.  Zarriello was a Managing  Director-  Principal of
Bear  Stearns & Co.,  Inc.  and from  1989 to 1991 he served as Chief  Financial
Officer of the  Principal  Activities  Group  that  invested  the Bear  Stearns'
capital in middle market companies. Prior to that time, he has held positions as
Chief Financial Officer of United States Leather Holdings, Inc., Chief Financial
Officer of Avon  Products,  Inc.  Healthcare  Division and  Assistant  Corporate
Controller  for Avon. He graduated  with a Bachelors of Science  degree from the
State  University  of New  York at  Albany;  he  holds  a  Masters  in  Business
Administration from Fairleigh Dickinson University and an Advanced  Professional
Certificate from New York University.  Mr. Zarriello holds several licenses from
the National Association of Securities Dealers.

      DIRECTORSHIPS

      Mr. McLaughlin serves on the Boards of Directors of InfoTech USA, Inc. and
Digital Angel Corporation. Messrs. Silverman and Zarriello serve on the Board of
Directors of Digital Angel Corporation. No other directors or executive officers
hold  directorships  in  any  other  company  that  has a  class  of  securities
registered  pursuant to Section 12 of the  Securities  Exchange Act of 1934,  or
subject to the  requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940.


                                       90
<PAGE>


      BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

      The Board of Directors  held 11 meetings  and acted by written  consent 38
times during 2003.

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

      The Audit  Committee  recommends  for approval by the Board of Directors a
firm of certified public  accountants whose duty it is to audit our consolidated
financial  statements  for the  fiscal  year in which  they are  appointed,  and
monitors the  effectiveness  of the audit  effort,  our  internal and  financial
accounting  organization  and  controls  and  financial  reporting.   The  Audit
Committee  held four  meetings  and acted by written  consent  four times during
2003. The Audit Committee  approves all auditor services and otherwise  complies
with the  provisions  of the  Sarbanes-Oxley  Act of 2002.  The Audit  Committee
members  are  independent  as  defined  in  Rule  4200(a)(15)  of  the  National
Association of Securities Dealers listing standards, as applicable and as may be
modified or supplemented and as defined by the Sarbanes-Oxley Act of 2002.

      The Compensation Committee administers our 1996 Non-Qualified Stock Option
Plan, the 1999 Flexible  Stock Plan, the 1999 Employees  Stock Purchase Plan and
the 2003 Flexible  Stock Plan including the review and grant of stock options to
officers and other  employees  under such plans,  and recommends the adoption of
new plans.  The  Compensation  Committee also reviews and approves various other
compensation  policies and matters and reviews and  approves  salaries and other
matters relating to our executive officers.  The Compensation  Committee reviews
all senior  corporate  employees  after the end of each fiscal year to determine
compensation  for the  subsequent  year.  Particular  attention  is paid to each
employee's  contributions  to our  current and future  success  along with their
salary level as compared to the market value of  personnel  with similar  skills
and responsibilities.  The Compensation Committee also looks at accomplishments,
which are above and beyond management's normal expectations for their positions.
The Compensation  Committee met two times and acted by written consent six times
during 2003.

      COMPENSATION OF DIRECTORS

      Our non-employee  directors receive a fixed quarterly fee in the amount of
$7,000 per quarter,  effective  July 1, 2003.  In addition,  the Chairman of the
Audit  Committee  receives a  quarterly  fee of $2,500 and the  Chairman  of the
Compensation  Committee  receives a  quarterly  fee $1,500.  Other  non-employee
directors  receive a quarterly fee in the amount of $1,000 for each committee on
which they serve as a member.  Reasonable  travel  expenses are reimbursed  when
incurred.  During 2003,  Messrs.  Penni and Rawan and Ms. Weaver each received a
bonus of $150,000, and Mr. Zarriello received a bonus of $30,000, as a result of
the  successful  repayment of all of our  obligations  to IBM Credit on June 30,
2003, under the terms of a forbearance agreement.  As a result of the repayment,
we  recognized  a gain on the  extinguishment  of debt  of  approximately  $70.1
million during 2003.  Individuals who become directors are automatically granted
an initial  option to  purchase  2,500  shares of common  stock on the date they
become  directors.  Each  of  such  options  is  granted  pursuant  to our  1996
Non-Qualified  Stock  Option Plan,  the 1999  Flexible  Stock Plan,  or the 2003
Flexible  Stock  Plan  on  terms  and  conditions  determined  by our  Board  of
Directors.  During 2003, Messrs.  Penni, Rawan and Zarriello and Ms. Weaver were
granted 25,000,  25,000,  12,500 and 25,000 options,  respectively,  to purchase
shares of our common stock. Messrs. Penni and Rawan and Ms Weaver's options were
annual option awards. Twenty-five hundred of Mr. Zarriello's options were issued
in connection  with his  appointment  to our Board of Directors in May 2003, and
10,000 were issued as part of our annual option award.  The amount of the annual
option awards was discretionary and was determined by the Compensation Committee
of the Board of Directors. Directors who are not also executive officers are not
eligible to participate in any of our other benefit plans. Mr. Norris joined our
Board of Directors on January 12, 2004,  and  therefore,  he did not receive any
compensation during 2003.


                                       91
<PAGE>

      CODE OF ETHICS

      We have  adopted a code of ethics  that  applies  to,  among  others,  our
principal executive officer and principal  financial officer,  and other persons
performing similar functions. We will provide to any person without charge, upon
request,  a copy of such code.  Requests  for the code  should be  directed  to:
Corporate  Secretary,  Applied  Digital  Solutions,  Inc.,  1690 South  Congress
Avenue, Suite 200, Delray Beach, Florida 33445.

      ITEM 11. EXECUTIVE COMPENSATION

      The following table sets forth certain summary information  concerning the
total remuneration received or accrued for services rendered in 2003 and the two
prior fiscal years to our Chief  Executive  Officer,  our former Chief Executive
Officer who retired in March  2003,  and our four other most highly  compensated
executive officers (collectively, the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                       Annual Compensation
-------------------------------------------------------------------------------
                                                                 Other Annual
                                                                 Compensation
Name and Principal Position (1)  Year    Salary ($) Bonus ($)(2)     ($)(3)
-------------------------------------------------------------------------------
<S>                              <C>    <C>         <C>          <C>
Scott R. Silverman(5)            2003   $  278,077  $1,350,000     $  44,442
   Chairman and CEO              2002      165,577      22,030         2,563
                                 2001           --          --            --

Richard J. Sullivan(6)           2003   $  103,406          --     $  15,106
  Former Chairman, CEO and       2002      450,000  $  140,000       326,841
     Secretary                   2001      450,000     448,801        57,424

Kevin H. McLaughlin(7)           2003   $  157,692  $  650,000     $   8,250
   President and Chief
    Operating                    2002      152,885      20,000         9,517
    Officer                      2001      150,000       7,087        10,615

Michael E. Krawitz(8)            2003   $  181,538  $  650,000            --
   Executive Vice President,     2002      170,769      22,030            --
    General Counsel              2001      160,000      14,174            --
     Secretary

Evan C. McKeown(9)               2003   $  167,692  $  650,000            --
   Senior Vice President,        2002      155,673       7,868            --
     Chief Financial Officer,    2001       93,750       7,087            --

 Peter Zhou                      2003   $  228,981  $    7,500            --
   Vice President,               2002      216,058       7,500            --
   Chief Scientist               2001      212,839          --            --
</TABLE>

<TABLE>
<CAPTION>
                                                            Long-Term Compensation
                                 ---------------------------------------------------------------------------
                                                 Awards               Payouts
------------------------------------------------------------------------------------------------------------
                                 Restricted
                                  Stock         Options/               LTIP              All Other
Name and Principal Position (1)   Awards ($)   SAR's(#)(4)            Payouts(#)        Compensation ($)
------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>                     <C>               <C>
Scott R. Silverman(5)                 --      1,450,000(10)                --                   --
   Chairman and CEO                   --      1,460,000(11)                --                   --
                                      --        276,250(12)                --                   --

Richard J. Sullivan(6)                --      1,088,500(13)(30)                         $13,069,204 (31)
  Former Chairman, CEO and            --      3,230,000(14)(29)(30)        --                   --
     Secretary                        --      1,551,000(15)(28)(29)        --                   --

Kevin H. McLaughlin(7)                --        575,000(16)                --                   --
   President and Chief
    Operating                         --        375,500(17)                --                   --
    Officer                           --        288,275(18)(28)            --                   --

Michael E. Krawitz(8)                 --        950,000(19)                --                   --
   Executive Vice President,          --      1,390,000(20)                --                   --
    General Counsel                   --        207,275                    --                   --
     Secretary

Evan C. McKeown(9)                    --        325,000(22)                --                   --
   Senior Vice President,             --        115,000(23)                --                   --
     Chief Financial Officer,         --         45,469(24)                --                   --

 Peter Zhou                           --        415,000(25)                --                   --
   Vice President,                    --         20,000(26)                --                   --
   Chief Scientist                    --        136,650(27)(28)            --                   --
</TABLE>

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

(1)   See "Related Party Transactions."

(2)   The amounts in the Bonus column were  discretionary  awards granted by the
      Compensation  Committee  in  consideration  of  the  contributions  of the
      respective Named Executive Officers.

(3)   Other annual  compensation  includes:  (a) in 2003, for Mr.  Silverman,  a
      general expense allowance of $38,462 and an auto allowance of $5,980,  and
      for Richard J. Sullivan, health insurance reimbursements of $10,190 and an
      auto allowance of $4,916, for Mr.  McLaughlin,  a car allowance of $8,250;
      (b) in 2002, for Mr. Silverman,  an auto allowance of $2,563,  for Richard
      J. Sullivan,  $296,190 related to the difference between the price used to
      determine  the number of shares of common stock issued to Mr.  Sullivan in
      lieu of cash  compensation  and the  market  price of stock at the time of
      issuance,  a general  expense  allowance of $17,362,  an auto allowance of
      $10,242  and a  payment  of  $3,047  for a  tax  gross  up,  and  for  Mr.
      McLaughlin,  an auto allowance of $9,517;  and (c) in 2001, for Richard J.
      Sullivan,  a general expense allowance of $39,673 and an auto allowance of
      $17,751, and for Mr. McLaughlin, an auto allowance of $10,615.


                                       92
<PAGE>


(4)   Indicates  number  of  securities  underlying  options.  Includes  options
      granted by our subsidiaries.

(5)   Mr.  Silverman  joined us as a Director and  President  in March 2002.  He
      assumed the  positions  of Chairman  of the Board of  Directors  and Chief
      Executive Officer in March 2003.

(6)   Mr. Sullivan retired in March 2003.

(7)   Mr.  McLaughlin joined us as Vice President of Sales and Marketing in June
      2000. He assumed the positions of Chief Operating Officer and President in
      March 2003, and May 2003, respectively.

(8)   Mr. Krawitz assumed the position of Secretary in March 2003.

(9)   Mr.  McKeown joined us as Vice  President,  Chief  Accounting  Officer and
      Corporate Controller in March 2001. He was appointed Vice President, Chief
      Financial Officer in March 2002 and Senior Vice President in March 2003.

(10)  Includes 200,000 options granted by us, 500,000 options granted by Digital
      Angel Corporation and 750,000 options granted by Thermo Life Energy Corp.

(11)  Includes  160,000  options  granted  by us,  350,000  options  granted  by
      InfoTech USA, Inc., 950,000 options granted by VeriChip Corporation.

(12)  Includes  32,500 options granted by us, 143,750 options granted by Digital
      Angel Corporation, 100,000 options granted by InfoTech USA, Inc.

(13)  Includes  1,088,500  options  which were  granted by us in prior years and
      that were  re-priced  in March  2003,  under  the terms of Mr.  Sullivan's
      severance agreement.

(14)  Includes  330,000  options  granted by us,  1,000,000  options  granted by
      Digital Angel Corporation,  350,000 options granted by InfoTech USA, Inc.,
      1,450,000 options granted by VeriChip  Corporation,  and 100,000 shares of
      VeriChip Corporation belonging to Mr. Sullivan's wife.

(15)  Includes  1,341,000  options  granted by us,  200,000  options  granted by
      InfoTech  USA,  Inc,  and  10,000  shares  of  Applied  Digital  Solutions
      belonging to Mr. Sullivan's wife.

(16)  Includes  25,000 options granted by us, 250,000 options granted by Digital
      Angel Corporation,  100,000 options granted by VeriChip  Corporation,  and
      200,000 options granted by Thermo Life Energy Corp.

(17)  Includes  7,500  options  granted by us, and  350,000  options  granted by
      InfoTech USA, Inc.

(18)  Includes  53,900  options  granted by us, and 234,375  options  granted by
      Digital Angel Corporation.

(19)  Includes 100,000 options granted by us, 100,000 options granted by Digital
      Angel Corporation, and 750,000 options granted by Thermo Life Energy Corp.

(20)  Includes  100,000  options  granted  by us,  350,000  options  granted  by
      InfoTech USA, Inc, and 940,000 options granted by VeriChip Corporation.

(21)  Includes  60,400 options  granted by us, 46,875 options granted by Digital
      Angel Corporation, and 100,000 options granted by InfoTech USA, Inc.

(22)  Includes 25,000 options granted by us, 100,000 options granted by VeriChip
      Corporation, and 200,000 options granted by Thermo Life Energy Corp.

(23)  Includes  15,000  options  granted by us, and 100,000  options  granted by
      VeriChip Corporation.

(24)  Includes  15,000  options  granted by us, and  30,469  options  granted by
      Digital Angel Corporation.

(25)  Includes  15,000  options  granted by us, and 100,000  options  granted by
      VeriChip  Corporation,  and 300,000  options granted by Thermo Life Energy
      Corp.

(26)  Includes 20,000 options granted by us.

(27)  Includes  42,900  options  granted by us, and  93,750  options  granted by
      Digital Angel Corporation.

(28)  Includes  options granted by us in prior years that were re-priced  during
      2001 as  follows;  (a) for  Richard J.  Sullivan,  767,500;  (b) for Kevin
      McLaughlin,  18,900;  (c) for Michael E.  Krawitz,  15,400;  and (d) Peter
      Zhou, 12,900.

(29)  Info Tech USA, Inc. options forfeited on resignation.

(30)  VeriChip Corporation options forfeited on resignation.

(31)  Includes the value of 5,600,000 shares of our common stock of $10,976,000,
      which  were  issued to Mr.  Sullivan  on March 1,  2004,  and the value of
      1,088,500  common stock  options of  $2,093,204,  which were  re-priced in
      March 2003, under the terms of Mr.  Sullivan's  severance  agreement.  The
      issuance  of the  shares  and the  re-pricing  of the stock  options  were
      approved by our shareholders on July 25, 2003.


                                       93
<PAGE>


      The following table contains information concerning the grant under all of
our stock option plans and under all of our  subsidiary  stock option plans,  to
the Named Executive Officers during the year ended December 31, 2003:

<TABLE>
<CAPTION>
                              OPTION GRANTS IN 2003
                                Individual Grants
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Potential Realizable Value At
                                                                                                          Assumed Rates of Stock
                                                                                                       Appreciation for Option Term
------------------------------------------------------------------------------------------------------------------------------------
                                                  % of Total
                                                   Options
                           Number of Securities   Granted to
                            Underlying Options   Employees in      Exercise
       Name                     Granted (#)        2003          Price ($/Sh)      Expiration Date        5% ($)        10% ($)
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                   <C>             <C>               <C>                  <C>           <C>
Scott R. Silverman              200,000 (1)         9.9%           $3.90            November-11         $955,701     $2,289,417
                                250,000 (2)        13.9             1.91            September-14         177,756        463,838
                                250,000 (2)        13.9             3.89            December-14          413,768      1,434,072
                                750,000 (4)        19.2             0.05            April-11             358,388        858,531
Richard J. Sullivan             200,000 (5)         9.9             0.10 (5)        July-08              595,572      1,327,890
                                120,000 (5)         6.0             0.10 (5)        February-08          321,946        709,038
                                 18,500 (5)         0.9             0.10 (5)        April-04               9,614         19,245
                                350,000 (5)        17.4             0.10 (5)        September-06         654,798      1,392,898
                                100,000 (5)         5.0             0.10 (5)        September-07         246,439        537,768
                                200,000 (5)         9.9             0.10 (5)        January-07           405,154        867,665
                                100,000 (5)         5.0             0.10 (5)        May-05               110,784        227,824
Kevin H. McLaughlin              25,000 (1)         1.2             3.90            November-11          119,463        286,177
                                250,000 (2)        13.9             1.91            September-11         177,699        463,652
                                100,000 (3)        12.7             0.25            April-11              47,785        114,471
                                200,000 (4)         5.1             0.05            April-11              95,570        228,942
Michael E. Krawitz              100,000 (1)         5.0             3.90            November-11          477,850      1,144,709
                                100,000 (2)         5.6             3.89            December-14          165,507        573,629
                                750,000 (4)        19.2             0.05            April-11             358,388        858,531
Evan C. McKeown                  25,000 (1)         1.2             3.90            November-14          119,463        286,177
                                100,000 (3)        12.7             0.25            April-11              47,785        114,471
                                200,000 (4)         5.1             0.05            April-11              95,570        228,942
Peter Zhou                       15,000 (1)         0.7             3.90            November-14           94,432        239,366
                                100,000 (3)        12.7             0.25            April-11              47,785        114,471
                                300,000 (4)         7.7             0.05            April-11             143,355        343,413
</TABLE>

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

(1)   These  options  were  granted  under the 2003  Flexible  Stock  Plan at an
      exercise  price equal to the fair market  value of our common stock on the
      date of grant. These options vest one year from the date of grant.

(2)   Digital Angel Corporation granted these options at an exercise price equal
      to the fair market value of our common  stock on the date of grant.  These
      options vest one year from the date of grant.

(3)   VeriChip  Corporation  granted these options at an exercise price equal to
      the fair  market  value of our  common  stock on the date of grant.  These
      options vest one year from the date of grant.

(4)   Thermo Life Energy Corp.  granted these options at an exercise price equal
      to the fair market value of our common  stock on the date of grant.  These
      options vest one year from the date of grant.

(5)   These options were granted by us under the 1996 Non-Qualified Stock Option
      Plan and/or the 1999 Flexible Stock Plan in prior years and were re-priced
      on March 24, 2003,  as part of Mr.  Sullivan's  severance  agreement.  The
      re-priced  options  are  exercisable  at $0.10 per share.  All other terms
      remained unchanged.

      The terms of the 1996  Non-Qualified  Stock Option Plan, the 1999 Flexible
Stock  Plan  and  the  2003  Flexible  Stock  Plan  include  change  of  control
provisions. Upon a change of control, as defined in the plans, all stock options
become fully vested, exercisable or payable.


                                       94
<PAGE>


      The following table sets forth  information  with respect to stock options
exercised by the Named  Executive  Officers  concerning  the exercise of options
during the fiscal  year ended  December  31, 2003 and stock  options  held as of
December 31, 2003 by each Named Executive Officer:

             2003 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                         Number of Securities
                                                                               Underlying                Value of Unexercised
                                       Exercised in 2003                Unexercised Options at          In-The-Money Options at
                                                                         December 31, 2003 (#)          December 31, 2003 ($)(2)
                                  ---------------------------------   ----------------------------   -------------------------------
                                  Shares Acquired      Value
          Name                   Upon Exercise (#)  Realized ($)(1)   Exercisable    Unexercisable   Exercisable      Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                <C>               <C>            <C>            <C>              <C>
Scott R. Silverman
 Applied Digital Solutions, Inc.          -                  -           192,500         200,000      $368,000         $160,000
       Digital Angel Corporation          -                  -           250,000         250,000       707,500          212,500
              InfoTech USA, Inc.          -                  -           100,000         350,000             -                -
            VeriChip Corporation          -                  -           500,000         450,000       100,000           90,000
        Thermo Life Energy Corp.          -                  -                 -         750,000             -                -
Richard J. Sullivan
 Applied Digital Solutions, Inc.   1,148,500 (3)     $4,662,159 (3)       10,000 (4)           -        15,000                -
      Digital Angel Corporation           -                  -         1,093,750 (5)           -     4,601,078                -
             InfoTech USA, Inc.           -                  -                 - (4)           -             -                -
           VeriChip Corporation           -                  -           100,000               -        20,000                -
        Thermo Life Energy Corp.                                               -               -             -                -
Kevin H. McLaughlin
 Applied Digital Solutions, Inc.          -                  -            39,166          25,000       112,583           20,000
       Digital Angel Corporation          -                  -                 -         250,000             -          707,500
              InfoTech USA, Inc.          -                  -                 -         350,000             -                -
            VeriChip Corporation          -                  -                 -         100,000             -                -
         Thermo Life Energy Corp.                                              -         200,000             -                -
Michael E. Krawitz
 Applied Digital Solutions, Inc.          -                  -           150,400         100,000       327,280           80,000
       Digital Angel Corporation          -                  -           114,188         100,000       506,161           85,000
              InfoTech USA, Inc.          -                  -           100,000         350,000             -                -
            VeriChip Corporation          -                  -           500,000         440,000       100,000           88,000
         Thermo Life Energy Corp.                                              -         750,000             -                -
Evan C. McKeown
 Applied Digital Solutions, Inc.          -                  -            23,333          26,667        51,166           25,333
       Digital Angel Corporation          -                  -                 -               -             -                -
              InfoTech USA, Inc.          -                  -                 -               -             -                -
            VeriChip Corporation          -                  -           100,000         100,000        20,000                -
        Thermo Life Energy Corp.                                               -         200,000             -                -
Peter Zhou
 Applied Digital Solutions, Inc.          -                  -            32,900          15,000        73,280           12,000
       Digital Angel Corporation          -                  -           271,875               -     1,086,986                -
              InfoTech USA, Inc.          -                  -                 -               -             -                -
            VeriChip Corporation          -                  -                 -         100,000             -                -
        Thermo Life Energy Corp.                                               -         300,000             -                -
 </TABLE>

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

(1)   The values  realized  represent 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, 2003, is
      based upon the following fair market values: $4.70 for options exercisable
      into shares of our common stock (based on the closing  price of our common
      stock as reported on the Nasdaq  SmallCap  Market on  December  31,  2003,
      adjusted for the reverse stock split);  $4.74 for options exercisable into
      shares of Digital Angel Corporation's common stock (based upon the closing
      price of  Digital  Angel  Corporations  common  stock as  reported  on the
      American  Stock  Exchange  on  December  31,  2003);   $0.23  for  options
      exercisable into shares of InfoTech USA, Inc.'s common stock (based on the
      closing  price of InfoTech  USA,  Inc.'s  common stock on the OTC Bulletin
      Board on December 31, 2003); $0.25 for options  exercisable into shares of
      VeriChip Corporation's common stock based upon the estimated fair value on
      December 31, 2003; and $0.05 for options exercisable into shares of Thermo
      Life Energy  Corp.'s  common stock based upon the estimated  fair value on
      December 31, 2003. The values shown are net of the option  exercise price,
      but do not include  deduction for taxes or other expenses  associated with
      the exercise of the option or the sale of the underlying shares.

(3)   Includes  60,000  options  exercised  by Mr.  Sullivan's  wife.  The value
      received for these shares was $198,000.

(4)   These options are owned by Mr. Sullivan's wife.

(5)   Includes 93,570  exercisable  options,  which are owned by Mr.  Sullivan's
      wife. The options have a value of $394,378.


                                       95
<PAGE>



      The  following  table sets  forth  information  with  respect to the named
executive officers  concerning the repricing of options during 2003 and 2001 and
for the last ten completed fiscal years:

                          10-Year Option/SAR Re-pricing

<TABLE>
<CAPTION>

                                            Number of Securities                                                  Length of Original
                                                 Underlying        Market Price of    Exercise Price at               Option Term
                                                Options/SARs      Stock at Time of  Time of Repricing or          Remaining at Date
                                            Re-priced or Amended    Repricing or        Amendment ($)  New Exercis  of Repricing or
 Name                            Date                (#)            Amendment ($)                       Price ($)       Amendment
----------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                    <C>                   <C>                <C>               <C>        <C>
Richard J. Sullivan        March 24, 2003         200,000              $2.00            $2.80            $ 0.10          55 months
                           March 24, 2003         120,000               2.00             3.20              0.10          50 months
                           March 24, 2003          18,500               2.00             1.50              0.10           4 months
                           March 24, 2003         350,000               2.00             1.50              0.10          33 months
                           March 24, 2003         100,000               2.00             1.50              0.10          45 months
                           March 24, 2003         200,000               2.00             1.50              0.10          36 months
                           March 24, 2003         100,000               2.00             1.50              0.10          17 months
                       September 21, 2001          50,000               1.50            39.30              1.50          22 months
                       September 21, 2001          50,000               1.50            55.80              1.50          25 months
                       September 21, 2001          63,000               1.50            44.60              1.50          12 months
                       September 21, 2001           4,500               1.50            42.50              1.50          10 months
                       September 21, 2001          50,000               1.50            35.10              1.50          30 months
                       September 21, 2001          50,000               1.50            30.30              1.50        31.5 months
                       September 21, 2001          50,000               1.50            21.90              1.50          38 months
                       September 21, 2001         100,000               1.50            20.30              1.50       104.5 months
                       September 21, 2001         350,000               1.50            27.50              1.50          60 months
                       September 21, 2001         200,000               1.50             6.90              1.50          63 months

Scott R. Silverman     September 21, 2001          10,000               1.50             2.70              1.50        58.5 months

Kevin McLaughlin       September 21, 2001           3,333               1.50            36.60              1.50        57.5 months
                       September 21, 2001           3,333               1.50            36.60              1.50        69.5 months
                       September 21, 2001           3,333               1.50            36.60              1.50        81.5 months
                       September 21, 2001           3,900               1.50            27.50              1.50          60 months
                       September 21, 2001           7,500               1.50             6.90              1.50          63 months

Michael E. Krawitz     September 21, 2001           2,500               1.50            20.30              1.50       104.5 months
                       September 21, 2001           5,000               1.50            20.00              1.50        49.5 months
                       September 21, 2001           7,900               1.50            27.50              1.50          60 months
                       September 21, 2001          10,000               1.50             6.90              1.50          63 months

Evan C. McKeown        September 21, 2001           1,667               1.50            12.20              1.50          66 months
                       September 21, 2001           1,667               1.50            12.20              1.50          78 months
                       September 21, 2001           1,666               1.50            12.20              1.50          90 months


Peter Zhou             September 21, 2001           1,667               1.50            63.40              1.50        51.5 months
                       September 21, 2001           1,667               1.50            63.40              1.50        63.5 months
                       September 21, 2001           1,666               1.50            63.40              1.50        75.5 months
                       September 21, 2001           7,900               1.50            27.50              1.50          60 months
                       September 21, 2001          10,000               1.50             6.90              1.50          63 months
</TABLE>

      Incentive Plans

      Cash and Stock Incentive Compensation Programs. To reward performance,  we
provide our  executive  officers and our  subsidiary  officers  with  additional
compensation in the form of a cash bonus and/or stock awards. As of December 31,
2003,  no fixed  formula  or  weighting  has been  applied  by the  Compensation
Committee to corporate performance versus individual  performance in determining
these awards. The Compensation Committee acting in its discretion has determined
the amounts of such awards. Such determination,  except in the case of the award
for the Chairman, was 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  amount  specified.  The amount of the total
incentive  is  divided   between  cash  and  stock  at  the  discretion  of  the
Compensation Committee.


                                       96
<PAGE>


      Stock Options and Other Awards Granted under the 1996 Non-Qualified  Stock
Option Plan,  the 1999 Flexible Stock Plan and the 2003 Flexible Stock Plan. The
1996 Non-Qualified  Stock Option Plan, the 1999 Flexible Stock Plan and the 2003
Flexible  Stock  Plan  are  long-term   plans  designed  to  link  rewards  with
shareholder  value over time.  Stock options are granted to aid in the retention
of employees  and to align the  interests of employees  with  shareholders.  The
value of the stock  options to an employee  increases  as the price of our stock
increases  above the fair market value on the grant date,  and the employee must
remain  in our  employ  for the  period  required  for the  stock  option  to be
exercisable, thus providing an incentive to remain in our employ.

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

      The 2003 Flexible  Stock Plan is also  designed to encourage  ownership of
our common stock by employees,  directors and other individuals,  and to promote
and further the best interests of us by granting cash and other stock awards. We
also  intend to grant  awards of our common  stock in lieu of  payments  of cash
compensation pursuant to the mutual agreement with the participant.

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

      Other than as otherwise disclosed herein,  there were no plans pursuant to
which cash or  non-cash  compensation  was paid or  distributed  during the last
fiscal year.

      COMPENSATION   COMMITTEE   INTERLOCKS   AND   INSIDER   PARTICIPATION   IN
COMPENSATION DECISIONS

      None

      EMPLOYMENT  CONTRACTS AND TERMINATION OF EMPLOYMENT AND  CHANGE-IN-CONTROL
ARRANGEMENTS

      We have not entered into  employment  contracts  with any of our executive
officers. Previously, we had entered into an employment contract with Michael E.
Krawitz,  Executive Vice  President,  General  Counsel and Secretary,  which Mr.
Krawitz  agreed to terminate  for no  consideration  in November  2003.  We have
established a severance  policy for our executive  officers  under which,  if we
terminate an employee  without cause, as defined,  or the employee  resigns with
good reason the employee  will  receive  severance  payments.  Under the policy,
senior vice  presidents  and above will receive one year of base salary and vice
presidents will receive six months of base salary, based on the salary in effect
at time of the  termination.  The  severance  amount is  reduced  by half if the
employee  has been in our employ for less than one year.  Payments  cease if, in
any material respect,  the employee engages in an activity that competes with us
or if the employee breaches a duty of confidentiality.


                                       97
<PAGE>


      On March 21, 2003,  Richard J.  Sullivan  retired.  Under the terms of Mr.
Sullivan's, severance agreement, Mr. Sullivan received a one-time payment of 5.6
million shares of our common stock,  which were issued to Mr.  Sullivan on March
1, 2004, and 1.1 million re-priced options. The options surrendered had exercise
prices  ranging  from $1.50 to $3.20 per share and were  replaced  with  options
exercisable at $0.10 per share. All of the options have been exercised.

      Richard Sullivan's employment agreement provided for:

      o     an annual  salary of $450,000  and an annual  bonus of not less than
            $140,000 for the term of his employment  agreement (which was due to
            expire March 1, 2008, roughly five years later);

      o     supplemental  compensation  of  $2,250,000  (to be paid in 60  equal
            monthly  payments of $37,500 each), in the event of a termination of
            his  employment  for any reason other than a termination  due to his
            material default under the agreement; and

      o     a  lump  sum  payment  of  $12,105,000,  upon  the  occurrence  of a
            "Triggering  Event,"  defined  under  the  employment  agreement  to
            include a change of  control  of us or his  ceasing  to serve as our
            Chairman  of the Board or Chief  Executive  Officer  for any  reason
            other than due to his material default, with us having the option to
            pay this amount in cash or in our common stock or any combination of
            the two. In the event we opted to make any portion of the payment in
            common stock,  the agreement  stipulated that the common stock is to
            be valued at the  average  closing  price of the stock on the Nasdaq
            National  Market  (our  stock  was,  at the time the  agreement  was
            entered  into,  listed on the Nasdaq  National  Market but has since
            been  transferred to the Nasdaq SmallCap  Market) over the last five
            business days prior to the date of the Triggering Event.

      In total,  the employment  agreement  obligated us to pay Richard Sullivan
approximately  $17.3 million under or in connection  with the termination of his
employment  agreement.  In view of our cash constraints and our need at the time
to dedicate  essentially all of our cash resources to satisfying our obligations
to IBM Credit,  we commenced  negotiations with Richard Sullivan that led to the
proposed terms of his severance agreement.

      Effective March 3, 2004,  Richard J. Sullivan  resigned from Digital Angel
Corporation's  Board of Directors,  and thus,  he no longer has any  affiliation
with us.

      SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section  16(a) of the Exchange Act requires our officers and directors and
persons who own more than 10% of our Common  Stock to file  reports of ownership
and changes in ownership  with the  Securities  and Exchange  Commission  and to
furnish  copies  of all such  reports  to us.  We  believe,  based on our  stock
transfer  records  and  other  information  available  to us,  that all  reports
required  under  Section  16(a) were timely filed during 2003 except for a joint
Form 4 for Applied  Digital  Solutions,  Inc. and the Digital  Angel Share Trust
related to the  disposition  of 4,546  shares of the Digital  Angel  Corporation
common  stock owned by us in  connection  with the  exchange of a portion of our
8.5% Convertible Exchangeable Debentures that was filed approximately two months
late.


                                       98
<PAGE>


ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      OWNERSHIP OF EQUITY SECURITIES

      The following table sets forth information  regarding beneficial ownership
of our common stock by each director and by each executive  officer named in the
summary  compensation table and by all the directors and executive officers as a
group as of March 10, 2004:

<TABLE>
<CAPTION>
                                                                      ---------------------------------
                                                                         Number of
                                                                         Shares of        Percent of
                                                                       Common Stock      Common Stock
                                                                       Beneficially      Beneficially
                      Name of Beneficial Owner                           Owned (1)           Owned
--------------------------------------------------------------------- ----------------   --------------
<S>                                                                   <C>                 <C>
  Scott R. Silverman                                                        194,500              *
  J. Michael Norris                                                              --             --
  Daniel E. Penni                                                           191,264              *
  Dennis G. Rawan                                                             1,333              *
  Constance K. Weaver                                                       132,917              *
  Michael S. Zarriello                                                        2,452              *
  Richard J. Sullivan (2) (3)                                                12,222              *
  Kevin H. McLaughlin                                                        40,233              *
  Michael E. Krawitz                                                        156,236              *
  Evan C. McKeown                                                            25,155              *
  Peter Zhou                                                                 35,253              *

  All directors and executive officers as a group (12 persons)              834,817             1.6%
</TABLE>

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

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

(1)   This table includes  presently  exercisable stock options and options that
      are  exercisable  within sixty days of March 10, 2004, in accordance  with
      Rule 13d-3(d)  under the  Securities  Exchange Act of 1934.  The following
      directors and executive  officers hold the number of  exercisable  options
      set forth following their respective names:  Scott R. Silverman - 192,500;
      Daniel E. Penni - 116,400;  Dennis G. Rawan - 833;  Constance  K. Weaver -
      98,900; Richard J. Sullivan - 10,000; Kevin H. McLaughlin -39,133; Michael
      E. Krawitz - 150,400;  Evan C. McKeown - 25,000;  Peter Zhou - 32,900; and
      all directors and officers as a group - 703,467.

(2)   Includes 10,000 presently  exercisable  options and 2,222 shares of common
      stock owned by Mr. Sullivan's spouse.

(3)   Mr.  Sullivan  did not respond to our request  for  information  about his
      holdings.


                                       99
<PAGE>


      The following table sets forth information  regarding beneficial ownership
of our 68.5% subsidiary, Digital Angel Corporation, by each of our directors and
by each executive officer named in the summary compensation table and by all the
directors and executive officers as a group as of March 10, 2004:

<TABLE>
<CAPTION>
                                                          NUMBER OF
                                                          SHARES OF      PERCENT OF
                                                           COMMON          COMMON
                                                            STOCK          STOCK
                                                        BENEFICIALLY    BENEFICIALLY
       NAME OF BENEFICIAL OWNER                           OWNED (1)        OWNED
---------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Scott R. Silverman
400 Royal Palm Way, Palm Beach, FL 33480                      78,450         *

J. Michael Norris
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Daniel E. Penni
260 Eliot Street, Ashland, MA 01721                           93,750         *

Dennis G. Rawan                                                 --           --
400 Royal Palm Way, Palm Beach, FL 33480

Constance K. Weaver                                           82,950         *
295 North Maple Ave, Basking Ridge, NJ 07920

Michael S. Zarriello                                            --           --
400 Royal Palm Way, Palm Beach, FL 33480

Richard J. Sullivan
400 Royal Palm Way, Palm Beach, FL 33480                   1,143,750 (2)    3.3%
                                                                     (3)

Kevin H. McLaughlin
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Michael E. Krawitz
400 Royal Palm Way, Palm Beach, FL 33480                     114,118         *

Evan C. McKeown
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Peter Zhou
5750 Division Street, Riverside, CA 92506                    271,875         *

All directors and executive officers as a group (12        1,802,706        5.3%
persons)
</TABLE>

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

* Represents less than 1% of the issued and outstanding  shares of Digital Angel
Corporation's common stock.

(1)   This table includes  presently  exercisable stock options and options that
      are  exercisable  within sixty days of March 10, 2004, in accordance  with
      Rule 13d-3(d)  under the  Securities  Exchange Act of 1934.  The following
      directors and executive  officers hold the number of  exercisable  options
      set forth following their respective  names:  Scott R. Silverman - 50,000;
      Constance K. Weaver - 82,950; Richard J. Sullivan - 1,143,750;  Michael E.
      Krawitz - 114,118; Peter Zhou - 271,875; and all directors and officers as
      a group - 1,680,506.

(2)   Includes  93,750  presently  exercisable  options owned by Mr.  Sullivan's
      spouse.

(3)   Mr.  Sullivan  did not respond to our request  for  information  about his
      holdings.


                                      100
<PAGE>

      The following table sets forth information  regarding beneficial ownership
of our 52.5%  subsidiary,  InfoTech  USA,  Inc., by each of our directors and by
each executive  officer named in the summary  compensation  table and by all the
directors and executive officers as a group as of March 10, 2004:

<TABLE>
<CAPTION>
                                                          NUMBER OF
                                                          SHARES OF      PERCENT OF
                                                           COMMON          COMMON
                                                            STOCK          STOCK
                                                        BENEFICIALLY    BENEFICIALLY
NAME OF BENEFICIAL OWNER                                   OWNED (1)        OWNED
-------------------------------------------------------------------------------------
<S>                                                    <C>              <C>
Scott R. Silverman
400 Royal Palm Way, Palm Beach, FL 33480                     450,000        7.3%

J. Michael Norris
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Daniel E. Penni
260 Eliot Street, Ashland, MA 01721                             --           --

Dennis G. Rawan
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Constance K. Weaver
295 North Maple Ave, Basking Ridge, NJ 07920                    --           --

Michael S. Zarriello
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Richard J. Sullivan
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Kevin H. McLaughlin
400 Royal Palm Way, Palm Beach, FL 33480                     350,000        5.7%

Michael E. Krawitz
400 Royal Palm Way, Palm Beach, FL 33480                     450,000        7.3%

Evan C. McKeown
400 Royal Palm Way, Palm Beach, FL 33480                        --           --

Peter Zhou
5750 Division Street, Riverside, CA 92506                         --         --

All directors and executive officers as a group (12        1,250,000       20.3%
persons)
</TABLE>

(1)   This table includes  presently  exercisable stock options and options that
      are  exercisable  within sixty days of March 10, 2004, in accordance  with
      Rule 13d-3(d)  under the  Securities  Exchange Act of 1934.  The following
      directors and executive  officers hold the number of  exercisable  options
      set forth following their respective names:  Scott R. Silverman - 450,000;
      Kevin H.  McLaughlin  -  350,000;  Michael E.  Krawitz - 450;000;  and all
      directors and officers as a group - 1,250,000.


                                      101
<PAGE>


      The following table sets forth information  regarding beneficial ownership
of our wholly owned subsidiary,  VeriChip Corporation,  by each of our directors
and by each executive officer named in the summary compensation table and by all
the directors and executive officers as a group as of March 10, 2004:

<TABLE>
<CAPTION>
                                                          NUMBER OF
                                                          SHARES OF      PERCENT OF
                                                           COMMON          COMMON
                                                            STOCK          STOCK
                                                        BENEFICIALLY    BENEFICIALLY
        NAME OF BENEFICIAL OWNER                          OWNED (1)        OWNED
--------------------------------------------------------------------------------------
<S>                                                     <C>            <C>
Scott R. Silverman                                           950,000        4.2%
400 Royal Palm Way, Palm Beach, FL 33480

J. Michael Norris                                               --           --
400 Royal Palm Way, Palm Beach, FL 33480

Daniel E. Penni                                              100,000         *
260 Eliot Street, Ashland, MA 01721

Dennis G. Rawan                                                 --           --
400 Royal Palm Way, Palm Beach, FL 33480

Constance K. Weaver                                          100,000         *
295 North Maple Ave, Basking Ridge, NJ 07920

Michael S. Zarriello                                            --           --
400 Royal Palm Way, Palm Beach, FL 33480

Richard J. Sullivan                                          100,000 (2)     *
400 Royal Palm Way, Palm Beach, FL 33480

Kevin H. McLaughlin                                          100,000         *
400 Royal Palm Way, Palm Beach, FL 33480

Michael E. Krawitz                                           940,000        4.1%
400 Royal Palm Way, Palm Beach, FL 33480

Evan C. McKeown                                              200,000         *
400 Royal Palm Way, Palm Beach, FL 33480

Peter Zhou                                                   100,000         *
5750 Division Street, Riverside, CA 92506

All directors and executive officers as a group (12        2,655,000       11.8%
persons)
</TABLE>

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

*  Represents  less than 1% of the issued  and  outstanding  shares of  VeriChip
Corporation's common stock.

(1)   This table includes  presently  exercisable stock options and options that
      are  exercisable  within sixty days of March 10, 2004, in accordance  with
      Rule 13d-3(d)  under the  Securities  Exchange Act of 1934.  The following
      directors and executive  officers hold the number of  exercisable  options
      set forth following their respective names;  Scott R. Silverman - 950,000;
      Daniel E. Penni - 100,000; Constance K. Weaver - 100,000; Richard Sullivan
      - 100,000;  Kevin H.  McLaughlin - 100,000;  Michael E. Krawitz - 940,000;
      Evan C. McKeown - 200,000;  Peter Zhou - 100,000;  and all  directors  and
      officers as a group - 4,765,000.

(2)   Includes 100,000  presently  exercisable  options owned by Mr.  Sullivan's
      spouse.


                                      102
<PAGE>


      The following table sets forth information  regarding beneficial ownership
of our  wholly  owned  subsidiary,  Thermo  Life  Energy  Corp.,  by each of our
directors and by each executive officer named in the summary  compensation table
and by all the directors and executive officers as a group as of March 10, 2004:


<TABLE>
<CAPTION>
                                                          NUMBER OF
                                                          SHARES OF      PERCENT OF
                                                           COMMON          COMMON
                                                            STOCK          STOCK
                                                        BENEFICIALLY    BENEFICIALLY
        NAME OF BENEFICIAL OWNER                          OWNED (1)        OWNED
--------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Scott R. Silverman                                           750,000        3.3%
400 Royal Palm Way, Palm Beach, FL 33480

J. Michael Norris                                               --           --
400 Royal Palm Way, Palm Beach, FL 33480

Daniel E. Penni                                              200,000         *
260 Eliot Street, Ashland, MA 01721

Dennis G. Rawan                                              200,000         --
400 Royal Palm Way, Palm Beach, FL 33480

Constance K. Weaver                                          200,000         *
295 North Maple Ave, Basking Ridge, NJ 07920

Michael S. Zarriello                                            --           --
400 Royal Palm Way, Palm Beach, FL 33480

Richard J. Sullivan                                             --           --
400 Royal Palm Way, Palm Beach, FL 33480

Kevin H. McLaughlin                                          200,000         *
400 Royal Palm Way, Palm Beach, FL 33480

Michael E. Krawitz                                           750,000        3.3%
400 Royal Palm Way, Palm Beach, FL 33480

Evan C. McKeown                                              200,000         *
400 Royal Palm Way, Palm Beach, FL 33480

Peter Zhou                                                        --         --
5750 Division Street, Riverside, CA 92506

All directors and executive officers as a group (12        2,585,000       11.4%
persons)
</TABLE>

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

* Represents  less than 1% of the issued and  outstanding  shares of Thermo Life
Energy Corp.'s common stock.

(1)   This table includes  presently  exercisable stock options and options that
      are  exercisable  within sixty days of March 10, 2004, in accordance  with
      Rule 13d-3(d)  under the  Securities  Exchange Act of 1934.  The following
      directors and executive  officers hold the number of  exercisable  options
      set forth following their respective names;  Scott R. Silverman - 750,000;
      Daniel E. Penni - 200,000;  Dennis G.  Rawan -  200,000;  3.3Constance  K.
      Weaver - 200,000;  Kevin H.  McLaughlin  - 200,000;  Michael E.  Krawitz -
      750,000;  Evan C. McKeown - 200,000;  and all  directors and officers as a
      group - 2,585,000.


                                      103
<PAGE>


      CHANGES IN CONTROL

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

      SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      During 2003, we granted  2,016,800  options under our 2003 Flexible  Stock
Plan,  1999  Flexible  Stock  Plan and 1996  Non-Qualified  Stock  Option  Plan,
including  1,321,400  options that were re-priced in March 2003, under the terms
of two  severance  agreements  with our  former  officers  and  director.  As of
December 31, 2003, the following  shares of our common stock were authorized for
issuance under our equity compensation plans:

<TABLE>
<CAPTION>

                                EQUITY COMPENSATION PLAN INFORMATION

                                                (a)                     (b)                        (c)
Plan Category (1)                     Number of securities to    Weighted-average         Number of securities
                                      be issued upon exercise     exercise price         remaining available for
                                      of outstanding options,      per share of           future issuance under
                                        warrants and rights        outstanding             equity compensation
                                                                options, warrants           plans (excluding
                                                                    and rights           securities reflected in
                                                                                               column (a))
<S>                                   <C>                       <C>                     <C>
Equity compensation plans
approved by security holders                   2,491,530               $9.30                  1,352,376  (2)
Equity compensation plans not
approved by security holders                          --                  --                         --
                                ----------------------------------------------------------------------------
Total                                          2,491,530               $9.30                  1,352,376
                                ============================================================================
</TABLE>


(1)   A narrative  description of the material terms of our equity  compensation
      plans is set forth in Note 15 to our Consolidated Financial Statements.

(2)   Includes  594,926  shares  available  for future  issuance  under our 1999
      Employees Stock Purchase Plan.


                                      104
<PAGE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      INDEBTEDNESS OF MANAGEMENT AND OTHERS

      Daniel E.  Penni,  a member  of our Board of  Directors,  has  executed  a
revolving line of credit  promissory note in favor of Applied Digital  Solutions
Financial Corp., our subsidiary, in the amount of $450,000. The promissory note,
which was  executed  on March 23,  1999,  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).  On March 10, 2004, the interest rate equaled 5.0%. The largest
amount  outstanding  of  principal  under the  promissory  note  during 2002 was
$420,000,  and as of March 10, 2004,  $390,000 was  outstanding  under the note.
There was no interest due under the note as of March 10, 2004.

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

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

<TABLE>
<CAPTION>
Named Executive Officer                          Amount       Interest Rate    Due Date
-----------------------                          ------       -------------    --------
<S>                                           <C>             <C>              <C>
Richard J. Sullivan                           $1,375,000           6.0%        September 27, 2003
Kevin H. McLaughlin                               30,250           6.0         September 27, 2003
Michael E. Krawitz                                57,750           6.0         September 27, 2003
Peter Zhou                                        57,750           6.0         September 27, 2003

Directors                                        Amount       Interest Rate    Due Date
---------                                        ------       -------------    --------
Daniel E. Penni                                 $236,500           6.0%        September 27, 2003
Constance K. Weaver                              236,500           6.0         September 27, 2003
</TABLE>


      In  September  2000,  when the loans were  originated,  we notified  these
officers and directors that we intended to pay their annual  interest as part of
their compensation  expense/directors remuneration and to provide a gross-up for
the associated income taxes.  Annual interest payments were due on September 27,
2001 and  September 27, 2002. We have chosen not to pay the interest and related
tax gross-up.  In addition,  the principal  balance and a final interest payment
became due on September 27, 2003.  We,  therefore,  consider such notes to be in
default and are in the process of foreclosing on the underlying  collateral (all
of our stock) in satisfaction of the notes.


                                      105
<PAGE>


      Marc Sherman, the former Chief Executive Officer of Intellesale,  Inc. and
brother-in-law  of Constance  Weaver,  a member of our Board of  Directors,  was
indebted  to us for  approximately  $990,000,  which  amount  was  satisfied  in
connection with a settlement  agreement  described below. This amount represents
the amount  due to us under  seven  promissory  notes  with  principal  balances
aggregating  $795,000,  plus accrued  interest of  approximately  $195,000.  The
largest  principal  amount  outstanding  under the seven promissory notes during
2003 was $795,000,  plus accrued  interest.  Six of the promissory notes with an
aggregate  principal balance of $595,000 were executed during a six-month period
beginning March 26, 1998 through  September 10, 1998. These six promissory notes
were due on demand and bore interest at the rate of 6% per annum.  Following the
institution of litigation, a settlement was negotiated which became effective in
March of 2004. Pursuant to the settlement,  these principal amounts were paid by
offsetting  (on a  dollar-for-dollar  basis) a pension  obligation we had to Mr.
Sherman's  family.  The  seventh  promissory  note  is  a  non-interest  bearing
promissory  note in the amount of  $200,000,  which was  executed  on January 1,
1999.  The  proceeds of the  $200,000  note were used by Mr.  Sherman to acquire
10,000  shares of our common  stock,  which 10,000  shares were the security for
such note.  As part of the  settlement,  Mr.  Sherman is to deliver those shares
back to us, along with 5,000 additional shares.

      SARBANES-OXLEY ACT OF 2002

      The  Sarbanes-Oxley  Act of 2002,  referred to herein as the Act, makes it
unlawful for a public  company to make  material  modifications  to any existing
loans made to its  executive  officers and  directors.  The Act does not provide
guidance  as to  whether a  company's  election  not to make  demand on a demand
promissory note will be deemed a material modification.

      TRANSACTIONS WITH SUBSIDIARIES

      Digital Angel Corporation

      As of December  31, 2003,  we are the  beneficial  owner of  approximately
66.9% of Digital Angel  Corporation's  outstanding  common  stock.  During 2003,
Digital Angel  Corporation  reimbursed us $0.1 million for research services and
billed us $0.5 million for VeriChip  product.  During  2002,  the Digital  Angel
Corporation  paid us  approximately  $0.3 million for research  services.  Other
transactions,  primarily for research services and insurance premiums,  resulted
in a $0.3  million  payment  due to us  from  Digital  Angel  Corporation  as of
December 31, 2003.

      Before  March 27, 2002,  we provided  certain  general and  administrative
services to pre-merger  Digital Angel,  including finance,  legal,  benefits and
other  miscellaneous  items. The costs of these services were about $0.2 million
for the year ended December 31, 2002. In addition, during 2002, accrued expenses
of $0.3 million were  relieved and  contributed  to pre-merger  Digital  Angel's
capital by us.

      All  of  the  transactions  noted  above  between  us  and  Digital  Angel
Corporation have been eliminated in consolidation.

      InfoTech USA, Inc.

      On June 22, 2003, we borrowed  $1.0 million from InfoTech USA, Inc.  under
the terms of a  commercial  loan  agreement  and a term note.  The loan  accrues
interest at an annual rate of 16% and interest is payable  monthly  beginning on
July 31, 2003,  with principal and accrued  interest due on June 30, 2004. As of
March 10, 2004,  $1.0 million of principal  was  outstanding  under the note and
accrued interest was approximately  five thousand dollars.  Under the terms of a
Stock  Pledge  Agreement,  we pledged  0.8 million  shares of the Digital  Angel
Corporation common stock that we own as collateral for the loan. The proceeds of
the loan were used to fund operations.


                                      106
<PAGE>


      Beginning  in April 2002,  and for the period of time  during  which Kevin
McLaughlin served as InfoTech USA, Inc.'s President, Chief Executive Officer and
Chief Operating Officer, we had a financial  arrangement with InfoTech USA, Inc.
whereby the  salary,  bonus and  benefits  for Mr.  McLaughlin  were paid by us.
InfoTech USA, Inc.  reimbursed us for all payroll and  benefit-related  expenses
incurred  as a result of such  financial  arrangement  on a monthly  basis.  Mr.
McLaughlin  resigned as InfoTech USA, Inc.'s President,  Chief Executive Officer
and Chief Operating  Officer on March 10, 2003. In addition,  InfoTech USA, Inc.
reimburses us on a monthly basis for various  business  insurance  coverages and
other miscellaneous business expenses.  During 2003 and 2002, InfoTech USA, Inc.
reimbursed us  approximately  $0.2 million and $0.4 million,  respectively,  for
such expenses.

      All of the transactions noted above between us and InfoTech USA, Inc. have
been eliminated in consolidation.

ITEM 14. PRINCIPAL ACCOUNTANTS SERVICES AND FEES

                            AUDIT AND NON-AUDIT FEES

      For the fiscal years ended  December 31, 2003 and 2002,  fees for services
provided by Eisner LLP were as follows:


<TABLE>
<CAPTION>
                                                                  2003           2002
                                                          --------------- ---------------
<S>                                                       <C>             <C>
A.    Audit Fees                                                $467,546      $1,137,859

B.    Audit Related Fees (review of registration
        statements and other SEC filings)                        266,525         473,958

C.    Tax fees (tax-related services, including
      income tax advice regarding
      income taxes within the United States)                      25,166              --
                                                          --------------- ---------------

       Total Fees                                               $759,237      $1,611,817
                                                          =============== ===============
</TABLE>

      The Audit  Committee of the Board of  Directors  has  authorized  the fees
incurred above for all services provided.

      Compatibility of Fees

      The Audit  Committee of the Board of Directors has considered  whether the
provision  of the  services  covered  in  All  Other  Fees  is  compatible  with
maintaining the principal  accountant's  independence and has concluded that the
services did not interfere with the principal accountant's independence.


                                      107
<PAGE>


      Pre-Approval Policies and Procedures

      The Audit  Committee has a policy for the  pre-approval  of audit services
requiring its prior  approval for all audit and non-audit  services  provided by
our  independent  auditors.  Our  independent  auditors may not provide  certain
prohibited  services.  The Audit  Committee's  prior  approval  must be obtained
before the scope or cost of pre-approved services is increased.



                                      108
<PAGE>


                                     PART IV

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

(A)(1)THE FINANCIAL  STATEMENTS AND FINANCIAL  STATEMENT  SCHEDULE  LISTED BELOW
      ARE INCLUDED IN THIS REPORT

      Report of Management

      Reports of Independent Accountants

      Financial Statements

      Consolidated Balance Sheets

      Consolidated Statements of Operations

      Consolidated  Statements  of  Preferred  Stock,  Common  Stock  and  Other
      Stockholders' (Deficit) Equity

      Consolidated Statements of Cash Flows

      Notes to Consolidated Financial Statements

      Financial Statement Schedule

      Schedule of Valuation and Qualifying Accounts

(A)(2) FINANCIAL STATEMENT SCHEDULES HAVE BEEN INCLUDED IN ITEM 15(A)(1) ABOVE.

(A)(3) EXHIBITS

      See Index to Exhibits filed as part of this Annual Report on Form 10-K.

(B)   REPORTS ON FORM 8-K

            (i) Form 8-K filed November 3, 2003,  furnished under Item 5. "Other
            Events"  containing  our  press  release  dated  October  31,  2003,
            announcing  that we had received  notification  from the Nasdaq that
            our common  stock did not meet the $1.00  minimum bid closing  price
            requirement of Nasdaq Marketplace Rule 4310 (c)(4).

            (ii) Form 8-K filed dated November 14, 2003, furnished under Item 5.
            "Other  Events"  announcing the terms of an agreement to satisfy our
            aggregate   principal  amount  of  $10.5  million  8.5%  Convertible
            Exchangeable  Debentures,  which were originally  issued on June 30,
            2003.

            (iii) Form 8-K filed dated November 14, 2003,  furnished  under Item
            9.  "Regulation  FD" containing our earnings  release dated November
            14, 2003.

            (iv) Form 8-K filed  November  20,  2003,  furnished  under  Item 5.
            "Other  Events"  announcing  that  we  had  satisfied  in  full  our
            obligations  under our $10.5 million 8.5%  Convertible  Exchangeable
            Debentures.

            (v) Form 8-K filed December 3, 2003,  furnished under Item 5. "Other
            Events"  announcing  that  we  had  entered  into  eight  securities
            purchase  agreements  on  December 2, 2003 for the sale of up to 8.0
            million shares of our common stock.

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


                                      109
<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  amendment  to be signed on its behalf by the
undersigned thereunto duly authorized.


DATE:  SEPTEMBER 22, 2004        APPLIED DIGITAL SOLUTIONS, INC. (REGISTRANT)

                                 By: /s/ Evan C. McKeown
                                     ----------------------------------
                                     Evan C. McKeown,
                                     Senior Vice President and
                                     Chief Financial Officer


                                      110
<PAGE>

List Of Exhibits
(Item 15 (c))

EXHIBIT
NUMBER                                DESCRIPTION
------                                -----------

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

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

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

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

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

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

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

      2.8   Agreement  and Plan of  Merger,  dated  July 1,  2000,  by and among
            Applied Digital Solutions, Inc., Web Serve Acquisition Corp., WebNet
            Services, Inc., Steven P. Couture, Jeffery M. Couture and Raymond D.
            Maggi  (incorporated by reference to Exhibit 2.8 to the registrant's
            Annual  Report on Form 10-K/A for the year ended  December 31, 2003,
            filed with the Commission on December 11, 2003)

      2.9   Agreement and Plan of Merger,  dated  November 2, 2003, by and among
            Digital  Angel  Corporation,  DA  Acquisition,  Inc.  and  OuterLink
            Corporation  (incorporated herein by reference to Exhibit 2.9 to the
            registrant's  Registration  Statement on Form s-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

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

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


                                      111
<PAGE>


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

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

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

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

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

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

      4.4   Third Restated  Articles of  Incorporation  of the Registrant  filed
            with the  Secretary  of State  of  Missouri  on  December  20,  2002
            (incorporated  by  reference  to  Exhibit  4.4 to  the  registrant's
            Pre-Effective  Amendment No. 1 to Registration Statement on Form S-1
            (File No. 333-102165) filed with the Commission on February 6, 2003)

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

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

      4.7   Amended and Restated  Bylaws of the Registrant  dated March 31, 1998
            (incorporated  by  reference  to  Exhibit  4.7 to  the  registrant's
            Post-Effective Amendment No. 1 to Registration Statement on Form S-1
            (File No. 333-102165) filed with the Commission on April 11, 2003)

      4.8   Fourth Restated  Articles of  Incorporation  of the Registrant filed
            with  the  Secretary  of  State  of  Missouri  on  August  26,  2003
            (incorporated  by  reference  to  Exhibit  4.5 to  the  registrant's
            Registration  Statement on Form S-1 (File No. 333-108338) filed with
            the Commission on August 28, 2003)

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

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

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


                                      112
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      113
<PAGE>


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

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

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

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

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

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

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

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

      10.28 Forbearance Agreement,  Consent and Amendment,  dated as of April 2,
            2003,  with  respect  to  the  Third  Amended  and  Restated  Credit
            Agreement, dated as of March 1, 2002 and amended as of September 30,
            2002 and  November 1, 2002 (as  amended,  supplemented,  restated or
            otherwise modified through the date hereof, the "Credit Agreement"),
            among IBM Credit LLC, a Delaware limited liability company, formerly
            IBM Credit  Corporation ("IBM Credit"),  Applied Digital  Solutions,
            Inc., a Missouri  corporation  ("ADS" or the "Tranche B  Borrower"),
            Digital Angel Share Trust, a Delaware  statutory  business trust (in
            such  capacity,  the  "Trust";  in its  capacity as a Borrower,  the
            "Tranche A Borrower";  and together with the Tranche B Borrower, the
            "Borrowers") and the other Loan Parties party thereto  (incorporated
            herein  by   reference   to  Exhibit   10.27  to  the   registrant's
            Post-Effective Amendment No. 1 to Registration Statement on Form S-1
            (File No. 333-102165) filed with the Commission on April 11, 2003)

      10.29 Letter Agreement  between Applied Digital  Solutions,  Inc. and R.J.
            Sullivan dated March 24, 2003  (incorporated  herein by reference to
            Exhibit 10.3 to the  registrant's  Current  Report on Form 8-K filed
            with the Commission on March 27, 2003)*

      10.30 Letter Agreement  between Applied Digital  Solutions,  Inc. and J.C.
            Artigliere dated March 24, 2003 (incorporated herein by reference to
            Exhibit 10.29 to the  registrant's  Annual Report on Form 10-K filed
            with the Commission on March 31, 2003)*

      10.31 Placement Agency Agreement by and between Applied Digital Solutions,
            Inc.  and  J.P.  Carey  Securities  Inc.   (incorporated  herein  by
            reference  to  Exhibit  10.31  to  the  registrant's  Post-Effective
            Amendment  No. 2 to  Registration  Statement  on Form S-1  (File No.
            333-102165) filed with the Commission on April 17, 2003)


                                      114
<PAGE>


      10.32 Securities Purchase Agreement among Applied Digital Solutions,  Inc.
            and the  Purchasers,  dated June 30,  2003  (incorporated  herein by
            reference to Exhibit 10.1 to the registrant's Current Report on Form
            8-K filed with the Commission on July 9, 2003)

      10.33 Form of 8.5%  Convertible  Exchangeable  Debentures  Due November 1,
            2005,  between  Applied  Digital  Solutions,  Inc.  and  each of the
            Purchasers  (incorporated herein by reference to Exhibit 10.2 to the
            registrant's Current Report on Form 8-K filed with the Commission on
            July 9, 2003)

      10.34 Stock Purchase Warrant  (incorporated herein by reference to Exhibit
            10.3 to the  registrant's  Current Report on Form 8-K filed with the
            Commission on July 9, 2003)

      10.35 Amend and Restated  Trust  Agreement  dated June 30,  2003,  between
            Wilmington  Trust  Company  and  Applied  Digital  Solutions,   Inc.
            (incorporated   herein  by   reference   to  Exhibit   10.4  to  the
            registrant's Current Report on Form 8-K filed with the Commission on
            July 9, 2003)

      10.36 Security Agreement among Applied Digital Solutions,  Inc.,  Computer
            Equity Corporation and the Secured Parties  (incorporated  herein by
            reference to Exhibit 10.5 to the registrant's Current Report on Form
            8-K filed with the Commission on July 9, 2003)

      10.37 Pledge Agreement made by Applied Digital Solution,  Inc. in favor of
            the investors  (incorporated  herein by reference to Exhibit 10.6 to
            the  registrant's   Current  Report  on  Form  8-K  filed  with  the
            Commission on July 9, 2003)

      10.38 Registration Rights Agreement among Applied Digital Solutions,  Inc.
            and the Purchasers (incorporated herein by reference to Exhibit 10.7
            to the  registrant's  Current  Report  on Form  8-K  filed  with the
            Commission on July 9, 2003)

      10.39 Share Exchange Agreement between Applied Digital Solutions, Inc. and
            Digital Angel Corporation dated August 14, 2003 (incorporated herein
            by  reference  to  Exhibit  10.30 to the  registrant's  Registration
            Statement  on  Form  S-1  (File  No.   333-109512)  filed  with  the
            Commission on October 6, 2003)

      10.40 Securities  Purchase  Agreement  between Applied Digital  Solutions,
            Inc. and First Investors Holding Co., Inc. dated September 19, 2003,
            (incorporated   herein  by   reference   to  Exhibit   10.1  to  the
            registrant's Current Report on Form 8-K filed with the Commission on
            September 22, 2003)

      10.41 Securities  Purchase  Agreement  between Applied Digital  Solutions,
            Inc.  and  Magellan  International  LTD dated  September  19,  2003,
            (incorporated   herein  by   reference   to  Exhibit   10.2  to  the
            registrant's Current Report on Form 8-K filed with the Commission on
            September 22, 2003)

      10.42 Securities  Purchase  Agreement  between Applied Digital  Solutions,
            Inc.  and   Cranshire   Capital,   LP  dated   September  19,  2003,
            (incorporated   herein  by   reference   to  Exhibit   10.3  to  the
            registrant's Current Report on Form 8-K filed with the Commission on
            September 22, 2003)

      10.43 Form of letter agreement between Applied Digital Solutions, Inc. and
            each of the Purchasers  (incorporated herein by reference to Exhibit
            99.1 to the  registrant's  Current Report on Form 8-K filed with the
            Commission on November 14, 2003)

      10.44 Letter Agreement  between Applied Digital  Solutions,  Inc. and G.A.
            Sullivan.  (incorporated herein by reference to Exhibit 10.30 to the
            registrant's  Annual  Report  on  Form  10-K/A  for the  year  ended
            December 31, 2003, filed with the Commission on December 11, 2003)*

      10.45 Amendment to Letter  Agreement  between Applied  Digital  Solutions,
            Inc. and G.A. Sullivan  (incorporated herein by reference to Exhibit
            10.45 to the registrant's  Registration  Statement on Form s-1 (File
            No. 109512) filed with the Commission on February 17, 2004)*

      10.46 International  Distribution  Agreement,  dated March 8, 2003, by and
            between  VeriChip   Corporation  and  the  Company  La  Font,  Ltda.
            (incorporated   herein  by  reference   to  Exhibit   10.46  to  the
            registrant's  Annual  Report  on  Form  10-K/A  for the  year  ended
            December 31, 2003, filed with the Commission on December 11, 2003)


                                      115
<PAGE>


      10.47 International  Distribution  Agreement,  dated March 8, 2003, by and
            between VeriChip Corporation and RussGPS, Ltd.  (incorporated herein
            by reference to Exhibit 10.47 to the  registrant's  Quarterly Report
            on Form 10-Q/A for the period ended March 31,  2003,  filed with the
            Commission on December 11, 2003)

      10.48 Securities  Purchase  Agreement,  dated May 8, 2003,  by and between
            Applied  Digital  Solutions,   Inc.  and  Cranshire  Capital,   L.P.
            (incorporated   herein  by  reference   to  Exhibit   10.48  to  the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.49 Securities  Purchase  Agreement,  dated May 8, 2003,  by and between
            Applied  Digital  Solutions,  Inc. and Magellan  International  Ltd.
            (incorporated   herein  by  reference   to  Exhibit   10.49  to  the
            registrant's  Registration  Statement on Form s-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.50 Securities  Purchase  Agreement,  dated May 22, 2003, by and between
            Applied  Digital  Solution,   Inc.  and  Cranshire   Capital,   L.P.
            (incorporated   herein  by  reference   to  Exhibit   10.50  to  the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.51 Securities  Purchase  Agreement,  dated May 22, 2003, by and between
            Applied  Digital  Solution,  Inc.  and Magellan  International  Ltd.
            (incorporated   herein  by  reference   to  Exhibit   10.51  to  the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.52 Securities  Purchase  Agreement,  dated June 4, 2003, by and between
            Applied  Digital  Solution,   Inc.  and  Cranshire   Capital,   L.P.
            (incorporated   herein  by  reference   to  Exhibit   10.52  to  the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.53 Securities  Purchase  Agreement,  dated June 4, 2003, by and between
            Applied  Digital  Solution,  Inc.  and Magellan  International  Ltd.
            (incorporated   herein  by  reference   to  Exhibit   10.53  to  the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

      10.54 United States Postal Service  Contract,  effective June 16, 2003, by
            and  between   United   States   Postal   Service   and   Government
            Telecommunications,   Inc.  (incorporated  herein  by  reference  to
            Exhibit 10.54 the  registrant's  Registration  Statement on Form S-1
            (File No. 109512) filed with the Commission on February 17, 2004)

      10.55 Blanket Purchase  Agreement by and between United States  Department
            of Agriculture and Government Telecommunications, Inc. (incorporated
            herein by reference to Exhibit 10.55 the  registrant's  Registration
            Statement on Form S-1 (File No. 109512) filed with the Commission on
            February 17, 2004)

      10.56 International  Distribution Agreement,  dated September 10, 2003, by
            and between VeriChip  Corporation and Metro Risk Management LLC, for
            the territory of Brazil (incorporated herein by reference to Exhibit
            10.56 to the  registrant's  Quarterly  Report on Form 10-Q/A for the
            period  ended  September  30,  2003,  filed with the  Commission  on
            December 11, 2003)

      10.57 Master Product Purchase  Agreement,  dated September 5, 2003, by and
            between  VeriChip  Corporation  and Metro Risk  Management,  for the
            territory of the State of New York (incorporated herein by reference
            to Exhibit 10.57 to the registrant's Quarterly Report on Form 10-Q/A
            for the period ended  September 30, 2003,  filed with the Commission
            on December 11, 2003)

      10.58 2003  Flexible  Stock  Plan  (incorporated  herein by  reference  to
            Appendix  E of the  registrant's  Proxy  Statement  filed  with  the
            Commission on June 10, 2003)


                                      116
<PAGE>


      10.59 International  Distribution Agreement,  dated September 25, 2002, by
            and between VeriChip Corporation and Sistemas de Proteccion Integral
            de Mexico, S.A. de C.V. (incorporated herein by reference to Exhibit
            10.32 of the registrant's Annual Report on Form 10K/A filed with the
            Commission on December 11, 2003)

      10.60 International  Distribution  Agreement,  dated September 3, 2003, by
            and between VeriChip  Corporation and Metro Risk Management LLC, for
            the territories including Argentina,  Chile, Paraguay,  Uruguay, and
            Spain  (incorporated  herein by  reference  to Exhibit  10.60 to the
            registrant's  Quarterly  Report on Form 10-Q/A for the period  ended
            September 30, 2003, filed with the Commission on December 11, 2003)

      10.61 International  Distribution Agreement, dated August 20, 2003, by and
            between VeriChip  Corporation and Metro Risk Management LLC, for the
            territory  of Ecuador  (incorporated  herein by reference to Exhibit
            10.61 to the  registrant's  Quarterly  Report on Form 10-Q/A for the
            period  ended  September  30,  2003,  filed with the  Commission  on
            December 11, 2003)

      10.62 International  Distribution  Agreement,  dated March 8, 2003, by and
            between VeriChip Corporation and the Company La Font, Ltda., for the
            territory of Columbia  (incorporated  herein by reference to Exhibit
            10.61 to the registrant's  Registration  Statement on Form S-1 (File
            No. 109512) filed with the Commission on February 17, 2004)

      10.63 International  Distribution Agreement,  dated September 25, 2003, by
            and between  VeriChip  Corporation  and Digital  Applied  Technology
            Associates (incorporated herein by reference to Exhibit 10.63 to the
            registrant's  Registration  Statement on Form S-1 (File No.  109512)
            filed with the Commission on February 17, 2004)

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

      23.1  Consent of Eisner LLP**

      23.2  Consent of PricewaterhouseCoopers LLP**

      31.1  Certification  by  Scott  R.  Silverman,  Chief  Executive  Officer,
            pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)**

      31.2  Certification by Evan C. McKeown, Chief Financial Officer,  pursuant
            to Exchange Act Rules 13A-14(a) and 15d-14(a)**

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

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


-------

       * - Management contract or compensatory plan.

      ** - Filed herewith

                                      117
<PAGE>

                        APPLIED DIGITAL SOLUTIONS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                        AND FINANCIAL STATEMENT SCHEDULE

CONTENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                       PAGE
<S>                                                                                                    <C>
REPORT OF MANAGEMENT ...................................................................................F-2

REPORT OF REGISTERED PUBLIC ACCOUNTING FIRMS............................................................F-3

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002............................................F-5

CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
          DECEMBER 31, 2003.............................................................................F-6

CONSOLIDATED STATEMENTS OF PREFERRED STOCK, COMMON STOCK AND OTHER
          STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD
          ENDED DECEMBER 31, 2003.......................................................................F-7

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
          DECEMBER 31, 2003............................................................................F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................................F-11

   SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS.......................................................F-78
</TABLE>


                                                                        Page F-1

<PAGE>


                              REPORT OF MANAGEMENT

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

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

Eisner LLP, the Company's  independent  auditors,  were recommended by the Audit
Committee  of the Board of  Directors  and  selected by the Board of  Directors.
Eisner LLP communicates the quality, not just the acceptability,  and clarity of
the Company's accounting procedures and their disclosures. Eisner LLP obtains an
understanding  of internal  controls and conducts such tests and other  auditing
procedures considered necessary in the circumstances to express their opinion in
the report that follows.

The Audit Committee of the Company's Board of Directors has reviewed the audited
financials statements with management and the outside auditors and has discussed
with them their judgments of the financial  statements.  The Audit Committee has
met  periodically  with  the  independent  auditors  and the vice  president  of
internal  audit  without  management  present  to  ensure  that the  independent
auditors  and the vice  president  of  internal  audit  have free  access to the
Committee.   The  Audit   Committee  has  also  discussed  the  judgments  among
themselves,  without others present. As a result of these discussions, the Audit
Committee,  in reliance  on review  with  management  and  discussions  with the
outside  auditors,  believes the financial  statements  are fairly  presented in
accordance with generally accepted accounting principles.

SCOTT R. SILVERMAN                             EVAN C. MCKEOWN

Chairman of the Board of Directors and         Senior Vice President and
Chief Executive Officer                        Chief Financial Officer

March 15, 2004


                                                                        Page F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Applied Digital Solutions, Inc.

We have audited the accompanying  consolidated balance sheets of Applied Digital
Solutions,  Inc. and  subsidiaries  (the  "Company") as of December 31, 2003 and
2002, and the related  consolidated  statements of operations,  preferred stock,
common  stock and other  stockholders'  equity and cash flows for the years then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

      We conducted  our audits in  accordance  with the  Standards of the Public
Accounting Oversight Board (United States). 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  audits  provide  a
reasonable basis for our opinion.

      In our opinion, the financial statements  enumerated above present fairly,
in all material respects, the consolidated financial position of Applied Digital
Solutions,  Inc.  and  subsidiaries  as of December  31, 2003 and 2002,  and the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended in conformity  with the Standards of the Public  Accounting
Oversight Board (United States).

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

      As  discussed in Note 31 to the  consolidated  financial  statements,  the
Company  retroactively  restated the financial  statements to reflect a 1-for-10
reverse stock split effectuated on April 5, 2004.

      As  discussed in Note 30 to the  consolidated  financial  statements,  the
Company   retroactively   restated  the  financial   statements  to  reflect  as
discontinued   operations a reporting  unit  previously  included in  continuing
operations and disposed on April 19, 2004.

      In  connection  with our audits of the  financial  statements  referred to
above, we audited the financial  schedules of Valuation and Qualifying  Accounts
for 2003 and 2002. In our opinion, these financial schedules, when considered in
relation to the financial  statements taken as a whole,  present fairly,  in all
material respects, the information stated therein.

Eisner LLP

New York, New York
February 20, 2004

With respect to Note 17
March 1, 2004

With respect to the reverse stock split
April 5, 2004

With respect to the disposition of a reporting unit
April 19, 2004


                                                                        Page F-3
<PAGE>


        REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

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

In our opinion,  the  consolidated  statements of operations,  preferred  stock,
common stock and other  stockholders'  equity  (deficit)  and cash flows for the
year ended  December 31, 2001 listed in the index under Item  15(a)(1),  present
fairly,  in all material  respects,  the results of operations and cash flows of
Applied Digital Solutions, Inc. and its subsidiaries for the year ended December
31, 2001 in conformity  with  accounting  principles  generally  accepted in the
United States of America. In addition,  in our opinion,  the financial statement
schedule  for the year ended  December  31,  2001 listed in the index under Item
15(a)(1),  presents fairly, in all material respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.  These financial statements and financial statement schedule are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial  statements and financial statement schedule based on
our audit.  We conducted our audit of these  statements  in accordance  with the
standards of the Public  Company  Accounting  Oversight  Board (United  States).
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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

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

PricewaterhouseCoopers LLP
St. Louis, Missouri

March 27, 2002, except for the 2001 segment information
included in Note 27, which is as of August 23, 2002,
Note 21, which is as of May 30, 2003, and as to the
reverse stock split which is as of April 5, 2004.


                                                                        Page F-4
<PAGE>

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

<TABLE>
<CAPTION>
                                         ASSETS                                                    DECEMBER 31,
                                                                                              ------------------------
                                                                                                 2003          2002
                                                                                              ---------      ---------
CURRENT ASSETS
<S>                                                                                           <C>            <C>
   Cash and cash equivalents                                                                  $  10,161      $   5,809
   Restricted cash                                                                                  765             --
   Accounts receivable and unbilled receivables (net of allowance
      for doubtful accounts of $1,028 in 2003 and $1,158 in 2002)                                14,078         16,058
    Inventories                                                                                   9,444          6,352
    Notes receivable                                                                              1,658          2,801
    Other current assets                                                                          2,760          2,866
-----------------------------------------------------------------------------------------     ---------      ---------
TOTAL CURRENT ASSETS                                                                             38,866         33,886

PROPERTY AND EQUIPMENT, NET                                                                       8,228          8,432

NOTES RECEIVABLE, NET                                                                               504            758

GOODWILL, NET                                                                                    63,331         65,451

OTHER ASSETS, NET                                                                                 1,002          2,629
-----------------------------------------------------------------------------------------     ---------      ---------

                                                                                              $ 111,931      $ 111,156
=========================================================================================     =========      =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
    Notes payable and current maturities of long-term debt                                    $   5,226      $  81,829
    Accounts payable                                                                             13,639          9,520
    Accrued interest                                                                                 --         10,149
    Other accrued expenses                                                                       22,517         17,106
    Put accrual                                                                                     200            200
    Net liabilities of Discontinued Operations                                                    8,294          6,531
-----------------------------------------------------------------------------------------     ---------      ---------
TOTAL CURRENT LIABILITIES                                                                        49,876        125,335

LONG-TERM DEBT AND NOTES PAYABLE                                                                  2,860          2,436
OTHER LONG-TERM LIABILITIES                                                                       3,430          1,055
-----------------------------------------------------------------------------------------     ---------      ---------

TOTAL LIABILITIES                                                                                56,166        128,826
-----------------------------------------------------------------------------------------     ---------      ---------
COMMITMENTS AND CONTINGENCIES
-----------------------------------------------------------------------------------------     ---------      ---------
MINORITY INTEREST                                                                                23,029         18,422
-----------------------------------------------------------------------------------------     ---------      ---------
PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)
    Preferred shares: Authorized 5,000 shares in 2003 and 2002 of $10 par value;
      special voting, no shares issued or outstanding in 2003 and 2002, Class B voting,
      no shares issued or outstanding in 2003 and 2002                                               --             --
    Common shares: Authorized 560,000 shares in 2003 and 435,000 shares in 2002 of
      $.01 par value; 41,220 shares issued and 41,126 shares outstanding in 2003 and                412            285
      28,507 shares issued and 28,413 shares outstanding in 2002
    Additional paid-in-capital                                                                  443,099        377,621
    Accumulated deficit                                                                        (413,923)      (417,066)
    Common stock warrants                                                                         5,650          5,650
    Treasury stock (carried at cost, 94 shares in 2003 and 2002)                                 (1,777)        (1,777)
    Accumulated other comprehensive income                                                          206             31
    Notes received for shares issued                                                               (931)          (836)
-----------------------------------------------------------------------------------------     ---------      ---------
TOTAL PREFERRED STOCK, COMMON STOCK, AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)                    32,736        (36,092)
-----------------------------------------------------------------------------------------     ---------      ---------
                                                                                              $ 111,931      $ 111,156
=========================================================================================     =========      =========
</TABLE>

            See the accompanying notes to consolidated financial statements.

                                                                        Page F-5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                                          ---------------------------------------
                                                                            2003           2002            2001
                                                                          ---------      ---------      ---------
<S>                                                                       <C>            <C>            <C>
PRODUCT REVENUE                                                           $  77,774      $  80,390      $ 113,147
SERVICE REVENUE                                                              15,213         18,095         43,340
------------------------------------------------------------------------- ---------      ---------      ---------
TOTAL REVENUE                                                                92,987         98,485        156,487
COST OF PRODUCTS SOLD                                                        59,538         58,969         87,508
COST OF SERVICES SOLD                                                         5,354          8,500         23,169
------------------------------------------------------------------------- ---------      ---------      ---------
GROSS PROFIT                                                                 28,095         31,016         45,810
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE                                  55,880         65,681        102,316
RESEARCH AND DEVELOPMENT EXPENSE                                              6,255          4,130          8,783
GAIN ON EXTINGUISHMENT OF DEBT                                              (70,064)            --         (9,465)
ASSET IMPAIRMENT                                                              2,456         38,657         71,719
DEPRECIATION AND AMORTIZATION                                                 1,262          3,520         28,061
 (GAIN) LOSS ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS                       330           (132)         6,058
INTEREST AND OTHER INCOME                                                      (919)        (2,340)        (2,076)
NTEREST EXPENSE                                                              22,587         17,477          8,555
------------------------------------------------------------------------- ---------      ---------      ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
  INCOME TAXES, MINORITY INTEREST, LOSSES ATTRIBUTABLE TO CAPITAL
  TRANSACTIONS OF SUBSIDIARY AND EQUITY IN NET LOSS OF AFFILIATE             10,308        (95,977)      (168,141)
PROVISION FOR INCOME TAXES                                                    1,702            326         20,870
------------------------------------------------------------------------- ---------      ---------      ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
   INTEREST, LOSSES ATTRIBUTABLE TO CAPITAL TRANSACTIONS
   OF SUBSIDIARY AND AND EQUITY IN NET LOSS OF AFFILIATE                      8,606        (96,303)      (189,011)
MINORITY INTEREST                                                            (4,132)       (11,579)          (718)
 NET LOSS ON CAPITAL TRANSACTIONS OF SUBSIDIARY                                 244          2,437             --
 LOSS ATTRIBUTABLE TO CHANGES IN MINORITY INTEREST AS A
  RESULT OF CAPITAL TRANSACTIONS OF SUBSIDIARY                                6,535          2,048             --
EQUITY IN NET LOSS OF AFFILIATE                                                  --            291            328
------------------------------------------------------------------------- ---------      ---------      ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS                                      5,959        (89,500)      (188,621)
INCOME FROM DISCONTINUED OPERATIONS,
   NET OF INCOME TAXES OF $0 IN 2001                                         (2,434)       (24,405)           213
CHANGE IN ESTIMATE ON LOSS ON DISPOSAL AND OPERATING
  LOSSES DURING THE PHASE OUT PERIOD                                           (382)         1,420        (16,695)
------------------------------------------------------------------------- ---------      ---------      ---------
NET INCOME (LOSS)                                                             3,143       (112,485)      (205,103)
PREFERRED STOCK DIVIDENDS AND OTHER                                              --             --          1,147
ACCRETION OF BENEFICIAL CONVERSION FEATURE OF
    REDEEMABLE PREFERRED STOCK - SERIES C                                        --             --          9,392
------------------------------------------------------------------------- ---------      ---------      ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS                        $   3,143      $(112,485)     $(215,642)
========================================================================= =========      =========      =========

EARNINGS (LOSS) PER COMMON SHARE - BASIC
    INCOME (LOSS) FROM CONTINUING OPERATIONS                              $    0.17      $   (3.33)     $  (11.71)
    (LOSS) INCOME FROM DISCONTINUED OPERATIONS                                (0.08)         (0.85)         (0.97)
------------------------------------------------------------------------- ---------      ---------      ---------
NET INCOME (LOSS) PER COMMON SHARE - BASIC                                $    0.09      $   (4.18)     $  (12.68)
========================================================================= =========      =========      =========

EARNINGS (LOSS) PER COMMON SHARE - DILUTED
    INCOME (LOSS) FROM CONTINUING OPERATIONS                              $    0.16      $   (3.33)     $  (11.71)
    (LOSS) INCOME FROM DISCONTINUED OPERATIONS                                (0.08)         (0.85)         (0.97)
------------------------------------------------------------------------- ---------      ---------      ---------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED                              $    0.08      $   (4.18)     $  (12.68)
========================================================================= =========      =========      =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC                 36,178         26,923         17,001
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED               37,299         26,923         17,001
========================================================================= =========      =========      =========
</TABLE>

        See the accompanying notes to consolidated financial statements.


                                                                        Page F-6
<PAGE>


                APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF PREFERRED STOCK
              COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               PREFERRED STOCK                  COMMON STOCK          ADDITIONAL
                                          -------------------------     -------------------------       PAID-IN-      ACCUMULATED
                                            NUMBER         AMOUNT         NUMBER         AMOUNT         CAPITAL         DEFICIT
                                          ----------     ----------     ----------     ----------     ----------      ----------
<S>                                       <C>            <C>            <C>            <C>            <C>             <C>
   BALANCE - DECEMBER 31, 2000                    --     $       --         10,306     $      103     $  266,573      $  (99,478)
   Net loss                                       --             --             --             --             --        (205,103)
   Comprehensive loss -
      Foreign currency translation                --             --             --             --             --              --
                                                                                                                      ----------
   Total comprehensive loss                       --             --             --             --             --        (205,103)
   Conversion of redeemable preferred
      shares to common shares                     --             --          6,481             65         14,485              --
   Accretion of beneficial conversion
      feature of redeemable preferred
      shares                                      --             --             --             --         (9,392)             --
   Dividends accrued on redeemable
      preferred stock                             --             --             --             --           (535)             --
   Beneficial conversion feature of
      redeemable preferred stock                  --             --             --             --          9,392              --
   Penalty paid by issuance of
      redeemable preferred stock                  --             --             --             --           (612)             --
   Stock option re-pricing                        --             --             --             --          5,274              --
   Stock option discounts                         --             --             --             --            246              --
   Issuance of warrants                           --             --             --             --            115              --
   Issuance of common shares                      --             --            763              8          1,980              --
   Issuance of common shares for
      software license purchase                   --             --            628              6         10,195              --
   Issuance of common shares for
      investment                                  --             --            332              3          8,070              --
   Issuance of common shares under
      earnout, put and price
      protection provisions of
      acquisition agreements                      --             --          6,181             61         27,030              --
   Common shares repurchased                      --             --             --             --             --              --
   Notes received for shares issued               --             --            554              6          9,368              --
   Note received for shares issued
     charged to bad debt expense                  --             --             --             --             --              --
                                          ----------     ----------     ----------     ----------     ----------      ----------

BALANCE - DECEMBER 31, 2001                       --     $       --         25,245     $      252     $  342,189      $ (304,581)
                                          ==========     ==========     ==========     ==========     ==========      ==========
</TABLE>

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

BALANCE - DECEMBER 31, 2001                 $    3,293     $   (1,777)     $     (747)     $  (10,510)     $   28,119
                                            ==========     ==========      ==========      ==========      ==========
</TABLE>

                                                                        Page F-7

<PAGE>

                APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF PREFERRED STOCK
              COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                   PREFERRED STOCK                  COMMON STOCK         ADDITIONAL
                                              -------------------------     -------------------------      PAID-IN-     ACCUMULATED
                                                NUMBER         AMOUNT         NUMBER         AMOUNT        CAPITAL        DEFICIT
                                              ----------     ----------     ----------     ----------    ----------     ----------
<S>                                           <C>            <C>            <C>            <C>            <C>           <C>
BALANCE - DECEMBER 31, 2001
   (BROUGHT FORWARD)                                 --      $      --        25,245      $     252      $ 342,189      $(304,581)
   Net loss                                          --             --            --             --             --       (112,485)
   Comprehensive loss -
      Foreign currency translation                   --             --            --             --             --             --
                                                                                                                        ----------
   Total comprehensive loss                          --             --            --             --             --       (112,485)
   Expiration of redeemable preferred
      stock option - Series C                        --             --            --             --          5,180             --
  Adjustment for notes received for
      shares issued                                                                                         (4,424)
   Allowance for uncollectible portion
      of notes received for shares issued            --             --            --             --             --             --
   Collection of notes received
      for shares issued                              --             --            --             --             --             --
   Treasury stock transaction                        --             --            --             --          1,878             --
   Retirement of treasury stock                      --             --           (98)            (1)        (1,878)            --
   Shares issuable for settlement of                 --             --            --             --             63             --
   liability
   Obligation for shares issuable in
      settlement of liability                        --             --            --             --            (63)            --
   Stock option re-pricing                           --             --            --             --            254             --
  Stock options - Digital Angel                      --             --            --             --         18,800             --
   Corporation
   Stock options - VeriChip Corporation                                                                        200             --
   Issuance of warrants                              --             --            --             --             --             --
   Issuance of warrants - Digital
     Angel Corporation                               --             --            --             --            163             --
   Issuance of warrants - VeriChip                   --             --            --             --
     Corporation                                     --             --            --             --             44             --
   Remeasurement of warrants-

      Digital Angel Corporation                      --             --            --             --          1,066             --
   Issuance of common shares for exercise
   of stock options                                  --             --           746              8          1,169             --
   Issuance of common shares and options
      for services, compensation and other           --             --         2,614             26         12,979             --
                                              ---------      ---------     ---------      ---------      ---------      ---------
BALANCE - DECEMBER 31, 2002                          --      $      --        28,507      $     285      $ 377,621      $(417,066)
                                              =========      =========     =========      =========      =========      =========
</TABLE>

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

      Digital Angel Corporation                         --             --             --             --            1,066
   Issuance of common shares for exercise
   of stock options                                     --             --             --             --            1,177
   Issuance of common shares and options
      for services, compensation and other              --             --             --             --           13,005
                                                 ---------      ---------      ---------      ---------        ---------
BALANCE - DECEMBER 31, 2002                      $   5,650      $  (1,777)     $      31      $    (836)       $ (36,092)
                                                 =========      =========      =========      =========        =========
</TABLE>

                                                                        Page F-8

<PAGE>

                APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF PREFERRED STOCK
              COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                    PREFERRED STOCK                COMMON STOCK         ADDITIONAL
                                               -----------------------     -------------------------      PAID-IN-      ACCUMULATED'
                                                 NUMBER       AMOUNT         NUMBER         AMOUNT        CAPITAL         DEFICIT
                                               ----------   ----------     ----------     ----------    ----------      ------------
<S>                                            <C>            <C>            <C>            <C>           <C>           <C>
BALANCE - DECEMBER 31, 2002
   (BROUGHT FORWARD)                                 --     $       --         28,507     $      285    $  377,621      $ (417,066)
   Net income                                        --             --             --             --            --           3,143
   Comprehensive income
      Foreign currency translation                   --                            --             --            --              --
                                                                                                                        ----------
   Total comprehensive income                        --             --             --             --            --           3,143
   Adjustment to allowance for uncollectible
     portion of notes received for shares            --             --             --             --            --              --
     issued
   Stock option re-pricing                           --             --             --             --        (1,340)             --
   Stock options - VeriChip Corporation                                                                        188              --
   Issuance of warrants - Digital
     Angel Corporation                               --             --             --             --         1,055              --
   Issuance of common shares                         --             --          9,645             96        28,803              --
   Liability to be settled in common                 --             --             --             --        17,966              --
    stock
   Issuance of common shares under earnout
     provision of acquisition agreement              --             --             96              1           407              --
   Issuance of common shares to settle
     convertible debt                                --             --          2,770             28         9,711              --
   Beneficial conversion feature of
     convertible, exchangeable debentures            --             --             --             --         7,652              --
   Issuance of common shares and options
      for services, compensation and other           --             --            202              2         1,036              --
                                               --------     ----------     ----------     ----------    ----------      ----------

BALANCE - DECEMBER 31, 2003                          --     $       --         41,220     $      412    $  443,099      $ (413,923)
                                               ========     ==========     ==========     ==========    ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                ACCUMULATED
                                                   COMMON                          OTHER           NOTES           TOTAL
                                                    STOCK         TREASURY      COMPREHENSIVE   RECEIVED FOR    STOCKHOLDERS'
                                                   WARRANTS         STOCK      (LOSS) INCOME   SHARES ISSUED  EQUITY (DEFICIT)
                                                  ----------     ----------    -------------   -------------  ---------------
<S>                                               <C>            <C>           <C>             <C>            <C>
BALANCE - DECEMBER 31, 2002
   (BROUGHT FORWARD)                              $    5,650     $   (1,777)     $       31     $     (836)     $  (36,092)
   Net income                                             --             --              --             --           3,143
   Comprehensive income
      Foreign currency translation                        --             --             175             --             175
                                                                                 ----------                     ----------
   Total comprehensive income                             --             --             175             --           3,318
   Adjustment to allowance for uncollectible
     portion of notes received for shares                 --             --              --            (95)            (95)
     issued
   Stock option re-pricing                                --             --              --             --          (1,340)
   Stock options - VeriChip Corporation                  --              --              --             --             188
   Issuance of warrants - Digital
     Angel Corporation                                    --             --              --             --           1,055
   Issuance of common shares                              --             --              --             --          28,899
   Liability to be settled in common                      --             --              --             --          17,966
    stock
   Issuance of common shares under earnout
     provision of acquisition agreement                   --             --              --             --             408
   Issuance of common shares to settle
     convertible debt                                     --             --              --             --           9,739
   Beneficial conversion feature of
     convertible, exchangeable debentures                 --             --              --             --           7,652
   Issuance of common shares and options
      for services, compensation and other                --             --              --             --           1,038
                                                  ----------     ----------      ----------     ----------      ----------

BALANCE - DECEMBER 31, 2003                       $    5,650     $   (1,777)     $      206     $     (931)     $   32,736
                                                  ==========     ==========      ==========     ==========      ==========
</TABLE>

See the accompanying notes to consolidated financial statements.


                                                                        Page F-9
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                                             ---------------------------------------
                                                                               2003            2002           2001
                                                                             ---------      ---------      ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                          <C>            <C>            <C>
    Net income (loss)                                                        $   3,143      $(112,485)     $(205,103)
    Adjustments to reconcile net income (loss)
       to net cash used in operating activities:
         Asset impairment                                                        2,456         38,657         71,719
         Loss (income) from discontinued operations                              2,816         22,985         16,482
         Depreciation and amortization                                           1,891          4,364         28,899
         Stock-based interest expense                                           13,178          5,760             --
         Deferred income taxes                                                   1,236            (69)        21,435
         (Recovery) impairment of notes receivable                                  (5)         4,472         21,873
         Interest income on notes received for shares issued                        --           (475)            --
      Net loss on capital transactions of subsidiary                               244          2,437             --
         Loss attributable to changes in minority interest as a result
      of capital transactions of subsidiary                                      6,535          2,048             --
         Non-cash gain from extinguishment of debt                             (70,064)            --         (9,465)
         Minority interest                                                      (4,132)       (11,579)          (718)
         Loss (gain) on sale of subsidiaries and business assets                   330           (132)         6,058
         Loss (gain) on sale of equipment and assets                                15           (406)            --
         Stock-based compensation and administrative expenses                   16,835         20,143          5,274
         Equity in net loss of affiliate                                            --            291            328
         Issuance of stock for services                                            262          2,958             --
      Increase in restricted cash                                                 (765)            --             --
         Net change in operating assets and liabilities                         14,848         17,225         28,365
         Net cash (used in) provided by discontinued operations                   (224)          (108)        (3,127)
------------------------------------------------------------------------     ---------      ---------      ---------
NET CASH USED IN OPERATING ACTIVITIES                                          (11,401)        (3,914)       (17,980)
------------------------------------------------------------------------     ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES
    Decrease in notes receivable                                                 1,795          3,155          1,299
    Received from buyers of divested subsidiaries                                   --          2,625             --
    Proceeds from sale of property and equipment                                    15          3,535          1,347
    Proceeds from sale of subsidiaries and business assets                          --          1,382          1,673
    Payments for property and equipment                                         (1,409)        (1,858)        (2,757)
    Payment for asset and business acquisition (net of cash balances
    acquired)                                                                       --           (261)            --
    Decrease in other assets                                                        46            210            944
    Net cash (used in) provided by discontinued operations                         200           (714)           208
------------------------------------------------------------------------     ---------      ---------      ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                          647          8,074          2,714
------------------------------------------------------------------------     ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net amounts (paid) borrowed on notes payable                               (26,987)        (4,648)        13,981
    Proceeds on long-term debt                                                  12,035            377            553
    Payments for long-term debt                                                   (736)        (1,422)        (2,485)
    Other financing costs                                                         (587)          (798)          (375)
    Issuance of common shares and warrants                                      29,858          1,695            678
    Collection of notes receivable for shares issued                                --          1,156             --
    Proceeds from subsidiary issuance of common stock                            2,404            630            126
    Stock issuance costs                                                          (959)          (518)          (798)
    Net cash used in discontinued operations                                       (50)           703           (757)
------------------------------------------------------------------------     ---------      ---------      ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                             14,978         (2,825)        10,923
------------------------------------------------------------------------     ---------      ---------      ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             4,224          1,335         (4,343)

EFFECT OF EXCHANGE RATES CHANGES ON CASH
  AND CASH EQUIVALENTS                                                             128            778             --
------------------------------------------------------------------------     ---------      ---------      ---------
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                    5,809          3,696          8,039
------------------------------------------------------------------------     ---------      ---------      ---------

CASH AND CASH EQUIVALENTS - END OF YEAR                                      $  10,161      $   5,809      $   3,696
========================================================================     =========      =========      =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Income taxes paid (refunds received)                                     $   1,027      $    (971)     $  (2,227)
    Interest paid                                                                2,346          3,778          4,071
------------------------------------------------------------------------     ---------      ---------      ---------
</TABLE>

           See the accompanying notes to consolidated financial statements.

                                                                       Page F-10
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (IN THOUSANDS)

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Applied Digital Solutions,  Inc., a Missouri corporation,  and subsidiaries (the
"Company") is an advanced  technology  development  company.  As of December 31,
2003,  the Company's  business  operations  consisted of the  operations of five
wholly-owned  subsidiaries,  which are collectively  referred to as the Advanced
Technology  segment,   and  two  majority-owned   subsidiaries,   Digital  Angel
Corporation  (AMEX:DOC),  and InfoTech USA, Inc.  (OTC:IFTH)  (formerly  SysComm
International  Corporation).   As  of  December  31,  2003,  the  Company  owned
approximately 66.9% of Digital Angel Corporation and 52.5% of InfoTech USA, Inc.

Sale of Medical Systems' Assets

Medical Systems represented the business operations of Medical Advisory Systems,
Inc.,  referred to as MAS, which was acquired on March 27, 2002. The acquisition
of MAS is more fully  described in Note 3. Digital  Angel  Corporation  sold the
business  assets of  Medical  Systems  during the  second  quarter of 2004,  and
accordingly,  its financial condition,  results of operations and cash flows are
now included as part of the Company's Discontinued Operations, and prior periods
have been restated. See Notes 20 and 30.

Reverse Stock Split

On  September  10, 2003,  the  Company's  shareholders  approved the granting of
discretionary  authority to the Board of Directors for a period of twelve months
to  effect a  reverse  stock  split  not to  exceed a ratio of  1-for-25,  or to
determine  not to proceed  with a reverse  stock split.  On March 12, 2004,  the
Board of  Directors  authorized  a  1-for-10  reverse  stock  split,  which  was
effectuated  on April 5, 2004. As a result of the reverse  stock split,  the par
value of the Company's common stock increased from $0.001 to $0.01 per share. In
conjunction  with the reverse  stock  split,  the  Company's  Board of Directors
authorized  a  reduction  in the number of  authorized  shares of the  Company's
common stock from 560.0 million to 125.0 million. All share information provided
in the Consolidated  Financial  Statements and the  accompanying  Notes has been
adjusted to reflect the reverse stock split.

The reduced  settlement  payment of the Company's debt obligations to IBM Credit
LLC ("IBM  Credit"),  the  conversion  to equity  of its  obligations  under the
Debentures,  and the sale of  3.0million  shares of the  Company's  common stock
under its 3.0  million  share  offering,  have  been  major  factors  mitigating
concerns  that  existed  about the  Company's  ability  to  continue  as a going
concern.  The  Company's  profitability  and  liquidity  depend on many  factors
including the success of its marketing  programs,  the maintenance and reduction
of expenses and its ability to successfully  develop and bring to market its new
products  and  technologies.  The  Company has  established  a  management  plan
intending to guide it in achieving  profitability  and positive  cash flows over
the next twelve months;  however,  no assurance can be given that such plan will
be realized. The major components of the plan are discussed in Note 2.

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


                                                                       Page F-11
<PAGE>


      o     Digital  AngelTM,  a device used for monitoring and tracking  people
            and objects;

      o     Thermo LifeTM, a thermoelectric generator;

      o     VeriChipTM,   a  human  implantable  radio  frequency   verification
            microchip  that  can  be  used  for  security,  financial,  personal
            identification/safety and other applications;

      o     Bio-ThermoTM, a temperature-sensing implantable microchip for use in
            pets, livestock and other animals; and

      o     Personal Locating Device ("PLD"),  an implantable global positioning
            system ("GPS") location device.

BUSINESS SEGMENTS

As a result of the merger of pre-merger Digital Angel and MAS on March 27, 2002,
(which is more fully described in Note 3), the significant  restructuring of the
Company's  business  during 2002 and 2001,  and the  Company's  emergence  as an
advanced technology  development company, the Company re-evaluated and realigned
its reporting segments. Effective as of January 1, 2002, the Company operates in
three business  segments:  Advanced  Technology,  Digital Angel  Corporation and
InfoTech USA,  Inc.  Prior to January 1, 2002,  the Company was  organized  into
three  segments:  Applications,  Services  and Advanced  Wireless.  Prior period
information has been restated to present the Company's  reportable segments on a
comparative basis.

ADVANCED TECHNOLOGY SEGMENT

The  business  units  comprising  the  Company's  Advanced   Technology  segment
represent  those  business  units that the  Company  believes  will  provide the
necessary synergies,  support and infrastructure to allow it to develop, promote
and fully integrate its advanced technology products and services.  Its customer
base includes governmental agencies, commercial operations, and consumers. As of
December 31, 2003, 2002 and 2001, revenues from this segment were $44.6 million,
$41.9 million and $44.6 million,  respectively,  and accounted for 48.0%,  42.6%
and 28.5%, respectively, of the Company's total revenues. The principal products
and services in this segment are as follows:

      o     Voice, data and video telecommunications networks;

      o     Call center and customer relationship management software;

      o     Networking products and services (in 2002 and 2001);

      o     Website design and Internet access;

      o     Miniaturized implantable verification chip (VeriChipTM);

      o     Miniaturized power generator (Thermo Life TM); and

      o     Implantable GPS device (PLD).

Approximately  $37.1  million,  or 83.2%,  $31.3  million,  or 74.7%,  and $27.4
million, or 61.5%, of the Company's Advanced  Technology  segment's revenues for
2003,  2002  and  2001,   respectively,   were  generated  by  its  wholly-owned
subsidiary,  Computer  Equity  Corporation.  Computer  Equity  Corporation  is a
telecommunications  network  integrator and a supplier to the federal government
of telephone systems,  data networks,  video, cable and wire  infrastructure and
wireless telecommunications products and services. No other products or services
provided more than 10.0% of the revenues for this segment  during 2003 and 2002.
Networking  products and services  provided  approximately  11.0%,  and customer
relationship  management  software provided  approximately 11.3% of the revenues
for this segment during 2001. No other  products or services  provided more than
10% of revenues  during  2001.  As of December  31, 2003,  2002,  and 2001,  the
Company has reported  revenue of $0.5  million,  $0.0 million and $0.0  million,
respectively, from the sale of its VeriChip product and no revenue from the sale
of its Thermo  Life and PLD  products.  During the fourth  quarter of 2003,  the
Company began  sending  samples of Thermo Life to potential  customers.  If, and
when,  an  order is  received,  the  manufacturing  will be  original  equipment
manufacturing. PLD is currently in the development stage.


                                                                       Page F-12
<PAGE>


DIGITAL ANGEL CORPORATION SEGMENT

The  Company's  Digital  Angel  Corporation  segment  consists  of the  business
operations of Digital Angel  Corporation  (AMEX:DOC).  Digital Angel Corporation
develops and deploys sensor and  communications  technologies  that enable rapid
and accurate  identification,  location  tracking,  and condition  monitoring of
animals  and   high-value   mobile  assets.   Applications   for  Digital  Angel
Corporation's  products include the  identification and monitoring of pets, fish
and livestock  through its patented visual  identification  tags and implantable
microchips, location tracking and message monitoring of vehicles and aircraft in
remote locations through systems that integrate GPS and geosynchronous satellite
communications,  and  monitoring of asset  conditions  such as  temperature  and
movement, through advanced miniature sensors.

Before March 27, 2002, the business of Digital Angel Corporation was operated in
four segments: Animal Tracking, Digital Angel Technology, Digital Angel Delivery
System, and Radio Communications and Other. With the acquisition of MAS on March
27,  2002,  Digital  Angel  Corporation  re-organized  into the  following  four
segments:   Animal  Applications   (formerly  Animal  Tracking),   Wireless  and
Monitoring (a combination of the former Digital Angel Technology and the Digital
Angel Delivery System segments),  GPS and Radio  Communications  (formerly Radio
Communications and Other),  and Medical Systems (formerly  Physician Call Center
and Other).  With the acquisition on January 22, 2004 of OuterLink  Corporation,
referred to as  OuterLink,  Digital  Angel  Corporation  further  realigned  its
segments and effective  January 1, 2004, it began  operating in three  segments:
Animal  Applications,  GPS and Radio Communications and Medical Systems. The new
GPS  and  Radio   Communications   segment   consists   of  the  GPS  and  Radio
Communications, Wireless and Monitoring and OuterLink divisions. The acquisition
of OuterLink is more fully  described in Note 30. The Company  refers to Digital
Angel  Corporation's  operations in terms of its divisions:  Animal Application,
GPS and Radio  Communications,  Wireless and  Monitoring,  OuterLink and Medical
Systems.  The business assets  associated  with the Medical Systems  operations,
which  represented  the  business  activity of MAS,  were sold during the second
quarter of 2004, and accordingly, the financial condition, results of operations
and cash flows of Medical  Systems have been  restated and are now  presented as
part of Discontinued Operations. See Note 20.

The Animal  Applications  division develops,  manufactures,  and markets a broad
line of electronic and visual  identification  devices for the companion animal,
livestock, laboratory animal, fish and wildlife markets worldwide. The principal
technologies  employed by the Animal  Applications  division are  electronic ear
tags and  implantable  microchips  that use radio  frequency  transmission.  The
Animal Applications  division's pet identification system involves the insertion
of a microchip with  identifying  information  in the animal.  Readers at animal
shelters,  veterinary  clinics and other  locations  can  determine the animal's
owner and other information.  This pet identification  system is marketed in the
United  States by  Schering-Plough  Pharmaceutical  under the brand  name  "Home
Again(TM),"  in  Europe  by  Merial  Pharmaceutical,  and in Japan by  Dainippon
Pharmaceutical.  Digital Angel  Corporation has  distribution  agreements with a
variety of other companies outside the United States to market its products.  It
has an established  infrastructure with readers placed in approximately  seventy
thousand  global  animal  shelters  and  veterinary  clinics.  Over 2.0  million
companion  animals in the United States have been enrolled in the database,  and
more than five  thousand pet  recoveries  occur in the United States each month.
Digital Angel Corporation's Bio-Thermo TM product is included in this division.

The Wireless and Monitoring division develops and markets advanced technology to
gather  location  and  local  sensory  data and to  communicate  that data to an
operations  center.  This  technology,  which  is  referred  to as the  "Digital
Angel(TM)  technology," is the integration and  miniaturization  into marketable
products of three  technologies:  wireless  communications  (such as  cellular),
sensors (including  bio-sensors) and position location technology (GPS and other
systems).  The Digital  AngelTM  technology  continues to be in the  development
stage,  and the Company is uncertain when this  technology  will be incorporated
into its products.  The first Digital AngelTM  technology  product, a bio-sensor
chip linked to GPS in a watch/pager  device,  was marketed from November 2001 to
the fourth quarter of 2002.  This  technology has not generated any  significant
revenue through December 31, 2003.


                                                                       Page F-13
<PAGE>


The GPS and Radio  Communications  division consists of the design,  manufacture
and support of secure GPS enabled  search and rescue  equipment and  intelligent
communications  products  and  services  for  telemetry,  mobile  data and radio
communications   applications   serving  commercial  and  military  markets.  In
addition, this division designs, manufactures and distributes intrinsically safe
sounders (horn alarms) for industrial use and other electronic components.

Sales of the Animal Applications  division's products were $23.9 million,  $21.0
million and $22.2 million,  respectively, and represented 70.6%, 64.7% and 60.3%
of the total revenue from this segment during 2003, 2002 and 2001, respectively.
Sales  of the  GPS and  Radio  Communications  division's  products  were  $10.4
million, $10.0 million and $11.1 million,  respectively,  and represented 30.5%,
30.9%  and  30.2%  of  this  segment's  revenue  during  2003,  2002  and  2001,
respectively.

INFOTECH USA, INC., SEGMENT (FORMERLY THE SEGMENT TITLED SYSCOMM INTERNATIONAL)

The  InfoTech  USA,  Inc.  segment  consists of the business  operations  of our
majority-owned  subsidiary,  InfoTech  USA,  Inc. This segment is a full service
provider of Information Technology,  or IT, products and services. In 2003, this
segment  continued  its  strategy of moving away from a  product-driven  systems
integration  business model to a  customer-oriented  IT strategy-based  business
model.  It has further  developed  its  deliverable  IT products and services by
adding new  consulting  and  service  offerings,  and  increasing  the number of
strategic  alliances with outside  technical  service firms and manufacturers of
high-end IT products.

As of December 31, 2003, 2002 and 2001, revenues from this segment accounted for
15.5%,  23.1% and 21.9%,  respectively,  of the Company's  total  revenues.  The
principal  products  and services in this  segment  were  computer  hardware and
computer  services.  The majority of InfoTech USA,  Inc.'s  revenue during 2003,
2002 and 2001 was  derived  from  sales of  computer  hardware,  which  provided
approximately  80.3%,  88.3% and 89.2% of InfoTech USA,  Inc.'s revenue in 2003,
2002 and 2001,  respectively.  InfoTech's  USA,  Inc.'s  services  consist of IT
consulting,  installation,  project management, design and deployment,  computer
maintenance and other  professional  services.  No single service  accounted for
more than 10% of InfoTech's total revenue during 2003, 2002 and 2001.

ALL OTHER

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

The  "Corporate/Eliminations"  category  includes  all amounts  recognized  upon
consolidation  of  the  Company's   subsidiaries  such  as  the  elimination  of
intersegment      revenues,      expenses,      assets     and      liabilities.
"Corporate/Eliminations"  also  includes  certain  interest  expense  and  other
expenses  associated  with  corporate  activities  and  functions.  Included  in
"Corporate/Eliminations"  for the year ended December 31, 2003, is a gain on the
extinguishment of debt obligations to IBM Credit of approximately $70.1 million,
$4.3 million of bonuses  awarded to  directors,  officers and  employees for the
successful repayment of all obligations to IBM Credit, and a severance charge of
approximately  $17.9 million  associated  with the termination of certain former
officers and directors.  Included in "Corporate/Eliminations" for the year ended
December  31,  2002,  is a non-cash,  stock-based  compensation  charge of $18.7
million associated with pre-merger  Digital Angel options,  which were converted
into  options  to  acquire  shares  of MAS in  connection  with  the  merger  of
pre-merger Digital Angel and MAS on March 27, 2002.

On March 1, 2001,  the Company's  Board of Directors  approved a plan to sell or
close Intellesale,  Inc. and all of the Company's other non-core businesses. The
results of  operations,  financial  condition  and cash flows now reflect  these
operations as  "Discontinued  Operations." As of December 31, 2003, all of these
businesses have been sold or closed.


                                                                       Page F-14
<PAGE>


Certain items in the  Consolidated  Financial  Statements  for the 2002 and 2001
periods have been reclassified for comparative purposes.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The  financial   statements   include  the  accounts  of  the  Company  and  its
wholly-owned and majority-owned  subsidiaries.  The minority interest represents
outstanding  voting  stock of the  subsidiaries  not owned by the  Company.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

The Company's majority-owned subsidiary, InfoTech USA, Inc. operates on a fiscal
year ending  September 30.  InfoTech USA, Inc.'s results of operations have been
reflected in the Company's  consolidated financial statements on a calendar year
basis.

USE OF ESTIMATES

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

FOREIGN CURRENCIES

As of December 31, 2003, the Company had one foreign  subsidiary  located in the
United  Kingdom.  This  subsidiary  uses its local  currency  as its  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 (loss) in the statement of
preferred stock, common stock and other stockholders' equity (deficit).

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

CASH AND CASH EQUIVALENTS

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

UNBILLED RECEIVABLES

Unbilled  receivables  consist of certain  direct costs and profits  recorded in
excess  of  amounts  currently  billable  pursuant  to  contract  provisions  in
connection with information system installation  projects.  Unbilled receivables
included in accounts  receivable  was $0.2  million and $0.1 million in 2003 and
2002, respectively.

INVENTORIES

Inventories  consist of raw materials,  work in process and finished goods.  The
majority  of  the  components  are  plastic  ear  tags,  electronic  microchips,
electronic  readers and components as well as products and components related to
GPS  search and  rescue  equipment  and  work-in-process  related to  government
contract  projects.  Inventory  is  valued  at the  lower  of  cost  or  market,
determined by the first-in,  first-out method. The Company 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.


                                                                       Page F-15
<PAGE>


PROPERTY AND EQUIPMENT

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

GOODWILL AND OTHER INTANGIBLE ASSETS

Up through December 31, 2001, the Company reviewed goodwill and other intangible
assets  quarterly  for  impairment   whenever  events  or  changes  in  business
circumstances  indicated  that the  remaining  useful  life  may have  warranted
revision or that the carrying  amount of the long-lived  asset may not have been
fully  recoverable.  Included in factors  considered were  significant  customer
losses,  changes in profitability due to sudden economic or competitive factors,
change  in  managements'  strategy  for the  business  unit,  letters  of intent
received  for the sale of the business  unit,  or other  factors  arising in the
quarterly  period.  The  Company  annually  performed  undiscounted  cash  flows
analyses by business  unit to determine if impairment  existed.  For purposes of
these analyses,  earnings before interest,  taxes, depreciation and amortization
were used as the measure of cash flow.  When impairment was determined to exist,
any related  impairment loss was calculated based on fair value.  Fair value was
determined  based on discounted cash flows and where  available,  market related
information.  The discount  rate  utilized by the Company was the rate of return
expected  from the  market or the rate of return for a similar  investment  with
similar risks. The Company recorded goodwill impairment charges of $63.6 million
during 2001.

On January 1, 2002,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  ("FAS") No. 142,  Goodwill and Intangible Assets ("FAS 142"). FAS 142
eliminates the  amortization  of goodwill.  Intangible  assets deemed to have an
indefinite life under FAS 142, such as goodwill,  are no longer  amortized,  but
instead reviewed at least annually for impairment. Intangible assets with finite
lives are amortized over the useful life. Other than goodwill,  the Company does
not  have  any  intangible   assets  with  indefinite  lives.  As  part  of  the
implementation  of FAS 142, the Company was required to complete a  transitional
impairment test of goodwill and other intangible assets. There was no impairment
of goodwill  upon the  adoption  of FAS 142.  Annually,  the  Company  tests its
goodwill and intangible  assets for impairment as a part of its annual  business
planning  cycle.  Based upon this annual test,  the Company  recorded a goodwill
impairment  charge of  approximately  $2.2 million in the fourth quarter of 2003
for goodwill  associated with the Company's  InfoTech USA, Inc. segment,  and it
recorded a goodwill  impairment charge of $31.5 million in the fourth quarter of
2002 for goodwill associated with its Digital Angel Corporation segment. (During
the  fourth  quarters  of 2003 and 2002,  the  Company  also  recorded  goodwill
impairment charges of $2.4 million and $30.7 million,  respectively,  and during
the fourth quarter of 2003, it incurred an impairment charge of $0.6 million for
other intangible assets,  all of which were related to Medical Systems,  and all
of which are now  included  in the loss from  Discontinued  Operations).  Future
events,  such as market  conditions or operational  performance of the Company's
acquired  businesses,  could  cause the  Company  to  conclude  that  additional
impairment  exists.  Any  resulting  impairment  loss could also have a material
adverse impact on the Company's  financial  condition and results of operations.
See Notes 8 and 18.


                                                                       Page F-16
<PAGE>


PROPRIETARY SOFTWARE IN DEVELOPMENT

In accordance with FAS No. 86,  Accounting for the Costs of Computer Software to
be Sold,  Leased, or Otherwise  Marketed ("FAS 86"), the Company has capitalized
certain  computer   software   development   costs  upon  the  establishment  of
technological  feasibility.  Technological  feasibility  is  considered  to have
occurred upon  completion of a detailed  program design which has been confirmed
by documenting  and tracing the detail program design to product  specifications
and has been  reviewed  for  high-risk  development  issues,  or to the extent a
detailed program design is not pursued,  upon completion of a working model that
has  been  confirmed  by  testing  to be  consistent  with the  product  design.
Amortization  is provided  based on the greater of the ratios that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product, or the straight-line method over the estimated useful
life of the product.  The estimated useful life for the straight-line  method is
determined to be 2 to 5 years.

These unamortized computer software and computer software development costs were
$0.1 million and $0.3 million at December 31, 2003 and 2002,  respectively.  The
total  amount  charged  to expense  for the  amortization  of these  capitalized
computer software costs and for amounts written down to net realizable were $0.3
million,  $2.4  million and $0.7 million in 2003,  2002 and 2001,  respectively.
Research  and  developments  costs  incurred  for the  development  of  computer
software  were $0.5  million,  $0.9 million and $3.3  million in 2003,  2002 and
2001, respectively.

ADVERTISING COSTS

The Company expenses production costs of print  advertisements on the first date
the advertisements take place. Advertising expense, included in selling, general
and administrative  expense, was $0.8 million,  $0.3 million and $0.3 million in
2003, 2002 and 2001, respectively.

REVENUE RECOGNITION

ADVANCED TECHNOLOGY SEGMENT REVENUE RECOGNITION

Computer Equity Corporation Revenue Recognition

The  largest  company in the  Advanced  Technology  segment is  Computer  Equity
Corporation.  This company  supplies  voice,  data and video  telecommunications
networks and related  products to government  agencies.  These products  include
voice mail, Internet cabling,  phones and telephone wiring. Services are a minor
part of the  business  and  usually  consist of small jobs such as phone  moves.
Computer Equity Corporation also receives monthly revenues from  product-related
maintenance  contracts,  which  revenues  represent the smallest  portion of its
business.  For product sales, the Company  recognizes revenue after the products
are shipped and title has  transferred,  provided that a purchase order has been
received or a contract has been executed,  there are no uncertainties  regarding
customer   acceptance,   the  sales   price  is  fixed  and   determinable   and
collectability  is  deemed  probable.   If  uncertainties   regarding   customer
acceptance  exists,  revenue is recognized when such uncertainties are resolved.
Hardware  sales for products  that are shipped to a customer's  site and require
modification  or  installation  are  recognized  when the work is  complete  and
accepted by the customer.  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  manufacturer  provides the warranty.  Services and
phone  installation jobs are billed and the revenue is recognized  following the
completion  of the  work  and the  receipt  of a  written  acceptance  from  the
customer. Revenue from maintenance contracts is recognized ratably over the term
of the contract.


                                                                       Page F-17
<PAGE>


Other Advanced  Technology  Companies Revenue  Recognition  (Excluding  VeriChip
Corporation)

The other companies in the Advanced Technology segment that provide programming,
consulting  and  software  licensing  services  recognize  revenue  based on the
expended  actual  direct labor hours in the job times the standard  billing rate
and adjusted to realizable  value, if necessary.  It is the Company's  policy to
record  contract losses in their entirety in the period in which such losses are
foreseeable.  The Company  does not offer a warranty  policy for services to its
customers.  Revenue from license  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.

For product sales, the Company recognizes revenue after the products are shipped
and title has transferred, provided that a purchase order has been received or a
contract  has been  executed,  there  are no  uncertainties  regarding  customer
acceptance,  the sale  price is fixed and  determinable  and  collectability  is
deemed probable.  If uncertainties  regarding customer acceptance exist, revenue
is recognized when such uncertainties are resolved.  Hardware sales for products
that are shipped to a customer's  site and require  modification or installation
are  recognized  when the work is complete  and  accepted by the  customer.  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
manufacturer provides the warranty.

VeriChip Corporation Revenue Recognition

VeriChip is a miniaturized,  implantable radio frequency  identification  device
("RFID") for use in a variety of  identification  and information  applications.
About  the  size  of  a  grain  of  rice,   each  VeriChip   contains  a  unique
identification number that can be used to access a subscriber-supplied  database
providing personal related information.

To complement  the VeriChip  microchip,  the VeriChip  Proprietary  Scanner is a
scanning  device that  activates  and reads the RFID within the  microchip.  The
scanner  emits a small  amount of radio  frequency  energy  that  energizes  the
dormant  VeriChip,  which then emits a radio  frequency  signal  containing  the
VeriChip identification number.

VeriChip  revenue is  comprised  of the sale of  VeriChip  microchips,  VeriChip
scanners,  and a nominal  distributorship  fee.  Generally,  the distributorship
rights  include  the  rights to market,  promote  and sell the  product(s)  in a
specific  territory under the VeriChip name and trademarks for a specific period
of time. The Company is currently amending the distributor  agreements such that
the distributor  strives to meet annual  marketing  goals, or quotas,  as agreed
upon by the  distributor  and the Company,  by ordering and taking delivery from
the Company of predetermined quantities of product each year through the term of
the contract. Failure to meet the quota will constitute a material breach of the
contract  and the loss of  distributorship  exclusivity  privileges  within  the
territory. To renew a pre-existing  agreement,  the distributor must request so,
in writing, 30 days prior to the expiration of the contract. The Company, at its
own  discretion,  may then  negotiate in good faith with the  distributor  for a
renewal of the agreement.

Originally,  the Company  entered into  distributorship  agreements  whereby the
distributor  would pay an up-front  fee in exchange for the  exclusive  right to
market,  promote and sell VeriChip  products  within the agreed upon  territory.
Under this arrangement, the distribution fee was not credited against or applied
towards amounts due for any products  subsequently  ordered by the  distributor.
However,  it soon  became  clear  that  there  was more  realizable  value via a
relationship  where  distributors  could apply  up-front  monies in exchange for
product.  The Company found that distributors  expressed  reluctance to pay fees
without receiving a tangible product in return. After time, it became clear that
the standard for entrants into comparable  non-established  marketplaces was not
to charge  up-front  fees. In an effort to retain the Company's  customer  base,
management redefined its business strategy and amended its existing contracts in
2003 to  stipulate  that  $1.00 of  up-front  money  would be  allocated  to the
distribution fee, and the remaining amounts were customer  deposits,  which were
applied  against  future  purchases of VeriChip  microchips  and  scanners.  The
advantage  to this was that the  distributor  was  able to  receive  a  tangible
product to directly supply to the resellers,  as opposed to fronting  additional
money to purchase additional product.


                                                                       Page F-18
<PAGE>


Product Sales

Revenue from the sale of VeriChip  microchips and VeriChip  scanners is recorded
at gross with a separate  display of cost of sales.  Until the amount of returns
can be reasonably estimated, the Company does not recognize revenues until after
the products  are shipped and title has  transferred,  provided  that a purchase
order  has  been  received  or a  contract  has  been  executed,  there  are  no
uncertainties  regarding  customer  acceptance,  the  sales  price is fixed  and
determinable,  the period of time the  distributor has to return the products as
provided  in their  distributor  agreement  has expired  and  collectability  is
reasonably  assured.  Once the amount of returns  can be  reasonably  estimated,
revenues  (net of expected  returns)  will be recognized at the time of shipment
and the passage of title, assuming there are no uncertainties regarding customer
acceptance.  If uncertainties  regarding customer acceptance exist, revenue will
not be recognized until such uncertainties are resolved.

Monitoring Services

When offered,  monitoring  services  will be sold as a stand-alone  contract and
treated as a separate  earnings  process from product  sales.  Revenue from this
service will be recognized on a straight-line basis over the term of the service
agreement.  Since the  final use of the  product  is  unknown  at the time it is
shipped to the  distributor,  end users will have the option of choosing  from a
number  of  non-proprietary  monitoring  services  or to  choose  none  at  all.
Therefore, the monitoring services are not essential to the functionality of all
chips,  and the Company  will not attempt to bundle the revenue from the sale of
chips with potential future revenues from a monitoring service.

DIGITAL ANGEL CORPORATION SEGMENT REVENUE RECOGNITION

For product  sales,  Digital Angel  Corporation  recognizes  revenue at the time
product is shipped and title has transferred, provided that a purchase order has
been  received  or a  contract  has been  executed,  there are no  uncertainties
regarding  customer  acceptance,  the sales price is fixed and  determinable and
collectability  is  deemed  probable.   If  uncertainties   regarding   customer
acceptance  exist,  revenue is recognized when such  uncertainties are resolved.
There  are no  significant  post-contract  support  obligations  at the  time of
revenue  recognition.  Digital Angel  Corporation's  accounting policy regarding
vendor  and post  contract  support  obligations  is  based on the  terms of the
customers'  contracts,  and billable upon  occurrence of the post-sale  support.
Costs of goods sold are recorded as the related  revenue is recognized.  Digital
Angel Corporation does not offer a warranty policy for services to customers. It
is  Digital  Angel  Corporation'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
multiplied  by the standard  billing rate and adjusted to realizable  value,  if
necessary.  Revenues from contracts that provide services are recognized ratably
over the term of the contract.  Fixed fee revenues  from  contracts for services
are recorded  when earned and exclude  reimbursable  costs.  Reimbursable  costs
incurred in  performing  such  services are presented on a net basis and include
transportation  and  communication  costs.  Other revenues are recognized at the
time the service or goods are provided.

INFOTECH USA, INC. SEGMENT REVENUE RECOGNITION

For product sales,  InfoTech USA, Inc. recognizes revenue in accordance with the
applicable  product's  shipping terms.  InfoTech USA, Inc. has no obligation for
warranties on new product sales.  The  manufacturer  provides the warranty.  For
consulting and  professional  services,  InfoTech USA, Inc.  recognizes  revenue
based on the direct  labor  hours  incurred  times the  standard  billing  rate,
adjusted to  realizable  value,  if  necessary.  Revenues  from sales  contracts
involving  both products and consulting and other services are allocated to each
element 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.


                                                                       Page F-19
<PAGE>


STOCK-BASED COMPENSATION

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

At December 31, 2003,  the Company had five  stock-based  employee  compensation
plans and the Company's  subsidiaries had six stock-based employee  compensation
plans,  which are  described  more fully in Note 15. As permitted  under FAS No.
148,  Accounting for Stock-Based  Compensation--Transition  and Disclosure ("FAS
148"),  which amended FAS 123, the Company has elected to continue to follow the
intrinsic   value  method  in  accounting  for  its   stock-based   compensation
arrangements as defined by APB No. 25 and FIN 44.


                                                                       Page F-20
<PAGE>


The  following  table  illustrates  the effect on net  income  (loss) and income
(loss)  per  share  if the  Company  had  applied  the  fair  value  recognition
provisions of FAS 123 to stock-based  employee  compensation for options granted
under its plans as well as to the plans of its subsidiaries:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                  --------------------------------------------------
                                                         2003             2002             2001
                                                  --------------------------------------------------
<S>                                                  <C>              <C>              <C>
Net income (loss) available to common                $     3,143      $  (112,485)     $  (215,642)
   shareholders, as reported
  Add back (deduct): Total stock-based employee
  compensation expense determined under APB 25
  for all awards, net of related tax effects (1)          (1,304)          19,318            5,256
  Deduct: Total stock-based employee
  compensation expense determined under fair
  value-based method for all awards, net of
  related tax effects (2)                                 (5,194)         (23,558)          (4,450)
                                                  --------------------------------------------------

  Pro forma net loss                                 $    (3,355)     $  (116,725)     $  (214,836)
                                                  ==================================================

  Income (loss) per share:
           Basic--as reported                        $      0.09      $     (4.18)     $    (12.68)
           Basic--pro forma                          $     (0.09)     $     (4.34)     $    (12.64)
           Diluted--as reported                      $      0.08      $     (4.18)     $    (12.68)
           Diluted--pro forma                        $     (0.09)     $     (4.34)     $    (12.64)
</TABLE>


(1)   For 2003, 2002 and 2001,  amounts include $0.0 million,  $18.9 million and
      $0.0  million  of  compensation  expense,  respectively,  associated  with
      subsidiary options.

(2)   For 2003, 2002 and 2001,  amounts include $4.4 million,  $20.5 million and
      $0.3  million  of  compensation  expense,  respectively,  associated  with
      subsidiary options.

The weighted average per share fair values of grants made in 2003, 2002 and 2001
for the Company's incentive plans were $2.70, $1.90 and $3.60, respectively. The
fair values of the options  granted  were  estimated on the grant date using the
Black-Scholes   valuation   model  based  on  the   following   weighted-average
assumptions:


                                         2003           2002           2001
                                      ------------------------------------------
Estimated option life                  7.9 years       5.5 years       5 years
Risk free interest rate                     3.69%           2.89%         4.49%
Expected volatility                        69.24%          76.00%        68.75%
Expected dividend yield                     0.00%           0.00%         0.00%


RESEARCH AND DEVELOPMENT

Research and development  expense consists of personnel costs,  supplies,  other
direct  costs  and  indirect  costs,  primarily  rent  and  other  overhead,  of
developing new products and technologies and is charged to expense as incurred.


                                                                       Page F-21
<PAGE>


WARRANTS  SETTLEABLE  IN SHARES OF THE DIGITAL  ANGEL  CORPORATION  COMMON STOCK
OWNED BY THE COMPANY

In connection with the Company's 8.5% Convertible  Exchangeable  Debentures (the
"Debentures"),  which were issued on June 30, 2003,  the Company  granted to the
Debenture holders warrants (the "Warrants") to acquire approximately 0.5 million
shares  of its  common  stock,  or 0.95  million  shares  of the  Digital  Angel
Corporation  common stock owned by the Company,  or a combination of shares from
both companies,  at the Debenture holders' option. The exercise prices are $5.64
and $3.178 for the  Company's  common  stock and the Digital  Angel  Corporation
common  stock  owned  by  the  Company,   respectively.   The  Warrants   vested
immediately,  are  subject  to  anti-dilution  provisions,  and are  exercisable
through June 30, 2007.

The value  assigned to the  Warrants  was  recorded as a reduction  in the value
assigned  to  the  Debentures  (original  issue  discount)  and an  increase  in
long-term liabilities. The liability for the Warrants, to the extent potentially
settleable in shares of the Digital Angel Corporation  common stock owned by the
Company,  is  being  revalued  at  each  reporting  period  with  any  resulting
increase/decrease being recorded as interest  expense/income.  During the fourth
quarter of 2003,  the Company  recorded  interest  expense of $2.0  million as a
result of such  revaluation.  Going  forward,  changes  in the  market  price of
Digital Angel  Corporation's  common stock will result in additional  charges or
credits to operations, and any such charges could have a material adverse effect
on the Company's result of operations. The Company will be required to record an
impairment  loss if its carrying value of the Digital Angel  Corporation  common
stock underlying the Warrants exceeds the exercise price.  Should the Purchasers
elect to exercise  the  Warrants  into shares of the Digital  Angel  Corporation
common  stock  owned by the  Company,  such  exercise  may result in the Company
recording a gain on the sale transaction.

INCOME TAXES

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

GAINS/LOSSES ATTRIBUTABLE TO CAPITAL TRANSACTIONS OF SUBSIDIARY

Gains where  realizable and losses on issuances of shares of common stock by the
Company's consolidated subsidiary,  Digital Angel Corporation,  are reflected in
the  Consolidated  Statements of Operations.  The Company  determined  that such
recognition of gains and losses on issuances of shares of stock by Digital Angel
Corporation  was  appropriate  since the shares issued to date were not sales of
unissued  shares  in a  public  offering,  since  the  Company  does not plan to
reacquire the shares issued,  and the value of the proceeds could be objectively
determined.  These  gains and losses  result  from the  differences  between the
carrying  amount of the pro-rata  share of the  Company's  investment in Digital
Angel  Corporation  and the net proceeds  from the  issuances of the stock.  The
issuances of stock by Digital Angel  Corporation  have also given rise to losses
as a result of the changes in the minority  interest  ownership of Digital Angel
Corporation.   Future  stock   issuances  to  third  parties  by  Digital  Angel
Corporation will further dilute the Company's ownership  percentage and may give
rise to additional  losses,  which could have a material  adverse  impact on the
Company's financial condition and results of operations.  A detail of the amount
of gains and losses for the three years ended December 31, 2003, is presented in
Note 3.


                                                                       Page F-22
<PAGE>

EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT

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

COMPREHENSIVE INCOME (LOSS)

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial  Accounting  Standards Board ("FASB") issued FAS No.
143,  Accounting  for  Asset  Retirement  Obligations  ("FAS  143"),  which  was
effective for fiscal years beginning after June 15, 2002. FAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair  value at the time the  obligations  are  incurred.  Upon  initial
recognition  of a  liability,  that cost  should be  capitalized  as part of the
related  long-lived  asset and  allocated to expense over the useful life of the
asset.  The Company  adopted FAS 143 on January 1, 2003.  Application of the new
rules did not have any impact on the Company's financial position and results of
operations,  as it does not currently have any legal obligations associated with
the retirement of long-lived assets or leased facilities.

In May 2002, the FASB issued FAS No. 145,  Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical  Corrections ("FAS
145"). FAS 145 eliminates FAS 4 (and FAS 64, as it amends FAS 4), which requires
gains and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary  item. Also, the exception to applying APB No. 30
is eliminated.  This statement is effective for years  beginning  after May 2002
for the  provisions  related  to the  rescission  of FAS 4 and  64,  and for all
transactions  entered into  beginning May 2002 for the provision  related to the
amendment  of FAS 13. The  adoption  of FAS 145 had the effect of  reducing  the
Company's loss from continuing  operations and eliminating an extraordinary gain
as previously reported for the year ended December 31, 2001.

In June 2002, the FASB issued FAS No. 146,  Accounting for Costs Associated with
Exit or Disposal Activities ("FAS 146"). This statement requires recording costs
associated  with  exit or  disposal  activities  at  their  fair  values  when a
liability has been incurred.  Under previous  guidance,  certain exit costs were
accrued upon management's commitment to an exit plan. Adoption of this Statement
was required  with the beginning of fiscal year 2003.  The Company  adopted this
statement on January 1, 2003. The adoption of FAS 146 did not have any impact on
the  Company's  financial  position  or results of  operations.  The Company has
recorded the costs  associated with its Medical Systems  operations,  which were
disposed of during the three-months  ended June 30, 2004, in accordance with the
provisions of FAS 146.

Effective  January 1, 2003, the Company  adopted the recognition and measurement
provisions of FASB Interpretation No. 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others ("Interpretation 45"). This interpretation  elaborates on the disclosures
to be made by a guarantor in interim and annual  financial  statements about the
obligations  under certain  guarantees.  Interpretation 45 also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation  undertaken in issuing the  guarantee.  The
initial  recognition and initial  measurement  provisions of this interpretation
are  applicable on a prospective  basis to guarantees  issued or modified  after
December 31, 2002. The Company does not currently provide significant guarantees
on a routine  basis.  As a result,  this  interpretation  has not had a material
impact on the Company's financial statements.


                                                                       Page F-23
<PAGE>


In  January  2003,  the FASB  issued  Interpretation  No. 46,  Consolidation  of
Variable  Interest  Entities--an  Interpretation of ARB No. 51 ("FIN 46"), which
addresses  consolidation  of  variable  interest  entities.  FIN 46 expands  the
criteria for  consideration  in determining  whether a variable  interest entity
should  be   consolidated   by  a  business   entity,   and  requires   existing
unconsolidated  variable interest  entities (which include,  but are not limited
to,  Special  Purpose  Entities,  or SPEs) to be  consolidated  by their primary
beneficiaries  if the entities do not  effectively  disperse risks among parties
involved.  On October 9, 2003,  the FASB issued  Staff  Position  No. 46-6 which
deferred the effective  date for applying the provisions of FIN 46 for interests
held by public  entities in variable  interest  entities or  potential  variable
interest  entities  created  before  February 1, 2003. On December 24, 2003, the
FASB  issued  a  revision  to FIN 46.  Under  the  revised  interpretation,  the
effective  date was  delayed  to periods  ending  after  March 15,  2004 for all
variable  interest  entities,  other than SPEs.  The  adoption  of FIN 46 is not
expected  to have an impact on the  Company's  financial  condition,  results of
operations or cash flows.

In May  2003,  the FASB  issued  FAS No.  149,  Amendment  of  Statement  133 on
Derivative  Instruments and Hedging  Activities  ("FAS 149"). FAS 149 amends and
clarifies  accounting for derivative  instruments,  including certain derivative
instruments  embedded in other contracts,  and for hedging  activities under FAS
No. 133. FAS 149 is effective for contracts  entered into or modified after June
30, 2003,  and for hedging  relationships  designated  after June 30, 2003.  The
adoption of FAS 149 did not have any impact on the Company's  financial position
or results of operations.

In May 2003,  the FASB issued FAS No.  150,  Accounting  for  Certain  Financial
Instruments with Characteristics of Both Liabilities and Equity ("FAS 150"). FAS
150  establishes  standards for how an issuer  classifies  and measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Many of those  instruments
were  previously  classified  as  equity.  FAS 150 is  effective  for  financial
instruments  entered  into or modified  after May 31,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003. It is to be implemented by reporting the cumulative  effect of a change in
accounting principle for financial  instruments created before the issuance date
of the  statement and still  existing at the beginning of the interim  period of
adoption.  Restatement is not permitted.  The Company  adopted the provisions of
FAS 150 effective  July 1, 2003. The adoption of FAS 150 did not have any impact
on the Company's financial position or results of operations.

2.    FINANCING AGREEMENTS AND LIQUIDITY

Payment in Full of Obligations to IBM Credit LLC

The Company's Third Amended and Restated Term Credit  Agreement (the "IBM Credit
Agreement") with IBM Credit LLC ("IBM Credit") and the Digital Angel Share Trust
contained   covenants   relating  to  the  Company's   financial   position  and
performance,  as well as the financial position and performance of Digital Angel
Corporation.  At December 31, 2002, the Company did not maintain compliance with
the revised financial  performance  covenant under the IBM Credit Agreement.  In
addition,  under the terms of the IBM Credit Agreement, the Company was required
to repay IBM Credit $29.8  million of the $77.2  million  outstanding  principal
balance  currently  owed to them,  plus $16.4  million of accrued  interest  and
expenses (totaling approximately $46.2 million), on or before February 28, 2003.
The Company  did not make such  payment by February  28,  2003,  and on March 7,
2003,  it  received a notice  from IBM  Credit  declaring  the loan in  default.
Effective April 1, 2003, the Company  entered into a Forbearance  Agreement with
IBM Credit.  In turn,  the Company agreed to dismiss with prejudice a lawsuit it
filed against IBM Credit and IBM  Corporation  in Palm Beach County,  Florida on
March 6, 2003. Under the terms of the Forbearance Agreement, the Company had the
right  to  purchase  all of its  outstanding  debt  obligations  to IBM  Credit,
totaling  approximately $100.1 million (including accrued interest),  if it paid
IBM Credit  $30.0  million in cash by June 30, 2003.  As of June 30,  2003,  the
Company made cash payments to IBM Credit  totaling  $30.0 million and,  thus, it
has satisfied in full its debt  obligations to IBM Credit.  As a result,  during
2003 the Company recorded a gain on the extinguishment of debt of $70.1 million,
exclusive of the bonuses discussed below.


                                                                       Page F-24
<PAGE>


On June 30, 2003,  the Company's  Board of Directors  (through the  Compensation
Committee)  approved the payment of approximately  $4.3 million in discretionary
bonus  awards.  The approval of the bonuses  directly  reflected  the efforts of
certain  employees/directors  in satisfying all of the Company's  obligations to
IBM Credit, which resulted in the Company recording a gain on the extinguishment
of debt of $70.1  million  during 2003,  and  accordingly,  the approval was not
subject to further  conditions,  except for continuation of employment until the
bonuses were paid. The Company's  Board of Directors,  based on various  factors
including the contribution of the respective employee/director and the Company's
cash needs and availability,  determined the allocation of the bonuses among the
group of employees/directors and the timing of the payments. The Company's Board
of  Directors  determined  to satisfy the  payment of the  bonuses in cash.  The
bonuses were paid to the directors in November 2003,  and to executive  officers
and other employees on various dates in November 2003, December 2003 and January
2004.

Funding for $30.0 Million Payment to IBM Credit

Funding for the $30.0 million  payment to IBM Credit  consisted of $17.8 million
in net  proceeds  from the sales of an  aggregate  of 5.0 million  shares of the
Company's  common stock,  $10.0 million in net proceeds from the issuance of the
Company's 8.5% Convertible Exchangeable  Debentures,  and $2.2 million from cash
on hand.

The 5.0 million  shares of the  Company's  common  stock were  offered on a best
efforts basis through the efforts of a placement  agent J.P.  Carey  Securities,
Inc. under the terms of a placement agency agreement.  The Company agreed to pay
J.P. Carey  Securities,  Inc. a 3% placement agency fee. In connection with this
offering,  on May 8, 2003,  May 22, 2003 and June 4, 2003,  the Company  entered
into Securities  Purchase  Agreements with Cranshire Capital,  L.P. and Magellan
International  Ltd. The Securities  Purchase  Agreements  provided for Cranshire
Capital  L.P. and  Magellan  International  Ltd. to purchase an aggregate of 2.0
million  shares  and  3.0  million   shares  of  the  Company's   common  stock,
respectively,  resulting in net proceeds to the Company of $17.8 million,  after
deduction of the 3% placement agency fee.

Issuance of 8.5% Convertible Exchangeable Debentures

On June 30, 2003,  the Company  entered into the Securities  Purchase  Agreement
(the "Agreement") with certain investors, collectively referred to herein as the
Debenture  holders or "the  Purchasers." In connection  with the Agreement,  the
Company issued to the Purchasers its $10,500,000  aggregate  principal amount of
8.5%   Convertible   Exchangeable   Debentures   due   November   1,  2005  (the
"Debentures"). Subject to the terms under the various agreements, the Debentures
were  convertible  into shares of the Company's common stock or exchangeable for
shares of the Digital Angel Corporation common stock owned by the Company,  or a
combination thereof, at any time at the Purchasers' option prior to the maturity
date of November 1, 2005. On November 12, 2003,  the Company  announced  that it
had  entered  into a letter  agreement  with the  Purchasers.  Under the  letter
agreement,  the  Purchasers  were  required  to  convert a minimum of 50% of the
outstanding  principal  amount of the  Debentures  plus all  accrued  and unpaid
interest into shares of the Company's common stock on November 12, 2003, and any
remaining  outstanding  principal amount of the Debentures plus accrued interest
on or before  November 19, 2003.  As of November 19, 2003,  the total  principal
amount of the  Debentures has been  converted,  and  accordingly,  the Company's
obligations  under the  Debentures  have been  satisfied  in full.  The  Company
realized net  proceeds  from the issuance of the  Debentures  of $10.0  million,
which were used to repay a portion of its obligation to IBM Credit.

In connection with the Debentures,  the Company granted to the Debenture holders
the Warrants to acquire approximately 0.5 million shares of the Company's common
stock,  or 0.95 million  shares of the Digital  Angel  Corporation  common stock
owned by the Company,  or a combination  of shares from both  companies,  at the
Purchasers'  option. The Debentures and the Warrants are more fully described in
Note 11.


                                                                       Page F-25
<PAGE>


Digital Angel Corporation Financing Transactions

On July 31, 2003, Digital Angel Corporation  entered into a securities  purchase
agreement to sell securities to Laurus Master Fund, Ltd.  ("Laurus").  Under the
terms of the securities purchase agreement, Digital Angel Corporation issued and
sold to Laurus a two-year  secured  convertible  note in the original  principal
amount  of $2.0  million.  In  addition,  on  August  28,  2003,  Digital  Angel
Corporation  entered into a second security agreement with Laurus under which it
may  borrow  from  Laurus  the  lesser  of $5.0  million  or an  amount  that is
determined based on percentages of Digital Angel Corporation's eligible accounts
receivable  and inventory as prescribed by the terms of the Security  Agreement.
Digital Angel  Corporation's  financing  transactions with Laurus are more fully
described in Note 11.

InfoTech USA, Inc. Financing Transaction

The InfoTech USA, Inc. segment  finances its accounts  receivable and inventory.
Its  current  financing  arrangement  with  IBM  Credit  provides  financing  on
inventory  purchases up to $1.8  million.  Borrowing for purchases is based upon
75% of all  eligible  receivables  due  within  90  days  and up to  100% of all
eligible  inventory.  Interest for  balances  not paid within the interest  free
period  provided for in the arrangement  accrues at prime plus 4.4%.  Borrowings
under the financing  arrangement  amounted to $0.8 million at December 31, 2003,
and are  reflected  in the  balance  sheet in either  accounts  payable or other
accrued  expenses.  On September 5, 2003,  InfoTech USA, Inc.  received a letter
from  IBM  Credit  constituting  their  formal  notice  of  termination  of  the
agreement. The effective date of such termination,  which was originally set for
March 10, 2004,  has been  extended  until April 9, 2004.  InfoTech USA, Inc. is
currently in the process of securing other  financing and expects to replace its
financing arrangement prior to the termination date set by IBM Credit.  InfoTech
USA, Inc. believes that its present financing  arrangement with IBM Credit,  its
current cash position, the expected replacement of the IBM Credit agreement, and
the  repayment by the Company of its $1.0 million loan from  InfoTech,  which is
due in June 2004,  will provide  InfoTech  USA,  Inc.  with  sufficient  working
capital for the next twelve  months.  The $1.0 million loan from  InfoTech  USA,
Inc. is more fully  described in Note 28.  However,  there is no assurance  that
InfoTech  USA,  Inc.  will be able to obtain a  replacement  for its IBM  Credit
arrangement.

Securities Purchase Agreements Dated September 30, 2003 and December 2, 2003

During 2003, the Company offered up to 3.0 million shares of its common stock in
a public  offering  registered  under the  Securities  Act of 1933.  J.P.  Carey
Securities,  Inc. acted as the Company's  placement agent for the offering.  The
Company  sold an  aggregate  of 2.2 million of these  shares  under the terms of
three  separate  Securities  Purchase  Agreements  entered into on September 19,
2003, with each of First Investors Holding Co., Inc., Magellan International LTD
and  Cranshire  Capital,  LP.,  resulting  in gross  proceeds  to the Company of
approximately $8.0 million before deduction of the 2.0% placement agency fee. In
addition, the Company sold an aggregate of 0.8 million of the shares under eight
separate  Securities  Purchase  Agreements  entered into on December 2, 2003, as
amended, with each of First Investors Holding Co., Inc., Magellan  International
LTD, Elliott Associates,  L.P.,  Islandia,  L.P.,  Midsummer  Investment,  Ltd.,
Omicron  Master  Trust,   Portside  Growth  and  Opportunity  Fund  and  Elliott
International  L.P.,  resulting  in aggregate  gross  proceeds to the Company of
approximately  $2.9 million before  deduction of the 2.0% placement  agency fee.
The  Company  has  used  approximately  $4.3  million  of the  net  proceeds  of
approximately  $10.7  million  from the 3.0  million-share  offering  to pay the
bonuses accrued at June 30, 2003.

The  repayment  of all of the  Company's  debt  obligations  to IBM Credit,  the
repayment of all of its obligations  under the  Debentures,  and the sale of 3.0
million  shares  of the  Company's  common  stock  under  its 3.0  million-share
offering,  contributed  to its  ability  to  continue  as a going  concern.  The
Company's  profitability  and  liquidity  depend on many factors  including  the
success of its marketing programs, the maintenance and reduction of expenses and
its ability to  successfully  develop and bring to market its new  products  and
technologies.  The Company's  ability to achieve  profitability  and/or generate
positive cash flows from  operations  in the future is predicated  upon numerous
factors with varying levels of importance as follows:


                                                                       Page F-26
<PAGE>


      o     First,  the  Company  will  attempt to  successfully  implement  its
            business plans,  manage  expenditures  according to its budget,  and
            generate positive cash flow from operations;

      o     Second,  the Company will attempt to develop an effective  marketing
            and  sales  strategy  in  order  to grow its  business  and  compete
            successfully in its markets;

      o     Third, the Company will attempt to obtain the necessary approvals to
            expand the market for the  VeriChip  product in order to improve the
            product's salability;

      o     Fourth,  the Company will attempt to realize positive cash flow with
            respect to its  investment in Digital Angel  Corporation in order to
            provide it with an appropriate return on its investment; and

      o     Finally, the Company will attempt to complete the development of the
            Digital Angel and PLD products.

The  Company  has  established  a  management  plan to  assist  it in  achieving
profitability  and positive  cash flows over the next twelve  months.  The major
components of its plan are as follows:

      o     To attempt to establish a  sustainable  positive  cash flow business
            model;

      o     To attempt  to produce  additional  cash flow and  revenue  from its
            advanced  technology  products  - Digital  AngelTM,  Thermo  LifeTM,
            VeriChipTM, Bio-ThermoTM and PLD;

      o     To generate  additional  liquidity  through  divestiture of business
            units and assets that are not critical to the Company;

      o     To  position   Digital  Angel   Corporation  for  growth  under  the
            leadership  of  its  new  management  team  and  through   strategic
            acquisitions such as the recent OuterLink acquisition;

      o     To  generate  additional  liquidity  for Digital  Angel  Corporation
            through the Share Exchange Agreement between the Company and Digital
            Angel Corporation. The Share Exchange Agreement is described in Note
            3; and

      o     To attempt to pair VeriChip Corporation with a complementary company
            that will bring  experienced  management,  revenue and a synergistic
            customer base.

The  Company's  management  estimates  that the  above  plan can be  effectively
implemented.  As of  December  31,  2003,  the  Company  had a  working  capital
deficiency.   However,  a  significant  portion  of  the  past  due  liabilities
associated  with the  Discontinued  Operations and All Other business units have
not been  guaranteed by the Company  and/or the Company does not intend to repay
such   liabilities   in  cash   during  the  next  twelve   months.   Therefore,
notwithstanding the Company's working capital  deficiency,  the Company believes
that with its current cash position,  its  expectation  about the achievement of
its management  plan, and the reliance on its various other sources of liquidity
as discussed  below,  that it should have sufficient  working capital to satisfy
its needs over the next twelve months.

Sources of Liquidity

The Company's  sources of liquidity may include proceeds from the sale of common
stock and preferred shares, proceeds from the sale of businesses,  proceeds from
the sale of the Digital  Angel  Corporation  common  stock owned by the Company,
proceeds  from  the  sale  of  the  Company's  stock  issued  to  Digital  Angel
Corporation  under the Share Exchange  Agreement,  proceeds from the exercise of
stock options and warrants,  proceeds  from  accounts  receivable  and inventory
financing arrangements, and the raising of other forms of debt or equity through
private  placement  or  public  offerings.  However,  these  options  may not be
available,  or if available,  they may not be on favorable  terms. The Company's
capital  requirements depend on a variety of factors,  including but not limited
to, the rate of increase or decrease in its existing business base, the success,
timing, and amount of investment required to bring new products on-line, revenue
growth or decline, and potential acquisitions. Failure to generate positive cash
flow from  operations  will have a materially  adverse  effect on the  Company's
business, financial condition and results of operations.


                                                                       Page F-27
<PAGE>


3.    ACQUISITIONS AND DISPOSITIONS

On February 27, 2001, the Company  acquired 16.6% of the capital stock of MAS, a
provider  of medical  assistance  and  technical  products  and  services,  in a
transaction  valued at  approximately  $8.3  million  in  consideration  for 0.3
million  shares of its common  stock.  The  Company  became  the single  largest
stockholder and controlled two of the seven board seats.  The Company  accounted
for this investment under the equity method of accounting.

Effective  March 27, 2002,  the  Company's 93% owned  subsidiary,  Digital Angel
Corporation,  which the Company  refers to herein as pre-merger  Digital  Angel,
merged with and into a  wholly-owned  subsidiary of a publicly  traded  company,
MAS, and MAS changed its name to Digital Angel  Corporation.  Under the terms of
the merger  agreement,  each  issued and  outstanding  share of common  stock of
pre-merger  Digital Angel  (including each share issued upon exercise of options
prior to the effective  time of the merger) was cancelled and converted into the
right to receive 0.9375 shares of MAS's common stock. The Company obtained 18.75
million shares of MAS common stock in the merger (representing approximately 61%
of the shares then  outstanding).  Prior to the  transaction,  the Company owned
0.85 million shares of MAS, or approximately 16.6%. As of December 31, 2003, the
Company  owned  19.3  million  shares,  or  approximately  66.9%  of the  shares
outstanding.  Also, pursuant to the merger agreement, the Company contributed to
MAS all of its stock in Timely Technology Corp., a wholly-owned subsidiary,  and
Signature  Industries,  Limited,  an 85% owned  subsidiary.  Pre-merger  Digital
Angel,   Timely  Technology  Corp.  and  Signature   Industries,   Limited  were
collectively  referred to as the Advanced  Wireless Group (AWG).  The merger has
been treated as a reverse  acquisition  for  accounting  purposes,  with the AWG
treated as the accounting acquirer.

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

During the three-months ended June 30, 2004, Digital Angel  Corporation's  Board
of Directors approved a plan to sell the Medical Systems operations,  which were
acquired on March 27, 2002, and the business assets of Medical Systems were sold
effective April 19, 2004. The land and building  associated with Medical Systems
were sold in a separate transaction on July 31, 2004. Medical Systems was one of
the Company's  reporting  units in  accordance  with FAS 142.  Accordingly,  the
financial  condition,  results of operations  and cash flows of Medical  Systems
have been reported as Discontinued  Operations in the financial statements,  and
the prior periods have been restated.  As a result,  unaudited pro forma results
of operations for 2002 have not been provided.


                                                                       Page F-28
<PAGE>

NET LOSS ON CAPITAL  TRANSACTIONS OF SUBSIDIARY AND LOSS ATTRIBUTABLE TO CHANGES
IN MINORITY INTEREST AS A RESULT OF CAPITAL TRANSACTIONS OF SUBSIDIARY

During 2003, the Company recorded a loss of $0.2 million on the issuances of 2.3
million shares of Digital Angel  Corporation's  common stock  resulting from the
exercise of stock options.  During 2002, the Company recorded a net loss of $2.4
million,  comprised of a loss of approximately  $5.1 million  resulting from the
exercise  of  1.5  million   pre-merger   Digital  Angel  options,   a  gain  of
approximately  $4.7  million  from the  deemed  sale of 22.85% of the AWG,  as a
result of the merger with MAS,  and a loss of $2.0  million on the  issuances of
1.1 million shares of Digital Angel Corporation common stock resulting primarily
from the  exercise  of stock  options.  The  losses  on the  issuances  of stock
represent the difference  between the carrying amount of the Company's  pro-rata
share of its investment in Digital Angel  Corporation  and the proceeds from the
issuances of the stock. In addition,  during 2003 and 2002, the Company recorded
a loss of $6.5 million and $2.0 million,  respectively,  attributable to changes
in its minority  interest  ownership of Digital Angel Corporation as a result of
the stock issuances.  The details and the impact of Digital Angel  Corporation's
stock issuances during 2003 and 2002 were as follows:


<TABLE>
<CAPTION>
====================================================================================================
                                                                                For the Year Ended
                                                                                   December 31,
                                                                   ---------------------------------
                                                                     2003        2002          2001
                                                               (in thousands, except per share amounts)
<S>                                                                <C>         <C>          <C>
Issuances of common stock for stock option exercises                 2,323       2,452            --
Issuances of common stock for services                                  --          98            --
                                                                   ---------------------------------
Total issuances of common stock                                      2,323       2,550            --
                                                                   =================================
Proceeds from stock issuances                                      $ 2,404     $ 1,192            --
                                                                   =================================

Average price per share                                            $  1.03     $  0.47            --
                                                                   =================================

Beginning ownership percentage of Digital Angel Corporation          73.91%      100.0%           --
Ending ownership percentage of Digital Angel Corporation (1)          66.9%      73.91%           --
                                                                   ---------------------------------

Change in ownership percentage (1)                                    7.01%      26.09%           --
                                                                   =================================

Loss on the issuances of stock by Digital Angel Corporation        $   244     $ 7,192            --
Gain on the sale of AWG (1)                                             --      (4,755)           --
                                                                   ---------------------------------

Net loss on capital transactions of subsidiary (2)                 $   244     $ 2,437
                                                                   =================================

Loss  attributable to changes in minority interest as a result
   of capital transactions of subsidiary (2)                       $ 6,535     $ 2,048            --
====================================================================================================
</TABLE>

(1)   The reduction in the Company's ownership  percentage for 2002 includes the
      impact of the sale of the AWG, as well as the stock  issuances  by Digital
      Angel Corporation.

(2)   The  Company  has not  provided a tax  benefit for the net loss on capital
      transactions  of subsidiary and loss  attributable  to changes in minority
      interest as a result of capital transactions of subsidiary.


Share Exchange Agreement

On August 14, 2003,  the Company  entered into a Share  Exchange  Agreement with
Digital Angel Corporation.  The Share Exchange Agreement  represents a strategic
investment  by the  Company,  whereby the Company is  increasing  its  ownership
interest in Digital Angel Corporation.  On August 14, 2003, the Company believed
that Digital Angel Corporation's  common stock was undervalued,  and the Company
desires to  maintain  a  controlling  interest  in  Digital  Angel  Corporation.
Therefore,  the Company  considers  the  additional  investment in Digital Angel
Corporation to be a strategically  advantageous undertaking.  The Share Exchange
Agreement  provided  for the Company to purchase  3.0 million  shares of Digital
Angel Corporation's  common stock at a price of $2.64 per share, and for Digital
Angel  Corporation to issue a warrant to the Company (the "DAC Warrant") for the
purchase  of up to 1.0  million  shares of Digital  Angel  Corporation's  common
stock.  The DAC Warrant is exercisable  for five years  beginning on February 1,
2004,  at a price  per  share  of  $3.74  payable  in cash or in  shares  of the
Company's  common  stock.  The  purchase  price for the 3.0  million  shares was
payable in the Company's common stock having an aggregate value of $7.9 million.
The  aggregate  purchase  price of $7.9  million for the 3.0  million  shares of
Digital  Angel  Corporation's  common  stock was based on the  closing  price of
Digital Angel  Corporation's  common stock on June 30, 2003, of $2.64 per share.
This price was used because the Company and Digital Angel  Corporation felt that
this was a fair price and because it reflected the market price of Digital Angel
Corporation's  common stock before any impact of the  Debentures  as a result of
the Purchasers potentially hedging their position in Digital Angel Corporation's
common stock and thereby  affecting  the market price of the stock.  On March 1,
2004,  the Company  issued 1.98  million  shares of its common  stock to Digital
Angel  Corporation  as  payment  for  the  3.0  million  shares.  Digital  Angel
Corporation  expects to generate cash by selling the 1.98 million  shares of the
Company's  common  stock.  Digital  Angel  Corporation  expects  that  the  cash
generated,  along with other funds  available,  will be  sufficient  to meet its
projected working capital requirements for the next 12 months.


                                                                       Page F-29
<PAGE>


Digital  Angel  Corporation  has  granted a five-year  warrant to the  Debenture
holders to acquire up to 0.5 million  shares of its common  stock at an exercise
price of $2.64 per share. The warrant was issued in  consideration  for a waiver
from the Debenture holders allowing the Company to register the shares issued to
Digital Angel Corporation in connection with the Share Exchange  Agreement.  The
value  of  the  warrant  of  $0.8  million,   which  was  determined  using  the
Black-Scholes valuation model, was recorded as interest expense during 2003.

As  of  December  31,  2003,  the  Company  owned  approximately  66.9%  of  the
outstanding common stock of Digital Angel Corporation. Digital Angel Corporation
has outstanding options and warrants and it has issued debt and preferred stock,
which are convertible into shares of its common stock. If all of the outstanding
options and warrants and all of the  convertible  debt and preferred  stock were
converted into shares of Digital Angel Corporation's common stock, the Company's
ownership  would be less than 50%. The Company desires to maintain a controlling
interest in Digital Angel Corporation, and therefore, the Company may enter into
additional share exchange  agreements with Digital Angel Corporation,  or it may
elect in the future to buy back a portion of the  outstanding  shares of Digital
Angel Corporation's common stock that is does not currently own.

DISPOSITIONS

Gain (Loss) on Sale of Subsidiaries and Business Assets

The gain (loss) on sale of subsidiaries  and business assets was $(0.3) million,
$0.1 million and $(6.1) million for the years ended December 31, 2003,  2002 and
2001, respectively.  The loss on the sale of subsidiaries and business assets of
$0.3  million  for 2003  resulted  from the sale of the  Company's  wholly-owned
subsidiary,  WebNet  Services  Inc.  The  loss on the sale of  subsidiaries  and
business  assets of $6.1  million for 2001 was due to the sale of the  Company's
85% ownership interest in Atlantic Systems,  Inc., and the sales of the business
assets of its  wholly-owned  subsidiaries  as follows:  ADS Retail Inc.,  Signal
Processors,  Limited,  ACT  Wireless  Corp.  and ATI  Communications  companies.
Proceeds from the sales were  approximately $3.5 million and were used primarily
to repay debt.

See Note 20 for a discussion of dispositions related to Discontinued  Operations
companies.

EARNOUT AND PUT AGREEMENTS

Certain  acquisition  agreements included  additional  consideration,  generally
payable in shares of the Company's  common  stock,  contingent on profits of the
acquired subsidiary.  Upon earning this additional consideration,  the value was
recorded as additional goodwill.  As of December 31, 2003, there were no earnout
arrangements outstanding. In January 2001, the Company entered into an agreement
with the minority  shareholders  of  Intellesale to terminate all put rights and
employment   agreements  that  each  shareholder  had  with  or  in  respect  of
Intellesale.  In exchange, the Company issued an aggregate of 0.7 million shares
of the Company's common stock valued at $10.3 million.  In addition,  during the
years ended  December 31, 2003,  2002 and 2001, 0.1 million common shares valued
at $0.4  million,  1.4  million  common  shares  valued at $6.6  million and 2.8
million  common shares  valued at $16.9  million,  respectively,  were issued to
satisfy earnouts and to purchase minority interests.


                                                                       Page F-30
<PAGE>


4.    INVENTORIES

Inventories consist of the following:


                                                               DECEMBER 31,
                                                               ------------

                                                             2003        2002
                                                             ----        ----
                                                              (in thousands)

Raw materials                                              $ 1,982     $ 1,725
Work in process                                              2,723       1,447
Finished goods                                               6,598       4,602
---------------------------------------------------------- -------     -------
                                                            11,303       7,774
Less:  Allowance for excess and obsolescence                 1,859       1,422
---------------------------------------------------------- -------     -------

                                                           $ 9,444     $ 6,352
========================================================== =======     =======


5.    NOTES RECEIVABLE

Notes receivable consist of the following:

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

                                                                                       2003                     2002
                                                                                -----------------------------------------
                                                                                             (in thousands)
<S>                                                                             <C>                     <C>
Due from purchaser of subsidiary, collateralized by pledge of rights to
distributions from a joint venture of the purchaser and an unrelated entity,
bears interest at the London Interbank Offered Rate plus 1.65%, payable in
quarterly installments of principal and interest totaling
$332.  Allowance of $25 reflected in allowance for bad debts in 2003.                 $   436                  $ 1,023

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

Due from purchaser of subsidiary, collateralized by pledge of investment
securities, bears interest at prime, interest payable semi-annually, principal
due November 2004. Allowance of $2,328
reflected in allowance for bad debts in 2003 and 2002.                                  2,328                    2,328

Due from purchaser of subsidiary, collateralized by pledge of investment
securities, principal payable in monthly installments of
$33. Balance due December 2004.                                                           397                        --

Due from officers, directors and employees of the Company, unsecured,
bears interest at varying interest rates, due on demand.  Allowance of
$90 reflected in allowance for bad debts in 2003.                                         653                      677

Due from individuals and corporations, bearing interest at varying rates above
prime, secured by business assets, personal guarantees, and
securities, due various dates through July 2004.                                           31                      858

Due from purchaser of divested subsidiary, collateralized by business
assets, bears interest at 8%, payable in monthly installments of
principal and interest of $10, balance due in February 2006.  Allowance
of $1,266 reflected in allowance for bad debts in 2003 and 2002.                        1,266                    1,266
</TABLE>


                                                                       Page F-31
<PAGE>

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

                                                                                       2003                     2002
                                                                                -----------------------------------------
                                                                                             (in thousands)
<S>                                                                             <C>                     <C>

Due from purchaser of divested subsidiary, collateralized by personal guarantee
and securities of the purchaser, bears interest at prime plus 1%, payable in
monthly installments of interest only through March 2003, and then payable in
monthly installments of principal and interest of $11 through December 2007.              412                      497

Due from purchaser of divested subsidiary, collateralized, bears interest at 5%,
payable in monthly payments of interest, and annual
payments of principal through March 2005.                                                 318                      478

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. Allowance of $373 reflected in allowance for bad debts in 2002.          --                      373

Other                                                                                      30                       26
------------------------------------------------------------------------------------------------------------------------
                                                                                        5,871                   10,226
Less:  Allowance for bad debts                                                          3,709                    6,667
Less:  Current portion                                                                  1,658                    2,801
------------------------------------------------------------------------------------------------------------------------

                                                                                       $  504                   $  758
========================================================================================================================
</TABLE>


6.    OTHER CURRENT ASSETS

Other Current Assets consist of the following:

                                                            DECEMBER 31,
                                                            ------------

                                                      2003              2002
                                                --------------------------------
                                                           (in thousands)
  Deferred tax asset                                $   --        $       13
  Prepaid expenses                                   1,774             2,733
  Prepaid taxes                                        800                --
  Other                                                186               120
--------------------------------------------------------------- ----------------

                                                    $2,760        $    2,866
=============================================================== ================


7.    PROPERTY AND EQUIPMENT

Property and Equipment consist of the following:

                                                         DECEMBER 31,
                                                         ------------

                                                  2003                 2002
                                                --------------------------------
                                                   (in thousands)
  Land                                              $ 546               $546
  Building and leasehold improvements               5,900              6,435
  Equipment                                         9,530             14,385
  Software                                             15                 94
--------------------------------------------------------------------------------
                                                   15,991             21,460
  Less:  Accumulated depreciation                   7,763             13,028
--------------------------------------------------------------------------------

                                                  $ 8,228            $ 8,432
================================================================================

Included  above  are  vehicles  and  equipment   acquired  under  capital  lease
obligations  in the amount of $0.3 million and $1.0 million at December 31, 2003
and 2002,  respectively.  Related accumulated  depreciation amounted to $0.2 and
$0.7 million as of December 31, 2003 and 2002, respectively.


                                                                       Page F-32
<PAGE>


Depreciation  expense  charged  against  income  amounted to $1.7 million,  $3.9
million and $4.6 million for the years ended  December 31, 2003,  2002 and 2001,
respectively.  Accumulated  depreciation  related to  disposals  of property and
equipment  amounted  to  $0.3  million  and  $4.0  million  in  2003  and  2002,
respectively.

During  2002,  the Company  recorded  an  impairment  charge of $6.4  million to
write-down  certain software related to its Digital Angel  Corporation  segment.
The write off  related  to an  exclusive  license  to a digital  encryption  and
distribution software system, which was on longer usable. The charge is included
in the Consolidated Statements of Operations under the caption Asset Impairment.

8.    GOODWILL

Goodwill  consists  of the  excess of cost over fair value of net  tangible  and
identifiable  intangible assets of companies purchased.  The Company applies the
principles  of FAS No. 141,  Business  Combinations  ("FAS  141"),  and uses the
purchase   method  of  accounting   for   acquisitions   of   wholly-owned   and
majority-owned subsidiaries.

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

                                                                2003            2002
                                                              ---------      ---------
<S>                                                           <C>            <C>
Beginning balance                                             $  96,672      $ 123,060
Acquisitions, earnout payments and other changes                    450          6,080
Sale of business                                                   (408)            --
Less goodwill impairment                                         (2,154)       (31,460)
Accumulated amortization                                        (31,229)       (32,229)
----------------------------------------------------------    ---------      ---------

Carrying value                                                $  63,331      $  65,451
==========================================================    =========      =========
</TABLE>

Goodwill  amortization  expense  amounted  to $21.3  million  for the year ended
December 31, 2001.

CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

Upon the adoption of FAS 142, on January 1, 2002, the Company  discontinued  the
amortization  of goodwill.  (Other than goodwill,  the Company does not have any
intangible  assets deemed to have  indefinite  lives).  Instead,  the Company is
required to test goodwill for impairment annually as part of its annual business
planning  cycle during the fourth  quarter of each year or earlier  depending on
specific changes in conditions surrounding its business units.

As part of the  implementation  of FAS 142 on January 1, 2002,  the  Company was
required  to  complete  a  transitional   impairment  test  for  goodwill.   The
transitional  impairment  test required the Company to compare the fair value of
each of its  reporting  units to its  carrying  value.  At January 1, 2002,  the
Company's  reporting units  consisted of the following (the Company's  reporting
units  listed  below are those  businesses,  which have  goodwill  and for which
discrete  financial  information is available and upon which segment  management
makes operating  decisions).  Goodwill was assigned to each applicable reporting
unit as of the date of acquisition.

      o     Advanced Technology segment's Computer Equity Corporation;

      o     Advanced Technology segment's P-Tech., Inc.;

      o     Advanced Technology segment's Pacific Decision Sciences;

      o     Pre-merger Digital Angel Corporation's Animal Applications division;

      o     Pre-merger  Digital  Angel  Corporation's  Wireless  and  Monitoring
            division;

      o     Pre-merger Digital Angel Corporation's GPS and Radio  Communications
            division; and

      o     InfoTech USA, Inc.


                                                                       Page F-33
<PAGE>


Methodology for Assigning Goodwill to Reporting Units:

The goodwill assigned to the Company's reporting units was based on the goodwill
resulting  from  the  Company's  acquisition  of the  reporting  unit,  with the
goodwill attributable to the merger of Destron Fearing Corporation,  which was a
publicly held company trading on the Nasdaq  ("Destron"),  and Digital Angel.net
Inc.  ("DA.net")  allocated between the Animal Applications and the Wireless and
Monitoring  reporting  units.  The merger of  Destron  and  DA.net  occurred  in
September  2000.  The goodwill  resulting from the Destron and DA.net merger was
approximately  $74.7  million,  of which $50.7  million was  allocated to Animal
Applications  and $24.0 was allocated to Wireless and Monitoring.  (The Wireless
and  Monitoring  reporting unit also included the goodwill  associated  with the
acquisition of Timely Technology Corp., of approximately $7.5 million).

The Company  believed that a portion of the goodwill  resulting from the Destron
and DA.net merger was due to the synergies of the combined companies. There were
several  potential  benefits/synergies  of the  merger  that it  believed  would
contribute to the success of the combination. These potential benefits/synergies
included:

      o     the   acceleration  of  the   opportunities  of  the  Digital  Angel
            technology  through  the  combination  with  Destron and the current
            products  it  offers,  which  establishes  a company  with  stronger
            capabilities;

      o     the combination of DA.net and Destron, with its injectable microchip
            technology  and its current  products  in the animal  identification
            markets, provide broader product offerings for the combined company;

      o     improvement  in the  purchasing  power of the  combined  company  as
            compared to either  company  standing  alone,  resulting  in reduced
            costs;

      o     the management team of the combined  company having greater depth of
            knowledge  of the  injectable  microchip  and animal  identification
            industries and more business  experience than that of either company
            standing alone;

      o     the potential to expand the market  presence of DA.net and Destron's
            products   globally  through  a  larger  combined  sales  force  and
            geographically more extensive sales and distribution channels;

      o     the  complementary  nature of each company's product offerings as an
            extension of the offerings of the other company;

      o     increased product  diversification and penetration of each company's
            customer base;

      o     similarities in corporate culture; and

      o     the  opportunity  for  expanded  research  and  development  of  the
            combined  product   offerings,   including   potential  new  product
            offerings.

Since  none of the  assets and  liabilities  resulting  from the merger had been
assigned to the Wireless and Monitoring  reporting unit, the Company  determined
the allocation of the goodwill between the Animal  Applications and Wireless and
Monitoring  reporting  units based upon  guidance  provided in FAS 142.  FAS 142
states that, "the methodology used to determine the amount of goodwill to assign
to a reporting unit shall be reasonable and  supportable and shall be applied in
a consistent  manner."  Since Destron was a publicly held company at the time of
the merger, and as a result, its fair market value was readily determinable, the
Company  allocated  to the  Animal  Applications  reporting  unit the  amount of
goodwill equal to Destron's  fair market value prior to the public  announcement
of the potential merger, which was approximately $50.7 million. This resulted in
the  allocation of  approximately  $24.0 million to the Wireless and  Monitoring
reporting unit, which the Company believed  represented the fair market value of
the unit at that point in time,  based on its belief in the market potential for
the Digital Angel product, coupled with the synergies of the combined companies,
as discussed above.


                                                                       Page F-34
<PAGE>


The Company's  methodology  for estimating the fair value of each reporting unit
at January 1, 2002, was a combination of impairment testing both internally (for
the Computer Equity  Corporation,  P-Tech,  Inc.,  Pacific Decision Sciences and
InfoTech USA, Inc.  reporting  units based  primarily on discounted  future cash
flows), and externally (by engagement of independent valuation  professionals to
analyze  the  reporting  units   associated   with   pre-merger   Digital  Angel
Corporation,  using a combination of comparable company and discounted cash flow
analyses).  If the fair value of a reporting  unit exceeded its carrying  value,
then no further  testing  was  required.  However,  if the  carrying  value of a
reporting unit exceeded its fair value,  then an impairment charge was required.
Based upon the  conclusion  of the  Company's  internal and external  impairment
testing  methodology,  the  adoption of FAS 142 did not result in an  impairment
charge.

In the fourth  quarters of 2003 and 2002,  the Company  tested  goodwill at each
reporting  unit level.  At December  31, 2002,  the  Company's  reporting  units
consisted of the following:

      o     Advanced Technology segment's Computer Equity Corporation:

      o     Advanced Technology segment's P. Tech, Inc.;

      o     Advanced Technology segment's Pacific Decision Sciences;

      o     Digital Angel Corporation's Animal Applications division;

      o     Digital Angel Corporation's Wireless and Monitoring division;

      o     Digital Angel Corporation's GPS and Radio Communications division;

      o     Digital Angel Corporation's  Medical Systems division (consisting of
            the  business  operations  of MAS,  which was  acquired on March 27,
            2002, and which is now included as part of  Discontinued  Operations
            in the financial statements); and

      o     InfoTech USA, Inc.

The  Company's  reporting  units  at  December  31,  2003,  were the same as its
reporting units at December 31, 2002,  except for the exclusion of Digital Angel
Corporation's  Wireless  and  Monitoring  division,  as its  goodwill  was fully
impaired at December 31, 2002, as discussed below.

The Company's  methodology  for estimating the fair value of each reporting unit
during the fourth  quarters  of 2003 and 2002 was a  combination  of  impairment
testing  performed both  internally and  externally.  The tests for the P-Tech.,
Inc., and Pacific Decision  Sciences  reporting units were performed  internally
based  primarily  on  discounted  future cash flows.  The tests for the Computer
Equity  Corporation  reporting unit, the reporting units associated with Digital
Angel  Corporation  and the InfoTech USA,  Inc.  reporting  unit were  performed
externally  through the engagement of independent  valuation  professionals  who
performed  valuations  using a combination of comparable  company and discounted
cash flow  analyses.  The InfoTech  USA, Inc.  reporting  unit has a fiscal year
ending on September 30, and therefore,  these tests were performed  during their
fiscal 2003 and 2002  fourth  quarters.  If the fair value of a  reporting  unit
exceeded its carrying value, then no further testing was required.  However,  if
the  carrying  value  of a  reporting  unit  exceeded  its fair  value,  then an
impairment charge was recorded.  The assumptions used in the comparable  company
and discounted cash flow analyses are described in Note 18.

As of December 31, 2002,  Digital Angel  Corporation's  Wireless and  Monitoring
segment had not recorded any significant revenues from its Digital Angel product
and it had not  achieved  the  revenue  projections  used as the  basis  for the
Company's  impairment  tests upon the adoption of FAS 142 on January 1, 2002. At
December 31, 2002, the market value of the Company's investment in Digital Angel
Corporation was approximately  $50.0 million. In consideration of these factors,
the newness of the Digital Angel  Technology,  the operating  history of Digital
Angel Corporation, the challenging economic environment and uncertainties in the
marketplace  along  with  the  independent  fair  value  measurement  valuations
performed by the independent  professionals,  the Company  concluded that future
cash flows from certain operations would not be sufficient to recover all of the
$31.5 million of goodwill associated with Digital Angel  Corporation's  Wireless
and Monitoring division.  Accordingly, this amount was recorded as an impairment
charge during the fourth quarter of 2002. This  impairment  charge is more fully
discussed in Note 18. (During the fourth  quarters of 2003 and 2002, the Company
also  impaired  $2.4  million  and  $30.7  million  of  goodwill,  respectively,
associated with Digital Angel Corporation's  Medical Systems division,  which is
included as part of Discontinued Operations in the financial statements, as more
fully discussed in Note 20).


                                                                       Page F-35
<PAGE>


The  Company's  InfoTech  USA,  Inc.  reporting  unit operates on a September 30
fiscal year end. As part of InfoTech  USA,  Inc.'s fiscal year end 2003 planning
cycle,  it engaged an  independent  valuation  firm to review and  evaluate  its
goodwill  of  approximately  $2.2  million.  The  goodwill  resulted  from prior
acquisitions  by InfoTech  USA,  Inc. The  methodology  used by the  independent
valuation  firm to  evaluate  InfoTech  USA,  Inc.'s  goodwill  was the  same as
discussed  above (and in Note 18) for the  evaluations  associated  with Digital
Angel  Corporation.  Based on the evaluation,  InfoTech USA, Inc.'s goodwill was
not  impaired as of September  30, 2003.  However,  InfoTech  USA,  Inc. has not
achieved  its  projected   operating  results,   and  it  has  not  returned  to
profitability  (InfoTech  USA, Inc. has incurred  losses during the past several
years).  Also, the market value of InfoTech USA, Inc.'s common stock, even after
adjustment for its limited public float, was significantly less at December than
its  current  book value.  In  addition,  certain  third  parties had  expressed
interest in  purchasing  InfoTech  USA, Inc. for amounts less than the Company's
carrying  value.  As a result of these factors,  the full value of InfoTech USA,
Inc.'s  goodwill of  approximately  $2.2 million was impaired as of December 31,
2003.

In  conjunction  with the Company's  review for impairment of goodwill and other
intangible assets in the fourth quarter of 2000, the Company reviewed the useful
lives assigned to goodwill and,  effective October 1, 2000, changed the lives to
periods  ranging  from 5 to 10 years,  down from  periods  ranging from 10 to 20
years.  The  impact  in  2001  of  this  change  was  an  increase  in  goodwill
amortization  of $7.2  million and a decrease  in  earnings  per share of $0.40.
Goodwill and other intangible  assets are stated on the cost basis and have been
amortized,  principally  on a  straight-line  basis,  over the estimated  future
periods to be benefited  (ranging from 5 to 10 years) through December 31, 2001.
Prior to the  adoption  of FAS 142 on  January  1, 2002,  the  Company  reviewed
goodwill and other intangible assets quarterly for impairment whenever events or
changes in business  circumstances  indicated that the remaining useful life may
have warranted  revision or that the carrying amount of the long-lived asset may
not have been fully recoverable.  The Company followed the provisions of FAS No.
121 "Accounting for the Impairment Of Long-Lived Assets and Of Long-Lived Assets
to be  Disposed  Of," to  assess  and  measure  the asset  impairments.  Factors
considered included significant customer losses, changes in profitability due to
sudden economic or competitive factors,  change in management's strategy for the
business unit,  letters of intent received for the sale of the business unit, or
other factors arising in the quarterly  period.  The Company annually  performed
undiscounted  cash flow  analyses by business unit to determine if an impairment
existed and, where available, market related information.  For purposes of these
analyses,  earnings before interest,  taxes,  depreciation and amortization were
used as the measure of cash flow.  When an impairment  was  determined to exist,
any related  impairment loss was calculated based on fair value.  Fair value was
determined  based on  discounted  cash flows.  The discount rate utilized by the
Company  was the rate of return  expected  from the market or the rate of return
for a similar  investment  with  similar  risks.  Based on these  analyses,  the
Company recorded goodwill  impairment  charges of $63.6 million during 2001. See
Note 18. The business  operations of the Company's reporting units are described
above beginning on page F-12.


                                                                       Page F-36
<PAGE>


The changes in the carrying  amount of goodwill for the two years ended December
31, 2003, by reporting unit are as follows (in thousands):

<TABLE>
<CAPTION>

                       COMPUTER                   PACIFIC        WEBNET    ANIMAL
                        EQUITY        P-TECH,    DECISIONS      SERVICES APPLICATIONS
                     CORPORATION(1)   INC.(1)   SCIENCES (1)     INC.(1)    (2)
--------------------------------------------------------------------------------------
<S>                    <C>          <C>          <C>               <C>     <C>
Balance January 1,     $ 13,178     $    530     $  1,504          $--     $ 43,971
2002
Acquisitions,
adjustments and
earnout payments          3,000           --           --           --           --
Less goodwill
impairment                   --           --           --           --           --
--------------------------------------------------------------------------------------

Balance December       $ 16,178     $    530     $  1,504          $--     $ 43,971
31, 2002

Earnout payments
and other
adjustments                  --           --           --          408           --

Less sale of
business                     --           --           --         (408)          --

Less goodwill
impairment                   --           --           --           --           --
--------------------------------------------------------------------------------------

Balance December       $ 16,178     $    530     $  1,504          $--     $ 43,971
31, 2003
======================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                    GPS AND
                                      RADIO
                     WIRELESS AND   COMMUNI-       INFOTECH,
                     MONITORING(2)  CATIONS(2)(3)  UAS, INC.     CORPORATE    TOTAL
----------------------------------------------------------------------------------------
<S>                   <C>           <C>          <C>                <C>      <C>
Balance January 1,    $ 27,854      $  1,051     $  2,154           589      $ 90,831
2002
Acquisitions,
adjustments and
earnout payments         3,606            63           --          (589)        6,080
Less goodwill
impairment             (31,460)           --           --            --       (31,460)
----------------------------------------------------------------------------------------

Balance December           $--      $  1,114     $  2,154            --      $ 65,451
31, 2002

Earnout payments
and other
adjustments                 --            34           --            --           442

Less sale of
business                    --            --           --            --          (408)

Less goodwill
impairment                  --            --       (2,154)           --        (2,154)
----------------------------------------------------------------------------------------

Balance December           $--      $  1,148          $--           $--      $ 63,331
31, 2003
========================================================================================
</TABLE>

(1)   Reporting unit is a component of the Advanced Technology segment.

(2)   Reporting unit is a component of the Digital Angel Corporation segment.

(3)   The InfoTech USA, Inc. segment is a reporting unit.


                                                                       Page F-37
<PAGE>


           The following table presents the impact of FAS 142 on net loss and
           net loss per share had the standard been in effect beginning January
           1, 2001:

                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                                       2001
                                                                  (in thousands)

Net loss available to common stockholders:

 Net loss available to common stockholders as reported              $  (215,642)
 Add back: Goodwill amortization                                         21,312
 Add back: Equity method investment amortization                          1,161
                                                                    -----------
Adjusted net loss                                                   $  (193,169)
                                                                    -----------

Loss per common share - basic
 Net loss per share - basic, as reported                            $    (12.68)
 Goodwill amortization                                                     1.25
 Equity method investment amortization                                     0.07
                                                                    -----------
Adjusted net loss - basic                                           $    (11.36)
                                                                    -----------

Loss per share - diluted
 Net loss per share - diluted, as reported                          $    (12.68)
 Goodwill amortization                                                     1.25
 Equity method investment amortization                                     0.07
                                                                    -----------
Adjusted net loss per share - diluted                               $    (11.36)
                                                                    -----------

The Company had  entered  into  various  earnout  arrangements  with the selling
shareholders of certain acquired  subsidiaries.  These arrangements provided for
additional  consideration  to be paid in future years if certain earnings levels
were met. As of December 31, 2003, there were no remaining earnout arrangements.
Payments made under earnout arrangements were added to goodwill as earned.

9.    OTHER ASSETS

Other Assets consist of the following:


                                                         DECEMBER 31,
                                                         ------------
                                                       2003        2002
----------------------------------------------------  -------     -------
Proprietary software                                  $ 1,725     $   940
Loan acquisition costs                                    487      10,502
Other assets                                              577       2,206
----------------------------------------------------  -------     -------
                                                        2,789      13,648
Less:  Accumulated amortization                         2,139      12,681
----------------------------------------------------  -------     -------
                                                          650         967
Other investments                                         248          --
Deferred tax asset                                         --       1,223
Other                                                     104         439
----------------------------------------------------  -------     -------

                                                      $ 1,002     $ 2,629
====================================================  =======     =======


Amortization  of other assets charged  against income  amounted to $0.2 million,
$0.5  million and $1.8 million for the years ended  December 31, 2003,  2002 and
2001, respectively.


                                                                       Page F-38
<PAGE>


10.   OTHER ACCRUED EXPENSES

Other Accrued Expenses consist of the following:


                                                         DECEMBER 31,
                                                         ------------

                                                   2003              2002
                                               -------------------------------
                                                        (in thousands)

  Accrued wages and payroll expenses             $1,728           $ 1,824
  Accrued severance                               1,443                 --
  Accrued bonuses                                 2,270                 --
  Accrued purchases                               4,857              4,837
  Accrued legal reserves                          3,746              2,379
  Accrued professional fees                         839              1,553
  Other accrued expenses                          5,146              4,655
  Deferred revenue                                2,488              1,858
------------------------------------------------------------ -----------------
                                                $22,517           $17,106
============================================================ =================


11.   NOTES PAYABLE AND LONG-TERM DEBT

NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable and Long-Term Debt consist of the following:

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                   ------------------------------------
                                                                                            2003               2002
                                                                                  -------------------------------------
                                                                                               (in thousands)
<S>                                                                                 <C>                       <C>
Term Loan - IBM Credit, collateralized by all domestic assets of the Company and
a pledge of the stock of the Company's subsidiaries, bearing
interest from 17% to 25% through February 28, 2003, due February 28, 2003.         $         --                $80,655

Digital Angel Corporation
Mortgage notes payable, collateralized by land and buildings, payable in monthly
installments of principal and interest totaling $30 thousand,
bearing interest at 8.18%, due through November 2010.                                      2,376                2,369

Convertible note payable, collateralized by all Digital Angel Corporation
assets, net of unamortized discount of $113, due July 31, 2005, bearing
interest at the higher of prime plus 1.75% or 6% at December 31, 2003.                     1,601
</TABLE>


                                                                       Page F-39
<PAGE>

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                   ------------------------------------
                                                                                            2003               2002
                                                                                  -------------------------------------
                                                                                               (in thousands)
<S>                                                                                 <C>                       <C>
Revolving note payable, collateralized by all Digital Angel Corporation assets,
net of unamortized discount of $119, interest payable monthly at
prime plus 2.5%, due in August 2006.                                                       2,868                   --

Line of credit, interest payable monthly at prime plus 2.25%, due in
September 2004.                                                                              889                   --

Line of credit, collateralized by all Digital Angel Corporation assets,
interest payable monthly at prime plus 3%, due in October 2005.                               --                  709

Notes payable - other                                                                         92                  299

Capital lease obligations                                                                    260                  233
-----------------------------------------------------------------------------------------------------------------------
                                                                                           8,086               84,265
Less:  Current maturities                                                                  5,226               81,829
-----------------------------------------------------------------------------------------------------------------------

                                                                                         $ 2,860            $   2,436
=======================================================================================================================
</TABLE>


Payment in Full of Obligations to IBM Credit LLC

As more fully  discussed in Note 2, effective April 1, 2003, the Company entered
into a Forbearance Agreement with IBM Credit. Under the terms of the Forbearance
Agreement,  the Company had the right to purchase  all of its  outstanding  debt
obligations to IBM Credit,  totaling  approximately  $100.1  million  (including
accrued interest), if it paid IBM Credit $30.0 million in cash by June 30, 2003.
As of June 30, 2003, the Company made cash payments to IBM Credit totaling $30.0
million and, thus, it has satisfied in full its debt  obligations to IBM Credit.
As a result,  during 2003, the Company recorded a gain on the  extinguishment of
debt of $70.1 million.

Amendment, Restatement and Waiver Fees Associated With the IBM Credit Agreements

During 2002 and 2001, IBM Credit amended and restated its credit agreements with
the Company on several occasions.  As part of the amendments and restatements to
the credit  agreements,  the  Company  paid bank fees of $0.4  million  and $0.3
million in 2002 and 2001,  respectively,  and during 2001,  the Company issued a
five-year warrant to acquire 0.3 million shares of the Company's common stock to
IBM Credit valued at $1.9 million. In 2002, the Company agreed to re-price these
warrants.  The re-priced warrants were valued at $1.0 million. In addition, as a
result  of the  merger  between  pre-merger  Digital  Angel  and  MAS,  warrants
convertible into common stock of Digital Angel  Corporation that were previously
issued to IBM Credit were  revalued  using the Black Scholes  valuation  method,
resulting in additional deferred financing costs of $1.1 million.  The bank fees
and fair value of the warrants have been recorded as interest expense.

During 2002, IBM Credit provided the Company with a waiver of  noncompliance  of
certain debt covenants under the IBM Credit Agreement.  As consideration for the
waiver,  the  Company  issued to IBM Credit a five year  warrant to acquire  0.3
million  shares of the  Company's  common  stock at $1.50 per  share,  valued at
approximately  $1.3 million,  and a five year-warrant to purchase  approximately
1.8  million  shares  of  the  Company's   wholly-owned   subsidiary,   VeriChip
Corporation's  common  stock at $0.05 per  share,  valued at  approximately  $44
thousand.  The fair value of the warrants was determined using the Black-Scholes
valuation model, and was recorded as interest expense in 2002.


                                                                       Page F-40
<PAGE>


Issuance of 8.5% Convertible Exchangeable Debentures

On June 30, 2003,  the Company  entered into the Securities  Purchase  Agreement
(the "Agreement") with certain investors, collectively referred to herein as the
Debenture  holders or "the  Purchasers." In connection  with the Agreement,  the
Company issued to the Purchasers its $10.5 million aggregate principal amount of
8.5%   Convertible   Exchangeable   Debentures   due   November  1,  2005  ("the
Debentures").  Subject to the terms under the various agreements, the Debentures
were  convertible  into shares of the Company's common stock or exchangeable for
shares of Digital  Angel  Corporation  common stock owned by the  Company,  or a
combination thereof, at any time prior to the maturity date of November 1, 2005,
at the Purchasers' option.

On November 12, 2003,  the Company  announced  that it had entered into a letter
agreement with the Purchasers.  Under the letter agreement,  the Purchasers were
required to convert a minimum of 50% of the outstanding  principal amount of the
Debentures  plus all accrued and unpaid  interest  into shares of the  Company's
common stock on November 12, 2003,  the First  Conversion  Date.  The conversion
price was $3.50 per share.  In addition,  per the terms of the letter  agreement
the  Purchasers  were  required to convert any remaining  outstanding  principal
amount of the Debentures  plus accrued  interest on or before November 19, 2003,
the Second  Conversion Date. The conversion price for the Second Conversion Date
was 84% of the volume  weighted  average  trading price of the Company's  common
stock for the five trading days prior to November  17, 2003,  which  average was
$4.406.  As of November 19, 2003, the total  principal  amount of the Debentures
has been  converted,  and  accordingly,  the  Company's  obligations  under  the
Debentures  have been  satisfied in full. The Company has issued an aggregate of
2.8 million shares of its common stock in connection with the conversions taking
place on the First and Second Conversion Dates. In addition,  in connection with
the Debentures, the Company has issued an aggregate of 0.3 million shares of the
Digital  Angel  Corporation  common stock that it owned at an exchange  price of
$2.20 per share per the terms of the Debentures.  Following these exchanges, the
Company owned 19.3 million shares of Digital Angel Corporation's common stock.

As a result of the repayment of all of the Debentures,  the unamortized  balance
of the  original  issue  discount  and debt issue  costs of  approximately  $4.2
million was recorded as additional interest expense during the fourth quarter of
2003. In addition, as a result of the difference between the original conversion
price under the Agreement of $5.15 per share, and the revised  conversion prices
per the terms of the letter  agreement,  which  averaged  $3.51 per  share,  the
Company recorded additional  beneficial conversion feature of approximately $4.5
million during the fourth quarter of 2003. This additional beneficial conversion
feature was recorded as interest expense and an increase in  additional-paid  in
capital.  Thus,  during the fourth  quarter of 2003,  the Company  incurred $8.7
million  in total  non-cash  stock-based  interest  expense  as a result  of the
conversions of the Debentures under the terms of the letter agreement.

Common Stock Warrants Issued to the Debenture Holders

In connection with the Debentures,  the Company granted to the Debenture holders
Warrants to acquire  approximately  0.5 million  shares of the Company's  common
stock,  or 0.95 million  shares of the Digital  Angel  Corporation  common stock
owned by the Company,  or a combination  of shares from both  companies,  at the
Purchasers'  option.  The exercise prices are $5.64 and $3.178 for the Company's
common stock and the Digital Angel Corporation common stock,  respectively.  The
Warrants are subject to  anti-dilution  provisions,  vested  immediately and are
exercisable  through June 30, 2007. The Company had registered its common shares
issuable upon  conversion of the Debentures and Warrants in accordance  with the
terms of a Registration  Rights Agreement entered into among the Company and the
Purchasers.


                                                                       Page F-41
<PAGE>


The proceeds upon issuance of the Debentures were allocated as follows:

Face value of Debentures                                               $ 10,500
Beneficial conversion feature                                            (3,120)
Relative fair value of Warrants                                          (1,387)
                                                                       --------
Relative fair value of Debentures                                      $  5,993
                                                                       ========

The beneficial  conversion  feature was calculated as the difference between the
beneficial  conversion  price and the fair value of the Company's  common stock,
multiplied by the number of shares into which the Debentures were convertible in
accordance with the Emerging Issues Task Force ("EITF") - 00-27.  The beneficial
conversion  feature was  recorded as a  reduction  in the value  assigned to the
Debentures   (original   issue   discount)   and  an  increase   in   additional
paid-in-capital.  The value assigned to the Warrants was recorded as a reduction
in the  value  assigned  to the  Debentures  (original  issue  discount)  and an
increase in long-term liabilities. The liability for the Warrants, to the extent
potentially  settleable in shares of the Digital Angel Corporation  common stock
owned by the  Company,  is  being  revalued  at each  reporting  period  and any
resulting  increase/decrease  will  result in an  increase/decrease  in interest
expense. During 2003, the Company recorded interest expense of $2.0 million as a
result of such revaluation. The Company will be required to record an impairment
loss if the  carrying  value  of the  Digital  Angel  Corporation  common  stock
underlying the Warrants exceeds the exercise price.  Should the Purchasers elect
to exercise the Warrants  into shares of the Digital  Angel  Corporation  common
stock owned by the Company,  such exercise may result in the Company recording a
gain on the transaction.

The original  issue discount of $4.5 million was being accreted over the life of
the Debentures as additional interest expense. During 2003, the Company incurred
approximately  $0.7 million of interest  expense as a result of the accretion of
the original issue discount.  As a result of conversion of all of the Debentures
in November 2003, the remaining  balance of the original issue discount and debt
issue costs,  such debt issue costs are discussed below, of  approximately  $3.8
million was recorded as interest expense during the fourth quarter of 2003.

In addition,  Digital Angel  Corporation has granted a five-year  warrant to the
Debenture  holders to acquire up to 0.5 million shares of its common stock at an
exercise price of $2.64 per share. The warrant was issued in consideration for a
waiver from the  Debenture  holders,  which  allowed the Company to register the
shares that were issued in connection  with a Share Exchange  Agreement  between
the  Company  and Digital  Angel  Corporation.  The fair value of the warrant of
approximately  $0.8 million was  determined  using the  Black-Scholes  valuation
model and was  recorded as interest  expense  during  2003.  The Share  Exchange
Agreement is described in Note 3. The total interest expense recorded in 2003 in
connection with the Debentures was approximately $12.7 million.

In connection with the Debentures,  the Company  incurred a placement agency fee
of $0.4 million, and it reimbursed one of the Purchasers $0.1 million for legal,
administrative,  due  diligence  and other  expenses  incurred  to  prepare  and
negotiate the transaction documents.  The Company realized net proceeds of $10.0
million from the issuance of the  Debentures,  after  deduction of the placement
agency fee and transaction  costs.  The Company used the net proceeds to repay a
portion  of the $30.0  million  payment  that it made to IBM  Credit on June 30,
2003.  To date,  the Company has not realized any proceeds  from the issuance of
the Warrants, as the Warrants have not been exercised.

As a result of the complete  satisfaction of all of the Company's obligations to
IBM Credit,  the Company  entered into an Amended and Restated  Trust  Agreement
dated June 30, 2003,  with the Digital  Angel Share Trust  ("Trust").  Under the
terms of the revised  trust  agreement,  the Trust  retained  all of its rights,
title and  interest  in 15.0  million  shares of the Digital  Angel  Corporation
common  stock owned by the Company in  consideration  of the  Debentures  and in
order to secure and  facilitate the payment of the Company's  obligations  under
the  Debentures.  As a result  of the  repayment  in full of the  Debentures  on
November 19, 2003, the Company expects to dissolve the Trust in the near future.
Currently,  Scott R. Silverman, the Company's Chief Executive Officer, serves as
the sole advisory board member to the Trust.


                                                                       Page F-42
<PAGE>


Digital Angel Corporation Financing Transactions

On July 31, 2003, Digital Angel Corporation  entered into a securities  purchase
agreement to sell securities to Laurus Master Fund, Ltd.  ("Laurus").  Under the
terms of the securities purchase agreement, Digital Angel Corporation issued and
sold to Laurus a two-year  secured  convertible  note in the original  principal
amount of $2.0 million and a common stock  warrant to purchase up to 0.1 million
shares of Digital Angel Corporation's common stock. The note is convertible,  at
Laurus' option, into shares of Digital Angel Corporation's common stock at a per
share price of $2.33,  subject to limitations.  The note accrues  interest at an
annual rate equal to the greater of prime plus 1.75% or 6%. The exercise  prices
of the  warrant  range  from  $2.68  to  $3.38  per  share  and the  warrant  is
exercisable  for  five  years.  In  connection  with  the  note,  Digital  Angel
Corporation  and Laurus entered into a security  agreement  granting to Laurus a
lien and security interest in Digital Angel Corporation's  assets,  having a net
book value of $48.5 million as of December 31, 2003. On August 28, 2003, Digital
Angel  Corporation  entered into a second  security  agreement with Laurus under
which it may borrow from Laurus the lesser of $5.0  million or an amount that is
determined based on percentages of Digital Angel Corporation's eligible accounts
receivable  and inventory as prescribed by the terms of the Security  Agreement.
Under the  Security  Agreement,  Digital  Angel  Corporation  issued to Laurus a
Secured  Revolving  Convertible  Note (the  "Revolving  Note")  in the  original
principal  amount of $3.5 million and a Secured  Minimum  Borrowing  Convertible
Note (the "Minimum  Borrowing  Note") in the original  principal  amount of $1.5
million.  The notes accrue interest at an annual rate equal to prime plus 2.50%.
Digital Angel Corporation used proceeds from the loans from Laurus to satisfy in
full its credit  facility  with Wells Fargo  Business  Credit,  Inc.,  which was
cancelled  effective  August 28, 2003.  As of December 31, 2003,  the  aggregate
amount  outstanding under the Minimum Borrowing Note and Revolving Note was $3.0
million  and the  availability  under  the  Revolving  Note  was  $0.2  million.
Beginning May 28, 2004,  the Minimum  Borrowing  Note and the Revolving Note are
convertible,  at Laurus'  option,  into  shares of Digital  Angel  Corporation's
common  stock at a price per  share of  $2.64,  subject  to  adjustments  upward
following each conversion of $2.0 million. Additionally, the securities purchase
agreement with Laurus includes default provisions should an Event of Default (as
defined  in the  agreement)  occur;  furthermore,  under a related  registration
rights  agreement,  Digital Angel  Corporation has agreed to register the common
stock underlying the Convertible Note.

The scheduled  payments due based on  maturities  of long-term  debt and amounts
subject to  acceleration  at December 31, 2003 are  presented  in the  following
table.  These  amounts  are based on the stated  principal  maturities,  and are
presented gross of unamortized debt discount.

          Year                                    Amount
          ----                                    ------
          2004                                    $5,345
          2005                                       672
          2006                                        73
          2007                                        60
          2008                                        63
       Thereafter                                  2,105
                                      ------------------------
                                                  $8,318
                                      ========================

Interest  expense on the long and  short-term  notes  payable  amounted to $22.6
million,  $17.5 million and $8.6 million for the years ended  December 31, 2003,
2002 and 2001, respectively.

      The  weighted  average  interest  rate was 50% and 21% for the years ended
December 31, 2003 and 2002, respectively.

The Medical Systems operations,  which are included in Discontinued  Operations,
also had a mortgage  note  obligation  of  approximately  $0.9  million and $1.0
million as of December 31, 2003 and 2002,  respectively.  The mortgage  note was
paid in full on July 31, 2004. Certain of the Company's subsidiaries included in
Discontinued  Operations also have capital lease  obligations of $26 thousand at
December 31, 2003 and 2002.


                                                                       Page F-43
<PAGE>


12.   OTHER LONG-TERM LIABILITIES

Other Long-Term Liabilities consist of the following:



                                                                 DECEMBER 31,
                                                                 ------------

                                                              2003         2002
                                                              ----         ----
                                                                (in thousands)

  Warrants payable                                           $3,430       $   --
  Deferred compensation payable                                  --        1,005
  Other                                                          --           --
                                                             ------       ------

                                                             $3,430       $1,005
                                                             ======       ======


13.   FAIR VALUE 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,  net of the allowance  for doubtful  accounts,
approximate   fair  value  because  either  the  interest  rates  of  the  notes
approximate  the current rate that the Company  could receive on a similar note,
or because of the short-term nature of the notes.

NOTES PAYABLE

      The carrying amount  approximates  fair value because of the current rates
approximate market rates.

LONG-TERM DEBT

      The carrying  amount  approximates  fair value  because the current  rates
approximate market rates.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The carrying amount approximates fair value.

WARRANTS PAYABLE

      The carrying amount of warrants  payable is revalued each reporting period
and approximates current fair value.

14.   REDEEMABLE PREFERRED SHARES - SERIES C

On October  26,  2000,  the Company  issued 26  thousand  shares of its Series C
convertible  preferred stock to a select group of  institutional  investors in a
private placement. The stated value of the preferred stock was $1,000 per share,
or an aggregate of $26.0 million,  and the purchase price of the preferred stock
and the related  warrants  and options was an aggregate  of $20.0  million.  The
preferred  stock was  convertible  into shares of the Company's  common stock at
various conversion rates.

The proceeds upon issuance were allocated to the preferred stock, the detachable
warrants  and the option  based  upon  their  relative  fair  values.  The value
assigned to the warrants and option  increased the discount on preferred  stock,
as follows (in thousands):


                                                                       Page F-44
<PAGE>


Face value of preferred stock                                  $ 26,000
Discount on preferred stock                                      (6,000)
Preferred stock issuance costs                                     (944)
=============================================================  ========
Net proceeds                                                   $ 19,056
=============================================================  ========

Relative fair value of warrants                                $    627
Relative fair value of option                                     5,180
Relative fair value of preferred shares                          13,249
-------------------------------------------------------------  --------
Total                                                          $ 19,056
=============================================================  ========


The beneficial  conversion  feature was calculated as the difference between the
most  beneficial  conversion  price and the fair value of the  Company's  common
stock,  multiplied  by the number of shares into which the  preferred  stock was
convertible in accordance with EITF 98-5 and 00-27.  For the year ended December
31, 2001, the beneficial  conversion feature (BCF) associated with the Company's
preferred stock charged to earnings per share was $9.4 million.  The Company has
cumulatively  recorded a charge to earnings per share of $13.2 million since the
issuance  of the  preferred  stock.  As of June  30,  2001,  the  BCF was  fully
accreted.  As of  December  31,  2001,  all of the  preferred  shares  have been
converted into shares of the Company's common stock.

The BCF was recorded as a reduction in the value assigned to the preferred stock
and an  increase  in  additional  paid-in  capital.  The  Company  recorded  the
accretion  of the BCF over the period from the date of issuance to the  earliest
beneficial  conversion  date  available  through  equity,  reducing  the  income
available to common stockholders and earnings per share.

The  holders of the  preferred  stock also  received  0.1  million  warrants  to
purchase up to 0.1 million  shares of the Company's  common stock.  The warrants
expire in October 2005. At December 31, 2002,  the exercise price was $46.60 per
share,  subject to  adjustment  for various  events,  including  the issuance of
shares of common stock,  or options or other rights to acquire common stock,  at
an issuance price lower than the exercise price under the warrants. The exercise
price  may be paid in  cash,  in  shares  of  common  stock  or by  surrendering
warrants.  The warrants were valued using the Black Scholes valuation model. See
Note 15 for the valuation and related assumptions.

OPTION TO ACQUIRE ADDITIONAL PREFERRED STOCK

The investors  had the option to purchase up to an  additional  $26.0 million in
stated  value of  Series C  convertible  preferred  stock and  warrants  with an
initial conversion price of $50.00 per share, for an aggregate purchase price of
$20.0 million,  at any time up to ten months following the effective date of the
Company's  registration  statement  relating  to the common  stock  issuable  on
conversion  of  the  initial  series  of the  preferred  stock.  The  additional
preferred stock would have had the same preferences,  qualifications  and rights
as the initial preferred stock. The fair value of the option was estimated using
the Black-Scholes option-pricing model with the following assumptions:  dividend
yield of 0%,  expected  volatility of 40% and a risk free interest rate of 5.5%.
The investors  elected not to exercise the option and it expired on February 24,
2002. Upon  expiration,  the value of the option was  reclassified to Additional
Paid-in-Capital.

15.   PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT)

PREFERRED SHARES

The Company has  authorized 5.0 million  shares of preferred  stock,  $10.00 par
value,  to be issued  from time to time on such  terms as are  specified  by the
Company's  Board of Directors.  At December 31, 2003,  no preferred  shares were
issued or outstanding.

WARRANTS

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


                                                                       Page F-45
<PAGE>


<TABLE>
<CAPTION>
                                                                    BALANCE
CLASS OF                                                          DECEMBER 31,     EXERCISE                          EXERCISABLE
WARRANTS          AUTHORIZED   ISSUED    EXERCISED    EXPIRED        2003           PRICE      DATE OF ISSUE            PERIOD
--------          ----------   ------    ---------    -------        ----           -----      -------------            ------
<S>               <C>          <C>       <C>          <C>         <C>               <C>        <C>                  <C>
Class S                  60        60          22          38                --        20.00     April 1998            5 years
Class U                  25        25          --          25                --        83.80     November 1998         5 yearS
Class W                  84        84          --          --                84        44.80     October 2000          5 yearS
Class X                 290       290          --          --               290         1.50     April 2001            5 yearS
Class Y                 290       290          --          --               290         1.50     August 2002           5 yearS
Class Z                 535       535          --          --               535         5.64     June 2003             4 yearS
                      -----     -----      ------     -------           -------
                      1,284     1,284          22          63             1,199
                      -----     -----      ------     -------           -------
</TABLE>

The warrants in classes S and U were issued at the then-current  market value of
the common stock in consideration  for investment  banking services  provided to
the Company.

The class W warrants were issued in connection with the Series C preferred stock
issuance.  These  warrants were valued at $0.6  million,  and were recorded as a
discount on the preferred stock at issuance.

The class X warrants were issued to IBM Credit Corporation in connection with an
"Acknowledgement,  Waiver and Amendment No. 1 to the Second Amended and Restated
Term and Revolving Credit  Agreement" with IBM Credit.  The warrants were valued
at $1.9  million.  Under the terms of the IBM  Credit  Agreement,  which  became
effective on March 27, 2002,  these  warrants  were  re-priced  from an exercise
price of $12.50 per share to an exercise price of $1.50 per share. The re-priced
warrants  were valued at $1.0  million.  The fair values of the warrants and the
re-priced  warrants were reflected as deferred financing fees and were amortized
as interest expense.

The class Y warrants were issued to IBM Credit  Corporation  in connection  with
the IBM Credit  Agreement.  The warrants were valued at $1.3  million.  The fair
value of the warrants was reflected as deferred financing fees and was amortized
as interest expense.

The class Z warrants were issued in connection with the Debentures. The Warrants
were originally valued at $1.4 million.  The original fair value assigned to the
Warrants  was recorded as a reduction  in the value  assigned to the  Debentures
(original issue discount) and an increase in long-term liabilities. The original
issue discount was amortized as interest expense. The unamortized portion of the
original issue  discount was fully  expensed  during the fourth quarter of 2003,
when the  Debentures  were  satisfied in full.  The Warrants are  settleable  in
either the  Company's  common stock or shares of the Digital  Angel  Corporation
common stock owned by the Company,  or a combination of both, at the Purchasers'
option. The liability for the Warrants, to the extent potentially  settleable in
shares of the Digital Angel  Corporation  common stock owned by the Company,  is
being revalued at each reporting period and any resulting increase/decrease will
result in an  increase/decrease  in interest  expense.  During 2003, the Company
recorded interest expense of $2.0 million as a result of such  revaluation.  The
Company will be required to record an impairment  loss if the carrying  value of
the Digital Angel  Corporation  common stock underlying the Warrants exceeds the
exercise price. Should the Purchasers elect to exercise the Warrants into shares
of the  Digital  Angel  Corporation  common  stock  owned by the  Company,  such
exercise may result in the Company recording a gain on the transaction.


                                                                       Page F-46
<PAGE>


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


<TABLE>
<CAPTION>
    WARRANT SERIES         DIVIDEND YIELD          VOLATILITY           EXPECTED LIVES (YRS.)             RISK-FREE RATES
    --------------         --------------          ----------           ---------------------             ---------------
<S>                        <C>                     <C>                  <C>                               <C>
S & U                            0%                  43.69%                      1.69                            8.5%

W                                0%                  43.41%                      1.69                            6.4%

X (initial grant)                0%                  53.32%                      5.0                             4.6%

X (re-pricing)                   0%                  68.75%                      4.0                             4.4%

Y                                0%                  68.75%                      5.0                             3.3%

Z (initial grant)                0%                  76.00%                      4.0                             1.5%

Z (revaluation)                  0%                 126.76%                      3.4                             2.8%
</TABLE>

STOCK OPTION PLANS

During 1996, the Company  adopted a nonqualified  stock option plan (the "Option
Plan"). During 2000, the Company adopted the 1999 Flexible Stock Plan (the "1999
Flexible  Plan").  With the 2000  acquisition  of Destron  Fearing,  the Company
acquired two  additional  stock option plans,  an Employee Stock Option Plan and
Non-employee  Director Stock Option Plan. The names of the plans were changed to
Digital  Angel.net Inc. Stock Option Plan (the "Employee  Plan") and the Digital
Angel.net Inc.  Non-employee  Director Stock Option Plan (the "Director  Plan").
During  2003,  the  Company  adopted  the 2003  Flexible  Stock  Plan (the "2003
Flexible Plan").

Under the Option Plan, options for 1.0 million common shares were authorized for
issuance to certain  officers,  directors  and  employees of the Company.  As of
December  31,  2003,  1.0 million  options  have been issued and 0.3 million are
outstanding under the Option Plan. 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 1999 Flexible  Plan, the number of shares which may be issued or sold,
or for which options, Stock Appreciation Rights (SARs) or Performance Shares may
be granted to officers,  directors  and employees of the Company is 3.6 million.
As of December 31, 2003,  3.6 million  options have been granted and 1.4 million
are outstanding. The options may not be exercised until one to three years after
the grant date, and are exercisable over a period of five years.

Under  the  Employee  Plan,  the Plan  authorized  the grant of  options  to the
employees to purchase  shares of common  stock.  As of December  31,  2003,  0.1
million  options  have been  granted and 0.1 million are  outstanding.  The Plan
provides for the grant of incentive  stock  options,  as defined in the Internal
Revenue Code, and  non-incentive  options.  The Plan has been  discontinued with
respect to any future grant of options.

Under  the  Director  Plan,  the Plan  authorized  the grant of  options  to the
non-employee  directors to purchase  shares of common stock.  As of December 31,
2003, 30 thousand options have been granted and 10 thousand are outstanding. The
Plan has been discontinued with respect to any future grant of options.

Under the 2003 Flexible  Plan, the number of shares which may be issued or sold,
or for which options, Stock Appreciation Rights (SARs) or Performance Shares may
be granted to officers,  directors  and employees of the Company is 1.4 million.
As of December 31, 2003,  0.7 million  options have been granted and 0.7 million
are outstanding.  The options may not be exercised until one to four years after
the grant date, and are  exercisable  over a period of seven years. In addition,
as of December 31, 2003, 30 thousand shares of restricted common stock have been
granted  under the 2003 Flexible  Plan to  non-employee  directors in payment of
certain directors' fees.


                                                                       Page F-47
<PAGE>


A summary of stock  option  activity  for 2003,  2002 and 2001 is as follows (in
thousands, except weighted-average exercise price):

<TABLE>
<CAPTION>
                                                       2003                       2002                       2001
                                               -------------------       -----------------------   -----------------------
                                                            WEIGHTED-                  WEIGHTED-                  WEIGHTED-
                                               NUMBER        AVERAGE                    AVERAGE                    AVERAGE
                                               OF           EXERCISE     NUMBER OF     EXERCISE     NUMBER OF     EXERCISE
                                               OPTIONS       PRICE       OPTIONS        PRICE       OPTIONS        PRICE
                                               -------      ------       --------       ------      --------      --------
<S>                                              <C>        <C>             <C>         <C>            <C>         <C>
         Outstanding on January 1                3,404      $ 7.10          3,023       $ 7.60         2,246       $28.70
         Granted (1)                             2,017        1.40          1,013         3.20         1,229         3.30
         Exercised (2)                           1,544        0.30           (629)        2.30          (237)        1.50
         Forfeited (1) (2)                       1,385        2.80             (3)       10.09          (215)        8.80
                                                 -----                      -----                      -----
         Outstanding on December 31              2,492        9.30          3,404         7.10         3,023         7.60
                                                 -----                      -----                      -----

         Exercisable on December 31              1,780       11.30          2,372         8.70         2,000         9.90
                                                 -----                      -----                      -----
         Shares available on December 31
           for options that may be granted         758                         28                        204
                                                 -----                      -----                      -----
</TABLE>

(1)   For 2001,  amount excludes  options to acquire  approximately  1.9 million
      shares of the Company's  common stock,  which were re-priced  during 2001.
      See Note 16.

(2)   Includes  approximately 1.3 million options, which were re-priced in 2003.
      See Note 17.


The Company recovered approximately $1.3 million and incurred approximately $0.7
million and $5.3 million of non-cash  stock based  compensation  expense  during
2003, 2002 and 2001, respectively, due primarily to re-pricing 1.9 million stock
options during 2001. The re-priced  options are more fully described in Note 16.
In addition,  on September 24, 2001, the company  issued 0.4 million  options to
employees and directors  with exercise  prices of $1.50 per share,  or $0.20 per
share less than the fair market value of the underlying common stock on the date
of grant.  In accordance  with APB No. 25, the Company  recognized  compensation
expense of $0.1 million associated with these options.  The compensation expense
was  amortized  over  the  vesting  period  of  the  options.   These  non-cash,
stock-based  charges are reflected in the Consolidated  Statements of Operations
in selling, general and administrative expense.

      The following table summarizes information about stock options at December
31, 2003, (in thousands, except weighted-average amounts):

<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 $10.00                1,851              5.2              $ 3.30                 1,146            $ 2.90
   $10.01 to $20.00                  143              3.5               14.80                   137             14.90
   $20.01 to $30.00                  375              2.1               25.00                   375             25.00
   $30.01 to $40.00                   79              1.7               35.40                    78             35.40
   $40.01 to $50.00                   25              1.7               45.00                    25             45.00
   $50.01 to $60.00                   19              1.5               55.90                    19             55.90
                                --------            -----         -------------             -------           -------

                                   2,492              4.5              $ 9.30                 1,780           $ 11.30
                                   =====                                                      =====           =======
</TABLE>


In addition  to the above  options,  certain  subsidiaries  of the Company  have
issued  options  to  various  employees,  officers  and  directors.  Information
pertaining to option plans of the Company's subsidiaries is as follows:

Digital Angel Corporation

During 1999, Digital Angel Corporation adopted a non-qualified stock option plan
(the "Stock Option Plan"). In connection with the merger with MAS, Digital Angel
Corporation  assumed the options  granted  under the Stock Option Plan under its
Amended and Restated  Digital  Angel  Corporation  Transition  Stock Option Plan
("DAC Stock Option  Plan").  As amended,  11.2 million  shares of Digital  Angel
Corporation's common stock may be granted under the DAC Stock Option Plan. As of
December 31, 2003,  options to purchase 6.4 million shares were  outstanding and
0.9 million shares were available for the grant.  The options vest as determined
by Digital  Angel  Corporation's  Board of Directors and are  exercisable  for a
period of no more than 10 years.


                                                                       Page F-48
<PAGE>


Under  MAS's  nonqualified  stock  option  plan (the "MAS Stock  Option  Plan"),
options may be granted at or below the fair market value of the stock and have 5
and 10 year lives.  Options  granted to certain  individuals  vest  ratably over
three years. The MAS Stock Option Plan provides for 1.6 million shares of common
stock for which  options may be granted.  As of December  31,  2003,  options to
purchase  1.0  million  shares  were  outstanding  and 0.3  million  shares were
available for the grant.

A summary of stock option activity for Digital Angel  Corporation's stock option
plans  for  2003,   2002  and  2001  is  as  follows   (in   thousands,   except
weighted-average exercise price data):

<TABLE>
<CAPTION>
                                                 2003                        2002                        2001
                                       --------------------------  --------------------------  --------------------------
                                         SHARES       WEIGHTED       SHARES       WEIGHTED       SHARES       WEIGHTED
                                                       AVERAGE                     AVERAGE                     AVERAGE
                                                      EXERCISE                    EXERCISE                    EXERCISE
                                                        PRICE                       PRICE                       PRICE
                                       ------------  ------------  ------------  ------------  ------------  ------------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
Outstanding on January 1                     7,816   $      2.56         5,148   $      0.44         4,340   $      0.38
Granted                                      1,825          2.63         3,910          3.39         1,050          0.67
Assumed in MAS Acquisition                     --             --         1,211          4.23           --             --
Exercised                                   (1,672)         0.67        (2,452)         0.25           --             --
Forfeited                                     (612)         3.44            (1)        10.00          (242)        (0.49)
                                       ------------                ------------                ------------
Outstanding on December 31                   7,357          2.98         7,816          2.56         5,148          0.44
                                       ============                ============                ============
Exercisable on December 31                   5,333          3.07         3,893          1.70         4,270          0.39
                                       ============                ============                ============
Shares available for grant on
   December 31                               1,157                       2,370                           8
                                       ============                ============                ============
</TABLE>

The following table  summarizes  information  about Digital Angel  Corporation's
stock  options at  December  31,  2003 (in  thousands,  except  weighted-average
exercise price data):

<TABLE>
<CAPTION>
                                    OUTSTANDING STOCK OPTIONS           EXERCISABLE STOCK
                               -----------------------------------------------------------------
                                           WEIGHTED
                                            AVERAGE      WEIGHTED
                                           REMAINING      AVERAGE
                                          CONTRACTUAL    EXERCISE             WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES        SHARES       LIFE          PRICE   SHARES      EXERCISE PRICE
------------------------------ --------- -------------- -------------------  -------------------
<S>                            <C>         <C>          <C>         <C>       <C>
$ 0.01 to $2.00                   1,945           8.04  $   1.10     1,096      $    0.49
$ 2.01 to $4.00                   4,720           8.76      2.70     3,546           3.42
$ 4.01 to $6.00                     550           7.17      4.15       550           4.15
$ 6.01 to $8.00                     --              --        --        --             --
$ 8.01 to $10.00                    142           6.38     10.00       141          10.00
                               ---------                           --------     ----------
                                  7,357                 $   2.98     5,333      $    3.07
                               =========                           ========
</TABLE>

InfoTech USA, Inc.

In February 1998, InfoTech USA, Inc.'s shareholders approved a stock option plan
(the  "InfoTech  1998  Plan"),  as amended.  Under the InfoTech  1998 Plan,  1.0
million  shares of InfoTech  USA,  Inc.'s common stock are reserved for issuance
upon the exercise of options  designated  as either  incentive  stock options or
non-qualified  stock options.  The InfoTech 1998 Plan will terminate in February
2008.  During  1998,  1999 and 2000,  options  were  granted  to  directors  and
employees of InfoTech  USA,  Inc.  with  immediate  vesting.  All other  options
granted under the plan vest over a four-year period following the date of grant.
Options  granted  under the InfoTech 1998 Plan expire from five to 11 years from
the date of grant. As of December 31, 2003, 0.8 million options have been issued
under the InfoTech 1998 Plan and 0.2 million options remain outstanding.


                                                                       Page F-49
<PAGE>


In March 2001, the shareholders of InfoTech USA, Inc. approved the InfoTech USA,
Inc. 2001 Flexible  Stock Plan (the  "InfoTech  2001 Plan").  Under the InfoTech
2001 Plan, the number of shares which were issued, or for which options, SARs or
performance shares may be granted to certain  directors,  officers and employees
of InfoTech USA,  Inc. was 2.5 million with a provision for an annual  increase,
effective as of the first day of each calendar year, commencing with 2002, equal
to 25% of the number of InfoTech USA, Inc.'s  outstanding shares as of the first
day of such calendar  year, but in no event more than 10.0 million shares in the
aggregate.  As of December 31, 2003,  3.5 million stock options have been issued
under the InfoTech 2001 Plan,  and 3.2 million were  outstanding  as of December
31, 2003. No SARs have been granted as of December 31, 2003. The options may not
be exercised  until  six-months to one year after the options have been granted,
and are exercisable  over a period of ranging from seven to ten years.

VeriChip Corporation

In February  2002, the Board of Directors of VeriChip  Corporation  approved the
VeriChip  Corporation 2002 Flexible Stock Plan (the "VeriChip 2002 Plan"). Under
the  VeriChip  2002  Plan,  the  number of shares  for  which  options,  SARs or
performance shares may be granted to certain  directors,  officers and employees
is  8.0  million.  As  of  December  31,  2003,  6.2  million  options,  net  of
forfeitures,  have been granted to directors,  officers and employees  under the
plan, and all of the options  granted were  outstanding as of December 31, 2003.
The  options  vest from one to two years  from the date of grant and  expire ten
years from the vesting  date. As of December 31, 2003, no SARs have been granted
under the VeriChip 2002 Plan.

Thermo Life Energy Corp.

In April 2003,  the Board of Directors of Thermo Life Energy Corp.  approved the
Thermo Life Energy Corp. 2003 Flexible Stock Plan (the "Thermo Life 2003 Plan").
Under the Thermo Life 2003 Plan, the number of shares for which options, SARs or
performance shares may be granted to certain  directors,  officers and employees
is 7.0 million.  As of December 31, 2003, 3.9 million  options have been granted
to  directors,  officers and  employees  under the plan,  and all of the options
granted were  outstanding  as of December  31,  2003.  The options vest from six
months to three  years  from the date of grant and expire  seven  years from the
vesting  date.  As of December  31, 2003,  no SARs have been  granted  under the
Thermo Life 2003 Plan.

All options  granted under the stock option plans of the Company's  subsidiaries
have been issued at the fair market value on the date of grant.

QUALIFIED EMPLOYEE STOCK PURCHASE PLAN

During 1999, the Company adopted a  non-compensatory,  qualified  Employee Stock
Purchase Plan (the Stock Purchase Plan).  Under the Stock Purchase Plan, options
are granted at an exercise  price of the lesser of 85% of the fair market  value
on the date of grant or 85% of the fair market value on the exercise date. Under
the Stock Purchase Plan,  options for 0.9 million common shares were  authorized
for issuance to substantially all full-time  employees of the Company,  of which
0.3 million  shares have been issued and  exercised  through  December 31, 2003.
Each  participant's  options to purchase shares will be automatically  exercised
for the  participant on the exercise dates  determined by the Company's Board of
Directors.

16.   STOCK-BASED   COMPENSATION  EXPENSE  ASSOCIATED  WITH  OPTIONS  AND  NOTES
      RECEIVABLE FOR STOCK ISSUANCES

The Company recovered approximately $1.3 million and incurred approximately $0.7
million and $5.3 million of non-cash,  stock-based  compensation  expense during
2003, 2002 and 2001, respectively, due primarily to re-pricing 1.9 million stock
options during 2001. The re-priced  options had original exercise prices ranging
from $6.90 to $63.40 per share and were modified to change the exercise price to
$1.50 per share. Due to the modification,  these options are being accounted for
as  variable  options  under APB No. 25 and,  accordingly,  fluctuations  in the
Company's  common  stock price result in  increases  and  decreases of non-cash,
stock-based  compensation expense until the options are exercised,  forfeited or
expired.


                                                                       Page F-50
<PAGE>

During 2003 and 2002, the Company incurred  approximately  $0.1 million and $4.1
million,  respectively,  for charges to increase valuation  reserves  associated
with the  uncollectibility  of notes received for stock  issuances of which $0.1
million and $3.8  million,  respectively,  related to notes  received  for stock
issuances to directors and officers being held in escrow by the Company.

Pursuant to the terms of the pre-merger  Digital Angel and MAS merger agreement,
effective March 27, 2002,  options to acquire shares of pre-merger Digital Angel
common stock were  converted into options to acquire shares of MAS common stock.
The  transaction  resulted in a new  measurement  date for the options and, as a
result,  the Company  recorded  non-cash,  stock-based  compensation  expense of
approximately $18.7 million during 2002.

The non-cash, stock-based compensation charges associated with options and notes
receivable for stock  issuances are included in the  Consolidated  Statements of
Operations in selling, general and administrative expense.

17.   SEVERANCE AGREEMENTS

On March 21, 2003, Richard J. Sullivan, the Company's then Chairman of the Board
of Directors  and Chief  Executive  Officer,  retired from such  positions.  The
Company's  Board of  Directors  negotiated  a severance  agreement  with Richard
Sullivan  under which he received a one-time  payment of 5.6.  million shares of
the Company's common stock. The Company issued the shares to Richard Sullivan on
March  1,  2004.  In  addition,  stock  options  held  by  him  exercisable  for
approximately  1.1 million shares of the Company's  common stock were re-priced.
The options  surrendered  had  exercise  prices  ranging from $1.50 to $3.20 per
share and were replaced with options  exercisable at $0.10 per share. All of the
re-priced options have been exercised.  Richard Sullivan's  severance  agreement
provides that the payment of shares and re-pricing of options provided for under
that  agreement is in lieu of all future  compensation  and other  benefits that
would have been owed to him under his employment  agreement.  Richard Sullivan's
employment agreement provided for:

      o     an annual  salary of $450,000  and an annual  bonus of not less than
            $140,000 for the term of his employment  agreement (which was due to
            expire March 1, 2008, roughly five years later);

      o     supplemental  compensation  of  $2,250,000  (to be paid in 60  equal
            monthly  payments of $37,500 each), in the event of a termination of
            his  employment  for any reason other than a termination  due to his
            material default under the agreement; and

      o     a  lump  sum  payment  of  $12,105,000,  upon  the  occurrence  of a
            "Triggering  Event,"  defined  under  the  employment  agreement  to
            include a change of control of the  Company or his  ceasing to serve
            as the Company's  Chairman of the Board or Chief  Executive  Officer
            for any reason  other  than due to his  material  default,  with the
            Company having the option to pay this amount in cash or in shares of
            its common  stock or any  combination  of the two.  In the event the
            Company  opted to make any  portion of the  payment in shares of its
            common stock, the agreement  stipulated that the common stock was to
            be valued at the  average  closing  price of the stock on the Nasdaq
            National  Market (the Company's stock was, at the time the agreement
            was entered into, listed on the Nasdaq National Market but has since
            been  transferred  to the SmallCap) over the last five business days
            prior to the date of the Triggering Event.

In total, the employment agreement obligated the Company to pay Richard Sullivan
approximately $17.3 million under, or in connection with, the termination of his
employment agreement.  In view of the Company's cash constraints and its need at
the time to dedicate its cash  resources to satisfying  its  obligations  to IBM
Credit, the Company commenced negotiations with Richard Sullivan that led to the
proposed terms of his severance agreement.  The severance agreement required the
Company to make  approximately $3.9 million less in payments to Richard Sullivan
than would have been owed to him under his employment agreement.


                                                                       Page F-51
<PAGE>


On March  21,  2003,  Jerome C.  Artigliere,  the  Company's  then  Senior  Vice
President and Chief Operating Officer,  resigned from such positions.  Under the
terms of his severance agreement,  Mr. Artigliere received 0.5 million shares of
the Company's common stock.  The Company issued the shares to Mr.  Artigliere on
March  1,  2004.  In  addition,  stock  options  held  by  him  exercisable  for
approximately  0.2 million shares of the Company's  common stock were re-priced.
The options  surrendered  had  exercise  prices  ranging from $1.50 to $3.20 per
share and were replaced with options  exercisable at $0.10 per share. All of the
re-priced  options have been exercised.  Mr.  Artigliere's  severance  agreement
provides  that the payment of shares and  re-pricing of options  provided  under
that  agreement is in lieu of all future  compensation  and other  benefits that
would  have  been owed to him under his  employment  agreement.  That  agreement
required  the Company to make  payments  of  approximately  $1.5  million to Mr.
Artigliere.

As a  result  of the  termination  of  Richard  Sullivan's  employment  with the
Company, a "triggering  event" provision in the severance  agreement the Company
entered into with Garrett  Sullivan,  the Company's  former Vice Chairman of the
Board,  (who is not related to Richard  Sullivan)  at the time of his ceasing to
serve in such  capacity  in  December  2001,  has been  triggered.  The  Company
negotiated a settlement of its obligations  under Garrett  Sullivan's  severance
agreement  that  required  the Company to issue to Garrett  Sullivan 0.8 million
shares of the Company's common stock.  The Company issued the shares,  valued at
approximately $3.5 million, to Garrett Sullivan on February 17, 2004.

The Company's  shareholders  have approved the issuances of the common stock and
have  ratified the  re-pricing  of the options  under the terms of the severance
agreements  with  Richard J.  Sullivan  and Jerome C.  Artigliere  and they have
approved the issuance of the common stock under the agreement  entered into with
Garrett Sullivan.  The terms of each of the severance agreements were subject to
shareholder  approval,  in accordance with applicable Nasdaq rules,  because the
agreements:  (i) were  deemed to be  compensatory  arrangements  under which the
Company's common stock was being acquired by officers or directors;  and (ii) in
Richard  Sullivan's  case,  such issuance may have  resulted in his  potentially
holding more than 20% of the  outstanding  shares of the Company's  common stock
following  the  issuance of the shares and  exercise  of options  covered by his
severance agreement.

During the year ended  December 31,  2003,  as a result of the  terminations  of
Messrs.  Sullivan and  Artigliere,  the Company  recorded  severance  expense of
approximately  $18.1 million,  including $2.7 million of expense relating to the
re-priced  options.  The  severance  expense  is  included  in the  Consolidated
Statements of Operations in selling,  general and  administrative  expense.  The
remaining  obligation under the severance agreements as of December 31, 2003, is
included in the Consolidated Balance Sheets as a component of additional paid-in
capital under the caption  "Liability to be settled in common stock." The shares
were issued to Garrett  Sullivan on February 17, 2004,  and to Messrs.  Sullivan
and Artigliere on March 1, 2004.

18.   ASSET IMPAIRMENT

      Asset  impairment  during the years ended December 31, 2003, 2002 and 2001
was:

                                        2003         2002        2001
                                        ----         ----        ----
Goodwill:
  Advanced Technology                  $    --     $    --     $30,453
  Digital Angel Corporation                 --      31,460         726
  All Other                              2,154          --      32,427
----------------------------------     -------     -------     -------
       Total goodwill                    2,154      31,460      63,606
Property and equipment                      --       6,860       2,372
Software and other                         302         337       5,741
----------------------------------     -------     -------     -------
                                       $ 2,456     $38,657     $71,719
==================================     =======     =======     =======


                                                                       Page F-52
<PAGE>


As of December 31, 2003,  the net carrying  value of the Company's  goodwill was
$63.3 million.  There was no impairment of goodwill upon the adoption of FAS 142
on  January  1,  2002.  However,  based  upon the  Company's  annual  review for
impairment, the Company recorded goodwill impairment charges of $2.2 million and
$31.5  million  in the  fourth  quarters  of 2003 and  2002,  respectively.  The
impairment  charge recorded in 2003 relates to the goodwill  associated with the
Company's InfoTech USA, Inc. segment.  The impairment charge for 2002 relates to
the goodwill associated with Digital Angel Corporation's Wireless and Monitoring
division.  (During  the  fourth  quarters  of 2003 and 2002,  the  Company  also
impaired  $2.4  million and $30.7  million of goodwill,  respectively,  and $0.6
million of intangible assets associated with Digital Angel Corporation's Medical
Systems  operations,  all of which are included in Discontinued  Operations,  as
more fully discussed in Note 20).

In accordance with FAS 142, upon adoption,  the Company was required to allocate
goodwill  to its  reporting  units.  The  Company's  reporting  units  are those
businesses,  which have goodwill and for which discrete financial information is
available  and upon which  segment  management  make  operating  decisions.  The
Company's methodology for assigning goodwill to its reporting units is described
in Note 8.

      As of December 31, 2002, the Company's  reporting  units  consisted of the
following:

      o     Advanced Technology segment's Computer Equity Corporation:

      o     Advanced Technology segment's P. Tech, Inc.;

      o     Advanced Technology segment's Pacific Decision Sciences;

      o     Digital Angel Corporation's Animal Applications division;

      o     Digital Angel Corporation's Wireless and Monitoring division;

      o     Digital Angel Corporation's GPS and Radio Communications division;

      o     Digital Angel Corporation's  Medical Systems division (consisting of
            the  business  operations  of MAS,  which was  acquired on March 27,
            2002, and which is now included as part of  Discontinued  Operations
            in the financial statements); and

      o     InfoTech USA, Inc.

The  Company's  reporting  units  at  December  31,  2003,  were the same as its
reporting units at December 31, 2002,  except for the exclusion of Digital Angel
Corporation's  Wireless  and  Monitoring  division,  as its  goodwill  was fully
impaired at December 31, 2002, as discussed below.

The Company's  methodology  for estimating the fair value of each reporting unit
during the fourth  quarters  of 2003 and 2002 was a  combination  of  impairment
testing  performed both  internally and  externally.  The tests for the P-Tech.,
Inc., and Pacific Decision  Sciences  reporting units were performed  internally
based  primarily  on  discounted  future cash flows.  The tests for the Computer
Equity  Corporation  reporting unit, the reporting units associated with Digital
Angel  Corporation  and the InfoTech USA,  Inc.  reporting  unit were  performed
externally  through the engagement of independent  valuation  professionals  who
performed  valuations  using a combination of comparable  company and discounted
cash flow  analyses).  The InfoTech USA, Inc.  reporting  unit has a fiscal year
ending on September 30, and therefore,  these tests were performed  during their
fiscal 2003 and 2002  fourth  quarters.  If the fair value of a  reporting  unit
exceeded its carrying value, then no further testing was required.  However,  if
the  carrying  value  of a  reporting  unit  exceeded  its fair  value,  then an
impairment charge was recorded.

Digital Angel  Corporation  engaged an independent  valuation firm to review and
evaluate  the  goodwill  of  Digital  Angel  Corporation,  as  reflected  on the
Company's books as of December 31, 2003 and 2002.  Independently,  the valuation
firm reviewed the goodwill of the various reporting units (Animal  Applications,
Wireless and Monitoring,  GPS and Radio  Communications  and Medical Systems) at
the request of Digital Angel Corporation. Digital Angel Corporation's management
compiled the cash flow forecasts, growth rates, gross margin, fixed and variable
cost structure,  depreciation and amortization expenses, corporate overhead, tax
rates, and capital expenditures, among other data and assumptions related to the
financial projections upon which the valuation reports were based.


                                                                       Page F-53
<PAGE>

The  valuation  firm's  methodology  including  residual or terminal  enterprise
values were based on the following factors:  risk free rate of 10 years; current
leverage (E/V); leveraged beta - Bloomberg; unleveraged beta; risk premium; cost
of equity;  after-tax cost of debt; and weighted average cost of capital.  These
variables  generated a discount rate  calculation.  The assumptions  used in the
determination of fair value using discounted cash flows were as follows:

        o   Cash  flows  were  generated  for 5 years,  which  was the  expected
            recovery period for the goodwill;

        o   Earnings before interest,  taxes, depreciation and amortization were
            used as the measure of cash flow; and

        o   Discount  rates  ranging  from 15% to 20% were used.  The rates were
            determined based on the risk free rate of the 10-year U.S.  Treasury
            Bond plus a market risk premium of 7.5%. (The discount rate utilized
            by the  Company was the rate of return  expected  from the market or
            the rate of return for a similar investment with similar risks).

Residual or Terminal Enterprise Value Calculation:

The  independent  valuation  firm was engaged by Digital  Angel  Corporation  to
perform a company comparable analysis utilizing financial and market information
on publicly traded  companies that are considered to be generally  comparable to
the Animal Applications,  Wireless and Monitoring,  GPS and Radio Communications
and Medical  Systems  reporting  units.  Each analysis  provided a benchmark for
determining  the terminal  values for each  business  unit to be utilized in its
discounted  cash flow  analysis.  The  analysis  generated  a multiple  for each
reporting unit,  which was  incorporated  into the  appropriate  business unit's
discounted cash flow model.

The analyses for 2002 indicated that all of the goodwill associated with Digital
Angel  Corporation's  Wireless and Monitoring  division of  approximately  $31.5
million was impaired, as discussed below.

On November 26, 2001, the Company  launched the Digital Angel product and during
2002,  it marketed the product  extensively.  Despite the  Company's  aggressive
marketing  campaign,  the Digital  Angel  product did not achieve the  Company's
forecasted  revenues  during  2002.  Sales of the  Digital  Angel  product  were
affected,  in part, by the lack of GPS tracking  capabilities  within buildings.
The  Company  is  currently  working on the  development  of the  Digital  Angel
technology to include assisted GPS capabilities to enhance these "line of sight"
issues. Neither the Company nor Digital Angel Corporation had a historical track
record of  achieving  forecasts  for new or existing  technology  products.  The
Digital Angel  watch/pager  is the primary  revenue driver for the Digital Angel
Corporation's  Wireless  and  Monitoring  division.  In addition to the "line of
sight  issues,"  the poor sales are partly  explained  by an  overestimation  of
consumer  demand  as  a  result  of a  challenging  economic  environment  (i.e.
consumers  considered the Digital Angel watch/pager to be a discretionary luxury
item), and an uncertain marketplace (the Company  overestimated  consumer demand
for an  innovative  and  new  technology  to be  introduced  into  the  consumer
marketplace).  As of December 31, 2002, Digital Angel Corporation's Wireless and
Monitoring  segment had not recorded any  significant  revenues from its Digital
Angel product and it had not achieved the revenue  projections used as the basis
for the  Company's  impairment  tests upon the adoption of FAS 142 on January 1,
2002.  At December 31, 2002,  the market value of the  Company's  investment  in
Digital  Angel  Corporation  (AMEX:DOC)  was  approximately  $50.0  million.  In
consideration of these factors, the newness of the Digital Angel Technology, the
operating  history  of  Digital  Angel  Corporation,  the  challenging  economic
environment and uncertainties in the marketplace along with the independent fair
value measurement  valuations  performed by the independent  professionals,  and
other valuations  performed,  the Company  concluded that future cash flows from
certain  operations  would not be sufficient to recover all of the $31.5 million
of goodwill associated with Digital Angel Corporation's  Wireless and Monitoring
division.  Accordingly,  this amount was recorded as an impairment charge during
the fourth quarter of 2002.


                                                                       Page F-54
<PAGE>

The Company's  InfoTech USA, Inc. segment operates on a September 30 fiscal year
end. As part of  InfoTech  USA,  Inc.'s  fiscal year end  planning  cycle,  they
engaged an  independent  valuation firm to review and evaluate their goodwill of
approximately  $2.2 million.  The goodwill  resulted from prior  acquisitions by
InfoTech USA, Inc. The  methodology  used by the  independent  valuation firm to
evaluate  InfoTech USA,  Inc.'s goodwill was the same as discussed above for the
evaluations associated with Digital Angel Corporation.  Based on the evaluation,
InfoTech  USA,  Inc.'s  goodwill  was not  impaired as of  September  30,  2003.
However,  InfoTech USA, Inc. has not achieved its projected  operating  results,
and it has not returned to profitability (InfoTech USA, Inc. has incurred losses
during the past several years.).  Also, the market value of InfoTech USA, Inc.'s
common  stock,   even  after  adjustment  for  its  limited  public  float,  was
significantly less at December 31, 2003, than its book value. In addition, third
parties had expressed interest in purchasing InfoTech USA, Inc. for amounts less
than the Company's  carrying  value.  As a result of these factors,  the Company
believes that the full value of InfoTech USA, Inc.'s  goodwill of  approximately
$2.2 million was impaired as of December 31, 2003.

Future goodwill  impairment reviews may result in additional  write-downs.  Such
determination  involves  the use of  estimates  and  assumptions,  which  may be
difficult to accurately measure or value.

In the fourth quarter of 2002,  Digital Angel Corporation  impaired $6.4 million
of software associated with its Wireless and Monitoring  segment.  The write off
related  to an  exclusive  license  to a  digital  encryption  and  distribution
software  system.  The charge is  included  in the  Consolidated  Statements  of
Operations under the caption Asset Impairment.

As a result of the  economic  slowdown  during  2001,  the  Company  experienced
deteriorating  sales for  certain of its  businesses.  In  addition,  management
concluded that a full transition to an advanced  technology company required the
sale or closure of all units that did not fit into the  Company's  new  business
model or were not cash-flow  positive.  This resulted in the shutdown of several
of the Company's businesses during the third and fourth quarters of 2001 and the
first  quarter of 2002.  Also,  letters of intent that the Company had  received
during the last half of 2001 and the first  quarter of 2002  related to the sale
of certain of its businesses  indicated a decline in their fair values. The sale
of these  businesses  did not comprise the sale of an entire  business  segment.
Based  upon these  developments,  the  Company  reassessed  its future  expected
operating  cash flows and  business  valuations  and at December  31,  2001,  it
performed  undiscounted  cash flow  analyses by business unit to determine if an
impairment  existed.  For purposes of these analyses,  earnings before interest,
taxes, depreciation and amortization were used as the measure of cash flow. When
an  impairment  was  determined  to  exist,  any  related  impairment  loss  was
calculated  based on fair value.  Fair value was determined  based on discounted
cash flows.  The  discount  rate  utilized by the Company was the rate of return
expected  from the  market or the rate of return for a similar  investment  with
similar risks. This reassessment  resulted in the asset impairments listed above
during 2001. The assumptions  used in the Company's  determination of fair value
using discounted cash flows were as follows:

      o     Cash flows were  generated  for periods  ranging  from 5 to 10 years
            based on the expected life of the business' goodwill;

      o     Earnings before interest,  taxes, depreciation and amortization were
            used as the measure of cash flow; and

      o     A discount rate of 12.0% was used. The rate was determined  based on
            the risk free rate of the 10 year U.S.  Treasury  Bond plus a market
            risk premium of 7%.

As a result of the restructuring  and revision to the Company's  business model,
the plan to implement an enterprise wide software  system  purchased in 2000 was
discontinued  during  the third  quarter of 2001,  at which time the  associated
software costs were fully written off and the computer hardware was written down
to its estimated net realizable  value.  During 2002, the remaining value of the
equipment,  which was no longer deemed saleable of  approximately  $0.5 million,
was written off.


                                                                       Page F-55
<PAGE>

19.   INCOME TAXES

The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                     2003         2002          2001
                                                  --------     --------      --------
Current:
<S>                                               <C>          <C>           <C>
     United States at statutory rates             $    101     $    392      $     --
                                                  --------     --------      --------
     International                                      --            3            --
     Current taxes covered by net operating
       loss                                             --           --          (565)
                                                  --------     --------      --------

     Current income tax provision (credit)             101          395          (565)
                                                  --------     --------      --------

Deferred:
     United States                                   1,601          (69)       21,484
     International                                      --           --           (49)
                                                  --------     --------      --------
     Deferred income taxes provision (credit)        1,601          (69)       21,435
                                                  --------     --------      --------

                                                  $  1,702     $    326      $ 20,870
                                                  ========     ========      ========
</TABLE>

The tax effects of temporary  differences  and  carryforwards  that give rise to
significant  portions  of  deferred  tax assets and  liabilities  consist of the
following:

                                                       2003              2002
                                                   -----------------------------

Deferred Tax Assets:
Liabilities and reserves                             $  6,104          $  6,000
Stock-based compensation                               11,847             7,799
Property and equipment                                  2,142             2,115
Net operating loss carryforwards                       68,504            80,222
-------------------------------------------------------------------------------
Gross deferred tax assets                              88,597            96,136
Valuation allowance                                   (87,274)          (93,214)
-------------------------------------------------------------------------------
                                                        1,323             2,922
-------------------------------------------------------------------------------

Deferred Tax Liabilities:

Accounts receivable                                        --               366
Installment sales                                       1,151             1,151
Property and equipment                                     --                --
Intangible assets                                         172               169
-------------------------------------------------------------------------------
                                                        1,323             1,686
-------------------------------------------------------------------------------

Net Deferred Tax Asset                               $     --          $  1,236
===============================================================================

The current and long-term components of the deferred tax asset are as follows:


                                                          2003             2002
                                                       -------------------------

Current deferred tax asset                               $   --           $   13
Long-term deferred tax asset                                 --            1,223
--------------------------------------------------------------------------------
                                                         $   --           $1,236
================================================================================

The  valuation  allowance  for deferred tax asset  decreased by $5.9 million and
increased  by $26.3  million in 2003 and 2002,  respectively,  due mainly to the
generation and use of net operating losses. The valuation allowance was provided
for net deferred tax assets that exceeded the Company's  available carryback and
the level of existing deferred tax liabilities and projected pre-tax income. The
deferred tax asset of $1.2 million at December 31, 2002, relates entirely to the
Company's  52.5%  interest  its InfoTech  USA,  Inc.  subsidiary,  which files a
separate federal income tax return.

                                                                       Page F-56
<PAGE>

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


                                     2003              2002              2001
                                ------------------------------------------------
           Domestic               $  12,312          $(95,464)        $(158,552)
           International             (2,004)             (513)           (9,589)
--------------------------------------------------------------------------------
                                  $  10,308          $(95,977)        $(168,141)
================================================================================

At December 31, 2003, the Company had aggregate net operating loss carryforwards
of  approximately  $171.3 million for income tax purposes that expire in various
amounts through 2022. In 2003, the Company's gain on  extinguishment  of the IBM
debt is excluded  from  taxable  income under ss.  108(a)(1)(B)  of the Internal
Revenue Code. As a result,  the net operating loss carryforwards at December 31,
2003,   have  been  reduced  by  the  amount  of  the  gain  of  $70.1  million.
Approximately  $14.2  million  of the  net  operating  loss  carryforwards  were
acquired in connection  with various  acquisitions  and are limited as to use in
any particular year based on Internal  Revenue Code sections related to separate
return year and change of ownership restrictions.  Digital Angel Corporation and
InfoTech USA, Inc. file separate  federal  income tax returns.  Of the aggregate
net  operating  loss  carryforwards,  $33.9  million and $4.7 million  relate to
Digital  Angel  Corporation  and InfoTech  USA,  Inc.,  respectively.  These net
operating loss  carryforwards are available to only offset future taxable income
of those companies.

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


                                                    2003         2002      2001
                                                --------------------------------
                                                     %            %         %
                                                --------------------------------
Statutory benefit rate                               34           34        34
Nondeductible goodwill amortization/impairment       27          (17)      (17)
State income taxes, net of federal benefits           2           --        --
International tax rates different from the
  the statutory US federal rate                      --           --        (2)
Increase in value of warrants exercisable
in Digital Angel common stock                        10           --        --
Nondeductible interest                               53           --        --
Change in deferred tax asset valuation
  Allowance                                        (104)(1)      (20)      (30)
Other                                                 3            3         3
--------------------------------------------------------------------------------

                                                     25           --       (12)
================================================================================

      (1)   INCLUDES THE TAX EFFECT ON STOCK OPTIONS EXERCISED IN 2003 OF 18%.


                                                                       Page F-57
<PAGE>


20.   DISCONTINUED OPERATIONS

During the three-months ended June 30, 2004, Digital Angel  Corporation's  Board
of Directors approved a plan to sell its Medical Systems operations,  which were
acquired on March 27, 2002, and the business assets of Medical Systems were sold
effective April 19, 2004. Medical Systems represented the business operations of
MAS. On March 31,  2002,  the  Company's  93% owned  subsidiary,  Digital  Angel
Corporation,  referred to as pre-merger  Digital Angel,  merged with MAS and MAS
changed  its  name  to  Digital  Angel  Corporation.  Medical  Systems  business
activities  consisted of a staff of logistics  specialists  and  physicians  who
provided  medical  assistance   services  and  interactive  medical  information
services  to  people  traveling   anywhere  in  the  world.   Services  included
coordination  of  medical  care,   provision  of  general  medical  information,
physician  consultation,   translation  assistance,  claims  handling  and  cost
containment on behalf of assistance  companies,  insurance companies and managed
care  organizations.  It also offered medical training  services to the maritime
industry,  and sold a variety  of kits  containing  pharmaceutical  and  medical
supplies to its  maritime  and  airline  customers  through  its  pharmaceutical
warehouse facility located in Owings, Maryland.

The business assets of Medical Systems were sold to MedAire,  Inc. in connection
with an Asset  Purchase  Agreement,  referred to as APA, dated April 8, 2004, by
and between Digital Angel  Corporation and MedAire,  Inc. Under the terms of the
APA, the purchase price was $0.4 million, plus any prepaid deposits, the cost of
certain  pharmaceutical  inventory and supplies,  and the  assumption of certain
liabilities,  reduced by any  pre-billing to or pro-rata  prepayments by certain
customers.  The  assets  sold  included  all  of  the  tangible  and  intangible
intellectual  property  developed for the medical  services  business  including
pharmaceutical  supplies  and  other  inventory  items,  customer  and  supplier
contracts,  computer  software  licenses,  internet  website and domain name and
mailing lists, but did not include the land and building used by this operation.
Medical Systems' land and building were sold in a separate unrelated transaction
to a third party on July 31, 2004 for approximately $1.5 million.

Medical Systems was one of the Company's  reporting units in accordance with FAS
142. Accordingly,  the financial condition, results of operations and cash flows
of  Medical  Systems  have  been  reported  as  Discontinued  Operations  in the
Company's  financial  statements,  and prior  periods  have been  restated.  The
following  discloses the operating losses from  Discontinued  Operations for the
years ended December 31, 2003 and 2002, which consist of the losses attributable
to Medical Systems:

                                                  YEAR ENDED    YEAR ENDED
                                                  DECEMBER 31,  DECEMBER 31,
                                                --------------------------------
                                                     (AMOUNTS IN THOUSANDS)

                                                     2003          2002
                                                     ----          ----
   Product revenue                                 $    875      $    546
   Service revenue                                    1,405         1,181
                                                --------------------------------
Total revenue                                         2,280         1,727
   Cost of products sold                                383           270
   Cost of services sold                              1,172           823
                                                --------------------------------
Total cost of products and services sold              1,555         1,093
                                                --------------------------------
Gross profit                                            725           634
   Selling, general and administrative expense          776           769
   Asset impairment                                   2,986        30,725
   Depreciation and amortization                        492           409
   Interest and other income                           (196)          (16)
   Interest expense                                     149            47
   Minority interest                                 (1,048)       (6,895)
                                                --------------------------------
Loss from Discontinued Operations                  $ (2,434)     $(24,405)
                                                ================================


                                                                       Page F-58
<PAGE>


The above results do not include any allocated or common overhead expenses.  The
Company has not provided a benefit for income  taxes on the losses  attributable
to Medical Systems.  The Company does not anticipate  Medical Systems  incurring
additional  losses in the  future.  However,  in  accordance  with FAS 144,  any
additional  operating  losses or changes in the values of assets or  liabilities
will be reflected in the Company's financial statements as incurred.

The asset  impairments  for  Medical  Systems  consisted  of the  impairment  of
goodwill of  approximately  $2.4  million  and $30.7  million as a result of the
Company's  annual  impairment tests performed during the fourth quarters of 2003
and 2002,  respectively.  In addition,  during the fourth  quarter of 2003,  the
Company incurred an impairment  charge of approximately  $0.6 million related to
Medical Systems' intangible assets.

On March 1, 2001, the Company's Board of Directors  approved a plan to offer for
sale its  IntelleSale  business  segment and several other  noncore  businesses.
Prior to approving the plan, the assets and results of operations of the noncore
businesses  had been  segregated for external and internal  financial  reporting
purposes from the assets and results of operations of the Company.  All of these
non-core  businesses were part of their own reporting unit for segment reporting
purposes  and all of these  businesses  were  being  held for sale.  These  five
individually  managed  businesses  operated  in  manufacturing  and  fabricating
industries  apart  from  the  Company's  core  businesses.   Accordingly,  these
operating results have been reclassified and reported as discontinued operations
for all periods presented.  The plan of disposal anticipated that these entities
would be sold or  closed  within 12  months  from  March 1,  2001,  the  defined
"measurement date".

As of December  31, 2003,  the Company has sold or closed all of the  businesses
comprising  Discontinued  Operations.  Proceeds  from the sales of  Discontinued
Operations  companies were used primarily to repay amounts outstanding under the
IBM Credit Agreement.

The  following  discloses  the results of the  discontinued  operations  for the
period  January  1, 2001 to March 1, 2001.  The income for the period  January 1
through  March 1, 2001  consists  of the income  attributable  to the  Company's
Intellesale and all other non-core businesses:

                                                                 JANUARY 1, 2001
                                                                        TO
                                                                  MARCH 1, 2001
                                                                  (in thousands)

Product revenue                                                       $13,039
Service revenue                                                           846
-----------------------------------------------------------------     -------
Total revenue                                                          13,885
Cost of products sold (exclusive of depreciation and                   10,499
   amortization shown separately below)
Cost of services sold                                                     259
-----------------------------------------------------------------     -------
   Total cost of products and services sold (exclusive of              10,758
     depreciation and amortization shown separately below)
Selling, general and administrative expense                             2,534
Depreciation and amortization                                             264
Interest, net                                                              29
Provision for income taxes                                                 34
Minority interest                                                          53
-----------------------------------------------------------------     -------
Income from Discontinued Operations                                   $   213
=================================================================     =======


The above  results do not include any  allocated  or common  overhead  expenses.
Included in Interest,  net, above are interest  charges based on the debt of one
of these businesses.  This debt was repaid when the business was sold on January
31, 2002.


                                                                       Page F-59
<PAGE>


      Assets  and  liabilities  of  Discontinued  Operations  are as  follows at
December 31:

<TABLE>
<CAPTION>
MEDICAL SYSTEMS DIVISION:                                          2003          2002
                                                                 --------      --------
<S>                                                              <C>           <C>
Assets
Cash and cash equivalents                                        $     --      $      9
Accounts and unbilled receivables, net                                453           490
Inventories                                                            46            57
Other current assets                                                   43            54
Property and equipment, net                                         1,137         1,390
Goodwill, net                                                          --         2,367
Intangible and other Assets, net                                      652         1,710
----------------------------------------------------------------------------------------
Total Assets                                                     $  2,331      $  6,077
========================================================================================

Current Liabilities
   Notes payable and current
     maturities of long-term debt                                $    910      $    960
   Accounts payable                                                    71           241
   Accrued expenses                                                    99         2,039
----------------------------------------------------------------------------------------
Total Current Liabilities                                           1,080         3,240
Minority interest                                                      --            --
----------------------------------------------------------------------------------------
Total Liabilities                                                   1,080         3,240
----------------------------------------------------------------------------------------
Net Assets Of Medical Systems Division                           $  1,251      $  2,837
========================================================================================


INTELLESALE AND OTHER NON-CORE BUSINESSES:                         2003          2002
Assets                                                           --------      --------
Cash and cash equivalents                                             $--      $     66
Accounts and unbilled receivables, net                                 --           167
Inventories                                                            --            38
Property and equipment, net                                            --            56
----------------------------------------------------------------------------------------
Total Assets                                                     $     --      $    327
========================================================================================

Current Liabilities
   Notes payable and current
     maturities of long-term debt                                $     26      $     26
   Accounts payable                                                 4,178         4,189
   Accrued expenses                                                 5,341         5,334
----------------------------------------------------------------------------------------
Total Current Liabilities                                           9,545         9,549
Minority interest                                                      --           146
----------------------------------------------------------------------------------------
Total Liabilities                                                   9,545         9,695
----------------------------------------------------------------------------------------
Net Liabilities Of Intellesale and
  Other Non-Core Businesses                                      $ (9,545)     $ (9,368)
========================================================================================

TOTAL DISCONTINUED OPERATIONS:                                       2003          2002
Assets                                                           --------      --------
Cash and cash equivalents                                        $     --      $     75
Accounts and unbilled receivables, net                                453           657
Inventories                                                            46            95
Other current assets                                                   43            54
Property and equipment, net                                         1,137         1,446
Goodwill, net                                                          --         2,367
Intangible and other Assets, net                                      652         1,710
----------------------------------------------------------------------------------------
Total Assets                                                     $  2,331      $  6,404
========================================================================================
Current Liabilities
   Notes payable and current
     maturities of long-term debt                                $    936      $    986
   Accounts payable                                                 4,249         4,430
   Accrued expenses                                                 5,440         7,373
----------------------------------------------------------------------------------------
Total Current Liabilities                                          10,625        12,789
Minority interest                                                      --           146
----------------------------------------------------------------------------------------
Total Liabilities                                                  10,625        12,935
----------------------------------------------------------------------------------------
Total Net Liabilities Of Discontinued Operations                 $ (8,294)     $ (6,531)
========================================================================================
</TABLE>


The Company  has sold or closed all of the  businesses  comprising  Discontinued
Operations.  Proceeds from the sales of the  Discontinued  Operations  companies
were used primarily to repay outstanding debt.


                                                                       Page F-60
<PAGE>

The  Company  accounted  for the  Intellesale  segment  and its  other  non-core
businesses as Discontinued  Operations in accordance with Accounting  Principles
Board 30, Reporting the Results of Operations-Reporting  the Effects of Disposal
of  a  Segment  of a  Business,  and  Extraordinary,  Unusual  and  Infrequently
Occurring Events and Transactions  ("APB 30"). APB 30, of which portions related
to the  accounting  for  discontinued  operations  have been  superceded  by the
provisions  of FAS 144,  required that the Company  accrue  estimates for future
operating  losses,  gains/losses on sale, costs to dispose and carrying costs of
these businesses at the time the businesses were discontinued.  Accordingly,  at
December 31, 2000,  the Company  recorded a provision for  operating  losses and
carrying  costs  during  the  phase-out  period  for its  Intellesale  and other
non-core businesses including estimated disposal costs to be incurred in selling
the businesses.  Carrying costs consisted  primarily of cancellation of facility
and equipment leases,  legal settlements,  employment contract buyouts and sales
tax liabilities.

During  2003,  2002 and  2001,  Discontinued  Operations  incurred  an  increase
(decrease)  in estimated  loss on disposal and operating  losses  accrued on the
measurement   date  of  $0.4  million,   $(1.4)   million  and  $16.7   million,
respectively.  The primary reasons for the increase in estimated losses for 2003
were an increase in estimated  facility  cancellation  costs of $0.2 million and
the operations of the one remaining  business unit in  Discontinued  Operations,
which was sold in July 2003.  The primary  reason for the  decrease in estimated
losses  for 2002 was the  settlement  of  litigation  for an  amount  less  than
anticipated.  The primary reasons for the increase in estimated  losses for 2001
were  inventory  write-downs  of $4.5  million,  a decrease in  estimated  sales
proceeds  as  certain  of the  businesses  were  closed in the  second and third
quarters of 2001, an increase in legal expenses  related to ongoing  litigation,
additional  sales tax  liabilities  and  additional  facility  lease costs.  The
business  closures in 2001 were the result of a combination of the deteriorating
market conditions for the technology  sector as well as the Company's  strategic
decision  to  reallocate  funding  to its  core  businesses.  The  Company  also
increased its estimated loss on the sale of Innovative Vacuum  Solutions,  Inc.,
which was sold during the second  quarter of 2001, by $0.2  million,  and on the
Company's 85% owned subsidiary, Ground Effects Ltd., which was sold in the first
quarter of 2002, by $1.2 million.

The  Company  does not  anticipate  any future  losses  related to  Discontinued
Operations  as a result of changes in carrying  costs.  However,  actual  losses
could differ from its  estimates  and any  adjustments  will be reflected in the
Company's future financial statements. During the years ended December 31, 2003,
2002 and 2001, the estimated amounts recorded were as follows:

<TABLE>
<CAPTION>
      ----------------------------------------------------------------------------------------
                                                             YEAR ENDED DECEMBER 31,
                                                      2003               2002           2001
                                                      ----               ----           ----
                                                          (amounts in thousands)
<S>                                                   <C>               <C>        <C>
      Operating losses and estimated loss
         on the sale of business units                $205              $684       $13,010
      Carrying costs                                   177            (2,104)        3,685
                                                 ----------------------------------------------
                                                      $382           $(1,420)      $16,695
                                                 ==============================================
</TABLE>

A  provision  (benefit)  for  income  taxes was not  provided  on the  change in
estimated loss on disposal and operating  losses during the phase out period due
to the Company's net operating losses.


                                                                       Page F-61
<PAGE>


The following table sets forth the roll forward of the liabilities for operating
losses and carrying costs from December 31, 2001, through December 31, 2003:

<TABLE>
<CAPTION>
                                              Balance,                                                         Balance
Type of Cost                             December 31, 2001          Additions           Deductions        December 31, 2002
--------------------------------------- --------------------- ---------------------- ------------------ -----------------------
<S>                                     <C>                   <C>                    <C>                <C>
Operating losses and estimated loss
   on sale                                       $ 1,173                  $684               $1,857            $       --
Carrying costs                                     7,218                (2,104)                 206                 4,908
                                        --------------------- ---------------------- ------------------ -----------------------
Total                                            $ 8,391               $(1,420)              $2,063               $ 4,908
                                        ===================== ====================== ================== =======================
</TABLE>

<TABLE>
<CAPTION>
                                              Balance,                                                         Balance
Type of Cost                             December 31, 2002          Additions           Deductions        December 31, 2003
--------------------------------------- --------------------- ---------------------- ------------------ -----------------------
<S>                                     <C>                   <C>                    <C>                <C>
Operating losses and estimated loss
   on sale                                         $  --                  $205                 $205            $       --
Carrying costs (1)                                 4,908                   177                  172                 4,913
--------------------------------------- --------------------- ---------------------- ------------------ -----------------------
Total                                            $ 4,908                  $382                 $377                $4,913
======================================= ===================== ====================== ================== =======================
</TABLE>

      (1)   Carrying costs at December 31, 2003,  include all estimated costs to
            dispose of the  discontinued  businesses  including $2.2 million for
            lease  commitments,   $1.7  million  for  severance  and  employment
            contract settlements and $1.0 million for sales tax liabilities.

21.   EXTRAORDINARY GAIN AND IMPACT OF FAS 145

The Company  recorded  an  extraordinary  gain as a result of  settling  certain
disputes  between  the  Company  and the former  owners of Bostek,  Inc.  and an
affiliate (Bostek). As part of the settlement  agreement,  the parties agreed to
forgive a $9.5 million payable provided the Company registered approximately 0.3
million  shares of the Company's  common stock by June 15, 2001. The Company was
successful in meeting the June 15, 2001 registration  deadline, and accordingly,
the  extinguishment  of the $9.5  million  payable  was  recorded  in 2001 as an
extraordinary gain.

CHANGE IN METHOD OF ACCOUNTING FOR EXTINGUISHMENT OF DEBT - IMPACT OF FAS 145

As required,  the Company has adopted FAS 145 effective  January 1, 2003.  Under
FAS 145, gains and losses on the  extinguishment of debt are included as part of
continuing operations.  FAS 145 requires all periods presented to be consistent,
and as such, gains and losses on the extinguishment of debt previously  recorded
as extraordinary must be reclassified from extraordinary treatment and presented
as a component of continuing operations.


                                                                       Page F-62
<PAGE>


The following table presents the impact of FAS 145 on the Company's Consolidated
Statements of Operations as indicated (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                  YEAR ENDED       YEAR ENDED
                                                                 DECEMBER 31,     DECEMBER 31,
                                                                      2002             2001
                                                                 ------------     ------------
<S>                                                              <C>              <C>
Loss from continuing operations before provision (benefit)
for income taxes and minority interest: Loss from continuing
operations before provision (benefit) for income taxes and
minority interest, as previously reported                        $    (95,977)    $   (177,606)

Gain from extinguishment of debt, previously reported as
extraordinary                                                              --            9,465
                                                                 ------------     ------------
Adjusted loss from continuing operations before provision
(benefit) for income taxes and minority interest                 $    (95,977)    $   (168,141)
                                                                 ============     ============

Loss from continuing operations before minority interest:
Loss from continuing operations before minority interest, as
previously reported                                              $    (96,303)    $   (198,476)
Gain from extinguishment of debt, previously reported as
extraordinary                                                              --            9,465
Deduct taxes on gain from extinguishment of debt (1)                       --               --
                                                                 ------------     ------------

Adjusted loss from continuing operations before
minority interest                                                $    (96,303)    $   (189,011)
                                                                 ============     ============

Loss from continuing operations:

Loss from continuing operations, as previously reported          $    (89,500)    $   (198,086)
Gain from extinguishment of debt, previously reported as
extraordinary                                                              --            9,465
Deduct taxes on gain from extinguishment of debt (1)                       --               --
                                                                 ------------     ------------
Adjusted loss from continuing operations                         $    (89,500)    $   (188,621)
                                                                 ============     ============

Loss before extraordinary gain:

Loss before extraordinary gain, as previously reported           $   (112,485)    $   (214,568)
Gain from extinguishment of debt, previously reported as
extraordinary                                                              --            9,465
Deduct taxes on gain from extinguishment of debt (1)                       --               --
                                                                 ------------     ------------
Adjusted loss before extraordinary gain                          $   (112,485)    $   (205,103)
                                                                 ============     ============

Earnings (loss) per common share - basic and diluted:

 Loss from continuing operations, as previously reported         $      (3.33)    $     (12.27)
 Gain from extinguishment of debt, previously reported as
  Extraordinary                                                            --             0.56
                                                                 ------------     ------------
 Adjusted loss from continuing operations                        $      (3.33)    $     (11.71)
                                                                 ============     ============

Earnings (loss) per common share - basic and diluted:

 Extraordinary gain, previously as reported                      $         --     $      (0.56)
 Reclassify gain from extinguishment of debt                               --            (0.56)
                                                                 ------------     ------------
 Adjusted extraordinary gain                                     $         --     $         --
                                                                 ============     ============
</TABLE>

      (1)   No taxes were provided on the gain from the  extinguishment  of debt
            due to the Company's net operating losses.


                                                                       Page F-63
<PAGE>

22.   EARNINGS (LOSS) PER SHARE

      A  reconciliation  of the numerator and  denominator  of basic and diluted
earnings (loss) per share is provided as follows:

<TABLE>
<CAPTION>
                                                                                       2003             2002              2001
                                                                                       ----             ----              ----
         NUMERATOR:
<S>                                                                                 <C>              <C>              <C>
   Income (loss) from continuing operations                                         $     5,959      $   (89,500)     $  (188,621)
   Preferred stock dividends                                                                 --               --           (1,147)
   Accretion of beneficial conversion feature
      of redeemable preferred stock                                                          --               --           (9,392)
-------------------------------------------------------------------------------     -----------      -----------      -----------

Numerator for basic earnings per share -
   Income (loss) from continuing operations available to common
      stockholders                                                                        5,959          (89,500)        (199,160)
   (Loss) income from discontinued operations available to
      common stockholders                                                                (2,816)         (22,985)         (16,482)
-------------------------------------------------------------------------------     -----------      -----------      -----------

   Net income (loss) available to common stockholders                               $     3,143      $  (112,485)     $  (215,642)
===============================================================================     ===========      ===========      ===========

DENOMINATOR:
   Denominator for basic earnings per
    share - weighted-average shares outstanding (1)                                      36,178           26,923           17,001
  Weighted-average shares:
     Stock options                                                                          759               --               --
     Warrants                                                                               362               --               --
-------------------------------------------------------------------------------     -----------      -----------      -----------
   Denominator for diluted earnings per
      share - weighted-average shares outstanding (1)                                    37,299           26,923           17,001
-------------------------------------------------------------------------------     -----------      -----------      -----------

EARNINGS (LOSS) PER SHARE - BASIC
   Continuing operations                                                            $      0.17      $     (3.33)     $    (11.71)
   Discontinued operations                                                                (0.08)           (0.85)           (0.97)
-------------------------------------------------------------------------------     -----------      -----------      -----------
TOTAL - BASIC                                                                       $      0.09      $     (4.18)     $    (12.68)
===============================================================================     ===========      ===========      ===========
EARNINGS (LOSS) PER SHARE - DILUTED
   Continuing operations                                                            $      0.16      $     (3.33)     $    (11.71)
   Discontinued operations                                                                (0.08)           (0.85)           (0.97)
-------------------------------------------------------------------------------     -----------      -----------      -----------
TOTAL - DILUTED                                                                     $      0.08      $     (4.18)     $    (12.68)
===============================================================================     ===========      ===========      ===========
</TABLE>

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

(1)   The  weighted-average  shares  listed  below  were  not  included  in  the
      computation  of diluted  loss per share for the years ended  December  31,
      2003, 2002 and 2001, because to do so would have been anti-dilutive.


                                                2003       2002       2001
                                               ------     ------     ------
Debenture conversion                             749         --         --
Redeemable preferred stock conversion             --         --     14,077
Warrants                                          --        295         --
Stock options                                     --      1,540        417
--------------------------------------------------------------------------------
                                                 749      1,835     14,494
================================================================================


                                                                       Page F-64
<PAGE>


23.   COMMITMENTS AND CONTINGENCIES

Rentals of space, vehicles, and office equipment under operating leases amounted
to approximately $1.7 million, $2.0 million and $3.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

The approximate  minimum payments required under operating leases and employment
contracts that have initial or remaining terms in excess of one year at December
31, 2003, are as follows (in thousands):

                                      MINIMUM                     EMPLOYMENT
YEAR                              RENTAL PAYMENTS                 CONTRACTS
--------------------------------------------------------------------------------

2004                                  $1,345                       $1,660
2005                                     939                          648
2006                                     577                          367
2007                                     590                           --
2008                                     573                           --
Thereafter                             9,134                           --
--------------------------------------------------------------------------------
                                     $13,158                       $2,675
================================================================================

The  Company  currently  does  not  have  employment  contracts  with any of the
executive  officers  of  Applied  Digital   Solutions,   Inc.  The  Company  has
established a severance  policy for its executive  officers  under which,  if it
terminates  an executive  officer  without  cause,  as defined,  or the employee
resigns with good reason the employee will receive severance payments. Under the
policy,  senior vice  presidents  and above will receive one year of base salary
and vice presidents will receive six-months of base salary,  based on the salary
in effect at time of the termination. The severance amount is reduced by half if
the employee has been in the Company's  employ for less than one year.  Payments
cease if, in any  material  respect,  the employee  engages in an activity  that
competes with the Company or if the employee breaches a duty of confidentiality.

On June 30, 2003,  the Company's  Board of Directors  (through the  Compensation
Committee)  approved the payment of approximately  $4.3 million in discretionary
bonus  awards.  The approval of the bonuses  directly  reflected  the efforts of
certain  employees/directors  in satisfying all of the Company's  obligations to
IBM Credit, which resulted in the Company recording a gain on the extinguishment
of debt of $70.1 million during 2003.  These bonuses are more fully described in
Note 2.

The  Company  has  entered  into  employment  contracts  with key  officers  and
employees of the Company's subsidiaries.  The agreements are for periods ranging
from one to three years through February 2007. Some of the employment  contracts
also call for bonus arrangements  based on earnings of a particular  subsidiary.
The Company  recorded $0.0 million and $0.5 million  associated with these bonus
arrangements during 2003 and 2002, respectively.

On March 24, 2003, the Company terminated its employment  agreements with two of
its executive officers. The terms of the IBM Credit Agreement limited the amount
of salary the Company could pay these  executive  officers in cash and prevented
the Company from making certain cash incentive and perquisite  payments to these
executive officers. These terminations are more fully discussed in Note 17.

Effective December 31, 2001, one of the Company's directors,  who had previously
been an executive officer of the Company, retired and resigned from the Board of
Directors. As part of his termination agreement, the Company agreed to grant him
0.2 million shares of the Company's common stock the value of which was recorded
as compensation expense in the year ended December 31, 2001.


                                                                       Page F-65
<PAGE>


One of  Computer  Equity  Corporation's  major  suppliers  has  filed a UCC lien
against the ongoing accounts receivable related to Computer Equity Corporation's
telecommunications   infrastructure  contract  with  the  United  States  Postal
Service.  Currently  Computer  Equity  Corporation  is  current  on all  payment
obligations under the contract.

24.   PROFIT SHARING PLAN

The Company has a savings plan under section 401(k) of the Internal Revenue Code
for the benefit of eligible  United  States  employees.  The Company has made no
contributions to the 401(k) Plan.

In 1994,  MAS adopted a Retirement  Savings Plan (the "MAS Plan") in  accordance
with Section  401(k) of the Internal  Revenue Code. The MAS Plan is available to
all  eligible   employees  of  the  Medical  Systems  division.   Digital  Angel
Corporation  provides for discretionary  matching  contributions to the MAS Plan
equal  to  a  percentage  of  the  participant's  contributions.  Digital  Angel
Corporation made no contributions to the MAS Plan during 2003 or 2002.

The Company's  international  subsidiary  operates certain defined  contribution
pension plans.  The Company's  expense relating to the plans  approximated  $0.1
million,  $0.1 million and $0.2  million for the years ended  December 31, 2003,
2002 and 2001, respectively.

25.   LEGAL PROCEEDINGS

The  Company is party to  various  legal  proceedings  and other  legal  matters
encompassing all threatened, pending claims, judgments and or settlements, etc.,
and  accordingly,  has  recorded a provision  of $3.7  million in the  financial
statements at December 31, 2003. 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.

On January 31, 2002, Treeline,  Inc. filed a complaint in the Common Pleas Court
of  Cuyahoga  County,  Ohio  against  the  Company,  and  one of  the  Company's
subsidiaries, STR, Inc., now known as ARJANG, Inc. ("STR") and another defendant
who was  formerly an  executive  of STR,  alleging  that STR  breached its lease
agreement with Treeline, Inc. in connection with a facility no longer being used
by the Company.  On May 15, 2003, the Company settled the dispute with Treeline,
Inc., subject to certain conditions subsequent.  The settlement provided for the
issuance of 0.1 million shares of the Company's  common stock,  subject to price
protection  provisions  under  the  settlement  agreement.  The  Securities  and
Exchange Commission declared the Company's  Registration  Statement  registering
the 0.1 million  shares  issued in  connection  with this  settlement  agreement
effective on September 10, 2003.

On March 31, 2002, 510 Ryerson Road,  Inc.  filed a lawsuit  against the Company
and one of its  subsidiaries  in connection with a lease for a facility that the
Company  vacated prior to the  expiration of the lease and which is no longer in
use. The plaintiffs  demanded relief in the amount of $2.0 million.  The Company
has entered into a settlement agreement with the plaintiffs pursuant to which it
issued to the plaintiff shares having a value of approximately $1.1 million plus
interest. The shares were issued on February 17, 2004.

On May 20, 2002, a purported securities fraud class action was filed against the
Company  and one of its  former  directors.  In the  following  weeks,  fourteen
virtually  identical  complaints were  consolidated  into a single action, In re
Applied  Digital  Solutions  Litigation,  which was filed in the  United  States
District Court for the Southern District of Florida.  In March 2003, the Company
entered into a memorandum of understanding  to settle the pending  lawsuit.  The
settlement of $5.6 million will be entirely  covered by proceeds from insurance,
and is subject to approval by the District Court. In December 2003, the District
Court issued a preliminary  approval of the class action settlement and directed
that Class  Members be given notice of the  Settlement.  The final  hearing,  at
which the Court  will  consider  whether to issue its final  approval  and enter
final judgment, is set for March 19, 2004.


                                                                       Page F-66
<PAGE>

On October 22, 2002, Anat Ebenstein, InfoTech USA, Inc.'s former Chief Executive
Officer,  filed a  complaint  against the Company and  InfoTech  USA,  Inc.  and
certain  officers  and  directors  in  connection  with the  termination  of her
employment.  The  complaint  filed in the Superior  Court of New Jersey,  Mercer
County,  seeks compensatory and punitive damages of $1.0 million arising from an
alleged  improper  termination.  The action is currently in the discovery stage.
The Company believes that a portion of any ultimate damages may be covered under
insurance.

On October 22, 2003, Melvin Maudlin (the "Plaintiff"),  a former employee at the
Company's subsidiary, Pacific Decision Sciences Corporation ("PDSC"), filed suit
in the Superior Court of California  against PDSC,  Hark Vasa and the Company in
connection with a purported trust agreement  involving PDSC which,  according to
the  Plaintiff  provides that he is to receive  monthly  payments of $10,000 for
approximately  17 years.  The  Plaintiff  has obtained a  pre-judgment  right to
attach order in the amount of his total claim of $2.1  million and  subsequently
obtained a purported writ of attachment of certain PDSC assets. The suit has not
materially affected PDSC's ability to operate its business but could affect such
operations  in the future.  Discovery  has not yet begun,  and no trial date has
been set. The Company intends to vigorously defend this suit.

In February 2003, an action was filed in Middlesex  County Superior Court in the
Commonwealth of Massachusetts. Digital Angel Corporation's subsidiary, OuterLink
(OuterLink  was acquired in January 2004, see Note 30), as well as a significant
stockholder  of OuterLink  and a principal of the  significant  stockholder  are
named as defendants.  Such principal was a director of OuterLink.  The complaint
alleged  breach of an August 25, 1999  employment  contract.  The  plaintiff was
President and Chief Executive Officer of OuterLink from July 1999 through August
2002. The Complaint seeks damages based  principally on a contractual  severance
provision that allegedly provided for four months of compensation for every year
or fraction thereof served prior to termination. At the time of termination, the
complaint alleges that the plaintiff's salary was approximately $0.3 million per
year.   The   Defendants   answered   denying  all  liability  and  asserting  a
counterclaim.  Discovery  will be  completed  in  this  matter  shortly  and the
Defendants   intend  to   vigorously   defend  this  matter  and  pursue   their
counterclaim.  The ultimate  outcome of this  proceeding  cannot be predicted at
this time and the Company is currently  unable to determine the potential effect
of this litigation on its consolidated financial position,  results of operation
or cash flows.

In June 2002, eResearch Technology,  Inc. f/k/a Premier Research Worldwide, Ltd.
("ERT")  commenced a  proceeding  in the United  States  District  Court for the
District of New Jersey  against U.S. Bank National  Association  ("US Bank") and
Digital Angel Corporation.  This suit was commenced to pursue alleged damages of
approximately  $0.4 million due to the Digital Angel  Corporation  and US Bank's
alleged failure to register  transfers of restricted  Digital Angel  Corporation
stock sold by ERT in May 2002. Digital Angel Corporation has agreed to indemnify
US Bank for all  damages  and  reasonable  costs  relating  to this  litigation.
Digital Angel Corporation has asserted a counterclaim against ERT based on ERT's
breach of a license agreement and services  agreements  between the parties that
resulted in the original issuance of approximately 0.6 million restricted shares
of Digital Angel Corporation's common stock to ERT. The damages to Digital Angel
Corporation  exceed $4 million  and this  amount  does not  include the share of
profits,  which Digital Angel  Corporation seeks to recover had ERT not breached
the  agreements.  Further,  the alleged  damages sought by the Plaintiff in this
matter do not take into account  plaintiff's duty to mitigate damages,  which if
discharged, would have resulted in a profit to ERT. The ultimate outcome of this
proceeding cannot be predicted at this time, and the Company is currently unable
to  determine  the  potential  effect  of this  litigation  on its  consolidated
financial position, results of operation or cash flows.

In February 2004,  Electronic  Identification  Devices, Ltd. ("EID") commenced a
Declaratory  Judgment  Action  against  Digital Angel  Corporation in the United
States  District  Court for the Western  District of Texas.  This action seeks a
declaration of patent  non-infringement  relating to Digital Angel Corporation's
syringe implantable identification transponders.  Monetary damages are not being
sought.  The lawsuit  alleges that Plaintiff EID has developed a new transponder
that it believes does not infringe on Digital Angel  Corporation's  patent.  The
lawsuit  acknowledges  that  Digital  Angel  Corporation  obtained a Judgment of
infringement  and two  Contempt  Orders  against  EID based on  selling  certain
systems that infringed on Digital Angel  Corporation's  patent in 1997, 1998 and
1999. Digital Angel Corporation has not yet answered the Complaint and given the
very early stage of this matter,  the ultimate outcome of this proceeding cannot
be predicted at this time.


                                                                       Page F-67
<PAGE>

26.   SUPPLEMENTAL CASH FLOW INFORMATION

The changes in operating assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                              For the Years Ended December 31,
                                                         ------------------------------------------
                                                               2003          2002          2001
                                                         ------------------------------------------
<S>                                                          <C>           <C>           <C>
Decrease in accounts receivable
   and unbilled receivables                                  $  1,726      $  5,567      $ 16,020
(Increase) decrease in inventories                             (3,148)         (258)        4,090
Decrease in other current assets                                   79         2,465         2,969
Increase in other assets                                           --           361         1,626
Increase in accounts payable,
   accrued expenses and other liabilities                      16,191         9,089         3,660
---------------------------------------------------------------------------------------------------

                                                             $ 14,848      $ 17,224      $ 28,365
===================================================================================================
</TABLE>

In the years  ended  December  31,  2003,  2002,  and 2001,  the Company had the
following non-cash investing and financing activities (in thousands):


<TABLE>
<CAPTION>
                                                             2003          2002        2001
                                                           ----------------------------------
<S>                                                        <C>             <C>     <C>
Assets acquired for common stock                           $    --       $    --     $10,201
Due from buyer of divested subsidiary                           --            --       2,625
Common shares issued to settle convertible debt              9,739            --          --
Assets acquired for long-term debt and capital leases          184            --          --
Common stock issued upon conversion of preferred stock          --            --      14,550
</TABLE>


27.   SEGMENT INFORMATION

As a result of (a) the merger of  pre-merger  Digital Angel and MAS on March 27,
2002, (b) the  significant  restructuring  of the Company's  business during the
first quarter of 2002 and (c) the Company's  emergence as an advanced technology
development  company,  the Company has  re-evaluated and realigned its reporting
segments.  On January 1, 2002, the Company began operating in the three business
segments: Advanced Technology, Digital Angel Corporation and InfoTech USA, Inc.

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

The  "Corporate/Eliminations"  category  includes  all amounts  recognized  upon
consolidation  of  the  Company's   subsidiaries  such  as  the  elimination  of
intersegment      revenues,      expenses,      assets     and      liabilities.
"Corporate/Eliminations"  also  includes  certain  interest  expense  and  other
expenses  associated  with  corporate  activities  and  functions.  Included  in
"Corporate/Elimination"  for the year ended  December 31, 2003, is a gain on the
extinguishment of debt obligations to IBM Credit of approximately $70.1 million,
$4.3 million of bonuses  awarded to  directors,  officers and  employees for the
successful repayment of all obligations to IBM Credit, and a severance charge of
approximately  $17.9 million  associated  with the termination of certain former
officers and directors.  Included in "Corporate/Eliminations" for the year ended
December  31,  2002,  is a non cash  stock  based  compensation  charge of $18.7
million associated with pre-merger  Digital Angel options,  which were converted
into  options  to  acquire  shares  of MAS in  connection  with  the  merger  of
pre-merger Digital Angel and MAS on March 27, 2002.


                                                                       Page F-68
<PAGE>

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

The Advanced  Technology,  Digital  Angel  Corporation  and InfoTech  USA,  Inc.
segment's products and services are as follows:


OPERATING SEGMENT             PRINCIPAL PRODUCTS AND SERVICES
-----------------             -------------------------------

Advanced Technology
                              o    Voice,  data  and  video  communications
                                   networks

                              o    Call  center and  customer  relationship
                                   management

                              o    Networking products and services

                              o    Website design and Internet access

                              o    Miniaturized   implantable  verification
                                   chip

                              o    Miniaturized power generator

                              o    Position location device

Digital Angel Corporation
                              o    Animal Applications

                              o    Wireless and Monitoring

                              o    GPS and Radio Communications

InfoTech USA, Inc.
                              o    Computer hardware

                              o    Computer services

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 and segment data for
the  Advanced  Technology  segment  includes an allocated  charge for  corporate
overhead  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.  Certain
amounts  in 2002 and 2001  have  been  reclassified  for  comparative  purposes.
Corporate amounts have been adjusted from amounts previously reported to reflect
the   reclassification   of  the  2001  gain  on  extinguishment  of  debt  from
extraordinary to Continuing Operations (see Note 21).


                                                                       Page F-69
<PAGE>

<TABLE>
<CAPTION>
                                                                             2003 (IN THOUSANDS)
                                               ----------------------------------------------------------------------------------
                                                ADVANCED     DIGITAL ANGEL    INFOTECH                 CORPORATE/
                                               TECHNOLOGY     CORPORATION     USA, INC.    ALL OTHER  ELIMINATIONS  CONSOLIDATED
                                               ----------     -----------     ---------    ---------  ------------  ------------
<S>                                            <C>           <C>             <C>           <C>        <C>           <C>
Net product revenue from external customers      $ 33,804      $ 32,364      $ 11,606      $     --     $     --      $ 77,774
Net service revenue from external customers        10,805         1,558         2,850            --           --        15,213
Intersegment net revenue                               --           510            --            --         (510)           --
                                                 --------      --------      --------      --------     --------      --------
Total revenue                                    $ 44,609      $ 34,432      $ 14,456      $     --     $   (510)     $ 92,987
                                                 --------      --------      --------      --------     --------      --------

Depreciation and amortization (1)                $    245      $  1,233      $    213      $     --     $    200      $  1,891
Asset impairment                                      302            --         2,154            --           --         2,456
Interest income                                        88           172            95            --          564           919
Interest expense                                      162           772            18            --       21,635        22,587
(Loss) income from continuing operations
 before provision for income taxes, minority
 interest, losses attributable to capital
 transactions of subsidiary, and equity in
 net loss of affiliate (2)                           (108)       (6,271)       (3,052)          298       19,441        10,308
Goodwill, net                                      18,212        45,119            --            --           --        63,331
Segment assets                                     38,282        64,976         5,789         2,662          222       111,931
Expenditures for property and equipment               192         1,165            42            --           18         1,417
</TABLE>

<TABLE>
<CAPTION>
                                                                                    2002 (IN THOUSANDS)
                                               ----------------------------------------------------------------------------------
                                                ADVANCED     DIGITAL ANGEL    INFOTECH                 CORPORATE/
                                               TECHNOLOGY     CORPORATION     USA, INC.    ALL OTHER  ELIMINATIONS  CONSOLIDATED
                                               ----------     -----------     ---------    ---------  ------------  ------------
<S>                                            <C>           <C>             <C>           <C>        <C>           <C>
Net product revenue from external customers    $  28,991      $  30,330      $  20,056    $   1,013    $      --      $  80,390
Net service revenue from external customers       12,939          2,116          2,665          375           --         18,095
Intersegment net revenue                              --             70             --           --          (70)            --
                                               ---------      ---------      ---------    ---------    ---------      ---------
Total revenue                                  $  41,930      $  32,516      $  22,721    $   1,388    $     (70)     $  98,485
                                               ---------      ---------      ---------    ---------    ---------      ---------

Depreciation and amortization (1)              $     569      $   3,229      $     262    $       9    $     295      $   4,364
Asset impairment                                      --         37,872             --           --          785         38,657
Interest income                                      239            585             45           --        1,471          2,340
Interest expense                                     422            256            184          148       16,467         17,477
Loss from continuing operations
 before provision for income taxes, minority
 interest, losses attributable to capital
 transactions of subsidiary, and equity in
 net loss of affiliate (2)                          (786)       (45,139)          (422)        (320)     (49,310)       (95,977)
Goodwill, net                                     18,212         45,085          2,154           --           --         65,451
Segment assets                                    41,404         61,721          9,340        2,753       (4,062)       111,156
Expenditures for property and equipment              340          1,437             41           --           38          1,856
</TABLE>


                                                                       Page F-70
<PAGE>

<TABLE>
<CAPTION>
                                                                               2001 (IN THOUSANDS)
                                               ----------------------------------------------------------------------------------
                                                ADVANCED     DIGITAL ANGEL    INFOTECH                 CORPORATE/
                                               TECHNOLOGY     CORPORATION     USA, INC.    ALL OTHER  ELIMINATIONS  CONSOLIDATED
                                               ----------     -----------     ---------    ---------  ------------  ------------
<S>                                            <C>           <C>             <C>           <C>        <C>           <C>
Net product revenue from external customers   $  28,123      $  33,220       $  30,075      $  21,318   $     411     $ 113,147
Net service revenue from external customers      16,447          2,691           4,100         19,974         128        43,340
Intersegment net revenue                            232            964              --            870      (2,066)           --
                                              ---------      ---------       ---------      ---------   ---------     ---------
Total revenue                                 $  44,802      $  36,875       $  34,175      $  42,162   $  (1,527)    $ 156,487
                                              ---------      ---------       ---------      ---------   ---------     ---------

Depreciation and amortization (1)             $   9,088      $  12,298       $     503      $   4,768   $   2,242     $  28,899
Asset impairment                                 30,453            726              --         32,427       8,113        71,719
Interest and other income                            20             17              68             34       1,937         2,076
Interest expense                                    216            529             325          1,465       6,020         8,555
Income (loss) from continuing operations
  before provision for income taxes,
  minority interest and equity in net loss
  of affiliate                                  (41,493)       (16,262)         (1,322)       (71,636)    (37,428)     (168,141)
Goodwill, net                                    15,379         73,095           2,357             --          --        90,831
Segment assets                                   38,247        105,042          15,004          4,968       4,228       167,489
Expenditures for property and equipment             151          1,591             490          1,703      10,226        14,161
</TABLE>


(1)   Depreciation and amortization includes $0.6 million, $0.8 million and $0.8
      million  included  in cost  of  products  sold in  2003,  2002  and  2001,
      respectively.

(2)   For Digital Angel  Corporation,  for 2002, amount excludes $1.8 million of
      interest  expense  associated with the Company's  obligation to IBM Credit
      and $18.7 million of non-cash stock based compensation  expense associated
      with pre-merger Digital Angel options which were converted into options to
      acquire MAS stock, both of which have been reflected as additional expense
      in the separate financial statements of Digital Angel Corporation included
      in its Form 10-K dated December 31, 2003.

The  following  is a breakdown of the  Company's  revenue by segment and type of
product and service:

<TABLE>
<CAPTION>
                                                  2003                             2002                             2001
                                     -----------------------------------------------------------------------------------------------
ADVANCED TECHNOLOGY                  PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL
                                     -------    -------    -------    -------    -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Voice, data and video
telecommunications networks          $32,253    $ 4,862    $37,115    $26,535    $ 4,792    $31,327    $22,656    $ 4,757    $27,413

Call center and customer
relationship management software         608      4,819      5,427        976      5,165      6,141      1,197      7,314      8,511

Networking products and services          --         --         --        357        940      1,297      2,505      2,466      4,971

Website design and Internet access       398      1,124      1,522      1,123      2,042      3,165      1,765      1,910      3,675

Implantable verification chip            545         --        545         --         --         --         --         --         --

Intersegment revenue                      --         --         --         --         --         --         --        232        232
                                     -----------------------------------------------------------------------------------------------
  Total                              $33,804    $10,805    $44,609    $28,991    $12,939    $41,930    $28,123    $16,679    $44,802
                                     ===============================================================================================
</TABLE>


                                                                       Page F-71
<PAGE>

<TABLE>
<CAPTION>
                                                  2003                             2002                             2001
                                     -----------------------------------------------------------------------------------------------
DIGITAL ANGEL CORPORATION            PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL
                                     -------    -------    -------    -------    -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Animal Applications                  $21,880    $ 1,558    $23,438    $20,308    $   613    $20,921    $22,074    $   173     22,247

GPS and Radio Communications          10,362         --     10,362     10,022         --     10,022     11,144                11,144

Wireless and Monitoring                  122         --        122         --      1,503      1,503          2      2,518      2,520

Intersegment revenue                     510         --        510         70         --         70         --        964        964
                                     -----------------------------------------------------------------------------------------------
Total                                $32,874    $ 1,558    $34,432    $30,400    $ 2,116    $32,515    $33,220    $ 3,655    $36,875
                                     ===============================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                  2003                             2002                             2001
                                     -----------------------------------------------------------------------------------------------
INFOTECH USA, INC.                   PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL
                                     -------    -------    -------    -------    -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Computer hardware                    $11,606    $    --    $11,606    $20,056    $    --    $20,056    $30,075    $    --    $30,075

Computer services                         --      2,850      2,850         --      2,665      2,665         --      4,100      4,100
                                     -----------------------------------------------------------------------------------------------
  Total                              $11,606    $ 2,850    $14,456    $20,056    $ 2,665    $22,721    $30,075    $ 4,100    $34,175
                                     ===============================================================================================

</TABLE>

<TABLE>
<CAPTION>
                                                  2003                             2002                             2001
                                     -----------------------------------------------------------------------------------------------
ALL OTHER                            PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL     PRODUCT    SERVICE     TOTAL
                                     -------    -------    -------    -------    -------    -------    -------    -------    -------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Telephony systems                    $    --    $    --    $    --    $    --    $    --    $    --    $ 8,720    $ 7,210    $15,930

Software development
  and applications                        --         --         --      1,013        375      1,388     11,451     11,325     22,776

Networking products
  and services                            --         --         --         --         --         --      1,147      1,439      2,586

Intersegment revenue                      --         --         --         --         --         --         88        782        870
                                     -----------------------------------------------------------------------------------------------

   Total                             $    --    $    --    $    --    $ 1,013    $   375    $ 1,388    $21,406    $20,756    $42,162
                                     ===============================================================================================
</TABLE>


                                                                       Page F-72
<PAGE>


Approximately  $37.1  million,  or 83.2%,  $31.3  million,  or 74.7%,  and $27.4
million, or 61.5%, of the Company's Advanced  Technology  segment's revenues for
2003, 2002 and 2001, respectively,  were generated by the Company's wholly-owned
subsidiary, Computer Equity Corporation. Approximately 99.3%, 99.1% and 77.7% of
Computer Equity Corporation's revenues during 2003, 2002 and 2001, respectively,
were  generated  through sales to various  agencies of the United States Federal
Government.  No other sales to an individual customer amounted to 10% of more of
this segment's revenues in 2003, 2002 and 2001.

During 2003, the top six customers, Schering-Plough, United States Army Corps of
Engineers,  Biomark,  Inc., United States  Department of Energy,  Pacific States
Marine and Merial  and  accounted  for 44.0% of the  Digital  Angel  Corporation
segment's revenues,  one of which accounted for 12.8% of the segment's revenues.
During  2002,  the  top  seven  customers,  Schering-Plough,  US Army  Corps  of
Engineers,  Biomark,  Inc.,  Pacific  States Marine and San  Bernardino  County,
Merial, Animal Care Limited and San Bernardino County accounted for 39.2% of the
Digital  Angel  Corporation  segment's  revenues;  however,  no single  customer
accounted for more than 10% of revenues.  During 2001,  the top four  customers,
Schering  Plough,  Merial,  Pacific  States  Marine  and  the US Army  Corps  of
Engineers  accounted  for  30.4%  of the  Digital  Angel  Corporation  segment's
revenues, one of which accounted for 10.3% of the segment's revenues.

During 2003, three customers,  GAF Material  Corporation,  Hackensack University
Medical  Center and  Centenary  College,  accounted  for 15%, 12% and 11% of the
InfoTech USA, Inc segment's  consolidated revenues,  respectively.  During 2002,
five customers,  Deutsche Bank,  Hackensack  University Medical Center,  Liberty
Mutual,  Morgan Stanley and Polytechnic  University accounted for 23%, 22%, 11%,
11% and 11% of the InfoTech USA, Inc. segment's revenues,  respectively.  During
2001, two customers, Liberty Mutual and Mass Mutual Life Insurance accounted for
40% and 31% of the InfoTech USA, Inc. segment's revenues, respectively.

Goodwill by segment for the year ended  December  31,  2003,  was as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------------------------------------------
                                      ADVANCED   DIGITAL ANGEL   INFOTECH
                                     TECHNOLOGY   CORPORATION    USA, INC.     ALL OTHER    CORPORATE   CONSOLIDATED
                                     ----------   -----------    ---------     ---------    ---------   ------------
<S>                                   <C>           <C>           <C>          <C>          <C>           <C>
Balance As of January 1, 2003         $ 18,212      $ 45,085      $  2,154     $     --     $     --      $ 65,451
Goodwill acquired during the year          408            --            --           --           --           408
Sale of subsidiary                        (408)                                                               (408)
Translation adjustment and other            --            34            --           --           --            34
Impairment losses                           --        (2,154)           --                        --        (2,154)
                                      --------      --------      --------     --------     --------      --------
  Balance as of December 31, 2003     $ 18,212      $ 45,119      $     --     $     --     $     --      $ 63,331
                                      ========      ========      ========     ========     ========      ========
</TABLE>


                                                                       Page F-73
<PAGE>


Revenues are attributed to geographic  areas based on the location of the assets
producing the revenue.  Information  concerning principal geographic areas as of
and for the years ended December 31, was as follows (in thousands):


                                           UNITED         UNITED
                                           STATES         KINGDOM   CONSOLIDATED
                                      ------------------------------------------
2003
Net revenue                               $ 82,625       $ 10,362       $ 92,987
Long-lived tangible assets                   7,113          1,115          8,228
Deferred tax asset                              --             --             --
--------------------------------------------------------------------------------


2002
Net revenue                               $ 87,075       $ 11,410       $ 98,485
Long-lived tangible assets                   7,577            855          8,432
Deferred tax asset                           1,236             --          1,236
--------------------------------------------------------------------------------


2001
Net revenue                               $139,060       $ 17,427       $156,487
Long-lived tangible assets                  19,193            992         20,185
Deferred tax asset                           1,167             --          1,167
--------------------------------------------------------------------------------


28.   RELATED PARTY TRANSACTION

On June 27, 2003,  the Company  borrowed  $1.0 million from  InfoTech  USA, Inc.
under the terms of a commercial  loan  agreement and term note. The loan accrues
interest at an annual rate of 16% and interest is payable  monthly  beginning on
July 31, 2003, with principal and accrued  interest due June 30, 2004. Under the
terms of a Stock Pledge Agreement, the Company has pledged 0.8 million shares of
the Digital Angel  Corporation  common stock that it owns as collateral  for the
loan. The proceeds of the loan were used to fund operations.  This loan has been
eliminated in consolidation.

29.   OTHER EVENTS

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

Nasdaq SmallCap Listing

Since November 12, 2002,  the Company's  common stock has traded on the National
SmallCap  Market  (SmallCap)  under the symbol "ADSX." Since being traded on the
SmallCap, the minimum bid price of the Company's common stock has been less than
the  SmallCap's  minimum bid price  requirement.  On January 6, 2004, the Nasdaq
Listing  Qualifications  Panel  notified the Company that it has been granted an
extension until July 25, 2004, to meet the requirements for continued  inclusion
on the SmallCap  pursuant to an exception  to the bid price  requirement  as set
forth in Nasdaq Marketplace Rule 4310 (c) (4).  Currently,  the Company complies
with  all of the  SmallCap's  listing  requirements  with the  exception  of the
minimum bid price  requirement.  If the  Company is unable to regain  compliance
with the  minimum  bid  price  requirement  by July 25,  2004,  and its stock is
delisted  from the SmallCap,  it may trade on the OTC Bulletin  Board or another
market  or  quotation  system.  While the  Company  does not  anticipate  that a
delisting  of its  common  stock  from the  SmallCap  would  have  any  material
implications on its results of operations,  it may impact the Company's  ability
to raise funds in the equity  markets,  and it may reduce the  liquidity  of the
Company's  common stock.  The delisting of the Company's  common stock would not
currently   constitute  an  event  of  default  under  any  of  its  significant
contractual agreements.  The Company's Board of Directors has approved a reverse
stock split as more fully described in Note 31.


                                                                       Page F-74
<PAGE>

30.   SUBSEQUENT EVENTS

OuterLink Corporation Acquisition

On January 22, 2004,  Digital Angel  Corporation  completed the  acquisition  of
OuterLink pursuant to an Agreement and Plan of Merger dated November 2, 2003, by
and among Digital Angel Corporation,  DA Acquisition and OuterLink.  Pursuant to
the  terms of the  agreement,  OuterLink  became a  wholly-owned  subsidiary  of
Digital Angel Corporation.

Under the terms of the agreement,  Digital Angel Corporation issued to OuterLink
0.1 million  shares of its Series A Preferred  Stock.  Approximately  20% of the
shares are being held in escrow as security for indemnified claims. The Series A
Preferred  Stock is  convertible  into  4.0  million  shares  of  Digital  Angel
Corporation's  common stock when the volume  weighted  average  price of Digital
Angel  Corporation's  common  stock  equals or  exceeds  $4.00 per share for ten
consecutive trading days. The preferred stockholders have the right to designate
one Director to Digital Angel Corporation's Board of Directors prior to July 22,
2004.

OuterLink provides real-time,  satellite-based automated tracking, wireless data
transfer and two-way  messaging  with large fleets of vehicles,  such as utility
trucks,  helicopters,  fixed-wing aircraft,  long and short-haul trucks, service
vehicles and ships.  OuterLink's current customer base includes various branches
of the U.S.  Department of Homeland  Security,  including the U.S. Border Patrol
and the U.S. Customs Service.

Sale of Medical Systems' Assets

During the three-months ended June 30, 2004, Digital Angel  Corporation's  Board
of Directors approved a plan to sell its Medical Systems operations,  which were
acquired on March 27, 2002, and the business assets of Medical Systems were sold
effective April 19, 2004. Medical Systems represented the business operations of
MAS.  The  business  assets of Medical  Systems  were sold to  MedAire,  Inc. in
connection with an Asset Purchase Agreement,  referred to as APA, dated April 8,
2004, by and between Digital Angel Corporation and MedAire, Inc. Under the terms
of the APA, the purchase price was $0.4 million, plus any prepaid deposits,  the
cost of certain  pharmaceutical  inventory and supplies,  and the  assumption of
certain liabilities of Medical Systems reduced by any pre-billing to or pro-rata
prepayments by certain  customers.  The assets sold included all of the tangible
and intangible intellectual property developed for the medical services business
including  pharmaceutical  supplies  and other  inventory  items,  customer  and
supplier contracts, computer software licenses, internet website and domain name
and  mailing  lists,  but did not  include  the land and  building  used by this
operation.  Medical Systems' land and building were sold in a separate unrelated
transaction  to a third party on July 31, 2004 for  approximately  $1.5 million.
Medical Systems was one of the Company's  reporting units in accordance with FAS
142. Accordingly,  the financial condition, results of operations and cash flows
of  Medical  Systems  have  been  reported  as  Discontinued  Operations  in the
Company's financial statements,  and prior periods have been restated.  See Note
20.

31.   REVERSE STOCK SPLIT

On  September  10, 2003,  the  Company's  shareholders  approved the granting of
discretionary  authority to the  Company's  Board of  Directors  for a period of
twelve months to effect a reverse stock split not to exceed a ratio of 1-for 25,
or to determine  not to proceed with a reverse  stock split.  On March 12, 2004,
the  Company's  Board of Directors  authorized a 1-for-10  reverse  stock split,
which was  effectuated on April 5, 2004. In  conjunction  with the reverse stock
split, the Company's Board of Directors has authorized a reduction in the number
of authorized  shares of the Company's common stock from 560.0 million pre-split
to 125.0  million  post-split.  The Board of Directors  approved a reverse stock
split to facilitate the continuing  listing of the Company's common stock on the
SmallCap,  and also to reduce the number of issued and outstanding shares of the
Company's   common  stock,   resulting,   in  part,   from  the  Company's  past
acquisitions,  the payment of debt obligations to IBM Credit and preferred stock
and Debenture  conversions.  All share information  provided in the Consolidated
Financial  Statements  and  accompanying  Notes has been adjusted to reflect the
reverse stock split.


                                                                       Page F-75
<PAGE>


32.   SUMMARIZED  QUARTERLY DATA  (UNAUDITED)  (IN  THOUSANDS,  EXCEPT PER SHARE
      AMOUNTS)

<TABLE>
<CAPTION>
                                                            FIRST        SECOND         THIRD        FOURTH          FULL
                                                           QUARTER       QUARTER       QUARTER       QUARTER         YEAR
                                                           -------       -------       -------       -------         ----
2003

<S>                                                       <C>           <C>           <C>           <C>           <C>
Total revenue                                             $ 24,362      $ 20,430      $ 23,468      $ 24,727      $ 92,987
Gross Profit                                                 8,729         6,101         7,240         6,025        28,095
Net income (loss) from Continuing Operations (1)           (26,696)       56,975        (1,045)      (23,275)        5,959
Net (loss) income from Discontinued Operations                (245)         (609)         (115)       (1,847)       (2,816)
Basic net income (loss) per share from
  Continuing Operations (3)                                  (0.95)         1.84         (0.03)        (0.59)         0.17
Basic net income (loss) per share from
  Discontinued Operations (3)                                (0.01)        (0.02)           --         (0.05)        (0.08)
Diluted net income (loss) per share
  from Continuing Operations (3)                             (0.95)         1.76         (0.03)        (0.59)         0.16
Diluted net income (loss) per share
  from Discontinued Operations (3)                           (0.01)        (0.02)           --         (0.05)        (0.08)
</TABLE>

<TABLE>
<CAPTION>
                                                            FIRST        SECOND         THIRD        FOURTH          FULL
                                                           QUARTER       QUARTER       QUARTER       QUARTER         YEAR
                                                           -------       -------       -------       -------         ----
2002

<S>                                                       <C>           <C>           <C>           <C>           <C>
Total revenue                                             $ 28,391      $ 25,269      $ 23,559      $ 21,266      $ 98,485
Gross Profit                                                 9,346         8,308         8,543         4,819        31,016
Net loss from Continuing Operations (2)                    (24,692)      (19,295)       (5,623)      (39,890)      (89,500)
Net income (loss) from Discontinued Operations                 687          (641)         (247)      (22,784)      (22,985)
Basic and diluted net loss per share from
  Continuing Operations (3)                                  (0.96)        (0.73)        (0.20)        (1.42)        (3.33)
Basic and diluted net income (loss) per share
  from Discontinued Operations (3)                            0.02         (0.02)        (0.01)        (0.81)        (0.85)
</TABLE>


A. CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

Effective  January 1, 2002,  the Company  adopted FAS 142,  which  requires that
goodwill and certain intangibles no longer be amortized,  but instead tested for
impairment  at least  annually.  There was no  impairment  of goodwill  upon the
adoption of FAS 142.  The Company  performed  its annual  review for  impairment
during the fourth  quarters of 2003,  and 2002,  which  resulted  in  impairment
charges of $2.2 million and $31.5 million in 2003 and 2002, respectively.  There
can be no assurance  that future  goodwill  impairment  tests will not result in
additional impairment charges.

      (1)   The loss from  continuing  operations  for the first quarter of 2003
            includes a non-cash stock based  severance  charge of  approximately
            $22.0 million pursuant to certain severance  agreements.  The income
            from continuing operations for the second quarter of 2003 includes a
            gain on  extinguishment  of debt of approximately  $70.1 million and
            bonus compensation expense of $4.3 million. The loss from continuing
            operations  for the third  quarter of 2003  includes the reversal of
            approximately  $3.9 million of the severance expense recorded during
            the first quarter of 2003. The loss from  continuing  operations for
            the fourth quarter of 2003 includes  approximately  $11.1 million of
            non-cash interest expense associated with the Company's  Debentures,
            an  impairment  charge of  approximately  $2.5  million  and  losses
            attributable   to   capital   transactions   of  a   subsidiary   of
            approximately $5.9 million.


                                                                       Page F-76
<PAGE>

      (2)   The first quarter of 2002 loss from continuing operations includes a
            non-cash  stock based  compensation  charge of  approximately  $18.7
            million associated with pre-merger  Digital Angel options.  Pursuant
            to the terms of the  merger  of  pre-merger  Digital  Angel and MAS,
            options  to  acquire  pre-merger  Digital  Angel  common  stock were
            converted into options to acquire shares of MAS common stock,  which
            resulted in a new measurement date for the options. In addition, the
            Company  incurred  a  loss  on  issuances  of  subsidiary  stock  of
            approximately  $3.9  million.  Second  quarter  of  2002  loss  from
            continuing  operations includes non-cash,  stock-based  compensation
            expense of $6.1 million  associated with options that were re-priced
            in 2001, and valuation  reserves on notes  receivable  from officers
            and  directors.  The third  quarter  of 2002  loss  from  continuing
            operations  includes a reversal  of  approximately  $2.9  million of
            non-cash,  stock-based  compensation  expense  associated  with  the
            options  re-priced  in 2001,  and a reversal of  approximately  $0.9
            million of bad debt  reserves.  The fourth quarter of 2002 loss from
            continuing operations includes asset impairments of $38.7 million.

      (3)   Earnings  per  share  are  computed  independently  for  each of the
            quarters presented. Therefore, the sum of the quarterly net earnings
            per share will not necessarily equal the total for the year.


                                                                       Page F-77
<PAGE>


                          FINANCIAL STATEMENT SCHEDULE

VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                             --------------
                                                BALANCE AT      CHARGED                         BALANCE
                                                BEGINNING       TO COST                        AT END OF
DESCRIPTION                                     OF PERIOD     AND EXPENSES     DEDUCTIONS       PERIOD
----------------------------------------------------------------------------------------------------------
VALUATION RESERVE DEDUCTEDIN THE BALANCE
 SHEET FROM THE ASSET TO WHICH IT APPLIES:
 ACCOUNTS RECEIVABLE:
<S>                                               <C>            <C>            <C>            <C>
2003 ALLOWANCE FOR DOUBTFUL ACCOUNTS              $ 1,158        $   148        $   278        $ 1,028
2002 ALLOWANCE FOR DOUBTFUL ACCOUNTS                2,476          4,236          5,554          1,158
2001 ALLOWANCE FOR DOUBTFUL ACCOUNTS                1,681          1,914          1,014          2,581

INVENTORY:

2003 ALLOWANCE FOR EXCESS AND OBSOLESCENCE        $ 1,422        $   439        $     2        $ 1,859
2002 ALLOWANCE FOR EXCESS AND OBSOLESCENCE          1,702            104            384          1,422
2001 ALLOWANCE FOR EXCESS AND OBSOLESCENCE          1,500            570            368          1,702

NOTES RECEIVABLE:

2003 ALLOWANCE FOR DOUBTFUL ACCOUNTS              $ 6,667        $   115        $ 3,073        $ 3,709
2002 ALLOWANCE FOR DOUBTFUL ACCOUNTS               12,671          1,266          7,270          6,667
2001 ALLOWANCE FOR DOUBTFUL ACCOUNTS                   --         12,671             --         12,671

DEFERRED TAXES:

2003 VALUATION RESERVE                            $93,214        $ 1,601        $ 7,541        $87,274
2002 VALUATION RESERVE                             66,932         26,282             --         93,214
2001 VALUATION RESERVE                             15,850         51,082             --         66,932
</TABLE>


                                                                       Page F-78