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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 o
    
    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.
  Delaware
    
    43-1641533(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1690 South Congress Avenue, Suite 201
Delray Beach, Florida, 33445
 
 
  (Title of each class)
    
    (Name of each exchange on which registered)
    Yes o No þ
 Yes o No þ
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   Class
    
    Outstanding at March 12, 2008Common Stock, $.01 par value per share
    
    116,386,932 shares




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##### 



APPLIED DIGITAL SOLUTIONS, INC.
 TABLE OF CONTENTS
 Item
    
    Description
    
    PagePART I1.
    
    Business
    
    
    31A.
    
    Risk Factors
    
    
    311B.
    
    Unresolved Staff Comments
    
    
    432.
    
    Properties
    
    
    433.
    
    Legal Proceedings
    
    
    444.
    
    Submission of Matters to a Vote of Security Holders
    
    
    44PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    456.
    
    Selected Financial Data
    
    
    487.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    507A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    748.
    
    Financial Statements and Supplementary Data
    
    
    759.
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    759A.
    
    Controls and Procedures
    
    
    759B.
    
    Other Information
    
    
    78PART III
    
    
    78PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    78Signatures
    
    
    79Exhibit 10.96Exhibit 10.99Exhibit 10.112Exhibit 10.141Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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PART 1
 
 ITEM 1. BUSINESS
 Unless the context otherwise provides, when we refer to the Company, we,  Digital Angel, or
us, we are referring to Applied Digital Solutions, Inc., doing business as Digital Angel, and its
subsidiaries (either wholly- or majority-owned). When we refer to DAC, we are referring to our now
wholly-owned subsidiary, Digital Angel Corporation, which formerly traded on the American Stock
Exchange. We acquired the minority owners interests in DAC on December 28, 2007, as more fully
discussed below.
 Overview
  
    
    developing, manufacturing and marketing of visual and electronic identification tags
and implantable RFID microchips, primarily for identification, tracking and location of
companion pets, horses, livestock (e.g., cattle and hogs), fish and wildlife worldwide,
and, more recently, for animal bio-sensing applications, such as temperature reading for
companion pet and livestock applications;
    
    developing and marketing global position systems (GPS) enabled products used for
location tracking and message monitoring of pilots, aircraft and maritime vehicles in
remote locations;
    
    developing, marketing and selling Radio Frequency Identification (RFID) systems
used to identify, locate and protect people and their assets for use in a variety of
healthcare, security and identification applications;
    
    developing and marketing service relationship management software and services; and
    
    selling vibration monitoring systems.
  Discontinued Operations
  Merger Agreement Among DAC, Digital Angel Acquisition Corp. and Us
   3




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Segments
  www.digitalangel.com
   Recent and Other Events
 Security Agreements
   4




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VeriChip Letter Agreement
   Amendments to Secured Term Notes
  Amendment of Warrants and Conditional Consent to Asset Sales
   5




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Merger with Geissler Technologies Corporation and Appointment of Randolph K. Geissler
      Amendment to Schering-Plough Supply and Distribution Agreement
 ®
 Appointment/ Resignation of Directors to the Board Post DA Merger
   6




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
    
    Audit and Governance Committee  Mr. Zarriello (Chair and audit committee financial
expert), Dennis G. Rawan and Daniel E. Penni
    
    Compensation Committee  Constance K. Weaver (Chair), Messrs. Zarriello and Block
    
    Nominating Committee  Messrs. Block (Chair), Rawan and Penni
 Appointment of Joseph J. Grillo as Chief Executive Officer and President
    Departure of Applied Digital Board Members and Former CEO
  Verizon Settlement Agreement
   7




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Notice of Nasdaq Delisting
   Pacific Decision Sciences Corporation
  Industry Overview
     
    
    a tag, containing a microchip-equipped transponder, an antenna and a
capacitor, attached to the item to be identified, located or tracked, which
wirelessly transmits stored information to a receiver;
    
    one or more receivers, also referred to as readers, which are devices that
read the tag by sending out an RF signal to which a tag, in the range of the
signal, responds; and
 
    
    the equipment, cabling, computer network and software applications to use the
processed data for one or more applications.
  8




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Pet Identification and Safeguarding
 New York Times
 Livestock/Fish Identification Tracking and Food Safety and Traceability
  Healthcare Industry
   9




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
    
    Infant ProtectionAt present, approximately 50% of maternity wards and other birthing
facilities in the United States (U.S.) and 65-75% of maternity wards with greater than
1,000 births per year, have some type of infant
protection system  though not necessarily an RFID system. Based on our experience, we
anticipate that hospital maternity wards and birthing centers will continue to upgrade
their security measures with RFID systems designed for these applications achieving
greater market penetration. The adoption of security measures, such as the implementation
of an RFID infant protection system, has been prompted by problems in dealing with
mother-baby mismatching and infant abduction. The Journal of Healthcare Protection
Management has reported that an estimated 20,000 mismatching incidents occur annually in
the U.S. Between 1983 and 2004, 223 infants were recorded as being abducted in the U.S.,
with over 50% taken from healthcare facilities.
    
    Wander PreventionAt present, we estimate that roughly 30% of the long-term care
facilities in the U.S. have deployed an RFID-type wander prevention system. The level of
system deployment varies by type of facility. Nursing homes reflect the highest level
followed by assisted living facilities. The implementation of RFID wander prevention
systems has been prompted by the significant number of individuals residing in long-term
care facilities, including nursing homes and assisted living facilities, who are at risk
of wandering away from their care facility. This can result in danger to the individual
and subsequent liability to the healthcare facility and its insurer. According to the
National Institute on Aging of the U.S. National Institutes of Health, in 2005 there
were approximately 37 million people over the age of 65 in the U.S. alone, and that
number is expected to grow to approximately 58 million by 2025. Furthermore, according
to the National Nursing Home Survey,published by the Center for Disease Control in June
2002, as of 1999, there were 18,000 nursing homes in the U.S. in which approximately 27%
of the residents suffered from Alzheimers disease, dementia or related disorders.
  GPS and Radio Communications Industries
    
    
    navigation, ranging from personal hand-held devices for trekking, to devices fitted
to cars, trucks, ships and aircraft;
    
    synchronization;
    
    location-based services such as enhanced 911;
  10




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
    
    surveying;
    
    entering data into a geographic information system;
    
    search and rescue;
    
    geophysical sciences; and
    
    tracking devices used in wildlife management.
  Operating Segments
  Animal Applications Segment
 Principal Products and Services
  
    
    visual and electronic ear tags for livestock; and
    
    implantable microchips and RFID scanners for the companion pet, horse, livestock,
fish and wildlife industries.
  TM ®
   11




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Growth Strategy
  
    
    focus on animal identification products in the growing livestock, fish and wildlife
industries;
    
    become a major player in the food source traceability and safety tracking systems
arena; and
    
    increase our market share in the pet identification and equine markets with enhanced
products such as our Bio-Thermo® product.
   ® ®
   12




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Sales, Marketing and Distribution
 ® ® ® ®
 ® ® ®
    Competition
   Manufacturing; Supply Arrangements
   13




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GPS and Radio Communications Segment
 Principal Products and Services
  
    
    GPS enabled search and rescue equipment and intelligent communications products and
services for telemetry, mobile data and radio communications applications, including our
SARBETM and McMurdo brands, which serve commercial and military markets; and
    
    alarm sounders for industrial use and other electronic components.
 GPS Enabled Search and Rescue Equipment and Intelligent Communications Products
 TM
 
  14




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Alarm Sounders
  Growth Strategy
     Sales and Distribution
   Competition
   15




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Manufacturing; Supply Arrangements
   Healthcare Segment
 Principal Products and Services
  
    
    infant protection systems used in hospital maternity wards and birthing centers to
prevent infant abduction and mother-baby mismatching;
    
    wander prevention systems used by long-term care facilities to locate and protect their
residents; and
    
    an asset/personnel location and identification systems used by hospitals and other
healthcare facilities to identify, locate and protect medical staff, patients, visitors and
medical equipment.
  Infant Protection
   Wander Prevention
   16




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Asset/Personnel Location and Identification
   
    
    tracking patients for identification purposes prior to the administration of
medications or surgery;
    
    tracking the location of caregivers in healthcare facilities to ensure timely
response to emergencies; and
    
    facilitating staff alarms in the event of patient violence.
  VeriMed System
   
    
    a glass-encapsulated microchip-equipped transponder, antenna and capacitor;
    
    a fixed location or a wireless handheld, scanner; and
    
    a secure, web-enabled database containing patient-approved information.
 TM
 Growth Strategy
   17




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
    
    Market and sell these systems internationally through distribution relationships. We are
only just beginning to penetrate geographic markets outside of North America for our infant
protection and wander prevention systems. In an effort to accelerate this process, we have
entered into distribution agreements with a combination of both local distributors who have
an in-depth knowledge of the relevant geographic region, as well as larger distributors
with a global or near-global reach.
    
    Leverage our established brand recognition, reseller network and extensive end-use
customer base for our infant protection and wander prevention systems to gain inroads in
the emerging market for asset/personnel location and identification systems. We intend to
leverage our established brand reputation, reseller network and extensive end-use customer
base for our infant protection and wander prevention systems to gain inroads in the
emerging market for RFID location, identification and protection systems for assets,
patients and staff in the healthcare industry. We are in the process of building out our
distribution network for our asset/personnel location and identification system and
providing the requisite training to certain dealers in an effort to be on the forefront of
the emerging market for these systems in the healthcare sector. We effected a limited
commercial launch of our asset/personnel location and identification system to our dealer
channel for this system in the first quarter of 2007. We believe that it is important for
our asset/personnel location and identification system to capture market share in this
emerging market within the next 12-24 months, as we expect that a significant factor in
hospitals choice of system vendors will be referrals to other healthcare facilities that
have deployed, and are pleased with, such systems. To achieve this, we will need to be on
the forefront of the effort to educate the healthcare industry regarding the benefits,
including the return on investment, achievable through implementation of RFID location,
identification and protection systems.
    18




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Sales, Marketing and Distribution
   Infant Protection/Wander Prevention
   19




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Asset/Personnel Location and Identification System
  VeriMed System
  Competition
      20




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Manufacturing; Supply Arrangements
      Security and Industrial Segment
 Principal Products and Services
  
    
    vibration monitoring instruments used by construction and mining professionals to
monitor the effects of human induced vibrations, such as blasting activity; and
    
    asset management systems used by industrial companies to manage and track their mobile
equipment and tools.
 Vibration Monitoring Instruments
   21




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Growth Strategy
  Sales, Marketing and Distribution
   Competition
  Manufacturing; Supply Arrangements
  Advanced Technology Segment
 Principal Products and Services
 Service Relationship Management Software and Services
   22




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Sales and Distribution
 Service Relationship Management Software and Services
  Competition
  Suppliers
  Government Regulation
 Laws and Regulations Pertaining to RFID Technologies
  U.S. Federal Communications Commission Regulations
   23




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Industry Canada Regulations
    Regulation by the FDA
   24




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FDA Premarket Clearance and Approval Requirements
  Guidance for Industry and FDA Staff, Class II Special
Controls Guidance Document: Implantable Radiofrequency Transponder System for Patient
Identification and Health Information
 Radio-Frequency Wireless Technology
in Medical Devices.
   
    
    FDA Form 483s, warning letters, fines, injunctions, consent decrees and civil penalties;
    
    repair, replacement, refunds, recall or seizure of products;
    
    operating restrictions, partial suspension or total shutdown of production;
    
    refusing requests for 510(k) clearance or premarket approval of new products, new intended
uses or modifications to existing products;
    
    withdrawing 510(k) clearance or premarket approvals that have already been granted; and
    
    criminal prosecution.
  25




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Privacy Laws and Regulations
  National Animal Identification System
  Federal Acquisition Regulations
  Foreign Regulations
  Environmental Regulation
  Intellectual Property
  Animal Applications and GPS and Radio Communications Segments
  
    
    U.S. Patent No. 5,211,129, Syringe-Implantable Identification Transponders, issued on
May 18, 1993. This patent covers a portion of the implantable microchip technology,
which DAC licenses to VeriChip. In 1994, Destron/IDI, Inc., a predecessor company to DAC,
granted a co-exclusive license under this patent, other than for certain specific fields of
use related to our Animal Application segment, which were retained by the predecessor
company, to Hughes Aircraft Company, or Hughes, and its then wholly-owned subsidiary,
Hughes Identification Devices, Inc., or HID. We retained all rights to the patent in
connection with our Animal Applications business. This patent expires in 2008.
  26




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
    
    U.S. Patent No. 7,176,846, Passive Integrated Transponder Tag With Unitary Antenna
Core, issued on February 13, 2007 covers our method of manufacturing an RFID microchip
wherein the coil and integrated circuit are unified thereby allowing more space for coil
material, which enables a greater capture of magnetic field resulting in longer read
distance. This patent expires in 2020.
    
    U.S. Patent No. 7,015,826, Method And Apparatus For Sensing And Transmitting A Body
Characteristic Of A HOST, issued on March 21, 2006. This patent covers our Bio-Thermo
temperature sensing implantable RFID microchip designed for non-laboratory applications
that use RFID technology to determine the body temperature of its host animal. This patent
expires in 2023.
    
    U.S. Patent No. 5,952,935, Programmable Channel Search Reader, issued on September 14,
1999. This patent covers our RFID tag readers that are capable of reading different RFID
tags of different frequencies or differing communications protocols. The patent expires in
2016.
    
    U.S. Patent No. 5,041,826, Identification System, issued on August 20, 1991. This
patent covers our RFID tag readers and the communication protocol used to communicate with
RFID tags. This patent expires in 2008.
    
    U.S. Patent No. 5,166,676, Identification System, issued on November 24, 1992. This
patent covers our RFID tags and the communication protocol used to communicate with RFID
tag readers. This patent expires in 2009.
    
    U.S. Patent No. 6,369,694, Apparatus And Method For Remotely Testing A Passive
Integrated Transponder Tag Interrogation System, issued on April 9, 2002. This patent
covers our method for remotely testing transponders within a fixed field. This patent
expires in 2020.
    
    U.S. Patent No. 6,700,547, Multidirectional Walkthrough Antenna, issued on March 2,
2004. This patent covers our walkthrough antenna for communicating with interrogators used
to read information from transponders attached to livestock. This patent expires in 2020.
    
    U.S. Patent No. 6,833,790, Livestock Chute Scanner, issued on December 21, 2004. This
patent covers our interrogator device for reading a plurality of transponders including
reading a plurality of transponders attached to livestock. This patent expires in 2020.
    
    U.S. Patent No. 7,125,382, Embedded Bio-Sensor System, issued on October 24, 2006.
This patent covers our passive implantable devices which monitors physiological parameters
of a patient. This patent expires in 2023.
    27




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Healthcare and Security and Industrial Segments
  
    
    U.S. Patent No. 6,144,303, Tag and System for Patient Safety Monitoring, applies to
infant protection tags that sense when they are in contact with the skin. The tag can
generate an alarm when it is removed. The U.S. patent expires in 2019. The corresponding
issued patent in Canada is Canadian Patent No. 2,260,577, which expires in 2019.
    
    U.S. Patent No. 5,977,877, Multiple Conductor Security Tag, which is licensed from BI
Incorporated, applies to tags attached with bands that can detect unauthorized cutting of a
band attached to a person or object. This patent expires in 2018.
    
    U.S. Patent No. 5,374,921, Fiber Optic Security and Communications Link applies to
security tags with an optical fiber in the band to detect unauthorized removal. This patent
expires in 2011. The corresponding issued patent in Canada is Canadian Patent No.
2,055,266, which expires in 2011.
    
    U.S. Patent No. 6,137,414, Asset Security Tag, applies to asset protection tags that
can generate an alarm if the asset to which it is attached (such as a piece of hospital
equipment) is moved to an unauthorized area or if the tag is removed without authorization.
This patent expires in 2019.
    
    U.S. Patent No. 6,456,191, Tag System with Anti-Collision Features, applies to RFID
tags with communication features that allow communications with multiple tags in close
proximity to one another. The U.S. patent expires in 2019. The corresponding issued patent
in Canada is Canadian Patent No. 2,266,337, which expires in 2019.
    
    U.S. Patent No. 7,116,230, Asset Location System, applies to an RFID tagging system
that utilizes a portable receiver, instead of a network of fixed receivers, to track,
analyze and prioritize information on the location of tagged assets within a building or
warehouse. This patent expires in 2025.
     28




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Advanced Technology Segment
  Financial Information About Segments
  For the Years EndedDecember 31,2007
    
    
    2006
    
    
    2005(in thousands)Animal Applications
    
    $
    43,825
    
    
    $
    38,058
    
    
    $
    35,972GPS and Radio Communications
    
    
    34,045
    
    
    
    16,351
    
    
    
    18,578Healthcare
    
    
    23,269
    
    
    
    20,508
    
    
    
    12,049Security and Industrial
    
    
    8,837
    
    
    
    6,796
    
    
    
    3,819Advanced Technology
    
    
    7,502
    
    
    
    6,072
    
    
    
    2,335Corporate/ Eliminations
    
    
    (76
    )
    
    
    (356
    )
    
    
    (697
    )Total
    
    $
    117,402
    
    
    $
    87,429
    
    
    $
    72,056
  Seasonality
  Employees
  Backlog
   29




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Geographic Areas
    United
    
    
    
    
    
    
    
    
    
    
    SouthStates
    
    
    Canada
    
    
    Europe
    
    
    America
    
    
    Total2007Net revenue
    
    $
    44,637
    
    
    $
    32,030
    
    
    $
    39,591
    
    
    $
    1,144
    
    
    $
    117,402Property and equipment, net
    
    
    7,067
    
    
    
    840
    
    
    
    4,818
    
    
    
    404
    
    
    
    13,1292006Net revenue
    
    $
    38,754
    
    
    $
    27,188
    
    
    $
    20,791
    
    
    $
    696
    
    
    $
    87,429Property and equipment, net
    
    
    6,246
    
    
    
    824
    
    
    
    4,242
    
    
    
    220
    
    
    
    11,5322005Net revenue
    
    $
    33,920
    
    
    $
    15,801
    
    
    $
    22,335
    
    
    $
    
    
    
    $
    72,056Property and equipment, net
    
    
    6,021
    
    
    
    758
    
    
    
    3,824
    
    
    
    
    
    
    
    10,603
  Discontinued Operations
   30




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Sale of InfoTechs Assets
   
    
    InfoTech does not acquire an operating business unrelated to its current business within
180 days after December 31, 2007 (the Transaction Date) and InfoTech is not liquidated
and its assets are not distributed to its stockholders within thirty days after the
Transaction Date;
    
    immediately following December 31, 2007, the financial statement of InfoTech are not
substantially similar to the pro forma information disclosed to the Lenders; and
    
    between December 31, 2007 and the Transaction Date, more than $200,000 is spent by InfoTech.
  
 ITEM 1A. RISK FACTORS
 We have a history of operating losses and negative cash flows and we may not become profitable in
the future, which could ultimately result in our inability to continue operations in the normal
course of business.
    31




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Our stock price has reflected a great deal of volatility, including a significant decrease over the
past few years. The volatility may mean that, at times, our stockholders may be unable to resell
their shares at or above the price at which they acquired them.
  If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our stock could
be delisted by the Nasdaq Capital Market. If delisting occurs, it would adversely affect the market
liquidity of our common stock and harm our businesses.
  
    
    a $1.00 minimum closing bid price;
    
    shareholders equity of $2.5 million, market value of publicly-held shares of
$35 million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
    
    500,000 shares of publicly-held common stock with a market value of at least
$1 million;
    
    300 round-lot stockholders; and
    
    compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
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The combined company may be unable to successfully integrate GT Acquisition Sub, Inc.s operations
or to realize the anticipated benefits of the GTC Merger. As a result, the value of our common
stock may be adversely affected.
  We have effected or entered into (and will likely continue to effect or enter into) capital raising
transactions, acquisitions, legal settlements and contracts for services that involve the issuance
of shares of our common stock (or securities convertible into or exchangeable for such shares) and,
as a result, the value of our common stock may be further diluted.
  We have issued and outstanding a significant number of derivative securities (e.g., options and
warrants) and the conversion or exercise of such securities may adversely affect the market price
of our common stock.
  We rely heavily on revenues derived from sales to various governmental agencies, and the loss of,
or a significant reduction in, orders from government agencies could result in significant losses
and deficits in cash flows from operations.
  Our Animal Applications segment relies heavily on revenue from a principal distributor and two
customers and the loss of the principal distributor and customers could negatively affect our
revenue, cash flows and results of operations.
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We depend on a small team of senior management and key employees, and we may have difficulty
attracting and retaining additional personnel.
   Over the past few years, we have made significant changes in the nature and scope of our businesses
and we have expanded into different product lines, including new, unproven technologies.
  Technological change could cause our products and technology to become obsolete or require the
redesign of our products, which could have a material adverse effect on our businesses.
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We may be subject to costly product liability claims from the use of our systems, which could
damage our reputation, impair the marketability of our systems and force us to pay costs and
damages that may not be covered by adequate insurance.
  Our majority-owned subsidiary, VeriChip, is endeavoring to create a market for its VeriMed system.
VeriChip may never achieve market acceptance or significant sales of this system.
   
    
    Many people who fit the profile for which the VeriMed system was designed may not be
willing to have a microchip implanted in their upper right arm.
    
    Physicians may be reluctant to discuss the implant procedure with their patients
until a greater number of hospital emergency rooms have adopted the VeriMed system as
part of their standard protocol.
    
    Physicians may be reluctant to discuss the implant procedure with their patients
because of the costs to their patients.
    
    The media has from time to time reported, and may continue to report, on the VeriMed
system in an unfavorable and, on occasion, an inaccurate manner. For example, there have
been articles published asserting, despite at least one study to the contrary, that the
implanted microchip is not magnetic resonance imaging, or MRI, compatible. There have
also been articles published asserting, despite numerous studies to the contrary, that
the implanted microchip causes malignant tumor formation in laboratory animals.
    
    Privacy concerns may influence individuals to refrain from undergoing the implant
procedure or dissuade physicians from recommending the VeriMed system to their patients.
Misperceptions that a microchip-implanted person can be tracked and that the microchip
itself contains a persons basic information, such as name, contact information, and
personal health records, may contribute to such concerns.
    
    Misperceptions and/or negative publicity may prompt legislative or administrative
efforts by politicians or groups opposed to the development and use of human-implantable
RFID microchips. In 2006, a number of states introduced, and at least three states
(Wisconsin, California and North Dakota) enacted, legislation that would prohibit any
requirement that an individual undergo a microchip-implant procedure. While VeriChip
supports all pending and enacted legislation that would preclude anything other than
voluntary implantation, legislative bodies or government agencies may determine to go
further, and their actions may have the effect, directly or indirectly, of delaying,
limiting or preventing the use of human-implantable RFID microchips or the sale,
manufacture or use of RFID systems utilizing such microchips.
    
    At present, the cost of the microchip implant procedure is not covered by Medicare,
Medicaid or private health insurance.
    
    At present, no clinical studies to assess the impact of the VeriMed system on the
quality of emergency department care have been completed.
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We believe that sales of our implantable microchip, and the extent to which our VeriMed system
achieves market acceptance, will depend, in part, on the availability of insurance reimbursement
from third-party payers, including federal and state governments under programs, such as Medicare
and Medicaid, and private insurance plans. Insurers may not determine to cover the cost of the
implant procedure, or it may take a considerable period of time for this to occur.
  Even if our VeriMed system achieves some level of market acceptance, the anticipated significant
and growing recurrent revenue from microchip-implanted persons subscribing to its database may not
be realized.
   If others assert that our products infringe their intellectual property rights, including rights to
the patent covering our implantable microchip for human applications, we may be drawn into costly
disputes and risk paying substantial damages or losing the right to sell our products.
  
    
    pay actual damages, royalties, lost profits and/or increased damages and the third
partys attorneys fees, which may be substantial;
    
    cease the development, manufacture, use and/or sale of products that use the
intellectual property in question through a court-imposed sanction called an injunction;
  36




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
    
    expend significant resources to modify or redesign our products, manufacturing
processes or other technology so that it does not infringe others intellectual property
rights or to develop or acquire non-infringing technology, which may not be possible; or
    
    obtain licenses to the disputed rights, which could require us to pay substantial
upfront fees and future royalty payments and may not be available to us on acceptable
terms, if at all, or to cease marketing the challenged products.
  VeriChip obtains the implantable microchip used in its VeriMed and VeriTrace systems and DAC
obtains the implantable microchip used in its Animal Applications segments products from a single
supplier, making us vulnerable to supply disruptions that could constrain our sales of such systems
and/or increase the per-unit cost of production of the microchip.
  VeriChips sales of systems that incorporate its implantable microchip for human use may be
enjoined by third parties who have rights to the intellectual property used in these systems, and
VeriChip may be required to pay damages that would have an adverse effect on its business.
   37




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The expiration of patents in 2008 and 2009 covering the implantable microchip technology used in
our Animal Applications segment will expose us to potential competition that may have a material
adverse effect on its sales and results of operations.
  Our inability to safeguard our intellectual property may adversely affect our business by causing
us to lose a competitive advantage or by forcing us to engage in costly and time-consuming
litigation to defend or enforce our rights.
   DAC competes with other companies in the visual and electronic identification and pilot locator
beacon markets, and the products sold by our competitors could become more popular than its
products or render its products obsolete.
   Infringement by third parties on our intellectual property or development of substantially
equivalent proprietary technology by our competitors could negatively affect our businesses.
  
    
    maintain patent and trade secret protection;
    
    obtain future patents and licenses; and
    
    operate without infringing on the proprietary rights of third parties.
   38




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##### Table of Contents



Our efforts to protect our intellectual property may be less effective in some foreign countries
where intellectual property rights are not as well protected as in the U.S..
  VeriChip may not be successful in its efforts to obtain federal registration of its trademarks
containing the Veri prefix with the U.S. Patent and Trademark Office.
  Implantation of VeriChips human implantable microchip may be found to cause risks to a persons
health, which could adversely affect sales of its systems that incorporate the implantable
microchip.
  If VeriChip is required to effect a recall of its implantable microchip, its reputation could be
materially and adversely affected and the cost of any such recall could be substantial, which could
adversely affect its results of operations and financial condition.
  Interruptions in access to, or the hacking into, VeriChips VeriMed patient information database
may have a negative impact on its revenue, damage its reputation and expose it to litigation.
   39




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Regulation of products and services that collect personally-identifiable information or otherwise
monitor an individuals activities may make the provision of VeriChips services more difficult or
expensive and could jeopardize its growth prospects.
    If VeriChip fails to comply with anti-kickback and false claims laws, VeriChip could be subject to
costly and time-consuming litigation and possible fines or other penalties.
     40




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Domestic and foreign government regulation and other factors could impair our ability to develop
and sell our products in certain markets.
   DACs foreign operations pose additional risks to its businesses.
  We have substantial debt and debt service.
    41




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##### Table of Contents




    
    our ability to obtain additional financing in the future for capital expenditures,
potential acquisitions, and other purposes may be limited, or financing may not be
available on terms favorable to us or at all; and
    
    a substantial portion of our cash flows from operations must be used to pay our
interest expense and repay our debt, which reduces the funds that would otherwise be
available to us for our operations and future business opportunities.
  Our results of operations may be adversely affected if we write-off goodwill and other intangible
assets.
  The sale of shares of common stock to third parties by our subsidiaries at prices below the per
share carrying amount of our investments has given (and may, in the future, give) rise to losses in
our consolidated statement of operations and our inability to consolidate their operations.
  We face the risk that the value of our inventory may decline before it is sold or that our
inventory may not be able to be sold at the anticipated prices.
  Currency exchange rate fluctuations could have an adverse effect on our sales and financial
results.
   42




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If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our operating results, our
ability to operate our business and our stock price.
  If we are found liable in lawsuits that have been brought against us or if we are found liable in
other litigation to which we may become subject in the future, we may be forced to pay substantial
damages and change our business practices, which could have a material adverse effect on our
revenue and profitability.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   Factory /Office
    
    
    Warehouse
    
    
    TotalOwned
    
    
    Leased
    
    
    Owned
    
    
    Leased
    
    
    Owned
    
    
    LeasedAnimal Applications
    
    
    31,892
    
    
    
    6,867
    
    
    
    47,800
    
    
    
    11,100
    
    
    
    79,692
    
    
    
    17,967GPS and Radio Communications
    
    
    
    
    
    
    21,135
    
    
    
    
    
    
    
    84,130
    
    
    
    
    
    
    
    105,265Healthcare
    
    
    
    
    
    
    10,505
    
    
    
    
    
    
    
    12,606
    
    
    
    
    
    
    
    23,111Security and Industrial
    
    
    
    
    
    
    2,550
    
    
    
    
    
    
    
    3,250
    
    
    
    
    
    
    
    5,800Advanced Technology
    
    
    
    
    
    
    5,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,805Corporate (1)
    
    
    
    
    
    
    2,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,600Total
    
    
    31,892
    
    
    
    49,462
    
    
    
    47,800
    
    
    
    111,086
    
    
    
    79,692
    
    
    
    160,548
 (1)
    
    In 2007 our Corporate offices moved to DACs leased office space and VeriChip took
over our previous Corporate office facility.  43




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Factory /Office
    
    
    Warehouse
    
    
    TotalOwned
    
    
    Leased
    
    
    Owned
    
    
    Leased
    
    
    Owned
    
    
    LeasedCalifornia
    
    
    
    
    
    
    5,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,805Canada
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    21,000Europe
    
    
    
    
    
    
    4,400
    
    
    
    
    
    
    
    11,100
    
    
    
    
    
    
    
    15,500Florida
    
    
    
    
    
    
    10,511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,511Minnesota
    
    
    31,892
    
    
    
    
    
    
    
    47,800
    
    
    
    
    
    
    
    79,692
    
    
    
    South America
    
    
    
    
    
    
    2,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,467United Kingdom
    
    
    
    
    
    
    21,135
    
    
    
    
    
    
    
    84,130
    
    
    
    
    
    
    
    105,265Total
    
    
    31,892
    
    
    
    52,318
    
    
    
    47,800
    
    
    
    108,230
    
    
    
    79,692
    
    
    
    160,548
 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    Approve the issuance of shares of our common stock to DAC stockholders pursuant to the
agreement and plan of reorganization, dated as of August 8, 2007, among us, Digital Angel
Acquisition Corp., a wholly-owned subsidiary of ours, and DAC. The proposal received
23,038,564 votes for, 2,563,459 votes against, 262,052 abstentions and 32,125,245 broker
non-votes;2)
    
    Approve and adopt an amendment to our certificate of incorporation to increase the
total number of authorized shares of our capital stock from 130 million shares, of which
125 million shares are common stock, to 170 million shares, of which 165 million shares
will be common stock. The proposal received 50,942,353 votes for, 6,512,684 votes against,
and 534,283 abstentions;3)
    
    Ratify the appointment of Michael E. Krawitz as a member of our board of directors to
hold office until the 2010 Annual Meeting of Stockholders or until his successor has been
duly elected and qualified. The proposal received 52,692,232 votes for, 3,906,553 votes
against, and 1,390,535 abstentions;4)
    
    Approve the issuance of shares of our common stock in lieu of cash to five officers of
ours, including our president and chief executive officer, should severance payments be
triggered and should we desire or be obligated to issue common stock instead of cash. The
proposal received 22,095,729 votes for, 3,249,554 votes against, 518,791 abstentions and
32,125,246 broker non-votes; and5)
    
    If submitted to a vote of the our stockholders, approve an adjournment or postponement
of the special meeting, including, if necessary, to solicit additional proxies in favor of
the merger proposals if there are not sufficient votes for these proposals. The proposal
received 50,889,763 votes for, 5,850,596 votes against, and 1,248,961 abstentions.
  44




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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  
 High
    
    
    Low2006First Quarter
    
    $
    3.06
    
    
    $
    2.50Second Quarter
    
    
    2.91
    
    
    
    1.60Third Quarter
    
    
    1.95
    
    
    
    1.34Fourth Quarter
    
    
    2.82
    
    
    
    1.562007First Quarter
    
    $
    2.33
    
    
    $
    1.45Second Quarter
    
    
    1.62
    
    
    
    1.16Third Quarter
    
    
    1.40
    
    
    
    0.85Fourth Quarter
    
    
    1.14
    
    
    
    0.41
  Holders
  Dividends
  Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information(c)Number of securities(a)
    
    
    (b)
    
    
    remaining available forNumber of securities to
    
    
    Weighted-average exercise
    
    
    future issuance underbe issued upon exercise
    
    
    price per share of
    
    
    equity compensation plansof outstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category (1)
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation plans approved by security holders
    
    
    18,317,393
    
    
    $
    2.80
    
    
    
    2,690,887
    (2)Equity compensation plans not approved by security holders (3)
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    18,317,393
    
    
    $
    2.80
    
    
    
    2,690,887
 (1)
    
    A narrative description of the material terms of our equity compensation plans is set forth in Note 12 to our consolidated financial statements.(2)
    
    Includes 560,948 shares available for future issuance under our 1999 Employees Stock Purchase Plan.(3)
    
    In addition, we have made grants outside of our equity plans and have outstanding options exercisable for 925,000 shares of our common stock.
These options were granted as an inducement for employment or for the rendering of consulting services.  45




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Recent Sales of Unregistered Securities
   ISSUER PURCHASES OF EQUITY SECURITIES DURING THE FOURTH QUARTER OF 2007(1)(c) Total Number
    
    
    (d) Approximateof Shares (or
    
    
    Dollar Value ofUnitss) Purchased
    
    
    Shares (or Units)(a) Total Number
    
    
    (b) Average
    
    
    as Part of
    
    
    that May Yet Beof Shares (or
    
    
    Price Paid per
    
    
    Publicaly
    
    
    PurchasedUnits) Purchased
    
    
    Share (or Unit)
    
    
    Announced Plans
    
    
    Under the PlansPeriod
    
    (2)
    
    
    (3)
    
    
    or Programs
    
    
    or Programs10/1/2007 - 10/31/2007
    
    
    163,199
    
    
    $
    4.18
    
    
    
    163,199
    
    
    $
    0Total
    
    
    163,199
    
    
    $
    4.18
    
    
    
    163,199
    
    
    $
    0
 (1)
    
    VeriChips stock repurchase program was announced on September 20, 2007. VeriChips board of directors unanimously authorized the
repurchase of up to $1.5 million of our common stock over a four month period.(2)
    
    All shares were purchased through our publicly announced stock repurchase plan. The purchases were made in open market transactions.(3)
    
    The average price paid per share includes commissions paid to effect the transactions.  46




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Notwithstanding anything to the contrary set forth in any of our previous filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might
incorporate future filings, including this Annual Report in whole or in part, the following
Performance Graph shall not be incorporated by reference into any such filings.
 PERFORMANCE GRAPH
 ®
 Cumulative Total Return
Based on Investment of $100
December 31, 2002  December 31, 2007
 
  47




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ITEM 6. SELECTED FINANCIAL DATA
  For the Fiscal Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands)Statement of Operations Data:Revenue
    
    $
    117,402
    
    
    $
    87,429
    
    
    $
    72,056
    
    
    $
    47,005
    
    
    $
    38,631Cost of sales
    
    
    66,319
    
    
    
    45,186
    
    
    
    37,071
    
    
    
    26,056
    
    
    
    22,072Gross profit
    
    
    51,083
    
    
    
    42,243
    
    
    
    34,985
    
    
    
    20,949
    
    
    
    16,559Selling, general and administrative expense
    
    
    68,989
    
    
    
    52,997
    
    
    
    40,377
    
    
    
    27,756
    
    
    
    48,576Research and development
    
    
    9,379
    
    
    
    7,228
    
    
    
    5,557
    
    
    
    2,837
    
    
    
    6,255Impairment charges
    
    
    4,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (31,917
    )
    
    
    (17,982
    )
    
    
    (10,949
    )
    
    
    (9,644
    )
    
    
    (38,272
    )(Gain) loss on sale of assets
    
    
    (691
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,064Interest and other income
    
    
    1,111
    
    
    
    1,344
    
    
    
    2,659
    
    
    
    1,889
    
    
    
    900Interest (expense) recovery
    
    
    (6,928
    )
    
    
    (3,137
    )
    
    
    1,936
    
    
    
    (2,736
    )
    
    
    (22,561
    )(Loss) income from continuing operations
before benefit (provision) for taxes,
minority interest, losses attributable to
capital transactions of subsidiaries and
equity in net loss of affiliate
    
    
    (37,043
    )
    
    
    (19,775
    )
    
    
    (6,354
    )
    
    
    (10,491
    )
    
    
    9,801Benefit (provision) for income taxes
    
    
    902
    
    
    
    (145
    )
    
    
    522
    
    
    
    (1
    )
    
    
    (246
    )(Loss) income from continuing operations
before minority interest, losses
attributable to capital transactions of
subsidiaries and equity in net loss of
affiliate
    
    
    (36,141
    )
    
    
    (19,920
    )
    
    
    (5,832
    )
    
    
    (10,492
    )
    
    
    9,555Minority interest
    
    
    12,244
    
    
    
    2,510
    
    
    
    (73
    )
    
    
    (415
    )
    
    
    2,094Net gain (loss) on capital transactions of
subsidiaries
    
    
    3,158
    
    
    
    (1,632
    )
    
    
    411
    
    
    
    11,090
    
    
    
    (244
    )(Loss) gain attributable to changes in
minority interest as a result of capital
transactions of subsidiaries
    
    
    (9,437
    )
    
    
    503
    
    
    
    598
    
    
    
    (20,203
    )
    
    
    (6,535
    )(Loss) income from continuing operations
    
    
    (30,175
    )
    
    
    (18,539
    )
    
    
    (4,896
    )
    
    
    (20,020
    )
    
    
    4,870(Loss) income from discontinued operations
    
    
    (1,845
    )
    
    
    (8,670
    )
    
    
    (5,269
    )
    
    
    2,721
    
    
    
    (1,727
    )Net (loss) income
    
    
    (32,020
    )
    
    
    (27,209
    )
    
    
    (10,165
    )
    
    
    (17,299
    )
    
    
    3,143Preferred stock dividends and other
    
    
    
    
    
    
    
    
    
    
    (1,573
    )
    
    
    
    
    
    
    Accretion of beneficial conversion feature
of preferred stock
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    
    
    
    
    Net (loss) income attributable to common
stockholders
    
    $
    (32,020
    )
    
    $
    (27,209
    )
    
    $
    (12,212
    )
    
    $
    (17,299
    )
    
    $
    3,143
  48




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(Loss) Earnings Per Share Adjusted For the Reverse Stock Split
  For the Fiscal Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands)Net (loss) income per common share  basic:Continuing operations
    
    $
    (0.43
    )
    
    $
    (0.27
    )
    
    $
    (0.11
    )
    
    $
    (0.39
    )
    
    $
    0.13Discontinued operations
    
    
    (0.03
    )
    
    
    (0.13
    )
    
    
    (0.08
    )
    
    
    0.05
    
    
    
    (0.05
    )Net (loss) income attributable to common shares  basic
    
    $
    (0.46
    )
    
    $
    (0.40
    )
    
    $
    (0.19
    )
    
    $
    (0.34
    )
    
    $
    0.09Net (loss) income per common share  diluted:Continuing operations
    
    $
    (0.43
    )
    
    $
    (0.27
    )
    
    $
    (0.11
    )
    
    $
    (0.39
    )
    
    $
    0.13Discontinued operations
    
    
    (0.03
    )
    
    
    (0.13
    )
    
    
    (0.08
    )
    
    
    0.05
    
    
    
    (0.05
    )Net (loss) income attributable to common shares 
diluted
    
    $
    (0.46
    )
    
    $
    (0.40
    )
    
    $
    (0.19
    )
    
    $
    (0.34
    )
    
    $
    0.08Average common shares outstanding (in thousands):Basic
    
    
    69,122
    
    
    
    67,338
    
    
    
    62,900
    
    
    
    51,291
    
    
    
    36,178Diluted
    
    
    69,122
    
    
    
    67,338
    
    
    
    62,900
    
    
    
    51,291
    
    
    
    37,299
 As of December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    9,643
    
    
    $
    7,271
    
    
    $
    22,062
    
    
    $
    30,603
    
    
    $
    9,510Restricted cash
    
    
    90
    
    
    
    81
    
    
    
    310
    
    
    
    327
    
    
    
    765Current assets from discontinued operations
    
    
    5,900
    
    
    
    6,213
    
    
    
    5,848
    
    
    
    6,361
    
    
    
    4,467Property and equipment
    
    
    13,129
    
    
    
    11,751
    
    
    
    10,849
    
    
    
    7,646
    
    
    
    7,931Goodwill and intangibles, net
    
    
    95,452
    
    
    
    82,385
    
    
    
    86,231
    
    
    
    64,340
    
    
    
    63,331Other assets from discontinued operations
    
    
    574
    
    
    
    671
    
    
    
    502
    
    
    
    8,408
    
    
    
    415Total assets
    
    
    171,689
    
    
    
    172,225
    
    
    
    185,958
    
    
    
    140,188
    
    
    
    111,931Current liabilities of discontinued operations
    
    
    4,587
    
    
    
    10,517
    
    
    
    10,352
    
    
    
    10,256
    
    
    
    10,339Long-term debt
    
    
    17,223
    
    
    
    14,211
    
    
    
    15,692
    
    
    
    2,288
    
    
    
    2,860Total debt
    
    
    32,973
    
    
    
    21,473
    
    
    
    18,511
    
    
    
    2,485
    
    
    
    8,071Other liabilities of discontinued operations
    
    
    2,495
    
    
    
    1,059
    
    
    
    536
    
    
    
    745
    
    
    
    Minority interest
    
    
    12,811
    
    
    
    47,984
    
    
    
    48,325
    
    
    
    52,644
    
    
    
    21,259Minority interest, discontinued operations
    
    
    554
    
    
    
    1,090
    
    
    
    1,437
    
    
    
    1,669
    
    
    
    1,770Stockholders equity
    
    
    70,995
    
    
    
    43,864
    
    
    
    66,546
    
    
    
    40,844
    
    
    
    32,736
  49




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
    
    our growth strategies including, without limitation, our ability to deploy our
products and services including VeriChip and Bio-Thermo;
    
    anticipated trends in our business and demographics;
    
    the ability to hire and retain skilled personnel;
    
    relationships with and dependence on technological partners;
    
    our reliance on government contractors;
    
    uncertainties relating to customer plans and commitments;
    
    our ability to successfully integrate the business operations of acquired companies;
    
    our future profitability and liquidity;
    
    our ability to maintain compliance with covenants under our credit facilities;
    
    our ability to obtain patents, enforce those patents, preserve trade secrets and
operate without infringing on the proprietary rights of third parties;
    
    governmental export and import policies, global trade policies, worldwide political
stability and economic growth;
    
    expectations about the outcome of litigation and asserted claims;
    
    regulatory, competitive or other economic influences;
    
    our ability to successfully mitigate the risks associated with foreign operations;
    
    our ability to successfully implement our business strategy;
    
    our expectation that we will incur losses, on a consolidated basis, for the
foreseeable future;
    
    our ability to fund our operations;
    
    borrowings under DSD Holdings existing bank facilities are payable on demand and the
facilities could be terminated at any time without notice;
    
    the impact on our success of the relative maturity in the U.S., and limited size, of
the markets for our infant protection and wander prevention systems and vibration
monitoring instruments;
    
    the degree of success we have in leveraging our brand reputation, reseller network and
end-use customer base for infant protection and wander prevention systems to gain inroads
in the emerging market for asset/personnel location and identification systems;
    
    the rate and extent of the U.S. healthcare industrys adoption of radio frequency
identification (RFID) asset/personnel location and identification systems;
    
    the relative degree of market acceptance of our zonal, or cell identification, active
RFID systems compared to competing technologies, such as lower power Ultra Wide
Band-based location technologies, 802.11 and Zigbee-location and wireless networking
technologies;
  50




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
    
    our ability to complete our efforts to introduce a new vibration monitoring
instrumentation platform;
    
    uncertainty as to whether we will be able to increase our sales of infant protection
and wander prevention systems outside of North America;
    
    our reliance on third-party dealers to successfully market and sell our products;
    
    our reliance on a single source supplied for our implantable microchip;
    
    we may become subject to costly product liability claims and claims that our products
infringe the intellectual property rights of others;
    
    our ability to comply with current and future regulations relating to our businesses;
    
    uncertainty as to whether a market for our VeriMed and VeriTrace systems will develop
and whether we will be able to generate more than a nominal level of revenue from the
sale of these systems;
    
    the potential for patent infringement claims to be brought against us asserting that
we hold no rights for the use of the implantable microchip technology and that we are
violating another partys intellectual property rights. If such a claim is successful, we
could be enjoined from engaging in activities to market the systems that utilize the
implantable microchip and be required to pay substantial damages;
    
    market acceptance of our VeriMed system, which will depend in large part on the future
availability of insurance reimbursement for the VeriMed system microchip implant
procedure from government and private insurers, and the timing of such reimbursement, if
it, in fact, occurs;
    
    our ability to provide uninterrupted, secure access to the VeriMed database;
    
    conflict of interest risks related to our continued affiliation with our
majority-owned subsidiaries;
    
    our ability to comply with the obligations in our various registration rights
agreements;
    
    the impact of new accounting pronouncements;
    
    our ability to establish and maintain proper and effective internal accounting and
financial controls; and
    
    all statements referring to the future or future events.
   Overview
  
    
    developing, manufacturing and marketing of visual and electronic identification tags and
implantable RFID microchips, primarily for identification, tracking and location of
companion pets, horses, livestock (e.g., cattle and hogs), fish and wildlife worldwide,
and, more recently, for animal bio-sensing applications, such as temperature reading for
companion pet and livestock applications;
    
    developing and marketing global position systems (GPS) enabled products used for
location tracking and message monitoring of pilots, aircraft and maritime vehicles in
remote locations;
    
    developing, marketing and selling Radio Frequency Identification (RFID) systems used
to identify, locate and protect people and their assets for use in a variety of healthcare,
security and identification applications;
    
    developing and marketing service relationship management software and services; and
    
    selling vibration monitoring systems.
  51




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Recent Events and other Significant Factors Affecting Our Results of Operations and Financial
Condition
  
    
    On December 6, 2007, we received a letter from the Nasdaq notifying us that we were not
in compliance with the listing standards because our stock price had fallen below the
minimum requirement of $1.00 per share and providing us a notice period to comply;
    
    On December 19, 2007, we settled a lawsuit between our subsidiary, GTI and Verizon
Federal Inc.;
    
    On December 20, 2007, as amended on February 29, 2008, we entered into a letter
agreement under which VeriChip may prepay it outstanding indebtedness to us at any time up
until October 30, 2008 for $10 million, plus accrued interest since October 1, 2007, less
payments made through the date of the repayment;
    
    Effective December 28, 2007, we acquired the minority owners interest in DAC per the
terms of the DA Merger Agreement;
    
    On January 5, 2008, we entered into an amendment to a product supply agreement with
Schering-Plough;
    
    On January 14, 2008, we acquired GTC per the terms of the GTC Merger Agreement; and
    
    On February 29, 2007, we entered into various agreements with our Lenders in connection
with a financing obtained by VeriChip.
  
    
    On December 28, 2007 Michael Krawitz and J. Michael Norris resigned their positions as
members of our board of directors;
    
    On December 31, 2007, Michael Krawitz also resigned from his positions as our chief
executive officer and president;
    
    During December 2007 and January 2008, all of the employees of PDSC resigned as
employees, including PDSCs two key employees;
    
    On January 3, 2008, pursuant to the terms of the DA Merger Agreement, our board approved
the appointment of John R. Block, Barry M. Edelstein and Michael S. Zarriello, former
members of the DAC board. Subsequently, Mr. Edelstein resigned as a member of our board;
    
    On January 3, 2008, we appointed Joseph J. Grillo as our chief executive officer,
president and director; and
    
    On January 15, 2008, in connection with the GTC Merger, Randolph K. Geissler became the
president of our Animal Applications division.
  Impact of Recently Issued Accounting Standards
   52




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Business Segments
  Animal Applications and GPS and Radio Communications Segments
    Healthcare and Security and Industrial Segments
    53




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Advanced Technology Segment
   Sources of Revenue:
    
    2007
    
    
    2006
    
    
    2005Visual and
electronic
identification tags
and implantable
microchips for the
companion pets,
horses, livestock,
fish and wildlife
markets and
bio-sensing
applications from
our Animal
Applications
segment
    
    
    37.3
    %
    
    
    43.1
    %
    
    
    49.0
    %GPS enabled
products used for
location tracking
and message
monitoring of
vehicles, pilots
and aircraft in
remote locations
from our GPS and
Radio
Communications
segment
    
    
    29.0
    %
    
    
    18.7
    %
    
    
    25.8
    %RFID-enabled
products for use in
a variety of
healthcare
applications from
our Healthcare
segment
    
    
    19.8
    %
    
    
    23.5
    %
    
    
    16.7
    %RFID-enabled
security systems,
asset tracking
systems, and
vibration monitors
for use in a
variety of security
and industrial
applications from
our Security and
Industrial segment
    
    
    7.5
    %
    
    
    7.8
    %
    
    
    5.3
    %Service
relationship
management software
and services from
our Advanced
Technology segment
    
    
    6.4
    %
    
    
    6.9
    %
    
    
    3.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Sources of Gross Profit:
    
    2007
    
    
    2006
    
    
    2005Visual and electronic
identification tags and
implantable microchips
for the companion pets,
horses, livestock, fish
and wildlife markets
and bio-sensing
applications from our
Animal Applications
segment
    
    
    25.7
    %
    
    
    33.1
    %
    
    
    41.8
    %GPS enabled products
used for location
tracking and message
monitoring of vehicles,
pilots and aircraft in
remote locations from
our GPS and Radio
Communications segment
    
    
    30.7
    %
    
    
    19.7
    %
    
    
    28.6
    %RFID-enabled products
for use in a variety of
healthcare applications
from our Healthcare
segment
    
    
    23.9
    %
    
    
    26.9
    %
    
    
    20.3
    %RFID-enabled security
systems, asset tracking
systems, and vibration
monitors for use in a
variety of security and
industrial applications
from our Security and
Industrial segment
    
    
    9.7
    %
    
    
    9.8
    %
    
    
    6.7
    %Service relationship
management software and
services from our
Advanced Technology
segment
    
    
    10.0
    %
    
    
    10.5
    %
    
    
    2.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  54




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2007
    
    
    2006
    
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    56.5
    
    
    
    56.4
    
    
    
    55.3Gross profit
    
    
    43.5
    
    
    
    43.6
    
    
    
    44.7Selling, general and administrative expense
    
    
    58.6
    
    
    
    60.6
    
    
    
    56.0Research and development
    
    
    8.0
    
    
    
    8.3
    
    
    
    7.7Impairment charges
    
    
    4.1
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    70.7
    
    
    
    68.9
    
    
    
    63.7Operating loss before other items
    
    
    (27.2
    )
    
    
    (25.3
    )
    
    
    (19.0
    )Gain on sale of asset
    
    
    (0.6
    )
    
    
    
    
    
    
    Interest and other income
    
    
    0.9
    
    
    
    1.5
    
    
    
    3.7Interest (expense) recovery
    
    
    (5.9
    )
    
    
    (3.6
    )
    
    
    2.7Loss from continuing operations before provision for
income taxes, minority interest, gain (loss)
attributable to capital transactions of subsidiaries
    
    
    (31.6
    )
    
    
    (27.4
    )
    
    
    (12.6
    )Benefit (provision) for income taxes
    
    
    0.8
    
    
    
    (0.2
    )
    
    
    0.7Loss from continuing operations before minority
interest, and gain (loss) attributable to capital
transactions of subsidiaries
    
    
    (30.8
    )
    
    
    (27.6
    )
    
    
    (11.9
    )Minority interest
    
    
    10.4
    
    
    
    2.9
    
    
    
    (0.1
    )Net gain (loss) on capital transactions of subsidiaries
    
    
    2.7
    
    
    
    (1.9
    )
    
    
    0.6(Loss) gain attributable to changes in minority
interest as a result of capital transactions of
subsidiaries
    
    
    (8.0
    )
    
    
    0.6
    
    
    
    0.8Loss from continuing operations
    
    
    (25.7
    )
    
    
    (26.0
    )
    
    
    (10.6
    )Loss from discontinued operations, net of income taxes
    
    
    (1.5
    )
    
    
    (9.9
    )
    
    
    (7.3
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (2.2
    )Accretion of beneficial conversion feature of
redeemable preferred stock  Series D
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Net loss attributable to common stockholders
    
    
    (27.2)
    %
    
    
    (35.9)
    %
    
    
    (20.8)
    %
   
    
    To streamline our segments operations and improve our supply chain management;
    
    To streamline and consolidate our corporate structure, which was exemplified by the
merger of DAC and us, which eliminated redundant overhead costs;
    
    To divest of non-core assets and businesses;
    
    To attempt to produce additional cash flow and revenue from our technology
products, primarily Bio-Thermo and VeriMed;
    
    To transition some of our in-house manufacturing to lower-cost countries;
    
    To instill a pay for performance culture; and
    
    To continue to grow under our new management team and through strategic
acquisitions, such as our acquisition of McMurdo in April 2007 and GTC in January
2008, among others.
  55




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Critical Accounting Policies and Estimates
  Revenue Recognition
  Goodwill and Other Intangible Assets
  Capital Transactions of Subsidiaries
 Net Gain/Loss on Capital Transactions of Subsidiaries
  Gain/Loss Attributable to Changes in Minority Interest as a Result of Capital Transactions of
Subsidiaries
   56




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Consolidation of Subsidiaries
  Stock-Based Compensation
  Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving
Stock Compensationan Interpretation of APB Opinion No. 25 Accounting for Stock-based Compensation Accounting for Stock-Based CompensationTransition and Disclosure
     
    
    the estimated value of our common stock;
    
    the expected life of issued stock options;
    
    the expected volatility of our stock price;
    
    the expected dividend yield to be realized over the life of the stock options; and
    
    the risk-free interest rate over the expected life of the stock option.
   57




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Inventory Obsolescence
  Legal Contingencies
   58




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##### Table of Contents



Accounting for Income Taxes
    Results of Operations from Continuing Operations
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(in thousands)Animal Applications
    
    $
    (18,124
    )
    
    $
    (4,048
    )
    
    $
    (926
    )GPS and Radio Communications
    
    
    86
    
    
    
    (1,230
    )
    
    
    1,032Healthcare
    
    
    (8,918
    )
    
    
    (5,661
    )
    
    
    (2,498
    )Security and Industrial
    
    
    (4,048
    )
    
    
    (1,030
    )
    
    
    (1,318
    )Advanced
Technology (1)
    
    
    5,193
    
    
    
    3,108
    
    
    
    372Corporate/Eliminations (2)
    
    
    (11,231
    )
    
    
    (10,914
    )
    
    
    (3,016
    )Total
    
    $
    (37,043
    )
    
    $
    (19,775
    )
    
    $
    (6,354
    )
 (1)
    
    In 2008, the remaining entity in this segment was determined
to be a discontinued operation. Therefore, in 2008 this segment will
cease. (2)
    
    The Corporate/Eliminations category includes all amounts given effect to in the consolidation of our
subsidiaries, such as the elimination of inter-segment revenues, expenses, assets and liabilities.
Corporate/Eliminations also includes certain selling, general and administrative expense (reductions) and
other income (expenses) associated with companies sold or closed in 2001 and 2002, and interest expense and
other expenses associated with corporate activities and functions.  59




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Year Ended December 31,2007
    
    
    2006
    
    
    2005(in thousands)Animal Applications
    
    $
    43,825
    
    
    $
    38,058
    
    
    $
    35,972GPS and Radio Communications
    
    
    34,045
    
    
    
    16,351
    
    
    
    18,578Healthcare
    
    
    23,269
    
    
    
    20,508
    
    
    
    12,049Security and Industrial
    
    
    8,837
    
    
    
    6,796
    
    
    
    3,819Advanced Technology
    
    
    7,502
    
    
    
    6,072
    
    
    
    2,335Corporate/Eliminations
    
    
    (76
    )
    
    
    (356
    )
    
    
    (697
    )Total
    
    $
    117,402
    
    
    $
    87,429
    
    
    $
    72,056
  Animal Applications Segment
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % of
    
    
    
    
    
    
    % of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue  external customers
    
    $
    43,749
    
    
    
    99.8
    %
    
    $
    37,702
    
    
    
    99.0
    %
    
    $
    6,047
    
    
    
    16.0
    %Revenue  intercompany
    
    
    76
    
    
    
    0.2
    
    
    
    356
    
    
    
    1.0
    
    
    
    (280
    )
    
    
    (78.6
    )Total revenue
    
    
    43,825
    
    
    
    100.0
    
    
    
    38,058
    
    
    
    100.0
    
    
    
    5,767
    
    
    
    15.2Gross profit  external customers
    
    
    13,133
    
    
    
    30.0
    
    
    
    13,967
    
    
    
    36.7
    
    
    
    (834
    )
    
    
    (6.0
    )Gross profit  intercompany
    
    
    42
    
    
    
    0.1
    
    
    
    216
    
    
    
    0.6
    
    
    
    (174
    )
    
    
    (80.5
    )Total gross profit
    
    
    13,175
    
    
    
    30.1
    
    
    
    14,183
    
    
    
    37.3
    
    
    
    (1,008
    )
    
    
    (7.1
    )Selling, general and administrative
expense
    
    
    23,275
    
    
    
    53.1
    
    
    
    15,522
    
    
    
    40.8
    
    
    
    7,753
    
    
    
    50.0Research and development
    
    
    2,560
    
    
    
    5.9
    
    
    
    2,668
    
    
    
    7.0
    
    
    
    (108
    )
    
    
    (4.1
    )Impairment charges
    
    
    3,086
    
    
    
    7.0
    
    
    
    
    
    
    
    
    
    
    
    3,086
    
    
    NM
    (1)Interest and other income
    
    
    (1,608
    )
    
    
    (3.7
    )
    
    
    (364
    )
    
    
    (1.0
    )
    
    
    1,244
    
    
    NM
    (1)Interest expense
    
    
    3,986
    
    
    
    9.1
    
    
    
    405
    
    
    
    1.1
    
    
    
    3,581
    
    
    NM
    (1)Loss from continuing operations before
taxes, minority interest, and gain
(loss) attributable to capital
transactions of subsidiaries
    
    $
    (18,124
    )
    
    
    (41.3
    )%
    
    $
    (4,048
    )
    
    
    (10.6
    )%
    
    $
    (14,076
    )
    
    NM
    (1)
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin 
  60




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Selling, General and Administrative Expense 
 Research and Development 
 Merger Expense 
 Impairment Charges 
 Other Income 
 Interest Expense 
 Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 % of
    
    
    
    
    
    
    % of
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue  external customers
    
    
    37,702
    
    
    
    99.0
    %
    
    $
    35,275
    
    
    
    98.0
    %
    
    $
    2,427
    
    
    
    6.9
    %Revenue  intercompany
    
    
    356
    
    
    
    1.0
    
    
    
    697
    
    
    
    2.0
    
    
    
    (341
    )
    
    
    (48.9
    )Total revenue
    
    
    38,058
    
    
    
    100.0
    
    
    
    35,972
    
    
    
    100.0
    
    
    
    2,086
    
    
    
    5.8Gross profit  external customers
    
    
    13,967
    
    
    
    36.7
    
    
    
    14,181
    
    
    
    39.4
    
    
    
    (214
    )
    
    
    (1.5
    )Gross profit  intercompany
    
    
    216
    
    
    
    0.6
    
    
    
    430
    
    
    
    1.2
    
    
    
    (214
    )
    
    
    (49.8
    )Total gross profit
    
    
    14,183
    
    
    
    37.3
    
    
    
    14,611
    
    
    
    40.6
    
    
    
    (428
    )
    
    
    (2.9
    )Selling, general and administrative
expense
    
    
    15,522
    
    
    
    40.8
    
    
    
    12,650
    
    
    
    35.2
    
    
    
    2,872
    
    
    
    22.7Research and development
    
    
    2,668
    
    
    
    7.0
    
    
    
    2,951
    
    
    
    8.2
    
    
    
    (283
    )
    
    
    (9.6
    )Interest and other income
    
    
    (364
    )
    
    
    (1.0
    )
    
    
    (401
    )
    
    
    (1.1
    )
    
    
    37
    
    
    
    9.2Interest expense
    
    
    405
    
    
    
    1.1
    
    
    
    337
    
    
    
    0.9
    
    
    
    68
    
    
    
    20.2Loss from continuing operations before
taxes, minority interest, and gain
(loss) attributable to capital
transactions of subsidiaries
    
    $
    (4,048
    )
    
    
    (10.6
    )%
    
    $
    (926
    )
    
    
    (2.6
    )%
    
    $
    3,122
    
    
    NM
    (1)
 (1)
  61




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Revenue 
 Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Research and Development 
 GPS and Radio Communications Segment
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % of
    
    
    
    
    
    
    % of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    34,045
    
    
    
    100.0
    %
    
    $
    16,351
    
    
    
    100.0
    %
    
    $
    17,694
    
    
    NM
    (1)%Gross profit
    
    
    15,698
    
    
    
    46.1
    
    
    
    8,307
    
    
    
    50.8
    
    
    
    7,391
    
    
    
    89.0Selling, general and administrative expense
    
    
    13,304
    
    
    
    39.1
    
    
    
    8,707
    
    
    
    53.2
    
    
    
    4,597
    
    
    
    52.8Research and development
    
    
    2,142
    
    
    
    6.3
    
    
    
    774
    
    
    
    4.7
    
    
    
    1,368
    
    
    NM
    (1)Interest and other income
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    4
    
    
    NM
    (1)Interest expense
    
    
    166
    
    
    
    0.5
    
    
    
    60
    
    
    
    0.4
    
    
    
    106
    
    
    NM
    (1)(Loss) income from continuing operations before
taxes, minority interest, and gain
(loss) attributable to capital transactions of
subsidiaries
    
    $
    86
    
    
    
    0.3
    %
    
    $
    (1,230
    )
    
    
    (7.5
    )%
    
    $
    1,316
    
    
    NM
    (1)
 (1)
 Revenue 
  62




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Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Research and Development 
 Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 % of
    
    
    
    
    
    
    % of
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    16,351
    
    
    
    100.0
    %
    
    $
    18,578
    
    
    
    100.0
    %
    
    $
    (2,227
    )
    
    
    (12.0
    )%Gross Profit:
    
    
    8,307
    
    
    
    50.8
    
    
    
    10,009
    
    
    
    53.9
    
    
    
    (1,702
    )
    
    
    (17.0
    )Selling, general and administrative expense
    
    
    8,707
    
    
    
    53.2
    
    
    
    8,568
    
    
    
    46.2
    
    
    
    139
    
    
    
    1.6Research and development
    
    
    774
    
    
    
    4.7
    
    
    
    392
    
    
    
    2.1
    
    
    
    382
    
    
    
    97.4Interest and other income
    
    
    (4
    )
    
    
    
    
    
    
    (10
    )
    
    
    (0.1
    )
    
    
    6
    
    
    
    (60.0
    )Interest expense
    
    
    60
    
    
    
    0.4
    
    
    
    27
    
    
    
    0.1
    
    
    
    33
    
    
    NM
    (1)Income from continuing operations before taxes,
minority interest, and gain (loss) attributable
to capital transactions of subsidiaries
    
    $
    (1,230
    )
    
    
    (7.5
    )%
    
    $
    1,032
    
    
    
    5.6
    %
    
    $
    (2,262
    )
    
    NM
    (1)
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin 
  63




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Selling, General and Administrative Expense 
 Research and Development 
 Healthcare Segment
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    23,269
    
    
    
    100.0
    %
    
    $
    20,508
    
    
    
    100.0
    %
    
    $
    2,761
    
    
    
    13.5
    %Gross profit
    
    
    12,203
    
    
    
    52.4
    
    
    
    11,367
    
    
    
    55.4
    
    
    
    836
    
    
    
    7.4Selling, general and administrative expense
    
    
    17,065
    
    
    
    73.3
    
    
    
    13,996
    
    
    
    68.2
    
    
    
    3,069
    
    
    
    21.9Research and development
    
    
    3,084
    
    
    
    13.3
    
    
    
    2,609
    
    
    
    12.7
    
    
    
    475
    
    
    
    18.2Interest and other income
    
    
    110
    
    
    
    0.4
    
    
    
    (49
    )
    
    
    (0.2
    )
    
    
    159
    
    
    NM
    (1)Interest expense
    
    
    862
    
    
    
    3.7
    
    
    
    472
    
    
    
    2.3
    
    
    
    390
    
    
    
    82.6Loss from continuing operations before taxes,
minority interest and gain (loss) attributable to
capital transactions of subsidiaries
    
    $
    (8,918
    )
    
    
    (38.3
    )%
    
    $
    (5,661
    )
    
    
    (27.6
    )%
    
    $
    (3,257
    )
    
    
    57.5
    %
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Research and Development 
 Interest Expense 
  64




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Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    20,508
    
    
    
    100.0
    %
    
    $
    12,049
    
    
    
    100.0
    %
    
    $
    8,459
    
    
    
    70.2
    %Gross profit
    
    
    11,367
    
    
    
    55.4
    
    
    
    7,115
    
    
    
    59.1
    
    
    
    4,252
    
    
    
    59.8Selling, general and
administrative expense
(1)
    
    
    13,996
    
    
    
    68.2
    
    
    
    8,178
    
    
    
    67.9
    
    
    
    5,818
    
    
    
    71.1Research and development
    
    
    2,609
    
    
    
    12.7
    
    
    
    1,313
    
    
    
    10.9
    
    
    
    1,296
    
    
    
    98.7Interest and other income
    
    
    (49
    )
    
    
    0.2
    
    
    
    (49
    )
    
    
    0.4
    
    
    
    
    
    
    
    Interest expense
    
    
    472
    
    
    
    (2.3
    )
    
    
    171
    
    
    
    (1.4
    )
    
    
    301
    
    
    NM

(2)Loss from continuing operations
before taxes, minority interest
and gain(loss) attributable to
capital transactions of
subsidiaries
    
    $
    (5,661
    )
    
    
    (27.6
    )%
    
    $
    (2,498
    )
    
    
    (20.7
    )%
    
    $
    3,163
    
    
    NM

(2)
 (1)
    
    The amounts exclude approximately $0.9 million of expense in 2005 primarily associated with stock options granted by VeriChip to persons who are our employees but who are not also employees of
VeriChip. These expenses were included in VeriChips separate financial statements filed as part of its registration statement on Form S-1.(2)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Research and Development 
 Interest Expense 
  65




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##### Table of Contents



Security and Industrial Segment
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    8,837
    
    
    
    100.0
    %
    
    $
    6,796
    
    
    
    100.0
    %
    
    $
    2,041
    
    
    
    30.0Gross profit
    
    
    4,943
    
    
    
    55.9
    
    
    
    4,158
    
    
    
    61.2
    
    
    
    785
    
    
    
    18.9Selling, general and administrative expense
    
    
    6,449
    
    
    
    73.0
    
    
    
    3,624
    
    
    
    53.3
    
    
    
    2,825
    
    
    
    78.0Research and development
    
    
    1,594
    
    
    
    18.0
    
    
    
    1,177
    
    
    
    17.3
    
    
    
    417
    
    
    
    35.4Interest and other income
    
    
    111
    
    
    
    1.2
    
    
    
    (8
    )
    
    
    0.1
    
    
    
    119
    
    
    NM
    (1)Interest expense
    
    
    837
    
    
    
    9.5
    
    
    
    395
    
    
    
    (5.8
    )
    
    
    442
    
    
    NM
    (1)Loss from continuing operations before taxes,
minority interest and gain(loss) attributable to
capital transactions of subsidiaries
    
    $
    (4,048
    )
    
    
    (45.8
    )%
    
    $
    (1,030
    )
    
    
    (15.2
    )%
    
    $
    (3,018
    )
    
    NM
    (1)
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin
 Selling, General and Administrative Expense 
 Research and Development 
 Interest Expense 
  66




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##### Table of Contents



Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    6,796
    
    
    
    100.0
    %
    
    $
    3,819
    
    
    
    100.0
    %
    
    $
    2,977
    
    
    
    78.0
    %Gross profit
    
    
    4,158
    
    
    
    61.2
    
    
    
    2,359
    
    
    
    61.8
    
    
    
    1,799
    
    
    
    76.3Selling, general and administrative expense
    
    
    3,624
    
    
    
    53.3
    
    
    
    2,873
    
    
    
    75.2
    
    
    
    751
    
    
    
    26.1Research and development
    
    
    1,177
    
    
    
    17.3
    
    
    
    646
    
    
    
    16.9
    
    
    
    531
    
    
    
    82.2Interest and other income
    
    
    (8
    )
    
    
    0.1
    
    
    
    (14
    )
    
    
    0.4
    
    
    
    (6
    )
    
    
    (42.9
    )Interest expense
    
    
    395
    
    
    
    (5.8
    )
    
    
    172
    
    
    
    (4.5
    )
    
    
    223
    
    
    NM
    (1)Loss from continuing operations before taxes,
minority interest and gain (loss) attributable to
capital transactions of subsidiaries
    
    $
    (1,030
    )
    
    
    (15.2
    )%
    
    $
    (1,318
    )
    
    
    (34.5
    )%
    
    $
    (288
    )
    
    
    (21.9
    )%
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
 Gross Profit and Gross Profit Margin
 Selling, General and Administrative Expense 
 Research and Development 
 Interest Expense 
 Advanced Technology Segment
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    7,502
    
    
    
    100.0
    %
    
    $
    6,072
    
    
    
    100.0
    %
    
    $
    1,430
    
    
    
    23.6
    %Gross profit
    
    
    5,106
    
    
    
    68.1
    
    
    
    4,444
    
    
    
    73.2
    
    
    
    662
    
    
    
    14.9Selling, general and administrative expense
    
    
    1,137
    
    
    
    15.2
    
    
    
    1,500
    
    
    
    24.7
    
    
    
    (363
    )
    
    
    (24.2
    )Interest and other income
    
    
    (1,222
    )
    
    
    (16.3
    )
    
    
    (147
    )
    
    
    (2.4
    )
    
    
    1,075
    
    
    NM
    (1)Interest (income) expense
    
    
    (2
    )
    
    
    
    
    
    
    (17
    )
    
    
    (0.3
    )
    
    
    (15
    )
    
    
    (88.2
    )Income from continuing operations before taxes,
minority interest and gain (loss) attributable to
capital transactions of subsidiaries
    
    $
    5,193
    
    
    
    69.2
    %
    
    $
    3,108
    
    
    
    51.2
    %
    
    $
    2,085
    
    
    
    67.1
    %
 (1)
    
    NM = Not meaningful as the change is greater than 100%  67




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##### Table of Contents



Revenue 
  Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Interest and Other Income 
 Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 % Of
    
    
    
    
    
    
    % Of
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    6,072
    
    
    
    100.0
    %
    
    $
    2,335
    
    
    
    100.0
    %
    
    $
    3,737
    
    
    NM
    %Gross profit
    
    
    4,444
    
    
    
    73.2
    
    
    
    1,321
    
    
    
    56.6
    
    
    
    3,123
    
    
    NM
    (1)Selling, general and administrative expense
    
    
    1,500
    
    
    
    24.7
    
    
    
    1,412
    
    
    
    60.5
    
    
    
    88
    
    
    
    6.2Research and development
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    2.7
    
    
    
    (64
    )
    
    
    (100.0
    )Interest and other income
    
    
    (147
    )
    
    
    (2.4
    )
    
    
    (578
    )
    
    
    (24.7
    )
    
    
    (431
    )
    
    
    74.6Interest expense
    
    
    (17
    )
    
    
    (0.3
    )
    
    
    51
    
    
    
    2.2
    
    
    
    68
    
    
    NM
    (1)Income (loss) from continuing operations before
taxes, minority interest and gain
(loss) attributable to capital transactions of
subsidiaries
    
    $
    3,108
    
    
    
    51.2
    %
    
    $
    372
    
    
    
    15.9
    %
    
    $
    2,736
    
    
    NM
    (1)
 (1)
    
    NM = Not meaningful as the change is greater than 100% Revenue 
   68




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##### Table of Contents



Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expense 
 Interest and Other Income 
 Corporate/Eliminations
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 Change2007
    
    
    2006
    
    
    Increase (Decrease)(dollar amounts in thousands)Elimination of intercompany revenue
    
    $
    (76
    )
    
    $
    (356
    )
    
    $
    280
    
    
    
    (78.6
    )%Elimination of intercompany product gross profit
    
    
    (42
    )
    
    
    (216
    )
    
    
    174
    
    
    
    (80.5
    )Selling, general and administrative expense
    
    
    7,759
    
    
    
    9,648
    
    
    
    (1,889
    )
    
    
    (19.6
    )Impairment charges
    
    
    1,546
    
    
    
    
    
    
    
    1,546
    
    
    NM
    (1)Gain on sale of asset
    
    
    (691
    )
    
    
    
    
    
    
    (692
    )
    
    NM
    (1)Interest and other expense (income)
    
    
    1,497
    
    
    
    (772
    )
    
    
    2,269
    
    
    NM
    (1)Interest (expense) recovery
    
    
    1,078
    
    
    
    1,822
    
    
    
    743
    
    
    
    (40.8
    )Loss from continuing operations before taxes,
minority interest and gain (loss) attributable to
capital transactions of subsidiaries
    
    $
    (11,231
    )
    
    $
    (10,914
    )
    
    $
    (317
    )
    
    
    (2.9
    )
 (1)
    
    NM = Not meaningful as the change is greater than 100% Selling, General and Administrative Expense 
 Impairment Charges 
 Interest and Other Expense (Income) 
 Interest Expense 
  69




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##### Table of Contents



Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 Change2006
    
    
    2005
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue  intercompany elimination
    
    $
    (356
    )
    
    $
    (697
    )
    
    $
    (341
    )
    
    
    (48.9
    )Gross profit  intercompany elimination
    
    
    (216
    )
    
    
    (430
    )
    
    
    (214
    )
    
    
    (49.8
    )Selling, general and administrative expense
    
    
    9,648
    
    
    
    6,696
    
    
    
    2,952
    
    
    
    44.1Research and development
    
    
    
    
    
    
    191
    
    
    
    (191
    )
    
    
    (100.0
    )Interest and other income
    
    
    (772
    )
    
    
    (1,607
    )
    
    
    (835
    )
    
    
    (52.0
    )Interest expense (recovery)
    
    
    1,822
    
    
    
    (2,694
    )
    
    
    4,516
    
    
    NM
    (1)(Loss) income from continuing operations before
taxes, minority interest and gain (loss)
attributable to capital transactions of
subsidiaries
    
    $
    (10,914
    )
    
    $
    (3,016
    )
    
    $
    7,898
    
    
    NM
    (1)
 (1)
    
    NM = Not meaningful as the change is greater than 100% Selling, General and Administrative Expense 
 Research and Development 
 Interest and Other Income 
 Interest Expense 
 Income Taxes
  LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
   70




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##### Table of Contents




    
    Accounts and unbilled receivables, net of allowance for doubtful accounts,
increased to $21.1 million and $16.0 million at December 31, 2007 and 2006,
respectively. The increase is primarily due to an increase in accounts receivable at
DAC and VeriChip due to an increase in revenue in the fourth quarter of 2007 as
compared to the fourth quarter of 2006.
    
    Inventories increased to $15.8 million at December 31, 2007, compared to
$13.0 million at December 31, 2006. The change was due primarily to an increase of
inventories at DAC primarily as a result of the acquisition of McMurdo in April 2007,
and a slight decrease of inventories at VeriChip.
    
    Accounts payable increased $2.9 million, or 22.5%, to $15.8 million at December 31,
2007, from $12.9 million at December 31, 2006. The increase was primarily a result of
the timing of billings for purchases and additional payables associated with McMurdo,
which was acquired in April 2007.
    
    Accrued expenses decreased $2.4 million, or 14.6%, to $13.9 million at December 31,
2007, from $16.2 million at December 31, 2006. The decrease was associated with the
$3.3 million accrued payment due to our former CEO which was included in 2006 but not
in 2007, partially offset by an increase of $0.9 million of accrued warranty expenses
in 2007.
   Financial Condition
 Financing Agreements and Debt Obligations
  Intercompany Loan Agreement with VeriChip
 The Wall Street Journal
  71




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##### Table of Contents



DACs Revolving Facility
   72




---



##### Table of Contents



Signatures Invoice Discounting Agreement
  DSD Holdings Line of Credit
  Royal Bank of Canada Credit Agreement
  Liquidity
    73




---



##### Table of Contents




    
    first, we will attempt to successfully implement our business plans, manage
expenditures according to our budget, and generate positive cash flow from
operations;
    
    second, we will attempt to develop an effective marketing and sales strategy in
order to grow our businesses and compete successfully in our markets;
    
    third, we will attempt to expand the market for our Bio Thermo® and VeriMed
products; and
    
    fourth, we will attempt to realize positive cash flow with respect to our
investment in DAC in order to provide us with an appropriate return on our
investment.
  Contractual Obligations
  Payments Due By PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(amounts in thousands)Notes payable, long-term
debt and other long-term
obligations
    
    $
    34,682
    
    
    $
    16,677
    
    
    $
    15,791
    
    
    $
    2,214
    
    
    $
    Operating lease obligations
    
    
    4,388
    
    
    
    1,124
    
    
    
    1,608
    
    
    
    1,124
    
    
    
    532Employment related contracts
    
    
    1,986
    
    
    
    462
    
    
    
    1,016
    
    
    
    508
    
    
    
    Total
    
    $
    41,056
    
    
    $
    18,263
    
    
    $
    18,415
    
    
    $
    3,846
    
    
    $
    532
  Outlook
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     74




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##### Table of Contents



Carrying Value at(in millions)
    
    December 31, 2007Total notes payable and long-term debt, including current portion
    
    $
    32,973Notes payable bearing interest at fixed interest rates
    
    $
    14.0Weighted-average interest rate during 2007
    
    
    20.8
    %
  For the Year Ended(in millions)
    
    December 31, 2007Exchange Rate Sensitivity:Net foreign currency gains recorded in our consolidated statements of operations
    
    $
    0.4Foreign currency translation adjustments included in other comprehensive income
    
    $
    0.3
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.  Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the
Evaluation Date). Based upon the evaluation, our principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are
controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed
under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls include controls and procedures designed to reasonably
ensure that such information is accumulated and communicated to our management, including our chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly
evaluation of disclosure controls and procedures includes an evaluation of some components of our internal control over
financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for
purposes of providing the management report which is set forth below. Report of Management on Internal Control Over Financial Reporting.  Our management is responsible for establishing
and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of
the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our
internal control system was designed to provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of published financial statements. The system of internal control over financial
reporting provides for appropriate division of responsibility and is documented by written policies and procedures that
are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our
internal control over financial reporting was set forth in Internal Controls  Integrated Frameworkpublished by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our
policies or procedures may deteriorate. Our independent registered public accounting firm has audited the financial statements included in Item 8 of this
report and has issued an attestation report on the Companys internal control over financial reporting which is
included at page F-3. Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting.  It
should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is
based in part upon certain assumptions about the likelihood of future events. Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  75




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##### Table of Contents



(i)
    
    pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;(ii)
    
    provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the U.S., and that
our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and(iii)
    
    provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the consolidated
financial statements.
     76




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)(1)
    
    The financial statements and financial statement schedule listed below are included in this reportReport of Independent Registered Public Accounting FirmFinancial StatementsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsFinancial Statement ScheduleSchedule of Valuation and Qualifying Accounts(a)(2)
    
    Financial statement schedules have been included in Item 15(a)(1) above.(a)(3)
    
    ExhibitsSee the Exhibit Index filed as part of this Annual Report on Form 10-K.
  77




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##### Table of Contents



SIGNATURES
  APPLIED DIGITAL SOLUTIONS, INC.By:
    /s/ Joseph J. GrilloDate: March 17, 2008
    
    Joseph J. GrilloPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Joseph J. Grillo
    
    President, Chief Executive Officer and Director (Principal Executive Officer)
    
    March 17, 2008(Joseph J. Grillo)/s/ Lorraine M. Breece
    
    Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
    
    March 17, 2008(Lorraine M. Breece)/s/ Daniel E. Penni
    
    Chairman of the Board of Directors
    
    March 17, 2008(Daniel E. Penni)/s/ John R. Block
    
    Director
    
    March 17, 2008(John R. Block)/s/ Dennis G. Rawan
    
    Director
    
    March 17, 2008(Dennis G. Rawan)/s/ Constance K. Weaver
    
    Director
    
    March 17, 2008(Constance K. Weaver)/s/ Michael S. Zarriello
    
    Director
    
    March 17, 2008(Michael S. Zarriello)
  78




---



##### 



APPLIED DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 CONTENTS
 PageReports
of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    F-4Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2007
    
    
    F-5Consolidated Statements of Stockholders Equity for each of the years
in the three-year period ended December 31, 2007
    
    
    F-6Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2007
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-11Schedule of Valuation and Qualifying Accounts
    
    
    F-64
   F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Accounting for Uncertainty in Income
Taxes  an interpretation of FASB No. 109, Share Based Payment,
  
  F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
    Internal Control  Integrated Framework
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB No. 109 Share Based Payment,
 
  F-3




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##### Table of Contents



Applied Digital Solutions, Inc. And Subsidiaries
 
 Consolidated Balance Sheets  (in thousands, except par value)
 December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,643
    
    
    $
    7,068Restricted cash
    
    
    90
    
    
    
    81Accounts receivable and unbilled receivables (net of allowance for doubtful accounts of $424
in 2007 and $483 in 2006)
    
    
    23,049
    
    
    
    16,895Inventories
    
    
    15,840
    
    
    
    12,958Deferred taxes
    
    
    394
    
    
    
    697Other current assets
    
    
    3,650
    
    
    
    3,522Current assets of discontinued operations
    
    
    5,900
    
    
    
    9,814Total current assets
    
    
    58,566
    
    
    
    51,035Property and equipment, net
    
    
    13,129
    
    
    
    11,532Goodwill, net
    
    
    56,527
    
    
    
    72,306Intangibles, net
    
    
    38,925
    
    
    
    20,200Deferred offering costs
    
    
    
    
    
    
    5,079Other assets, net
    
    
    3,968
    
    
    
    997Other assets of discontinued operations
    
    
    574
    
    
    
    11,076Total assets
    
    $
    171,689
    
    
    $
    172,225LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable and current maturities of long-term debt
    
    $
    15,750
    
    
    $
    7,250Accounts payable
    
    
    15,774
    
    
    
    12,874Advances from factor
    
    
    1,992
    
    
    
    875Accrued expenses
    
    
    13,880
    
    
    
    16,245Deferred revenue
    
    
    2,656
    
    
    
    1,638Current liabilities of discontinued operations
    
    
    4,587
    
    
    
    16,944Total current liabilities
    
    
    54,639
    
    
    
    55,826Long-term debt and notes payable
    
    
    17,223
    
    
    
    14,203Deferred taxes
    
    
    10,090
    
    
    
    5,803Warrant liability
    
    
    
    
    
    
    1,199Deferred revenue
    
    
    130
    
    
    
    1,091Other liabilities
    
    
    2,752
    
    
    
    Other liabilities of discontinued operations
    
    
    2,495
    
    
    
    1,165Total liabilities
    

    
    87,329
    
    
    
    79,287Commitments and contingencies:Minority interest
    
    
    12,811
    
    
    
    47,984Minority interest, discontinued operations
    
    
    554
    
    
    
    1,090Total minority interest
    
    
    13,365
    
    
    
    49,074Stockholders Equity:Preferred shares ($10 par value; shares authorized, 5,000, special voting; shares issued, nil)
    
    
    
    
    
    
    Common
shares ($.01 par value; shares authorized 165,000; shares issued,
105,082 and 67,088;
shares outstanding, 104,528 and 66,988)
    
    
    1,051
    
    
    
    671Additional paid-in-capital
    
    
    572,645
    
    
    
    513,242Accumulated deficit
    
    
    (500,706
    )
    
    
    (468,596
    )Accumulated
other comprehensive income - foreign currency translation
    
    
    428
    
    
    
    324Subtotal
    
    
    73,418
    
    
    
    45,641Treasury
stock (carried at cost, 554 and 100 shares)
    
    
    (2,423
    )
    
    
    (1,777
    )Total stockholders equity
    
    
    70,995
    
    
    
    43,864Total liabilities and stockholders equity
    
    $
    171,689
    
    
    $
    172,225
 See the accompanying notes to consolidated financial statements.
  F-4




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##### Table of Contents



Applied Digital Solutions, Inc. And Subsidiaries
 
 Consolidated Statements Of Operations  (in thousands, except per share data)
 For the years ended December 31,2007
    
    
    2006
    
    
    2005Revenue
    
    $
    117,402
    
    
    $
    87,429
    
    
    $
    72,056Cost of sales
    
    
    66,319
    
    
    
    45,186
    
    
    
    37,071Gross profit
    
    
    51,083
    
    
    
    42,243
    
    
    
    34,985Selling, general and administrative expenses
    
    
    68,989
    
    
    
    52,997
    
    
    
    40,377Research and development expenses
    
    
    9,379
    
    
    
    7,228
    
    
    
    5,557Goodwill impairment charges
    
    
    4,632
    
    
    
    
    
    
    
    Operating loss
    
    
    (31,917
    )
    
    
    (17,982
    )
    
    
    (10,949
    )Gain on sale of assets
    
    
    (691
    )
    
    
    
    
    
    
    Interest and other income
    
    
    1,111
    
    
    
    1,344
    
    
    
    2,659Interest (expense) recovery
    
    
    (6,928
    )
    
    
    (3,137
    )
    
    
    1,936Loss from continuing operations before taxes, minority interest and gains (losses)
attributable to capital transactions of subsidiaries
    
    
    (37,043
    )
    
    
    (19,775
    )
    
    
    (6,354
    )Benefit (provision) for income taxes
    
    
    902
    
    
    
    (145
    )
    
    
    522Loss from continuing operations before minority interest and gains (losses)
attributable to capital transactions of subsidiaries
    
    
    (36,141
    )
    
    
    (19,920
    )
    
    
    (5,832
    )Minority interest
    
    
    12,245
    
    
    
    2,510
    
    
    
    (73
    )Net gain (loss) on capital transactions of subsidiaries
    
    
    3,158
    
    
    
    (1,632
    )
    
    
    411(Loss) gain attributable to changes in minority interest as a result of capital
transactions of subsidiaries
    
    
    (9,437
    )
    
    
    503
    
    
    
    598Loss from continuing operations
    
    
    (30,175
    )
    
    
    (18,539
    )
    
    
    (4,896
    )Loss from discontinued operations, net of income taxes of $0
    
    
    (1,845
    )
    
    
    (8,670
    )
    
    
    (5,269
    )Net loss
    
    
    (32,020
    )
    
    
    (27,209
    )
    
    
    (10,165
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (1,573
    )Accretion of beneficial conversion feature of redeemable preferred 
stock  Series D
    
    
    
    
    
    
    
    
    
    
    (474
    )Net loss attributable to common stockholders
    
    $
    (32,020
    )
    
    $
    (27,209
    )
    
    $
    (12,212
    )Loss per common share  basic and diluted loss from continuing operations
    
    $
    (0.43
    )
    
    $
    (0.27
    )
    
    $
    (0.11
    )Loss per common share  basic and diluted loss from discontinued operations
    
    
    (0.03
    )
    
    
    (0.13
    )
    
    
    (0.08
    )Net loss per common share  basic and diluted
    
    $
    (0.46
    )
    
    $
    (0.40
    )
    
    $
    (0.19
    )Weighted average number of common shares outstanding  basic and diluted
    
    
    69,122
    
    
    
    67,338
    
    
    
    62,900
 See the accompanying notes to consolidated financial statements.
  F-5




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##### Table of Contents



Applied Digital Solutions, Inc. And Subsidiaries
 
 Consolidated Statements Of Stockholders Equity
For the Years Ended December 31, 2007, 2006 and 2005  (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Notes
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    Received for
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    Shares Issued
    
    
    EquityBalance  December 31, 2004
    
    
    56,541
    
    
    $
    565
    
    
    $
    474,153
    
    
    $
    (431,222
    )
    
    $
    402
    
    
    $
    (1,777
    )
    
    $
    (1,277
    )
    
    $
    40,844Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,165
    )Comprehensive loss  Foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (524
    )
    
    
    
    
    
    
    
    
    
    
    (524
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,165
    )
    
    
    (524
    )
    
    
    
    
    
    
    
    
    
    
    (10,689
    )Adjustment to allowance for
uncollectible portion of notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    628
    
    
    
    628Stock option re-pricing
    
    
    
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (230
    )Issuance of common shares
    
    
    443
    
    
    
    4
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    877Exercise of warrants
    
    
    1,500
    
    
    
    15
    
    
    
    5,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,218Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    (1,573
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,573
    )Issuance of common shares, options
and warrants for services
    
    
    7
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181Stock issue costs
    
    
    
    
    
    
    
    
    
    
    (235
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (235
    )Fees paid to Satellite
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )Issuance of warrants to Satellite
investors
    
    
    
    
    
    
    
    
    
    
    1,782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,782Beneficial conversion features of
debt and preferred stock issued to
Satellite investors
    
    
    
    
    
    
    
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Feature of preferred stock
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (474
    )Issuance of common shares to
Instantel escrow account
    
    
    809
    
    
    
    8
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common shares, options
and warrants for eXI Corporation
acquisition
    
    
    3,463
    
    
    
    35
    
    
    
    12,617
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,652Issuance of common shares to DAC
    
    
    685
    
    
    
    7
    
    
    
    3,493
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,500Satellite conversion of redeemable
preferred stock  series D to
common stock
    
    
    3,197
    
    
    
    32
    
    
    
    10,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,003Preferred stock dividend
    
    
    479
    
    
    
    5
    
    
    
    1,528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,533Adjustment for notes received for
shares issued
    
    
    (17
    )
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    Issuance of common shares for
settlement
    
    
    32
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100VeriChip options issued for services
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814Balance  December 31, 2005
    
    
    67,139
    
    
    $
    671
    
    
    $
    509,761
    
    
    $
    (441,387
    )
    
    $
    (122
    )
    
    $
    (1,777
    )
    
    $
    (600
    )
    
    $
    66,546
  F-6




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##### Table of Contents



Applied Digital Solutions, Inc. And SubsidiariesConsolidated Statements Of Stockholders Equity (continued)
For the Years Ended December 31, 2007, 2006 and 2005
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Notes
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    Received for
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    Shares Issued
    
    
    EquityBalance  December 31, 2005
(brought forward)
    
    
    67,139
    
    
    $
    671
    
    
    $
    509,761
    
    
    $
    (441,387
    )
    
    $
    (122
    )
    
    $
    (1,777
    )
    
    $
    (600
    )
    
    $
    66,546Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )Comprehensive
income  Foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    446Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    (26,763
    )Adjustment to allowance for
uncollectible portion of notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    412Warrant anti-dilution charge
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Stock option extensions
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145Issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    1,525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,525Issuance of common shares for
purchase of Signature Industries
Limited minority interest
    
    
    351
    
    
    
    4
    
    
    
    904
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Issuance of common shares
    
    
    97
    
    
    
    1
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194Issuance of common shares under
share exchange agreement
    
    
    455
    
    
    
    5
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    971Restricted stock issued under
incentive plan
    
    
    50
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )VeriChip options issued for services
    
    
    
    
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Adjustment for notes received for
shares issued
    
    
    (144
    )
    
    
    (1
    )
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    Retirement of common shares
    
    
    (860
    )
    
    
    (9
    )
    
    
    (252
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261
    )Balance  December 31, 2006
    
    
    67,088
    
    
    $
    671
    
    
    $
    513,242
    
    
    $
    (468,596
    )
    
    $
    324
    
    
    $
    (1,777
    )
    
    $
    
    
    
    $
    43,864
  F-7




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##### Table of Contents



Applied Digital Solutions, Inc. And SubsidiariesConsolidated Statements Of Stockholders Equity(continued)
For the Years Ended December 31, 2007, 2006 and 2005
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    EquityBalance  December 31, 2006 (brought
forward)
    
    
    67,088
    
    
    $
    671
    
    
    $
    513,242
    
    
    $
    (468,596
    )
    
    $
    324
    
    
    $
    (1,777
    )
    
    $
    43,864Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,020
    )
    
    
    
    
    
    
    
    
    
    
    (32,020
    )Comprehensive
income  Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    104Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,020
    )
    
    
    104
    
    
    
    
    
    
    
    (31,916
    )Effect of adopting FASB Interpretation No. 48 Accounting for
Uncertainties in Income Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    (90
    )Issuance of
common shares for settlement to Silverman
    
    
    2,391
    
    
    
    24
    
    
    
    3,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,034Issuance of
common shares for settlement to Krawitz
    
    
    3,509
    
    
    
    35
    
    
    
    1,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,730Reclassification of warrant payable
    
    
    
    
    
    
    
    
    
    
    1,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,240Issuance of restricted stock and
options for services
    
    
    50
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Issuance of common stock for options
exercise
    
    
    10
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Issuance of
common stock for legal settlement
    
    
    1,470
    
    
    
    15
    
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300Net issuances of common stock to
InfoTech for payment of note payable
    
    
    703
    
    
    
    7
    
    
    
    970
    
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    331Acquisition of DAC minority interest
    
    
    29,861
    
    
    
    299
    
    
    
    40,574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,873Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )Repricing of common stock warrants
for financing transaction
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185VeriChip options and restricted stock
issued for services
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Exercise of VeriChip warrant
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )DAC issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,044DAC options and restricted stock
issued for services
    
    
    
    
    
    
    
    
    
    
    4,893
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,893Purchase of treasury stock by VeriChip
    
    
    
    
    
    
    
    
    
    
    (761
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (761
    )Issuance of warrants for financing
transaction
    
    
    
    
    
    
    
    
    
    
    1,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711InfoTech options and restricted stock
issued for services
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Balance  December 31, 2007
    
    
    105,082
    
    
    $
    1,051
    
    
    $
    572,645
    
    
    $
    (500,706
    )
    
    $
    428
    
    
    $
    (2,423
    )
    
    $
    70,995
 See the accompanying notes to consolidated financial statements.
  F-8




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##### Table of Contents



Applied Digital Solutions, Inc. And Subsidiaries
 
 Consolidated Statements Of Cash Flows  (in thousands)
 For the Years ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (32,020
    )
    
    $
    (27,209
    )
    
    $
    (10,165
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss from discontinued operations
    
    
    1,845
    
    
    
    8,670
    
    
    
    5,269Depreciation and amortization
    
    
    5,159
    
    
    
    4,518
    
    
    
    3,259Allowance for bad debts
    
    
    333
    
    
    
    51
    
    
    
    76Allowance for slow moving inventory
    
    
    1,272
    
    
    
    69
    
    
    
    588Non-cash interest expense (recovery)
    
    
    3,501
    
    
    
    435
    
    
    
    (2,369
    )Deferred income taxes
    
    
    (1,291
    )
    
    
    (160
    )
    
    
    (235
    )Impairment of notes receivable
    
    
    
    
    
    
    
    
    
    
    103Goodwill impairment
    
    
    4,632
    
    
    
    
    
    
    
    Reduction in derivative warrant liability
    
    
    (589
    )
    
    
    
    
    
    
    Net (gain) loss on capital transactions of subsidiaries
    
    
    (3,158
    )
    
    
    1,632
    
    
    
    (411
    )(Loss) gain attributable to changes in minority interest as a result of
capital transactions of subsidiaries
    
    
    9,437
    
    
    
    (503
    )
    
    
    (598
    )Minority interest in net (loss) income of subsidiaries
    
    
    (12,245
    )
    
    
    (2,510
    )
    
    
    73(Gain) loss on sale of equipment and assets
    
    
    (691
    )
    
    
    8
    
    
    
    52Stock-based compensation and administrative expenses
    
    
    8,478
    
    
    
    1,751
    
    
    
    (3
    )Issuance of stock for services
    
    
    1.730
    
    
    
    
    
    
    
    1,090(Increase) decrease in restricted cash
    
    
    (9
    )
    
    
    251
    
    
    
    17Net change in operating assets and liabilities
    
    
    907
    
    
    
    4,173
    
    
    
    (9,565
    )Net cash provided by discontinued operations
    
    
    620
    
    
    
    909
    
    
    
    1,626Net cash used in operating activities
    
    
    (12,091
    )
    
    
    (7,915
    )
    
    
    (11,193
    )Cash flows from investing activities:Decrease in notes receivable
    
    
    108
    
    
    
    239
    
    
    
    909Proceeds from sale of property and equipment
    
    
    
    
    
    
    794
    
    
    
    5Payments for property and equipment
    
    
    (2,367
    )
    
    
    (3,813
    )
    
    
    (1,771
    )Payment for asset and business acquisitions (net of cash balances acquired)
    
    
    (7,338
    )
    
    
    (3,058
    )
    
    
    (22,116
    )(Increase) decrease in other assets
    
    
    (375
    )
    
    
    (262
    )
    
    
    210Net cash provided by (used in) discontinued operations
    
    
    580
    
    
    
    (381
    )
    
    
    (232
    )Net cash used in investing activities
    
    
    (9,392
    )
    
    
    (6,481
    )
    
    
    (22,995
    )
  F-9




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##### Table of Contents



Applied Digital Solutions, Inc. And Subsidiaries
Consolidated Statements Of Cash Flows (continued)
 For the Years ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from financing activities:Net amounts received on notes payable
    
    
    6,592
    
    
    
    1,728
    
    
    
    4Net proceeds
of long-term debt
    
    
    13,038
    
    
    
    13,848
    
    
    
    11,800Proceeds from issuance of debentures and preferred stock (net of offering costs)
    
    
    
    
    
    
    
    
    
    
    17,440Preferred stock dividends paid
    
    
    
    
    
    
    (190
    )
    
    
    (41
    )Payments for long-term debt
    
    
    (9,267
    )
    
    
    (12,900
    )
    
    
    (5,444
    )Proceeds from VeriChips initial public offering
    
    
    18,336
    
    
    
    
    
    
    
    VeriChip initial public offering costs
    
    
    (2,879
    )
    
    
    (2,924
    )
    
    
    (1,140
    )Other financing costs
    
    
    (1,205
    )
    
    
    
    
    
    
    Issuance of common shares and warrants
    
    
    
    
    
    
    89
    
    
    
    6,096Payments of dividends to minority shareholder
    
    
    (108
    )
    
    
    
    
    
    
    Net
(payments) proceeds from subsidiaries (repurchase) issuance of common stock
    
    
    (387
    )
    
    
    574
    
    
    
    (1,179
    )Stock issuance costs
    
    
    (90
    )
    
    
    (79
    )
    
    
    (235
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (757
    )
    
    
    (990
    )Net cash provided by (used in) financing activities
    
    
    24,030
    
    
    
    (611
    )
    
    
    26,311Net increase (decrease) in cash and cash equivalents
    
    
    2,547
    
    
    
    (15,007
    )
    
    
    (7,877
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    28
    
    
    
    48
    
    
    
    (315
    )Cash and cash equivalents  Beginning of year
    
    
    7,068
    
    
    
    22,027
    
    
    
    30,219Cash and cash equivalents  End of year
    
    $
    9,643
    
    
    $
    7,068
    
    
    $
    22,027Supplemental disclosure of cash flow information:Income taxes paid, net of refunds received
    
    $
    364
    
    
    $
    540
    
    
    $
    369Interest paid
    
    
    3,342
    
    
    
    2,704
    
    
    
    474
 See the accompanying notes to consolidated financial statements.
  F-10




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 1. Organization and Summary of Significant Accounting Policies
   
    
    developing, manufacturing and marketing of visual and electronic identification tags
and implantable RFID microchips, primarily for identification, tracking and location of
companion pets, horses, livestock (e.g., cattle and hogs), fish and wildlife worldwide,
and, more recently, for animal bio-sensing applications, such as temperature reading for
companion pet and livestock applications;
    
    developing and marketing GPS enabled products used for location tracking and message
monitoring of vehicles, pilots and aircraft in remote locations;
    
    developing, marketing and selling RFID systems used to identify, locate and protect
people and their assets for use in a variety of healthcare, security and identification
applications;
    
    developing and marketing service relationship management software and services; and
    
    selling vibration monitoring systems.
  Discontinued Operations
    F-11




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Business Segments
  Animal Applications Segment
  
    
    visual and electronic ear tags for livestock; and
    
    implantable microchips and RFID scanners for the companion pet, horse, livestock,
fish and wildlife industries.
 GPS and Radio Communications Segment
  
    
    GPS enabled search and rescue equipment and intelligent communications products and
services for telemetry, mobile data and radio communications applications, including our
SARBETM and McMurdo brands, which serve military and commercial markets;
    
    GPS and geosynchronous satellite tracking systems, including tracking software
systems for mapping and messaging associated with the security of high-value assets
under the brand name MOB (man overboard) Guardian; and
    
    alarm sounders for industrial use and other electronic components.
 Healthcare Segment
  
    
    infant protection systems used in hospital maternity wards and birthing centers to
prevent infant abduction and mother-baby mismatching;
    
    wander prevention systems used by long-term care facilities to locate and protect
their residents; and
    
    an asset/staff location and identification systems used by hospitals and other
healthcare facilities to identify, locate and protect medical staff, patients, visitors
and medical equipment.
  Security and Industrial Segment
  
    
    vibration monitoring instruments used by engineering, construction and mining
professionals to monitor the effects of human induced vibrations, such as blasting
activity; and
    
    asset management systems used by industrial companies to manage and track their
mobile equipment and tools.
  F-12




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
 Advanced Technology Segment
  Corporate/Eliminations
  Significant Accounting Policies
 Our consolidated operating activities used cash of $12.1 million, $7.9 million and $11.2 million during the years ended
December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, our cash and cash equivalents totaled $9.6
million, compared to $7.1 million as of December 31, 2006. As of December 31, 2007, we had an accumulated deficit of
$500.7 million.

 

We believe that we have or will be able to generate sufficient funds to operate our business over the next twelve
months ending December 31, 2008. However, our goal is to achieve profitability and to generate positive cash flows from
operations. Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase
or decrease in our existing business base, the success, timing, and amount of investment required to bring new products
on-line, revenue growth or decline, and potential acquisitions. Failure to generate positive cash flow from operations
will have a material adverse effect on our business, financial condition and results of operations. Principles of Consolidation
  Use of Estimates
  Foreign Currencies
     F-13




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Cash and Cash Equivalents
  Inventories
  Property and Equipment
  Goodwill and Intangible Assets
 Goodwill and Intangible Assets
  Accounting for the Impairment or Disposal of Long-Lived Assets
  F-14




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Advertising Costs
 Revenue Recognition
  Animal Applications and GPS and Radio Communications Segments
 
 Healthcare and Security and Industrial Segments
 Revenue Recognition Policy for Wander Prevention, Infant Protection, Asset Location and
Identification, and Vibration Monitoring Systems
  Revenue Recognition Policy for VeriMed and VeriTrace Systems and Services
   F-15




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  
      Warranties
   F-16




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Advanced Technology Segment
   
    
    if the only undelivered element is post-contract support, the deferred amount is
recognized ratably over the post-contract support period, adjusted on a prospective
basis for changes in the estimated post-contract support period; and
    
    if the only undelivered element is services that do not require significant
production, modification or customization of the software, the deferred amount is
recognized as the services are performed.Service Revenue
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember
    
    
    December
    
    
    December31, 2007
    
    
    31, 2006
    
    
    31, 2005Product revenue
    
    $
    107,311
    
    
    $
    80,053
    
    
    $
    67,063Service revenue
    
    
    10,091
    
    
    
    7,376
    
    
    
    4,993Total revenue
    
    $
    117,402
    
    
    $
    87,429
    
    
    $
    72,056
 Stock-Based Compensation
 Accounting for Stock-based Compensation Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving Stock
Compensationan Interpretation of APB Opinion No.
   F-17




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Research and Development
  Deferred Offering Costs
  Warrants Treated as a Liability
  Income Taxes
  Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Gains/Losses Attributable to Capital Transactions of Majority-Owned Subsidiaries
  Loss (Income) Per Common Share and Common Share Equivalent
   F-18




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Comprehensive Income (Loss)
  Impact of Recently Issued Accounting Standards
 Fair Value Measurements
 In February 2008, the FASB issued Staff Position No. FAS 157-1 (FSP FAS 157-1), Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes
of Lease Classification or Measurement Under Statement 13and Staff Position No. FAS 157-2 (FSP FAS 157-2), Effective
Date of FASB Statement No. 157. FSP FAS 157-1 excludes Statement of Financial Accounting Standards No. 13 (SFAS 13),
Accounting for Leases, as well as other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13 from the scope of SFAS 157. FSP FAS 157-2 delays the effective date of
SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008. Both FSP FAS 157-1 and FSP FAS 157-2 are effective upon an entitys initial
adoption of SFAS 157, which is our first quarter of fiscal year 2008. Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans
 The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement 115
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities
 Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
  F-19




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Business Combinations Business Combinations
 Other Events
 Notice of Nasdaq Delisting
   Departure of Applied Digital Board Members
  Appointment/Resignation of Directors to the Board Post DA Merger
   
    
    Audit and Governance Committee  Mr. Zarriello (Chair and audit committee financial
expert), Dennis G. Rawan and Daniel E. Penni
    
    Compensation Committee  Constance K. Weaver (Chair), Messrs. Zarriello and Block
    
    Nominating Committee  Messrs. Block (Chair), Rawan and Penni
  F-20




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
 Appointment of Joseph J. Grillo as Chief Executive Officer and President
  Merger with Geissler Technologies Corporation and Appointment of Randolph K. Geissler
   Pacific Decision Sciences Corporation
  2. Accounts Receivable
 December 31,
    
    
    December 31,2007
    
    
    2006(in thousands)Receivables assigned to factor
    
    $
    2,490
    
    
    $
    1,094Unfactored accounts receivable
    
    
    20,983
    
    
    
    16,284Allowance for doubtful accounts
    
    
    (424
    )
    
    
    (483
    )$
    23,049
    
    
    $
    16,895
   F-21




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 3. Acquisitions
 Goodwilland
    
    
    Other NetOther
    
    
    AssetsDate
    
    
    Acquisition
    
    
    Intangibles
    
    
    AndCompany Acquired
    
    Acquired
    
    
    Price
    
    
    Acquired
    
    
    Liabilities
    
    
    Business Description(in thousands)DSD Holding A/S
    
    
    2/28/05
    
    
    $
    5,902
    
    
    $
    8,008
    
    
    $
    (2,106
    )
    
    Manufactures and markets visual and electronic RFID tags for livestock.VeriChip Holdings Inc., formerly eXI Wireless, Inc.
    
    
    3/31/05
    
    
    $
    13,283
    
    
    $
    11,541
    
    
    $
    1,742
    
    
    Provider of patient wandering, infant protection and asset tracking/location systems combining automated RFID identification and real-time location technologies.Instantel, Inc.
    
    
    6/10/05
    
    
    $
    24,737
    
    
    $
    25,936
    
    
    $
    (1,199
    )
    
    Manufacturer of high-quality remote monitoring products including RFID based patient wandering and infant protection systems and vibration monitors.McMurdo
    
    
    4/05/07
    
    
    $
    7,302
    
    
    $
    4,456
    
    
    $
    2,846
    
    
    Develops and manufactures emergency location beacons and NAVTEX technology.
  DSD Holding A/S
     F-22




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   VeriChip Holdings Inc.
    Instantel Inc.
   F-23




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   McMurdo Limited
   Merger with DAC
   F-24




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  ($ in thousands, except per share amounts)Number of DAC shares outstanding at the effective time of the merger
    
    $
    21,330Exchange ratio per the terms of the DA Merger Agreement
    
    
    1.4Number of shares of our common stock issued
    
    
    29,862Value of our common stock issued (1)
    
    $
    1.152Value of the shares exchanged
    
    $
    34,401Value of the 13.3 million DAC options assumed (2)
    
    
    5,430Value of the 2.1 million DAC warrants assumed (3)
    
    
    1,041Transaction costs
    
    
    1,691Total purchase price
    
    $
    42,563
 (1)
    
    The fair value of our common stock was determined using an average of the
closing prices of our common stock for the period beginning two trading days before
and ending two trading days after August 9, 2007, the date on which the acquisition
was publicly announced.(2)
    
    Based on the Black Scholes valuation model using the following weighted
average assumptions: expected volatility of 60.0%, dividend yield of 0%, risk-free
interest rate of 3.52% and a weighted average life of 5.0 years.(3)
    
    Based on the Black Scholes valuation model using the following weighted
average assumptions: expected volatility of 60.0%, dividend yield of 0%, risk-free
interest rate of 3.62% and a weighted average life of 4.9 years.   MinorityOwnersDSD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    InterestHolding
    
    
    VHI
    
    
    Instantel
    
    
    McMurdo
    
    
    In DACCurrent assets
    
    $
    2,631
    
    
    $
    3,112
    
    
    $
    5,678
    
    
    $
    2,210
    
    
    $
    14,029Equipment
    
    
    1,864
    
    
    
    191
    
    
    
    493
    
    
    
    636
    
    
    
    5,569Other assets
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412Intangibles:Patented and non-patented proprietary technology
    
    
    1,050
    
    
    
    3,710
    
    
    
    1,720
    
    
    
    20
    
    
    
    5,274Trademarks and tradenames
    
    
    520
    
    
    
    1,131
    
    
    
    3,790
    
    
    
    2,860
    
    
    
    4,978Customer relationships and non-compete
    
    
    393
    
    
    
    895
    
    
    
    3,390
    
    
    
    840
    
    
    
    9,069Distribution network
    
    
    
    
    
    
    816
    
    
    
    6,000
    
    
    
    
    
    
    
    Goodwill
    
    
    6,045
    
    
    
    4,989
    
    
    
    11,036
    
    
    
    736
    
    
    
    26,600Current liabilities
    
    
    (3,371
    )
    
    
    (1,057
    )
    
    
    (2,748
    )
    
    
    
    
    
    
    (8,127
    )Long-term debt and other liabilities
    
    
    (2,713
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,800
    )Deferred tax liability
    
    
    (550
    )
    
    
    (504
    )
    
    
    (4,622
    )
    
    
    
    
    
    
    (6,441
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,902
    
    
    $
    13,283
    
    
    $
    24,737
    
    
    $
    7,302
    
    
    $
    42,563
    F-25




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   Pro Forma Results of Operations (Unaudited)
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember
    
    
    December
    
    
    December31, 2007
    
    
    31, 2006
    
    
    31, 2005Net operating revenue
    
    $
    121,580
    
    
    $
    99,759
    
    
    $
    94,469Net loss from continuing operations attributable to common 
shareholders
 basic and diluted
    
    $
    (35,138
    )
    
    $
    (23,833
    )
    
    $
    (10,814
    )Net loss from continuing operations per common share  basic and diluted
    
    $
    (0.36
    )
    
    $
    (0.25
    )
    
    $
    (0.12
    )
 Capital Transactions of Subsidiaries
 Net Gain/Loss on Capital Transactions of Subsidiaries
     F-26




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Gain/Loss Attributable to Changes in Minority Interest as a Result of Capital Transactions of
Subsidiaries
    For the Year Ended December 31,2007
    
    
    2006
    
    
    2005VeriChip
    
    (in thousands, except per share amounts)Issuances of common stock for restricted stock, stock options
and warrants
    
    
    1,169
    
    
    
    500
    
    
    
    Issuances of common stock in IPO
    
    
    3,100
    
    
    
    
    
    
    
    Repurchase of common stock
    
    
    (181
    )Total issuances of common stock
    
    
    4,088
    
    
    
    500
    
    
    
    Proceeds from stock issuances
    
    $
    12,494
    
    
    $
    
    
    
    $
    Average price per share
    
    $
    2.95
    
    
    $
    
    
    
    $
    Beginning ownership percentage of VeriChip
    
    
    91.7
    %
    
    
    100.0
    %
    
    
    100.0
    %Ending ownership percentage of VeriChip
    
    
    52.8
    %
    
    
    91.7
    %
    
    
    100.0
    %Change in ownership percentage
    
    
    (38.9
    )%
    
    
    (8.3
    )%
    
    
    
    %Net gain (loss) on capital transactions of VeriChip (1)
    
    $
    3,787
    
    
    $
    (1,954
    )
    
    $
    (Loss) gain attributable to changes in minority interest as a result of capital
transactions of VeriChip (1)
    
    $
    (5,809
    )
    
    $
    368
    
    
    $
    
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005DAC
    
    (in thousands, except per share amounts)Issuances of common stock for stock options, warrant exercises, preferred stock
conversions and services
    
    
    1,388
    
    
    
    386
    
    
    
    156Issuance of common stock under the share exchange agreement
    
    
    921
    
    
    
    282
    
    
    
    644Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (328
    )Total issuances of common stock
    
    
    2,309
    
    
    
    668
    
    
    
    472Proceeds from stock issuances
    
    $
    
    
    
    $
    1,561
    
    
    $
    3,923Average price per share
    
    $
    
    
    
    $
    2.34
    
    
    $
    4.90Beginning ownership percentage of DAC
    
    
    55.2
    %
    
    
    55.4
    %
    
    
    54.5
    %Ending ownership percentage of DAC before merger(2)
    
    
    54.4
    %
    
    
    55.2
    %
    
    
    55.4
    %Change in ownership percentage
    
    
    (0.8
    )%
    
    
    (0.2
    )%
    
    
    0.9
    %Net (loss) gain on capital transactions of DAC (1)
    
    $
    (628
    )
    
    $
    322
    
    
    $
    411(Loss) gain attributable to changes in minority interest as a result of capital
transactions of DAC (1)
    
    $
    (3,632
    )
    
    $
    135
    
    
    $
    598
 (1)
    
    We have not provided a tax benefit for the net gain (loss) on capital transactions of subsidiaries and gain (loss) attributable to changes in minority interest as a result of capital transactions of subsidiaries due to our current tax
status and available operating loss carry forwards.(2)
    
    Effective December 28, 2007 we acquired the minority
owners interest in DAC and owned 100% as of December 31, 2007.  F-27




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Dispositions
  4. Inventories
  December 31,2007
    
    
    2006(in thousands)Raw materials
    
    $
    12,819
    
    
    $
    4,780Work in process
    
    
    1,640
    
    
    
    1,657Finished goods
    
    
    3,198
    
    
    
    7,69717,657
    
    
    
    14,134Less: Allowance for excess and obsolescence
    
    
    (1,817
    )
    
    
    (1,176
    )Total
inventories
    
    $
    15,840
    
    
    $
    12,958
 5. Property and Equipment
  December 31,2007
    
    
    2006(in thousands)Land
    
    $
    278
    
    
    $
    278Building and leasehold improvements
    
    
    6,823
    
    
    
    6,433Equipment
    
    
    19,370
    
    
    
    15,300Software
    
    
    220
    
    
    
    23026,691
    
    
    
    22,241Less: Accumulated depreciation
    
    
    (13,562
    )
    
    
    (10,709
    )Total property and equipment
    
    $
    13,129
    
    
    $
    11,532
    F-28




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 6. Goodwill
 Business Combinations
 December 31,2007
    
    
    2006(in thousands)Beginning balance
    
    $
    72,306
    
    
    $
    69,523Acquisitions
    
    
    27,336
    
    
    
    3,740
    (1)Adjustment to purchase price allocation
    
    
    (22,655
    )
    
    
    (957
    )Adjustment to change in percentage ownership
    
    
    (15,925
    )
    
    
    Impairment
    
    
    (4,632
    )
    
    
    Other adjustments
    
    
    97
    
    
    
    Ending balance
    
    $
    56,527
    
    
    $
    72,306
 (1)
    
    Includes $0.5 million of goodwill related to a share exchange agreement
in April 2006 associated with the acquisition of DSD Holding and $0.5
million related to the purchase of Signature minority interest. Method of Accounting for Goodwill
   
    
    Animal Applications segment;
    
    GPS and Radio Communications segment;
    
    Healthcare segment;
    
    Security and Industrial segment; and
    
    Advanced Technology segment.
  
    
    Animal Applications segment (excluding DSD Holding);
    
    DSD Holding;
    
    GPS and Radio Communications segment (excluding McMurdo);
    
    McMurdo
    
    Healthcare segment;
    
    Security and Industrial segment; and
    
    Advanced Technology segment.
     F-29




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
      7. Intangibles, net
  WeightedAverage Lives2007
    
    
    2006
    
    
    (in years)Trademarks
    
    $
    11,743
    
    
    $
    5,441
    
    
    IndefinitePatents and non-patented proprietary technology, net of accumulated
amortization of $1,268 and $377
    
    
    10,027
    
    
    
    5,603
    
    
    
    12.4Customer relationships, net of accumulated amortization of $1,554 and $980
    
    
    12,267
    
    
    
    3,308
    
    
    
    9.5Tradenames and non compete, net of accumulated amortization of $82 and $125
    
    
    136
    
    
    
    268
    
    
    
    12.0Distribution networks, net of accumulated amortization of $2,064 and $1,236
    
    
    4,752
    
    
    
    5,580
    
    
    
    8.1$
    38,925
    
    
    $
    20,200
  2008
    
    $
    3,2542009
    
    
    3,1202010
    
    
    3,0782011
    
    
    3,0722012
    
    
    3,042Thereafter
    
    
    11,616$
    27,182
  F-30




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
    8. Accrued Expenses
  December 31,2007
    
    
    2006(in thousands)Accrued salary, wages and payroll expenses
    
    $
    3,145
    
    
    $
    2,994Accrued bonuses
    
    
    1,145
    
    
    
    745Accrued compensation to former CEOs
    
    
    246
    
    
    
    3,300Accrued purchases
    
    
    1,159
    
    
    
    407Accrued litigation reserves
    
    
    873
    
    
    
    2,946Accrued professional fees
    
    
    990
    
    
    
    1,706Accrued warranty
    
    
    1,445
    
    
    
    526Other accrued expenses
    
    
    4,877
    
    
    
    3,179Deferred purchase price obligation
    
    
    
    
    
    
    442$
    13,880
    
    
    $
    16,245
 9. Notes Payable and Other Financings
  December 31,2007
    
    
    2006(in thousands)Revolving facility, bears interest at prime plus 2.0% but not
less than 10.0% (10.0% at December 31, 2007), net of discount of
$927
    
    $
    4,747
    
    
    $
    Senior secured non-convertible term note, bears interest at
prime plus 3.0% but not less than 11.0% (11.0% at December 31,
2007)
    
    
    7,000
    
    
    
    Senior
secured non-convertible term note, net of discount of $781 and $1,344
    
    
    10,819
    
    
    
    12,156Mortgage notes payable, collateralized by DACs land and
building, payable in monthly installments of principal and
interest totaling $20 thousand, bearing interest at 8.2%, due
through November 2010.
    
    
    2,167
    
    
    
    2,226
  F-31




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 December 31,2007
    
    

2006(in thousands)Line of credit, bears interest at the international rates Danske
Bank can establish on a loan in DKK in the international market
plus 2.0% (6.65% at December 31, 2007) and is determined
quarterly. The agreement shall remain effective until further
notice.
    
    
    3,651
    
    
    
    3,013Equipment loans, collateralized by DSD Holdings production
equipment, payable in quarterly installments of principal and
interest totaling $32 thousand, bearing interest at variable
rates, ranging from 6.0% to 7.1% at December 31, 2007, due
through January 2010.
    
    
    821
    
    
    
    973Note payable, payable in quarterly installments of principal and
interest totaling $53 thousand, bearing interest at the
international rates Danske Bank can establish on a loan in DKK
in the international market plus 2.0% (5.5% at December 31,
2007), due through December 2008.
    
    
    238
    
    
    
    425Line of credit, bears interest at the Canadian or U.S. dollar
prime rate plus 1% (8.25% at December 31, 2007), due on demand,
and is secured by all of the assets of VHI.
    
    
    1,515
    
    
    
    853Notes payable  other and capital lease obligations
    
    
    2,015
    
    
    
    1,80732,973
    
    
    
    21,453Less: Current maturities
    
    
    15,750
    
    
    
    7,250Total notes payable and long-term debt
    
    $
    17,223
    
    
    $
    14,203
   AmountYear:
    
    (in thousands)2008
    
    $
    16,677
    (1)2009
    
    
    5,9302010
    
    
    9,8612011
    
    
    2,1542012
    
    
    60Total payments
    
    
    34,682Debt discount, net
    
    
    (1,709
    )Total debt outstanding
    
    $
    32,973
 (1)
    
    Excludes $927 of debt discount included in current maturities on the consolidated balance sheet.  $6.0 Million Revolving Asset-Based Facility with Kallina
   F-32




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  $7.0 Million Secured Non-Convertible Term Note
    $13.5 Million Secured Non-Convertible Term Note
     F-33




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   Omnibus Amendment and Waiver
   Intercompany Loan Agreement with VeriChip
 The Wall Street Journal
   F-34




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   VeriChip Financing
  VeriChip Letter Agreement
    Amendments of Warrants and Conditional Consent to Asset Sales
   F-35




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 DACs Mortgage Notes Payable
  DSD Holdings Line of Credit
  DSD Holdings Equipment Loans
  DSD Holdings Note Payable
  Royal Bank of Canada Credit Agreement
  DACs 10.25% Senior Secured Debenture and Securities Purchase Agreement
   F-36




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 10. Warrants Classified as a Liability
   11. Fair Value of Financial Instruments
 Cash and Cash Equivalents
  Notes Payable and Long-Term Debt
  Accounts Payable and Accrued Expenses
  Warrant Liability
   F-37




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 12. Stockholders Equity
  Warrants Classified as Equity
  BalanceExercised/
    
    
    December
    
    
    Exercise
    
    
    Date of
    
    
    ExercisableClass of Warrants
    
    Authorized
    
    
    Issued
    
    
    Forfeited
    
    
    31, 2007
    
    
    Price
    
    
    Issue
    
    PeriodSeries B
    
    
    667
    
    
    
    667
    
    
    
    
    
    
    
    667
    
    
    $
    3.264
    
    
    April 2004
    
    5 yearsSeries D
    
    
    667
    
    
    
    667
    
    
    
    
    
    
    
    667
    
    
    $
    4.972
    
    
    October 2004
    
    5 yearsSeries E
    
    
    976
    
    
    
    976
    
    
    
    
    
    
    
    976
    
    
    $
    4.035
    
    
    June 2005
    
    5 yearsSeries E
    
    
    200
    
    
    
    200
    
    
    
    
    
    
    
    200
    
    
    $
    3.704
    
    
    June 2005
    
    5 yearsClass A
    
    
    1,720
    
    
    
    1,720
    
    
    
    
    
    
    
    1,720
    
    
    $
    0.700
    
    
    August 2006
    
    7 yearsClass C
    
    
    1,707
    
    
    
    1,707
    
    
    
    
    
    
    
    1,707
    
    
    $
    1.000
    
    
    October 2007
    
    7 yearsClass C
    
    
    1,269
    
    
    
    1,269
    
    
    
    
    
    
    
    1,269
    
    
    $
    0.700
    
    
    October 2007
    
    7 yearsDAC Warrants  Class A
    
    
    105
    
    
    
    105
    
    
    
    
    
    
    
    105
    
    
    $
    1.910
    
    
    July 2003
    
    5 yearsDAC Warrants  Class B
    
    
    49
    
    
    
    49
    
    
    
    
    
    
    
    49
    
    
    $
    2.080
    
    
    July 2003
    
    5 yearsDAC Warrants  Class C
    
    
    21
    
    
    
    21
    
    
    
    
    
    
    
    21
    
    
    $
    2.410
    
    
    July 2003
    
    5 yearsDAC Warrants  Class D
    
    
    566
    
    
    
    566
    
    
    
    
    
    
    
    566
    
    
    $
    1.890
    
    
    February 2004
    
    5 yearsDAC Warrants  Class E
    
    
    1,355
    
    
    
    1,355
    
    
    
    
    
    
    
    1,355
    
    
    $
    0.700
    
    
    August 2007
    
    7 years9,302
    
    
    
    9,302
    
    
    
    
    
    
    
    9,302
      F-38




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   Dividend
    
    
    
    
    
    
    Expected
    
    
    Risk-Free
    
    
    Date of theClass of Warrant
    
    Yield
    
    
    Volatility
    
    
    Lives (Yrs.)
    
    
    Rate
    
    
    AssumptionsSeries B
    
    
    0.00
    %
    
    
    69.00
    %
    
    
    6.00
    
    
    
    3.38
    %
    
    April 5, 2004Series C
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    0.42
    
    
    
    2.00
    %
    
    October 21, 2004Series D
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    6.00
    
    
    
    3.31
    %
    
    October 21, 2004Series E
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    5.00
    
    
    
    3.75
    %
    
    June 10, 2005Class A
    
    
    0.00
    %
    
    
    60.00
    %
    
    
    7.00
    
    
    
    4.85
    %
    
    August 24, 2006Class C
    
    
    0.00
    %
    
    
    60.00
    %
    
    
    7.00
    
    
    
    4.18
    %
    
    October 31, 2007
  Stock Option Plans
    F-39




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  Year EndedDecember31, 2005Net loss attributable to common stockholders, as reported
    
    $
    (12,212
    )Deduct: Total stock-based employee compensation expense determined
under APB No. 25 for all awards, net of related tax
effects(1)
    
    
    (33
    )Deduct: Total stock-based employee compensation expense determined
under fair value-based method for all awards, net of related tax
effects(2)
    
    
    (15,349
    )Pro forma net loss
    
    $
    (27,594
    )Loss per share:Basicas reported
    
    $
    (0.19
    )Basicpro forma
    
    $
    (0.44
    )Dilutedas reported
    
    $
    (0.19
    )Dilutedpro forma
    
    $
    (0.44
    )
 (1)
    
    For 2005, amounts include $0.2 million of compensation expense associated with subsidiary options.(2)
    
    For 2005, amounts include $9.8 million of compensation expense associated with subsidiary options.    Applied Digital Stock Plans
    F-40




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
        2007
    
    
    2006
    
    
    2005Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    Exerciseof Options
    
    
    Price
    
    
    of Options
    
    
    Price
    
    
    of Options
    
    
    PriceOutstanding on January 1
    
    
    6,166
    
    
    $
    3.27
    
    
    
    6,490
    
    
    $
    4.34
    
    
    
    4,068
    
    
    $
    6.15DAC options converted in our options(1)
    
    
    13,322
    
    
    
    2.66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    110
    
    
    
    1.38
    
    
    
    
    
    
    
    
    
    
    
    3,004
    
    
    
    3.05Exercised(2)
    
    
    (10
    )
    
    
    1.50
    
    
    
    (31
    )
    
    
    1.33
    
    
    
    (46
    )
    
    
    2.42Forfeited
    
    
    (346
    )
    
    
    5.32
    
    
    
    (293
    )
    
    
    29.51
    
    
    
    (536
    )
    
    
    12.70Outstanding on December 31
    
    
    19,242
    
    
    
    2.80
    
    
    
    6,166
    
    
    
    3.27
    
    
    
    6,490
    
    
    
    4.34Exercisable on December 31(3)
    
    
    19,132
    
    
    
    2.81
    
    
    
    6,166
    
    
    
    3.27
    
    
    
    6,490
    
    
    
    4.34Shares available on December 31 for options that may be
granted
    
    
    2,280
    
    
    
    
    
    
    
    801
    
    
    
    
    
    
    
    669
 (1)
    
    Includes 13.3 million options assumed in connections with the DA Merger. Theses options had a weighted average exercise price of $2.66 per share as of December 31, 2007(2)
    
    The intrinsic value of the stock options exercised in 2006, was approximately $23,000.(3)
    
    The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The fair value of our common stock was $0.42 at December 31, 2007 based upon
the closing price on the NASDAQ. As of December 31, 2007, the aggregate intrinsic value was $0.2 million.  F-41




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  Outstanding Options
    
    
        Exercisable StockOptionsWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life in Years
    
    
    Price
    
    
    Shares
    
    
    PriceApplied Digital Stock Plan$0.0000 to $2.0000
    
    
    364
    
    
    
    3.1
    
    
    $
    1.47
    
    
    
    254
    
    
    $
    1.51$2.0001 to $4.0000
    
    
    5,178
    
    
    
    4.5
    
    
    $
    3.02
    
    
    
    5,178
    
    
    $
    3.02$4.0001 to $6.0000
    
    
    311
    
    
    
    5.2
    
    
    $
    4.64
    
    
    
    311
    
    
    $
    4.64$6.0001 to $8.0000
    
    
    9
    
    
    
    0.5
    
    
    $
    7.50
    
    
    
    9
    
    
    $
    7.50$8.0001 to $10.0000
    
    
    19
    
    
    
    1.4
    
    
    $
    8.53
    
    
    
    19
    
    
    $
    8.53$10.0001 and over
    
    
    39
    
    
    
    1.2
    
    
    $
    15.77
    
    
    
    39
    
    
    $
    15.775,920
    
    
    
    4.4
    
    
    $
    3.12
    
    
    
    5,810
    
    
    $
    3.15DAC Option Plan$0.0000 to $2.0000
    
    
    2,208
    
    
    
    5.8
    
    
    $
    1.07
    
    
    
    2,208
    
    
    $
    1.07$2.0001 to $4.0000
    
    
    10,758
    
    
    
    6.9
    
    
    $
    2.90
    
    
    
    10,758
    
    
    $
    2.90$4.0001 to $6.0000
    
    
    196
    
    
    
    7.2
    
    
    $
    4.01
    
    
    
    196
    
    
    $
    4.01$6.0001 to $8.0000
    
    
    160
    
    
    
    2.4
    
    
    $
    7.15
    
    
    
    160
    
    
    $
    7.15$8.0001 to $10.0000
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    $10.0001 and over
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    13,322
    
    
    
    6.7
    
    
    $
    2.66
    
    
    
    13,322
    
    
    $
    2.66Total stock options
    
    19,242
    
    
    
    
    
    
    
    
    
    
    
    19,132
  Year Ended
    
    Year EndedDecember
    
    December31, 2007
    
    31, 2005Estimated option life
    
    5 years
    
    5 yearsRisk free interest rate
    
    4.97  5.00%
    

    4.14%Expected volatility
    
    60.00%
    

    50.00%Expected dividend yield
    
    %
    

    %
  VeriChips Stock Option Plans
   F-42




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
      2007
    
    
    2006
    
    
    2005Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Average
    
    
    Number
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Exercise
    
    
    of
    
    
    Exercise
    
    
    of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding on January 1
    
    
    2,100
    
    
    $
    2.10
    
    
    
    2,055
    
    
    $
    1.91
    
    
    
    1,826
    
    
    $
    0.54Granted (1)
    
    
    417
    
    
    
    5.88
    
    
    
    52
    
    
    
    9.87
    
    
    
    428
    
    
    
    7.11Exercised
    
    
    (536
    )
    
    
    0.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (18
    )
    
    
    5.75
    
    
    
    (7
    )
    
    
    2.62
    
    
    
    (199
    )
    
    
    0.51Outstanding on December 31
    
    
    1,963
    
    
    
    3.26
    
    
    
    2,100
    
    
    
    2.10
    
    
    
    2,055
    
    
    
    1.92Exercisable on December 31 (2)
    
    
    1,530
    
    
    
    2.42
    
    
    
    2,049
    
    
    
    1.91
    
    
    
    2,055
    
    
    
    1.92Shares available on December 31 for options
that may be granted
    
    
    865
    
    
    
    
    
    
    
    503
    
    
    
    
    
    
    
    545
 (1)
    
    The total compensation expense associated with the options granted in 2007 was approximately $0.3 million. The remaining amount of the compensation expense to be recorded over
the remaining vesting period of the options is approximately $0.9 million.(2)
    
    The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The fair value of VeriChips
common stock was estimated to be $2.25 at December 31, 2007 based upon the closing price on the Nasdaq. As of December 31, 2007, the aggregate intrinsic value of VeriChips
outstanding stock options was $0.6 million.  F-43




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  Outstanding Stock Options
    
    
    Exercisable StockOptionsWeighted-AverageRemaining
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Contractual
    
    
    Average
    
    
    
    
    
    
    AverageLife In
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Years
    
    
    Price
    
    
    Shares
    
    
    Price$0.0000 to $2.0250
    
    
    1,087
    
    
    
    2.5
    
    
    $
    0.47
    
    
    
    1,087
    
    
    $
    0.47$2.0251 to $4.0500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $4.0501 to $6.0750
    
    
    437
    
    
    
    8.8
    
    
    
    5.65
    
    
    
    67
    
    
    
    5.12$6.0751 to $8.1000
    
    
    328
    
    
    
    5.9
    
    
    
    7.09
    
    
    
    298
    
    
    
    7.04$8.1001 to $10.1250
    
    
    105
    
    
    
    7.0
    
    
    
    9.23
    
    
    
    72
    
    
    
    8.88$10.1251 to $20.2500
    
    
    6
    
    
    
    6.0
    
    
    
    20.25
    
    
    
    6
    
    
    
    20.251,963
    
    
    
    4.7
    
    
    
    3.26
    
    
    
    1,530
    
    
    
    2.42
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Estimated option life
    
    6.0 years
    
    
    5.0 years
    
    
    5.5 yearsRisk free interest rate
    

    4.51%
    
    
    4.29%
    
    
    3.84%Expected volatility
    
    60.00%
    
    
    60.00%
    
    
    50.00%Expected dividend yield
    
    %
    
    
    %
    
    
    %
  Restricted Stock Grants
      F-44




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  13. Agreement With Our Former Chief Executive Officer
    14. Asset Impairment Testing
     F-45




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  
    
    Accounts receivable, inventory and other assets directly related to a specific product
were allocated to the reporting unit that included the revenue from that product;
    
    Intangible assets were allocated to the Healthcare and Security and Industrial reporting
units based on the classification of the revenue derived from the intellectual property. For
example, the distribution network associated with the infant protection and wander
prevention systems was allocated to the Healthcare reporting unit, while the distribution
network associated with the vibration monitoring system was allocated to the Security and
Industrial reporting unit;
    
    Goodwill was allocated to the Healthcare and Security and Industrial reporting units
based on the relative percentage of the allocation of the intellectual property.
   
    
    Earnings before interest, taxes, depreciation and amortization were used as the measure of cash flow;
    
    Cash flows were projected for five years and added to the present value of the terminal value; and
    
    Discount rates ranging from 13% to 26% were used. The rates were determined based on the level of
risk associated with a reporting units operations and the related degree of certainty of generating
future cash flows.
    15. Income Taxes
  2007
    
    
    2006
    
    
    2005Current:United States at statutory rates
    
    $
    (108
    )
    
    $
    (184
    )
    
    $
    538International
    
    
    (333
    )
    
    
    (301
    )
    
    
    (242
    )Current income tax (provision) benefit
    
    
    (441
    )
    
    
    (485
    )
    
    
    296Deferred:United States
    
    
    
    
    
    
    
    
    
    
    International
    
    
    1,343
    
    
    
    340
    
    
    
    226Deferred income taxes benefit
    
    
    1,343
    
    
    
    340
    
    
    
    226$
    902
    
    
    $
    (145
    )
    
    $
    522
   F-46




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   2007
    
    
    2006Deferred tax assets:Liabilities and reserves
    
    $
    2,100
    
    
    $
    4,401Stock-based compensation
    
    
    5,925
    
    
    
    2,938Property and equipment
    
    
    777
    
    
    
    537Intangible property
    
    
    
    
    
    
    11Foreign tax
credit carryforwards & other differences
    
    
    1,632
    
    
    
    397Net operating loss carryforwards
    
    
    109,183
    
    
    
    102,680Gross deferred tax assets
    
    
    119,617
    
    
    
    111,965Valuation allowance
    
    
    (118,000
    )
    
    
    (109,223
    )1,617
    
    
    
    1,741Deferred tax liabilities:Property and equipment
    
    
    68
    
    
    
    183Intangible assets
    
    
    11,245
    
    
    
    6,66411,313
    
    
    
    6,847Net Deferred Tax Asset/(Liability)
    
    $
    (9,696
    )
    
    $
    (5,106
    )
  (in thousands)December 31
    
    
    December 312007
    
    
    2006Current deferred tax assets
    
    $
    394
    
    
    $
    697Long-term deferred tax liability
    
    
    (10,090
    )
    
    
    (5,803
    )Net Deferred Tax Liabilities
    
    $
    (9,696
    )
    
    $
    (5,106
    )
   2007
    
    
    2006
    
    
    2005Domestic
    
    $
    (33,473
    )
    
    $
    (19,036
    )
    
    $
    (8,639
    )International
    
    
    (3,570
    )
    
    
    (739
    )
    
    
    2,285$
    (37,043
    )
    
    $
    (19,775
    )
    
    $
    (6,354
    )
   F-47




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
     2007
    
    
    2006
    
    
    2005%
    
    

    %
    
    

    %Statutory
tax/(benefit) rate (1)
    
    
    (35
    )
    
    
    (34
    )
    
    
    (34
    )Nondeductible intangibles amortization/impairment
    
    
    13
    
    
    
    8
    
    
    
    0State income taxes, net of federal benefits
    
    
    (3
    )
    
    
    (6
    )
    
    
    (5
    )Non-deductable
merger expenses
    
    
    5
    
    
    
    
    
    
    
    Disallowed losses from capital transactions and changes in minority
interest of subsidiary
    
    
    
    
    
    
    
    
    
    
    (31
    )Differences in interest on convertible debentures
    
    
    
    
    
    
    
    
    
    
    (13
    )Foreign tax differences
    
    
    (4
    )
    
    
    (2
    )
    
    
    (5
    )Change in
deferred tax asset valuation allowance (2)
    
    
    20
    
    
    
    36
    
    
    
    90Impact of
prior year adjustments (3)
    
    
    
    
    
    
    (2
    )
    
    
    (11
    )Other
    
    
    1
    
    
    
    0
    
    
    
    2(3
    )
    
    
    0
    
    
    
    (7
    )
 (1)
    
    Statutory rate increased to 35%, consistent with DACs reporting(2)
    
    Substantially attributed to net operating losses.(3)
    
    Related to the reversal of prior year estimated tax liabilities, which were no longer required. Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 
    
    Income tax benefits should be recognized when, based on the technical merits of a tax
position, the company believes that if a dispute arose with the taxing authority and were
taken to a court of last resort, it is more likely than not (i.e., a probability of greater
than 50 percent) that the tax position would be sustained as filed; and
    
    If a position is determined to be more likely than not of being sustained, the reporting
company should recognize the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with the taxing authority.
   (in thousands)
    
    2007Gross unrecognized tax benefits at January 1, 2007
    
    $
    89Increases in tax positions for current year
    
    
    114Lapse in statute of limitations
    
    
    (10
    )Gross unrecognized tax benefits at December 31, 2007
    
    $
    193
  F-48




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   16. Discontinued Operations
  
  F-49




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##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Revenue
    
    $
    27,708
    
    
    $
    35,259
    
    
    $
    41,681Cost of sales
    
    
    19,231
    
    
    
    26,402
    
    
    
    31,762Gross profit
    
    
    8,477
    
    
    
    8,857
    
    
    
    9,919Selling, general and administrative expenses
    
    
    7,742
    
    
    
    10,058
    
    
    
    10,725Research and development expenses
    
    
    376
    
    
    
    1,719
    
    
    
    1,645Gain on sale of asset
    
    
    (1,559
    )
    
    
    
    
    
    
    Asset impairment
    
    
    9,538
    
    
    
    6,629
    
    
    
    7,141Interest and other (expense) income
    
    
    5,692
    
    
    
    (14
    )
    
    
    164Interest expense
    
    
    (194
    )
    
    
    (317
    )
    
    
    (218
    )Loss before income taxes, minority interest and
gain/(loss) on capital transactions of subsidiaries
    
    
    (2,122
    )
    
    
    (9,880
    )
    
    
    (9,646
    )Income taxes
    
    
    (19
    )
    
    
    83
    
    
    
    (75
    )Minority interest
    
    
    77
    
    
    
    1,189
    
    
    
    4,368Net (loss) gain on capital transactions of subsidiary
    
    
    (21
    )
    
    
    5
    
    
    
    Gain (loss) attributable to changes in minority
interest as a result of capital transactions of
subsidiary
    
    
    240
    
    
    
    (67
    )
    
    
    Loss from discontinued operations
    
    $
    (1,845
    )
    
    $
    (8,670
    )
    
    $
    (5,269
    )Loss from discontinued operations per common share -
basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.08
    )Weighted average number of common shares outstanding
- basic and diluted
    
    
    69,122
    
    
    
    67,338
    
    
    
    62,900
    December 31,
    
    
    December 31,2007
    
    
    2006Current assets:Cash
    
    $
    640
    
    
    $
    336Accounts receivable
    
    
    3,775
    
    
    
    6,835Inventory
    
    
    595
    
    
    
    1,373Other current assets
    
    
    889
    
    
    
    1,270Total current assets
    
    
    5,900
    
    
    
    9,814Property and equipment, net
    
    
    164
    
    
    
    599Goodwill and intangibles, net
    
    
    371
    
    
    
    10,079Other assets, net
    
    
    39
    
    
    
    398Total assets
    
    $
    6,474
    
    
    $
    20,890Current liabilities:Notes payable
    
    $
    1,011
    
    
    $
    64Accounts payable
    
    
    1,752
    
    
    
    10,001Accrued expenses and other current liabilities
    
    
    1,435
    
    
    
    4,161Deferred revenue
    
    
    389
    
    
    
    2,718Total current liabilities
    
    
    4,587
    
    
    
    16,944Notes payable
    
    
    2,400
    
    
    
    Deferred revenue
    
    
    95
    
    
    
    Other long-term liabilities
    
    
    
    
    
    
    1,165Total liabilities
    
    
    7,082
    
    
    
    18,109Minority interest
    
    
    554
    
    
    
    1,090Net
(liabilities) assets of discontinued operations
    
    $
    (1,161
    )
    
    $
    1,691
   F-50




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 17. Loss Per Share
  2007
    
    
    2006
    
    
    2005Numerator:Numerator for basic earnings per share  loss from continuing operations
    
    $
    (30,175
    )
    
    $
    (18,539
    )
    
    $
    (4,896
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    (1,573
    )Accretion of beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    (474
    )Loss from continuing operations attributable to common stockholders
    
    
    (30,175
    )
    
    
    (18,539
    )
    
    
    (6,943
    )(Loss) income from discontinued operations
    
    
    (1,845
    )
    
    
    (8,670
    )
    
    
    (5,269
    )Net loss attributable to common stockholders
    
    $
    (32,020
    )
    
    $
    (27,209
    )
    
    $
    (12,212
    )Denominator:Denominator for basic earnings per share  weighted-average shares outstanding (1)
    
    
    69,122
    
    
    
    67,338
    
    
    
    62,900(Loss) earnings per share  Basic and DilutedContinuing operations
    
    $
    (0.43
    )
    
    $
    (0.27
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    (0.03
    )
    
    
    (0.13
    )
    
    
    (0.08
    )Total  basic and diluted
    
    $
    (0.46
    )
    
    $
    (0.40
    )
    
    $
    (0.19
    )
  2007
    
    
    2006
    
    
    2005Stock options
    
    
    19,242
    
    
    
    6,166
    
    
    
    6,490Warrants
    
    
    9,302
    
    
    
    4,663
    
    
    
    3,395Restricted stock
    
    
    31
    
    
    
    50
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    3,917Convertible note payable
    
    
    
    
    
    
    
    
    
    
    1,36828,575
    
    
    
    10,879
    
    
    
    15,170
  F-51




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 18. Commitments and Contingencies
   MinimumRental
    
    
    EmploymentYear
    
    Payments
    
    
    Contracts2008
    
    $
    1,124
    
    
    $
    4622009
    
    
    936
    
    
    
    5082010
    
    
    672
    
    
    
    5082011
    
    
    570
    
    
    
    5082012
    
    
    554
    
    
    
    Thereafter
    
    
    532
    
    
    
    $
    4,388
    
    
    $
    1,986
 Krawitz Employment Agreement
    F-52




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 VeriChip Employment and Non-Compete Agreement
  VeriChip Change in Control Plan
  Joseph Grillo Employment Agreement
    F-53




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Appointment of Randolph K. Geissler
   Severance Policies and other Employment Agreements
     F-54




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 Incentive and Recognition Policy
    Rights to U.S. Patent No. 5,211,129
   F-55




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  Amendment to Schering-Plough Supply and Distribution Agreement
 ®
 19. Profit Sharing Plan
   20. Legal Proceedings
  Vasa Suit
    F-56




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  Verizon Suit
  VeriChip
  21. Segment Information
   F-57




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
  2007 (in thousands)Total fromAnimal
    
    
    GPS and Radio
    
    
    
    
    
    
    Security and
    
    
    Advanced
    
    
    Corporate/
    
    
    ContinuingApplications
    
    
    Communications
    
    
    Healthcare
    
    
    Industrial
    
    
    Technology(3)
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    43,749
    
    
    $
    34,045
    
    
    $
    23,269
    
    
    $
    8,837
    
    
    $
    7,502
    
    
    $
    
    
    
    $
    117,402Intersegment net revenue
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    Total revenue
    
    $
    43,825
    
    
    $
    34,045
    
    
    $
    23,269
    
    
    $
    8,837
    
    
    $
    7,502
    
    
    $
    (76
    )
    
    $
    117,402Depreciation and amortization (1)
    
    $
    1,601
    
    
    $
    904
    
    
    $
    1,919
    
    
    $
    537
    
    
    $
    98
    
    
    $
    102
    
    
    $
    5,160Interest and other (expense) income
    
    
    1,608
    
    
    
    
    
    
    
    (110
    )
    
    
    (111
    )
    
    
    1,222
    
    
    
    (1,498
    )
    
    
    1,111Interest expense
    
    
    (3,986
    )
    
    
    (166
    )
    
    
    (862
    )
    
    
    (837
    )
    
    
    2
    
    
    
    (1,079
    )
    
    
    (6,928
    )Loss from continuing operations before
provision for income taxes, minority interest and gain (loss) attributable to
capital transactions of subsidiaries(2)
    
    
    (18,124
    )
    
    
    86
    
    
    
    (8,918
    )
    
    
    (4,048
    )
    
    
    5,193
    
    
    
    (11,231
    )
    
    
    (37,043
    )Goodwill, net
    
    
    34,626
    
    
    
    4,621
    
    
    
    12,162
    
    
    
    3,614
    
    
    
    1,504
    
    
    
    
    
    
    
    56,527Segment assets from continuing operations
    
    
    74,916
    
    
    
    30,721
    
    
    
    39,237
    
    
    
    10,615
    
    
    
    3,457
    
    
    
    6,269
    
    
    
    165,215Expenditures for property and equipment
    
    
    783
    
    
    
    725
    
    
    
    506
    
    
    
    330
    
    
    
    19
    
    
    
    4
    
    
    
    2.367
 2006 (in thousands)Total fromAnimal
    
    
    GPS and Radio
    
    
    
    
    
    
    Security and
    
    
    Advanced
    
    
    Corporate/
    
    
    ContinuingApplications
    
    
    Communications
    
    
    Healthcare
    
    
    Industrial
    
    
    Technology(3)
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    37,702
    
    
    $
    16,351
    
    
    $
    20,508
    
    
    $
    6,796
    
    
    $
    6,072
    
    
    $
    
    
    
    $
    87,429Intersegment net revenue
    
    
    356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (356
    )
    
    
    Total revenue
    
    $
    38,058
    
    
    $
    16,351
    
    
    $
    20,508
    
    
    $
    6,796
    
    
    $
    6,072
    
    
    $
    (356
    )
    
    $
    87,429Depreciation and amortization (1)
    
    $
    1,403
    
    
    $
    480
    
    
    $
    1,746
    
    
    $
    683
    
    
    $
    93
    
    
    $
    113
    
    
    $
    4,518Interest and other income
    
    
    364
    
    
    
    4
    
    
    
    49
    
    
    
    8
    
    
    
    147
    
    
    
    772
    
    
    
    1,344Interest (expense) recovery
    
    
    (405
    )
    
    
    (60
    )
    
    
    (472
    )
    
    
    (395
    )
    
    
    17
    
    
    
    (1,822
    )
    
    
    (3,137
    )Loss from continuing operations before provision
for income taxes, minority interest and gain (loss) attributable to capital transactions of
subsidiaries (2)
    
    
    (4,048
    )
    
    
    (1,230
    )
    
    
    (5,661
    )
    
    
    (1,030
    )
    
    
    3,108
    
    
    
    (10,914
    )
    
    
    (19,775
    )Goodwill, net
    
    
    52,639
    
    
    
    2,138
    
    
    
    12,342
    
    
    
    3,683
    
    
    
    1,504
    
    
    
    
    
    
    
    72,306Segment assets from continuing operations
    
    
    81,358
    
    
    
    10,159
    
    
    
    38,855
    
    
    
    11,390
    
    
    
    13,840
    
    
    
    (4,267
    )
    
    
    151,335Expenditures for property and equipment
    
    
    1,789
    
    
    
    1,091
    
    
    
    588
    
    
    
    222
    
    
    
    119
    
    
    
    4
    
    
    
    3,813
 2005 (in thousands)Total fromAnimal
    
    
    GPS and Radio
    
    
    
    
    
    
    Security and
    
    
    Advanced
    
    
    Corporate/
    
    
    ContinuingApplications
    
    
    Communications
    
    
    Healthcare
    
    
    Industrial
    
    
    Technology(3)
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    35,275
    
    
    $
    18,578
    
    
    $
    12,049
    
    
    $
    3,819
    
    
    $
    2,335
    
    
    $
    
    
    
    $
    72,056Intersegment net revenue
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697
    )
    
    
    Total revenue
    
    $
    35,972
    
    
    $
    18,578
    
    
    $
    12,049
    
    
    $
    3,819
    
    
    $
    2,335
    
    
    $
    (697
    )
    
    $
    72,056Depreciation and amortization (1)
    
    $
    1,221
    
    
    $
    408
    
    
    $
    1,007
    
    
    $
    376
    
    
    $
    140
    
    
    $
    107
    
    
    $
    3,259Interest and other income
    
    
    401
    
    
    
    10
    
    
    
    49
    
    
    
    14
    
    
    
    578
    (4)
    
    
    1,607
    
    
    
    2,659Interest (expense) recovery
    
    
    (337
    )
    
    
    (27
    )
    
    
    (171
    )
    
    
    (172
    )
    
    
    (50
    )
    
    
    2,693
    
    
    
    1,936Loss from continuing operations before provision
for income taxes, minority interest and gain
(loss) attributable to capital transactions of
subsidiaries (2)
    
    
    (926
    )
    
    
    1,032
    
    
    
    (2,498
    )
    
    
    (1,318
    )
    
    
    372
    
    
    
    (3,016
    )
    
    
    (6,354
    )Goodwill, net
    
    
    49,889
    
    
    
    1,148
    
    
    
    13,131
    
    
    
    3,851
    
    
    
    1,504
    
    
    
    
    
    
    
    69,523Segment assets from continuing operations
    
    
    82,754
    
    
    
    7,820
    
    
    
    37,144
    
    
    
    10,867
    
    
    
    13,084
    
    
    
    3,375
    
    
    
    155,044Expenditures for property and equipment
    
    
    820
    
    
    
    402
    
    
    
    326
    
    
    
    98
    
    
    
    68
    
    
    
    57
    
    
    
    1,771
 (1)
    
    Depreciation and amortization includes $1.9 million, $1.6 million, and $1.3 million included in cost of products sold in 2007, 2006 and 2005, respectively.(2)
    
    For Healthcare, amounts exclude expenses of approximately $0.9 million in 2005 primarily related to stock option expense, which were reflected as additional expense in the separate financial statements of VeriChip included in its Registration Statement on Form S-1 (333-130754). Certain stock options were granted to our employees and directors
who are not also employees or directors of VeriChip. Thus, VeriChip was required to record compensation expense in connection with the options in its separate financial statements in accordance with FAS 123.(3)
    
    In 2008, the remaining entity in this segment was determined
to be a discontinued operation as we made a decision to sell the entity.  F-58




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 (3)
    
    For Security and Industrial, amounts exclude expenses of approximately $0.5 million in 2005, primarily related to stock option expense, which will be reflected as additional expense in the separate financial statements of VeriChip included in its Registration Statement on Form S-1 (333-130754).(4)
    
    For Animal Applications, amounts exclude $1.2 million in losses on sales of our stock that DAC received from us under the terms of a share exchange agreement. This amount is recorded in DACs separate financial statements but eliminated in consolidation of ours and DACs results of operations.     Security and
    
    
    Animal
    
    
    GPS and Radio
    
    
    AdvancedHealthcare
    
    
    Industrial
    
    
    Applications
    
    
    Communications
    
    
    Technology
    
    
    Total($ in thousands)Balance December 31, 2005
    
    $
    13,131
    
    
    $
    3,851
    
    
    $
    49,458
    
    
    $
    1,579
    
    
    $
    1,504
    
    
    $
    69,523Acquisitions
    
    
    
    
    
    
    
    
    
    
    3,181
    
    
    
    559
    
    
    
    
    
    
    $
    3,740Adjustment
to purchase price allocation
    
    
    (789
    )
    
    
    (168
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (957
    )Balance December 31, 2006
    
    $
    12,342
    
    
    $
    3,683
    
    
    $
    52,639
    
    
    $
    2,138
    
    
    $
    1,504
    
    
    $
    72,306Acquisitions
    
    
    
    
    
    
    
    
    
    
    20,125
    
    
    
    7,211
    
    
    
    
    
    
    
    27,336Adjustment
to carrying value of minority interest
    
    
    
    
    
    
    
    
    
    
    (12,049
    )
    
    
    (3,876
    )
    
    
    
    
    
    
    (15,925
    )Adjustment
to purchase price allocation
    
    
    (69
    )
    
    
    (180
    )
    
    
    (21,554
    )
    
    
    (852
    )
    
    
    
    
    
    
    (22,655
    )Impairment
    
    
    
    
    
    
    
    
    
    
    (4,632
    )
    
    
    
    
    
    
    
    
    
    
    (4,632
    )Other
adjustments
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    97Balance December 31, 2007
    
    $
    12,162
    
    
    $
    3,614
    
    
    $
    34,626
    
    
    $
    4,621
    
    
    $
    1,504
    
    
    $
    56,527
  United
    
    
    
    
    
    
    
    
    
    
    SouthStates
    
    
    Canada
    
    
    Europe
    
    
    America
    
    
    Total2007Net revenue
    
    $
    44,637
    
    
    $
    32,030
    
    
    $
    39,591
    
    
    $
    1,144
    
    
    $
    117,402Property and equipment, net
    
    
    7,067
    
    
    
    840
    
    
    
    4,818
    
    
    
    404
    
    
    
    13,1292006Net revenue
    
    $
    38,754
    
    
    $
    27,188
    
    
    $
    20,791
    
    
    $
    696
    
    
    $
    87,429Property and equipment, net
    
    
    6,246
    
    
    
    824
    
    
    
    4,242
    
    
    
    220
    
    
    
    11,5322005Net revenue
    
    $
    33,920
    
    
    $
    15,801
    
    
    $
    22,335
    
    
    $
    
    
    
    $
    72,056Property and equipment, net
    
    
    6,021
    
    
    
    758
    
    
    
    3,824
    
    
    
    
    
    
    
    10,603
 22. Related Party Transactions
  Agreement between VeriChip and DAC
   F-59




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
    Transition Services Agreement
   F-60




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
   Loan Agreement with VeriChip
  Loan Agreement with DAC
  Satisfaction of Loan Agreement With InfoTech
   Legal Fees Paid to Akin Gump Strauss Hauer & Feld LLP
  Share Exchange with the Former Shareholders of DSD Holding
    F-61




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 23. Notes Received for Stock Issuances
  24. Supplemental Cash Flow Information
  For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Increase in accounts receivable and unbilled receivables
    
    $
    (5,079
    )
    
    $
    393
    
    
    $
    (2,533
    )(Increase) decrease in inventories
    
    
    (1,898
    )
    
    
    (1,987
    )
    
    
    (1,179
    )(Increase) decrease in other current assets
    
    
    (19
    )
    
    
    856
    
    
    
    (935
    )Increase (decrease) in accounts payable, accrued expenses and other liabilities
    
    
    7,903
    
    
    
    4,911
    
    
    
    (4,918
    )$
    907
    
    
    $
    4,173
    
    
    $
    (9,565
    )
  2007
    
    
    2006
    
    
    2005Issuance of shares, warrants, and options for business acquisition
    
    $
    40,574
    
    
    $
    
    
    
    $
    12,652Issuance of warrants in connection with amendment to financing
    
    
    1,711
    
    
    
    
    
    
    
    Issuance of DAC warrants in connection with financings
    
    
    2,297
    
    
    
    1,525
    
    
    
    Issuance of shares for purchase of minority interest
    
    
    
    
    
    
    907
    
    
    
    Deferred offering costs
    
    
    
    
    
    
    2,924
    
    
    
    Issuance of shares under a share exchange agreement
    
    
    
    
    
    
    973
    
    
    
    3,500Instantel deferred purchase price obligation
    
    
    
    
    
    
    
    
    
    
    3,000Reclassification of
deferred financing costs to acquisition costs
    
    
    494
    
    
    
    
    
    
    
    Assets acquired for long-term debt and capital leases
    
    
    
    
    
    
    606
    
    
    
    647
 25. Summarized Quarterly Data (Unaudited) (in thousands, except per share amounts)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year2007Total revenue
    
    $
    32,010
    
    
    $
    21,956
    
    
    $
    30,171
    
    
    $
    33,265
    
    
    $
    117.402Gross profit
    
    
    14,893
    
    
    
    9,055
    
    
    
    14,034
    
    
    
    13,101
    
    
    
    51,083Net loss from continuing operations
attributable to common stockholders(1)
    
    
    (2,212
    )
    
    
    (6,078
    )
    
    
    (7,557
    )
    
    
    (14,328
    )
    
    
    (30,175
    )Net (loss) income from discontinued
operations
    
    
    (510
    )
    
    
    929
    
    
    
    (3,742
    )
    
    
    1,478
    
    
    
    (1,845
    )Basic and diluted net loss per share from
continuing
operations(4)
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.11
    )
    
    $
    (0.21
    )
    
    $
    (0.44
    )Basic and diluted net (loss) income per
share from discontinued operations(4)
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.05
    )
    
    
    0.03
    
    
    
    (0.02
    )
  F-62




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##### Table of Contents



Applied Digital Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year2006Total revenue
    
    $
    22,916
    
    
    $
    20,902
    
    
    $
    20,923
    
    
    $
    22,688
    
    
    $
    87,429Gross profit
    
    
    11,368
    
    
    
    10,074
    
    
    
    10,300
    
    
    
    10,501
    
    
    
    42,243Net loss from continuing operations
attributable to common
stockholders(2)
    
    
    (2,643
    )
    
    
    (2,504
    )
    
    
    (2,976
    )
    
    
    (10,416
    )
    
    
    (18,539
    )Net loss from discontinued operations
    
    
    (402
    )
    
    
    (649
    )
    
    
    (623
    )
    
    
    (6,996
    )
    
    
    (8,670
    )Basic and diluted net loss per share from
continuing
operations(4)
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    (0.15
    )
    
    $
    (0.27
    )Basic and diluted net loss per share from
discontinued
operations(4)
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.11
    )
    
    
    (0.13
    )
 (1)
    
    The increase in the fourth quarter loss relates primarily to
$4.8 million in merger expenses, $1.7 million in severance expense to
our former CEO.(2)
    
    The increase in the fourth quarter loss, primarily relates to a $3.3 million payment due to our former CEO.(3)
    
    The loss from discontinued operations for the fourth quarter of 2006 includes a goodwill impairment charge of $6.6 million related to Computer Equity.(4)
    
    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. 26. Subsequent Events
 Geissler Technologies Corporation
    F-63




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##### Table of Contents



FINANCIAL STATEMENT SCHEDULE
 
 Valuation and Qualifying Accounts (in thousands)
 AdditionsBalance at
    
    
    Charged tobeginning of
    
    
    cost and
    
    
    
    
    
    
    Balance at endDescription
    
    period
    
    
    expenses
    
    
    Deductions
    
    
    of periodValuation reserve deducted in the balance
sheet from the asset to which it applies:Accounts receivable:2007 Allowance for doubtful accounts
    
    $
    483
    
    
    
    194
    
    
    
    253
    
    
    $
    4242006 Allowance for doubtful accounts
    
    
    750
    
    
    
    27
    
    
    
    294
    
    
    
    4832005 Allowance for doubtful accounts
    
    
    687
    
    
    
    126
    
    
    
    63
    
    
    
    750Inventory:2007 Allowance for excess and obsolescence
    
    $
    1,176
    
    
    
    1,272
    
    
    
    632
    
    
    $
    1,8162006 Allowance for excess and obsolescence
    
    
    2,097
    
    
    
    69
    
    
    
    990
    
    
    
    1,1762005 Allowance for excess and obsolescence
    
    
    1,915
    
    
    
    846
    
    
    
    664
    
    
    
    2,097Notes receivable:2007 Allowance for doubtful accounts
    
    $
    3,663
    
    
    
    
    
    
    
    3,663
    
    
    $
    2006 Allowance for doubtful accounts
    
    
    3,663
    
    
    
    
    
    
    
    
    
    
    
    3,6632005 Allowance for doubtful accounts
    
    
    3,663
    
    
    
    
    
    
    
    
    
    
    
    3,663Deferred Taxes:2007 Valuation reserve
    
    $
    109,223
    
    
    
    10,566
    
    
    
    
    
    
    $
    119,7892006 Valuation reserve
    
    
    99,008
    
    
    
    10,215
    
    
    
    
    
    
    
    109,2232005 Valuation reserve
    
    
    89,358
    
    
    
    9,650
    
    
    
    
    
    
    
    99,008
  F-64




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description2.1
    
    Stock Purchase Agreement dated February 28, 2005, among Digital
Angel Corporation and all the shareholders of DSD Holding A/S
(incorporated herein by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K filed with the Commission
on March 3, 2005)2.2
    
    Acquisition Agreement and Plan of Arrangement effective on January
26, 2005 between Applied Digital Solutions, Inc. and eXI Wireless,
Inc. (incorporated herein by reference to Exhibit 2.8 to the
registrants Annual Report on Form 10-K filed with the Commission
on March 9, 2005)2.3
    
    Share Purchase Agreement among Instantel, Inc., Instantel Holding
Company s.ar.l., Perceptis, L.P., VeriChip Inc. and solely for the
purposes of Section 1.4 of the Agreement, Applied Digital
Solutions, Inc. and VeriChip Corporation dated as of June 10, 2005
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K/A filed with the Commission on June 13,
2005)2.4
    
    Exchange Agreement dated as of June 9, 2005 between Applied
Digital Solutions, Inc. and VeriChip Corporation (incorporated by
reference to Exhibit 10.4 to the registrants Current Report on
Form 8-K/A filed with the Commission on June 13, 2005)2.5
    
    Asset Sale and Purchase Agreement dated December 14, 2006, between
Signature Industries Limited and McMurdo Limited (incorporated by
reference to Exhibit 2.8 to the registrants Annual Report on Form
10-K filed with the Commission on March 15, 2007)2.6
    
    Reincorporation Agreement and Plan of Merger dated as of March 30,
2007 between Applied Digital Solutions, Inc., a Missouri
corporation, and Applied Digital Solutions, Inc., a Delaware
corporation (incorporated by reference to Exhibit 2.1 to the
registrants Current Report on Form 8-K filed with the Commission
on April 25, 2007)2.7
    
    Agreement and Plan of Reorganization dated as of August 8, 2007
among Digital Angel Corporation, Applied Digital Solutions, Inc.,
and Digital Angel Acquisition Corp. (incorporated by reference to
Exhibit 2.1 to the registrants Current Report on Form 8-K filed
with the Commission on August 9, 2007)2.8
    
    Amendment No. 1 to Agreement and Plan of Reorganization dated as
of December 4, 2007 among Digital Angel Corporation, Applied
Digital Solutions, Inc., and Digital Angel Acquisition Corp.
(incorporated by reference to Exhibit 2.1 to the registrants
Current Report on Form 8-K filed with the Commission on December
4, 2007)2.9
    
    Agreement and Plan of Merger dated January 14, 2008 among Applied
Digital Solutions, Inc., GT Acquisition Sub, Inc., Geissler
Technologies Corporation and the individuals named therein
(incorporated by reference to Exhibit 2.1 to the registrants
Current Report on Form 8-K filed with the Commission on January
17, 2008)3.1
    
    Certificate of Elimination to Certificate of Designations filed
with the Secretary of State of Missouri on April 5, 2007
(incorporated by reference to Exhibit 3.4 to the registrants
Annual Report on Form 10-K/A filed with the Commission on April 6,
2007)3.2
    
    Certificate of Incorporation of Applied Digital Solutions, Inc.
filed with the Secretary of State of Delaware on March 7, 2007
(incorporated by reference to Exhibit 3.1 to the registrants
Current Report on Form 8-K filed with the Commission on April 25,
2007)




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ExhibitNumber
    
    Description3.3
    
    Amended and Restated Bylaws of Applied Digital Solutions, Inc.
(incorporated by reference to Exhibit 3.3 to the registrants
Quarterly Report on Form 10-Q filed with the Commission on August
9, 2007)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. 333-11294) filed with
the Commission on December 2, 1999)*10.2
    
    Applied Digital Solutions, Inc. 1999 Flexible Stock Plan, as
amended (incorporated herein by reference to Exhibit 4.2 to the
registrants Registration Statement on Form S-8 (File No.
333-118776) filed with the Commission on September 3, 2004)*10.3
    
    Thermo Life Energy Corp. 2003 Flexible Stock Plan (incorporated
herein by reference to Exhibit 10.77 to the registrants Annual
Report on Form 10-K filed with the Commission on March 9, 2005)*10.4
    
    Amended and Restated Digital Angel Corporation Transition Stock
Option Plan, as amended (incorporated herein by reference to
Exhibit 4.1 to the registrants Registration Statement on Form S-8
(file No. 333-148958) filed with the Commission on January 31,
2008)*10.5
    
    InfoTech USA, Inc. (formerly SysComm International Corporation)
2001 Flexible Stock Plan (incorporated herein by reference to
Exhibit 10.82 to the registrants Annual Report on Form 10-K filed
with the Commission on March 9, 2005)*10.6
    
    Applied Digital Solutions, Inc. 2003 Flexible Stock Plan, as
amended (incorporated by reference to Exhibit 4.1 to the
registrants Registration Statement on Form S-8 (File No.
333-126229) filed with the Commission on June 29, 2005)*10.7
    
    Applied Digital Solutions, Inc. 1999 Employees Stock Purchase
Plan, as amended (incorporated by reference to Exhibit 4.2 to the
registrants Registration Statement on Form S-8 (File No.
333-126229) filed with the Commission on June 29, 2005)*10.8
    
    Thermo Life Energy Corp. 2005 Flexible Stock Plan (incorporated by
reference to Exhibit 10.16 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on August 9, 2005)*10.9
    
    VeriChip Corporation 2002 Flexible Stock Plan, as amended through
December 21, 2006 (incorporated by reference to Exhibit 10.103 to
the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)*10.10
    
    VeriChip Corporation 2005 Flexible Stock Plan, as amended through
December 21, 2006 (incorporated by reference to Exhibit 10.104 to
the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)*10.11
    
    Form of Letter of Offer of Employment (incorporated herein by
reference to Exhibit 4.4 to the registrants Registration
Statement on Form S-8 (File No. 333-121123 filed with the
Commission on December 10, 2004)*10.12
    
    Non-Qualified Stock Option Award dated June 3, 2004 (incorporated
herein by reference to Exhibit 4.6 to the registrants
Registration Statement on Form S-8 (File No. 333-121123) filed
with the Commission on December 10, 2004)*10.13
    
    Non-Qualified Stock Option Award dated June 3, 2004 (incorporated
herein by reference to Exhibit 4.7 to the registrants
Registration Statement on Form S-8 (File No. 333-121123) filed
with the Commission on December 10, 2004)*




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##### Table of Contents



ExhibitNumber
    
    Description10.14
    
    Incentive and Recognition Policy dated March 10, 2006
(incorporated herein by reference to Exhibit 10.106 to the
registrants Annual Report on Form 10-K filed with the Commission
on March 15, 2006)*10.15
    
    Executive Change in Control Plan dated May 8, 2004 (incorporated
herein by reference to Exhibit 10.75 to the registrants Annual
Report on Form 10-K filed with the Commission on March 9, 2005)*10.16
    
    Employment Agreement dated February 28, 2005 between Digital Angel
Corporation and Lasse Nordfjeld (incorporated herein by reference
to Exhibit 10.76 to the registrants Annual Report on Form 10-K
filed with the Commission on March 9, 2005)*10.17
    
    Management Incentive Plan Outline for Digital Angel Corporation
(incorporated herein by reference to Exhibit 10.79 to the
registrants Annual Report on Form 10-K filed with the Commission
on March 9, 2005)*10.18
    
    Form of Digital Angel Corporation Restricted Stock Award Agreement
(incorporated herein by reference to Exhibit 10.81 to the
registrants Annual Report on Form 10-K filed with the Commission
on March 9, 2005)*10.19
    
    Digital Angel Corporation Annual Incentive Plan (incorporated by
reference to Exhibit 10.2 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on May 9, 2006)*10.20
    
    Applied Digital Solutions, Inc. Employment and Non-Compete
Agreement between Applied Digital Solutions, Inc. and Michael E.
Krawitz, dated December 6, 2006 (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on December 7, 2006)*10.21
    
    Agreement between Applied Digital Solutions, Inc. and Scott R.
Silverman, dated December 5, 2006 (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on December 7, 2006)*10.22
    
    VeriChip Corporation Executive Management Change in Control Plan
dated March 2, 2007 (incorporated by reference to Exhibit 10.1 to
the registrants Current Report on Form 8-K filed with the
Commission on March 8, 2007)*10.23
    
    Compensation and Change of Control Agreement between Digital Angel
Corporation and Thomas J. Hoyer dated December 18, 2006
(incorporated by reference to Exhibit 10.107 to the registrants
Annual Report on Form 10-K filed with the Commission on March 15,
2007)*10.24
    
    Form of Stock Award Agreement in connection with the Applied
Digital Solutions, Inc. 1999/2003 Flexible Stock Plan(incorporated by reference to Exhibit 10.110 to the registrants
Annual Report on Form 10-K filed with the Commission on March 15,
2007)*10.25
    
    Letter Agreement dated March 14, 2007 between Applied Digital
Solutions, Inc. and Scott R. Silverman (incorporated by reference
to Exhibit 10.111 to the registrants Annual Report on Form 10-K
filed with the Commission on March 15, 2007)*10.26
    
    Incentive and Recognition Policy dated April 2, 2007 (incorporated
by reference to Exhibit 10.112 to the registrants Annual Report
on Form 10-K/A filed with the Commission on April 6, 2007)*10.27
    
    2007 VeriChip Corporation Executive Management Incentive Plan
(incorporated by reference to Exhibit 10.113 to the registrants
Annual Report on Form 10-K/A filed with the Commission on April 6,
2007)*




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##### Table of Contents



ExhibitNumber
    
    Description10.28
    
    VeriChip Corporation 2007 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on June 20, 2007)*10.29
    
    Letter Agreement dated August 6, 2007 between Digital Angel
Corporation and Kevin N. McGrath (incorporated by reference to
Exhibit 10.8 to the registrants Quarterly Report on Form 10-Q
filed with the Commission on August 9, 2007)*10.30
    
    Employment Agreement effective as of January 1, 2008 between
Applied Digital Solutions, Inc. and Joseph J. Grillo (incorporated
by reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on January 4, 2008)*10.31
    
    Employment Letter Agreement dated January 15, 2008 between Digital
Angel Corporation and Randolph K. Geissler (incorporated by
reference to Exhibit 10.3 to the registrants Current Report on
Form 8-K filed with the Commission on January 17, 2008)*10.32
    
    Consulting Agreement dated August 8, 2007 between Randolph K.
Geissler and VeriChip Corporation (incorporated by reference to
Exhibit 10.7 to the registrants Quarterly Report on Form 10-Q
filed with the Commission on August 9, 2007)*10.33
    
    Form of Non-Qualified Stock Option Agreement (incorporated herein
by reference to Exhibit 4.2 to the registrants Registration
Statement on Form S-8 (file No. 333-148958) filed with the
Commission on January 31, 2008)*10.34
    
    Blanket Purchase Agreement between United States Department of
Agriculture and Government Telecommunications, Inc. (incorporated
herein by reference to Exhibit 10.55 the registrants Registration
Statement on Form S-1 (File No. 109512) filed with the Commission
on February 17, 2004)10.35
    
    Order For Supplies and Services between Government
Telecommunications, Inc. and the General Services Administration
dated June 18, 2004 (incorporated herein by reference to Exhibit
10.4 to the registrants Quarterly Report on Form 10-Q for the
period ended June 30, 2004, filed with the Commission on August 3,
2004)10.36
    
    Form of Series B Warrant to Purchase Common Stock of Applied
Digital Solution, Inc. (incorporated herein by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed
with the Commission on April 15, 2004)10.37
    
    Form of Series D Warrant to Purchase Common Stock of Applied Digital
Solutions, Inc., in favor of Satellite Strategic Finance Associates,
LLC dated October 21, 2004 (incorporated herein by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed
with the Commission on October 22, 2004)10.38
    
    Consulting Services Agreement between Applied Digital Solutions,
Inc. and Ovations International dated December 24, 2002
(incorporated herein by reference to Exhibit 4.5 to the registrants
Registration Statement on Form S-8 (File No. 333-121123) filed with
the Commission on December 10, 2004)10.39
    
    Stock Purchase Agreement dated February 25, 2005, between Applied
Digital Solutions, Inc. and Digital Angel Corporation (incorporated
herein by reference to Exhibit 10.1 to the registrants Current
Report on Form 8-K filed with the Commission on March 3, 2005)10.40
    
    Third Amendment and Waiver, dated as of January 24, 2006, among
InfoTech USA, Inc., Applied Digital Solutions, Inc., Information
Technology Services, Inc. and Wells Fargo Business Credit, Inc.
(incorporated by reference to Exhibit 10.83 to the registrants
Annual Report on Form 10-K filed with the Commission on March 15,
2006)




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##### Table of Contents



ExhibitNumber
    
    Description10.41
    
    Patient Security Systems Capital Equipment Supplier Agreement
between Novation, LLC and eXI Wireless Systems, Inc. (incorporated
by reference to Exhibit 10.1 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on August 9, 2005)10.42
    
    Form of Series E Warrant to Purchase Common Stock of Applied Digital
Solutions, Inc. dated as of June 10, 2005 (incorporated by reference
to Exhibit 10.8 to the registrants Current Report on Form 8-K/A
filed with the Commission on June 13, 2005)10.43
    
    Settlement and Mutual General Release of Claims Agreement dated as
of June 29, 2005 among Pacific Decision Sciences Corporation,
Applied Digital Solutions, Inc., Anne Tahim, an Accountancy
Corporation, and Anne Tahim, individually (incorporated by reference
to Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on July 26, 2005)10.44
    
    Amended and Restated Transition Services Agreement dated as of
December 21, 2006 between Applied Digital Solutions, Inc. and
VeriChip Corporation (incorporated by reference to Exhibit 10.58 to
the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)10.45
    
    Supply Agreement between Digital Angel Corporation and Raytheon
Microelectronics España, S.A. dated April 26, 2006 (incorporated by
reference to Exhibit 10.1 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on May 9, 2006)10.46
    
    Amended Credit Facility between Danske Bank and Daploma
International A/S dated June 1, 2006 (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on June 5, 2006)10.47
    
    Letter of Support Issued to Danske Bank A/SM (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on Form
8-K filed with the Commission on June 5, 2006)10.48
    
    Third Amendment to Loan Documents dated June 23, 2006 between
Applied Digital Solutions, Inc. and InfoTech USA, Inc (incorporated
by reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on June 26, 2006)10.49
    
    Sales Plan between Scott R. Silverman and Goldman, Sachs & Co. dated
July 14, 2006 (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the Commission on
July 19, 2006)10.50
    
    License & Development Works Agreement  Statement of Work #
4906FL0029 between Pacific Decision Sciences Corporation and
International Business Machines Corporation effective May 1, 2006
(portions of this agreement have been omitted pursuant to a request
for confidential treatment) (incorporated by reference to Exhibit
10.1 to the registrants Quarterly Report on Form 10-Q filed with
the Commission on August 7, 2006)10.51
    
    License & Development Works Agreement  Statement of Work #
4906FL0032 between Pacific Decision Sciences Corporation and
International Business Machines Corporation effective May 1, 2006
(portions of this agreement have been omitted pursuant to a request
for confidential treatment) (incorporated by reference to Exhibit
10.2 to the registrants Quarterly Report on Form 10-Q filed with
the Commission on August 7, 2006)10.52
    
    Licensed and Developed Works Agreement between Pacific Decision
Sciences Corporation and International Business Machines Corporation
dated as of April 1, 1999 (incorporated by reference to Exhibit 10.3
to the registrants Quarterly Report on Form 10-Q filed with the
Commission on August 7, 2006)




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##### Table of Contents



ExhibitNumber
    
    Description10.53
    
    Amended and Restated Supply, License and Development Agreement dated
December 28, 2005 between Digital Angel Corporation and VeriChip
Corporation (portions of this agreement have been omitted pursuant
to a request for confidential treatment) (incorporated by reference
to Exhibit 10.4 to the registrants Quarterly Report on Form 10-Q
filed with the Commission on August 7, 2006)10.54
    
    First Amendment to Amended and Restated Supply, License and
Development Agreement dated May 9, 2007 between Digital Angel
Corporation and VeriChip Corporation (incorporated by reference to
Exhibit 10.16 to the registrants Quarterly Report on Form 10-Q
filed with the Commission on May 10, 2007)10.55
    
    Letter Agreement executed by Digital Angel Corporation dated
February 29, 2008 in favor of LV Administrative Services, Inc.
regarding the Amended and Restated Supply, License and Development
Agreement dated December 28, 2005 between Digital Angel Corporation
and VeriChip Corporation (incorporated by reference to Exhibit 10.8
to the registrants Current Report on Form 8-K filed with the
Commission on March 5, 2008)10.56
    
    Securities Purchase Agreement between Applied Digital Solutions,
Inc. and Laurus Master Fund, Ltd., dated August 24, 2006
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on August 25,
2006)10.57
    
    Secured Term Note between Applied Digital Solutions, Inc. and Laurus
Master Fund, Ltd., dated August 24, 2006 (incorporated by reference
to Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on August 25, 2006)10.58
    
    Letter Agreement regarding Amendment of $13,500,000 Note dated as of
February 29, 2008 among Applied Digital Solutions, Inc., Laurus
Master Fund, Ltd., Valens U.S. SPV I, LLC, Valens Offshore SPV I,
Ltd. and PSource Structured Debt Limited (incorporated by reference
to Exhibit 10.10 to the registrants Current Report on Form 8-K
filed with the Commission on March 5, 2008)10.59
    
    Master Security Agreement between Applied Digital Solutions, Inc.
and Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by
reference to Exhibit 10.3 to the registrants Current Report on Form
8-K filed with the Commission on August 25, 2006)10.60
    
    Stock Pledge Agreement between Applied Digital Solutions, Inc. and
Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by
reference to Exhibit 10.4 to the registrants Current Report on Form
8-K filed with the Commission on August 25, 2006)10.61
    
    Common Stock Purchase Warrant between Applied Digital Solutions,
Inc. Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated
by reference to Exhibit 10.5 to the registrants Current Report on
Form 8-K filed with the Commission on August 25, 2006)10.62
    
    Registration Rights Agreement between Applied Digital Solutions,
Inc. and Laurus Master Fund, Ltd., dated August 24, 2006
(incorporated by reference to Exhibit 10.6 to the registrants
Current Report on Form 8-K filed with the Commission on August 25,
2006)10.63
    
    Funds Escrow Agreement among Applied Digital Solutions, Inc., Laurus
Master Fund, Ltd. and Loeb & Loeb LLP, dated August 24, 2006
(incorporated by reference to Exhibit 10.7 to the registrants
Current Report on Form 8-K filed with the Commission on August 25,
2006)10.64
    
    Commercial Loan Agreement between Applied Digital Solutions, Inc.
and VeriChip Corporation dated December 27, 2005 (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on Form
8-K filed with the Commission on January 3, 2006)




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##### Table of Contents



ExhibitNumber
    
    Description10.65
    
    First Amendment to Commercial Loan Agreement between Applied Digital
Solutions, Inc. and VeriChip Corporation dated October 6, 2006
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on October 11,
2006)10.66
    
    Second Amendment to Commercial Loan Agreement between Applied
Digital Solutions, Inc. and VeriChip Corporation dated January 19,
2007 (incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on January 24,
2007)10.67
    
    Third Amendment to Commercial Loan Agreement between Applied Digital
Solutions, Inc. and VeriChip Corporation dated February 8, 2007
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on February 14,
2007)10.68
    
    Fourth Amendment to Commercial Loan Agreement and Security Agreement
between Applied Digital Solutions, Inc. and VeriChip Corporation
dated February 13, 2007 (incorporated by reference to Exhibit 10.4
to the registrants Current Report on Form 8-K filed with the
Commission on February 14, 2007)10.69
    
    Security Agreement between Applied Digital Solutions, Inc. and
VeriChip Corporation dated December 27, 2005 (incorporated by
reference to Exhibit 10.3 to the registrants Current Report on Form
8-K filed with the Commission on January 3, 2006)10.70
    
    First Amendment to Security Agreement between Applied Digital
Solutions, Inc. and VeriChip Corporation dated October 6, 2006
(incorporated by reference to Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with the Commission on October 11,
2006)10.71
    
    Second Amendment to Security Agreement between Applied Digital
Solutions, Inc. and VeriChip Corporation dated January 19, 2007
(incorporated by reference to Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with the Commission on January 24,
2007)10.72
    
    Third Amendment to Security Agreement between Applied Digital
Solutions, Inc. and VeriChip Corporation dated February 8, 2007
(incorporated by reference to Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with the Commission on February 14,
2007)10.73
    
    Third Amended and Restated Revolving Line of Credit Note Working
Capital between Applied Digital Solutions, Inc. and VeriChip
Corporation dated February 8, 2007 (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on February 14, 2007)10.74
    
    Amendment to Third Amended and Restated Revolving Line of Credit
Note dated as of February 29, 2008 between VeriChip Corporation and
Applied Digital Solutions, Inc. (incorporated by reference to
Exhibit 10.7 to the registrants Current Report on Form 8-K filed
with the Commission on March 5, 2008)10.75
    
    Fifth Amendment and Waiver, dated as of November 16, 2006, among
InfoTech USA, Inc., Information Technology Services, Inc. and Wells
Fargo Business Credit, Inc. (incorporated by reference to Exhibit
10.1 to the registrants Current Report on Form 8-K filed with the
Commission on November 17, 2006)10.76
    
    Securities Purchase Agreement between Digital Angel Corporation
and Imperium Master Fund, Ltd. dated February 6, 2007
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on February
12, 2007)10.77
    
    Amendment No. 4 to Securities Purchase Agreement dated May 7,
2007 between Digital Angel Corporation and Imperium Master Fund,
Ltd. (incorporated by reference to Exhibit 10.18 to the
registrants Quarterly Report on Form 10-Q filed with the
Commission on May 10, 2007)




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##### Table of Contents



ExhibitNumber
    
    Description10.78
    
    Amendment No. 5 to Securities Purchase Agreement dated as of June
28, 2007 among Digital Angel Corporation, Imperium Master Fund,
Ltd. and Gemini Master Fund, Ltd. (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on July 5, 2007)10.79
    
    Amendment No. 6 to Securities Purchase Agreement dated as of
August 24, 2007 between Digital Angel Corporation and Imperium
Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 to
the registrants Current Report on Form 8-K filed with the
Commission on August 30, 2007)10.80
    
    10.25% Senior Secured Debenture payable to Imperium Master Fund,
Ltd. dated February 6, 2007 (incorporated by reference to Exhibit
10.2 to the registrants Current Report on Form 8-K filed with
the Commission on February 12, 2007)10.81
    
    Warrant to Purchase Common Stock issued to Imperium Master Fund,
Ltd. dated February 6, 2007 (incorporated by reference to Exhibit
10.3 to the registrants Current Report on Form 8-K filed with
the Commission on February 12, 2007)10.82
    
    Form of Warrant to Purchase Common Stock of Digital Angel
Corporation (incorporated by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K filed with the Commission
on July 5, 2007)10.83
    
    Securities Agreement between Digital Angel Corporation, Digital
Angel Technology Corporation, OuterLink Corporation, DSD Holding
A/S, Signature Industries Limited, Digital Angel International,
Inc., Digital Angel Holdings, LLC, Imperium Advisers, LLC and
Imperium Master Fund, Ltd. dated February 6, 2007 (incorporated
by reference to Exhibit 10.4 to the registrants Current Report
on Form 8-K filed with the Commission on February 12, 2007)10.84
    
    Subsidiary Guarantee between Digital Angel Technology
Corporation, OuterLink Corporation, DSD Holding A/S, Signature
Industries Limited, Digital Angel International, Inc., Digital
Angel Holdings, LLC and Imperium Advisers, LLC dated February 6,
2007 (incorporated by reference to Exhibit 10.5 to the
registrants Current Report on Form 8-K filed with the Commission
on February 12, 2007)10.85
    
    Registration Rights Agreement between Digital Angel Corporation
and Imperium Master Fund, Ltd. dated February 6, 2007
(incorporated by reference to Exhibit 10.6 to the registrants
Current Report on Form 8-K filed with the Commission on February
12, 2007)10.86
    
    Amendment No. 2 to Registration Rights Agreement dated as of June
28, 2007 between Digital Angel Corporation and Imperium Master
Fund, Ltd. (incorporated by reference to Exhibit 10.2 to the
registrants Current Report on Form 8-K filed with the Commission
on July 5, 2007)10.87
    
    Underwriting Agreement among Merriman Curhan Ford & Co., C.E.
Unterberg, Towbin, LLC and Kaufman Bros., L.P., as the
representatives of the underwriters, VeriChip Corporation and
Applied Digital Solutions, Inc. dated February 9, 2007
(incorporated by reference to Exhibit 10.5 to the registrants
Current Report on Form 8-K filed with the Commission on February
14, 2007)10.88
    
    Trademark Assignment Agreement dated as of December 21, 2006
between Applied Digital Solutions, Inc. and VeriChip Corporation
(incorporated by reference to Exhibit 10.105 to the registrants
Annual Report on Form 10-K filed with the Commission on March 15,
2007)10.89
    
    2006 Tax Allocation Agreement dated as of December 21, 2006
between Applied Digital Solutions, Inc. and VeriChip Corporation
(incorporated by reference to Exhibit 10.106 to the registrants
Annual Report on Form 10-K filed with the Commission on March 15,
2007)




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##### Table of Contents



ExhibitNumber
    
    Description10.90
    
    Credit Facility Agreement dated March 15, 2006 between VeriChip
Holdings Inc. and Royal Bank of Canada (incorporated by reference
to Exhibit 10.108 to the registrants Annual Report on Form 10-K
filed with the Commission on March 15, 2007)10.91
    
    General Security Agreement dated March 27, 2006 between Royal
Bank of Canada and VeriChip Holdings Inc. (incorporated by
reference to Exhibit 10.109 to the registrants Annual Report on
Form 10-K filed with the Commission on March 15, 2007)10.92
    
    Stock Purchase Agreement dated May 7, 2007 between Digital Angel
Corporation and Newcomb Communications, Inc. (incorporated by
reference to Exhibit 10.17 to the registrants Quarterly Report
on Form 10-Q filed with the Commission on May 10, 2007)10.93
    
    Satisfaction of Loan Agreement dated May 15, 2007 between Applied
Digital Solutions, Inc. and InfoTech USA, Inc. (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on May 21, 2007)10.94
    
    Letter Agreement regarding Consent to Satisfaction of Loan to
Applied Digital Solutions, Inc., dated May 14, 2007, among Wells
Fargo Bank, National Association, InfoTech USA, Inc., a New
Jersey corporation, InfoTech USA, Inc., a Delaware corporation,
and Information Technology Services, Inc. (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on
Form 8-K filed with the Commission on May 21, 2007)10.95
    
    Omnibus Amendment and Waiver dated as of October 31, 2007 among
Applied Digital Solutions, Inc., VeriChip Corporation, Laurus
Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC,
Valens Offshore SPV II, Corp. and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with the Commission on November
6, 2007)10.96**
    
    Omnibus Amendment Agreement dated February 29, 2008 among Applied
Digital Solutions, Inc., Laurus Master Fund, Ltd., Kallina
Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV II,
Corp., Valens Offshore SPV I, Ltd. and PSource Structured Debt
Limited10.97
    
    Common Stock Purchase Warrant in favor of PSource Structured Debt
Limited dated October 31, 2007 (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on November 6, 2007)10.98
    
    Common Stock Purchase Warrant in favor of Valens Offshore SPV I,
Ltd. dated October 31, 2007 (incorporated by reference to Exhibit
10.3 to the registrants Current Report on Form 8-K filed with
the Commission on November 6, 2007)10.99**
    
    Amendment to Common Stock Purchase Warrant between Applied
Digital Solutions, Inc. and Valens Offshore SPV I, Ltd. dated
February 29, 200810.100
    
    Common Stock Purchase Warrant in favor of Valens U.S. SPV I, LLC
dated October 31, 2007 (incorporated by reference to Exhibit 10.4
to the registrants Current Report on Form 8-K filed with the
Commission on November 6, 2007)10.101
    
    Securities Purchase Agreement dated August 31, 2007 between
Applied Digital Solutions, Inc. and Kallina Corporation
(incorporated by reference to Exhibit 10.1 to the registrants
Current Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.102
    
    Secured Term Note dated August 31, 2007 between Applied Digital
Solutions, Inc. and Kallina Corporation (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7, 2007)




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##### Table of Contents



ExhibitNumber
    
    Description10.103
    
    Letter Agreement regarding Amendment of $7,000,000 Note dated as
of February 29, 2008 among Applied Digital Solutions, Inc.,
Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV
I, Ltd. and Valens Offshore SPV II, Corp. (incorporated by
reference to Exhibit 10.9 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)10.104
    
    Master Security Agreement dated August 31, 2007 between Applied
Digital Solutions, Inc. and Kallina Corporation (incorporated by
reference to Exhibit 10.3 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7, 2007)10.105
    
    Stock Pledge Agreement dated August 31, 2007 among Applied
Digital Solutions, Inc., Kallina Corporation, Computer Equity
Corporation, Digital Angel Corporation and Digital Angel
Technology Corporation (incorporated by reference to Exhibit 10.4
to the registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.106
    
    Intellectual Property Security Agreement dated August 31, 2007
between Applied Digital Solutions, Inc. and Kallina Corporation
(incorporated by reference to Exhibit 10.5 to the registrants
Current Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.107
    
    Intercreditor Agreement dated August 31, 2007 among Applied
Digital Solutions, Inc., Kallina Corporation, Laurus Master Fund,
Ltd., Valens U.S. SPV I, LLC and Valens Offshore SPV II, Corp.
(incorporated by reference to Exhibit 10.6 to the registrants
Current Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.108
    
    Guaranty by Applied Digital Solutions, Inc. in favor of Kallina
Corporation dated August 31, 2007 (incorporated by reference to
Exhibit 10.7 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)10.109
    
    Amendment and Partial Assignment of Loans, Liens and Documents
dated August 31, 2007 among Kallina Corporation, Valens U.S. SPV
I, LLC, and certain other parties named therein (incorporated by
reference to Exhibit 10.8 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7, 2007)10.110
    
    Amendment and Partial Assignment of Loans, Liens and Documents
dated August 31, 2007 among Kallina Corporation, Valens Offshore
SPV II, Corp., and certain other parties named therein
(incorporated by reference to Exhibit 10.9 to the registrants
Current Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.111
    
    Amendment to Warrant dated August 31, 2007 among Applied Digital
Solutions, Inc., Laurus Master Fund, Ltd., Valens Offshore SPV
II, Corp. and Valens U.S. SPV I, LLC (incorporated by reference
to Exhibit 10.10 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)10.112**
    
    Second Amendment to Common Stock Purchase Warrant dated as of
February 29, 2008 among Applied Digital Solutions, Inc., Laurus
Master Fund, Ltd., Valens U.S. SPV I, LLC and PSource Structured
Debt Limited10.113
    
    Intellectual Property Security Agreement dated August 31, 2007
between Applied Digital Solutions, Inc. and Laurus Master Fund,
Ltd. (incorporated by reference to Exhibit 10.11 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.114
    
    Registration Rights Agreement dated August 31, 2007 between
Kallina Corporation and VeriChip Corporation (incorporated by
reference to Exhibit 10.12 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7, 2007)




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##### Table of Contents



ExhibitNumber
    
    Description10.115
    
    Secured Term Note dated August 31, 2007 among Digital Angel
Corporation, Digital Angel Technology Corporation, Fearing
Manufacturing Co., Inc. and Digital Angel International in favor
of Applied Digital Solutions, Inc. (incorporated by reference to
Exhibit 10.13 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)10.116
    
    Digital Angel Corporation Security Agreement dated August 31,
2007 among Applied Digital Solutions, Inc., Digital Angel
Corporation, Digital Angel Technology Corporation, Fearing
Manufacturing Co., Inc. and Digital Angel International
(incorporated by reference to Exhibit 10.14 to the registrants
Current Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.117
    
    Subordination Agreement dated August 31, 2007 among Applied
Digital Solutions, Inc., Kallina Corporation, Valens Offshore SPV
II, Corp. and Valens U.S. SPV I, LLC (incorporated by reference
to Exhibit 10.15 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)10.118
    
    Secured Revolving Note dated August 31, 2007 among Digital Angel
Corporation Digital Angel Technology Corporation, Fearing
Manufacturing Co., Inc., and Digital Angel International in favor
of Kallina Corporation (incorporated by reference to Exhibit
10.16 to the registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)10.119
    
    Security Agreement dated August 31, 2007 among Digital Angel
Corporation, Digital Angel Technology Corporation, Fearing
Manufacturing Co., Inc., Digital Angel International, and Kallina
Corporation (incorporated by reference to Exhibit 10.17 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.120
    
    Stock Pledge Agreement dated August 31, 2007 among Digital Angel
Corporation, Digital Angel Technology Corporation and Kallina
Corporation (incorporated by reference to Exhibit 10.18 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.121
    
    Intellectual Property Security Agreement dated August 31, 2007
among Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., and Kallina
Corporation (incorporated by reference to Exhibit 10.19 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.122
    
    Registration Rights Agreement dated August 31, 2007 between
Digital Angel Corporation and Kallina Corporation (incorporated
by reference to Exhibit 10.20 to the registrants Current Report
on Form 8-K/A filed with the Commission on November 7, 2007)10.123
    
    Common Stock Purchase Warrant in favor of Kallina Corporation
dated August 31, 2007 (incorporated by reference to Exhibit 10.21
to the registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.124
    
    Subsidiary Guaranty by Digital Angel Corporation, Digital Angel
Technology Corporation, Fearing Manufacturing Co., Inc., and
Digital Angel International in favor of Kallina Corporation
dated August 31, 2007 (incorporated by reference to Exhibit 10.22
to the registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.125
    
    Settlement Agreement and General Release dated September 28, 2007
among Hark M. Vasa, H&K Vasa 1999 Family Limited Partnership, H&K
Vasa 2000 Family Limited Partnership, Applied Digital Solutions,
Inc. and Pacific Decision Sciences Corporation (f/k/a PDS
Acquisition Corporation) (incorporated by reference to Exhibit
10.1 to the registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2007)




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##### Table of Contents



ExhibitNumber
    
    Description10.126
    
    Confidential Settlement Agreement and Release dated December 19,
2007 among Verizon Federal Inc., Government Telecommunications,
Inc. and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on December 21, 2007)10.127
    
    Guaranty by Applied Digital Solutions, Inc. in favor of Verizon
Federal Inc. dated December 19, 2007 (incorporated by reference
to Exhibit 10.2 to the registrants Current Report on Form 8-K
filed with the Commission on December 21, 2007)10.128
    
    Subordination Agreement dated December 19, 2007 among Verizon
Federal Inc., Laurus Master Fund, Ltd., Kallina Corporation,
Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens
Offshore SPV II, Corp., PSource Structured Debt Limited and LV
Administrative Services, Inc. (incorporated by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed
with the Commission on December 21, 2007)10.129
    
    Letter Agreement dated December 20, 2007 between VeriChip
Corporation and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.4 to the registrants Current Report on
Form 8-K filed with the Commission on December 21, 2007)10.130
    
    Joinder Agreement dated January 14, 2008 between GT Acquisition
Sub, Inc. and Kallina Corporation (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on January 17, 2008)10.131
    
    Joinder Agreement dated January 14, 2008 among GT Acquisition
Sub, Inc., Kallina Corporation, Valens Offshore SPV I, Ltd.,
Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC and PSource
Structured Debt Limited (incorporated by reference to Exhibit
10.2 to the registrants Current Report on Form 8-K filed with
the Commission on January 17, 2008)10.132
    
    Securities Purchase Agreement dated as of February 29, 2008 among
VeriChip Corporation, Xmark Corporation, Valens Offshore SPV II,
Corp. and LV Administrative Services, Inc. (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)10.133
    
    Secured Term Note dated as of February 29, 2008 among VeriChip
Corporation, Xmark Corporation and Valens Offshore SPV II, Corp.
(incorporated by reference to Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with the Commission on March 5,
2008)10.134
    
    Master Security Agreement dated as of February 29, 2008 among
VeriChip Corporation, Xmark Corporation and LV Administrative
Services, Inc. (incorporated by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K filed with the Commission
on March 5, 2008)10.135
    
    Stock Pledge Agreement dated as of February 29, 2008 among
VeriChip Corporation, Xmark Corporation and LV Administrative
Services, Inc. (incorporated by reference to Exhibit 10.4 to the
registrants Current Report on Form 8-K filed with the Commission
on March 5, 2008)10.136
    
    Intellectual Property Security Agreement dated as of February 29,
2008 among VeriChip Corporation, Xmark Corporation and LV
Administrative Services, Inc. (incorporated by reference to
Exhibit 10.5 to the registrants Current Report on Form 8-K filed
with the Commission on March 5, 2008)10.137
    
    Letter Agreement dated as of February 29, 2008 between VeriChip
Corporation and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.6 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)10.138
    
    Letter Agreement executed by Digital Angel Corporation dated as
of February 29, 2008 in favor of LV Administrative Services, Inc.
(incorporated by reference to Exhibit 10.8 to the registrants
Current Report on Form 8-K filed with the Commission on March 5,
2008)




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##### Table of Contents



ExhibitNumber
    
    Description10.139
    
    Subordination Agreement dated as of February 29, 2008 among
Applied Digital Solutions, Inc., VeriChip Corporation and LV
Administrative Services, Inc. (incorporated by reference to
Exhibit 10.11 to the registrants Current Report on Form 8-K
filed with the Commission on March 5, 2008)10.140
    
    Amendment of Warrants and Conditional Consent to Asset Sales
effective as of February 29, 2008 among Applied Digital
Solutions, Inc., Laurus Master Fund, Ltd., Kallina Corporation,
Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens
Offshore SPV II, Corp. and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.12 to the registrants
Current Report on Form 8-K filed with the Commission on March 5,
2008)10.141**
    
    Amendment to Replacement Common Stock Purchase Warrant dated as
of February 29, 2008 between Applied Digital Solutions, Inc. and
Kallina Corporation21.1**
    
    List of Subsidiaries of Applied Digital Solutions, Inc.23.1**
    
    Consent of Eisner LLP31.1**
    
    Certification by Joseph J. Grillo, Chief Executive Officer and
President, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)31.2**
    
    Certification by Lorraine M. Breece, Senior Vice President and
Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a)
and 15d-14(a)32.1**
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    - Management contract or compensatory plan.**
    
    - Filed herewith.