<PAGE>

   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 2003,
   -----------------------------------------------------------------------
    AND AS AMENDED ON APRIL 4, 2003, JUNE 3, 2003 AND DECEMBER 11, 2003
    -------------------------------------------------------------------

                     SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON, D.C. 20549

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

                                 FORM 10-K/A
                               AMENDMENT 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, 2002
                                     or

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

      For the transition period from _______________ to _______________

                      COMMISSION FILE NUMBER: 000-26020

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

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

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

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

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

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                        COMMON STOCK, $.001 PAR VALUE
                              (Title of Class)

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

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

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

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

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

Documents Incorporated by Reference: None.



<PAGE>
<PAGE>


                              TABLE OF CONTENTS

ITEM   DESCRIPTION                                                        PAGE

       PART I

1.     Business                                                             3
2.     Properties                                                          30
3.     Legal Proceedings                                                   31
4.     Submission of Matters to a Vote of Security Holders                 33

       PART II

5.     Market for Registrant's Common Equity and Related Stockholder
         Matters                                                           33
6.     Selected Financial Data                                             35

7.     Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                         38
7A.    Quantitative and Qualitative Disclosures About Market Risk          70
8.     Financial Statements and Supplementary Data                         70

9.     Changes in and Disagreements With Accountants on
       Accounting and Financial Disclosures                                71

       PART III

10.    Directors and Executive Officers of the Registrant                  74
11.    Executive Compensation                                              78

12.    Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters                                   85
13.    Certain Relationships and Related Transactions                      87
14.    Controls and Procedures                                             89

       PART IV

15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K    90
       Signatures                                                          91
       Certifications


                                     2

<PAGE>
<PAGE>

PART I
     ITEM 1.  BUSINESS

         See "Risk Factors" beginning on page 20.

         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 digital 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 basis that we
believed did not promote or complement our current business strategy. As of
December 31, 2002, our business operations consisted of the operations of
six 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, 2002, we owned
approximately 73.91% 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. This raises doubt about our ability to
continue as a going concern. The audit reports of Eisner LLP for the year
ended December 31, 2002, and of Pricewaterhouse Coopers LLP, for each of the
two-years ended December 31, 2001 and 2000, contain an explanatory paragraph
expressing doubt about our ability to continue as a going concern, as a
result of payment and covenant defaults under our credit agreement with
IBM Credit LLC ("IBM Credit"), which are more fully discussed in Note 2 to
the Consolidated Financial Statements, as well as our historical losses and
the negative cash flows from our operations. We incurred consolidated net
losses from continuing operations of $113.9 million, $198.1 million and
$29.2 million, respectively for the years ended December 31, 2002, 2001 and
2000, respectively, and as of December 31, 2002, we had an accumulative
deficit of $417.1 million. Our consolidated operating activities used cash
of $3.9 million, $18.0 million and $43.4 million during 2002, 2001 and 2000,
respectively.

         Digital Angel Corporation has suffered losses and has not generated
positive cash flows from operations. In addition, the audit reports of
Eisner LLP for the year ended December 31, 2002, and of Pricewaterhouse
Coopers LLP, for each of the two-years ended December 31, 2001 and 2000,
contain an explanatory paragraph expressing doubt about Digital Angel
Corporation's ability to continue as a going concern. Digital Angel
Corporation incurred losses during 2002, 2001 and 2000, which are presented
below. In addition, its operating activities used cash of $2.7 million, $3.2
million and $1.4 million during 2002, 2001 and 2000, respectively.

         Because of our situation with IBM Credit, we are unable to predict
when and if we will be profitable. Our attaining profitability and adequate
liquidity depends on many factors, including our complying with the
provisions of a forbearance agreement term sheet with IBM Credit as more
fully discussed in Note 2 to the Consolidated Financial Statements, 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 will need additional financing to comply with the
provisions of the forbearance agreement term sheet and to fund operations.
Without such additional financing, we will not have sufficient funds to
continue operations beyond the end of the current fiscal year.

                                     3

<PAGE>
<PAGE>

         BUSINESS SEGMENTS

         As a result of (a) the merger of pre-merger Digital Angel and MAS
on March 27, 2002, (b) the significant restructuring of our business during
the past year 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. 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. "Corporation/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 2002, 2001 and 2000 was as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    -----------------------
                                                2002          2001         2000
                                                ----          ----         ----
<S>                                             <C>           <C>         <C>
REVENUE BY SEGMENT:
Advanced Technology                              42.1%         28.5%       24.0%
Digital Angel Corporation                        33.7          22.9        16.5
InfoTech USA, Inc.                               22.8          21.9        20.2
All Other                                         1.4          26.4        39.1
"Corporate/Eliminations"                           --           0.3         0.2
                                            --------------------------------------
Total                                           100.0%        100.0%      100.0%
                                            ======================================
</TABLE>

         (Loss) income from continuing operations before taxes, minority
interest, net loss on subsidiary merger transaction and equity in loss of
affiliate from each of our segments during 2002, 2001 and 2000 was as
follows (we evaluate performance based on stand-alone segment operating
income as presented below):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                    -----------------------
                                                                2002         2001         2000
                                                                ----         ----         ----
                                                                        (in thousands)
                                                                        --------------
<S>                                                          <C>          <C>          <C>
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES,
  MINORITY INTEREST, NET LOSS ON SUBSIDIARY MERGER
  TRANSACTION AND EQUITY IN LOSS OF AFFILIATE BY SEGMENT:

Advanced Technology                                          $    (786)   $ (41,493)   $ (1,544)
Digital Angel Corporation(1)(2)                                (76,439)     (16,262)     (3,816)
InfoTech USA, Inc.                                                (422)      (1,322)        923
All Other                                                         (320)     (71,636)     (5,714)
"Corporate/Eliminations"(2)                                    (49,310)     (46,893)    (23,834)
                                                           --------------------------------------
Total                                                        $(127,277)   $(177,606)   $(33,985)
                                                           ======================================

<FN>
(1)  For Digital Angel Corporation, the loss for 2002 includes goodwill
     impairment of $62.2 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 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 statement of Digital Angel Corporation included in
     its Form 10-K dated December 31, 2002. The $18.7 million of non -cash
     compensation expense is reflected in "Corporate/Eliminations" for 2002.
</TABLE>

         Advanced Technology

         The business units comprising our Advanced Technology segment
represent those business units that we believe will provide the necessary
synergies, support and infrastructure to allow us to develop, promote and
fully-integrate our technology products and services. This segment
specializes in voice, data and video telecommunications networks, software,
and other networking products and service. In addition, its VeriChip(TM)
product has multiple applications in security, personal identification,
safety,


                                     4

<PAGE>
<PAGE>

healthcare information (subject to FDA approval) and more. Its customer base
includes governmental agencies, commercial operations, and consumers. As of
December 31, 2002, 2001 and 2000, revenues from this segment accounted for
42.1%, 28.5% and 24.0%, respectively, of our total revenues. 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;
                  o Internet access;
                  o Website design;
                  o Miniaturized implantable verification chip (VeriChip(TM));
                    and
                  o Miniaturized power generator (Thermo Life(TM)).

         Customers
         ---------

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

         Approximately $31.3 million, or 74.7% and $27.4 million, or 61.5%,
of our Advanced Technology segment's revenues for 2002 and 2001,
respectively, were generated by our wholly-owned subsidiary, Computer Equity
Corporation. We acquired Computer Equity Corporation effective June 1, 2000.
No other products or services provided more than 10.0% of the revenues for
this segment during 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.

         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 99.1% and 77.7% of Computer Equity Corporation's
revenues during 2002 and 2001, respectively, were generated through sales to
various agencies of the United States Federal Government. 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. There
government may terminate the CONNECTIONS contract with or without cause. 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


                                     5

<PAGE>
<PAGE>

without the need to follow the full procurement process for a new contract.

         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.

         As of December 31, 2002, we have not reported any revenues from the
sale of our VeriChip and Thermo Life products.

         Future Focus
         ------------

         Going forward the Advanced Technology Group intends to focus on (a)
increasing its government contract business and leveraging its government
contacts to enhance sales of it advanced technology products, (b) developing
new lines of business in technologies related to its Computer Equity
Corporation business including access control and video surveillance systems
and security networks, (c) developing the markets for its VeriChip, Thermo
Life and PLD products throughout the world, and (d) developing or finding
one or two new advanced technology products each year. Its strategy for
retaining existing customers is to continue to provide expertise in (a)
project management, (b) negotiation of deliverables and (c) development of
proposals. It also plans to develop and upgrade its proprietary software in
order to meets its customers' needs. It plans to continue to focus on
excellence in customer service and to leverage its current business
relationships in order to retain its existing customers and to generate new
business.

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

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

         We do not hold patents to any of the products in our Advanced
Technology segment. A German research company, Dunnschictht-Thermogenerator-
Systemen GmbH ("DTS"), developed our Thermo Life product. We have signed a
letter of intent to acquire certain assets of DTS, subject to due diligence.
Our goal is to secure the proprietary rights to the Thermo Life technology.
Furthermore, Digital Angel


                                     6

<PAGE>
<PAGE>

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

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

         As of December 31, 2002, 2001 and 2000, revenues from this segment
accounted for 33.7%, 22.9% and 16.5%, respectively, of our total revenues.
The principal products and services in this segment by division are as
follows:

         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
Animal Applications are electronic ear tags and implantable microchips that
use radio frequency transmission. This segment includes our Bio-Thermo(TM)
product;

         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 segment is continuously developing its
technology, which it refers to as its "Digital Angel(TM) technology." 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
(including global positioning systems (GPS) and other systems);

                                     7

<PAGE>
<PAGE>

         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; and

         Medical Systems division--is the MAS business that was acquired on
March 27, 2002. A staff of logistics specialists and physicians provide
medical assistance services and interactive medical information services to
people traveling anywhere in the world. It also sells a variety of kits
containing pharmaceutical and medical supplies.

         Customers
         ---------

         Sales of the Animal Applications division's products represented
60.6% and 61.8% of the total revenue from this segment during 2002 and 2001,
respectively. Sales of the GPS and Radio Communications division's products
represented 29.8% and 31.2% of this segments revenue during 2002 and 2001,
respectively. During 2002, the top five customers, Schering-Plough, US Army
Corps of Engineers, Biomark, Pacific States Marine and San Bernardino County
accounted for 31.8% of Digital Angel Corporation's revenues; however, no
single customer accounted for more than 10% of revenues. During 2001, the
top five customers, Schering Plough, Merial, Pacific States Marine, San
Bernardino County and the US Army Corps of Engineers accounted for 30.6% of
this segment's revenues, one of which accounted for 10.4% of the segment's
revenues.

         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, 2002, we have reported minimal sales of our
Digital Angel(TM) product and no revenues from the sale of our Bio-Thermo
product.

         Future Focus
         ------------

         Digital Angel Corporation intends to focus on (a) its animal
identification products in the growing livestock, fish and wildlife
industries, and (b) developing THE market for its Digital Angel(TM) product.
Its strategy for retaining existing customers is to continue to develop new
products based on its customers needs. Digital Angel Corporation will
continue to provide product offerings to identified market needs including,
but not limited to, Country of Origin Labeling (COOL) and food traceability
safety. It plans to rely on its historical arrangements with customers and
past performance, as well as its continuous commitment to provide the
services and products its customers require to retain existing customers and
to generate additional customers.

                                     8

<PAGE>
<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
its reputation for high quality products are its competitive advantages in
this market.

         The principal competitor for the Digital Angel product is Whereify
Wireless, Inc. We are not aware of any other competitors currently marketing
products that compete with the Digital Angel product. However, we are aware
of several potential competitors that have expressed an interest in
developing and marketing similar technologies. There is presently no
substantial revenue from our product sales or that of any participant in
this market. Once the second generation Digital Angel product is available
for sale, Digital Angel Corporation hopes 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 Tadiran Spectralink Ltd., Smith Group of Companies, Becker
Avionic Systems, A.C.R. Electronics Inc. and Securicor Information Systems
Ltd. This division's competitive advantages are (a) that it was one of the
first companies to market GPS in search and rescue beacons, and (b) it
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 the customers.

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

         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.
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, as well as under 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
patents have a term of twenty years from the filing date or seventeen years
from the issue date. 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. 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


                                     9

<PAGE>
<PAGE>

Corporation will be adequate to deter misappropriation of its proprietary
rights or that third parties will not develop substantially similar products
or technologies.

         InfoTech USA, Inc. (formerly SysComm International)

         Our InfoTech USA, Inc. segment consists of the business operations
of our 52.5% owned subsidiary, InfoTech USA, Inc. (OTC:IFTH). This 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 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, 2002, 2001 and 2000, revenues from this segment
accounted for 22.8%, 21.9% and 20.2%, 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
2002 and 2001 was derived from sales of computer hardware, which provided
approximately 88.3% and 89.2% of InfoTech USA, Inc.'s revenue in 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 revenue in either year.

         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 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
2002, approximately $1.6 million, or 7%, were 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.

         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 four
ways: 1) because it is a relatively small company, it is more easily able to
adapt to individual customer needs 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 understand the needs of those particular industries
better than its competition. InfoTech USA, Inc. has developed an excellent
reputation in its


                                     10

<PAGE>
<PAGE>

vertical markets and this provides it with referral business and strong,
relevant reference accounts when pursuing new clients in those industries.

         Future Focus
         ------------

         InfoTech USA, Inc. primarily targets small to medium-sized
businesses. It also plans to continue to focus on building relationships
with its larger customers and on searching for new opportunities in the
Fortune 1000 market space. InfoTech USA, Inc. 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.

         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 five
researchers each holding advanced degrees, one support engineer with a
bachelors degree, an officer manager and an intern student. Dr. Zhou has
thirty-eight years of scientific experience, and collectively, the Research
Group has over eighty-one years of research experience.

                                     11

<PAGE>
<PAGE>

         Research and development expense was $3.5 million, $8.6 million and
$2.5 million for the years 2002, 2001 and 2000, respectively. Research and
development expense relates primarily to the development of our Digital
Angel, Thermo Life and VeriChip products, and in 2001, to software
development. Included in research and development expense was software
development cost of $0.9 million, $3.3 million and $0.3 million in 2002,
2001 and 2000, 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 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 Angel(TM),
Thermo Life(TM), VeriChip(TM) and Bio-Thermo(TM) which are 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. Since each technology hopes to be "first
of its kind," there are no businesses that compete directly with the
technology.

         The first of these technologies was Digital Angel; 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. The result - Digital Angel 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-Thermo.

         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 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 hoping to be launched in the not too distant
future 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


                                     12

<PAGE>
<PAGE>

in each company, we will consolidate operating results and maximize our
investment.

Advanced Technology Products
----------------------------

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

         DIGITAL ANGEL(TM) - The first product to come out of our research
group is Digital Angel, a proprietary location and monitoring system that
combines advanced biosensor technology and location technology (such as a
global positioning satellite (GPS)) in a watch/pager device that
communicates through proprietary software to a secure 24/7 operations center
in California. This technology provides "where-you-are" and "how-you-are"
information about loved ones (particularly elderly relatives and children),
their location and their vital signs via the subscriber's computer, personal
digital assistant (PDA) or wireless telephone.

         The first generation cellular digital package data ("CDPD")
wireless protocol of Digital Angel was marketed from the end of 2001 to
fourth quarter of 2002. Since then, a second-generation global system for
mobile ("GSM") wireless protocol Digital Angel has been under development to
include assisted GPS capabilities to enhance "line of sight" issues. We
expect that the second-generation product will be in the beta testing stage
during the first quarter of 2004.

         THERMO LIFE(TM) - Our wholly-owned subsidiary, Thermo Life Energy
Corp., formerly Advanced Power Solutions, Inc., will develop, market and
license our product, Thermo Life, a small thermoelectric generator powered
by body heat. Thermo Life is intended to provide a miniaturized power source
for a wide range of consumer electronic devices including attachable or
implantable medical devices, smoke detectors and other heat-related sensors
and wristwatches. 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, thus doubling the capacity of
the product.

         We expect to begin marketing Thermo Life during the second half of
2003. If and when, an order is received, the manufacturing of Thermo Life
will be "original equipment manufacturing" ("OEM")

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

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


                                     13

<PAGE>
<PAGE>


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

         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, we believe
that the healthcare information applications would expand the market for
VeriChip. 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;
                o    in-hospital patient identification;
                o    medical facility connectivity via patient; and
                o    disease/treatment management of at-risk populations
                     (such as vaccination history).

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

         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.


                                     14

<PAGE>
<PAGE>


         OTHER EVENTS

         Digital Angel/MAS Merger

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

         IBM Credit Agreement

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

         Under the terms of the IBM Credit Agreement we were required to
repay IBM Credit


                                     15

<PAGE>
<PAGE>

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

         Term Sheet

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

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

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

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

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

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

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

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

         Payment of any of these amounts by the dates set forth herein will
constitute complete satisfaction of any and all of our obligations to IBM
Credit under the IBM Credit Agreement.

         In addition, we have agreed under the terms of the forbearance
agreement term sheet that the Digital Angel Trust will immediately engage an
investment bank to pursue the sale of the 19,600,000 shares of Digital Angel
Corporation common stock that are currently held in the Digital Angel Trust.
All proceeds from the sale of the Digital Angel Corporation common stock
will be applied to the loans and other obligations to satisfy the Tranche A
payment provisions as discussed above, in the event that the


                                     16

<PAGE>
<PAGE>

Company has not satisfied its purchase rights by September 30, 2003.

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

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

         Other

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

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

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

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

                                     17

<PAGE>
<PAGE>

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

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

         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 of Chief
                  Executive Officer for any reason other than due to his
                  material default, with our 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
                  this 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 roughly $17.3 million under or in connection with the termination
of his employment agreement. In view of our cash constraints and our need to
dedicate essentially all of our cash resources to satisfying our obligations
to IBM Credit, we commenced negotiations with Richard Sullivan that led to
proposed terms of his severance agreement.

         Richard J. Sullivan has retained his position of Chairman of the
Board of Digital Angel Corporation.

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

                                     18

<PAGE>
<PAGE>

         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% and 40% of the manufacturing and engineering
company's revenues were generated in U.S. Dollars for the years ended
December 31, 2001, and 2000, respectively, while 94% and 100% of its
expenses were incurred in Canadian Dollars during the same respective
periods.

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

         We did not incur any significant foreign currency gains or losses
during the three years ended December 31, 2002.

                                     19

<PAGE>
<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):

<TABLE>
<CAPTION>
                                                                           UNITED
                                UNITED STATES        CANADA               KINGDOM            CONSOLIDATED
                             ---------------------------------------------------------------------------------
<S>                                  <C>              <C>                 <C>                    <C>
2002
Net revenue                          $ 88,190         $ ---               $11,410                $ 99,600
Long-lived tangible assets             15,379           ---                   855                  16,234
Deferred tax asset                      1,236           ---                   ---                   1,236
--------------------------------------------------------------------------------------------------------------

2001
Net revenue                          $138,887         $ ---               $17,427                $156,314
Long-lived tangible assets             19,193           ---                   992                  20,185
Deferred tax asset                      1,167           ---                   ---                   1,167
--------------------------------------------------------------------------------------------------------------

2000
Net revenue                          $118,849         $ 766               $15,151                $134,766
Long-lived tangible assets             20,044           ---                 1,324                  21,368
Deferred tax asset (liability)         21,426          (204)                  564                  21,786
--------------------------------------------------------------------------------------------------------------
</TABLE>


         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.

         RISK FACTORS

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

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

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


                                     20

<PAGE>
<PAGE>

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

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

         IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, YOU COULD LOSE THE
ENTIRE VALUE OF YOUR INVESTMENT.

         Our financial statements have been prepared on a going concern
basis. Our ability to continue as a going concern and to continue operations
in the normal course of business is predicated upon numerous factors with
varying levels of importance as follows:

             o    First, we must successfully repay all of our debt obligations
                  to IBM Credit;

             o    Second, we must successfully implement our business plans,
                  manage expenditures according to our budget, and generate
                  positive cash flow from operations so that we can become
                  profitable and generate sufficient cash flow to meet our
                  operating needs;

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

             o    Fourth, we must obtain the necessary approvals to expand
                  the market for our VeriChip product;

             o    Fifth, we must complete the development of our second
                  generation Digital Angel product in order to improve the
                  product's salability; and

             o    Finally, we must 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.


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

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

         THE IBM CREDIT AGREEMENT PROHIBITS US FROM BORROWING FUNDS FROM OTHER
LENDERS WITHOUT IBM'S


                                     21

<PAGE>
<PAGE>

APPROVAL. IT IS POSSIBLE THAT WE WILL NOT HAVE ACCESS TO FUNDS NECESSARY TO
PROVIDE FOR OUR ONGOING OPERATIONS. FAILURE TO OBTAIN ADDITIONAL FUNDING
WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

         WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND WE
MAY NOT BECOME PROFITABLE IN THE FUTURE.

         We incurred net losses from continuing operations of $113.9
million, $198.1 million and $29.2 million for the years ended December 31,
2002, 2001 and 2000, respectively. Our consolidated operating activities
used cash of $3.9 million, $18.0 million and $43.4 million during 2002, 2001
and 2000, 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. We may not be able to generate
sufficient operating cash flow in the future to meet our operating expenses.

         As of December 31, 2002, we reported no revenues from the sale of
our VeriChip(TM), Bio Thermo(TM) and Thermo Life(TM) products and we have had
minimal sales of our Digital Angel product. We believe that absent
significant improvement in the sales of our Digital Angel, Bio Thermo,
VeriChip and Thermo Life products, our future business operations are
unlikely to provide sufficient cash flow to support our operational
requirements. Our sources of liquidity in the future may include proceeds
from the sale of common stock and preferred stock, proceeds from the sale of
businesses, proceeds from the sale of the Digital Angel Corporation common
stock owned by us, 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. However, we may not be able to obtain sufficient
additional financing to meet such requirements on terms acceptable to us, or
at all. Our failure to obtain additional funding could have a materially
adverse effect on our business, financial condition and results of
operations, and may result in our inability to continue operations in the
normal course of business.

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

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

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

         In addition, under the terms of the employment agreement dated
March 8, 2002, as amended, by and between Digital Angel Corporation and
Randolph K. Geissler (the President and Chief Executive Officer of Digital
Angel Corporation), a "change in control" occurs under that employment
agreement if any person becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of
securities of Digital Angel Corporation representing 20% or more of the
combined voting power of the then outstanding shares of common stock.
Therefore, if the Digital Angel Trust were required to sell more than
approximately 5.3 million shares of the Digital Angel Corporation common
stock, such sale would constitute a change in control under the employment
agreement with Mr. Geissler. Upon the occurrence of a change in control, Mr.
Geissler, at his sole option and discretion, may terminate his employment
with the Digital Angel Corporation at any time within one year after such
change in control upon 15 days' notice. In the event of such termination,
the employment agreement provides that Digital Angel Corporation must pay to
Mr. Geissler a severance


                                     22

<PAGE>
<PAGE>

payment equal to three times the base amount as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code") minus
$1.00 (or a total of approximately $750,000), which would be payable no
later than one month after the effective date of Mr. Geissler's termination
of employment. In addition, upon the occurrence of a change of control under
the employment agreement, all outstanding stock options held by Mr. Geissler
would become fully exercisable.

         The employment agreement also provides that upon:

         o    a change of control;

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

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

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

         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 $18.00 to a low of $0.03. The price of our common
stock has been, and may continue to be, highly volatile and subject to wide
fluctuations. 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.

                                     23

<PAGE>
<PAGE>

         IF WE ARE DELISTED FROM THE NASDAQ SMALLCAP MARKET IN THE FUTURE IT
MAY REDUCE THE LIQUIDITY OF OUR COMMON STOCK, WHICH WOULD IMPACT OUR ABILITY
TO RAISE FUNDS IN THE EQUITY MARKETS, AND MAY REDUCE THE MARKET VALUE OF
YOUR INVESTMENT.

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

         WE HAVE MADE SIGNIFICANT CHANGES TO OUR BUSINESS MODEL AND WE HAVE
EXPANDED INTO DIFFERENT PRODUCT LINES, INCLUDING NEW UNPROVEN TECHNOLOGIES,
AND THE 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 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.

         WE ARE REQUIRED TO ISSUE ADDITIONAL SHARES OF COMMON STOCK IN
CONNECTION WITH SEVERANCE AND OTHER AGREEMENTS AND ACQUISITIONS, AND AS A
RESULT, YOUR INVESTMENT IN OUR COMMON STOCK WILL BE FURTHER DILUTED.

         As of March 21, 2003, there were 284,612,961 shares of our common
stock outstanding. Since January 1, 2001, we have issued a net aggregate of
183,126,260 shares of common stock, of which 97,261,634 shares were issued
in connection with acquisitions of businesses and assets and 64,810,635
shares were issued upon conversion of our Series C preferred stock. We have
effected, and will likely continue to effect, acquisitions or contract for
services through the issuance of common stock or our other equity
securities. In addition, we have agreed to future earnout and "price
protection" provisions in prior acquisition and other agreements, which may
result in additional shares of common stock being issued. At December 31,
2002, based upon the expected performance of an acquired subsidiary, we are
contingently liable for additional consideration of approximately $1.0
million. In addition, on March 21, 2003, Richard J. Sullivan, our former
Chairman of the Board of Directors and Chief Executive Officer retired, and
Jerry C. Artigliere, our former Senior Vice President and Chief Operating
Officer resigned. Under the terms, of Messrs. Sullivan and Artigliere's
severance agreements they will receive shares of our common stock of 56.0
million and 4.8 million, respectively. These shares will be issued to the
respective parties on or before December 31, 2003. Such issuances of
additional securities will be dilutive to the value of our common stock and
may have a material adverse impact on the market price of our common stock.

                                     24

<PAGE>
<PAGE>

         THERE ARE 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 21, 2003, there were outstanding warrants and options
to acquire up to 41,567,858 additional shares of our common stock. In
addition, as of March 21, 2003, we had 89,710 additional shares of our
common stock available to be issued in the future under our stock option
plans, and 6,540,367 additional shares of our common stock available to be
issued in the future under our Employee Stock Purchase Plan. The exercise of
these 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 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 $31.3 million, or 74.7%, and $27.4 million, or 61.5%,
of our Advanced Technology segment's revenues for the years 2002 and 2001,
respectively, were generated by our wholly-owned subsidiary, Computer Equity
Corporation. Approximately 99.1% and 77.7% of Computer Equity Corporation's
revenues for the years 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.
Computer Equity has less than one percent of the federal telecommunications
market share. Computer Equity's business is highly competitive, and we
expect that the competitive pressures we face 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 Digital Angel
Corporation. 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 its
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. The principal competitor for the Digital Angel product is
Whereify Wireless, Inc. We are not aware of any other competitors currently
marketing products that compete with the Digital Angel product. However, we
are aware of several potential competitors that have expressed an interest
in developing and marketing similar technologies. There is no substantial
revenue from product sales of any participant in the market for the Digital
Angel product.

         OUR DIGITAL ANGEL CORPORATION'S ANIMAL APPLICATIONS DIVISION RELIES
HEAVILY ON SALES TO


                                     25

<PAGE>
<PAGE>

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.

         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 CONDITIONS AND RESULTS OF OPERATIONS.

         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, which
could have a material adverse effect on our financial condition and results
of operations.

         WE DEPEND GREATLY ON OUR SMALL TEAM OF SENIOR MANAGEMENT AND KEY
PERSONNEL, AND WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING ADDITIONAL
PERSONNEL; THE LOSS OF THE SERVICES OF ANY OF SUCH PERSONNEL COULD
MATERIALLY 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. Some of our employees have employment
contracts that call for bonus arrangements based on earnings. 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.

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

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

         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 31, 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 change in the future. In addition, we will continue to
incur additional legal costs in connection with pursuing and defending such
actions.

                                     26

<PAGE>
<PAGE>

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

         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/or 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 of
approximately ten years. VeriChip Corporation may not be able 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 the intended security, financial and personal
identification/safety applications. However, the FDA further stated in its
determination letter that with respect to the use of the VeriChip product in
health information applications, VeriChip is a medical device subject to the
FDA's jurisdiction. On November 8, 2002, we received a letter from the FDA,
based upon correspondence from us to the FDA, warning us not to market
VeriChip for medical applications. While we currently intend to market and
distribute the VeriChip product for security, financial and personal
identification/safety applications, in the future, we plan to expand our
marketing and distribution efforts to 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.

         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


                                     27

<PAGE>
<PAGE>

by these regulators could materially adversely affect Digital Angel
Corporation's business.

         THE THERMO LIFE TECHNOLOGY HAS NOT YET BEEN DEVELOPED FOR
COMMERCIAL DEPLOYMENT, AND THERE IS NO CERTAINTY THAT IT WILL BE
SUCCESSFULLY MARKETED.

         The Thermo Life technology has been successfully tested in the
laboratory. Our ability to develop and commercialize products based on this
proprietary technology will depend on our ability to develop our products
internally on a timely basis. However, there is no certainty as to when or
if the Thermo Life technology will be successfully marketed.

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

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

         CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

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

              o   anticipated trends in our business and demographics;

              o   the ability to hire and retain skilled personnel;

              o   relationships with and dependence on technological partners;

                                     28

<PAGE>
<PAGE>

              o   uncertainties relating to customer plans and commitments;

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

              o   our future profitability and liquidity;

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

              o   regulatory, competitive or other economic influences.

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

         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

         As of March 21, 2003, Computer Equity Corporation's major suppliers
were NEC, Graybar, Koss, and Computer Cable Connect, among others. Computer
Equity Corporation does 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 of
approximately ten years.

         Computer Equity Corporation has formed strategic partnerships with
various well-known companies within their industry. This dynamic group of
companies offers Computer Equity Corporation the experience and expertise
needed to meet the most demanding project requirements. Also, Computer
Equity Corporation relies on a network of eight hundred local equipment
suppliers and service providers throughout the nation. Under Computer
Equity's direction, they install and maintain equipment and networks and
enable Computer Equity Corporation to respond quickly to its customers.

         Digital Angel Corporation

         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 EM Microelectronics-Marin SA, Ashland
Distribution Company, Creation Technologies and TSI Molding, Inc. Digital
Angel Corporation does not


                                     29

<PAGE>
<PAGE>

have contracts or supply arrangements with these suppliers.

         InfoTech USA, Inc

         Principal Suppliers
         -------------------

         Over 80% of InfoTech USA, Inc.'s purchases during 2002 were from
its top four suppliers as follows: Support Net, 34%, Ingram, 25%, IBM, 11%,
Tech Data, 16%.

         SEASONALITY

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

         EMPLOYEES

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

         BACKLOG

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

         COMPLIANCE WITH ENVIRONMENTAL REGULATIONS

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

     ITEM 2.  PROPERTIES

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

                                     30

<PAGE>
<PAGE>

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

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

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

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

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

         In June 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after
June 15, 2002. SFAS 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 will adopt FAS
143 on January 1, 2003. Application of the new rules is not expected to have
a significant impact on our financial position and results of operations as
we believe we do not currently have any legal obligations associated with
the retirement of long-lived assets or leased facilities.

     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, 2002. In our
opinion, these proceedings are not likely to have a material adverse affect
on our financial position, our cash flows or our overall trends in results.
The estimate of the potential impact on our financial position, our overall
results of operations or our cash flows for these proceedings could change
in the future.

         On August 3, 2001, Prodigy Communications, successor to FlashNet
Communications, filed suit


                                     31

<PAGE>
<PAGE>

against Intellesale in connection with a settlement and computer purchase
agreement. During December 2002, we settled with Prodigy Communications for
$0.1 million. As a result of the settlement, during the fourth quarter of
2002, we reversed approximately $1.4 million in litigation reserves, which
were included in our Discontinued Operations.

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

         On March 31, 2002, 510 Ryerson Road Inc. filed a lawsuit in the
Superior Court of New Jersey, Essex County 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 have demanded relief in the amount of $2.0 million. The trial
date, originally set for December 2002, has been postponed and not yet
re-scheduled.

         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 and review by an
independent special litigation committee.

         In July, 2002, SRZ Trading LLC filed a derivative complaint in
the Circuit Court of Cole County, Missouri against us, and several of our
officers and directors for unspecified damages. The complaint alleges
that the defendants made false and misleading statements about Applied
Digital Solutions, Inc.'s business and financial performance. The Missouri
action was voluntarily dismissed and refiled in federal court in the
Southern District of Florida. The Florida action was voluntarily dismissed
with prejudice on March 7, 2003.

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

         On May 29, 2001, Janet Silva, individually and as Guardian ad litem
for Jonathan Silva, a minor, and the Estate of Clarence William Silva, Jr.
(collectively, "Plaintiffs") filed suit against Customized Services
Administrators, Incorporated (CSA), Pricesmart, Inc., Commercial Union
Insurance Company, CGU Insurance Group, and Digital Angel Corporation
(collectively, "Defendants") in the Superior Court of the State of
California in and for the County of Santa Clara. The allegations of the
complaint arise from a vacation guarantee insurance policy (the "Insurance
Contract") allegedly purchased by the Plaintiffs from the Defendants on
March 6, 2000. The complaint alleges, among other things, that the
Defendants breached the Insurance Contract, defrauded Plaintiffs, acted in
bad faith, engaged in deceptive and unlawful business practices, resulting
in the wrongful death of Clarence William Silva, Jr. (the "deceased") and
the intentional infliction of emotional distress on Plaintiffs. The
complaint seeks the


                                     32

<PAGE>
<PAGE>

cost of funeral and burial expenses of the Deceased and amounts constituting
the loss of financial support of the deceased, general damages, attorney's
fees and costs, and exemplary damages of an unspecified amount. CSA has
filed a cross-claim against us alleging that we should be held liable for
any liability that CSA may have to the Plaintiffs in this case. We have
denied the allegations of the complaint and the CSA cross-claim and are
vigorously contesting all aspects of this action.

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

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

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

                                   PART II

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

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

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

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

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


         HOLDERS

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

         DIVIDENDS

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


                                     33

<PAGE>
<PAGE>

purchase any such capital stock, or make any other distribution in respect
of such stock or other securities, whether in cash, property or other
obligations of us.

         RECENT SALES OF UNREGISTERED SECURITIES

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

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

<S>                             <C>                <C>             <C>       <C>      <C>              <C>
EnviroCommunications, Inc.      December, 2002     $82,000         1         1        Services         200,000
                                                                                                    -------------
Total                                                                                                  200,000
                                                                                                    =============

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

                                     34

<PAGE>
<PAGE>

     ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                      FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                           ------------------------------------------------------------
                                            2002          2001        2000          1999          1998
                                            ----          ----        ----          ----          ----

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

 Equity in net loss of affiliate               291           328           --           --           --
                                         ---------     ---------    ---------     --------      -------
 (Loss) income from continuing
   operations                             (113,905)     (198,086)     (29,174)       2,580       (1,382)
 Income (loss) from discontinued
   operations, net of income taxes              --           213      (75,702)       3,012        6,072
 Income (loss) on disposal of
   discontinued operations, including
   provision for operating losses
   during phase-out period, net of
   tax benefit                               1,420       (16,695)      (7,266)          --           --
                                         ---------     ---------    ---------     --------      -------
 (Loss) income before extraordinary
   gain (loss)                            (112,485)     (214,568)    (112,142)       5,592        4,690
 Extraordinary gain (loss), net of
   taxes                                        --         9,465           --         (160)          --
                                         ---------     ---------    ---------     --------      -------
 Net (loss) income                        (112,485)     (205,103)    (112,142)       5,432        4,690
 Preferred stock dividends                      --        (1,147)        (191)          --          (44)
 Accretion of beneficial conversion
   feature of preferred stock                   --        (9,392)      (3,857)          --           --
                                         ---------     ---------    ---------     --------      -------
 Net (loss) income available to
   common stockholders                   $(112,485)    $(215,642)   $(116,190)    $  5,432      $ 4,646
                                         =========     =========    =========     ========      =======


                                     35

<PAGE>
<PAGE>

<CAPTION>
                                                      FOR THE FISCAL YEAR ENDED DECEMBER 31,
                                         ---------------------------------------------------------------
                                           2002          2001         2000          1999          1998
                                           ----          ----         ----          ----          ----

<S>                                      <C>           <C>          <C>           <C>           <C>
 Net (loss) income per common
   share - basic:
    Continuing operations                $   (0.42)    $   (1.23)   $   (0.52)    $   0.06      $ (0.05)
    Discontinuing operations                    --         (0.10)       (1.30)        0.06         0.19
    Extraordinary gain (loss)                   --          0.06           --           --           --
                                         ---------     ---------    ---------     --------      -------
      Net (loss) income per common
        share basic                      $   (0.42)    $   (1.27)   $   (1.82)    $   0.12      $  0.14
                                         =========     =========    =========     ========      =======

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

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


<CAPTION>
                                                                AS OF DECEMBER 31,
                                         ---------------------------------------------------------------
                                           2002          2001         2000          1999          1998
                                           ----          ----         ----          ----          ----
                                                              (AMOUNTS IN THOUSANDS)

<S>                                      <C>           <C>          <C>           <C>           <C>
 BALANCE SHEET DATA:
 Cash and cash equivalents               $   5,818     $   3,696    $   8,039     $  2,181      $  1,936
 Due from buyers of divested
   subsidiary                                   --         2,625           --       31,302            --
 Property and equipment                      9,822        20,185       21,368        6,649         8,933
 Goodwill                                   67,818        90,831      166,024       24,285        23,786
 Net (liabilities) assets of
   discontinued operations                  (9,368)       (9,460)       8,076       75,284        37,320
 Total assets                              117,233       167,489      319,451      186,605        71,613
 Long-term debt                              3,346         2,586       69,146       33,260         1,864
 Total debt                                 85,225        86,422       74,374       62,915        26,055
 Minority interest                          18,422         4,460        4,879        1,292         1,300
 Redeemable preferred stock and option          --         5,180       18,620           --            --
 Stockholders' (deficit) equity            (36,092)       28,119      160,562       92,936        67,560
</TABLE>

                                     36

<PAGE>
<PAGE>

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

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

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

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

     Earnings (loss) per share - diluted
     Net (loss) income per share before extraordinary (loss)
       gain - diluted as reported                                     $   (1.26)       $   (1.76)        $ 0.11
     Goodwill amortization                                                 0.12             0.15           0.05
     Equity method investment amortization                                 0.01               --             --
                                                                      ---------        ---------         ------
     Adjusted (loss) income before extraordinary (loss) gain
       per share - diluted                                            $   (1.13)       $   (1.61)        $ 0.16
                                                                      =========        =========         ======

     Net (loss) income available to common stockholders:
     Net (loss) income available to common stockholders
       as reported                                                    $(215,642)       $(116,190)        $5,432
     Add back: Goodwill amortization                                     21,312            9,415          2,602
     Add back: Equity method investment amortization                      1,161               --             --
                                                                      ---------        ---------         ------
     Adjusted net (loss) income                                       $(193,169)       $(106,775)        $8,034
                                                                      =========        =========         ======

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

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


                                     37

<PAGE>
<PAGE>

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

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

OVERVIEW

         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 digital 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 a customer basis that
we believed did not promote or complement our current business strategy. As
of December 31, 2002, our business operations consisted of the operations of
six 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, 2002, we owned
approximately 73.91% of Digital Angel Corporation and 52.5% of InfoTech USA,
Inc.

         Historically, we have suffered losses and we have not generated
positive cash flows from operations. This raises doubt about our ability to
continue as a going concern. The audit reports of Eisner LLP for the year
ended December 31, 2002, and of Pricewaterhouse Coopers LLP, for each of the
two-years ended December 31, 2001 and 2000, contain an explanatory paragraph
expressing doubt about our ability to continue as a going concern, as a
result of payment and covenant defaults under our credit agreement with
IBM Credit LLC ("IBM Credit"), which are more fully discussed in this Form
10-K under Part I - Item 1 - Business "Other Events" beginning on page 15,
and in Note 2 to the Consolidated Financial Statements, as well as our
historical losses and the negative cash flows from our operations. We
incurred net losses from continuing operations of $113.9 million, $198.1
million and $29.2 million for the years ended December 31, 2002, 2001 and
2000, respectively and as of December 31, 2002, we had an accumulated
deficit of $417.1 million. Our operating activities used cash of $3.9
million, $18.0 million and $43.4 million during 2002, 2001 and 2000.

         Digital Angel Corporation has suffered losses and has not generated
positive cash flows from operations. In addition, the audit reports of
Eisner LLP for the year ended December 31, 2002, and of Pricewaterhouse
Coopers LLP, for each of the two-years ended December 31, 2001 and 2000,
contain an explanatory paragraph expressing doubt about Digital Angel
Corporation's ability to continue as a going concern. Digital Angel
Corporation incurred losses during 2002, 2001 and 2000, which are presented
below. In addition, its operating activities used cash of $2.7 million, $3.2
million and $1.4 million during 2002, 2001 and 2000, respectively.

         Our profitability and liquidity depend on many factors, including
our complying with the provisions of a forbearance agreement term sheet with
IBM Credit, as more fully discussed in this Form 10-K under Part II - Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Liquidity and Capital Resources from Continuing Operations"
beginning on page 63 and in Note 2 to the Consolidated Financial Statements,
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 will need additional financing to comply with
the provisions of the forbearance agreement term sheet and to fund
operations. Without such additional financing,


                                     38

<PAGE>
<PAGE>

we will not have sufficient funds to continue operations beyond the end of
the current fiscal year.

         We have established a management plan to mitigate the effect of our
going concern uncertainty conditions over the next twelve months. The major
components of our plan are as follows:

     o   To raise funds to repay a portion of our obligations to IBM Credit
         through the offering of up to 50 million shares of our common stock
         in a best efforts offering. These shares are currently being
         registered under a registration statement filed with the SEC on
         December 23, 2002 (File No. 333-102165);

     o   To utilize the shares of Digital Angel Corporation's common stock
         currently in the Digital Angel Trust and/or our receivables and
         inventory to secure additional funds to repay IBM Credit (noting
         that these assets will be released from liens by IBM Credit upon
         repayment in full of our obligations under the forbearance
         agreement);

     o   To borrow against Digital Angel Corporation's receivables and
         inventory, if necessary;

     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 Angel(TM), Thermo Life(TM),
         VeriChip(TM) and Bio-Thermo(TM); and

     o   To generate additional liquidity through divestiture of business
         units and assets that are not critical to our long-term strategy.

         It is the opinion of our management that the likelihood of the
above plan being effectively implemented is good. Our sources of revenue and
gross profit consist of sales of products and services from our three
operating segments.

         Our significant sources of revenue for 2002 were as follows:

<TABLE>
<CAPTION>
                                                                                     Percentage of
Sources of Revenue:                                                                  Total Revenue
-------------------                                                                  -------------

<S>                                                                                     <C>
Sales of voice, data and video telecommunications networks to government agencies        31.5%

Electronic visual identification tags and implantable microchips for the
  companion animal, livestock, laboratory animal, fish and wildlife markets              20.5%
Sales of IT hardware and services from our InfoTech USA, Inc. segment                    22.8%

GPS enabled search and rescue equipment, intelligent communications products
  and services for telemetry, mobile data and radio communications                       10.1%

Other products and services (individually, none of these products and services
  exceeded 10% of our total revenues for 2002)                                           15.1%
                                                                                     ------------
Total                                                                                   100.0%
                                                                                     ============
</TABLE>

                                     39


<PAGE>
<PAGE>

         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 will increase 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 of 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 source of animal and
other food sources will increase the markets for these products. We expect
revenue from our InfoTech USA, Inc. segment to decrease as we continue to
shift our focus from sales of lower-margin computer hardware products to
sales of higher-margin products and technology services 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.

         BUSINESS SEGMENTS

         As a result of the merger of pre-merger Digital Angel and MAS,
which occurred on March 27, 2002, the significant restructuring of our
business during the past year and our emergence as an advanced technology
development company, we have re-evaluated and realigned our reporting
segments. Effective January 1, 2002, we currently operate in three business
segments: Advanced Technology, Digital Angel Corporation and InfoTech USA,
Inc., formerly SysComm International. 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.
"Corporation/Eliminations" also includes certain interest expense and other
expenses associated with corporate activities and functions.

         (Loss) income from continuing operations before taxes, minority
interest, net loss on subsidiary merger transaction and equity in loss of
affiliate from each of our segments during 2002, 2001 and 2000 was as
follows (we evaluate performance based on stand-alone segment operating
income as presented below):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                    -----------------------
                                                                2002         2001         2000
                                                                ----         ----         ----
                                                                        (IN THOUSANDS)
<S>                                                          <C>          <C>          <C>
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES,
  MINORITY INTEREST, NET LOSS ON SUBSIDIARY MERGER
  TRANSACTION AND EQUITY IN LOSS OF AFFILIATE BY SEGMENT:

ADVANCED TECHNOLOGY                                          $    (786)   $ (41,493)   $ (1,544)
DIGITAL ANGEL CORPORATION(1)(2)                                (76,439)     (16,262)     (3,816)
INFOTECH USA, INC.                                                (422)      (1,322)        923
ALL OTHER                                                         (320)     (71,636)     (5,714)
"CORPORATE/ELIMINATIONS"(2)                                    (49,310)     (46,893)    (23,834)
                                                            -------------------------------------
TOTAL                                                        $(127,277)   $(177,606)   $(33,985)
                                                            =====================================

<FN>
         (1) For Digital Angel Corporation, the loss for 2002 includes
         goodwill impairment of $62.2 million and impairment of the value of
         certain software of $6.4 million.

         (2) For Digital Angel Corporation, the loss for 2002 excludes $1.8
         million of interest expense associated with our 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, all of such expenses
         having been reflected as additional expense in the separate
         financial statement of Digital Angel Corporation included in its
         Form 10-K dated December 31, 2002. The $1.8 million of interest
         expense and the $18.7 million of non-cash compensation expense are
         reflected in "Corporate/Eliminations" for 2002.
</TABLE>

                                     40

<PAGE>
<PAGE>

         Today, we are an advanced technology company that focuses on the
development of life-enhancing technology products and services. To date, we
have four such products in various stages of development, they are:

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

             o    Thermo Life(TM), a thermoelectric generator;

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

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

         These advanced technology products are more fully described in this
Form 10-K under Part I - Item 1 - Business. We have not recorded any
significant revenues from our advanced technology products.

         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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION

         Advanced Technology 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


                                     41

<PAGE>
<PAGE>

maintenance contracts, which revenues represent the smallest portion of
their 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 collectibility 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. 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.

         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
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
collectibility 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


                                     42

<PAGE>
<PAGE>

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

         The VeriChip microchip 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 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. The VeriChip subscriber number then provides
instant access to the Global VeriChip Subscriber Registry - through secure
password-protected web access to subscriber-supplied information.

         VeriChip revenue is comprised of the sale of VeriChip microchips,
scanners, and a 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. For these rights, the distributor pays a one-time, upfront
non-refundable fee. As long as minimum annual purchase requirements are
satisfied, the customer's exclusive distribution rights are retained. 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. The purchase requirements typically
increase substantially, during the contract period, as we and the
distributors hope to realize increased sales volumes for the VeriChip
microchips and scanners over time.

         Failure to meet the quota constitutes 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
the renewal in-writing thirty days prior to the expiration date of the
contract. The Company, at its own discretion, may then negotiate with the
distributor for a renewal of the agreement.

         As of December 31, 2002, we have not yet recognized revenue
associated with our VeriChip product. We plan to recognize revenue
associated with the distributor rights, product sales and monitoring
services in the future based upon the following policy:

         Distributor Rights Fees

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


                                     43

<PAGE>
<PAGE>

of time the distributor has to accept or reject the products as provided in
their agreements.

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

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

         Approximately $0.2 million of distributor fees were recorded as
deferred revenue on our balance sheet at December 31, 2002, and included in
accrued expenses.

Product Sales

         Revenue from the sale of products such as microchips and scanners
will be recorded at gross with a separate display of cost of sales. Until
the amount of returns can be reasonably estimated, we will 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 collectibility 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. The period of time to accept or reject products
is contract specific. This right of return privilege ranges from fifteen
to ninety days. Statement of Financial Accounting Standards No. 48,
Revenue Recognition When Right of Return Exists, precludes the
recognition of revenue at the time of sale or passage of title unless the
amount of returns can be reasonably estimated. The Company is currently
unable to reasonably estimate the amount of returns because of the absence
of historical experience. The Company anticipates that it will take
at least one full year to accumulate enough historical data to
reasonably estimate product returns. As a result, currently the Company will
only recognize revenue from a product sale when the product return period
has expired. Until that condition is met, revenue will not be recognized,
and it will be recorded as deferred revenue. We had no deferred revenue
associated with VeriChip product sales at December 31, 2002.

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


                                     44

<PAGE>
<PAGE>

Monitoring Services

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

         Digital Angel Corporation 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 collectibility 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 medical and communication costs. Other revenues are
recognized at the time service or goods are provided.

         InfoTech USA, Inc. Revenue Recognition

         For product sales, InfoTech USA, Inc. recognizes revenue in
accordance with the applicable


                                     45

<PAGE>
<PAGE>

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.

         All Other

         For arrangements where the contract to deliver software require
significant production, modification or customization of the software,
revenue is 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 or closed the businesses 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 and 2000 was $6.7 million and $14.7 million, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

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

         On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets" (FAS 142). FAS 142
eliminates the amortization of goodwill and instead requires that goodwill
be tested for impairment at least annually. Intangible assets deemed to


                                     46

<PAGE>
<PAGE>

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

STOCK-BASED COMPENSATION

        We account for our employee stock-based compensation plans in
accordance with APB Opinion No. 25 (APB No. 25), Accounting for Stock Issued
to Employees and Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25, and the disclosure provisions of SFAS
No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation.
Accordingly, no compensation cost is recognized for any of our fixed stock
options granted to employees when the exercise price of each option equals
or exceeds the fair value of the underlying common stock as of the grant
date for each stock option. When options are granted to employees and
directors at a price less than fair market value on the date of 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
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 Opinion No. 25. Accordingly, compensation
expense is measured in accordance with APB No. 25 and recognized over the
vesting period. If the modified grant is fully vested, any additional
compensation costs are recognized immediately. Under variable accounting,
changes in the underlying price of our stock may have a significant impact
to earnings. A rise in our stock price results in additional compensation
expense and a decrease in our stock price results in a reduction of reported
compensation expense. During 2001, we re-priced 19.3 million stock options.
As a result, we have recorded non-cash compensation expense of $0.7 million
and $5.3 million in 2002 and 2001, respectively. In addition, on September
24, 2001, we issued 3.9 million options to employees and directors with
exercise prices of $0.15 per share, or $0.02 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.

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

PROPRIETARY SOFTWARE IN DEVELOPMENT

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

                                     47

<PAGE>
<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.

                                     48

<PAGE>
<PAGE>

                      RESULTS OF CONTINUING OPERATIONS

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

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

                                     49

<PAGE>
<PAGE>

         Our significant sources of revenue for 2002 were as follows:

<TABLE>
<CAPTION>
                                                                                     Percentage of
Sources of Revenue:                                                                  Total Revenue
-------------------                                                                  -------------

<S>                                                                                      <C>
Sales of voice, data and video telecommunications networks to government agencies         31.5%

Electronic visual identification tags and implantable microchips for the
  companion animal, livestock, laboratory animal, fish and wildlife markets               20.5%

Sales of IT hardware and services from our InfoTech USA, Inc. segment                     22.8%

GPS enabled search and rescue equipment, intelligent communications products
  and services for telemetry, mobile data and radio communications                        10.1%

Other products and services (individually, none of these products and services
  exceeded 10% of our total revenues for 2002)                                            15.1%
                                                                                       ----------
Total                                                                                    100.0%
                                                                                       ==========
</TABLE>


         Our significant sources of gross profit and gross profit margin by
product type for 2002 were as follows:

<TABLE>
<CAPTION>
                                                                                     GROSS PROFIT       GROSS MARGIN
Gross Profit and Gross Profit Margin by Product Type:                               (IN THOUSANDS)       PERCENTAGE
-----------------------------------------------------                               --------------      ------------

<S>                                                                                    <C>                 <C>
Sales of voice, data and video telecommunications networks to government agencies      $ 7,992             25.5%

Visual identification tags and implantable microchips for the companion
  animal, livestock, laboratory animal, fish and wildlife markets                        8,087             39.7%

Sales of IT hardware and services from our InfoTech USA, Inc. segment                    4,150             18.3%

GPS enabled search and rescue equipment, intelligent communications
  products and services for telemetry, mobile data and radio communications              4,878             48.7%

Other products and services                                                              6,775             44.7%
                                                                                    --------------------------------
Total                                                                                  $31,882             32.0%
                                                                                    ================================
</TABLE>

         REVENUE

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

                                     50

<PAGE>
<PAGE>

         Revenue for each of the continuing operating segments was:

<TABLE>
<CAPTION>
                                              2002                          2001                            2000
                                  ---------------------------   -----------------------------    ------------------------------
                                  PRODUCT   SERVICE    TOTAL     PRODUCT   SERVICE     TOTAL      PRODUCT    SERVICE     TOTAL
                                  -------   -------    -----     -------   -------     -----      -------    -------     -----
                                                                  (AMOUNTS IN THOUSANDS)

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

         Changes during the years were:

         Our Advanced Technology 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 of $3.6 million in revenue. 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 $4.8 million in 2002 and 2001. Computer
Equity Corporation's revenue accounted for 74.7% of this segment's revenue
for 2002. During 2001, this segment experienced an increase in sales due
primarily to the inclusion of twelve months of operating results for two
significant acquisitions acquired in 2000. These two significant
acquisitions include Computer Equity Corporation, acquired on June 1, 2000,
which contributed $10.0 million of the increase, and Pacific Decision
Sciences Corporation, acquired on October 1, 2000, which contributed $3.9
million of the increase.

         Our Digital Angel Corporation segment's revenue decreased $2.2
million, or 6.1%, from 2001 to 2002. Product revenue decreased by $2.3
million, or 7.1%, while service revenue increased by $0.2 million, or 6.6%.
We attribute the decrease in product sales for 2002 primarily to a decrease
in shipments of visual identification tags, which contributed approximately
$1.4 million of the decrease, a decrease in the shipment of the Animal
Application division's electronic identification products, which contributed
approximately $0.3 million of the decrease, a decrease in the GPS and Radio
Communication division's control product sales, which contributed
approximately $1.1 million of the decrease, partially offset by an increase
of $0.6 million in the Medical Systems division's product revenue. We
attribute the increase in service revenue to the acquisition of the Medical
Systems in March 2002, which contributed approximately $1.2 million of the
increase in service revenue during 2002. This was partly offset by a
decrease in service revenue from the Wireless and Monitoring division of
approximately$1.0 million. Revenue increased $13.5 million, or 60.8%, from
2000 to 2001. The increase in revenue in 2001 was primarily the result of
the acquisitions of Timely Technology Corp. in April 2000, which contributed
$0.9 million of the increase, and Destron Fearing Corporation in September
2000, which contributed $15.5 million of the increase. These increases were
partially offset by a reduction in revenue from our one existing business in
this segment.

         Our InfoTech USA, Inc. segment's revenue decreased $11.5 million,
or 33.5%, from 2001 to 2002. Product revenue decreased by $10.0 million, or
33.3%, while service revenue decreased by $1.4 million, or 35.0%. The
decrease in product and service sales was primarily a result of an industry
wide softening in demand that existed throughout 2002. Additionally, product
sales declined as a result of a decision in April 2002, to cease selling
certain lower-margin computer hardware products and to focus on sales of
higher-margin products and related technical services. The lower-margin
computer hardware products were mid-range Unix based computers, which
offered little opportunity


                                     51

<PAGE>
<PAGE>

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-margined technical
services. Revenue increased $6.9 million, or 25.2%, from 2000 to 2001. Both
product and service revenue increased as a result of internal growth and the
acquisition of InfoTech USA, Inc.

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

         GROSS PROFIT AND GROSS PROFIT MARGIN

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

         Gross profit from continuing operations for each operating segment
was:

<TABLE>
<CAPTION>
                                              2002                          2001                              2000
                                  ---------------------------   -----------------------------    ------------------------------
                                  PRODUCT   SERVICE    TOTAL     PRODUCT   SERVICE     TOTAL      PRODUCT    SERVICE     TOTAL
                                  -------   -------    -----     -------   -------     -----      -------    -------     -----
                                                                  (AMOUNTS IN THOUSANDS)

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

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

<TABLE>
<CAPTION>
                                              2002                          2001                              2000
                                  ---------------------------   -----------------------------    ------------------------------
                                  PRODUCT   SERVICE    TOTAL     PRODUCT   SERVICE     TOTAL      PRODUCT    SERVICE     TOTAL
                                  -------   -------    -----     -------   -------     -----      -------    -------     -----
                                     %         %         %          %         %          %           %          %          %
                                  -------   -------    -----     -------   -------     -----      -------    -------     -----

<S>                               <C>       <C>       <C>       <C>        <C>       <C>         <C>         <C>         <C>
      Advanced Technology          19.5      56.3      30.8        24.4      52.2       34.7        34.8       64.2       42.0
      Digital Angel Corporation    42.7      17.5      40.6        39.0      18.7       37.6        41.2       45.8       41.8
      InfoTech USA, Inc.           14.5      46.7      18.3        10.0      57.1       15.7        19.2       41.4       21.3
      All Other                    81.5      90.4      83.9        15.1      42.4       28.3        40.0       53.7       44.4
      Corporate                      --        --        --       100.0     100.0      100.0       100.0        0.0      100.0
      -------------------------------------------------------------------------------------------------------------------------
                                   27.9      50.0      32.0        23.4      46.3       29.7        34.2       54.8       38.8
      =========================================================================================================================
</TABLE>

                  Changes during the years were:

         Our Advanced Technology segment's gross profit decreased $2.5
million from 2001 to 2002, and margins decreased to 30.8% in 2002 compared
to 34.7% in 2001. We attribute the decrease in gross profit and margin
primarily to the reduction in sales of 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. Gross profit increased $1.9 million from 2000 to 2001 and
margins decreased to 34.7% in 2001 compared to 42.0% in 2000. During 2001,
this segment experienced an increase in gross margin due primarily to the
inclusion of twelve months of operating results for two significant
businesses acquired in 2000. These two significant acquisitions were
Computer Equity Corporation, acquired on June 1, 2000, and Pacific Decision

                                     52

<PAGE>
<PAGE>

Sciences Corporation, acquired on October 1, 2000. Companies acquired in
2000 contributed $9.4 million in gross profit in 2000. Gross profit and
margin percentage from existing businesses decreased in 2000 as the poor
performance of the technology sector during the fourth quarter of 2000
resulted in lower capital spending and increased incentives.

         Our Digital Angel Corporation segment's gross profit increased $0.2
million, or 1.5%, from 2001 to 2002, and margins increase to 40.6% from
37.6%. We attribute the increase in gross profit for 2002, to the
acquisition of the Medical Systems division in March 2002, which contributed
approximately $0.6 million of gross profit. This was partially offset by a
decrease in gross profit of approximately $0.4 million from the Wireless and
Monitoring division as a result of the decreased in sales in this division..
Gross profit increased by $4.1 million, or 44.5%, from 2000 to 2001, and
margins decreased to 37.6% from 41.8%. Gross profit increased in 2001
primarily as a result of the acquisitions of Timely Technology Corp. in
April 2000, which contributed $0.2 million of the increase, and Destron
Fearing Corporation in September 2000, which contributed $5.6 million of the
increase. These increases were partially offset by a reduction in gross
margin from our existing business in this group. Gross profit margins
decreased in 2001, primarily because the businesses acquired in 2000 earn
lower margin percentages than our one existing business in this segment.

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

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

                                     53

<PAGE>
<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

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

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

<TABLE>
<CAPTION>
                                                                2002            2001             2000
                                                                ----            ----             ----
                                                                     (AMOUNTS IN THOUSANDS)

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

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

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

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


         Changes during the years were:

         Our Advanced Technology segment's selling, general and
administrative 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. As a percentage of revenue, selling, general
and administrative expense increased 1.4% in 2002 as compared to 2001.
Selling, general and administrative expense increased $1.7 million, or
16.1%, to $12.3 million in 2001 from $10.6 million in 2000. The acquisition
of Computer Equity in June 2000 contributed $2.6 million of the increase and
$1.2 million resulted from bad debt reserves. The increases were partially
offset by staff reductions and other cost saving measures. Selling expense
decreased as a percentage of revenue in 2001 as compared to 2000, as
companies acquired in 2000 incurred less selling, general and administrative
expenses as a percentage of revenue than the existing businesses.

         Our Digital Angel Corporation segment's selling, general and
administrative expense increased by $6.0 million, or 62.7%, to $15.6 million
in 2002 from $9.6 million in 2001. As a percentage of revenue, selling,
general and administrative expense increased to 46.4% as compared to 26.8%
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


                                     54

<PAGE>
<PAGE>

$2.5 million in expenses associated with the introduction of the Digital
Angel product, approximately $0.6 million of additional commission and
marketing expense in the GPS and Radio Communications division, and
approximately $0.8 million of expense attributable to the Medical Systems
division which was acquired in March 2002.. Selling, general and
administrative expense increased by $1.8 million, or 23.1% to $9.6 million
in 2001 from $7.8 million in 2000. The increase in 2001 was the result of
the acquisitions during 2000 of Destron Fearing Corporation, which
contributed $2.9 million of the increase, and Timely Technology Corp., which
contributed $0.4 million of the increase. These increases were partially
offset by a decrease in selling, general and administrative expense from our
one existing business in this segment.

         Our InfoTech USA, Inc. segment's selling, general and
administrative expense decreased $1.3 million, or 23.5%, 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.
Selling, general and administrative expense increased to $5.5 million in
2001 from $4.1 million in 2000. The increase in 2001 was due to the
acquisition of InfoTech USA, Inc. in the fourth quarter of 2000.

         Our All Other's 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 decrease resulted from the sale or closure of all of
the business units comprising this group during the last half of 2001 and
the first half of 2002. Selling, general and administrative expense
increased $5.8 million, or 25.3%, to $28.9 million in 2001 from $23.0
million in 2000. We attribute the increase to the acquisition of a software
provider in December 2000.

         Corporate/Eliminations selling, general and administrative expense
decreased $13.1 million, or 28.3%, to $33.1 million in 2002 from $46.1
million in 2001. We attribute the decrease in 2002 primarily to the one-time
costs incurred during 2001, as more fully discussed below, and to a
reduction in legal fees of approximately $1.7 million. Partially offsetting
the decrease were increases related to the following factors:

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

             o   We incurred an increase in professional fees associated
with accounting and auditing services during 2002 of approximately $1.2
million; and

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

                                     55

<PAGE>
<PAGE>

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

             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 are 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 the
                 Company's common stock was deemed uncollectible based upon
                 the financial condition of the debtor.

         Also contributing to the increase in 2001 were:

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

             o   $3.6 million in litigation reserves.

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

                                     56

<PAGE>
<PAGE>

         RESEARCH AND DEVELOPMENT EXPENSE

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

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

<TABLE>
<CAPTION>
                                                      2002         2001         2000
                                                      ----         ----         ----
                                                          (AMOUNTS IN THOUSANDS)

<S>                                                  <C>          <C>          <C>
Advanced Technology                                  $  861       $3,321       $  269
Digital Angel Corporation                             2,422        5,071        2,235
All Other                                                --          218           --
Corporate                                               235           --           --
---------------------------------------------------------------------------------------
                                                     $3,518       $8,610       $2,504
=======================================================================================
</TABLE>

         Research and development expense relates primarily to the
development of our products, Digital Angel, Thermo Life, VeriChip and
Bio-Thermo and to software development costs. The research and development
expense associated with software development was $0.9 million, $3.3 million
and $0.3 million in 2002, 2001 and 2000, respectively.

         ASSET IMPAIRMENT

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

<TABLE>
<CAPTION>
                                                       2002         2001        2000
                                                       ----         ----        ----
                                                          (AMOUNTS IN THOUSANDS)

<S>                                                  <C>          <C>          <C>
Goodwill:

Advanced Technology                                  $    --      $30,453      $   --
  Digital Angel Corporation                           62,185          726          --
  All Other                                               --       32,427         818
--------------------------------------------------------------------------------------
       Total goodwill                                 62,185       63,606         818
Property and equipment                                 6,860        2,372          --
Investment in ATEC and Burling stock                      --           --       5,565
Software and other                                       337        5,741          --
--------------------------------------------------------------------------------------
                                                     $69,382      $71,719      $6,383
======================================================================================
</TABLE>

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

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


                                     57

<PAGE>
<PAGE>

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

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

         During the fourth quarter of 2000, we reviewed our goodwill and
certain other investments for impairment and concluded that certain assets
were impaired. At December 31, 2000, we recorded a charge of $6.4 million
for permanent asset impairment related to our Digital Angel Corporation
segment. The write off related to an exclusive license to a digital
encryption and distribution software system. The charge is included in the
consolidated statement of operations under the caption Asset Impairment.

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

         DEPRECIATION AND AMORTIZATION

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

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

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

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


                                     58

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                            2002            2001         2000
                                                            ----            ----         ----
                                                                (AMOUNTS IN THOUSANDS)

<S>                                                        <C>            <C>          <C>
Advanced Technology                                        $  569         $ 9,088      $ 2,990
Digital Angel Corporation                                   3,638          12,298        2,962
InfoTech USA, Inc.                                            261             503          176
All Other                                                       9           4,768        3,366
Corporate                                                     296           2,242        1,579
-----------------------------------------------------------------------------------------------
Total                                                      $4,773         $28,899      $11,073
===============================================================================================
</TABLE>

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

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

         LOSS/GAIN ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS

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

         INTEREST INCOME AND EXPENSE

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

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

         INCOME TAXES

         We had effective income tax (benefit) rates of 0.3%, 11.8%, and
(14.8)% in 2002, 2001 and 2000, respectively. Differences in the effective
income tax rates from the statutory federal income tax rate arise from
goodwill amortization associated with acquisitions, state taxes net of
federal benefits and the increase or reduction of valuation allowances
related to net operating loss carry forwards and other deferred tax assets.
As of December 31, 2002, 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.

                                     59

<PAGE>
<PAGE>

         EXTRAORDINARY GAIN/LOSS

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

         RESULTS OF DISCONTINUED OPERATIONS

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

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

                                     60

<PAGE>
<PAGE>

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

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

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

                                     61

<PAGE>
<PAGE>

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

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

         During 2002 and 2001, Discontinued Operations incurred a change in
estimated loss on disposal and operating losses accrued on the measurement
date of $1.4 million and $(16.7) million, respectively. The primary reason
for the reduction in estimated losses for 2002 was due to the settlement of
litigation for an amount less than anticipated. The primary reasons for the
excess losses in 2001 were due to inventory write-downs of $4.5 million
during the second quarter of 2001, a decrease in estimated sales proceeds as
certain of the businesses were closed in the second and third quarters of
2001, an increase in legal expenses related to 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 a further loss on sale of the remaining
business comprising Discontinued Operations. However, actual losses could
differ from our estimates and any adjustments will be reflected in our
future financial statements. During the years ended December 31, 2002, 2001
and 2000, the estimated amounts recorded were as follows:

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

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

                                     62

<PAGE>
<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, 2002:

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

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

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

         In the second quarter of 2000, Intellesale recorded a pre-tax
charge of $17.0 million. Included in this charge was an inventory reserve of
$8.5 million for products Intellesale expected to sell below cost (included
in cost of goods sold), $5.5 million related to specific accounts and other
receivables, and $3.0 million related to fees and expenses incurred in
connection with Intellesale's cancelled public offering and certain other
intangible assets. This charge reflects the segment's decreasing revenue
trend, lower quarterly gross profits and the expansion of Intellesale's
infrastructure into a major warehouse facility. In addition, a more
competitive business environment resulting from an overall slowdown in
Intellesale's business segment, and management's attention to the Bostek
operational and legal issues, contributed to the negative results. The
impact of the loss resulted in Intellesale restructuring its overhead and
refocusing its business model away from the Internet segment and back to its
traditional business lines. This restructuring was completed in the fourth
quarter of 2000 and during that quarter an additional $5.5 million of
inventory acquired for retail distribution was written down to realizable
value.

         LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

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

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


                                     63

<PAGE>
<PAGE>


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

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

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

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

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

         Financing activities (used) provided cash of ($2.8) million, $10.9
million and $30.8 million in 2001, 2000 and 1999, respectively. In 2002,
cash was used to pay $6.2 million in notes payable and long-term debt,
offset by $1.7 million provided from issuance of common shares, $1.2 from
collections of notes receivable for shares issued, and $1.3 provided by
increases in notes payable. In 2001, cash of $14.0 million was obtained
through notes payable, $0.6 million was provided by long-term debt and $0.7
million was provided from the issuance of common shares. Cash was used
primarily for stock issuance costs of $0.8 million, and payments of
long-term debt of $2.5 million. In 2000, $19.1 million was received from the
issuance of Series C preferred stock, $16.0 million was obtained through
long-term debt, $2.2 million was obtained from net increases in notes
payable and $6.1 million was obtained through the issuance of common shares.
Uses of cash in 2000 included payments of $11.6 million against long-term
debt, and $0.8 million for other financing costs.

         Debt, Covenant Compliance and Liquidity

         On March 1, 2002, we and the Digital Angel Trust entered into the
IBM Credit Agreement with IBM Credit, which became effective on March 27,
2002, the effective date of the merger between pre-merger Digital Angel and
MAS. The principal amount outstanding had an annual rate of 17% and matured
on February 28, 2003. If certain amounts were not repaid on or before
February 28, 2003, the interest rate increased to an annual rate of 25%. On
September 30, 2002, we entered into an amendment to the IBM Credit
Agreement, which revised certain financial covenants relating to our
financial performance and the financial position and performance of Digital
Angel Corporation for the quarter ended September 30, 2002, and the fiscal
year ending December 31, 2002. On November 1, 2002, we entered into another
amendment to the IBM Credit Agreement, which further revised certain

                                     64

<PAGE>
<PAGE>

covenants relating to the financial performance of Digital Angel Corporation
for the quarter ended September 30, 2002, and the fiscal year ending
December 31, 2002. At September 30, 2002, we and Digital Angel Corporation
were in compliance with the revised covenants under IBM Credit Agreement. At
June 30, 2002, we were not in compliance with our Minimum Cumulative
Modified EBITDA debt covenant and with other provisions of the IBM Credit
Agreement, and Digital Angel Corporation was not in compliance with its
Minimum Cumulative Modified EBITDA and Current Assets to Current Liabilities
debt covenants. On August 21, 2002, IBM Credit provided us with a waiver of
such noncompliance. As consideration for the waiver, we issued to IBM Credit
a five year-warrant to acquire 2.9 million shares of our common stock at
$0.15 per share, valued at approximately $1.3 million, and a five
year-warrant to purchase approximately 1.8 million shares of our
wholly-owned subsidiary VeriChip Corporation's common stock at $0.05 per
share, valued at approximately $44 thousand. The fair value of these
warrants was included in interest expense in 2002.

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

         On March 27, 2003, we announced that we had executed a forbearance
agreement term sheet with IBM Credit. The forbearance agreement becomes
effective on or about March 31, 2003 and grants us more favorable loan
repayment terms and more time in which to meet our current obligations to
IBM Credit. It contains various purchase rights for us to buy back our
existing indebtedness from IBM Credit, including a one-time payment on or
before June 30, 2003, of $30 million. Payment of this amount will constitute
complete satisfaction of any and all of our obligations to IBM Credit.
Provided there has not earlier occurred a "Termination Event," as defined,
at the end of the forbearance period, the provisions of the forbearance
agreement shall become of no force and effect. At that time, if the
repayment terms of the forbearance agreement are not met, IBM Credit shall
be free to exercise and enforce, or to take steps to exercise and enforce,
all rights, powers, privileges and remedies available to them under the IBM
Credit Agreement, as a result of the payment and covenant defaults existing
on March 24, 2003. If we are not successful in satisfying the payment
obligations under the forbearance agreement or we do not comply with the
terms of the forbearance agreement or the IBM Credit Agreement, and IBM
Credit were to enforce its rights against the collateral securing the
obligations to IBM Credit, there would be substantial doubt that we would be
able to continue operations in the normal course of business.

         Our ability to continue as a going concern and to continue
operations in the normal course of business is also predicated upon numerous
factors with varying levels of importance as follows:

              o   First, to the successful repayment of all of our
                  obligations to IBM Credit, is to successfully implement
                  our business plans, manage expenditures according to our
                  budget, and generate positive cash flow from operations so
                  that we can become profitable and generate sufficient cash
                  flow to meet our operating needs;

                                     65

<PAGE>
<PAGE>

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

              o   Third, we must obtain the necessary approvals to expand
                  the market for our VeriChip product;

              o   Fourth, we must complete the development of the second
                  generation Digital Angel product in order to improve the
                  product's salability; and

              o   Finally, we must 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.

         We have established a management plan to mitigate the effect of our
going concern uncertainty conditions over the next twelve months. The major
components of our plan are as follows:

     o   To raise funds to repay a portion of our obligations to IBM Credit
         through the offering of up to 50 million shares of our common stock
         in a best efforts offering. These shares are currently being
         registered under a registration statement filed with the SEC on
         December 23, 2002 (File No. 333-102165);

     o   To utilize the shares of Digital Angel Corporation's common stock
         currently in the Digital Angel Trust and/or our receivables and
         inventory to secure additional funds to repay IBM Credit (noting
         that these assets will be released from liens by IBM Credit upon
         repayment in full of our obligations under the forbearance
         agreement);

     o   To borrow against Digital Angel Corporation's receivables and
         inventory, if necessary;

     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 Angel(TM), Thermo Life(TM),
         VeriChip(TM) and Bio-Thermo(TM); and

     o   To generate additional liquidity through divestiture of business
         units and assets that are not critical to our long-term strategy.

         It is the opinion of our management that the likelihood of the
above plan being effectively implemented is good. On a consolidated
reporting basis, cash of $3.9 million was used by operations for the year
ended December 31, 2002. Of this amount, Digital Angel Corporation used
approximately $2.7 million. Our goal is to establish a sustainable positive
cash flow business model.

         We believe that we will be able to generate sufficient revenues,
profit margins and related cash flow in the year 2003 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 the year
ended December 31, 2002, the Advanced Technology segment reported gross
revenue of $41.9 million. Of this amount, Computer Equity Corporation
represented $31.3 million or 74.7% of the total revenue. The future revenue
outlook for Computer Equity Corporation appears 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.


                                     66

<PAGE>
<PAGE>

The renewal options are at the discretion of the government. 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 2003 and beyond our focus will be to generate
significant revenue and cash flow from our advanced technology products. We
hope to realize revenue and positive cash flow in 2003 and beyond as these
products gain customer acceptance and awareness throughout the world.

         As of December 31, 2002, the Advanced Technology segment and
"Corporate/Eliminations" had a combined cash balance $3.0 million, Digital
Angel Corporation had a cash balance of $0.2 million and InfoTech USA, Inc.
had a cash balance of $2.6 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 - $6.2 million
               o   To fund capital expenditures - $1.4 million
               o   To fund debt service - $30.5 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
2003 will be less than $0.4 million, that Digital Angel Corporation's
capital expenditure will be approximately $1.0 million for 2003 and that
InfoTech USA, Inc.'s capital expenditures for 2003 will be de minimus. For
the year ended December 31, 2003, we anticipate the cash outlay for our
research and development efforts relating to our advanced technology
products to approximate $0.8 million and that Digital Angel Corporation's
cash outlay for such efforts will be approximately $5.4 million. InfoTech
USA, Inc. does not incur research and development expense.

         Assuming that we are successful in satisfying our obligations to
IBM Credit under the terms of the forbearance agreement, that we have
positive cash flow from operations and that we rely on our various other
sources of liquidity as discussed below, we believe that we should have
sufficient working capital to satisfy our short-term needs over the next
twelve months.

         Sources of Liquidity

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

                                     67

<PAGE>
<PAGE>

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

         Contractual Obligations

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

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

         Outlook

         We are constantly looking for ways to maximize shareholder value.
As such, we are continually seeking operational efficiencies and synergies
within our operating segment as well as evaluating acquisitions of
businesses and customer bases which complement our operations. These
strategic initiatives may include acquisitions, raising additional funds
through debt or equity offerings, or the divestiture of business units that
are not critical to our long-term strategy or other restructuring or
rationalization of existing operations. We will continue to review all
alternatives to ensure maximum appreciation of our shareholders'
investments. There can be no assurance, however, that any initiatives will
be found, or if found, that they will be on terms favorable to us.

         IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

         In June 2001, the FASB issued SFAS 143, Accounting for Asset
Retirement Obligations, which is effective for fiscal years beginning after
June 15, 2002. SFAS 143 requires legal obligations


                                     68

<PAGE>
<PAGE>

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 will adopt FAS 143 on January 1, 2003. Application of the new
rules is not expected to have a significant impact on our financial position
and results of operations.

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

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

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

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

                                     69

<PAGE>
<PAGE>

     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. Borrowings under our IBM
Credit Agreement and borrowings under Digital Angel Corporation's mortgage
notes payable bear interest at fixed interest rates. Our interest income is
sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term (less
than three-months) investments.

         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.

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

<TABLE>
<CAPTION>
                                                                       Carrying Value at
         Dollars in Millions                                           December 31, 2002*
         --------------------------------------------------------------------------------
<S>                                                                          <C>
           Total notes payable and long-term debt                            $85.2
           Notes payable bearing interest at fixed interest rates            $84.0
           Weighted-average interest rate in 2002                            21.0%

<FN>
         *Due to the current default and resulting Forbearance Agreement
with respect to the IBM debt, it is not practicable to determine the fair
value of the Company's notes payable and long-term debt.
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      For the Year Ended
         Dollars in Millions                                           December 31, 2002
         --------------------------------------------------------------------------------
<S>                                                                      <C>
         Exchange Rate Sensitivity:
         Net foreign currency gains recorded
           in our Consolidated Statement of Operations                   $0.03 million
         Foreign currency translation adjustments included
           in Other Comprehensive Income                                 $ 0.8 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.

                                     70

<PAGE>
<PAGE>

     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.

         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


                                     71

<PAGE>
<PAGE>

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.

         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


                                     72

<PAGE>
<PAGE>

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.

                                     73

<PAGE>
<PAGE>

                                  PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
         Name                  Age                          Position                         Position Held Since
----------------------------------------------------------------------------------------------------------------------

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

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

         Scott R. Silverman: Mr. Silverman, age 39, has served since August
2001 as a special advisor to the Board of Directors. In March 2002, he was
appointed to the Board of Directors and named President. In March 2003, he
was appointed Chairman of the Board and Chief Executive Officer. Mr.
Silverman's term as director expires in 2004. From September 1999 to March
2002, Mr. Silverman operated his own private investment-banking firm and
prior to that time, from October 1996 to September 1999, he served in
various capacities for us including positions related to business
development, corporate development and legal affairs. From July 1995 to
September 1996, he served as President of ATI Communications, Inc., one of
our subsidiaries. He began his career as an attorney specializing in
commercial litigation and communications law at the law firm of Cooper
Perskie in Atlantic City, New Jersey, and Philadelphia, Pennsylvania. Mr.
Silverman is a graduate of the University of Pennsylvania and Villanova
University School of Law.

         Kevin H. McLaughlin: Mr. McLaughlin, age 60, was appointed our
Senior Vice President and Chief Operating Officer in March 2003. From April
12, 2002, Mr. McLaughlin served as a director and Chief Executive Officer of
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 33, joined us as our Assistant
Vice President and General Counsel in April 1999, and was appointed Vice
President and Assistant Secretary in December 1999, Senior Vice President in
December 2000 and Secretary in March 2003. From 1994 to April 1999, Mr.
Krawitz was an attorney with Fried, Frank, Harris, Shriver & Jacobson in New
York. Mr. Krawitz earned a Bachelor of Arts degree from Cornell University
in 1991 and a juris doctorate from Harvard Law School in 1994.

                                     74

<PAGE>
<PAGE>

         Evan C. McKeown: Mr. McKeown, age 44, joined us as our Vice
President, Chief Accounting Officer and Corporate Controller in March 2001.
He was appointed Vice President, Chief Financial Officer in March 2002.
Prior to joining us, Mr. McKeown served as Corporate Controller at Orius
Corporation in West Palm Beach, Florida. From 1992 to 1999, he served as
Controller and then Chief Financial Officer of Zajac, Inc., in Portland,
Maine. Mr. McKeown has more that 20 years experience in accounting and
financial reporting, including serving as a Tax Manager for Ernst & Young
and public accountant with Coopers & Lybrand. He is a graduate of the
University of Maine and is a certified public accountant.

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

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

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

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

         Constance K. Weaver: Ms. Weaver, age 50, was elected to the Board
of Directors in July 1998 and serves on the Compensation Committee of the
Board of Directors. Ms. Weaver's term as director expires in 2003. Ms.
Weaver is Executive Vice President, Publications and Brand Management for
AT&T Corporation (AT&T) (NYSE:T). From 1996 to October 2002, Ms. Weaver was
Vice President, Investor Relations and Financial Communications for AT&T.
From 1995 through


                                     75

<PAGE>
<PAGE>

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).

         DIRECTORSHIPS

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

         BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

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

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

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

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

                                     76

<PAGE>
<PAGE>

         COMPENSATION OF DIRECTORS

         Our non-employee directors receive a fixed quarterly fee in the
amount of $5,000 per quarter. In addition, non-employee directors receive a
quarterly fee in the amount of $1,000 for each committee of which they are a
member. Reasonable travel expenses are reimbursed when incurred. During
2002, Messrs. Noterman, Penni and Ms. Weaver each received $28,000 in
additional non-cash compensation, which resulted from the difference between
the price used to determine the number of shares of common stock issued to
Messrs. Noterman, Penni and Ms. Weaver in payment of their standard directors
fees and the market price of our common stock at the time of issuance.
Individuals who become directors are automatically granted an initial option
to purchase 25,000 shares of common stock on the date they become directors.
Each of such options is granted pursuant to our 1996 Non-Qualified Stock
Option Plan or the 1999 Flexible Stock Plan on terms and conditions
determined by the Board of Directors. During 2002, Messrs. Noterman, Penni
and Rawan and Ms. Weaver were granted 200,000, 200,000, 25,000 and 200,000
options to purchase shares of our common stock, respectively. Mr. Rawan's
options were issued in connection with his appointment to the Board of
Directors in December 2002. Messrs. Noterman, Penni and Ms Weaver's options
were annual option awards. The amount of options granted 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.

                                     77

<PAGE>
<PAGE>

     ITEM 11.  EXECUTIVE COMPENSATION

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

<TABLE>
                                               SUMMARY COMPENSATION TABLE

<CAPTION>
                                                                                       Long-Term Compensation
                                                                               --------------------------------------
                                                Annual Compensation                     Awards               Payouts
-----------------------------------------------------------------------------------------------------------------------------------
                                                                  Other
                                                                  Annual       Restricted    Options/          LTIP     All Other
    Name and Principal                    Salary     Bonus($)  Compensation      Stock       SAR's(#)         Payouts  Compensation
       Position (1)               Year      ($)        (2)        ($)(3)        Awards($)      (4)              (#)        ($)

<S>                               <C>    <C>         <C>          <C>             <C>      <C>                  <C>        <C>
Richard J. Sullivan(5)            2002   $450,000    $140,000     $326,841        $  --     6,000,000(9)        $ --       $ --
Former Chairman, CEO and          2001    450,000     448,801       57,424           --    10,875,000(10)(11)     --         --
     Secretary                    2000    450,000     180,000      936,672           --     4,000,000(12)         --         --


Scott R. Silverman(6)             2002    165,577      22,030        2,563           --     2,900,000(13)         --         --
  Chairman, CEO, President        2001         --          --           --           --       243,750(14)         --         --

  and Director                    2000         --          --           --           --            --             --         --

Jerome C. Artigliere(7)           2002    178,365      22,030       31,588           --     2,750,000(15)         --         --
  Former Senior Vice President,   2001    175,000      14,174       87,688           --     1,363,375(10),(16)    --         --
  Chief Operating Officer,        2000    134,616      35,000           --           --       100,000(17)         --         --
  Assistant Treasurer

Michael E. Krawitz(8)             2002    170,769      22,030           --           --     1,950,000(18)         --         --
  Senior Vice President,          2001    160,000      14,174           --           --       550,875(9),(19)     --         --
  General Counsel                 2000    151,853      35,000           --           --       100,000(20)         --         --
  Secretary

Peter Zhou                        2002    216,058       7,500           --           --       200,000(21)         --         --
  Vice President, Chief           2001    212,839          --           --           --       322,750(9),(22)     --         --
  Scientist                       2000    151,456      25,000           --           --       478,125(23)         --         --

<FN>
----------------------------
(1)  See "Related Party Transactions."
(2)  The amounts in the Bonus column were discretionary awards granted by
     the Compensation Committee in consideration of the contributions of the
     respective named executive officers.
(3)  Other annual compensation includes: (a) in 2002, for Richard J.
     Sullivan $296,190 related to the difference between the price used to
     determine the number of shares of common stock issued to Mr. Sullivan
     in lieu of cash compensation and the market price of stock at the time
     of issuance, a general expense allowance of $17,362, an auto allowance
     of $10,242 and a payment of $3,047 for a tax gross up; for Mr.
     Silverman, an auto allowance of $2,563, for Mr. Artigliere a general
     expense allowance of $25,000 and an auto allowance of $6,588; (b) in
     2001, for Richard J. Sullivan, a general expense allowance of $39,673
     and an auto allowance of $17,751, for Mr. Artigliere, $50,000 in moving
     expenses, a general expense allowance of $30,000 and an auto allowance
     of $7,688; and (c) in 2000, for Richard J. Sullivan, $936,672 of other
     compensation representing the fair value of property (a two bedroom
     condominium in Ocean Ridge, Florida) paid to Richard J. Sullivan,
     including the associated payment of taxes on his behalf, pursuant to
     his employment agreement.
(4)  Indicates number of securities underlying options. Includes options
     granted by our subsidiaries.
(5)  Mr. Sullivan retired in March 2003.
(6)  Mr. Silverman joined us as a Director and President in March 2002.
     He assumed the positions of Chairman of the Board of Directors and
     Chief Executive Officer in March 2003.
(7)  Mr. Artigliere resigned in March 2003.
(8)  Mr. Krawitz assumed the position of Secretary in March 2003.
(9)  Includes 3,200,000 options granted by us, 1,000,000 options granted by
     Digital Angel, 350,000 options granted by InfoTech USA, Inc., 1,450,000
     options granted by VeriChip Corporation.
(10) Includes options granted in prior years that were re-priced during 2001
     as follows: (a) for Richard J. Sullivan, 7,675,000; (b) for Jerome C.
     Artigliere, 254,000; (c) for Michael E. Krawitz, 154,000; and (d) for
     Peter Zhou, 129,000.
(11) Includes 10,675,000 options granted by us, 200,000 options granted
     by InfoTech USA.
(12) Includes 4,000,000 options granted by us.
(13) Includes 1,600,000 options granted by us, 350,000 options granted
     by InfoTech USA, Inc., 950,000 options granted by VeriChip
     Corporation.
(14) Includes 93,750 options granted by Digital Angel, 50,000 options
     granted by New Digital Angel, 100,000 options granted by InfoTech USA,
     Inc.
(15) Includes 1,300,000 options granted by us, 500,000 options granted by
     InfoTech USA, Inc., 950,000 options granted by VeriChip Corporation.

                                     78

<PAGE>
<PAGE>

(16) Includes 1,129,000 options granted by us, 234,375 options granted by
     Digital Angel.
(17) Includes 100,000 granted by us.
(18) Includes 1,000,000 options granted by us, 950,000 options granted by
     VeriChip Corporation.
(19) Includes 504,000 options granted by us, 46,875 options granted by Digital
     Angel.
(20) Includes 100,000 granted by us.
(21) Includes 200,000 granted by us.
(22) Includes 229,000 granted by us, 93,750 options granted by Digital
     Angel.
(23) Includes 150,000 granted by us, 328,125 options granted by Digital Angel.
</TABLE>

                                     79

<PAGE>
<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 2002:

<TABLE>
                                                  OPTION GRANTS IN 2002
                                                    INDIVIDUAL GRANTS
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                           Potential Realizable Value At
                                                                                              Assumed Rates of Stock
                                                                                           Appreciation for Option Term
---------------------------------------------------------------------------------------    -----------------------------
                         Number of         % of Total
                         Securities          Option
                         Underlying        Granted to
                          Options           Employees     Exercise
       Name              Granted (#)         in 2002    Price ($/Sh)    Expiration Date       5% ($)             10% ($)
-----------------------  ----------        ----------   ------------    ---------------      --------         ----------
<S>                       <C>          <C>    <C>         <C>             <C>                <C>              <C>
Richard J. Sullivan       1,200,000    (1)    11.9%       $0.32(7)        February-08        $130,666         $  296,457
                          2,000,000    (1)    19.8         0.28(7)            July-08         190,654            432,592
                          1,000,000    (2)    27.1         3.39               June-13         711,025          1,855,353
                            350,000    (3)    13.6         0.28               June-10         167,248            400,648
                          1,000,000    (4)    14.5         0.05           February-10         477,850          1,144,709
                            450,000    (5)     6.5         0.05              April-11         248,284            611,631

Scott R. Silverman        1,000,000    (1)     9.9         0.32           February-08         108,888            247,048
                            600,000    (1)     5.9         0.28               July-08          57,196            129,778
                            350,000    (3)    13.6         0.28               June-10         167,248            400,648
                            500,000    (4)     7.2         0.05           February-10         238,925            572,354
                            450,000    (5)     6.5         0.05              April-11         248,284            611,631

Jerome C. Artigliere(6)     850,000    (1)     8.4         0.32(7)        February-08          92,555            209,990
                            450,000    (1)     4.4         0.28(7)            July-08          42,897             97,333
                            500,000    (3)    19.4         0.28               June-10         238,925            572,354
                            500,000    (4)     7.2         0.05           February-10         238,925            572,354
                            450,000    (5)     6.5         0.05              April-11         248,284            611,631

Michael E. Krawitz (6)      600,000    (1)     5.9         0.32           February-08          65,333            148,229
                            400,000    (1)     4.0         0.28               July-08          38,131             86,518
                            350,000    (3)    13.6         0.28               June-10         167,248            400,648
                            500,000    (4)     7.2         0.05           February-10         238,925            572,354
                            440,000    (5)     6.4         0.05              April-11         242,767            598,039

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

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

(5)  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 two years from the date of grant.

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

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

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

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

                                     80

<PAGE>
<PAGE>

<TABLE>
                  AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
                                                              Number of Securities           Value of Unexercised
                                                             Underlying Unexercised          In-The-Money Options
                                 Exercised in 2002         Options at Year End 2002 (#)    at Year End 2002 ($)(2)
                          -------------------------------  ----------------------------   ----------------------------
                            Shares Acquired     Value
            Name            Upon Exercise(#)  Realized($)  Exercisable    Unexercisable   Exercisable    Unexercisable
--------------------------  ----------------  -----------  -----------    -------------   -----------    -------------
<S>                             <C>            <C>         <C>              <C>            <C>              <C>
RICHARD J. SULLIVAN
           Applied Digital
           Solutions, Inc.      646,297        $171,837    8,285,000(3)     3,300,000(3)   $2,154,100       $377,000
       Digital Angel Corp.      937,500               -            -                -               -              -
        InfoTech USA, Inc.            -               -      200,000          350,000               -              -
      VeriChip Corporation            -               -            -        1,450,000               -        290,000

SCOTT R. SILVERMAN
           Applied Digital
           Solutions, Inc.            -               -       325,000       1,600,000          84,500        168,000
       Digital Angel Corp.       93,750         366,830             -               -               -              -
        InfoTech USA, Inc.            -               -       100,000         350,000               -              -
      VeriChip Corporation            -               -             -         950,000               -        190,000

JEROME C. ARTIGLIERE
           Applied Digital
           Solutions, Inc.      104,577           4,049     1,029,000       1,300,000         267,540        135,000
       Digital Angel Corp.            -               -       234,375               -         440,156              -
        InfoTech USA, Inc.            -               -             -         500,000               -              -
      VeriChip Corporation            -               -             -         950,000               -        190,000

MICHAEL E. KRAWITZ
           Applied Digital
           Solutions, Inc.       13,178             828       504,000       1,000,000         131,040        106,000
       Digital Angel Corp.        3,000          19,962       114,188               -         214,445              -
        InfoTech USA, Inc.            -               -       100,000         350,000               -              -
      VeriChip Corporation            -               -                       940,000               -        188,000

PETER ZHOU
           Applied Digital
           Solutions, Inc.      100,000          58,000       112,333         216,667          29,207         24,333
       Digital Angel Corp.      150,000         529,595       271,875               -         491,581              -
        InfoTech USA, Inc.            -               -             -               -               -              -
      VeriChip Corporation            -               -             -         100,000               -              -

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

(2)  The value of the unexercised in-the-money options at December 31, 2002,
     is based upon the following fair market values: $0.41 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, 2002); $2.55 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, 2002; $0.17 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, 2002; and $0.25 for options exercisable into shares of
     VeriChip Corporation's common stock based upon the estimated fair value
     on December 31, 2002. The values shown are net of the option exercise
     price, but do not include deduction for taxes or other expenses
     associated with the exercise of the option or the sale of the
     underlying shares.

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

         Incentive Plans

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

         Stock Options Granted under the 1996 Non-Qualified Stock Option
Plan and the 1999


                                     81

<PAGE>
<PAGE>

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

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

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

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

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS

         None

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

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

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

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

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

         On March 21, 2003, Richard J. Sullivan retired. Scott R. Silverman
has assumed the positions of Chairman of our Board of Directors and Chief
Executive Officer is Scott R. Silverman. Under the terms of Mr. Sullivan's,
severance agreement, Mr. Sullivan will receive a one-time payment of 56.0
million shares of our common stock and 10.9 million re-priced options. The
options surrendered had exercise prices ranging from $0.15 to $0.32 per
share and were replaced with options


                                     82

<PAGE>
<PAGE>

exercisable at $0.01 per share.

         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 of 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 the Company's common stock or any
                  combination of the two. In the event the Company 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 (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 Nasdaq SmallCap
                  Market) 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 roughly $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 to dedicate essentially all of its cash resources
to satisfying its obligations to IBM Credit, the Company commenced
negotiations with Richard Sullivan that led to proposed terms of his
severance agreement.

         Richard J. Sullivan has retained his position of Chairman of the
Board of Digital Angel Corporation.

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

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

                                     83

<PAGE>
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

                                     84

<PAGE>
<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 24, 2003:

<TABLE>
<CAPTION>
                                                                      ---------------------------------
                                                                         Number of
                                                                         Shares of        Percent of
                                                                       Common Stock      Common Stock
                                                                       Beneficially      Beneficially
                      Name of Beneficial Owner                           Owned (1)           Owned
--------------------------------------------------------------------- ----------------   --------------
<S>                                                                      <C>                  <C>
  Arthur F. Noterman                                                      1,385,000              *
  Daniel E. Penni                                                         1,849,065              *
  Dennis G. Rawan                                                                --              *
  Constance K. Weaver                                                     1,123,000              *
  Richard J. Sullivan(2)(3)                                              69,633,852           19.0%
  Scott R. Silverman                                                      1,325,000              *
  Kevin H. McLaughlin                                                       369,333              *
  Jerome C. Artigliere                                                    7,121,049            1.9%
  Michael E. Krawitz                                                      1,158,781              *
  Evan C. McKeown                                                           184,170              *
  Peter Zhou                                                                302,526              *
  All directors and executive officers as a group (14 persons)           85,453,426           23.3%

<FN>
---------------
*   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 24, 2003 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: Arthur F. Noterman -1,064,000; Daniel E. Penni -1,064,000;
    Constance K. Weaver - 889,000; Scott R. Silverman - 1,325,000;
    Kevin H. McLaughlin - 358,333; Michael E. Krawitz - 1,104,000; Evan
    C. McKeown - 183,334; Peter Zhou - 279,000; and all directors and
    officers as a group -7,204,667.

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

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

                                     85

<PAGE>
<PAGE>

         CHANGES IN CONTROL

         Except as provided with respect to the IBM Credit Agreement and
related forbearance agreement, 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 2002, the Company granted 10,126,000 options under its 1999
Flexible Stock Plan and 1996 Non-Qualified Stock Option Plan. As of December
31, 2002, the following shares of the Company's common stock were authorized
for issuance under the Company's equity compensation plans:

         EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                          (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                34,039,000               $0.71                  7,183,000(2)(3)
Equity compensation plans not
  approved by security holders                        --                  --                         --
                                -------------------------------------------------------------------------------
Total                                         34,039,000               $0.71                  7,183,000
--------------------------------===============================================================================

<FN>
(1)      A narrative description of the material terms of the Company's
         equity compensation plans is set forth in Note 13 to the Company's
         consolidated financial statements, which are set forth in the
         Company's Annual Report on Form 10-K/A filed with the Securities
         and Exchange Commission on April 4, 2003.

(2)      In addition to the shares available for future issuance reflected
         in the above table, the shares available for future issuance under
         the 2003 Flexible Stock Plan, if approved, would be 14,000,000.

(3)      Includes 6,900,000 shares available for future issuance under the
         Company's 1999 Employees Stock Purchase Plan.
</TABLE>

                                     86

<PAGE>
<PAGE>


     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         INDEBTEDNESS OF MANAGEMENT AND OTHERS

         Daniel E. Penni, a member of our Board of Directors, has executed a
revolving line of credit promissory note in favor of Applied Digital
Solutions Financial Corp., our subsidiary, in the amount of $450,000. The
promissory note, 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 21, 2003, the
interest rate equaled 5.25%. The largest amount outstanding under the
promissory note during 2002 was $420,000, and as of March 21, 2003, $420,000
had been advanced under this note. Accrued interest at March 21, 2003, was
$942.

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

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

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

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

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

         As of March 21, 2003, Marc Sherman, the former Chief Executive
Officer of Intellesale, Inc.


                                     87

<PAGE>
<PAGE>

and brother-in-law of Constance Weaver, a member of our Board of Directors,
is indebted to us for $961,271. This amount represents the amount due to us
under seven promissory notes with principal balances aggregating $795,000,
plus accrued interest of $166,271. 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 are due on demand and bear interest at the rate of 6% per
annum. 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 100,000
shares of our common stock. This note is due upon the sale of such common
stock by Mr. Sherman. The largest principal amount outstanding under the
seven promissory notes during 2002 was $795,000.

         Mr. Sherman was also indebted to us under a mortgage note with a
principal balance of $825,000. The mortgage note was executed on January 1,
1999. During 2001, the highest balance outstanding on the note was $345,119.
The note, which had an interest rate equal to the prime rate published by
the Wall Street Journal plus 1%, was paid in full in May 2001.

         TRANSACTIONS WITH SUBSIDIARIES

         Digital Angel Corporation

         During 2002, the Digital Angel Corporation paid us approximately
$300,000 for research services. Other transactions, primarily for research
services and insurance premiums, resulted in a $500,000 payment due to us
from Digital Angel at December 31, 2002. We are the beneficial owner, along
with the Digital Angel Share Trust, of approximately 73.91% of the Digital
Angel Corporation's outstanding common stock on December 31, 2002. Our
former Chairman of the Board and Chief Executive Officer, Richard J.
Sullivan, is Chairman of the Board of Directors of Digital Angel
Corporation.

         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 $200,000 for the year ended December 31, 2002. We also charged
pre-merger Digital Angel $1.8 million of interest expense in 2002, which was
converted to pre-merger Digital Angel's capital by us. In addition, during
2002, accrued expenses of $300,000 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 December 31, 2002, InfoTech USA, Inc. was indebted to us in the
amount of $149,000, which amount has been eliminated in consolidation. We
owned approximately 52.5% of InfoTech USA, Inc. at December 31, 2002.

                                     88

<PAGE>
<PAGE>

     ITEM 14.  CONTROLS AND PROCEDURES

         Evaluation of Disclosure Controls and Procedures

         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 quarterly period ended December 31,
2002. 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) Changes in Internal Controls

         There have not been any changes in the Company's internal controls
or in other factors 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.

                                     89

<PAGE>
<PAGE>


                                   PART IV

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

(a)(1)        THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE LISTED
              BELOW ARE INCLUDED IN THIS REPORT
              Report of Management
              Reports of Independent Accountants
              Financial Statements
              Consolidated Balance Sheets
              Consolidated Statements Of Operations
              Consolidated Statements Of Preferred Stock, Common Stock and
                Other Stockholders' (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) On March 4, 2003, we filed a Current Report on Form 8-K,
              which reported the failure to make a required payment on
              February 28, 2002, under the Third Amended and Restated Term
              Credit Agreement with IBM Credit LLC (formerly IBM Credit
              Corporation).
              (ii) On March 7, 2003, we filed a Current Report on Form 8-K,
              which reported the failure to make a required payment on March
              6, 2003, under the Third Amended and Restated Term Credit
              Agreement with IBM Credit LLC and certain litigation filed
              against IBM Credit LLC and IBM Corporation.
              (iii) On March 7, 2003, we filed a Current Report on Form 8-K,
              which reported that we had received a notice of default under
              the Third Amended and Restated Term Credit Agreement.
              (iv) On March 10, 2003, we filed a Current Report on Form 8-K
              which reported that we had settled the pending and
              consolidated shareholder class action lawsuit.
              (v) On March 27, 2003, we filed a Current Report on Form 8-K
              announcing that we had agreed to the terms of a forbearance
              agreement with IBM Credit, that Richard J. Sullivan retired
              effective March 21, 2003, and that Scott R. Silverman had
              assumed the titles of Chairman and Chief Executive Officer.

(c)           EXHIBITS - INCLUDED IN ITEM 15(a)(3) ABOVE.

                                     90

<PAGE>
<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:  DECEMBER  11, 2003         APPLIED DIGITAL SOLUTIONS, INC. (REGISTRANT)

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


                                     91

<PAGE>
<PAGE>

<TABLE>
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)

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

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

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

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

                                     92

<PAGE>
<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 as of July 1, 2000 by and among
         Applied Digital Solutions, Inc., Web Serve Acquisition Corp.,
         WebNet Services, Inc., Steven P. Couture, Jeffrey M. Couture
         and Raymond D. Maggi**

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

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

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

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

    3.5  Amendment of Second Restated Articles of Incorporation of the
         Registrant filed with the Secretary of State of Missouri on July
         18, 2001 (incorporated herein by reference to Exhibit 4.3 to the
         Registrant's Quarterly

                                     93

<PAGE>
<PAGE>

         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 herein by reference to Exhibit 4.4 to the
         registrant's Registration Statement on Form S-1 (File No.
         333-102165) filed with Commission on December 23, 2002.

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

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

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

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

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

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

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

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

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

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

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

                                     94

<PAGE>
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  10.24  Warrant Agreement between VeriChip Corporation and IBM Credit
         Corporation dated August 21, 2002 (incorporated herein by reference
         to Exhibit 10.22 to the registrant's Registration Statement on
         Form S-1

                                     95

<PAGE>
<PAGE>

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

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

  10.30  Letter Agreement between Applied Digital Solutions, Inc. and
         G.A. Sullivan**

  10.31  International Distribution Agreement dated March 8, 2003, by
         and between Verichip Corporation and the Company LaFont, LTDA**

  10.32  International Distribution Agreement, dated September 25, 2002,
         by and between VeriChip Corporation and Sistemas de Proteccion
         Integral de Mexico, S.A. de C.V.**

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

  23.1   Consent of PricewaterhouseCoopers LLP**

  23.2   Consent of Eisner 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)**

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

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

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

                                     96

<PAGE>
<PAGE>

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


                       APPLIED DIGITAL SOLUTIONS, INC.
                              AND SUBSIDIARIES

                            FINANCIAL STATEMENTS

                              DECEMBER 31, 2002

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


                              F-1

<PAGE>
<PAGE>

<TABLE>
                                      APPLIED DIGITAL SOLUTIONS, INC.
                                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS
===========================================================================================================
<CAPTION>
                                                                                                      PAGE
<S>                                                                                                   <C>
Report of Management................................................................................  F-3

Reports of Independent Accountants..................................................................  F-4

Consolidated Balance Sheets as of December 31, 2002 and 2001........................................  F-6

Consolidated Statements of Operations for each of the years in the three year period ended
       December 31, 2002............................................................................  F-7

Consolidated Statements of Preferred Stock, Common Stock and Other Stockholders' (Deficit)
      Equity for each of the years in the three year period ended December 31, 2002.................  F-8

Consolidated Statements of Cash Flows for each of the years in the three year period ended
      December 31, 2002.............................................................................  F-11

Notes to Consolidated Financial Statements..........................................................  F-12
</TABLE>



                                                                    Page F-2


<PAGE>
<PAGE>

                            REPORT OF MANAGEMENT


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

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

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

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



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

March 31, 2003


                                                      Page F-3




<PAGE>
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS




Board of Directors and Stockholders
Applied Digital Solutions, Inc.

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

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

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

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

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

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


Eisner LLP
New York, New York
March 27, 2003

                                                      Page F-4



<PAGE>
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements as of December 31,
2001 and for the years ended December 31, 2001 and 2000 listed in the
index appearing on page F-2, present fairly, in all material respects,
the financial position of Applied Digital Solutions, Inc. and its
subsidiaries at December 31, 2001 and the results of their operations
and their cash flows for each of the two years in the period ended
December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion,
the financial statement schedule for the years ended December 31, 2001
and 2000 listed in the index on page F-2 presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

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


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

                                                      Page F-5




<PAGE>
<PAGE>

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


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

          PROPERTY AND EQUIPMENT, NET                                                                 9,822        20,185

          NOTES RECEIVABLE, NET                                                                         758         4,004

          GOODWILL, NET                                                                              67,818        90,831

          INVESTMENT IN AFFILIATE                                                                        --         6,779

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

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

                             LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

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

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

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

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

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

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





<PAGE>
<PAGE>

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

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

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

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

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

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

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


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





<PAGE>
<PAGE>
<TABLE>
                                           APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------
                                             CONSOLIDATED STATEMENTS OF PREFERRED STOCK
                                       COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT) EQUITY
                                                            PAGE 1 OF 3
                                        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                                           (IN THOUSANDS)
<CAPTION>
                                                                                                      RETAINED
                                            PREFERRED STOCK          COMMON STOCK        ADDITIONAL   EARNINGS
                                         ----------------------------------------------   PAID-IN   (ACCUMULATED
                                            NUMBER    AMOUNT     NUMBER        AMOUNT     CAPITAL     DEFICIT)
                                         -------------------------------------------------------------------------
<S>                                         <C>        <C>      <C>            <C>       <C>          <C>
BALANCE - DECEMBER 31, 1999                   --        $--      51,116        $  51     $  87,470    $  12,664
  (BROUGHT FORWARD)
   Net loss                                   --         --          --           --            --     (112,142)
   Comprehensive loss -
     Foreign currency translation             --         --          --           --            --           --
                                                                                                      ------------
   Total comprehensive loss                   --         --          --           --            --     (112,142)
   Issuance of warrants attached to
     redeemable preferred shares              --         --          --           --            --           --
   Accretion of beneficial conversion
     feature of redeemable preferred
     shares                                   --         --          --           --        (3,857)          --
   Dividends accrued on redeemable
     preferred stock                          --         --          --           --          (191)          --
   Beneficial conversion feature of
     redeemable preferred stock               --         --          --           --         3,857           --
   Issuance of common shares                  --         --       1,862(1)         2         4,838           --
   Issuance of common shares for
     investment in MAS                        --         --       3,123            3         7,997           --
   Issuance of common shares for
     acquisitions                             --         --      46,226           46       160,273           --
   Issuance of common stock warrants
     for acquisition                          --         --          --           --            --           --
   Warrants redeemed for common shares        --         --         736            1         2,118           --
   Notes receivable for shares issued         --         --          --           --            --           --
   Tax effect of exercise of
     nonqualified stock options               --         --          --           --         4,068           --
                                         -------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2000
  (CARRIED FORWARD)                           --        $--     103,063        $ 103     $ 266,573    $ (99,478)

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

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

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





<PAGE>
<PAGE>

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

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

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



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

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

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

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





<PAGE>
<PAGE>

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

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

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

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

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





<PAGE>
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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





<PAGE>
<PAGE>

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

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

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION

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

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

ORGANIZATION

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

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

  *  Thermo Life(TM), a thermoelectric generator;

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

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

BUSINESS SEGMENTS

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

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

The business units comprising the Company's Advanced Technology segment
represent those business units that it believes will provide the necessary
synergies, support and infrastructure to allow it to develop, promote and
fully-integrate its technology products and services. This segment
specializes in voice, data and video telecommunications networks, software,
and other networking products and service. In addition, its VeriChip(TM)

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







<PAGE>
<PAGE>

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


product has multiple applications in security, personal identification,
safety, healthcare (subject to FDA approval) and more. Its customer base
includes governmental agencies, commercial operations, and consumers. As of
December 31, 2002, 2001 and 2000, revenues from this segment accounted for
42.1%, 28.5% and 24.0%, 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;
         o   Internet access;
         o   Website design;
         o   Miniaturized implantable verification chip (VeriChip(TM)); and
         o   Miniaturized power generator (Thermo Life (TM)).

Approximately $31.3 million, or 74.7% and $27.4 million, or 61.5%, of the
Advanced Technology segment's revenues for 2002 and 2001, respectively, were
generated by the Company's wholly-owned subsidiary, Computer Equity
Corporation. Computer Equity Corporation was acquired effective June 1,
2000. No other products or services provided more than 10.0% of the revenues
for this segment during 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, 2002, the Company has not reported any revenues from sale of
its VeriChip and Thermo Life products.

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 of
products and services.

Digital Angel Corporation

The Digital Angel Corporation segment consists of the business
operations the Company's 73.91% owned subsidiary, Digital Angel
Corporation (AMEX:DOC). This segment is engaged in the business of
developing and bringing to market proprietary technologies used to
identify, locate and monitor people, animals and objects. Before March
27, 2002, the business of Digital Angel Corporation was operated in four
divisions: Animal Tracking, Digital Angel Technology, Digital Angel
Delivery System, and Radio Communications and Other. With the
acquisition of MAS on March 27, 2002, Digital Angel Corporation
re-organized into four new divisions: Animal Applications (formerly
Animal Tracking), Wireless and Monitoring (a combination of the former
Digital Angel Technology and the Digital Angel Delivery System
segments), GPS and Radio Communications (formerly Radio Communications
and Other), and Medical Systems (formerly Physician Call Center and
Other). Medical Systems represents the business activity of the newly
acquired MAS. As of December 31, 2002, 2001 and 2000, revenues from this
segment accounted for 33.7%, 22.9% and 16.5%, respectively, of our total
revenues. The principal products and services in this segment by division
are as follows:

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 or asset management and for
disease control and food safety. The principal technologies employed by
Animal Applications are electronic ear tags and implantable microchips that
use radio frequency transmission. This segment includes the Bio-Thermo(TM)
product;

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 segment is continuously developing its technology,
which it refers to as its "Digital Angel(TM) technology." 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 (including
global positioning systems (GPS) and other systems);

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

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







<PAGE>
<PAGE>

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

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;
and

Medical Systems division--is the MAS business that was acquired on March 27,
2002. A staff of logistics specialists and physicians provide medical
assistance services and interactive medical information services to people
traveling anywhere in the world. It also sells a variety of kits containing
pharmaceutical and medical supplies.

Sales of the Animal Applications division's products represented 60.6% and
61.8% of the total revenue from this segment during 2002 and 2001,
respectively. Sales of the GPS and Radio Communications division's products
represented 29.8% and 31.2% of this segments revenue during 2002 and 2001,
respectively.

InfoTech USA, Inc., formerly SysComm International

The InfoTech USA, Inc. segment consists of the business operations of the
Company's 52.5% owned subsidiary, InfoTech USA, Inc., formerly SysComm
International Corporation (OTC:IFTH). This segment is a full service
provider of Information Technology, or IT, products and services. It
specializes in tailoring its approach to the individual customer's needs. In
2002, this segment continued its strategy of moving away from a
product-driven systems integration business model to a customer-oriented IT
solutions-based business model. It has further developed its deliverable IT
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, 2002, 2001 and 2000, revenues from this segment accounted
for 22.8%, 21.9% and 20.2%, 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 2002
and 2001 was derived from sales of computer hardware, which provided
approximately 88.3% and 89.2% of InfoTech USA, Inc.'s revenue in 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 revenue in either year.

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.
"Corporation/Eliminations" also includes certain interest expense and
other expenses associated with corporate activities and functions.
Included in "Corporate/Eliminations" for the year ended December 31,
2002, is a non-cash compensation charge of $18.7 million associated with
pre-merger Digital Angel options, which were converted into options to
acquire shares of MAS in connection with the merger of pre-merger
Digital Angel and MAS.

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

PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries, including Digital Angel
Corporation and InfoTech USA, Inc. The minority interest represents
outstanding voting stock of the subsidiaries not owned by the Company or the
Digital Angel Trust (as defined in

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





<PAGE>
<PAGE>

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


Note 2). All significant intercompany accounts and transactions have been
eliminated in consolidation.

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

USE OF ESTIMATES

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

FOREIGN CURRENCIES

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

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

CASH AND CASH EQUIVALENTS

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

UNBILLED RECEIVABLES

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

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





<PAGE>
<PAGE>

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


INVENTORIES

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

PROPERTY AND EQUIPMENT

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

GOODWILL AND OTHER INTANGIBLE ASSETS

In conjunction with the Company's review for impairment of goodwill and
other intangible assets in the fourth quarter of 2000, the Company
reviewed the useful lives assigned to goodwill and, effective October 1,
2000, changed the lives to periods ranging from 5 to 10 years, down from
periods ranging from 10 to 20 years. The impact in 2001 and 2000 of this
change was an increase in amortization of $7.2 million and $3.5 million,
respectively and a decrease in earnings per share of $0.04 and $0.05,
respectively. Goodwill and other intangible assets are stated on the
cost basis and have been amortized, principally on a straight-line
basis, over the estimated future periods to be benefited (ranging from 5
to 10 years) through December 31, 2001. Prior to the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets" (SFAS 142) on January 1, 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 Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment Of Long-Lived Assets and Of Long-Lived Assets
to be Disposed Of." to access and measure the asset impairments. Included in
factors considered were significant customer losses, changes in
profitability due to sudden economic or competitive factors, change in
managements' strategy for the business unit, letters of intent received for
the sale of the business unit, or other factors arising in the quarterly
period. The Company annually performed undiscounted cash flow analyses by
business unit to determine if an impairment existed 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 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 and $0.8 million during 2001 and 2000,
respectively. See Note 15.

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

The annual test performed by the Company during the fourth quarter of 2002,
resulted in an impairment charge of $62.2 million associated with the
Company's Digital Angel Corporation segment. This impairment charge is
included in the consolidated statement of operations under Asset Impairment.
In the fourth quarter of 2002, the company tested goodwill at each reporting
level unit. Goodwill was assigned to each applicable reporting unit as of
the date of acquisition. The Company's reporting units are those businesses
for which discrete financial information is available and upon which segment
management makes operating decisions.

At December 31, 2002, the Company's reporting units consisted of the
following:

               o  Advanced Technology segment
               o  Digital Angel Corporation's Animal Application 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
               o  InfoTech USA, Inc.


----------------------------------------------------------------------------
                                                                   Page F-16





<PAGE>
<PAGE>

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


The fair values of the Company's reporting units were estimated using the
expected present value of future cash flows. Based upon these fair value
tests, it was determined that certain goodwill was impaired. The impairment
relates to the goodwill associated with Digital Angel Corporation's Medical
Systems division resulting from the acquisition of MAS in March 2002, and to
Digital Angel Corporation's Wireless and Monitoring division. 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 the
revenues associated with the Medical Systems business had decreased. The
changes in the carrying amount of goodwill for the year ended December 31,
2002, by reporting unit are as follows (in thousands):

<TABLE>
<CAPTION>
                  COMPUTER                                        WIRELESS   GPS AND
                   EQUITY               PACIFIC        ANIMAL       AND       RADIO                   INFOTECH
                CORPORATION   P-TECH,  DECISIONS    APPLICATIONS MONITORING  COMMUNI-    MEDICAL        USA
                    (1)       INC.(1)  SCIENCES(1)       (2)        (2)      CATIONS(2)  SYSTEMS(2)    INC.(3)  CORPORATE   TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>          <C>      <C>            <C>       <C>          <C>        <C>            <C>      <C>      <C>
Balance
January 1, 2002   $13,178      $530     $1,504         $43,971   $ 27,854     $1,051     $     --       $2,154   $ 589    $ 90,831
Acquisitions,
  adjustments
  and earnout
  payments          3,000        --         --                      3,606         63       33,092                 (589)     39,172
Less goodwill
  impairment           --        --         --                    (31,460)        --      (30,725)                         (62,185)
                -------------------------------------------------------------------------------------------------------------------
Balance
December 31,
2002              $16,178      $530     $1,504         $43,971        $--     $1,114     $  2,367       $2,154   $  --    $ 67,818

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

<FN>
(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.
</TABLE>

PROPRIETARY SOFTWARE IN DEVELOPMENT

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

These unamortized computer software and computer software development costs
were $2.6 million and $2.4 million, at December 31, 2002 and 2001,
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 $2.4 million, $0.7 million and $0.2 million in 2002,
2001 and 2000, respectively. Research and developments costs incurred for
the development of computer software were $0.9 million, $3.3 million and
$0.3 million in 2002, 2001 and 2000, respectively.

ADVERTISING COSTS

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

----------------------------------------------------------------------------
                                                                   Page F-17






<PAGE>
<PAGE>

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


REVENUE RECOGNITION

ADVANCED TECHNOLOGY 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 their 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 collectibility 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. 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.

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
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 collectibility is
deemed probable. If uncertainties regarding

----------------------------------------------------------------------------
                                                                   Page F-18





<PAGE>
<PAGE>

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

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. 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
----------------------------------------

The VeriChip microchip 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 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. The VeriChip subscriber number then provides instant
access to the Global VeriChip Subscriber Registry - through secure
password-protected web access to subscriber-supplied information.

VeriChip revenue is comprised of the sale of VeriChip microchips, scanners,
and a 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. For
these rights, the distributor pays a one-time, upfront non-refundable fee.
As long as minimum annual purchase requirements are satisfied, the
customer's exclusive distribution rights are retained. 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. The purchase requirements typically increase substantially,
during the contract period, as we and the distributors hope to realize
increased sales volumes for the VeriChip microchips and scanners over time.

Failure to meet the quota constitutes 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 the renewal
in-writing thirty (30) days prior to the expiration date of the contract.
The Company, at its own discretion, may then negotiate with the distributor
for a renewal of the agreement.

As of December 31, 2002, we have not yet recognized revenue associated with
our VeriChip product. We plan to recognize revenue associated with the
distributor rights, product sales and monitoring services in the future
based upon the following policy:

Distributor Rights Fees

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

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

----------------------------------------------------------------------------
                                                                   Page F-19





<PAGE>
<PAGE>

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


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

Approximately $0.2 million of distributor fees were recorded as deferred
revenue on our balance sheet at December 31, 2002, and included in accrued
expenses.

Product Sales

Revenue from the sale of products such as microchips and scanners will be
recorded at gross with a separate display of cost of sales. Until the amount
of returns can be reasonably estimated, we will 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 collectibility 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. The
period of time to accept or reject products is contract specific. This right
of return privilege ranges from fifteen (15) to ninety (90) days. Statement of
Financial Accounting Standards No. 48, Revenue Recognition When Right of
Return Exists, precludes the recognition of revenue at the time of sale or
passage of title unless the amount of returns can be reasonably estimated.
The Company is currently unable to reasonably estimate the amount of returns
because of the absence of historical precedence. The Company anticipates
that it will take approximately one full year to accumulate enough
historical data to reasonably estimate product returns. As a result,
currently the Company will only recognize revenue from a product sale when
the product return period has expired. Until that condition is met, revenue
will not be recognized, and it will be recorded as deferred revenue. We had
no deferred revenue associated with VeriChip product sales at December 31,
2002.

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

Monitoring Services

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

----------------------------------------------------------------------------
                                                                   Page F-20





<PAGE>
<PAGE>

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


DIGITAL ANGEL CORPORATION 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 collectibility 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 medical and communication costs. Other revenues are
recognized at the time service or goods are provided.

INFOTECH USA, INC. 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.

ALL OTHER

For arrangements where the contract to deliver software require significant
production, modification or customization of the software, revenue is
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, the Company had sold or closed the businesses 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 and 2000 was $6.7 million and $14.7 million, respectively.

----------------------------------------------------------------------------
                                                                   Page F-21





<PAGE>
<PAGE>

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


STOCK-BASED COMPENSATION

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

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

----------------------------------------------------------------------------
                                                                   Page F-22





<PAGE>
<PAGE>

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


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

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

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

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

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

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

RESEARCH AND DEVELOPMENT

Research and development expense consists of personnel costs, supplies,
other direct costs and indirect costs, primarily rent and other
overhead, of developing new products and technologies and are charged to
expense as incurred.

ISSUANCE OF SHARES OF STOCK BY SUBSIDIARY

Gains where realizable and losses on issuance of shares of stock by the
Company's consolidated subsidiary, Digital Angel Corporation, are reflected
in the consolidated statement 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, the Company does not
plan to reacquire the shares issued and the value of the proceeds could be
objectively determined. During 2002, the Company recorded a net loss of $0.4
million occasioned by the merger of pre-merger Digital Angel and MAS,
comprised of a loss of approximately $5.1 million resulting from the
exercise of 1.5 million pre-merger Digital Angel options (representing the
difference between the carrying amount of the Company's pro-rata share of
the investment in pre-merger Digital Angel and the exercise price of the
options) and a gain of approximately $4.7 million from the deemed sale of
22.85% of the AWG, as a result of the merger with MAS. In addition, during
2002, the Company recorded a loss of $4.1 million on the issuances of 1.1
million shares of Digital Angel Corporation common stock resulting primarily
from the exercise of stock options. The loss represents the difference
between the carrying amount of the Company's pro-rata share of its
investment in Digital Angel

----------------------------------------------------------------------------
                                                                   Page F-23





<PAGE>
<PAGE>

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

Corporation and the net proceeds from the issuances of the stock and other
changes in the minority interest ownership.

INCOME TAXES

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

EARNINGS (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT

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

COMPREHENSIVE INCOME (LOSS)

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

METHOD OF ACCOUNTING FOR DIGITAL ANGEL CORPORATION

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

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

The consolidated financial statements included in this Form 10-K include
the accounts of Digital Angel Corporation and reflect the outstanding
voting stock not owned by the Digital Angel Share Trust (the "Digital
Angel Trust") (as defined in Note 2) as a minority ownership interest in
Digital Angel Corporation on the balance

----------------------------------------------------------------------------
                                                                   Page F-24





<PAGE>
<PAGE>

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

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

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

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

----------------------------------------------------------------------------
                                                                   Page F-25





<PAGE>
<PAGE>

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


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

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

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

------------------------------------------------------------------------------
                                                                     Page F-26




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


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

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

------------------------------------------------------------------------------
                                                                     Page F-27






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


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

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

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

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

</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-28






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


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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which is effective for fiscal years beginning after June 15,
2002. SFAS 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 will adopt FAS 143
on January 1, 2003. Application of the new rules is not expected to have a
significant 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 August 2001, the FASB issued SFAS 144, Accounting for the Impairment of
Disposal of Long-Lived Assets. This standard supersedes SFAS 121, Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of, and provides a
single accounting model for long-lived assets to be disposed of. This
standard significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. This distinction is important because
assets to be disposed of are stated at the lower of their fair values or
carrying amounts and depreciation is no longer recognized. The new rules
will also supercede the provisions of APB Opinion 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a disposal of a
segment of a business and will require expected future operating losses from
Discontinued Operations to be displayed in Discontinued Operations in the
period in which the losses are incurred, rather than as of the measurement
date as required by APB 30. This statement is effective for fiscal years
beginning after December 15, 2001. The Company adopted this statement on
January 1, 2002. The adoption of FAS 144 did not have a material impact on
the Company's operations or financial position.

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

------------------------------------------------------------------------------
                                                                     Page F-29






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


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

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

2.  DEBT COVENANT COMPLIANCE AND LIQUIDITY AND GOING CONCERN
CONSIDERATIONS

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

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

The IBM Credit Agreement contained covenants relating to the Company's
financial position and performance, as well as the financial position and
performance of Digital Angel Corporation. On September 30, 2002, the Company
entered into an amendment to the IBM Credit Agreement, which revised certain
financial covenants relating to its financial performance and the financial
position and performance of Digital Angel Corporation for the quarter ended
September 30, 2002 and the fiscal year ending December 31, 2002. On November
1, 2002, the Company entered into another amendment to the IBM Credit
Agreement, which further revised certain covenants relating to the financial
performance of Digital Angel Corporation for the quarter ended September 30,
2002, and the fiscal year ending December 31, 2002. At September 30, 2002,
the Company and Digital Angel Corporation were in compliance with the
revised covenants under the IBM Credit Agreement. At June 30, 2002, the
Company was not in compliance with our Minimum Cumulative Modified EBITDA
debt covenant and with other provisions of the IBM Credit Agreement and
Digital Angel Corporation was not in compliance with its Minimum Cumulative
Modified EBITDA and Current Assets to Current Liabilities debt covenants. On
August 21, 2002, IBM Credit provided the Company with a waiver of such
noncompliance. As consideration for the waiver, the Company issued

------------------------------------------------------------------------------
                                                                     Page F-30






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


to IBM Credit a five year-warrant to acquire 2.9 million shares of its common
stock at $0.15 per share, valued at approximately $1.3 million, and a five
year-warrant to purchase approximately 1.8 million shares of its
wholly-owned subsidiary, VeriChip Corporation's, common stock at $0.05 per
share, valued at approximately $44 thousand. At December 31, 2002, the
Company was not in compliance with the revised covenants under the IBM
Credit Agreement. Digital Angel Corporation did not maintain compliance with
certain financial covenants under its credit agreement with its lender,
Wells Fargo Business Credit, Inc. (Wells Fargo). Wells Fargo provided Digital
Angel Corporation with a waiver of non-compliance. IBM Credit did not
provide a waiver.

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

FORBEARANCE AGREEMENT

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


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

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

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

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

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

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

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

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






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


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

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

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

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

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

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

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

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

  *  Develop an effective marketing and sales strategy;

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

  *  Complete the development of its second generation Digital
     Angel product.

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


3.  ACQUISITIONS AND DISPOSITIONS

On February 27, 2001, the Company acquired 16.6% of the capital
stock of MAS, a provider of medical assistance and technical
products and services, in a transaction valued at approximately $8.3
million in consideration for 3.3

------------------------------------------------------------------------------
                                                                     Page F-32






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


million shares of its common stock. The Company became the single largest
stockholder and controlled two of the seven board seats. The Company
accounted for this investment under the equity method of accounting. The
excess of the purchase price over the net book value acquired was
approximately $7.0 million and was being amortized on a straight-line basis
over five years. Under FAS 142, which the Company adopted on January 1,
2002, the goodwill embedded in the Company's equity investment in MAS is no
longer amortized. As a result of no longer amortizing this goodwill, the
Company's 2002 net income increased by $1.2 million.

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

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

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


DISPOSITIONS

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

EARNOUT AND PUT AGREEMENTS

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

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

------------------------------------------------------------------------------
                                                                     Page F-33



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


4.  INVENTORIES
<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                     ------------
                                                2002            2001
                                                ----            ----
<S>                                           <C>             <C>
Raw materials                                  $1,725          $1,474
Work in process                                 1,447             176
Finished goods                                  4,659           6,226
                                               ------          ------
                                                7,831           7,876
Less:  Allowance for excess and obsolescence    1,422           1,702
                                               ------          ------
                                               $6,409          $6,174
                                               ======          ======
</TABLE>

5.  NOTES RECEIVABLE
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                    ------------
                                                                2002            2001
                                                                ----            ----
<S>                                                         <C>              <C>
Due from purchaser of subsidiary, collateralized
by pledge of rights to distributions from a joint
venture of the purchaser and an unrelated entity,
bears interest at the London Interbank Offered Rate
plus 1.65%, payable in quarterly installments of
principal and interest totaling $332.                        $ 1,023          $ 9,073

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

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

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

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

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

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

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

Other                                                             26               --

------------------------------------------------------------------------------
                                                                     Page F-34



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



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 and 2001.           373              373
-------------------------------------------------------------------------------------
                                                              10,226           18,931
Less:  Allowance for bad debts                                 6,667           12,671
Less:  Current portion                                         2,801            2,256
-------------------------------------------------------------------------------------
                                                            $    758         $  4,004
=====================================================================================
</TABLE>

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

6.   OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                               ------------
                                                           2002             2001
                                                   ------------------------------------
<S>                                                      <C>              <C>
Deferred tax asset                                       $   13           $  171
Prepaid expenses                                          2,787            3,336
Income tax refund receivable                                 --              806
Other                                                       120              473
----------------------------------------------------------------------------------------
                                                         $2,920           $4,786
========================================================================================
</TABLE>

7.  PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                ------------
                                                           2002             2001
                                                     -------------------------------
<S>                                                     <C>              <C>
Land                                                    $   611          $   956
Building and leasehold improvements                       7,770            8,351
Equipment                                                14,505           14,387
Software                                                     94           10,001
------------------------------------------------------------------------------------
                                                         22,980           33,695
Less:  Accumulated depreciation                          13,158           13,510
------------------------------------------------------------------------------------
                                                        $ 9,822          $20,185
====================================================================================
</TABLE>

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

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

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

------------------------------------------------------------------------------
                                                                     Page F-35



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


8.  GOODWILL

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

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

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

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

CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

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

The adoption of SFAS 142 did not result in an impairment charge, however,
the annual test performed by the Company during the fourth quarter of 2002
resulted in an impairment charge of $62.2 million associated with the
Company's Digital Angel Corporation segment. This impairment charge is
included in the consolidated statement of operations under the caption Asset
Impairment. In the fourth quarter of 2002, the company tested goodwill at
each reporting level unit. Goodwill was assigned to each applicable
reporting unit as of the date of acquisition. The Company's reporting units
are those businesses for which discrete financial information is available
and upon which segment management makes operating decisions.

At December 31, 2002, the Company's reporting units consisted of the
following:

               o  Advanced Technology segment
               o  Digital Angel Corporation's Animal Application 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
               o  InfoTech USA, Inc.

The fair values of the Company's reporting units were estimated using the
expected present value of future cash flows. Based upon these fair value
tests, it was determined that certain goodwill was impaired. The impairment
relates to the goodwill associated with Digital Angel Corporation's Medical
Systems division resulting from the acquisition of MAS in March 2002, and to
Digital Angel Corporation's Wireless and Monitoring division. 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 the
revenues associated with the Medical Systems business had decreased. In
addition, there can be no assurance that future goodwill impairment tests
will not result in additional impairment charges.

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

------------------------------------------------------------------------------
                                                                     Page F-36



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



<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,

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

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

Earnings (loss) per share - diluted
 Net (loss) income per share before extraordinary (loss)
  gain - basic as reported                                     $    (1.26)  $   (1.76)
 Goodwill amortization                                               0.12        0.15
 Equity method investment amortization                               0.01          --
                                                               ----------   ---------
 Adjusted (loss) income before extraordinary (loss) gain
  per share - diluted                                          $    (1.13)  $   (1.61)
                                                               ==========   =========
`
Net (loss) income available to common stockholders:
 Net (loss) income available to common stockholders
  as reported                                                  $ (215,642)  $(116,190)
 Add back: Goodwill amortization                                   21,312       9,415
 Add back: Equity method investment amortization                    1,161          --
                                                               ----------   ---------
Adjusted net (loss) income                                     $ (193,169)  $(106,775)
                                                               ==========   =========

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

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

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

------------------------------------------------------------------------------
                                                                     Page F-37




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


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

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

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

10.  NOTES PAYABLE AND LONG-TERM DEBT

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

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

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

------------------------------------------------------------------------------
                                                                     Page F-38




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


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

The Company's covenants under the IBM Credit Agreement, as amended
were as follows:
<TABLE>
<CAPTION>
         COVENANT                                              COVENANT REQUIREMENT
         --------                                              --------------------

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

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

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


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

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

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




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

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

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

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

------------------------------------------------------------------------------
                                                                     Page F-39




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


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

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

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

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

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

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

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

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

Notes payable - other                                                   299             11

Capital lease obligations                                               233            434
------------------------------------------------------------------------------------------
                                                                     85,225         86,422
Less:  Current maturities                                            81,879         83,836
------------------------------------------------------------------------------------------
                                                                  $   3,346      $   2,586
==========================================================================================
<FN>
(1) The Digital Angel Corporation line of credit contains certain
financial covenants, including a monthly minimum book net worth and
monthly minimum earnings before taxes, and it limits Digital Angel
Corporation's capital expenditures during 2002 and 2003. Any breach
of the financial covenants by Digital Angel Corporation will
constitute an event of default under the line of credit.  As of
December 31, 2002, Digital Angel Corporation was not in compliance
with the minimum book net worth and monthly minimum earnings before
taxes covenants. Digital Angel Corporation has obtained a waiver of
these covenant violations from Wells Fargo.
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-40



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


The scheduled payments due based on maturities of long-term debt and
amounts subject to acceleration at December 31, 2002 are as follows:

<TABLE>
<CAPTION>
YEAR                                   AMOUNT
----                                   ------
<S>                                   <C>
2003                                  $81,879
2004                                    1,012
2005                                       53
2006                                       54
2007                                       59
Thereafter                              2,168
                                      -------
                                      $85,225
                                      =======
</TABLE>

Interest expense on the long and short-term notes payable amounted to
$17.5 million, $8.6 million, and $5.9 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

The weighted average interest rate was 21% and 7.3% for the years
ended December 31, 2002 and 2001, respectively.

Certain of the Company's subsidiaries included in discontinued
operations also have notes payable and long-term debt as follows:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                --------------------------------
                                                                     2002                  2001
                                                                --------------------------------
<S>                                                                  <C>                <C>
Revolving credit line - IBM Credit, collateralized by all
domestic assets of the Company and a pledge of the stock
of the Company's subsidiaries, bearing interest at the
base rate as announced by the Toronto-Dominion Bank of
Canada plus 1.17% in 2000, due in May 2002.  Amounts
paid in full upon sale of the discontinued Canadian
subsidiary in January 2002                                           $ --               $ 3,373

Term Loan - IBM Credit, collateralized by all Canadian
assets of the Company and a pledge of two-thirds of the
stock of the Company's Ground Effects, Ltd. subsidiary,
bearing interest at the base rate as announced by the
Toronto-Dominion Bank of Canada plus 1.17% in 2000, payable
in quarterly principal installments of $113 plus interest,
due in May 2002.  Amounts paid in full upon sale of the
discontinued Canadian subsidiary in January 2002                       --                 1,570

Term loans, other                                                      --                    59

Capital lease obligations                                              26                    38
-------------------------------------------------------------------------------------------------
                                                                       26                 5,040
Less:  Current maturities                                              26                 5,040
-------------------------------------------------------------------------------------------------

                                                                     $ --               $    --
=================================================================================================
</TABLE>
The obligations to IBM Credit noted above, were repaid in connection
with the sale of Ground Effects, Ltd, which was sold on January 31,
2002.

------------------------------------------------------------------------------
                                                                     Page F-41



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


11.  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 short-term
nature of the notes and the current rates approximate market rates.

LONG-TERM DEBT

Due to the current default and resulting Forbearance Agreement with
respect to the IBM debt, it is not practicable to determine the fair
value of the Company's Long-Term Debt.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The carrying amount approximates fair value.


12.  REDEEMABLE PREFERRED SHARES - SERIES C

On October 26, 2000, the Company issued 26,000 shares of Series C
convertible preferred stock to a select group of institutional
investors in a private placement. The stated value of the preferred
stock was $1,000 per share, or an aggregate of $26.0 million, and the
purchase price of the preferred stock and the related warrants and
options was an aggregate of $20.0 million. The preferred stock was
convertible into shares of the Company's common stock at various
conversion rates.

The proceeds upon issuance were allocated to the preferred stock, the
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 (amounts in thousands):

<TABLE>
<CAPTION>
<S>                                          <C>

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 options                   5,180
Relative fair value of preferred shares         13,249
                                               -------
                                               $19,056
                                               =======
</TABLE>

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

------------------------------------------------------------------------------
                                                                     Page F-42



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


of the preferred stock. As of June 30, 2001, the BCF was fully accreted. As
of December 31, 2001, all of the preferred shares have been converted into
shares of the Company's common stock.

The BCF was recorded as a reduction in the value assigned to the
preferred stock and an increase in additional paid-in capital. The
Company recorded the accretion of the BCF over the period from the
date of issuance to the earliest beneficial conversion date available
through equity, reducing the income available to common stockholders
and earnings per share.

The holders of the preferred stock also received 0.8 million warrants
to purchase up to 0.8 million shares of the Company's common stock.
The warrants expire in October 2005. At December 31, 2002, the
exercise price was $4.66 per share, subject to adjustment for various
events, including the issuance of shares of common stock, or options
or other rights to acquire common stock, at an issuance price lower
than the exercise price under the warrants. The exercise price may be
paid in cash, in shares of common stock or by surrendering warrants.
See Note 13 for the valuation and related assumptions.

OPTION TO ACQUIRE ADDITIONAL PREFERRED STOCK

The investors had the option to purchase up to an additional $26.0 million
in stated value of Series C convertible preferred stock and warrants with an
initial conversion price of $5.00 per share, for an aggregate purchase price
of $20.0 million, at any time up to ten months following the effective date
of the Company's registration statement relating to the common stock
issuable on conversion of the initial series of the preferred stock. The
additional preferred stock would have had the same preferences,
qualifications and rights as the initial preferred stock. The fair value of
the option was estimated using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%, expected volatility of .40%
and a risk free interest rate of 5.5%. The investors elected not to exercise
the option and it expired on February 24, 2002. Upon expiration, the value
of the options was reclassified to Additional Paid-in-Capital.


13.  PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY

PREFERRED SHARES

The Company has authorized 5 million shares of preferred stock,
$10.00 par value, to be issued from time to time on such terms as is
specified by the board of directors. At December 31, 2002, no
preferred shares were issued or outstanding.

WARRANTS

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

<TABLE>
<CAPTION>
                                                                   BALANCE
         CLASS OF                                                DECEMBER 31,  EXERCISE       DATE OF           EXERCISABLE
         WARRANTS        AUTHORIZED  ISSUED EXERCISED  EXPIRED      2002        PRICE          ISSUE              PERIOD
         --------        ----------  ------ ---------  -------      ----        -----          -----              ------
<S>                        <C>      <C>      <C>         <C>        <C>       <C>          <C>                <C>
         Class P             520      520      480        40           --          3.00    September 1997     5 years
         Class S             600      600      223        --          377          2.00    April 1998         5 years
         Class U             250      250       --        --          250          8.38    November 1998      5 years
         Class V             828      828      429       399           --     .67 -3.32    September 2000     Up to 2.2 years
         Class W             800      800       --        --          800          4.66    October 2000       5 years
         Class X           2,895    2,895       --        --        2,895          0.15    April 2001         5 years
         Class Y           2,895    2,895       --        --        2,895          0.15    August 2002        5 years
                           -----    -----    -----       ---        -----
                           8,788    8,788    1,132       439        7,217
                           =====    =====    =====       ===        =====

</TABLE>


Warrants in classes P through U were issued at the then-current
market value of the common stock in consideration for investment
banking services provided to the Company.

Class V warrants were issued in connection with the merger of the
Company's wholly owned subsidiary, Digital

------------------------------------------------------------------------------
                                                                     Page F-43



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


Angel.net, Inc. into Destron Fearing. These warrants were valued at $1.7
million and included as part of the initial purchase price.

Class W warrants were issued in connection with the Series C
preferred stock issuance. These warrants were valued at $0.6 million,
and were recorded as a discount on the preferred stock at issuance.

Class X warrants were issued to IBM Credit Corporation in connection
with an "Acknowledgement, Waiver and Amendment No. 1 to the Second
Amended and Restated Term and Revolving Credit Agreement" with IBM
Credit. The warrants were valued at $1.9 million. The fair value of
the warrants was reflected as deferred financing fees and was
amortized as interest expense. 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 $1.25 per share to an
exercise price of $0.15 per share. The re-priced warrants were valued
at $1.0 million.

Class Y warrants were issued to IBM Credit Corporation in connection
with the IBM Credit Agreement. The warrants were valued at $1.3
million. The fair value of the warrants was reflected as deferred
financing fees and is being amortized as interest expense.

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

<TABLE>
<CAPTION>
WARRANT SERIES         DIVIDEND YIELD     VOLATILITY   EXPECTED LIVES (YRS.)  RISK FREE RATES
--------------         --------------     ----------   ---------------------  ---------------

<S>                           <C>           <C>                <C>                 <C>
P                             0%            44.03%             1.69                8.5%

S & U                         0%            43.69%             1.69                8.5%

V                             0%            43.41%             0.10                6.4%

W                             0%            43.41%             1.69                6.4%

X (initial grant)             0%            53.32%             5.0                 4.6%

X (re-pricing)                0%            68.75%             4.0                 4.4%

Y                             0%            68.75%             5.0                 3.3%
</TABLE>

STOCK OPTION PLANS

During 1996, the Company adopted a nonqualified stock option plan (the
Option Plan). During 2000, the Company adopted a nonqualified Flexible
Stock Plan (the Flexible Plan). With the 2000 acquisition of Destron
Fearing, the Company acquired two additional stock option plans, an
Employee Stock Option Plan and Non-employee Director Stock Option Plan. The
names of the plans were changed to Digital Angel.net Inc. Stock Option
Plan (the Employee Plan) and the Digital Angel.net Inc. Non-employee
Director Stock Option Plan (the Director Plan).

Under the Option Plan, options for 10 million common shares were
authorized for issuance to certain officers and employees of the Company
as of December 31, 2002, of which 9.8 million have been issued through
December 31, 2002. The options may not be exercised until one to three
years after the options have been granted, and are exercisable for a
period of five years.

Under the Flexible Plan, the number of shares which may be issued or sold,
or for which options, Stock Appreciation Rights (SARs) or Performance
Shares may be granted to certain officers and employees of the Company is
36.0 million as of December 31, 2002, of which 35.9 million options have
been issued through December 31, 2002. Some of the options may not be
exercised until one to three years after the options have been granted,
and are exercisable over a period of five years.

Under the Employee Plan, the Plan authorized the grant of options to the
employees to purchase 1.6 million shares of

------------------------------------------------------------------------------
                                                                     Page F-44



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


common stock as of December 31, 2002, of which 1.4 million options have been
issued through December 31, 2002. The Plan provides for the grant of
incentive stock options, as defined in the Internal Revenue Code, and
non-incentive options. The Plan has been discontinued with respect to any
future grant of options.

Under the Director Plan, the Plan authorized the grant of options to the
non-employee directors to purchase shares of common stock. As of December
31, 2002, 0.5 million options have been granted of which 0.3 million
options have been issued through December 31, 2002. The Plan has been
discontinued with respect to any future grant of options.

A summary of stock option activity for 2002, 2001 and 2000 is as follows
(in thousands, except weighted average exercise price):
<TABLE>
<CAPTION>
                                                    2002                           2001                        2000
                                          ------------------------      ------------------------     ------------------------
                                                         WEIGHTED-                     WEIGHTED-                    WEIGHTED-
                                          NUMBER          AVERAGE       NUMBER         AVERAGE       NUMBER          AVERAGE
                                            OF           EXERCISE         OF           EXERCISE        OF           EXERCISE
                                          OPTIONS          PRICE        OPTIONS         PRICE        OPTIONS          PRICE
                                          -------          -----        -------         -----        -------          -----
<S>                                       <C>             <C>           <C>             <C>           <C>             <C>
Outstanding on January 1                  30,230          $0.76         22,457          $2.87         12,172          $3.01
Granted                                   10,126            .32         12,287            .33         13,725           2.76
Exercised                                 (6,290)           .23         (2,369)           .15         (3,257)          2.89
Forfeited                                    (27)          1.09         (2,145)           .88           (183)          3.28
                                          ------          -----         ------          -----         ------          -----
Outstanding on December 31                34,039           0.71         30,230            .76(1)      22,457           2.87
                                          ------          -----         ------          -----         ------          -----

Exercisable on December 31                23,721           0.87         19,999            .99(1)      11,821           2.87
                                          ------          -----         ------          -----         ------          -----
Shares available on December 31
 for options that may
 be granted                                  283                         2,043                        12,878
                                          ------                        ------                        ------
<FN>
---------
   (1)  Options to acquire 19.3 million shares of the Company's common stock were re-priced during 2001.
        See Note 14.
</TABLE>

The Company incurred approximately $0.7 million and $5.3 million of non-cash
compensation expense during 2002 and 2001, respectively, due primarily to
re-pricing 19.3 million stock options during 2001. The re-priced options had
original exercise prices ranging from $0.69 to $6.34 per share and were
modified to change the exercise price to $0.15 per share. Due to the
modification, these options are being accounted for as variable options
under APB Opinion No. 25 and, accordingly, fluctuations in the Company's
common stock price result in increases and decreases of non-cash
compensation expense until the options are exercised, forfeited or expire.
This non-cash charge is reflected in the condensed consolidated statement of
operations in selling, general and administrative expenses. In addition, on
September 24, 2001, the company issued 3.9 million options to employees
and directors with exercise prices of $0.15 per share, or $0.02 per share
less than the fair market value of the underlying common stock on the date
of grant. In accordance with APB Opinion 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.
During 2000, a de minimus amount of compensation expense was recorded
related to options granted to several employees at a 15% discount to
the fair market value on the date of grant.

------------------------------------------------------------------------------
                                                                     Page F-45



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


The following table summarizes information about stock options at
December 31, 2002 (in thousands, except weighted average exercise price):

<TABLE>
<CAPTION>
                                     OUTSTANDING STOCK OPTIONS            EXERCISABLE STOCK OPTIONS
                              ---------------------------------------     -------------------------
                                             WEIGHTED-
                                              AVERAGE       WEIGHTED-                     WEIGHTED-
                                             REMAINING      AVERAGE                       AVERAGE
    RANGE OF                                CONTRACTUAL     EXERCISE                      EXERCISE
 EXERCISE PRICE               SHARES           LIFE          PRICE         SHARES          PRICE
 --------------               ------           ----          -----         ------          -----
<S>                           <C>              <C>           <C>           <C>             <C>
 $0.01 to $1.00               27,100           4.20          $0.24         16,986          $0.20
 $1.01 to $2.00                1,614           4.00           1.47          1,505           1.49
 $2.01 to $3.00                4,037           2.90           2.51          4,037           2.51
 $3.01 to $4.00                  791           2.60           3.53            700           3.56
 $4.01 to $5.00                  307           2.20           4.45            306           4.45
 $5.01 to $8.00                  190           2.50           5.59            187           5.56
                              ------                         -----         ------          -----
 $0.01 to $8.00               34,039                         $0.71         23,721          $0.87
                              ======                         =====         ======          =====
</TABLE>

The number of options granted for the year ended December 31, 2000
includes 1,903 stock options acquired in conjunction with the Destron
Fearing acquisition.

In addition to the above options, certain wholly-owned subsidiaries of the
Company have issued options to various employees, officers and directors.
Information pertaining to options granted by Digital Angel Corporation is
as follows: During 1999, Digital Angel Corporation adopted a non-qualified
stock option plan (the "Stock Option Plan"). In connection with the merger
with MAS, Digital Angel Corporation assumed the options granted under the
Stock Option Plan under its Amended and Restated Digital Angel Corporation
Transition Stock Option Plan ("DAC Stock Option Plan"). As amended, the
DAC Stock Option Plan provides 11,195,000 shares of common stock for which
options may be granted. As of December 31, 2002, options to purchase
7,816,000 shares were outstanding and 2,137,000 shares were available for
the grant of options under the DAC Stock Option Plan. The options vest as
determined by Digital Angel Corporation's Board of Directors and are
exercisable for a period of no more than ten years.

Under MAS's nonqualified stock option plan (the "MAS Stock Option Plan")
options may be granted at or below the fair market value of the stock and
have five and 10 year lives. Options granted to certain individuals vest
ratably over three years. As of December 31, 2002 options to purchase
1,150,000 shares were outstanding and 233,000 shares were available for the
grant of options under the plan. The MAS Stock Option Plan provides for
1,650,000 shares of common stock for which options may be granted.

A summary of stock option activity for the aforementioned plans for 2002 is
as follows (in thousands, except weighted average exercise price data):

<TABLE>
<CAPTION>
                                                    2002
                                          ------------------------
                                                         WEIGHTED-
                                                         AVERAGE
                                                         EXERCISE
                                          SHARES          PRICE
                                          ------         ---------
<S>                                       <C>            <C>
Outstanding on January 1                   5,148         $ 0.44

Granted                                    3,910           3.39

Assumed in MAS Acquisition                 1,211           4.23

Exercised                                 (2,452)          0.25

Forfeited                                     (1)         10.00
                                          ------

Outstanding on December 31                 7,816           2.56
                                          ------

Exercisable on December 31                 3,893           1.70
                                          ======

Shares available for grant on
 December 31                               2,370             --
                                          ======
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-46



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


The following table summarizes information about the Digital Angel
Corporation's stock options at December 31, 2002 (in thousands, except
weighted average exercise price data):

<TABLE>
<CAPTION>
                                     OUTSTANDING STOCK OPTIONS            EXERCISABLE STOCK OPTIONS
                             ---------------------------------------      -------------------------
                                             WEIGHTED
                                              AVERAGE       WEIGHTED                      WEIGHTED
                                             REMAINING      AVERAGE                       AVERAGE
   RANGE OF                                 CONTRACTUAL     EXERCISE                      EXERCISE
EXERCISE PRICE                SHARES           LIFE          PRICE         SHARES          PRICE
--------------                ------           ----          -----         ------          -----
<S>                           <C>              <C>          <C>             <C>           <C>
$0.01 to $2.00                2,898            7.31         $ 0.60          2,898         $ 0.60
$2.01 to $4.00                4,214            9.40           3.43            304           3.90
$4.01 to $6.00                  550            8.11           4.15            550           4.15
$6.01 to $8.00                   --              --             --             --             --
$8.00 to $10.00                 154            7.31          10.00            141          10.00
                              -----                         ------          -----         ------
                              7,816            8.49         $ 2.56          3,893         $ 1.70
                              =====                         ======          =====         ======
</TABLE>

QUALIFIED EMPLOYEE STOCK PURCHASE PLAN

During 1999, the Company adopted a non-compensatory, qualified Employee
Stock Purchase Plan (the Stock Purchase Plan). Under the Stock Purchase
Plan, options are granted at an exercise price of the lesser of 85% of the
fair market value on the date of grant or 85% of the fair market value on
the exercise date. Under the Stock Purchase Plan, options for 9.0 million
common shares were authorized for issuance to substantially all full-time
employees of the Company, of which 2.1 million shares have been issued and
exercised through December 31, 2002. Each participant's options to purchase
shares will be automatically exercised for the participant on the exercise
dates determined by the board of directors.


14. NON-CASH COMPENSATION EXPENSE ASSOCIATED WITH OPTIONS AND NOTES
RECEIVABLE FOR STOCK ISSUANCES

Pursuant to the terms of the pre-merger Digital Angel and MAS merger
agreement, effective March 27, 2002, options to acquire shares of pre-merger
Digital Angel common stock were converted into options to acquire shares of
MAS common stock. The transaction resulted in a new measurement date for the
options and, as a result, the Company recorded a non-cash compensation
expense of approximately $18.7 million on March 27, 2002. This charge is
included in the condensed consolidated statement of operations in selling,
general and administrative expenses.

In addition, the Company incurred approximately $0.7 million and $5.3
million of non-cash compensation expense during 2002 and 2001, respectively,
due primarily to re-pricing 19.3 million stock options during 2001. The
re-priced options had original exercise prices ranging from $0.69 to $6.34
per share and were modified to change the exercise price to $0.15 per share.
Due to the modification, these options are being accounted for as variable
options under APB Opinion No. 25 and, accordingly, fluctuations in the
Company's common stock price result in increases and decreases of non-cash
compensation expense until the options are exercised, forfeited or expired.
This non-cash charge is reflected in the condensed consolidated statement of
operations in selling, general and administrative expenses.

During 2002, the Company incurred approximately $4.1 million for charges to
increase valuation reserves associated with the uncollectibility of notes
receivable for stock issuances of which $3.8 million related to notes
receivable for stock issuances to directors and officers held in escrow by
the Company.

------------------------------------------------------------------------------
                                                                     Page F-47



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


15. ASSET IMPAIRMENT

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

<TABLE>
<CAPTION>
                                              2002          2001             2000
----------------------------------------------------------------------------------
                                                    (AMOUNTS IN THOUSANDS)

<S>                                         <C>            <C>             <C>
Goodwill:

  Advanced Technology                       $    --        $30,453         $   --
  Digital Angel Corporation                  62,185            726             --
  All Other                                      --         32,427            818
----------------------------------------------------------------------------------
    Total goodwill                           62,185         63,606            818
Property and equipment                        6,860          2,372             --
Investment in ATEC and Burling stock             --             --          5,565
Software and other                              337          5,741             --
----------------------------------------------------------------------------------
                                            $69,382        $71,719         $6,383
==================================================================================
</TABLE>

As of December 31, 2002, the net book value of the Company's goodwill was
$67.8 million. There was no impairment of goodwill upon the adoption of FAS
142 on January 1, 2002. However, based upon the Company's annual review for
impairment during the fourth quarter of 2002, the Company recorded an
impairment charge of $62.2 million associated with its Digital Angel
Corporation segment. The impairment relates to the goodwill associated with
the acquisition of MAS in March 2002, and to Digital Angel Corporation's
Wireless and Monitoring segment. Future goodwill impairment reviews may
result in additional periodic write-downs. This impairment charge is
included in the consolidated statement of operations under Asset Impairment.
In the fourth quarter of 2002, the company tested goodwill at each reporting
level unit. Goodwill was assigned to each applicable reporting unit as of
the date of acquisition. The Company's reporting units are those businesses
for which discrete financial information is available and upon which segment
management makes operating decisions. The fair values of the Company's
reporting units were estimated using the expected present value of future
cash flows. Based upon these fair value tests, it was determined that
certain goodwill was impaired. The impairment relates to the goodwill
associated with Digital Angel Corporation's Medical Systems segment
resulting from the acquisition of MAS in March 2002, and to Digital Angel
Corporation's Wireless and Monitoring segment. 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 the revenues
associated with the Medical Systems business had decreased. The changes in
the carrying amount of goodwill for the year ended December 31, 2002, by
reporting unit are as follows (in thousands):

<TABLE>
<CAPTION>
                  COMPUTER                                        WIRELESS   GPS AND
                   EQUITY               PACIFIC        ANIMAL       AND       RADIO                   INFOTECH
                CORPORATION   P-TECH,  DECISIONS    APPLICATIONS MONITORING  COMMUNI-    MEDICAL        USA
                    (1)       INC.(1)  SCIENCES(1)       (2)        (2)      CATIONS(2)  SYSTEMS(2)    INC.(3)  CORPORATE   TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>          <C>      <C>            <C>       <C>          <C>        <C>            <C>      <C>      <C>
Balance
January 1, 2002   $13,178      $530     $1,504         $43,971   $ 27,854     $1,051     $     --       $2,154     589    $ 90,831
Acquisitions,
  adjustments
  and earnout
  payments          3,000        --         --                      3,606         63       33,092                 (589)     39,172
Less goodwill
  impairment           --        --         --                    (31,460)        --      (30,725)                         (62,185)
                -------------------------------------------------------------------------------------------------------------------
Balance
December 31,
2002              $16,178      $530     $1,504         $43,971        $--     $1,114     $  2,367       $2,154   $  --    $ 67,818
===================================================================================================================================

<FN>
(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.
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-48



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


In addition, Digital Angel Corporation impaired $6.4 million of software
associated with its Wireless and Monitoring segment. This software was
included in property and equipment.

The Company experienced goodwill write-downs and impairments in the third
and fourth quarters of 2001 and first quarter of 2002.  The write-downs
related to (a) business closings, (b) letters of intent used as the basis
for fair market value, and (c) impairments of assets pursuant to  Statement
of Financial Accounting Standard No. 121 "Accounting for  the Impairment
of Long-Lived Assets and of Long-Lived Assets to be Disposed Of" ("FAS 121").
As a result of the economic slowdown during 2001, the Company experienced
deteriorating sales for certain of its businesses. In addition, management
concluded that a full transition to an advanced technology company required
the sale or closure of all units that did not fit into the Company's new
business model or were not cash-flow positive. This resulted in the shut
down of several of its businesses during the third and fourth quarters of
2001 and the first quarter of 2002 and related goodwill write-downs; and
also, letters of intent that the Company had received during the last
half of 2001 and the first quarter of 2002 related to the sales of
certain of its businesses indicated a decline in their fair values.
These contractual letters of intent were used as the foundation to
determine fair market value and related goodwill write-downs of each
individual business unit. The sales of these businesses did not comprise
the sale of an entire business segment. Based upon these developments, the
Company reassessed its future expected operating cash flows and business
valuations and at December 31, 2001, the Company performed undiscounted cash
flows analyses by business unit to determine if an impairment existed. The
Company followed the provisions of FAS 121 to assess and measure the asset
impairments. 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 written off and the computer hardware was
written down to its estimated net realizable value. During 2002, the
remaining value of the equipment of approximately $0.5 million was fully
impaired and written off.

In addition to the impairments above, during 2002 and 2001, the Company
recorded inventory reserves of $1.4 million and $4.0 million, respectively
and bad debt reserves of $1.3 million and $25.7 million, respectively. The
inventory reserves are included in the Company's financial statements in
cost of products and the bad debt reserves are included in selling, general
and administrative expense.

During the fourth quarter of 2000, the Company reviewed its goodwill and
certain other investments for impairment and concluded that certain assets
were impaired. At December 31, 2000, the Company recorded a charge of $6.4
million for permanent impairment. The Company acquired a 16% interest in
ATEC Group, Inc. as of October 27, 2000. The Company issued 2,077,150 shares
of its stock in exchange for its investment in ATEC. As of October 27, 2000
the Company's investment in ATEC was valued at $7.2 million. Due to a
continued decline in the value of ATEC's common stock from October 27, 2000
to December 31, 2001, the Company determined its investment in ATEC had
experienced a decline in value that was other than temporary. As such, the
Company reduced the value of its investment in ATEC by $3.6 million. On
March 1, 2001, the Company rescinded the stock purchase transaction in
accordance with the rescission provision in the ATEC common stock purchase
agreement in consideration of a $1.0 million termination fee which was
payable through the issuance of the Company's common stock.

16. LOSS/GAIN ON SALES OF SUBSIDIARIES AND BUSINESS ASSETS

The gain (loss) on sale of subsidiaries and business assets reported in
continuing operations was $0.1 million, $(6.1)

------------------------------------------------------------------------------
                                                                     Page F-49



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


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

See Note 18 for a discussion of dispositions related to Discontinued
Operations companies.

17. INCOME TAXES

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
                                              2002           2001           2000
                                           ---------------------------------------
                                                   (AMOUNTS IN THOUSANDS)
                                           ---------------------------------------
<S>                                          <C>          <C>            <C>
Current:
  United States at statutory rates           $ 392        $    --        $(1,675)
  International                                  3             --             --
  Current taxes covered by net operating
    Loss                                        --           (565)            --
----------------------------------------------------------------------------------
  Current income tax provision (credit)        395           (565)        (1,675)
----------------------------------------------------------------------------------
Deferred:
  United States                                (69)        21,484         (3,005)
  International                                 --            (49)          (360)
----------------------------------------------------------------------------------
  Deferred income taxes provision (credit)     (69)        21,435         (3,365)
----------------------------------------------------------------------------------
                                             $ 326        $20,870        $(5,040)
==================================================================================
</TABLE>

The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:

<TABLE>
<CAPTION>
                                            2002           2001
                                      ---------------------------
                                         (AMOUNTS IN THOUSANDS)
<S>                                     <C>            <C>
Deferred Tax Assets:
Liabilities and reserves                $  6,000       $  6,511
Stock-based compensation                   7,779            118
Property and equipment                     2,115             --
Net operating loss carryforwards          80,222         67,842
-----------------------------------------------------------------
Gross deferred tax assets                 96,136         74,471
Valuation allowance                      (93,214)       (66,932)
-----------------------------------------------------------------
                                           2,922          7,539
-----------------------------------------------------------------
Deferred Tax Liabilities:
Accounts receivable                          366            359
Installment sales                          1,151          4,866
Property and equipment                        --            730
Intangible assets                            169            417
-----------------------------------------------------------------
                                           1,686          6,372
-----------------------------------------------------------------

Net Deferred Tax Asset                  $  1,236       $  1,167
=================================================================
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-50



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


The current and long-term components of the deferred tax asset are as follows:

<TABLE>
<CAPTION>
                                            2002           2001
                                       --------------------------
                                         (AMOUNTS IN THOUSANDS)
<S>                                      <C>            <C>
Current deferred tax asset               $    13        $   171
Long-term deferred tax asset               1,223            996
-----------------------------------------------------------------

                                         $ 1,236        $ 1,167
=================================================================
</TABLE>

The valuation allowance for deferred tax asset increased by $26.3 million
and $51.1 million in 2002 and 2001, respectively, due mainly to the
generation of net operating losses. The valuation allowance was provided for
net deferred tax assets that exceeded the Company's available carryback and
the level of existing deferred tax liabilities and projected pre-tax income.
The deferred tax asset of $1.2 million and $1.2 million at December 31, 2002
and 2001, respectively, relates entirely to the Company's 53% interest in
InfoTech USA, Inc. subsidiary, which files a separate federal income tax
return.

The ability of the Company to utilize its net operating losses in future
years may be limited in accordance with the provisions of Section 382 of the
Internal Revenue Code.

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

<TABLE>
<CAPTION>
                                         2002           2001           2000
                                   ---------------------------------------------
                                              (AMOUNTS IN THOUSANDS)
<S>                                  <C>            <C>             <C>
Domestic                             $ (126,764)    $ (168,017)     $ (32,661)
International                              (513)        (9,589)        (1,324)
--------------------------------------------------------------------------------

                                     $ (127,277)    $ (177,606)     $ (33,985)
================================================================================
</TABLE>

At December 31, 2002, the Company had aggregate net operating loss
carryforwards of approximately $194.0 million for income tax purposes that
expire in various amounts through 2022. Approximately $9.0 million of the
net operating loss carryforwards were acquired in connection with various
acquisitions and are limited as to use in any particular year based on
Internal Revenue Code sections related to separate return year and change of
ownership restrictions. Digital Angel Corporation and InfoTech USA, Inc.
file separate federal income tax returns. Of the aggregate net operating
loss carryforwards, $17.0 million and $4.0 million relate to Digital Angel
Corporation and InfoTech USA, Inc., respectively. These net operating loss
carryforwards are available to only offset future taxable income of those
companies.

------------------------------------------------------------------------------
                                                                     Page F-51



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


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

<TABLE>
<CAPTION>
                                                           2002           2001           2000
                                                         --------------------------------------
                                                              %              %              %
                                                         --------------------------------------
<S>                                                         <C>            <C>            <C>
Statutory benefit rate                                       34             34             34
Nondeductible goodwill amortization/impairment              (17)           (17)            (8)
State income taxes, net of federal benefits                  --             --              7
International tax rates different from the
  statutory US federal rate                                  --             (2)            --
Change in deferred tax asset valuation
  allowance                                                 (20)           (30)           (16)
Other                                                         3              3             (2)
-----------------------------------------------------------------------------------------------

                                                             --            (12)            15
===============================================================================================
</TABLE>


18.  DISCONTINUED OPERATIONS

On March 1, 2001, the Company's Board of Directors approved a plan to offer
for sale of 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 noncore 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
our 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 March 31, 2003, the Company has sold or closed all of the businesses
comprising Discontinued Operations, except one. This Company had revenue and
net loss for the year ended December 31, 2002 of $0.7 million and $0.2
million, respectively. The Company anticipates selling or closing this
remaining business in the next several months. Proceeds from the sales of
Discontinued Operations companies were used to repay amounts outstanding
under the IBM Credit Agreement. Any additional proceeds on the sale of the
remaining business will also be used to repay debt.

------------------------------------------------------------------------------
                                                                     Page F-52




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


The following discloses the results of the discontinued operations for the
period January 1, 2001 to March 1, 2001 and the year ended December 31,
2000:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED
                                                                       ----------
                                                    JANUARY 1, 2001    DECEMBER 31,
                                                          TO           ------------
                                                     MARCH 1, 2001         2000
                                                    ---------------    ------------
<S>                                                     <C>             <C>
Product revenue                                         $13,039         $137,901
Service revenue                                             846            6,826
                                                        -------         --------
Total revenue                                            13,885          144,727
                                                        -------         --------
Cost of products sold                                    10,499          137,824
Cost of services sold                                       259            5,315
                                                        -------         --------
  Total cost of products and services sold               10,758          143,139
Gross profit                                              3,127            1,588
Selling, general and administrative expenses              2,534           40,697
Gain on sale of subsidiaries                                 --           (4,617)
Depreciation and amortization                               264            4,217
Interest, net                                                29              187
Impairment of assets                                         --           50,219
(Benefit) provision for income taxes                         34          (13,614)
Minority interest                                            53              201
                                                        -------         --------
  Income (loss) income from discontinued operations     $   213         $(75,702)
                                                        =======         ========
</TABLE>

The above results do not include any allocated or common overhead expenses.
Included in Interest, net, above are interest charges based on the debt of
one of these businesses. This debt was repaid when the business was sold on
January 31, 2002.

Assets and liabilities of discontinued operations are as follows at
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                          2002           2001
                                                                          ----           ----
<S>                                                                    <C>            <C>
Current Assets
   Cash and cash equivalents                                           $    66        $    --
   Accounts receivable and unbilled receivables                            167          5,745
   Inventories                                                              38          4,430
   Prepaid expenses and other current assets                                --            291
                                                                       -------        -------
Total Current Assets                                                       271         10,466

Property and equipment, net                                                 56          3,553
Notes receivable                                                            --            242
                                                                       -------        -------
                                                                       $   327        $14,261
                                                                       =======        =======

Current Liabilities
   Notes payable and current maturities of long-term debt              $    26        $ 5,040
   Accounts payable                                                      4,189          8,670
   Accrued expenses                                                      5,334          9,610
                                                                       -------        -------
Total Current Liabilities                                                9,549         23,320

Minority interest                                                          146            401
                                                                       -------        -------
                                                                         9,695         23,721
                                                                       -------        -------

Net (Liabilities) Assets Of Discontinued Operations                    $(9,368)       $(9,640)
                                                                       =======        =======
</TABLE>

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

------------------------------------------------------------------------------
                                                                     Page F-53




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


During 2002 and 2001, Discontinued Operations incurred a change in estimated
loss on disposal and operating losses and carrying costs accrued on the
measurement date of $(1.4) million and $16.7 million, respectively. The
primary reason for the reduction in estimated losses for 2002 was due to the
settlement of litigation for an amount less than previously anticipated. The
primary reasons for the excess losses in 2001 were due to inventory
write-downs during the second quarter of 2001, a decrease in estimated sales
proceeds as certain of the businesses were closed in the second and third
quarters of 2001, an increase is legal expenses related to on-going
litigation, additional sales tax liabilities and additional facility lease
costs. The business closures in 2001 were the result of a combination of the
deteriorating market condition for the technology sector as well as the
Company's strategic decision to reallocate funding to our core businesses.

Effective May 10, 2001, the Company sold its 80% ownership interest in
Innovative Vacuum Solutions, Inc. (IVS) for $1.4 million, or $0.2 million
less than the estimated proceeds at December 31, 2000. On October 1, 2001,
the Company sold 100% of the stock of its wholly-owned subsidiary, Hopper
Manufacturing Co., Inc. (Hopper) and on November 29, 2001, the Company sold
substantially all of the business assets of GDB Software Services, Inc.
(GDB). The sales proceeds for Hopper and GDB approximated the estimated
proceeds of $0.6 million. In addition, in November 2001, the Company ceased
operations for all of its Intellesale companies. On January 31, 2002, the
Company sold its 85% ownership interest in its Canadian subsidiary, Ground
Effects, Ltd. The sales proceeds were $1.6 million plus the repayment of the
Canadian portion of the IBM debt, which resulted in an additional loss above
the estimated loss on the measurement date of $1.2 million. On May 23, 2002,
the Company sold certain business assets of U.S. Electrical Products Corp.
for $0.1 million, which resulted in an additional loss above the estimate
loss on the measurement date of $0.2 million.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                             YEAR ENDED DECEMBER 31,
                                                                        2002           2001          2000
------------------------------------------------------------------------------------------------------------
                                                                             (AMOUNTS IN THOUSANDS)
<S>                                                                   <C>            <C>           <C>
Operating losses and estimated loss on the sale of business units     $   684        $13,010       $ 1,619
Carrying Costs                                                         (2,104)         3,685         6,954
Less: Benefit for income taxes                                             --             --        (1,307)
------------------------------------------------------------------------------------------------------------
                                                                      $(1,420)       $16,695       $ 7,266
============================================================================================================
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-54



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


The following table sets forth the roll forward of the liabilities for
operating losses and carrying costs from December 31, 2000 through December
31, 2002. The additions represent changes in the estimated loss on sale or
closure and actual losses in excess of estimated operating losses and
carrying costs during the phase out period (in thousands):

<TABLE>
<CAPTION>
                                          BALANCE                                     BALANCE
                                        DECEMBER 31,                                DECEMBER 31,
     TYPE OF COST                           2000       ADDITIONS      DEDUCTIONS       2001
     ------------                           ----       ---------      ----------       ----
<S>                                       <C>           <C>            <C>             <C>
Operating losses and
  estimated loss on sale                  $1,619        $13,010        $13,456         $1,173
Carrying costs                             6,954          3,685          3,421          7,218
                                          ------        -------        -------         ------
Total                                     $8,573        $16,695        $16,877         $8,391
                                          ======        =======        =======         ======

<CAPTION>
                                          BALANCE                                     BALANCE
                                        DECEMBER 31,                                DECEMBER 31,
     TYPE OF COST                           2001       ADDITIONS      DEDUCTIONS       2002
     ------------                           ----       ---------      ----------       ----
<S>                                       <C>           <C>            <C>             <C>
Operating losses and
  estimated loss on sale                  $1,173        $   684         $1,857         $   --
Carrying costs(1)                          7,218         (2,104)           206          4,908
                                          ------        -------        -------         ------
Total                                     $8,391        $(1,420)        $2,063         $4,908
                                          ======        =======        =======         ======

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

Included in Discontinued Operations for 2000 is an IntelleSale pre-tax
charge of $17.0 million recorded in the second quarter of 2000. This charge
was comprised of an inventory reserve of $8.5 million for products
IntelleSale expected to sell below cost (included in cost of goods and
services sold), $5.5 million related to specific accounts and other
receivables, and $3.0 million related to fees and expenses incurred in
connection with IntelleSale's cancelled initial public offering and certain
other intangible assets.

19. EXTRAORDINARY GAIN (LOSS)

The Company recorded an extraordinary gain as a result of settling certain
disputes between the Company and the former owners of Bostek, Inc. and an
affiliate (Bostek). As part of the settlement agreement, the parties agreed
to forgive a $9.5 million payable and the former owners of Bostek agreed
invest up to $6 million in shares of our common stock provided the Company
registered approximately 3.0 million common shares of the Company's common
stock by June 15, 2001. The Company was successful in meeting the June 15,
2001 registration deadline and, accordingly, the extinguishment of the $9.5
million payable was recorded in 2001 as an extraordinary gain.

------------------------------------------------------------------------------
                                                                     Page F-55




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


20.  EARNINGS (LOSS) PER SHARE

A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          2002           2001            2000
                                                                          ----           ----            ----
<S>                                                                    <C>            <C>             <C>
NUMERATOR:
   Loss from continuing operations                                     $(113,905)     $(198,086)      $ (29,174)
   Preferred stock dividends                                                  --         (1,147)           (191)
   Accretion of beneficial conversion feature
      of redeemable preferred stock                                           --         (9,392)         (3,857)
-----------------------------------------------------------------------------------------------------------------

Numerator for basic earnings per share -
   Loss from continuing operations available to common
      Stockholders                                                      (113,905)      (208,625)        (33,222)
   Net income (loss) from discontinued operations available to
      common stockholders                                                  1,420        (16,482)        (82,968)
   Extraordinary gain                                                         --          9,465              --
-----------------------------------------------------------------------------------------------------------------

   Net loss available to common stockholders                            (112,485)      (215,642)       (116,190)

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

   Accretion of beneficial conversion feature of redeemable
      preferred stock                                                         --             --              --

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

Numerator for diluted earnings per share -
   Net income (loss) available to common stockholders                  $(112,485)     $(215,642)      $(116,190)
=================================================================================================================

DENOMINATOR:
   Denominator for basic and diluted earnings per
     share - weighted-average shares outstanding(1)                      269,232        170,009          63,825
-----------------------------------------------------------------------------------------------------------------

EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
   Continuing operations                                               $   (0.42)     $   (1.23)      $    (.52)
   Discontinued operations                                                    --           (.10)          (1.30)
   Extraordinary gain (loss)                                                  --           0.06              --
-----------------------------------------------------------------------------------------------------------------
TOTAL - BASIC AND DILUTED                                              $   (0.42)     $   (1.27)      $   (1.82)
=================================================================================================================

<FN>
--------
(1)  The weighted average shares listed below were not included in the
     computation of diluted loss per share for the year ended December 31, 2002,
     2001 and 2000 because to do so would have been anti-dilutive.

<CAPTION>

                                         2002       2001          2000
                                         ----       ----          ----
<S>                                   <C>         <C>            <C>
Redeemable preferred stock                 --     140,768          617
Warrants                                2,950          --          301
Employee stock options                 15,399       4,173        2,741
------------------------------------------------------------------------
                                       18,349     144,941        3,659
========================================================================
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-56




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


21. COMMITMENTS AND CONTINGENCIES

Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $2.0 million, $3.5 million and $2.9 million for
the years ended December 31, 2002, 2001 and 2000, respectively.

The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of one
year at December 31, 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                      MINIMUM  EMPLOYMENT
YEAR                          RENTAL PAYMENTS   CONTRACTS
-----------------------------------------------------------
<S>                                 <C>           <C>
2003                                $   1,385     $ 2,483
2004                                    1,061       1,404
2005                                      696         789
2006                                      427         671
2007                                      357          51
Thereafter                             11,113          --
-----------------------------------------------------------
                                     $ 15,039     $ 5,398
===========================================================
</TABLE>

The Company has entered into employment contracts with key officers and
employees of the Company. The agreements are for periods ranging from one to
five years through February 2007. Some of the employment contracts also call
for bonus arrangements based on earnings of a particular subsidiary. The
Company recorded $0.5 million associated with these bonus arrangements
during 2002.

On March 24, 2003, the Company terminated its employment agreements with two
of its executive officers. The terms of the IBM Credit Agreement limited the
amount of salary the Company could pay these executive officers in cash and
prevented the Company from making certain cash incentive and perquisite
payments to these executive officers. These terminations are more fully
discussed in Note 27.

Effective December 31, 2001, one of the Company's directors, who had
previously been an executive officer of the Company, retired and resigned
from the Board of Directors. As part his termination agreement, the Company
agreed to grant him 2.5 million shares of the Company's common stock the
value of which was recorded as compensation expense in the year ended
December 31, 2001.

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

POSSIBLE CONSEQUENCES OF SALES OF THE DIGITAL ANGEL TRUST SHARES

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

In addition, under the terms of the employment agreement dated March 8,
2002, as amended, by and between Digital Angel Corporation and Randolph K.
Geissler (the President and Chief Executive Officer of Digital Angel
Corporation), a "change in control" occurs under that employment agreement
if any person becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of securities
of Digital Angel Corporation representing 20% or more of the combined voting
power of the then outstanding shares of common stock. Therefore, if the
Digital Angel Trust were to sell more than approximately 5.3 million shares
of the Digital Angel Corporation common stock, such sale would constitute a
change in control

------------------------------------------------------------------------------
                                                                     Page F-57




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

under the employment agreement with Mr. Geissler. Upon the occurrence of a
change in control, Mr. Geissler, at his sole option and discretion, may
terminate his employment with Digital Angel Corporation at any time within
one year after such change in control upon 15 days' notice. In the event of
such termination, the employment agreement provides that Digital Angel
Corporation must pay to Mr. Geissler a severance payment equal to three
times the base salary amount as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended ("Code") minus $1.00 (or a total
of approximately $750,000), which would be payable no later than one month
after the effective date of Mr. Geissler's termination of employment. In
addition, upon the occurrence of a change of control under the employment
agreement, all outstanding stock options held by Mr. Geissler would become
fully exercisable. As of December 31, 2002, Mr. Geissler owned options to
purchase 1.0 million shares for $3.39 per share none of which had vested
which would become exercisable upon the occurrence of such a change in
control.

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

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

22.  PROFIT SHARING PLAN

The Company has a 401(k) Plan for the benefit of eligible United States
employees. The Company has made no contributions to the 401(k) Plan.

The Company's International subsidiaries operate certain defined
contribution pension plans. The Company's expense relating to the plans
approximated $0.1 million, $0.2 million and $0.2 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

23. LEGAL PROCEEDINGS

The Company is party to various legal proceedings, and accordingly, has
recorded $1.7 million in reserves in its financial statements at December
31, 2002. In the opinion of management, these proceedings are not likely to
have a material adverse affect on the financial position or overall trends
in results of the Company. The estimate of potential impact on the Company's
financial position, overall results of operations or cash flows for the
above legal proceedings could change in the future.

In May 2002, a class action was filed against the Company and one of its
directors. Fourteen virtually identical complaints were consolidated into a
single action, in re Applied Digital Solutions Litigation, which was filed
in the United States District Court for the Southern District of Florida. In
March 2003, the Company entered into a

------------------------------------------------------------------------------
                                                                     Page F-58




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


memorandum of understanding to settle the pending lawsuit. The settlement of
$5.6 million, which is subject to various conditions, is expected to be
covered by proceeds from insurance.

24.  SUPPLEMENTAL CASH FLOW INFORMATION

The changes in operating assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                     ---------------------------------
                                                      2002         2001         2000
                                                     ---------------------------------
<S>                                                  <C>         <C>          <C>
(Increase) decrease in accounts receivable
  and unbilled receivables                           $ 5,350     $16,020      $(6,359)
(Increase) decrease in inventories                      (247)      4,090          607
Decrease in other current assets                       2,453       2,969          843
Increase in other assets                                 361       1,626           --
Increase (decrease) in accounts payable,
  accrued expenses and other liabilities               9,249       3,660         (668)
---------------------------------------------------------------------------------------
                                                     $17,166     $28,365      $(5,577)
=======================================================================================
</TABLE>

In the years ended December 31, 2002, 2001, and 2000, the Company had the
following noncash investing and financing activities:

<TABLE>
<CAPTION>
                                                         2002        2001         2000
                                                       -----------------------------------
<S>                                                       <C>       <C>         <C>
Assets acquired for common stock                          $--       $10,201     $168,319
Due from buyer of divested subsidiary                      --         2,625           --
Common stock issued for services                           --           207          125
Assets acquired for long-term debt and capital leases      --            --        2,201
Common stock issued upon conversion of preferred stock     --        14,550           --
</TABLE>

25. SEGMENT INFORMATION

As a result of (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.
"Corporation/Eliminations" also includes certain interest expense and other
expenses associated with corporate activities and functions. Included in
"Corporate/Eliminations" for the year ended December 31, 2002, is a non-cash
compensation charge of $18.7 million associated with pre-merger Digital
Angel options, which were converted into options to acquire shares of MAS in
connection with the merger of pre-merger Digital Angel and MAS.

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

------------------------------------------------------------------------------
                                                                     Page F-59





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


Advanced Technology, Digital Angel Corporation and SysComm International's
product and services are as follows:

<TABLE>
<CAPTION>
OPERATING SEGMENT                  PRINCIPAL PRODUCTS AND SERVICES
-----------------                  -------------------------------
<S>                                <C>
Advanced Technology
                                   o  Voice, data and video telecommunications
                                      networks
                                   o  Call center and customer relationship
                                      management software
                                   o  Networking products and services
                                   o  Website design
                                   o  Internet access
                                   o  Miniaturized implantable verification chip
                                   o  Miniaturized power generator

Digital Angel Corporation
                                   o  Animal Applications
                                   o  Wireless and Monitoring
                                   o  GPS and Radio Communications
                                   o  Medical Systems

InfoTech USA, Inc.
                                   o  Computer hardware
                                   o  Computer services
</TABLE>

The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies, except that
intersegment sales and transfers are generally accounted for as if the sales
or transfers were to third parties at current market prices; segment data
includes an allocated charge for the corporate headquarters costs. It is on
this basis that management utilizes the financial information to assist in
making internal operating decisions. The Company evaluates performance based
on stand-alone segment operating income.

------------------------------------------------------------------------------
                                                                     Page F-60




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


<TABLE>
<CAPTION>
                                                                               2002 (IN THOUSANDS)
                                               -----------------------------------------------------------------------------------
                                                 ADVANCED     DIGITAL ANGEL    INFOTECH                 CORPORATE AND
                                                TECHNOLOGY     CORPORATION     USA, INC.    ALL OTHER   ELIMINATIONS  CONSOLIDATED
                                                ----------    -------------    ---------    ---------   ------------- ------------
<S>                                               <C>           <C>            <C>           <C>          <C>           <C>
Net product revenue from external customers       $28,991       $ 30,876       $20,056       $1,013       $     --      $ 80,936
Net service revenue from external customers        12,939          2,685         2,665          375             --        18,664
Intersegment net revenue                               --             70            --           --            (70)           --
                                                ---------       --------       -------       ------       --------     ---------
Total revenue                                     $41,930       $ 33,631       $22,721       $1,388       $    (70)     $ 99,600
                                                =========       ========       =======       ======       ========     =========

Depreciation and amortization                     $   569       $  3,638       $   262       $    9       $    295      $  4,773
Asset impairment                                       --         68,597            --           --            785        69,382
Interest income                                       239            601            45           --          1,471         2,356
Interest expense                                      422            303           184          148         16,467        17,524
Loss from continuing operations
  before provision for income taxes, minority
 interest, net loss on subsidiary merger
 transaction, and equity in net loss of
 affiliate(1)                                        (786)       (76,439)         (422)        (320)       (49,310)     (127,277)
Goodwill, net                                      18,212         47,452         2,154           --             --        67,818
Segment assets                                     41,404         67,798         9,340        2,753         (4,062)      117,233
Expenditures for property and equipment               340          1,439            41           --             38         1,858

<FN>
(1)  For Digital Angel Corporation, amount excludes $1.8 million of interest
     expense associated with the Company's obligation to IBM Credit and $18.7
     million of non-cash compensation expense associated with pre-merger Digital
     Angel options which were converted into options to acquire MAS stock, both
     of which have been reflected as additional expense in the separate financial
     statements of Digital Angel Corporation included in its Form 10-K dated
     December 31, 2002.

<CAPTION>
                                                                               2001 (IN THOUSANDS)
                                               -----------------------------------------------------------------------------------
                                                 ADVANCED     DIGITAL ANGEL  INFOTECH                   CORPORATE AND
                                                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         2,518        4,100          19,974          128         43,167
Intersegment net revenue                              232           964           --             870       (2,066)            --
                                                  -------       -------      -------         -------      -------       --------
Total revenue                                     $44,802       $36,702      $34,175         $42,162      $(1,527)      $156,314
                                                  =======       =======      =======         =======      =======       ========

Depreciation and amortization                     $ 9,088       $12,298      $   503         $ 4,768      $ 2,242        $28,899
Asset impairment                                   30,453           726           --          32,427        8,113         71,719
Interest and other income                              20            17           68              34        1,937          2,076
Interest expense                                      216           529          325           1,465        6,020          8,555
Income (loss) from continuing operations
  before provision for income taxes,
  minority interest, equity in net loss
  of affiliate and extraordinary gain             (41,493)      (16,262)      (1,322)        (71,636)     (46,893)      (177,606)
Goodwill, net                                      15,379        73,095        2,357              --           --         90,831
Segment assets                                     38,247       105,042       15,004           4,968        4,228        167,489
Expenditures for property and equipment               151         1,591          490           1,703       10,226         14,161


<CAPTION>
------------------------------------------------------------------------------
                                                                     Page F-61




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

                                                                               2000 (IN THOUSANDS)
                                               -----------------------------------------------------------------------------------
                                                 ADVANCED     DIGITAL ANGEL     INFOTECH               CORPORATE AND
                                                TECHNOLOGY     CORPORATION      USA, INC.  ALL OTHER   ELIMINATIONS  CONSOLIDATED
                                                ----------    -------------     --------   ---------   ------------- ------------
<S>                                               <C>          <C>             <C>           <C>          <C>           <C>
Net product revenue from external customers       $24,384      $19,605         $24,774       $35,805      $    --       $104,759
Net service revenue from external customers         7,970        2,647           2,514        16,876          191         30,007
Intersegment net revenue                               --           --              --         5,142       (5,142)            --
                                                  -------      -------         -------       -------      -------       --------
Total revenue                                     $32,354      $22,252         $27,288       $57,823      $(4,951)      $134,766
                                                  =======      =======         =======       =======      =======       ========

Depreciation and amortization                     $ 2,990      $ 2,962         $   176       $ 3,366      $ 1,579        $11,073
Asset impairment                                       --           --              --           818        5,565          6,383
Interest and other income                            (431)           9              17            17        1,483          1,095
Interest expense                                      117           98             112         1,213        4,361          5,901
Income (loss) from continuing operations
  before provision for income taxes and
  minority interest                                (1,544)      (3,816)            923        (5,714)     (23,834)       (33,985)
Goodwill, net                                      49,431       77,464           2,330        36,779           --        166,024
Segment assets                                     77,463       95,582          16,434        68,741       53,155        311,375
Expenditures for property and equipment               155          758               7         1,183        6,288          8,391
</TABLE>


Segment assets do not include net assets of discontinued operations of $0
million, $0 million and $8.1 million, in 2002, 2001, and 2000, respectively.

Approximately $31.3 million, or 74.7%, and $27.4 million, or 61.5%, of the
Company's Advanced Technology segment's revenue for 2002 and 2001,
respectively, were generated by its wholly-owned subsidiary, Computer Equity
Corporation. Approximately 99.1% and 77.7% of Computer Equity Corporation's
revenue during 2002 and 2001, respectively, were generated through sales to
various agencies of the United States Federal Government.

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

For 2002, five customers, InfoTech USA, Inc.'s top five customers, Deutsche
Bank, Hackensack University Medical Center, Liberty Mutual, Morgan Stanley
and Polytechnic University, accounted for 23%, 22%, 11%, 11% and 11% of
InfoTech USA, Inc.'s revenue, respectively. For 2001, two customers, Liberty
Mutual and Mass Mutual Life Insurance accounted for 40% and 31% of InfoTech
USA, Inc.'s revenue, respectively.

Sales to an individual customer did not exceed 10% of a segment's revenue
during 2000.
------------------------------------------------------------------------------
                                                                     Page F-62




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


Goodwill by segment for the year ended December 31, 2002, is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 2002
                                          -----------------------------------------------------------------------------------
                                            ADVANCED     DIGITAL ANGEL     INFOTECH
                                           TECHNOLOGY     CORPORATION      USA, INC.   ALL OTHER     CORPORATE   CONSOLIDATED
                                           ----------    -------------     ---------   ---------   ------------- ------------
<S>                                          <C>          <C>              <C>           <C>           <C>           <C>
Balance As of January 1, 2002                $15,212      $ 72,876         $2,154         $--          $ 589         $90,831
Goodwill acquired during the year              3,000        36,761             --          --             --          39,761
Other adjustment                                  --            --             --          --           (589)           (589)
Impairment Losses                                 --       (62,185)            --          --             --         (62,185)
                                          ------------------------------------------------------------------------------------
Balance as of December 31, 2002              $18,212      $ 47,452         $2,154         $--          $  --         $67,818
                                          ====================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                    UNITED
                                    UNITED STATES      CANADA      KINGDOM    CONSOLIDATED
                                  ----------------------------------------------------------
<S>                                      <C>           <C>         <C>            <C>
2002
Net revenue                              $ 88,190      $   --      $11,410        $ 99,600
Long-lived tangible assets                 15,379          --          855          16,234
Deferred tax asset                          1,236          --           --           1,236
--------------------------------------------------------------------------------------------

2001
Net revenue                              $138,887      $   --      $17,427        $156,314
Long-lived tangible assets                 19,193          --          992          20,185
Deferred tax asset                          1,167          --           --           1,167
--------------------------------------------------------------------------------------------

2000
Net revenue                              $118,849      $  766      $15,151        $134,766
Long-lived tangible assets                 20,044          --        1,324          21,368
Deferred tax asset (liability)             21,426        (204)         564          21,786
--------------------------------------------------------------------------------------------
</TABLE>

26. NASDAQ LISTING REQUIREMENTS

From July 12, 2002, to July 30, 2002, the Company's common stock was traded
on the Pink Sheets under the symbol "ADSX.PK." Prior to that time, the
Company's shares were traded on the Nasdaq National Market (NasdaqNM).
Effective July 31, 2002, the Company's shares were relisted on the NasdaqNM
under the symbol "ADSX." As a condition of the relisting, NasdaqNM advised
the Company that it had until October 25, 2002, to regain compliance with
the minimum closing bid price requirement of at least $1.00 per share, and,
immediately following, a closing bid price of at least $1.00 per share for a
minimum of ten (10) consecutive trading days. The Company was unable to
satisfy the minimum closing bid price requirement by October 25, 2002, and,
as a result, effective November 12, 2002, the Company's common stock began
trading on the Nasdaq SmallCap Market (SmallCap), under its existing stock
symbol ADSX. The Company expects to have until October 2003, in which to
regain the minimum bid requirement of at least $1.00 per share for a minimum
of ten (10) consecutive trading days to maintain its SmallCap listing,
providing the Company continues to comply with the SmallCap's other listing
requirements, which as of December 31, 2002, it was in compliance with.
------------------------------------------------------------------------------
                                                                     Page F-63




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


27. SUBSEQUENT EVENTS

On March 21, 2003, Richard J. Sullivan retired from the Company. Replacing
him as Chairman of the Board and Chief Executive Officer is Scott R.
Silverman, the Company's current President and Director. The Company's Board
of Directors negotiated a satisfactory severance agreement with Mr.
Sullivan. Under the terms, Mr. Sullivan will receive a one-time payment of
56.0 million shares of the Company's common stock, and 10.9 million
re-priced stock options. The options surrendered had exercise prices ranging
from $0.15 to $0.32 per share and were replaced with options exercisable at
$0.01 per share.

         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 of 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 the Company's common stock or
                  any combination of the two. In the event the Company opted
                  to make this 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 (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 Nasdaq
                  SmallCap Market) 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 roughly $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 to dedicate essentially all of its cash resources
to satisfying its obligations to IBM Credit, the Company commenced
negotiations with Richard Sullivan that led to proposed terms of his
severance agreement.

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

On March 27, 2003, the Company announced that it had executed to a
forbearance agreement term sheet with IBM Credit. The forbearance agreement,
which becomes effective on or about March 31, 2003, allows for the
forbearance of the obligations due under the IBM Credit Agreement, provides
for more favorable loan repayment terms, reduces the interest rate on the
Tranche B portion of the debt to 7% per annum and provides for purchase
rights. The forbearance agreement term sheet is more fully describe in Note 2.

28. RECENT EVENT

The staff of the Securities and Exchange Commission's Southeast Regional
Office is conducting an informal inquiry concerning the Company. The Company
is fully and voluntarily cooperating with this informal inquiry. At this
point, the Company is unable to determine whether this informal inquiry may
lead to potentially adverse action.
------------------------------------------------------------------------------
                                                                     Page F-64





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


29. SUMMARIZED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                  FIRST        SECOND         THIRD        FOURTH       FULL
                                                 QUARTER       QUARTER       QUARTER      QUARTER       YEAR
                                                 -------       -------       -------      -------       ----
<S>                                              <C>          <C>            <C>         <C>         <C>
2002
Total revenue                                    $ 28,219     $ 25,836       $23,903     $ 21,642    $  99,600
Gross profit                                        9,378        8,728         8,735        5,041       31,882
Net loss from Continuing Operations (1)           (24,692)     (19,473)       (5,751)     (63,989)    (113,905)
Net income (loss) from Discontinued Operations        687         (463)         (119)       1,315        1,420
Basic and diluted net loss per share from
  Continuing Operations (5)                         (0.10)       (0.07)        (0.02)       (0.23)       (0.42)
Basic and diluted net income (loss) per share
  from Discontinued Operations (5)                   0.01        (0.01)           --           --           --


<CAPTION>
                                                  FIRST        SECOND        THIRD       FOURTH        FULL
                                                 QUARTER       QUARTER      QUARTER      QUARTER       YEAR
                                                 -------       -------      -------      -------       ----
<S>                                              <C>          <C>          <C>          <C>         <C>
2001 - AS REPORTED
Net operating revenue                            $ 47,409     $ 39,871     $  41,366     $ 27,668    $ 156,314
Gross profit                                       17,348       14,311         6,522        8,294       46,475
Net loss from Continuing Operations(2)            (11,393)     (29,346)     (109,349)     (47,998)    (198,086)
(Loss) income from Discontinued Operations(3)         213      (21,789)         (748)       5,842      (16,482)
Loss before extraordinary gain                    (11,180)     (51,135)     (110,097)     (42,156)    (214,568)
Basic and diluted loss per share from
   Continuing Operations(5)                         (0.13)       (0.22)        (0.56)       (0.18)       (1.23)
Basic and diluted loss per share from
   Discontinued Operations(5)                          --        (0.16)           --         0.02        (0.10)
Basic and diluted income per share from
   extraordinary gain(4)(5)                            --         0.07            --           --         0.06

2001 - ADJUSTED FOR CHANGE IN METHOD OF
  ACCOUNTING FOR GOODWILL(A)

Net operating revenue                             $47,409     $ 39,871     $  41,366     $ 27,668    $ 156,314
Gross profit                                       17,348       14,311         6,522        8,294       46,475
Net loss from Continuing Operations(2)             (5,865)     (23,221)     (103,036)     (43,491)    (175,613)
(Loss) income from Discontinued Operations(3)         213      (21,789)         (748)       5,842      (16,482)
Loss before extraordinary gain                     (5,652)     (45,010)     (103,784)     (37,649)    (192,095)
Basic and diluted loss per share from
   Continuing Operations(5)                         (0.06)       (0.17)        (0.52)       (0.18)       (1.03)
Basic and diluted loss per share from
   Discontinued Operations(5)                          --        (0.16)           --         0.02        (0.10)
Basic and diluted income per share from
   extraordinary gain(4)(5)                            --         0.07            --           --         0.06

<FN>
A. CHANGE IN METHOD OF ACCOUNTING FOR GOODWILL

    Effective January 1, 2002, the Company adopted Statement of Financial
    Accounting Standard No. 142 Goodwill and Other Intangible Assets (FAS 142).
    FAS 142 requires that goodwill and certain intangibles no longer be
    amortized, but instead tested for impairment at least annually. There was no
    impairment of goodwill upon adoption of FAS 142. The Company performed its
    annual review for impairment during the fourth quarter of 2002, which
    resulted in an impairment charge of $62.2 million in 2002. There can be no
    assurance that future goodwill impairment tests will not result in
    additional impairment charges.

(1) First quarter of 2002 loss from Continuing Operations includes a
    non-cash compensation charge of approximately $18.7 million
    associated with pre-merger Digital Angel options. Pursuant to the
    terms of the merger of pre-merger Digital Angel and MAS, options to
    acquire pre-merger Digital Angel common stock were converted into
    options to acquire shares of MAS commons stock, which resulted in a
    new measurement date for the options. In addition, the Company
    incurred a loss on issuances of subsidiary stock of approximately
    $3.9
------------------------------------------------------------------------------
                                                                     Page F-65




<PAGE>
<PAGE>

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

    million. Second quarter of 2002 loss from Continuing Operations
    includes non-cash compensation expense of $6.1 million associated with
    options that were re-priced in 2001, and valuation reserves on
    notes receivable from officers and directors. Third quarter of 2002
    loss from Continuing Operations includes a reversal of
    approximately $2.9 million of non-cash compensation expense
    associated with the options re-priced in 2001, and a reversal of
    approximately $0.9 million of bad debt reserves. Fourth quarter of
    2002 loss from Continuing Operations includes asset impairments of
    $69.4 million.

(2) Third quarter of 2001 loss from Continuing Operations includes
    asset impairment charges of $68,764, inventory reserves of $4,261,
    loss on disposition of assets of $3,967 and non-cash compensation
    expense of $1,231. Fourth quarter of 2001 loss from Continuing
    Operations includes asset impairment charges of $2,955, loss on
    disposition of assets of $2,091 and non-cash compensation expense
    of $4,042, and bad debt reserves of $12,758.

(3) Second quarter of 2001 loss from Discontinued Operations includes a
    change in estimate on loss on disposal and operating losses during
    the phase out period of $21,789. Third quarter of 2001 loss from
    Discontinued Operations includes a change in estimate on loss on
    disposal and operating losses during the phase out period of $748.

(4) Second quarter extraordinary gain results from the forgiveness of
    debt associated with the Bostek acquisition. See Note 19.

(5) Earnings per share are computed independently for each of the
    quarters presented. Therefore, the sum of the quarterly net
    earnings per share will not necessarily equal the total for the
    year.
</TABLE>

------------------------------------------------------------------------------
                                                                     Page F-66