Document:

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                                                                   EXHIBIT 10.4

                    AMENDED AND RESTATED TRUST AGREEMENT
                    ------------------------------------

                  This Amended and Restated Trust Agreement (the
"Agreement") of the Digital Angel Share Trust, a Delaware statutory trust
 ---------
(the "Trust") is made and entered into as of June 30, 2003, between
      -----
Wilmington Trust Company, a Delaware banking corporation (acting hereunder
not in its individual capacity but solely as trustee hereunder, the
"Trustee"), and Applied Digital Solutions, Inc., a corporation organized
 -------
under the laws of Missouri ("ADS").
                             ---

                                  RECITALS
                                  --------

                  A. This Agreement was originally entered into as of March
1, 2002 between the Trustee and ADS for the purpose of securing certain debt
obligations of ADS and its affiliates to IBM Credit LLC.

                  B. As of the date hereof, ADS has borrowed the sum of
$10,500,000 from certain lenders described herein, for the purpose, in part,
of repaying in full, the obligations of ADS and the Trust to IBM Credit.

                  C. In consideration of such new loan, and in order to
secure and facilitate the payment of the Obligations according to their
terms, ADS has agreed to continue the deposit with the Trustee the MAS
Stock, to continue to be held in trust hereunder on the terms and conditions
set forth herein.

                                  AGREEMENT
                                  ---------

                  NOW THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties hereto hereby agree as
follows:

                                 ARTICLE I.

                                DEFINITIONS
                                -----------

                  "Act" means the Delaware Business Trust Act, 12 Del. C.
                   ---
Sections 3801 et seq.
             -- ---

                  "ADS" is defined in the introductory paragraph of this
                   ---
Agreement.

                  "Advisory Board" means the Advisory Board prescribed by
                   --------------
Section 4.01.

                  "Advisory Board Member" means the member of the Advisory
                   ---------------------
Board.

                  "Affiliate" of any Person means a Person that, directly or
                   ---------
indirectly, through one or more intermediaries, controls, is controlled by
or is under common control with the first mentioned Person. A Person shall
be deemed to control another Person if such first Person possesses directly
or indirectly the power to direct, or cause the direction of, the management
and policies of the second Person, whether through the ownership of voting
securities, by contract or otherwise.

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                  "Bankruptcy Decision" means, with respect to a specified
                   -------------------
entity, any of the following actions: (a) filing any voluntary petition in
bankruptcy on behalf of such entity, (b) consenting to the filing of any
involuntary petition in bankruptcy against such entity, (c) filing any
petition seeking, or consenting to, reorganization or relief under any
applicable federal, state or foreign law relating to bankruptcy or
insolvency, on behalf of such entity, (d) consenting to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of such entity or a substantial part of the property of such
entity, (e) making any assignment for the benefit of creditors on behalf of
such entity, (f) admitting in writing the inability of such entity to pay
its debts generally as they become due, or (g) taking any action by such
entity in furtherance of any of the foregoing actions.

                  "Certificate of Trust" means the Certificate of Trust of
                   --------------------
the Trust filed under the Act with the Delaware Secretary of State on March
1, 2002, as such Certificate of Trust may be amended or restated from time
to time.

                  "Closing Date" is defined in the Securities Purchase
                   ------------
Agreement.

                  "Credit Documents" means the Securities Purchase
                   ----------------
Agreement, the Debentures, the Warrants, the Registration Rights Agreement,
the Pledge Agreement (each of the foregoing, as defined in the Securities
Purchase Agreement) and all dated as of June 30, 2003, and any instruments,
documents, guarantees, schedules of assignment, contracts and similar
agreements, including schedules, attachments, exhibits and ancillary
documentation or other supporting documents, executed by or on behalf of
ADS, and delivered to any Purchaser, pursuant to the Securities Purchase
Agreement or otherwise, and all amendments, supplements and other
modifications to the foregoing from time to time.

                  "Delaware Secretary of State" means the office of the
                   ---------------------------
Secretary of State of the State of Delaware.

                  "Fair Market Value" means, on any date specified, the
                   -----------------
average of the daily Market Price of a share of MAS Stock during the 10
consecutive trading days before such date, except that, if on any such date
the shares of MAS Stock are not listed or admitted for trading on any
national securities exchange or quoted in the over-the-counter market, Fair
Market Value shall be the Market Price on such date.

                  "Final Payment Date" means the date on which all Obligations
                   ------------------
have been paid and satisfied in full.

                  "Final Payment Notice" means the written notice from each
                   --------------------
Purchaser to the Trustee stating that the Final Payment Date has occurred.

                  "IBM Credit" is defined in Recital A.
                   ----------

                  "Indemnified Trustee Person(s)" is defined in Section 6.06.
                   -----------------------------

                  "Independent Agent" shall initially mean the law firm of
                   -----------------
Feldman Weinstein LLP, New York, New York, and any successor law firm
thereto, or any law firm located in New York,

                                    -2-

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New York and designated as such in writing by all of the Purchasers who are
then Holders of Debentures or Warrants, acting through any partner (or
equivalent title) thereof.

                  "Market Price" means, on any date specified, an amount per
                   ------------
share of MAS Stock equal to (i) the last reported sale price of such MAS
Stock, regular way, on such date or, in case no such sale takes place on
such date, the average of the closing bid and asked prices thereof regular
way on such date, in either case as officially reported on the principal
national securities exchange on which such MAS Stock is then listed or
admitted for trading, (ii) if such MAS Stock is not then listed or admitted
for trading on any national securities exchange but is designated as a
national market system security by the NASD, the last reported trading price
of the MAS Stock on such date, (iii) if there shall have been no trading on
such date or if the MAS Stock is not so designated, the average of the
closing bid and asked prices of the MAS Stock on such date as shown by the
NASD automated quotation system, or (iv) if such MAS Stock is not then
listed or admitted for trading on any national exchange or quoted in the
over-the-counter market, the fair value thereof (as of a date which is
within 10 days of the date as of which the determination is to be made)
determined in good faith by the Board of Directors of the issuer of such MAS
Stock.

                  "MAS" means Medical Advisory Systems, Inc., a Delaware
                   ---
corporation, subsequently re-named "Digital Angel Corporation".

                  "MAS Stock" means the common stock, par value $.005 per
                   ---------
share, of MAS, and any stock into which such common stock shall have been
changed, any stock resulting from any reclassification of such common stock,
any other shares of stock issued or issuable with respect thereto (whether
by way of a stock dividend or stock split or in exchange for or upon
conversion of such shares or otherwise in connection with a combination of
shares, recapitalization, merger, consolidation or other corporate
reorganization), and all other stock of any class or classes (however
designated) of MAS (or its successors) the holders of which have the right,
without limitation as to amount, either to all or to a share of the balance
of current dividends or liquidating dividends after the payment of dividends
and distributions on any shares entitled to preference.

                  "Merger Agreement" means that Agreement and Plan of Merger
                   ----------------
by and among ADS, Digital Angel Corporation, a Delaware corporation, MAS,
and Acquisition Subsidiary, Inc., a Delaware corporation, dated as of
November 1, 2001.

                  "Obligations" means the obligations of ADS under the
                   -----------
Credit Documents to (i) pay interest as set forth in the Debentures, (ii)
pay principal as set forth in the Debentures, (iii) honor conversion or
exchange notices pursuant to the Debentures, (iv) honor Warrant exercises as
set forth therein, and (v) otherwise perform ADS' covenants contained in the
various Credit Documents.

                  "Person" means an individual, a corporation, an
                   ------
association, a partnership, an estate, a trust, a limited liability company
and any other entity or organization, governmental or otherwise.

                  "Purchaser" means the Persons who are Holders of the
                   ---------
Debentures at any time ("Holder" as defined in the Debenture).

                                    -3-

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                  "Registration Rights Agreement" means that certain
                   -----------------------------
Registration Rights Agreement between MAS and ADS, dated as of March 27,
2002 and attached hereto as Exhibit A.
                            ---------

                  "Required Amount of Cash" means (a) the Trigger Amount or
                   -----------------------
such other amount as is then due and payable by the Trust under the Credit
Documents, minus (b) the amount of cash then in the Trust Estate, plus (c)
the costs of liquidating sufficient shares of MAS Stock held in the Trust
Estate to generate net proceeds equal to the amount produced by subtracting
clause (b) from clause (a).

                  "Trigger Amount" means the amount stated in a Trigger
                   --------------
Notice as owed but not timely paid by ADS under the Credit Documents.

                  "Trigger Event" means any Event of Default by ADS under
                   -------------
the Debentures (or any of them) or the Pledge Agreement, as defined therein.

                  "Trigger Notice" means a written notice from any Purchaser
                   --------------
to the Trustee stating that there has been and is continuing a Trigger
Event, specifying the Trigger Amount.

                  "Trust" means the Delaware statutory business trust formed
                   -----
pursuant to this Agreement and known as "Digital Angel Share Trust," which
was formed as of March 1, 2002, under the Act pursuant to the filing of the
Certificate of Trust.

                  "Trustee" means Wilmington Trust Company, not in its
                   -------
individual capacity, but solely as a trustee hereunder, and any successor
trustee appointed in accordance with Section 3807 of the Act and Section 6.04.

                  "Trust Estate" is defined in Article III.
                   ------------

                                 ARTICLE II.

                                   GENERAL
                                   -------

                  Section 2.01. Formation of the Trust.
                                ----------------------

                  (a) The Trust created hereby shall be known as "Digital
Angel Share Trust," in which name the Trustee may conduct the affairs of the
Trust, make and execute contracts and other instruments on behalf of the
Trust and sue and be sued on behalf of the Trust. ADS hereby appoints
Wilmington Trust Company as trustee of the Trust effective as of the date
hereof, to have all the rights, powers and duties set forth herein and in
the Act. Wilmington Trust Company hereby agrees to hold the Trust Estate as
Trustee on behalf of the Trust upon the terms and conditions set forth
herein. The Trustee is hereby authorized to file the Certificate of Trust
with the Delaware Secretary of State pursuant to Section 3810 of the Act.

                  (b) It is the intention of the parties hereto that the Trust
constitute a business trust under the Act and that this Trust Agreement
constitute the governing instrument of the

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Trust. Effective as of the date hereof, the Trustee shall have all rights,
powers and duties set forth herein and in the Act with respect to
accomplishing the purposes of the Trust.

                  Section 2.02. Name, Principal Office, and Name and Address
                                --------------------------------------------
of Trustee as Agent for Service of Process.
------------------------------------------

                  (a) The principal place of business and office of the Trust
shall be c/o Wilmington Trust Company, Rodney Square North, 1100 North
Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust
Administration. The Trustee is hereby designated to accept service of
process on behalf of the Trust at the address provided in the preceding
sentence. The Trustee may change the address set forth in this Section 2.02
upon written notice to each Advisory Board Member.

                  (b) The Trust shall be located and administered in, and all
bank accounts of the Trust maintained in, the State of Delaware. Payments
shall be received by the Trust only in the State of Delaware and payments
will be made by the Trust only from the State of Delaware.

                  Section 2.03. Purpose. The purpose of the Trust is to own,
                                -------
vote (subject to Section 4.04) and dispose of the Trust Estate as directed
in writing by the Advisory Board and with the ultimate objective of securing
and facilitating the repayment and satisfaction of the Obligations in
accordance with the terms and conditions of the Credit Documents. In
furtherance of such purpose, the Trust shall act as pledgeholder under the
Credit Documents, this Agreement and any other agreement, document or
instrument necessary or incidental thereto, and shall make all filings
required under Federal securities laws or otherwise in connection with its
ownership of the MAS Stock held in the Trust Estate. Pursuant to specific
instruction from ADS, or as otherwise provided in Article V hereof, the
Trustee shall timely honor all requests for exchange of any principal amount
of any Debenture into shares of MAS Stock and for the exercise of any
Warrant into shares of MAS Stock. The Trust will not conduct activities
other than those contemplated by this Section 2.03, and, except as required
in furtherance of its purpose, the Trust shall not: (i) have any property,
rights or interests, whether real or personal, tangible or intangible, (ii)
incur any legal liability or obligation, whether fixed or contingent,
matured or unmatured, or (iii) subject any of the Trust Estate to any
mortgage, lien, security interest or other claim or encumbrance.

                  Section 2.04. Certain Covenants Relating to the Separateness
                                ----------------------------------------------
of the Trust. The Trust shall maintain its separate existence and,
------------
specifically, shall conduct its affairs in accordance with, and ADS agrees
that it will not take any actions in its dealings with the Trust or with
other Persons (including creditors of ADS) that are inconsistent with, the
following:

                  (a) The Trust shall maintain its books, records and bank
accounts separate from those of any other Person.

                  (b) The Trust shall not commingle or pool any of its funds
or other assets with those of any other Person, and it shall, through the
Trustee, hold all of its assets in its own name.

                  (c) The Trust, through the Trustee, shall conduct its own
business in its own name and shall not operate, or purport to operate,
collectively as a single or consolidated business entity with respect to
any Person.

                                    -5-

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                  (d) The Trust has done, or caused to be done, and shall do,
all things necessary to observe all Delaware statutory business trust
formalities and other organizational formalities, and preserve its existence
(subject to Article VII and the other express provisions hereof), and it
shall not, nor will it permit any Affiliate or constituent party to, amend,
modify or otherwise change this Agreement in a manner which would adversely
affect the existence of the Trust as a special purpose entity.

                  (e) The Trust shall not have any employees.

                  (f) Except pursuant to the Credit Documents, the Trust does
not, and shall not, (i) guarantee, become obligated for, or hold itself or
its credit out to be responsible for or available to satisfy, the debts or
obligations of any other Person or (ii) control the decisions or actions
respecting the daily business or affairs of any other Person.

                  (g) The Trust shall, at all times, hold itself out to the
public as an entity separate and distinct from any other Person and shall
correct any known misunderstanding regarding its separate identity.

                  (h) The Trust shall not identify itself as a division or
agent of any other Person.

                  (i) The Trust shall maintain its assets in such a manner
that it will not be costly or difficult to segregate, ascertain or identify
its individual assets from those of any other Person.

                  (j) The Trust shall not use its separate existence to abuse
creditors or to perpetrate a fraud, injury, or injustice on creditors in
violation of applicable law.

                  (k) The Trust shall not be consensually merged or legally
consolidated with any other Person.

                  Section 2.05. Creditors of ADS. Except pursuant to the Credit
                                ----------------
Documents, to the fullest extent permitted by applicable law, no creditor of
ADS or any of its Affiliates shall have any right to obtain possession of,
or otherwise exercise legal or equitable remedies with respect to, the Trust
Estate.

                                ARTICLE III.

                                CONTRIBUTION
                                ------------

                  Section 3.01. Continuation of Assignment. On the Closing
                                --------------------------
Date, the Trust shall (a) retain all of its right, title and interest in
15,000,000 shares of MAS Stock, and (b) transfer the remaining 4,600,000
shares of MAS Stock which the Trust now owns of record in whatever manner
it is directed in writing by ADS. The Trustee acknowledges its continuing
record ownership and possession of the 15,000,000 shares of MAS Stock,
which shall constitute the initial trust estate (including all income on
and proceeds of such initial trust estate, the "Trust Estate"). The Trustee
                                                ------------
hereby declares that it will hold the Trust Estate in trust on the terms
and conditions set forth herein. For clarity, the same 15,000,000 shares
of MAS Stock constituting

                                    -6-

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the Trust Estate shall serve concurrently as the shares issuable to a
Purchaser on exchange of a Debenture, issuable to a Purchaser as payment of
interest on or principal of a Debenture, shares issuable to a Purchaser on
exercise of a Warrant, and as collateral under the Pledge Agreement in the
case of an Event of Default under a Debenture or the Pledge Agreement.

                  Section 3.02. Legal Title to Trust Property. Legal title
                                -----------------------------
to the Trust Estate shall be vested at all times in the Trust as a separate
legal entity except where applicable law in any jurisdiction requires title
to any part of the Trust Estate to be vested in a trustee or trustees, in
which case legal title shall be deemed to be vested in the Trustee, a
co-trustee and/or a separate trustee, as the case may be.

                  Section 3.03. Beneficial Owner. ADS shall be deemed to be
                                ----------------
the beneficial owner of the Trust Estate.

                                 ARTICLE IV.

                              TRUST GOVERNANCE
                              ----------------

                  Section 4.01. Advisory Board.
                                --------------

                  (a) General. The Trustee shall act upon and in accordance
                      -------
with this Agreement and the written instructions of the Advisory Board,
which shall initially consist of Scott Silverman, Chief Executive Officer of
ADS, who shall be replaced when and if another Person shall become Chief
Executive Officer of ADS, and thereafter such successor Chief Executive
Officer shall become the Advisory Board Member, who shall be similarly
replaced by the next successive Chief Executive Officer of ADS and so forth
until the dissolution of this Trust. The Trustee shall be entitled to rely
on the most recent public filing of ADS with the Securities and Exchange
Commission as to the identity of the Chief Executive Officer, or may request
and rely upon an incumbency certificate from the Secretary of ADS.

                  (b) Meetings. The Advisory Board shall meet as needed.
                      --------

                  (c) Action by Written Consent. Any action required or
                      -------------------------
permitted to be taken at any meeting of the Advisory Board may be taken
without a meeting if the requisite number of Advisory Board Members consents
thereto in writing, and the writing or writings are filed with the minutes
or proceedings of the Advisory Board.

                  (d) Compensation. The Advisory Board shall serve without
                      ------------
compensation from the Trust.

                  (e) Advisory Board Member Liability. To the full extent
                      -------------------------------
permitted by applicable law currently or hereafter in effect, no Advisory
Board Member will be personally liable, for breach of fiduciary duty or
otherwise, to the Trust, the Trustee, any Purchaser or ADS for or with
respect to any acts or omissions in the performance of his or her duties as
an Advisory Board Member. No repeal or modification of this Section 4.01(e)
will adversely affect any right or protection of an Advisory Board Member
existing prior to such repeal or modification.

                                    -7-

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                  (f) Indemnification. Each person who is or was or had agreed
                      ---------------
to become an Advisory Board Member will be indemnified by the Trust to the
full extent permitted by applicable law as currently or hereafter in effect
and will be entitled to advancement of expenses in connection therewith. The
right of indemnification and of advancement of expenses provided in this
Section 4.01(f): (i) will not be exclusive of any other rights to which any
Person seeking indemnification or advancement of expenses may otherwise be
entitled, including without limitation pursuant to any contract approved by
a majority of all Advisory Board Members (whether or not the Advisory Board
Members approving such contract are or are to be parties to such contract or
similar contracts), and (ii) will be applicable to matters otherwise within
its scope whether or not such matters arose or arise before or after the
date of this Agreement. Any amendment or repeal of, or addition of any
provision inconsistent with, this Section 4.01(i) will not adversely affect
any right or protection existing hereunder, or arising out of the facts
occurring, prior to such amendment, repeal, or adoption and no such
amendment, repeal, or adoption will affect the legality, validity, or
enforceability of any contract entered into or right granted prior to the
effective date of such amendment, repeal, or adoption. If so determined by
the Advisory Board, the Trust may obtain insurance to support its
indemnification obligations hereunder, the cost of which shall be paid from
the Trust Estate.

                  Section 4.02. Major Decisions. The following actions shall
                                ---------------
require the unanimous vote of the Advisory Board Members:

                  (a) (i) filing any voluntary petition in bankruptcy on behalf
of the Trust, (ii) consenting to the filing of any involuntary petition in
bankruptcy against the Trust, (iii) filing any petition seeking, or
consenting to, reorganization or relief under any applicable federal, state
or foreign law relating to bankruptcy or insolvency, on behalf of the Trust,
(iv) consenting to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Trust or a
substantial part of the property of the Trust, (v) making any assignment for
the benefit of creditors on behalf of the Trust, (vi) admitting in writing
the Trust's inability to pay its debts generally as they become due, or
(vii) taking any action by the Trust in furtherance of any of the foregoing
actions;

                  (b) determining to liquidate or dissolve the Trust;

                  (c) approving the merger, consolidation, sale or transfer
of all or a substantial amount of assets or other change in control
transaction involving the Trust, provided that in no event may any of the
aforementioned activities occur with any entity that may seek bankruptcy
protection or if such merger, consolidation, sale or transfer would
undermine the solvency of the Trust;

                  (d) except as permitted or required pursuant to Article V,
approving the payment or making of any distributions from the Trust;

                  (e) approving amendments to the constituent documents of the
Trust or the Credit Documents; or

                  (f) voting the MAS Stock in favor of a Bankruptcy Decision
with respect to MAS or any of its direct or indirect subsidiaries if, at the
time such Bankruptcy Decision is

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implemented or is to be implemented, (i) a Bankruptcy Decision has been made
with respect to ADS or any of its direct or indirect subsidiaries, or (ii)
any borrower under the Credit Documents is in default under or with respect
to any obligation for borrowed money, including the Credit Documents,
regardless of whether such default has been declared.

                  Section 4.03. Voting Rights with Respect to the MAS Stock.
                                -------------------------------------------
Except as otherwise specified in this Section, prior to such time as the MAS
Stock has been sold or otherwise released by the Trust, the Trustee shall
exercise the right to vote such MAS Stock as instructed in writing by the
Advisory Board in accordance with the terms hereof. After delivery of the
Final Payment Notice, ADS shall have the right to direct the Trustee with
respect to the voting of all MAS Stock then in the Trust Estate.

                                 ARTICLE V.

                 MAS STOCK LIQUIDATIONS; FINAL DISTRIBUTION
                 ------------------------------------------

                  Section 5.01. Release of MAS Stock Upon Exchange of
                                -------------------------------------
Debentures or Exercise of Warrants. From time to time, when the Trustee
----------------------------------
receives a Notice of Exchange from a Purchaser with respect to a Debenture
or a Notice of Exercise from a Purchaser with respect to a Warrant, the
Trustee shall promptly take such actions as are requested by the Purchaser
in such Notice as may be necessary to cause MAS and its transfer agent to
transfer the requisite number of shares of MAS Stock from the Trust to the
account designated by the Purchaser for such purpose, in accordance with the
provisions of the Debentures and the Warrants via the Depository Trust
Company DWAC system, if possible. The Trustee shall immediately notify ADS
and the Independent Agent of such Notice of Exchange or Notice of Exercise.
The Trustee shall act upon any such request upon receipt of a confirmatory
instruction from the Independent Agent, and without the need for any such
confirmatory instruction from ADS or the Advisory Board. The Trustee is
further authorized to similarly transfer shares of MAS Stock from the Trust
to the Purchasers upon the direction of ADS as payment of interest on, or
repayment of principal of, the Debentures, at the discretion of ADS, but
with ADS being subject to the various conditions precedent thereto as set
forth in the Debentures. ADS shall immediately notify Purchasers'
Representative of any such ADS notice. The Trustee shall be entitled to rely
on any written notice from any Purchaser or ADS to take any such action
which such notice states that all conditions precedent to such action have
been met, without further inquiry of any Person, other than the Independent
Agent with respect to any written notice from any Purchaser.

                  Section 5.02. MAS Stock Liquidations. From time to time,
                                ----------------------
when any sums are due and payable under the Credit Documents, upon receipt
of a Trigger Notice and a confirmatory instruction from the Independent
Agent, the Trustee shall promptly take action to liquidate the amount of MAS
Stock held in the Trust Estate required in order to generate the Required
Amount of Cash. Such action may include the sale of some or all of the MAS
Stock held in the Trust Estate in private transactions or on a national
stock exchange or quotation system, utilizing the registration rights
available pursuant to the Registration Rights Agreement where necessary. In
effecting such sale(s) of MAS Stock, the Trustee is authorized as
pledgeholder under the Pledge Agreement to release a sufficient number of
shares of MAS Stock to facilitate such sale and will endeavor not to sell
shares of MAS Stock in a manner which would disrupt an orderly market or is
reasonably likely to have an adverse impact on the market

                                    -9-

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price of MAS Stock and will use commercially reasonable efforts to maximize
the per share value realized for such MAS Stock. From the proceeds of such
MAS Stock liquidations and all other cash then held in the Trust Estate, the
Trustee shall (i) pay the fees and expenses incurred by it in accomplishing
such liquidations, and (ii) distribute to the Purchasers, pro-rata in
accordance with the original principal amounts of their respective
Debentures (except if one of the Debentures shall not then be outstanding,
pro-rata to the remaining Purchasers) as set forth in the Securities
Purchase Agreement (or in a certificate executed by all Purchasers and
delivered to the Trustee for such purpose, in which case the distribution
provisions of the latest dated such certificate shall control) the amounts
due and payable under the Credit Documents. Any excess proceeds shall remain
in the Trust Estate. The Trustee may rely, without investigation, on each
Purchaser's written instructions to it as to the place and method of
delivery to such Purchaser of any such funds.

                  Section 5.03. Final Distribution. Upon receipt of the Final
                                ------------------
Payment Notice, the Trust shall be dissolved pursuant to Article VII.

                  Section 5.04. Trust Expenses. In the event ADS fails to pay
                                --------------
the compensation or reimbursement due the Advisory Board Members pursuant to
Section 4.01(d), any indemnification amount or expense advance payable
pursuant to Section 4.01(f), the Trustee's fees and expenses as provided in
Section 6.07, or any indemnification amount payable pursuant to Section 6.06
within 5 business days after demand, the Trustee is hereby authorized to
liquidate such amount of MAS Stock held in the Trust Estate as is necessary
to pay such amounts. Payment in satisfaction of the Trustee's fees and
expenses as provided in Section 6.07 shall be made in full prior to any
other payment or distribution permitted or required hereunder.

                                 ARTICLE VI.

              CONCERNING THE TRUSTEE AND THE INDEPENDENT AGENT
              ------------------------------------------------

                  Section 6.01. General.
                                -------

                  (a) In the exercise or administration of the Trust hereunder,
the Trustee, at the expense of ADS (paid as specified in Section 6.07), may
(i) act directly or through agents or attorneys pursuant to agreements
entered into with any of them, and the Trustee shall not be liable for the
default or misconduct of such agents or attorneys if such agents or
attorneys shall have been selected by the Trustee with reasonable care; and
(ii) consult with counsel, accountants and other skilled Persons to be
selected with reasonable care and employed by the Trustee, and it shall not
be liable for anything done, suffered or omitted in good faith by it in
accordance with the advice or opinion of any such counsel, accountants or
other skilled Persons if such advice or opinion pertains to such matters as
the Trustee may reasonably presume to be within the scope of such counsel's,
accountant's or other skilled Person's area of expertise.

                  (b) Except as expressly provided herein, (i) in accepting
the Trust hereby created, Wilmington Trust Company acts solely as Trustee
hereunder and not in its individual capacity, and (ii) all Persons having
any claim against the Trustee or the Trust by reason of the transactions
contemplated by this Agreement shall look only to the Trust's property for
payment or satisfaction thereof.

                                    -10-

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                  (c) The Trustee will administer the business and affairs of
the Trust in accordance with the terms of the Act and this Agreement;
provided, however, that the Trustee undertakes to perform only such duties
--------  -------
as are specifically set forth in this Agreement and as the Trustee may be
duly directed from time to time in writing by the appropriate parties
specified herein. The Trustee shall not have any duty or obligation to
manage, control, use, sell, dispose of or otherwise deal with the Trust or
to otherwise take or refrain from taking any action under this Agreement
except as expressly required by the terms hereof or as expressly provided in
written instructions from the appropriate parties specified herein, and no
implied duties or obligations shall be read into this Agreement against the
Trustee. Wilmington Trust Company nevertheless agrees that it will, at its
own cost and expense (and not at the expense of the Trust), promptly take
all action as may be necessary to discharge any liens on any part of the
Trust Estate which are attributable to actions by or claims against
Wilmington Trust Company that are not related to the ownership of any part
of the Trust Estate or the administration of the Trust Estate or the
transactions contemplated by this Agreement.

                  (d) The Trustee shall not be required to take any action
under this Agreement if the Trustee shall reasonably determine or shall have
been advised by counsel that such action is contrary to the terms of this
Agreement or is otherwise contrary to applicable law.

                  (e) Whenever the Trustee is unable to decide between
alternative courses of action permitted or required by the terms of this
Agreement, or is unsure as to the application, intent, interpretation or
meaning of any provision hereof, the Trustee may give notice (in such form
as shall be appropriate under the circumstances) to the Advisory Board
Members requesting written instructions as to the course of action to be
adopted, and, to the extent the Trustee acts in good faith in accordance
with any such appropriate instruction received, the Trustee shall not be
liable on account of such action or inaction to any Person. If the Trustee
shall not have received appropriate instructions within ten days of such
notice (or within such shorter period of time as reasonably may be specified
in such notice or may be necessary under the circumstances), it may, but
shall be under no duty to, take or refrain from taking such action which is
consistent, in its view, with this Agreement and the Trust's purpose (as set
forth in Section 2.03), and the Trustee shall have no liability to any
Person for any such action or inaction.

                  (f) In no event whatsoever shall the Trustee be liable for
any representation, warranty, covenant, agreement, indebtedness or other
obligation of the Trust; provided, however, the foregoing shall in no event
                         --------  -------
whatsoever relieve the Trustee from any liability resulting from the
Trustee's bad faith, willful misconduct or gross negligence.

                  (g) The Trustee may rely upon and shall incur no liability
to anyone in acting upon any signature, instrument, notice, resolution,
request, consent, order, certificate, report, opinion, bond or other
document or paper reasonably believed by it to be genuine and reasonably
believed by it to be signed by the proper party or parties. The Trustee may
accept a certified copy of a resolution of the board of directors or other
governing body of any Person as conclusive evidence that such resolution has
been duly adopted by such body and that the same is in full force and
effect. As to any fact or matter the manner of ascertainment of which is not
specifically prescribed herein, the Trustee may for all purposes hereof rely
on a certificate, signed by the president or any vice president or by the
treasurer or any assistant treasurer or the

                                    -11-

<PAGE>
<PAGE>

secretary or any assistant secretary or any trust officer (or equivalent
position) of the relevant party, as to such fact or matter, and such
certificate shall constitute full protection to the Trustee for any action
taken or omitted to be taken by it in good faith reliance thereon.

                  (h) The Trustee shall not be required to take any action that
is inconsistent with the purposes of the Trust set forth in Section 2.03.

                  (i) The Trustee shall not have any responsibility or
liability for or with respect to the genuineness, value, sufficiency or
validity of the Trust Estate. The Trustee shall in no event assume or incur
any liability, duty or obligation to any Person other than as expressly
provided for herein, and in no event shall the Trustee have any implied
duties or obligations hereunder.

                  (j) The Trustee shall incur no liability if, by reason of
any provision of any future law or regulation thereunder, the Trustee shall
be prevented or forbidden from doing or performing any act or thing which
the terms of this Agreement provide shall or may be done or performed.

                  (k) No provision of this Agreement shall require the Trustee
to expend or risk its personal funds, or otherwise incur any financial
liability in the performance of its rights or powers hereunder, if the
Trustee shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured or provided to it.

                  (l) The Trustee shall not be liable for the default or
misconduct of the Advisory Board and shall not be liable for any act or
omission taken at the direction of the Advisory Board.

                  (m) Every provision of this Agreement relating to the Trustee
shall be subject to the provisions of this Section 6.01.

                  Section 6.02. Acceptance of the Trust. The Trustee declares
                                -----------------------
that it accepts the trust created hereunder and agrees to perform its duties
under this Agreement and the Act but only upon the terms of this Agreement.

                  Section 6.03. Authority and Duties of the Trustee.
                                -----------------------------------

                  (a) The Trustee is authorized and directed to execute and
deliver this Agreement, and to execute and deliver on behalf of the Trust,
the Credit Documents and any other document or instrument attached as an
Exhibit to, contemplated by, or necessary or incidental hereto, in such form
as the Advisory Board shall approve, as evidenced conclusively by the
Trustee's execution thereof. The execution and delivery of, and performance
of the terms of any other document or instrument necessary or incidental
hereto shall be deemed not to conflict with or constitute a breach or
default under this Agreement. The Trustee shall have only such authority and
shall perform such duties as are expressly set forth in this Agreement.

                                    -12-

<PAGE>
<PAGE>

                  (b) Upon the written instruction of the appropriate party
specified herein, the Trustee shall execute, acknowledge, deliver, file or
record any document or instrument necessary or appropriate to carry out the
provisions of this Agreement in such form as is provided to it.

                  (c) The Trustee shall have the power and authority to
execute, deliver, acknowledge and file all necessary documents and to
maintain all necessary records of the Trust as required by the Act.

                  (d) In the performance of its duties under this Agreement,
the Trustee may rely on any document believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in any such document, but the Trustee,
in its discretion, may make further inquiry or investigation.

                  (e) The Trustee shall cause to be prepared and filed such
securities law and tax filings and returns relating to the Trust, and shall
make such tax elections as may from time to time be required or appropriate
under any applicable Federal, state or local tax statute or rule or
regulation thereunder, in accordance with the Advisory Board's written
instructions; provided that the Trustee shall not make any tax elections
with respect to the Trust that are inconsistent with the income tax
characterization of the Trust as stated in Section 9.06.

                  (f) Subject to the provisions of any applicable
confidentiality agreement to which the Trust is or becomes a party, the
Trustee shall furnish to the Advisory Board, promptly upon receipt thereof,
duplicates or copies of all reports, notices, requests, demands,
certificates, financial statements and any other instruments furnished to
the Trustee hereunder; provided that the Trustee shall not be required to
                       --------
furnish the Advisory Board with a copy of any such materials if the Trustee
determines that such Person has otherwise received such copies, unless such
Person so requests.

                  Section 6.04. Resignation of the Trustee.
                                --------------------------

                  (a) The Trustee may resign by giving 30 days' prior written
notice to the Advisory Board. In the case of the resignation of the Trustee,
the Advisory Board shall appoint a Person to serve as successor Trustee,
provided that such Person shall in all respects satisfy the requirements of
Section 3807 of the Act, or any successor provision, and shall be a bank or
trust company incorporated and doing business within the United States of
America, whose business shall consist at least in part of serving as trustee
in arrangements comparable to those contemplated hereby and having a
combined capital and surplus of at least $50,000,000, if there be such an
institution willing, able and legally qualified to perform the duties of the
Trustee hereunder upon reasonable or customary terms. The appointment of the
successor Trustee shall take effect concurrently with (i) the resignation of
the former Trustee and (ii) the ratification of this Agreement, and no
resignation of a Trustee shall be effective absent the concurrent
appointment of a successor Trustee.

                  (b) If a successor Trustee shall not have been appointed
within 30 days after such notice of resignation, the Trustee or the Advisory
Board may apply to any court of competent jurisdiction to appoint a
successor Trustee to act until such time as a successor shall have been
appointed as above provided.

                                    -13-

<PAGE>
<PAGE>

                  (c) Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation to which substantially all the corporate trust
business of the Trustee may be transferred, shall, subject to such
corporation satisfying in all respects the requirements set forth in Section
6.04(a), be the Trustee hereunder without further action.

                  (d) Upon the substitution of the Person serving as Trustee,
the successor Trustee shall file an amendment to the Certificate of Trust
with the Secretary of State in accordance with the provisions of Section
3810 of the Act, indicating the change in the Trustee.

                  Section 6.05. Liability.
                                ---------

                  (a) The Trustee shall not be personally liable under any
circumstances, except (i) for its own bad faith, willful misconduct or gross
negligence, and (ii) for taxes, fees or other charges on, based on or
measured by any fees, commissions or compensation received by the Trustee in
connection with any of the transactions contemplated by this Agreement.

                  (b) The provisions of this Agreement, to the extent that
they restrict the duties and liabilities of the Trustee otherwise existing
at law or in equity, replace such other duties or liabilities of the Trustee
to the extent permissible under law or in equity.

                  (c) The Trustee shall not be liable for the default or
misconduct of the Advisory Board or ADS.

                  (d) The Trustee shall not be liable for voting (or refraining
from voting) the MAS Stock held in the Trust Estate so long as such shares
are voted (or not voted) in accordance with and as required by Section 4.04.

                  Section 6.06. Indemnification. ADS shall indemnify, pay,
                                ---------------
protect, and hold harmless each of the Trustee, its officers, directors,
employees, shareholders and agents (collectively the "Indemnified Trustee
                                                      -------------------
Persons" or individually an "Indemnified Trustee Person") from and against
-------                      --------------------------
any and all liabilities, obligations, losses, damages, claims, actions,
judgments, suits, proceedings, taxes, costs, expenses and disbursements of
any kind or nature whatsoever including, without limitation, all reasonable
legal fees, third party costs and expenses of defense, appeal and settlement
of any and all suits, actions, or proceedings instituted against such
Indemnified Trustee Person and all reasonable third party costs of
investigation in connection therewith that may be imposed on, incurred by,
or asserted against an Indemnified Trustee Person relating to or arising out
of any action or inaction on the part of the Trust or an Indemnified Trustee
Person in respect of the Trust. If any action, suit, or proceeding shall be
pending against one or more Indemnified Trustee Persons relating to or
arising out of any action or inaction of the Indemnified Trustee Person or
Indemnified Trustee Persons, ADS shall have the right to assume the defense
of the Indemnified Trustee Person or Indemnified Trustee Persons in which
case such defense shall be conducted by counsel chosen by ADS and reasonably
satisfactory to the Indemnified Trustee Person or Indemnified Trustee
Persons and Purchasers' Representative; provided, however, that if an
                                        --------  -------
Indemnified Trustee Person is advised by its counsel that due to actual or
potential conflicting interests representation by the same

                                    -14-

<PAGE>
<PAGE>

counsel would be inappropriate under applicable standards of professional
conduct, such Indemnified Trustee Person may, at the expense of ADS, employ
separate counsel of its choice with respect to all matters as to which such
conflicting interests arise in any such action. The indemnities contained in
this Section shall survive the resignation of the Trustee, termination of
the Trust or the termination of this Agreement.

                  Section 6.07. Fees and Expenses. The Trustee's fees (as
                                -----------------
detailed on Exhibit D) and all reasonable out-of-pocket expenses,
            ---------
disbursements and advances incurred or made by the Trustee, in its capacity
as Trustee hereunder, including, without limitation, the costs and expenses
of the winding up, liquidation and termination of the Trust, shall be paid
by ADS promptly upon written request therefor.

                  Section 6.08. Concerning the Independent Agent. The
                                --------------------------------
Independent Agent shall be subject to the same rights and protections,
subject to the same limitations thereon, as the Trustee pursuant to Section
6.01, 6.05(a), (b) or (c) (including at the end of (c) "any Purchaser") and
6.06, except that such indemnification shall be the joint and several
liability of ADS and every Purchaser, as if every reference therein to the
Trustee were to the Independent Agent. The Independent Agent shall be
entitled to receive its customary hourly fees for its services hereunder,
which shall be paid by ADS upon delivery of an invoice therefore, and
failing such payment, by the Purchasers, jointly and severally.

                                ARTICLE VII.

                  DISSOLUTION AND LIQUIDATION OF THE TRUST
                  ----------------------------------------

                  Section 7.01. Dissolution of the Trust. The Trust shall be
                                ------------------------
dissolved, wound up and terminated upon delivery by the several Purchasers
of the Final Payment Notice, as provided in Section 5.03.

                  Section 7.02. Liquidation of the Trust. In connection with
                                ------------------------
the dissolution of the Trust, the assets of the Trust shall be liquidated at
the written direction of ADS and applied as follows: (i) first, to pay the
costs and expenses of the winding up, liquidation and termination of the
Trust, including all amounts owed to the Trustee, (ii) second, to establish
reserves to the extent required by the Act and any applicable law, in each
case, in the order of priority provided by law, and (iii) third, to ADS.

                  Section 7.03. Termination of the Trust.
                                ------------------------

                  (a) The Trust (and this Agreement) shall be deemed terminated
when all of the Trust's assets shall have been disposed of and distributed
as provided herein.

                  (b) Upon the winding up of the Trust and its termination,
the Trustee shall cause the Certificate of Trust to be canceled by filing a
certificate of cancellation with the Delaware Secretary of State in
accordance with the provisions of Section 3810 of the Act.

                                    -15-

<PAGE>
<PAGE>

                                ARTICLE VIII.

                                   NOTICES
                                   -------

                  Section 8.01. Notices. All notices, demands, consents or
                                -------
requests required or permitted under this Agreement must be in writing, and
shall be delivered by facsimile, courier or first class mail, postage
prepaid, addressed as follows. Each notice hereunder must be delivered to
the Trustee, ADS, each Advisory Board Member and Purchasers' Representative.

                           (i) If to the Trustee, as set forth in Section 2.01.

                           (ii) If to ADS:

                                        Applied Digital Solutions, Inc.
                                         400 Royal Palm Way, Suite 410
                                           Palm Beach, Florida 33480
                                        Attention: Debenture Department
                                           Facsimile: (561) 805-8002
                                  with an e-mail copy to: debentures@adsx.com

                           (iii) If to the Advisory Board Members:

                                   c/o ADS

                           (iv) If to a Purchasers' Representative:

                                   Midsummer Capital
                                   485 Madison Ave.
                                   23rd Floor
                                   New York, NY  10022
                                   Facsimile: 212-584-2142
                                   Attention: Scott Kaufman

                                ARTICLE IX.

                          MISCELLANEOUS PROVISIONS
                          ------------------------

                  Section 9.01. Entire Agreement. This Agreement (including,
                                ----------------
without limitation, the exhibits hereto) supercedes all prior agreements,
written or oral, among the parties hereto relating to the transactions
contemplated hereby, and each of the parties hereto represents and warrants
to the others that this Agreement constitutes the entire agreement among the
parties hereto relating to the transactions contemplated hereby.

                                    -16-

<PAGE>
<PAGE>

                  Section 9.02. Governing Law.
                                -------------

                  (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (WITHOUT
REGARD TO CONFLICTS OF LAWS PRINCIPLES).

                  (b) The parties hereto hereby declare that it is their
intention that this Agreement shall be regarded as made under the laws of
the State of Delaware and that the laws of said State shall be applied in
interpreting its provisions in all cases where legal interpretation shall be
required. Each of the parties hereto agrees (a) that this Agreement involves
at least $100,000.00, and (b) that this Agreement has been entered into by
the parties hereto in express reliance upon 6 Del. C. section 2708. Each of
the parties hereto hereby irrevocably and unconditionally agrees (a) to be
subject to the jurisdiction of the courts of the State of Delaware and of
the federal courts sitting in the State of Delaware, and (b)(1) to the
extent such party is not otherwise subject to service of process in the
State of Delaware, to appoint and maintain an agent in the State of Delaware
as such party's agent for acceptance of legal process, and (2) that, to the
fullest extent permitted by applicable law, service of process may also be
made on such party by prepaid certified mail with a proof of mailing receipt
validated by the United States Postal Service constituting evidence of valid
service, and that service made pursuant to (b)(1) or (2) above shall, to the
fullest extent permitted by applicable law, have the same legal force and
effect as if served upon such party personally within the State of Delaware.

                  Section 9.03. Effect; Third Party Beneficiaries. Except as
                                ---------------------------------
otherwise specified herein, this Agreement shall be binding upon and inure
to the benefit of the parties and their respective legal representatives,
successors and assigns. Each Purchaser (and their respective assignees) is
an intended third party beneficiary hereof and shall be entitled to enforce
this Agreement against the parties hereto as if it were a party hereto. Each
present and former (and future) member of the Advisory Board is an intended
third party beneficiary hereof and shall be entitled to enforce Sections
4.01 (e) and (f) of this Agreement against the parties hereto as if it were
a party hereto.

                  Section 9.04. Severability of Provisions. If any term,
                                --------------------------
provision, covenant or condition of this Agreement, or the application
thereof to either party or any circumstance, is held to be unenforceable,
invalid or illegal (in whole or in part) for any reason (in any relevant
jurisdiction), the remaining terms, provisions, covenants and conditions of
this Agreement, modified by the deletion of the unenforceable, invalid or
illegal portion (in any relevant jurisdiction), will continue in full force
and effect, and such unenforceability, invalidity or illegality will not
otherwise affect the enforceability, validity or legality of the remaining
terms, provisions, covenants and conditions of this Agreement so long as
this Agreement as so modified continues to express, without material change,
the original intentions of the parties as to the subject matter hereof and
the deletion of such portion of this Agreement will not substantially impair
the respective expectations or reciprocal obligations of the parties or the
practical realization of the benefits that would otherwise be conferred upon
the parties. The parties will endeavor in good faith negotiations to replace
the prohibited or unenforceable provision with a valid provision, the
economic effect of which comes as close as possible to that of the
prohibited or unenforceable provision.

                  Section 9.05. Amendments, Waivers, Etc. This Agreement may
                                ------------------------
not be amended, discharged or terminated nor may any provision hereof be
waived unless such

                                    -17-

<PAGE>
<PAGE>

amendment, discharge, termination or waiver is in writing and signed by the
Trustee and ADS, with the prior unanimous written consent of the Advisory
Board.

                  Section 9.06. Tax Characterization.
                                --------------------

                  (a) Each of the parties hereto recognizes and intends that,
for United States federal, state and local income tax purposes the Trust
will not be treated as an association taxable as a corporation.

                  (b) To the extent that any of the parties hereto is required
to report any item of income, gain, loss, deduction or credit relating to
the Trust for United States federal, state or local income tax purposes,
such party shall report such item in a manner consistent with the
characterization intended by this Section 9.06 and shall not take any
contrary position on any tax return or report relating to the United States
federal, state or local income taxes or take any other action that is
inconsistent with such characterization.

                  Section 9.07. Counterparts. This Agreement may be executed
                                ------------
in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same instrument.

                                    -18-

<PAGE>
<PAGE>

                  IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date above first written.

                                 WILMINGTON TRUST COMPANY
                                 as Trustee

                                 By: /s/ Mary St. Armand
                                    --------------------------------
                                    Name: Mary St. Armand
                                    Title: Assistant Vice President

                                 APPLIED DIGITAL SOLUTIONS, INC.,
                                   as Beneficial Owner

                                 By: /s/ Scott Silverman
                                    --------------------------------
                                    Name: Scott Silverman
                                    Title: CEO

                                    -19-<PAGE>

                                                                    EXHIBIT 10.5

                             SECURITY AGREEMENT

            SECURITY AGREEMENT, dated as of June 30, 2003 (this
"Agreement"), among Applied Digital Solutions, Inc., a Missouri corporation
 ---------
(the "Company") and Computer Equity Corporation, a Delaware corporation
      -------
(collectively with the Company, the "Debtor") and the signatories hereto,
                                     ------
their endorsees, transferees and assigns (collectively referred to as, the
"Secured Parties").
 ---------------

                            W I T N E S S E T H:

            WHEREAS, pursuant to the Company's 8.5% Convertible Exchangeable
Debentures, due November 1, 2005 (the "Debentures"), issued pursuant that
                                       ----------
certain Securities Purchase Agreement, dated the date of this Agreement, by
and among the Company and the Secured Parties (the "Purchase Agreement"),
                                                    ------------------
the Secured Parties have agreed to extend the loan to the Debtor evidenced
by the Debentures; and

            WHEREAS, in order to induce the Secured Parties to extend the
loan evidenced by the Debentures, the Debtor has agreed to execute and
deliver to the Secured Parties this Agreement and to grant the Secured
Parties a first priority security interest in all of the accounts receivable
of the Debtor to secure the prompt payment, performance and discharge in
full of all of the Company's obligations under the Debentures.

            NOW, THEREFORE, in consideration of the agreements herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree
as follows:

            1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1. Terms used but
not otherwise defined in this Agreement that are defined in Article 9 of the
UCC (such as "general intangibles" and "proceeds") shall have the respective
meanings given such terms in Article 9 of the UCC.

                  (a) "Collateral" means the collateral in which the Secured
                       ----------
            Parties are granted a security interest by this Agreement and which
            shall include the following, whether presently owned or existing or
            hereafter acquired or coming into existence, and all additions and
            accessions thereto and all substitutions and replacements thereof,
            and all proceeds, products and accounts thereof, including, without
            limitation, all proceeds from the sale or transfer of the
            Collateral and of insurance covering the same and of any tort
            claims in connection therewith:

                           (i) All Receivables of the Debtor including all
                  insurance proceeds, and rights to refunds or
                  indemnification whatsoever owing, together with all
                  instruments, all documents of title representing any of
                  the foregoing, all rights in any merchandising, goods,
                  equipment, motor

                                     1

<PAGE>
<PAGE>

                  vehicles and trucks which any of the same may represent,
                  and all right, title, security and guaranties with respect
                  to each Receivable, including any right of stoppage in
                  transit; and

                           (ii) All of the Debtor's documents, instruments
                  and chattel paper, files, records, books of account,
                  business papers, computer programs relating to and the
                  products and proceeds of all of the foregoing Collateral
                  set forth above.

                           (iii) A current schedule of all Receivables as of
                  a date close to June 30, 2003 is attached hereto as
                  Schedule X.

                  (c) "Obligations" means all of the Debtor's obligations
                       -----------
            under this Agreement, the Debentures and any other agreements or
            obligations undertaken by the Company to the Secured Parties, in
            each case, whether now or hereafter existing, voluntary or
            involuntary, direct or indirect, absolute or contingent, liquidated
            or unliquidated, whether or not jointly owed with others, and
            whether or not from time to time decreased or extinguished and
            later increased, created or incurred, and all or any portion of
            such obligations or liabilities that are paid, to the extent all or
            any part of such payment is avoided or recovered directly or
            indirectly from the Secured Parties as a preference, fraudulent
            transfer or otherwise as such obligations may be amended,
            supplemented, converted, extended or modified from time to time.

                  (d) "UCC" means the Uniform Commercial Code and or any
                       ---
            other applicable law of any jurisdiction (including, without
            limitation, the state of California) as to any Collateral located
            therein.

            2. GRANT OF SECURITY INTEREST. As an inducement for the Secured
Parties to extend the loan as evidenced by the Debentures and to secure the
complete and timely payment, performance and discharge in full, as the case
may be, of all of the Obligations, the Debtor hereby, unconditionally and
irrevocably, pledges, grants and hypothecates to the Secured Parties, a
continuing first priority security interest in, a lien upon and a right of
set-off against all of their respective right, title and interest of
whatsoever kind and nature in and to the Collateral (the "Security
                                                          --------
Interest").
--------

            3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
DEBTOR. Each Debtor represents and warrants to, and covenants and agrees
with, the Secured Parties as follows:

                  (a) The Debtor has the requisite corporate power and
            authority to enter into this Agreement and otherwise to carry out
            its obligations thereunder. The execution, delivery and performance
            by the Debtor of this Agreement and the filings contemplated
            therein have been duly authorized by all necessary action on the
            part of the Debtor and no further action is required by the Debtor.

                                     2

<PAGE>
<PAGE>

                  (b) The Debtor represents and warrants that they have no
            place of business or offices where their respective books of
            account and records are kept (other than temporarily at the offices
            of its attorneys or accountants) or places where Collateral is
            stored or located, except as set forth on Schedule A attached
                                                      ----------
            hereto.

                  (c) Except as set forth on Schedule B attached hereto, the
                                             ----------
            Debtor is the sole owner of the Collateral (except for
            non-exclusive licenses granted by the Debtor in the ordinary course
            of business), free and clear of any liens, security interests,
            encumbrances, rights or claims, and are fully authorized to grant
            the Security Interest in and to pledge the Collateral. There is not
            on file in any governmental or regulatory authority, agency or
            recording office an effective financing statement, security
            agreement, license or transfer or any notice of any of the
            foregoing (other than those that have been filed in favor of the
            Secured Parties pursuant to this Agreement) covering or affecting
            any of the Collateral. So long as this Agreement shall be in
            effect, Debtor shall not execute and shall not knowingly permit to
            be on file in any such office or agency any such financing
            statement or other document or instrument (except to the extent
            filed or recorded in favor of the Secured Parties pursuant to the
            terms of this Agreement).

                  (d) No part of the Collateral has been judged invalid or
            unenforceable. No written claim has been received that any
            Collateral or Debtor's use of any Collateral violates the rights of
            any third party. There has been no adverse decision to Debtor's
            claim of ownership rights in or exclusive rights to use the
            Collateral in any jurisdiction or to Debtor's right to keep and
            maintain such Collateral in full force and effect, and there is no
            proceeding involving said rights pending or, to the best knowledge
            of the Debtor, threatened before any court, judicial body,
            administrative or regulatory agency, arbitrator or other
            governmental authority.

                  (e) The Debtor shall at all times maintain their
            respective books of account and records relating to the Collateral
            at their respective principal place of business and their
            respective Collateral at the locations set forth on Schedule A
                                                                ----------
            attached hereto and may not relocate such books of account and
            records or tangible Collateral unless they deliver to the Secured
            Parties at least 30 days prior to such relocation (i) written
            notice of such relocation and the new location thereof (which must
            be within the United States) and (ii) evidence that appropriate
            financing statements under the UCC and other necessary documents
            have been filed and recorded and other steps have been taken to
            perfect the Security Interest to create in favor of the Secured
            Parties a valid, perfected and continuing liens in the Collateral.

                  (f) This Agreement creates in favor of the Secured Parties
            a valid security interest in the Collateral securing the payment
            and performance of the Obligations and, upon making the filings
            described in the immediately following sentence, a perfected
            security interest in such Collateral. Except for the filing of
            financing

                                     3

<PAGE>
<PAGE>

            statements pursuant to the UCC with the proper filing and
            recording agencies in the jurisdictions indicated on Schedule C,
                                                                 ----------
            attached hereto, no authorization or approval of or filing with or
            notice to any governmental authority or regulatory body is required
            either (i) for the grant by the Debtor of, or the effectiveness of,
            the Security Interest granted hereby or for the execution, delivery
            and performance of this Agreement by the Debtor or (ii) for the
            perfection of or exercise by the Secured Parties of its rights and
            remedies hereunder.

                  (g) On the date of execution of this Agreement, the Debtor
            authorizes the Representative of the Secured Parties to file one or
            more financing statements under the UCC with respect to the
            Security Interest with the proper filing and recording agencies in
            the jurisdictions indicated on Schedule C, attached hereto and in
                                           ----------
            such other jurisdictions as may be requested by the Secured
            Parties.

                  (h) The execution, delivery and performance of this
            Agreement by the Debtor does not conflict with, or constitute a
            default (or an event that with notice or lapse of time or both
            would become a default) under, or give to others any rights of
            termination, amendment, acceleration or cancellation (with or
            without notice, lapse of time or both) of, any agreement, credit
            facility, debt or other instrument (evidencing Debtor's debt or
            otherwise) or other understanding to which Debtor is a party or by
            which any property or asset of the Debtor is bound or affected. No
            consent (including, without limitation, from stockholders or
            creditors of the Debtor) is required for the Debtor to enter into
            and perform its obligations hereunder.

                  (i) The Debtor shall at all times maintain the liens and
            Security Interest provided for hereunder as valid and perfected
            liens and security interests in the Collateral in favor of the
            Secured Parties until this Agreement and the Security Interest
            hereunder shall be terminated pursuant to Section 11 hereof. The
            Debtor hereby agrees to defend the same against any and all
            persons. The Debtor shall safeguard and protect all Collateral for
            the account of the Secured Parties. At the request of the Secured
            Parties, the Debtor will sign and deliver to the Secured Parties at
            any time or from time to time one or more financing statements
            pursuant to the UCC in form reasonably satisfactory to the Secured
            Parties and will pay the cost of filing the same in all public
            offices wherever filing is, or is deemed by the Secured Parties to
            be, necessary or desirable to effect the rights and obligations
            provided for herein. Without limiting the generality of the
            foregoing, the Debtor shall pay all fees, taxes and other amounts
            necessary to maintain the Collateral and the Security Interest
            hereunder, and the Debtor shall obtain and furnish to the Secured
            Parties from time to time, upon demand, such releases and/or
            subordinations of claims and liens which may be required to
            maintain the priority of the Security Interest hereunder.

                  (j) The Debtor will not transfer, pledge, hypothecate,
            encumber, license (except for non-exclusive licenses granted by a
            Debtor in its ordinary course of

                                     4

<PAGE>
<PAGE>

            business and sales of inventory), sell or otherwise dispose of any
            of the Collateral without the prior written consent of a majority
            in interest of the Secured Parties.

                  (k) The Debtor shall keep and preserve its Equipment,
            Inventory and other tangible Collateral in good condition, repair
            and order and shall not operate or locate any such Collateral (or
            cause to be operated or located) in any area excluded from
            insurance coverage.

                  (l) The Debtor shall, within ten (10) days of obtaining
            knowledge thereof, advise the Secured Parties promptly, in
            sufficient detail, of any substantial change in the Collateral, and
            of the occurrence of any event which would have a material adverse
            effect on the value of the Collateral or on the Secured Parties'
            security interest therein.

                  (m) The Debtor shall promptly execute and deliver to the
            Secured Parties such further deeds, mortgages, assignments,
            security agreements, financing statements or other instruments,
            documents, certificates and assurances and take such further action
            as the Secured Parties may from time to time request and may in its
            sole discretion deem necessary to perfect, protect or enforce its
            security interest in the Collateral.

                  (n) The Debtor shall permit the Secured Parties and their
            representatives and agents to inspect the Collateral at any
            commercially reasonable time, and to make copies of records
            pertaining to the Collateral as may be requested by a Secured Party
            from time to time.

                  (o) The Debtor shall take all steps reasonably necessary
            to diligently pursue and seek to preserve, enforce and collect any
            rights, claims, causes of action and accounts receivable in respect
            of the Collateral.

                  (p) The Debtor shall promptly notify the Secured Parties
            in sufficient detail upon becoming aware of any attachment,
            garnishment, execution or other legal process levied against any
            Collateral and of any other information received by the Debtor that
            may materially affect the value of the Collateral, the Security
            Interest or the rights and remedies of the Secured Parties
            hereunder.

                  (q) All information heretofore, herein or hereafter
            supplied to the Secured Parties by or on behalf of the Debtor with
            respect to the Collateral is accurate and complete in all material
            respects as of the date furnished.

                  (r) The Debtor shall at all times preserve and keep in
            full force and effect their respective valid existence and good
            standing and any rights and franchises material to its business.

                  (s) The Debtor will not change its name, corporate
            structure, or identity, or add any new fictitious name unless it
            provides at least 30 days prior written

                                     5

<PAGE>
<PAGE>

            notice to the Secured Parties of such change and, at the time of
            such written notification, such Debtor provides any financing
            statements or fixture filings necessary to perfect and continue
            perfected the Security Interest granted and evidenced by this
            Agreement.

                  (t) The Debtor may not relocate its chief executive office
            to a new location without providing 30 days prior written
            notification thereof to the Secured Parties and so long as, at the
            time of such written notification, the Debtor provides any
            financing statements or fixture filings necessary to perfect and
            continue perfected the Security Interest granted and evidenced by
            this Agreement.

            4. DEFAULTS. The following events shall be "Events of Default":

                  (a) The occurrence of an Event of Default (as defined in
            the Debenture) under the Debenture;

                  (b) Any representation or warranty of a Debtor in this
            Agreement shall prove to have been incorrect in any material
            respect when made;

                  (c) The failure by a Debtor to observe or perform any of
            its obligations hereunder for five (5) business days after delivery
            to such Debtor of notice of such failure by or on behalf of a
            Secured Party; or

                  (c) If any provision of this Agreement shall at any time
            for any reason be declared to be null and void, or the validity or
            enforceability thereof shall be contested by a Debtor, or a
            proceeding shall be commenced by a Debtor, or by any governmental
            authority having jurisdiction over a Debtor, seeking to establish
            the invalidity or unenforceability thereof, or a Debtor shall deny
            that a Debtor has any liability or obligation purported to be
            created under this Agreement.

            5. Duty To Hold In Trust. Upon the occurrence of any Event of
               ---------------------
Default and at any time thereafter, the Debtor shall, upon receipt of any
revenue, income or other sums subject to the Security Interest, whether
payable pursuant to the Debenture or otherwise, or of any check, draft,
note, trade acceptance or other instrument evidencing an obligation to pay
any such sum, hold the same in trust for the Secured Parties and shall
forthwith endorse and transfer any such sums or instruments, or both, to the
Secured Parties, pro-rata in proportion to their initial purchases of
Debentures for application to the satisfaction of the Obligations.

            6. Rights and Remedies Upon Default. Upon the occurrence of any
               --------------------------------
Event of Default and at any time thereafter, the Secured Parties shall have
the right to exercise all of the remedies conferred hereunder and under the
Debentures, and the Secured Parties shall have all the rights and remedies
of a secured party under the UCC. Without limitation, the Secured Parties
shall have the following rights and powers:

                                     6

<PAGE>
<PAGE>

                  (a) The Secured Parties shall have the right to take
            possession of the Collateral and, for that purpose, enter, with the
            aid and assistance of any person, any premises where the
            Collateral, or any part thereof, is or may be placed and remove the
            same, and the Debtor shall assemble the Collateral and make it
            available to the Secured Parties at places which the Secured
            Parties shall reasonably select, whether at the Debtor's premises
            or elsewhere, and make available to the Secured Parties, without
            rent, all of the Debtor's respective premises and facilities for
            the purpose of the Secured Parties taking possession of, removing
            or putting the Collateral in saleable or disposable form.

                  (b) The Secured Parties shall have the right to assign,
            sell, lease or otherwise dispose of and deliver all or any part of
            the Collateral, at public or private sale or otherwise, either with
            or without special conditions or stipulations, for cash or on
            credit or for future delivery, in such parcel or parcels and at
            such time or times and at such place or places, and upon such terms
            and conditions as the Secured Parties may deem commercially
            reasonable, all without (except as shall be required by applicable
            statute and cannot be waived) advertisement or demand upon or
            notice to the Debtor or right of redemption of a Debtor, which are
            hereby expressly waived. Upon each such sale, lease, assignment or
            other transfer of Collateral, the Secured Parties may, unless
            prohibited by applicable law which cannot be waived, purchase all
            or any part of the Collateral being sold, free from and discharged
            of all trusts, claims, right of redemption and equities of the
            Debtor, which are hereby waived and released.

            7. Applications of Proceeds. The proceeds of any such sale,
               ------------------------
lease or other disposition of the Collateral hereunder shall be applied
first, to the expenses of retaking, holding, storing, processing and
preparing for sale, selling, and the like (including, without limitation,
any taxes, fees and other costs incurred in connection therewith) of the
Collateral, to the reasonable attorneys' fees and expenses incurred by the
Secured Parties in enforcing its rights hereunder and in connection with
collecting, storing and disposing of the Collateral, and then to
satisfaction of the Obligations pro-rata in proportion to each Secured
Party's initial purchases of Debentures, and to the payment of any other
amounts required by applicable law, after which the Secured Parties shall
pay to the applicable Debtor any surplus proceeds. If, upon the sale,
license or other disposition of the Collateral, the proceeds thereof are
insufficient to pay all amounts to which the Secured Parties are legally
entitled, the Debtor will be liable for the deficiency, together with
interest thereon, at the rate of 10% per annum or the lesser amount
permitted by applicable law (the "Default Rate"), and the reasonable fees of
                                  ------------
any attorneys employed by the Secured Parties to collect such deficiency. To
the extent permitted by applicable law, the Debtor waives all claims,
damages and demands against the Secured Parties arising out of the
repossession, removal, retention or sale of the Collateral, unless due to
the gross negligence or willful misconduct of the Secured Parties. Upon the
receipt of any proceeds hereunder by a Secured Party, such Secured Party
shall, upon receipt of any revenue, income or other sums subject to the
Security Interest, whether payable pursuant to the Debenture or otherwise,
or of any check, draft, Debenture, trade acceptance or other instrument
evidencing an obligation to pay any such sum, hold the

                                     7

<PAGE>
<PAGE>

same in trust for the other Secured Parties and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Parties in
such amounts as is required hereunder.

            8. Costs and Expenses. The Debtor agrees to pay all reasonable
               ------------------
out-of-pocket fees, costs and expenses incurred in connection with any
filing required hereunder, including without limitation, any financing
statements pursuant to the UCC, continuation statements, partial releases
and/or termination statements related thereto or any expenses of any
searches reasonably required by the Secured Parties. The Debtor shall also
pay all other claims and charges which in the reasonable opinion of the
Secured Parties might prejudice, imperil or otherwise affect the Collateral
or the Security Interest therein. The Debtor will also, upon demand, pay to
the Secured Parties the amount of any and all reasonable expenses, including
the reasonable fees and expenses of its counsel and of any experts and
agents, which the Secured Parties may incur in connection with (i) the
enforcement of this Agreement, (ii) the custody or preservation of, or the
sale of, collection from, or other realization upon, any of the Collateral,
or (iii) the exercise or enforcement of any of the rights of the Secured
Parties under the Debentures. Until so paid, any fees payable hereunder
shall be added to the principal amount of the Debentures and shall bear
interest at the Default Rate.

            9. Responsibility for Collateral. The Debtor assumes all
               -----------------------------
liabilities and responsibility in connection with all Collateral, and the
Obligations in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Collateral or its unavailability
for any reason.

            10. Security Interest Absolute. All rights of the Secured
                --------------------------
Parties and all Obligations of the Debtor hereunder, shall be absolute and
unconditional, irrespective of: (a) any lack of validity or enforceability
of this Agreement, the Debentures or any agreement entered into in
connection with the foregoing, or any portion hereof or thereof; (b) any
change in the time, manner or place of payment or performance of, or in any
other term of, all or any of the Obligations, or any other amendment or
waiver of or any consent to any departure from the Debentures or any other
agreement entered into in connection with the foregoing; (c) any exchange,
release or nonperfection of any of the Collateral, or any release or
amendment or waiver of or consent to departure from any other collateral
for, or any guaranty, or any other security, for all or any of the
Obligations; (d) any action by the Secured Parties to obtain, adjust, settle
and cancel in its sole discretion any insurance claims or matters made or
arising in connection with the Collateral; or (e) any other circumstance
which might otherwise constitute any legal or equitable defense available to
a Debtor, or a discharge of all or any part of the Security Interest granted
hereby. Until the Obligations shall have been paid and performed in full,
the rights of the Secured Parties shall continue even if the Obligations are
barred for any reason, including, without limitation, the running of the
statute of limitations or bankruptcy. The Debtor expressly waives
presentment, protest, notice of protest, demand, notice of nonpayment and
demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Parties hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable

                                     8

<PAGE>
<PAGE>

preference or fraudulent conveyance under the bankruptcy or insolvency laws
of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Parties, then, in any such event, the Debtor's
obligations hereunder shall survive cancellation of this Agreement, and
shall not be discharged or satisfied by any prior payment thereof and/or
cancellation of this Agreement, but shall remain a valid and binding
obligation enforceable in accordance with the terms and provisions hereof.
The Debtor waives all right to require the Secured Parties to proceed
against any other person or to apply any Collateral which the Secured
Parties may hold at any time, or to marshal assets, or to pursue any other
remedy. The Debtor waives any defense arising by reason of the application
of the statute of limitations to any obligation secured hereby.

            11. Term of Agreement. The Security Interest as to a Secured
                -----------------
Party shall terminate on the earlier of (i) the date on which such Secured
Party no longer holds any principal amount of the original Debentures
purchased by such Secured Party or (ii) the date that the Purchasers'
Representative, acting on behalf of all Secured Parties as their duly
authorized agent, shall release the lien of the Secured Parties on the
Collateral in favor of a subsequent commercial lender to the Company on
terms reasonably satisfactory to the Purchaser's Representative, so long as
the Registration Statement is then effective. Upon such termination, the
Secured Parties, at the request and at the expense of the Debtor, will join
in executing any termination statement with respect to any financing
statement executed and filed pursuant to this Agreement.

            12. Power of Attorney; Further Assurances.
                -------------------------------------

                  (a) The Debtor authorizes the Secured Parties, and does
            hereby make, constitute and appoint the Secured Parties and their
            respective officers, agents, successors or assigns with full power
            of substitution, as the Debtor's true and lawful attorney-in-fact,
            with power, in the name of the Secured Parties or the Debtor, to,
            after the occurrence and during the continuance of an Event of
            Default, (i) endorse any Debentures, checks, drafts, money orders,
            or other instruments of payment (including payments payable under
            or in respect of any policy of insurance) in respect of the
            Collateral that may come into possession of the Secured Parties;
            (ii) to sign and endorse any financing statement pursuant to the
            UCC or any invoice, freight or express bill, bill of lading,
            storage or warehouse receipts, drafts against debtors, assignments,
            verifications and notices in connection with accounts, and other
            documents relating to the Collateral; (iii) to pay or discharge
            taxes, liens, security interests or other encumbrances at any time
            levied or placed on or threatened against the Collateral; (iv) to
            demand, collect, receipt for, compromise, settle and sue for monies
            due in respect of the Collateral; and (v) generally, to do, at the
            option of the Secured Parties, and at the expense of the Debtor, at
            any time, or from time to time, all acts and things which the
            Secured Parties deem necessary to protect, preserve and realize
            upon the Collateral and the Security Interest granted therein in
            order to effect the intent of this Agreement and the Debentures all
            as fully and effectually as the Debtor might or could do; and the
            Debtor hereby ratifies all that said attorney shall lawfully do or
            cause to be done by virtue hereof. This power of attorney is
            coupled with an

                                     9

<PAGE>
<PAGE>

            interest and shall be irrevocable for the term of this Agreement and
            thereafter as long as any of the Obligations shall be outstanding.

                  (b) On a continuing basis, the Debtor will make, execute,
            acknowledge, deliver, file and record, as the case may be, with the
            proper filing and recording agencies in any jurisdiction,
            including, without limitation, the jurisdictions indicated on
            Schedule C, attached hereto, all such instruments, and take all
            ----------
            such action as may reasonably be deemed necessary or advisable, or
            as reasonably requested by the Secured Parties, to perfect the
            Security Interest granted hereunder and otherwise to carry out the
            intent and purposes of this Agreement, or for assuring and
            confirming to the Secured Parties the grant or perfection of a
            security interest in all the Collateral under the UCC.

                  (c) The Debtor hereby irrevocably appoints the Secured
            Parties as the Debtor's attorney-in-fact, with full authority in
            the place and stead of the Debtor and in the name of the Debtor,
            from time to time in the Secured Parties' discretion, to take any
            action and to execute any instrument which the Secured Parties may
            deem necessary or advisable to accomplish the purposes of this
            Agreement, including the filing, in its sole discretion, of one or
            more financing or continuation statements and amendments thereto,
            relative to any of the Collateral without the signature of the
            Debtor where permitted by law.

            13. Notices. All notices, requests, demands and other
                -------
communications hereunder shall be subject to the notice provision of the
Purchase Agreement.

            14. Other Security. To the extent that the Obligations are now
                --------------
or hereafter secured by property other than the Collateral or by the
guarantee, endorsement or property of any other person, firm, corporation or
other entity, then the Secured Parties shall have the right, in its sole
discretion, to pursue, relinquish, subordinate, modify or take any other
action with respect thereto, without in any way modifying or affecting any
of the Secured Parties' rights and remedies hereunder.

            15. Miscellaneous.
                -------------

                  (a) No course of dealing between the Debtor and the
            Secured Parties, nor any failure to exercise, nor any delay in
            exercising, on the part of the Secured Parties, any right, power or
            privilege hereunder or under the Debentures shall operate as a
            waiver thereof; nor shall any single or partial exercise of any
            right, power or privilege hereunder or thereunder preclude any
            other or further exercise thereof or the exercise of any other
            right, power or privilege.

                  (b) All of the rights and remedies of the Secured Parties
            with respect to the Collateral, whether established hereby or by
            the Debentures or by any other agreements, instruments or documents
            or by law shall be cumulative and may be exercised singly or
            concurrently.

                                     10

<PAGE>
<PAGE>

                  (c) This Agreement constitutes the entire agreement of the
            parties with respect to the subject matter hereof and is intended
            to supersede all prior negotiations, understandings and agreements
            with respect thereto. Except as specifically set forth in this
            Agreement, no provision of this Agreement may be modified or
            amended except by a written agreement specifically referring to
            this Agreement and signed by the parties hereto.

                  (d) In the event that any provision of this Agreement is
            held to be invalid, prohibited or unenforceable in any jurisdiction
            for any reason, unless such provision is narrowed by judicial
            construction, this Agreement shall, as to such jurisdiction, be
            construed as if such invalid, prohibited or unenforceable provision
            had been more narrowly drawn so as not to be invalid, prohibited or
            unenforceable. If, notwithstanding the foregoing, any provision of
            this Agreement is held to be invalid, prohibited or unenforceable
            in any jurisdiction, such provision, as to such jurisdiction, shall
            be ineffective to the extent of such invalidity, prohibition or
            unenforceability without invalidating the remaining portion of such
            provision or the other provisions of this Agreement and without
            affecting the validity or enforceability of such provision or the
            other provisions of this Agreement in any other jurisdiction.

                  (e) No waiver of any breach or default or any right under
            this Agreement shall be considered valid unless in writing and
            signed by the party giving such waiver, and no such waiver shall be
            deemed a waiver of any subsequent breach or default or right,
            whether of the same or similar nature or otherwise.

                  (f) This Agreement shall be binding upon and inure to the
            benefit of each party hereto and its successors and assigns,
            including, without limitation, any successor to either Debtor by
            statutory merger.

                  (g) Each party shall take such further action and execute
            and deliver such further documents as may be necessary or
            appropriate in order to carry out the provisions and purposes of
            this Agreement.

                  (h) All questions concerning the construction, validity,
            enforcement and interpretation of this Agreement shall be governed
            by and construed and enforced in accordance with the internal laws
            of the State of New York, without regard to the principles of
            conflicts of law thereof. Each party agrees that all proceedings
            concerning the interpretations, enforcement and defense of the
            transactions contemplated by this Agreement and the Debenture
            (whether brought against a party hereto or its respective
            affiliates, directors, officers, shareholders, employees or agents)
            shall be commenced exclusively in the state and federal courts
            sitting in the City of New York, Borough of Manhattan. Each party
            hereto hereby irrevocably submits to the exclusive jurisdiction of
            the state and federal courts sitting in the City of New York,
            Borough of Manhattan for the adjudication of any dispute hereunder
            or in connection herewith or with any transaction contemplated
            hereby or discussed herein, and hereby irrevocably waives, and

                                     11

<PAGE>
<PAGE>

            agrees not to assert in any proceeding, any claim that it is not
            personally subject to the jurisdiction of any such court, that such
            proceeding is improper. Each party hereto hereby irrevocably waives
            personal service of process and consents to process being served in
            any such proceeding by mailing a copy thereof via registered or
            certified mail or overnight delivery (with evidence of delivery) to
            such party at the address in effect for notices to it under this
            Agreement and agrees that such service shall constitute good and
            sufficient service of process and notice thereof. Nothing contained
            herein shall be deemed to limit in any way any right to serve
            process in any manner permitted by law. Each party hereto hereby
            irrevocably waives, to the fullest extent permitted by applicable
            law, any and all right to trial by jury in any legal proceeding
            arising out of or relating to this Agreement or the transactions
            contemplated hereby. If either party shall commence a proceeding to
            enforce any provisions of this Agreement, then the prevailing party
            in such proceeding shall be reimbursed by the other party for its
            reasonable attorneys fees and other costs and expenses incurred
            with the investigation, preparation and prosecution of such
            proceeding.

                  (i) This Agreement may be executed in any number of
            counterparts, each of which when so executed shall be deemed to be
            an original and, all of which taken together shall constitute one
            and the same Agreement. In the event that any signature is
            delivered by facsimile transmission, such signature shall create a
            valid binding obligation of the party executing (or on whose behalf
            such signature is executed) the same with the same force and effect
            as if such facsimile signature were the original thereof.

                         ***************************

                                     12

<PAGE>
<PAGE>

            IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed on the day and year first above written.

          DEBTOR:                   APPLIED DIGITAL SOLUTIONS, INC.

                                    By: /s/ Scott Silverman
                                       -------------------------------------
                                       Name: Scott Silverman
                                       Title: CEO

                                    COMPUTER EQUITY CORPORATION

                                    By: /s/ Kevin McLaughlin
                                       -------------------------------------
                                       Name: Kevin McLaughlin
                                       Title: SVP

SECURED PARTIES:
MIDSUMMER INVESTMENT, LTD.                     Address for Notice:
                                               ------------------
For itself and as Purchasers' Representative   C/o Midsummer Capital, LLC
Under the Purchase Agreement                   485 Madison Avenue, 23rd Floor
                                               New York, New York 10022
By: /s/ Scott Kaufman                          Tel: (212) 584-2140
   -------------------------------------       Fax: (212) 584-2142
   Scott Kaufman                               Attn: Michel A. Amsalem
   Authorized Signatory

                                     13

<PAGE>
<PAGE>

                                 SCHEDULE A

Principal Place of Business of Debtor:

         Applied Digital Solutions, Inc.
         400 Royal Palm Way, Suite 410
         Palm Beach, FL 33480

         Computer Equity Corporation
         4500 Southgate Place, Suite 300
         Chantilly, VA 20151

Locations Where Collateral is Located or Stored:

            Same as above.

                                     14

<PAGE>
<PAGE>

                                 SCHEDULE B

UCC financing statements are in place in favor of IBM Credit LLC, all of
which (upon Closing) IBM Credit LLC has a contractual and legal obligation
to terminate promptly.

                                     15

<PAGE>
<PAGE>

                                 SCHEDULE C

                                  Delaware

                                   Florida

                                  Missouri

                                     16

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