SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

APPLIED DIGITAL SOLUTIONS, INC.
(Name of Registrant as Specified in Its Charter)

(Name of Person Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total Fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:

[APPLIED DIGITAL SOLUTIONS Logo]

RICHARD J. SULLIVAN
Chairman of The Board,
Chief Executive Officer and Secretary

April 24, 2002
Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders
which will be held on June 8, 2002, at 8:30 a.m. Eastern Daylight Time, at
the Brazilian Court Hotel, 301 Australian Avenue, Palm Beach, Florida 33480.

The enclosed notice of meeting identifies each business item for your
action. These items and the vote the Board of Directors recommends are:

RECOMMENDED
ITEM VOTE
---- ----

1. Election of two directors and ratification of appointment of one director; FOR
2. Approval of amendment to the Company's 1999 Flexible Stock Plan and ratification of FOR
options granted thereunder;
3. Approval of amendment to the Company's 1999 Employees Stock Purchase Plan; and FOR
4. Approval of amendment to Second Restated Articles of Incorporation, as amended, to FOR
increase the number of authorized shares of common stock.

The Company has also included a Proxy Statement that contains more
information about these items and the meeting.

If you plan to attend the meeting, please mark the appropriate box on
your proxy card to help the Company plan for the meeting. You will need an
admission card to attend the meeting, which you can obtain as follows:

o If your shares are registered in your name, you are a
shareholder of record. Your admission card is attached to your
proxy card, and you will need to bring it with you to the
meeting.

o If your shares are in the name of your broker or bank, your
shares are held in street name. You will need to check the box
on the proxy card stating that you will be attending the
meeting, or ask your broker or bank for an admission card in the
form of a legal proxy to bring with you to the meeting. If you
do not receive the legal proxy in time, bring your most recent
brokerage statement with you to the meeting so that the Company
can verify your ownership of the Company's stock and admit you
to the meeting. However, you will not be able to vote your
shares at the meeting without a legal proxy.

Your vote is important, regardless of the number of shares you own. The
Company encourages you to vote by proxy so that your shares will be
represented and voted at the meeting even if you cannot attend. All
shareholders can vote by written proxy card. Many shareholders also can vote
by proxy via touch-tone telephone from the U.S. and Canada, using the
toll-free number on your proxy card, or via the internet using the
instructions on your proxy card. In addition, shareholders may vote in
person at the meeting, as described above.

EACH SHAREHOLDER IS URGED TO VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD, USING THE TELEPHONE VOTING SYSTEM, OR ACCESSING THE
WORLD WIDE WEB SITE INDICATED ON YOUR PROXY CARD TO VOTE VIA THE INTERNET.
IF A SHAREHOLDER DECIDES TO ATTEND THE MEETING, HE OR SHE MAY REVOKE THE
PROXY AND VOTE THE SHARES IN PERSON.

Sincerely,

RICHARD J. SULLIVAN

[APPLIED DIGITAL SOLUTIONS Logo]

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO THE SHAREHOLDERS OF
APPLIED DIGITAL SOLUTIONS, INC.:

The 2002 Annual Meeting of Shareholders of Applied Digital Solutions,
Inc., a Missouri corporation (the "Company"), will be held at the Brazilian
Court Hotel, 301 Australian Avenue, Palm Beach, Florida on June 8, 2002, at
8:30 a.m. Eastern Daylight Time, for the following purposes:

1. To elect two directors to hold office until the 2005 Annual
Meeting of Shareholders and to ratify the appointment of one
director to hold office until the 2004 Annual Meeting of
Shareholders, or until their respective successors have been
elected or appointed;

2. To approve an amendment to the Company's 1999 Flexible Stock Plan
and to ratify options granted thereunder;

3. To approve an amendment to the Company's 1999 Employee's Stock
Purchase Plan;

4. To approve an amendment to the Company's Second Restated Articles
of Incorporation, as amended, to increase the number of authorized
shares of common stock; and

5. To transact such other business as may properly come before the
meeting and at any adjournments or postponements of the meeting.

The Board of Directors set April 5, 2002 as the record date for the
meeting. This means that owners of the Company's common stock at the close
of business on that date are entitled to (1) receive notice of the meeting
and (2) vote, or exercise voting rights through a voting trust, as the case
may be, at the meeting and any adjournments or postponements of the meeting.
The Company will make available a list of holders of record of the Company's
common stock as of the close of business on April 5, 2002, for inspection
during normal business hours at the offices of the Company, 400 Royal Palm
Way, Suite 410, Palm Beach, Florida 33480 for ten business days prior to the
meeting. This list will also be available at the meeting.

By Order of the Board of Directors

RICHARD J. SULLIVAN
Secretary
Palm Beach, Florida
April 24, 2002

[APPLIED DIGITAL SOLUTIONS Logo]

400 ROYAL PALM WAY, SUITE 410
PALM BEACH, FLORIDA 33480

April 24, 2002

PROXY STATEMENT
FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 8, 2002

The Board of Directors of Applied Digital Solutions, Inc., a Missouri
corporation (the "Company"), furnishes you with this Proxy Statement to
solicit proxies on its behalf to be voted at the 2002 Annual Meeting of
Shareholders of the Company. The meeting will be held at the Brazilian Court
Hotel, 301 Australian Avenue, Palm Beach, Florida, on June 8, 2002, at
8:30 a.m. Eastern Daylight Time, subject to adjournment or postponement
thereof (the "Meeting"). The proxies also may be voted at any adjournments or
postponements of the Meeting. This Proxy Statement and the accompanying form
of proxy are first being mailed to the shareholders of the Company on or
about April 24, 2002.

Voting and Revocability of Proxies

All properly executed written proxies and all properly completed
proxies voted by telephone or via the internet and delivered pursuant to
this solicitation (and not revoked later) will be voted at the Meeting in
accordance with the instructions of the shareholder. Below is a list of the
different votes shareholders may cast at the Meeting pursuant to this
solicitation.

o In voting on the election of the two directors to serve until the
2005 Annual Meeting of Shareholders and the ratification of the
appointment of one director to serve until the 2004 Annual Meeting
of Shareholders, shareholders may vote in one of the three
following ways:

1. in favor of the nominees and the appointee,

2. withhold votes as to the nominees and the appointee, or

3. withhold votes as to a specific nominee or the appointee.

o In voting on the approval of an amendment to the 1999 Flexible
Stock Plan and the ratification of options granted thereunder, the
approval of an amendment to the 1999 Employee Stock Purchase Plan,
and the approval of an amendment to the Company's Second Restated
Articles of Incorporation, as amended, to increase the number of
authorized shares of common stock, shareholders may vote in one of
the three following ways:

1. in favor of the item,

2. against the item, or

3. abstain from voting on the item.

Shareholders should specify their choice for each matter on the
enclosed form of proxy. If no specific instructions are given, proxies which
are signed and returned will be voted FOR the election of the directors as
set forth herein, FOR the approval of an amendment to the 1999 Flexible
Stock Plan and ratification of options granted thereunder since the 2001
Annual Meeting of Shareholders, FOR the approval of an amendment to the 1999
Employees Stock Purchase Plan and FOR approval an amendment to the Company's
Second Restated Articles of Incorporation, as amended, to increase the
number of authorized shares of common stock.

In addition, if other matters come before the Meeting, the persons
named in the accompanying form of Proxy will vote in accordance with their
best judgment with respect to such matters. A shareholder submitting a proxy
has the power to revoke it at any time prior to its exercise by voting in
person at the Meeting, by giving written notice to

the Company's Secretary bearing a later date than the proxy or by giving a
later dated proxy. Any written notice revoking a proxy should be sent to:
ADP Investor Communication Services, Inc., 51 Mercedes Way, Edgewood,
New York 11717. Proxies signed by brokers with no further statements
indicated on the proxy and shares as to which proxy authority has been
withheld with respect to any matter will be counted for quorum and for
purposes of determining the number of shares entitled to vote on a matter.
Broker non-votes (proxies where the broker has added statements such as
"non-vote," "no vote" or "do not vote") are not counted for quorum or for
purposes of determining the number of shares entitled to vote on a matter.
The presence in person or by proxy of the holders of the shares representing
a majority of all outstanding shares will constitute a quorum. Approval of
all of the items will require the favorable vote of a majority of the shares
represented and entitled to vote at the Meeting.

The telephone and internet voting procedures are designed to
authenticate shareholders' identities, to allow shareholders to vote their
shares and to confirm their instructions have been properly recorded.
Specific instructions to be followed by shareholders interested in voting
via the telephone or the internet are set forth on the proxy card. If the
proxy card does not contain these instructions, these options are not
available.

Record Date and Share Ownership

Owners of record of shares of the Company's common stock at the close
of business on April 5, 2002 (the "Record Date") will be entitled to vote at
the Meeting or adjournments or postponements thereof. Each owner of record
of the Company's common stock on the Record Date is entitled to one vote for
each share of common stock so held.

As of the close of business on April 5, 2002, there were 268,604,867
shares of common stock outstanding entitled to vote at the Annual Meeting
(all such shares being referred to herein as the "shares" and all holders
thereof being referred to as the "shareholders" of the Company). A majority
of the shares must be present, in person or by proxy, to conduct business at
the Meeting.

TABLE OF CONTENTS

Page
----

1. Election of Directors........................................................................................1
Board of Directors.......................................................................................1
Board Committees and Meetings............................................................................2
Section 16(a) Beneficial Ownership Reporting Compliance..................................................3
Ownership Of Equity Securities in the Company............................................................3
Principal Shareholders...................................................................................3
Compensation Committee Report on Executive Compensation..................................................4
Executive Officers.......................................................................................6
Executive Compensation...................................................................................7
Incentive Plans.........................................................................................10
Certain Relationships and Related Transactions..........................................................14
Performance Graph.......................................................................................15
Report of the Audit Committee...........................................................................16

2. Approval of an Amendment to the Company's 1999 Flexible Stock Plan and Ratification of Options
Granted Thereunder..........................................................................................17

3. Approval of an Amendment to the Company's 1999 Employees Stock Purchase Plan................................22

4. Approval of Amendment to Articles of Incorporation to Increase the Number of Authorized Shares of
Common Stock................................................................................................24

Shareholder Proposals............................................................................................26

ELECTION OF DIRECTORS

(ITEM 1)

BOARD OF DIRECTORS

The Directors are divided into three classes, each serving for a period
of three years, which has been the practice of the Company since 1998. The
class to which each Director has been assigned is designated as Group A,
Group B or Group C. The shareholders elect approximately one-third of the
members of the Board of Directors annually. The Company's basic philosophy
mandates the inclusion of directors who will be representative of
management, employees and the minority shareholders of the Company.
Directors may only be removed for "cause." The terms of Daniel E. Penni and
Angela M. Sullivan will expire at the 2002 Annual Meeting, and each has been
nominated to stand for reelection at the Meeting to hold office until the
2005 Annual Meeting of Shareholders and until his or her successor is
elected and qualified. In addition, Scott R. Silverman has been appointed by
the Board of Directors to fill the vacancy created upon Garrett A.
Sullivan's retirement and to hold office until the 2004 Annual Shareholders
Meeting and until his successor is elected or qualified. As of April 5,
2002, the Company had one vacancy on the Board of Directors resulting from
the resignation of Mercedes Walton during 2001, which has not yet been
filled. Proxies may not be voted for a greater number of persons than the
nominees identified below.

Cumulative voting does not apply in the election of Directors. Unless
otherwise indicated, the shares represented by this proxy will be voted for
each nominee named below. Should any one or more of these nominees become
unable to serve for any reason, or for good cause will not serve, which is
not anticipated, the Board of Directors may, unless the Board by resolution
provides for a lesser number of Directors, designate substitute nominees, in
which event the persons named in the enclosed proxy will vote proxies that
would otherwise be voted for all named nominees for the election of such
substitute nominee or nominees.

RECOMMENDATION OF THE BOARD OF DIRECTORS CONCERNING THE ELECTION OF DIRECTORS

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR DANIEL E.
PENNI AND FOR ANGELA M. SULLIVAN TO HOLD OFFICE UNTIL THE 2005 ANNUAL
MEETING OF SHAREHOLDERS AND FOR SCOTT R. SILVERMAN TO HOLD OFFICE UNTIL THE
2004 ANNUAL MEETING OF SHAREHOLDERS AND UNTIL THEIR SUCCESSORS ARE ELECTED
AND QUALIFIED. PROXIES RECEIVED BY THE BOARD OF DIRECTORS WILL BE VOTED FOR
THE NOMINEES AND THE APPOINTEE UNLESS SHAREHOLDERS SPECIFY A CONTRARY CHOICE
IN THEIR PROXY.

NOMINEES FOR ELECTION TO TERM EXPIRING 2005

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

Angela M. Sullivan: Ms. Sullivan, age 43, has served as a Director
since April 1996. From 1988 to the present, Ms. Sullivan has been a partner
in The Bay Group, a private merger and acquisition firm, President of Great
Bay Technology, Inc., and President of Spirit Saver, Inc. Ms. Sullivan
earned a Bachelor of Science degree in Business Administration in 1980 from
Salem State College. Ms. Sullivan is married to Richard J. Sullivan.

APPOINTEE TO TERM EXPIRING 2004

Scott R. Silverman: Mr. Silverman, age 38, has served since August 2001
as a special advisor to the Board of Directors. In March 2002, he was
appointed to the Board of Directors and named President. From September 1999
to March 2002, Mr. Silverman operated his own private investment-banking
firm and prior to that time, from October 1996 to September 1999, he served
in various capacities for the Company including positions related to
business development, corporate development and legal affairs. From July
1995 to September 1996, he served as President of ATI Communications, Inc.,
one of the subsidiaries of the Company. He began his career as an attorney
specializing in commercial litigation and communications law at the law firm
of Cooper Perskie in Atlantic City,

New Jersey, and Philadelphia, Pennsylvania. Mr. Silverman is a graduate of
the University of Pennsylvania and Villanova University School of Law.

INCUMBENT DIRECTORS - TERM EXPIRING 2003

Arthur F. Noterman: Mr. Noterman, age 60, a Chartered Life Underwriter,
has served as a Director since February 1997, and serves on the Audit and
Compensation Committees of the Board of Directors. Mr. Noterman currently
serves as President and Director of P.M.G. Insurance Marketing of MA Inc.
Mr. Noterman is a registered NASD broker affiliated with a Chicago, Illinois
registered broker/dealer. Mr. Noterman attended Northeastern University from
1965 to 1975 and obtained the Chartered Life Underwriters Professional
degree in 1979 from The American College, Bryn Mawr, Pennsylvania.

Constance K. Weaver: Ms. Weaver, age 50, was elected to the Board of
Directors in July 1998 and serves on the Compensation and Audit Committees
of the Board of Directors. From 1996 to the present, Ms. Weaver has been
Vice President, Investor Relations and Financial Communications for AT&T
Corporation. From 1995 through 1996, she was Senior Director, Investor
Relations and Financial Communications for Microsoft Corporation. From 1993
to 1995, she was Vice President, Investor Relations, and, from 1991 to 1993,
she was Director of Investor Relations for MCI Communications, Inc. Ms.
Weaver is a director of the National Investor Relations Institute (NIRI).
She earned a Bachelor of Science degree from the University of Maryland in
1975.

Richard S. Friedland: Mr. Friedland, age 51, was elected to the Board
of Directors in October 1999, is Chairman of the Audit Committee and serves
on the Compensation Committee of the Board of Directors. He was previously
associated with General Instrument Corporation. During his 19-year tenure,
he held various executive positions, including Chief Financial Officer,
President and Chief Operating Officer. In 1995, he was appointed Chairman of
the Board and Chief Executive Officer. Mr. Friedland currently serves on the
board of Video Network Communications, Inc., as well as several development
stage companies. He earned a Bachelor of Science degree in Accounting from
Ohio State University in 1972 and a Master of Business Administration degree
from Seton Hall University in 1985.

INCUMBENT DIRECTORS - TERM EXPIRING 2004

Richard J. Sullivan: Mr. Sullivan, age 62, was elected to the Board of
Directors and named Chief Executive Officer in May 1993. He was appointed
Secretary in March 1996 and served as President and Chief Operating Officer
from September 2001 to March 2002. Mr. Sullivan is currently Chairman of
Great Bay Technology, Inc. From August 1989 to December 1992, Mr. Sullivan
was Chairman of the board of directors of Consolidated Convenience Systems,
Inc., in Springfield, Missouri. He has been the Managing General Partner of
The Bay Group, a merger and acquisition firm in New Hampshire, since
February 1985. Mr. Sullivan was formerly Chairman and Chief Executive
Officer of Manufacturing Resources, Inc., an MRP II software company in
Boston, Massachusetts, and was Chairman and CEO of Encode Technology, a
"Computer-Aided Manufacturing" Company, in Nashua, New Hampshire from
February 1984 to August 1986. Mr. Sullivan is married to Angela M. Sullivan.

BOARD COMMITTEES AND MEETINGS

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

The Audit Committee recommends for approval by the Board of Directors a
firm of certified public accountants whose duty it is to audit the Company's
consolidated financial statements for the fiscal year in which they are
appointed, and monitors the effectiveness of the audit effort, the Company's
internal and financial accounting organization and controls and financial
reporting. The Audit Committee held four meetings during 2001.

The Compensation Committee administers the Company's 1996 Non-Qualified
Stock Option Plan, the 1999 Flexible Stock Plan and the 1999 Employees Stock
Purchase Plan, including the review and grant of stock options to officers
and other employees under such plans, and recommends the adoption of new
plans. The Compensation Committee also reviews and approves various other
compensation policies and matters and reviews and approves salaries and
other matters relating to the Company's executive officers. The Compensation
Committee reviews all senior corporate employees after the end of each
fiscal year to determine compensation for the subsequent year. Particular
attention is paid to each employee's contributions to the Company's current
and future success along with their salary level as compared to the market
value of personnel with similar skills and responsibilities. The
Compensation Committee also looks at accomplishments which are above and
beyond management's normal expectations for their positions. The
Compensation Committee met four times during 2001 and acted by written
consent ten times.

The Board of Directors held four meetings during 2001 and acted by
written consent 47 times. During the year, all Directors attended 75% or
more of the Board of Directors' meetings and the Committees to which they
were assigned.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the officers and directors
of the Company and persons who own more than 10% of the Company's common
stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish copies of all such reports
to the Company. The Company believes, based on its stock transfer records
and other information available to it, that all reports required under
Section 16(a) were timely filed during 2001, except for a final Form 5 for
Ms. Mercedes Walton which was filed several weeks late and a final Form 5 by
Mr. David Beckett which has not yet been filed.

OWNERSHIP OF EQUITY SECURITIES IN THE COMPANY

The following table sets forth information regarding beneficial
ownership of the Company's common stock by each director and by each
executive officer named in the Summary Compensation Table and by all the
directors and executive officers as a group as of April 5, 2002:

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

Richard J. Sullivan 11,740,993 (2) 4.2%
Angela M. Sullivan 1,458,475 (2) *
Richard S. Friedland 575,000 *
Arthur F. Noterman 1,035,000 *
Daniel E. Penni 1,499,065 *
Constance K. Weaver 858,000 *
Scott R. Silverman 325,000 *
Jerome C. Artigliere 800,000 *
Michael E. Krawitz 296,124 *
Evan C. McKeown 16,667 *
Kevin McLaughlin -- *
Peter Zhou 235,860 *
All Directors and Executive
Officers as a Group (15 Persons) 19,430,454 6.9%

<FN>
-----------------------
* Represents less than 1% of the issued and outstanding shares of
common stock of the Company.

(1) This table includes presently exercisable stock options or options
which may be acquired within 60 days. The following directors and
executive officers hold the number of exercisable options or
options which may be acquired within 60 days set forth following
their respective names: Richard J. Sullivan - 6,685,000; Angela M.
Sullivan - 350,000; Richard S. Friedland - 489,000; Arthur F.
Noterman - 714,000; Daniel E. Penni - 714,001; Constance K. Weaver
- 624,000 Jerry C. Artigliere - 779,000, Michael E. Krawitz -
254,000; Kevin McLaughlin - 0; Peter Zhou - 212,334; and all
directors and officers as a group - 11,681,001.

(2) Includes 367,177 shares owned by The Bay Group and 259,598 shares
owned by Great Bay Technology, Inc. The Bay Group is controlled by
Richard J. Sullivan and Angela M. Sullivan. Great Bay Technology,
Inc. is controlled by Richard J. Sullivan and Angela M. Sullivan.

PRINCIPAL SHAREHOLDERS

Set forth in the table below is information as of April 5, 2002 with
respect to persons known to the Company (other than the directors and
executive officers shown in the preceding table) to be the beneficial owners
of more than five percent of the Company's issued and outstanding common
stock:

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

None

The Company has made previous filings under the Securities Act of 1933,
as amended, or the Exchange Act, that incorporate future filings, including
this Proxy Statement, in whole or in part. However, the following
"Compensation Committee Report on Executive Compensation" shall not be
incorporated by reference into any such filings.

COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE OF THE BOARD

The Compensation Committee is composed of four members of the Board of
Directors, one of whom, Richard Friedland, is currently acting as interim
President and Chief Executive Officer of Advanced Power Solutions, Inc., a
subsidiary the Company created in October 2001. Mr. Friedland does not
currently receive any compensation from Advanced Power Solutions for acting
in this capacity. It is the Compensation Committee's responsibility to
review, recommend and approve changes to the Company's compensation policies
and programs. It is also the Committee's responsibility to review and
approve all compensation actions for the Company's executive officers and
various other compensation policies and matters and administer the Company's
1996 Non-Qualified Stock Option Plan, the Company's 1999 Flexible Stock Plan
and the Company's 1999 Employees Stock Purchase Plan, including the review
and approval of stock option grants to the Company's executive officers.

GENERAL COMPENSATION PHILOSOPHY

The Company's executive compensation programs are designed to enable it
to attract, retain and motivate the Company's executives and those of its
subsidiaries. The Company's general compensation philosophy is that total
cash compensation should vary with the Company's performance in attaining
financial and non-financial objectives and that any long-term incentive
compensation should be closely aligned with the interests of shareholders.
Total cash compensation for the majority of the Company's employees,
including the Company's executive officers, includes a base salary and a
cash bonus based on the Company's profitability and the profitability of its
individual subsidiaries. Long-term incentive compensation is realized
through the granting of stock options to most employees, at the discretion
of the presidents of the Company's divisions, as well as eligible executive
officers.

SETTING EXECUTIVE COMPENSATION

In setting the base salary and individual bonuses (hereafter together
referred to as "BSB") for executives, the Compensation Committee reviews
information relating to executive compensation of U.S. based companies that
are of the same size as the Company. While there is no specific formula that
is used to set compensation in relation to this market data, executive
officer BSB is generally set at or below the median salaries for comparable
jobs in the market place. However, when specific financial and non-financial
goals are met, additional compensation in the form of either cash
compensation or long-term incentive compensation may be paid to the
Company's executive officers.

BASE SALARY

The Compensation Committee reviews the history and proposals for the
compensation package of each of the executive officers, including base
salary. Increases in base salary are governed by three factors: merit
(an individual's performance); market parity (to adjust salaries based
on the competitive market); and promotions (to reflect increases in
responsibility). In assessing market parity, the Company relies on market
surveys of similarly sized publicly traded companies and generally pays
below the median of these companies. The guidelines are set each year and
vary from year to year to reflect the competitive environment and to control
the overall cost of salary growth. Individual merit increases are based on
performance and can range from 0% to 100%.

The salary guidelines for all presidents of the Company's subsidiaries
are generally based upon individually negotiated employment agreements.
Merit increases are submitted by the Company's President to the Compensation
Committee for approval based upon individual performance and the performance
of the subsidiary. Merit increases for non-executive employees are at the
discretion of the presidents of the Company's divisions.

CASH AND STOCK INCENTIVE COMPENSATION PROGRAMS

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

The amount of the total incentive is divided between cash and stock at the
discretion of the Compensation Committee.

STOCK OPTIONS GRANTED UNDER THE 1996 NON-QUALIFIED STOCK OPTION PLAN
AND THE 1999 FLEXIBLE STOCK PLAN

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

These Plans allow grants of stock options to all of the Company's
employees, including executive officers. Grants to the Company's executive
officers and to officers of the Company's subsidiaries are made at the
discretion of the Compensation Committee. The Compensation Committee may
also make available a pool of options to each subsidiary to be granted at
the discretion of such subsidiary's president. In 2001, stock options for
the executive officers were granted upon the recommendation of management
and approval of the Compensation Committee based on their subjective
evaluation of the appropriate amount for the level and amount of
responsibility for each executive officer.

STOCK OPTIONS GRANTED UNDER THE 1999 EMPLOYEES STOCK PURCHASE PLAN

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

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

STOCK OPTION REPRICINGS

During 2001, the Compensation Committee approved a stock option
repricing for the named executive officers, directors and various other key
employees. The Compensation Committee felt that is was appropriate to reward
and motivate such employees by repricing their stock options since the
Company's current financial condition limits the amount of cash available
for bonuses and other forms of cash compensation. The options were repriced
on September 21, 2001 to an exercise price of $0.15 per share, which was the
closing price of the Company's common stock on that date.

DECISIONS ON 2001 COMPENSATION

The Company's compensation program is leveraged towards the achievement
of corporate and business objectives. This pay-for-performance program is
most clearly exemplified in the compensation of the Company's Chief
Executive Officer, Richard J. Sullivan. Mr. Sullivan's compensation awards
were made based upon the Compensation Committee's assessment of the
Company's financial and non-financial performance. The results were
evaluated based on the overall judgment of the Compensation Committee.
During 2001, the Company paid Mr. Sullivan a base salary of $450,000. In
addition, in 2001, the Company paid Mr. Sullivan a bonus of $448,801. Under
the terms of the Company's employment agreement with Mr. Sullivan, the
Company agreed to pay Mr. Sullivan a minimum annual bonus of $140,000. In
addition, during 2001, the Company paid Mr. Sullivan a discretionary bonus
of $308,801. Mr. Sullivan was also awarded 3,000,000 stock option grants in
2001.

The Compensation Committee is pleased to submit this report with regard
to the above matters.

Daniel E. Penni, Chairman
Richard S. Friedland
Arthur F. Noterman
Constance K. Weaver

EXECUTIVE OFFICERS

The executive officers of the Company are:

Name Age Position Position Held Since
- -------------------------------------------------------------------------------------------------------------------

Richard J. Sullivan 62 Chairman, Chief Executive Officer and Secretary May 1993
Scott R. Silverman 38 Director and President March 2002
Jerome C. Artigliere 48 Senior Vice President, Chief Operating Officer and March 2002
Assistant Treasurer
Michael E. Krawitz 32 Senior Vice President, General Counsel and December 2000
Assistant Secretary
Evan C. McKeown 43 Vice President and Chief Financial Officer March 2002
Kevin McLaughlin 60 Vice President, Sales and Marketing June 2000
Peter Zhou 62 Vice President and Chief Scientist January 2000

Jerome C. Artigliere: Mr. Artigliere, age 47, joined one of the
Company's subsidiaries as President in January 1998, and was appointed Vice
President of the Company in April 1998 and Treasurer in December 1999. In
November 2000, Mr. Artigliere was appointed Vice President and Chief
Financial Officer, and Senior Vice President, Chief Financial Officer and
Assistant Treasurer in December 2000. From 1996 to 1997, he was Regional
Vice President at General Electric Capital Corporation in Portsmouth, NH.
Prior to that, from 1994 to 1996, he was State Vice President at First
National Bank in Portsmouth, NH, a commercial bank subsidiary of Peoples
Heritage Bank of Portland, Maine. He earned an undergraduate degree in
finance from Seton Hall University in 1977, and a Master of Business
Administration degree from Fairleigh Dickinson University in 1980.

Michael E. Krawitz: Mr. Krawitz, age 32, joined as the Company's
Assistant Vice President and General Counsel in April 1999, and was
appointed Vice President and Assistant Secretary in December 1999, and
Senior Vice President, Strategic Initiatives and Assistant Secretary in
December 2000. From 1994 to April 1999, Mr. Krawitz was an attorney with
Fried, Frank, Harris, Shriver & Jacobson in New York. Mr. Krawitz earned a
Bachelor of Arts degree from Cornell University in 1991 and a juris
doctorate from Harvard Law School in 1994.

Evan C. McKeown: Mr. McKeown, age 43, joined the Company as Vice
President, Chief Accounting Officer and Corporate Controller in March 2001.
He was appointed Vice President, Chief Financial Officer in March 2002.
Prior to joining the Company, Mr. McKeown served as Corporate Controller at
Orius Corporation in West Palm Beach, Florida. From 1992 to 1999, he served
as Controller and then Chief Financial Officer of Zajac, Inc., in Portland,
Maine. Mr. McKeown has more that 20 years experience in accounting and
financial reporting, including serving as a Tax Manager for Ernst & Young
and public accountant with Coopers & Lybrand. He is a graduate of the
University of Maine and is a certified public accountant.

Kevin McLaughlin: Mr. McLaughlin, age 60, joined as Vice President of
Sales and Marketing in June 2000. From June 1995 to May 2000, he served as
Senior Vice President of Sales for SCB Computer Technology, Inc. Prior to
that time, from 1979 to 1994, Mr. McLaughlin held various positions with
Applicon, Inc., a subsidiary of Schlumberger, Ltd., including Regional
Director.

Peter Zhou: Dr. Zhou, age 62, joined as Vice President and Chief
Scientist in January 2000. From 1998 to 1999, Dr. Zhou served as Vice
President, Technology for Sentry Technology Corp., and, from 1985 to 1988,
he served as Research Investigator for the University of Pennsylvania's
Department of Science & Engineering. Prior to that, he was a Research
Scientist for Max-Planck Institute, Metallforschung in Stuttgart, Germany
and a Post-Doctoral Research Fellow at the University of Pennsylvania. Dr.
Zhou has a PhD. in Materials Science/Solid State Physics from the University
of Pennsylvania and a Master of Sciences degree in Physics from the Beijing
University of Sciences and Technology.

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
the total remuneration paid in 2001 and the two prior fiscal years to the
Company's Chief Executive Officer, the Company's four other most highly
compensated executive officers and two other individuals for whom
disclosures would be required, or is anticipated to be required in 2002, but
for the fact that the individuals were not serving, or had not served, as
executive officers of the Company at December 31, 2001 or for the entire
year then ended.

SUMMARY COMPENSATION TABLE

Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
-------------------------------------- ----------------------- ----------
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Principal Salary Compen- Awards SARs Payouts Compen-
Position (1) Year ($) Bonus ($)(2) sation ($)(3) ($) (#)(4) (#) sation ($)
- ---------------------------------------------------------------------------------------------------------------------------------

Richard J. Sullivan 2001 $450,000 $ 448,801 $ 57,424 $ -- 10,675,000 (11) -- $ --
Chairman, CEO and 2000 450,000 180,000 936,672 -- 4,000,000 -- --
Secretary 1999 457,500 3,000,000 9,115 -- 1,000,000 -- --

Scott R. Silverman (5) 2001 N/A N/A N/A N/A N/A N/A N/A
President and director 2000 N/A N/A N/A N/A N/A N/A N/A
1999 N/A N/A N/A N/A N/A N/A N/A

Jerome C. Artigliere (6) 2001 175,000 14,174 87,688 -- 1,129,000 (11) -- --
Senior Vice President, 2000 134,616 35,000 -- -- 100,000 -- --
Chief Operating Officer, 1999 98,726 150,000 -- -- 100,000 -- --
Assistant Treasurer

Michael E. Krawitz (7) 2001 160,000 14,174 -- -- 504,000 (11) -- --
Senior Vice President, 2000 151,853 35,000 -- -- 100,000 -- --
General Counsel 1999 94,027 150,000 1,541 -- 125,000 -- --
Assistant Secretary

Evan C. McKeown (8) 2001 93,750 7,087 -- -- 100,000 -- --
Vice President, Chief 2000 N/A N/A N/A N/A N/A N/A N/A
Financial Officer 1999 N/A N/A N/A N/A N/A N/A N/A

Kevin McLaughlin (9) 2001 150,000 7,087 -- -- 514,000 (11) -- --
Vice President, Sales and 2000 83,014 20,000 -- -- 120,000 -- --
Marketing 1999 N/A N/A N/A N/A N/A N/A N/A

Peter Zhou (10) 2001 212,839 -- -- -- 229,000 (11) -- --
Vice President, Chief 2000 151,456 25,000 -- -- 150,000 -- --
Scientist 1999 N/A N/A N/A N/A N/A N/A N/A

<FN>
- ---------------------------
(1) See "Related Party Transactions" on page 18 below.
(2) The amounts in the Bonus column were discretionary awards granted by
the Compensation Committee in consideration of the contributions of the
respective named executive officers.
(3) Other annual compensation includes: (a) in 2001, for Richard J.
Sullivan, an auto allowance and other discretionary payments, for
Jerome C. Artigliere, $50,000 in moving expenses, an auto allowance and
other discretionary payments; and (b) in 2000, for Richard J. Sullivan,
$936,672 of other compensation representing the fair value of property
distributed to Richard J. Sullivan, including the associated payment of
taxes on his behalf, pursuant to his employment agreement.
(4) Indicates number of securities underlying options. Options granted
during 2001 includes options repriced during the year.
(5) Mr. Silverman joined the Company as a Director and President in
March 2002.
(6) Mr. Artigliere began his employment with one of the Company's
subsidiaries in January 1998 and was appointed as one of the Company's
officers in April, 1998. Mr. Artigliere was appointed Chief Financial
Officer in November 2000 and Senior Vice President, Chief Financial
Officer and Assistant Treasurer in December 2000 and was named Senior
Vice President and Chief Operating Officer in March 2002.
(7) Mr. Krawitz joined the Company in April 1999, and was appointed Senior
Vice President, Strategic Operations, and Assistant Secretary in
December 2000 and General Counsel in August 2001.
(8) Mr. McKeown joined the Company as Vice President, Corporate Controller
and Chief Accounting Officer in March 2001 and was appointed Chief
Financial Officer in March 2002.
(9) Mr. McLaughlin joined the Company as Vice President, Sales and
Marketing in June 2000. As of March 2002, Mr. McLaughlin is no longer
an executive officer.
(10) Dr. Zhou joined the Company as Vice President, Chief Scientist in
January 2000.
(11) Includes options granted in prior years that were repriced during 2001
as follows: (a) for Richard J. Sullivan, 7,675,000; (b) for Jerome C.
Artigliere, 254,000; (c) for Michael E. Krawitz, 154,000; (d) for Kevin
McLaughlin, 189,000 and (e) for Peter Zhou, 129,000.

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the Company's grant
of stock options under the Company's 1999 Flexible Stock Plan to the named
executive officers during 2001:

OPTION GRANTS IN 2001
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value At Assumed Rates
of Stock Appreciation for Option Term
- ---------------------------------------------------------------------------------- --------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price
Name (1) Granted (#) 2001 ($/Sh) Expiration Date 0% ($) 5% ($) 10% ($)
- ------------------- -------------- -------------- ----------- ---------------- ----------------- -------------- ------------

Richard J. Sullivan 2,000,000 (1) 6.3% 0.15 January-07 -- 83,038 183,532
1,000,000 (2) 3.2 0.15 September-07 20,000 48,425 109,088
500,000 (3) 1.6 0.15 August-03 -- 6,024 12,219
500,000 (3) 1.6 0.15 November-03 -- 7,027 14,339
630,000 (3) 2.0 0.15 October-02 -- 3,525 7,009
45,000 (3) 0.1 0.15 August-02 -- 195 386
500,000 (3) 1.6 0.15 April-04 -- 8,711 17,957
500,000 (3) 1.6 0.15 June-04 -- 9,554 19,795
500,000 (3) 1.6 0.15 November-04 -- 11,474 24,046
1,000,000 (3) 3.2 0.15 May-10 -- 75,805 183,510
3,500,000 (3) 11.1 0.15 September-06 -- 136,681 300,017

Scott R. Silverman 100,000 (1) 0.3 0.15 August-07 -- 4,734 10,633
100,000 (4) 0.3 0.15 September-07 -- 4,834 10,861
125,000 (2) 0.4 0.15 September-07 2,500 6,053 13,636

Jerome C. Artigliere 625,000 (1) 2.0 0.15 January-07 -- 25,949 57,354
250,000 (2) 0.8 0.15 September-07 5,000 12,106 27,272
75,000 (3) 0.2 0.15 May-10 -- 5,685 13,763
79,000 (3) 0.2 0.15 September-06 -- 3,085 6,772

Michael E. Krawitz 100,000 (1) 0.3 0.15 January-07 -- 4,152 9,177
250,000 (2) 0.8 0.15 September-07 5,000 12,106 27,272
25,000 (3) 0.1 0.15 May-10 -- 1,895 4,588
50,000 (3) 0.2 0.15 October-05 -- 1,529 3,276
79,000 (3) 0.2 0.15 September-06 -- 3,085 6,772

Evan C. McKeown 16,667 (1) 0.1 0.15 March-07 -- 728 1,618
16,667 (1) 0.1 0.15 March-08 -- 880 2,007
16,666 (1) 0.1 0.15 March-09 -- 1,059 2,484
50,000 (2) 0.2 0.15 September-07 1,000 2,421 5,454

Kevin McLaughlin 75,000 (1) 0.2 0.15 January-07 -- 3,114 6,882
250,000 (2) 0.8 0.15 September-07 5,000 12,106 27,272
33,334 (3) 0.1 0.15 June-06 -- 1,212 2,641
33,333 (3) 0.1 0.15 June-07 -- 1,523 3,405
33,333 (3) 0.1 0.15 June-08 -- 1,850 4,248
39,000 (3) 0.1 0.15 September-06 -- 1,523 3,334

Peter Zhou 100,000 (1) 0.3 0.15 January-07 -- 14,152 9,177
16,667 (3) 0.1 0.15 January-06 -- 546 1,178
16,667 (3) 0.1 0.15 January-07 -- 698 1,545
16,666 (3) 0.1 0.15 January-08 -- 858 1,950
79,000 (3) 0.2 0.15 September-06 -- 3,085 6,772
<FN>
- -------------------
(1) These options were granted under the 1999 Flexible Stock Plan at an
exercise price equal to the fair market value of the Company's common
stock on the date of grant. On September 21, 2001, these options were
re-priced to an exercise price of $0.15 per share, which was the fair
market value on that date. These options are exercisable over a
five-year period beginning on the first anniversary of the grant date.

(2) These options were granted under the 1999 Flexible Stock Plan at an
exercise price of $0.15 per share, which was $0.02 per share less than
the fair market value on the date of grant. These options are
exercisable over a five-year period beginning on the first anniversary
of the grant date.

(3) These options were granted prior to 2001 under the 1996 Non-Qualified
Stock Option Plan and the 1999 Flexible Stock Option Plan. On
September 21, 2001, these options were re-priced to an exercise price
of $0.15 per share, which was the fair market value on that date.

(4) These options were granted under the 1999 Flexible Stock Plan at an
exercise price equal to the fair market value of the Company's common
stock on the date of grant.

OPTION EXERCISES AND FISCAL YEAR-END VALUES

The following table sets forth information with respect to the named
executive officers concerning the exercise of options during 2001 and
unexercised options held on December 31, 2001:

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

Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Exercised in 2001 Options at Year End 2001 (#) Options at Year End 2001 ($) (2)
----------------------------- -------------------------------- -----------------------------------
Shares Acquired Value
Upon Exercise Realized
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------------- ------------- --------------- --------------- ---------------- ------------------

Richard J. Sullivan 2,353,703 $624,583 5,331,297 3,000,000 $1,492,763 $840,000

Scott R. Silverman -- -- -- 325,000 -- 91,000

Jerome C. Artigliere -- -- 154,000 875,000 43,120 245,000

Michael E. Krawitz -- -- 154,000 350,000 43,120 98,000

Evan C. McKeown -- -- -- 100,000 -- 28,000

Kevin McLaughlin -- -- 72,334 391,666 20,254 109,666

Peter Zhou -- -- 95,667 133,333 26,787 37,333

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

(2) The value of the unexercised in-the-money options at December 31, 2001
assumes a fair market value of $0.43, the closing price of our common
stock as reported on The Nasdaq Stock Market on December 31, 2001. The
values shown are net of the option exercise price, but do not include
deduction for taxes or other expenses associated with the exercise of
the option or the sale of the underlying shares.

OPTION REPRICINGS

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

10-YEAR OPTION/SAR REPRICINGS

Number of Market Length of
Securities Price of Exercise Original
Underlying Stock at Price at Option Term
Options/SARs Time of Time of New Remaining at
Repriced or Repricing or Repricing or Exercise Date of
Amended Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
- ------------------------ --------------------- ------------- -------------- ------------ ---------- -----------------

Richard J. Sullivan September 21, 2001 500,000 $ 0.15 $ 3.93 $ 0.15 22 months
September 21, 2001 500,000 0.15 5.58 0.15 25 months
September 21, 2001 630,000 0.15 4.46 0.15 12 months
September 21, 2001 45,000 0.15 4.25 0.15 10 months
September 21, 2001 500,000 0.15 3.51 0.15 30 months
September 21, 2001 500,000 0.15 3.03 0.15 31.5 months
September 21, 2001 500,000 0.15 2.19 0.15 38 months
September 21, 2001 1,000,000 0.15 2.03 0.15 104.5 months
September 21, 2001 3,500,000 0.15 2.75 0.15 60 months
September 21, 2001 2,000,000 0.15 0.69 0.15 63 months

Scott R. Silverman September 21, 2001 100,000 0.15 0.27 0.15 58.5 months

Jerome C. Artigliere September 21, 2001 75,000 0.15 2.03 0.15 104.5 months
September 21, 2001 79,000 0.15 2.75 0.15 60 months
September 21, 2001 625,000 0.15 0.69 0.15 63 months

Michael E. Krawitz September 21, 2001 25,000 0.15 2.03 0.15 104.5 months
September 21, 2001 50,000 0.15 2.00 0.15 49.5 months
September 21, 2001 79,000 0.15 2.75 0.15 60 months
September 21, 2001 100,000 0.15 0.69 0.15 63 months

Evan C. McKeown September 21, 2001 16,667 0.15 1.22 0.15 66 months
September 21, 2001 16,667 0.15 1.22 0.15 78 months
September 21, 2001 16,666 0.15 1.22 0.15 90 months

Kevin McLaughlin September 21, 2001 33,334 0.15 3.66 0.15 57.5 months
September 21, 2001 33,333 0.15 3.66 0.15 69.5 months
September 21, 2001 33,333 0.15 3.66 0.15 81.5 months
September 21, 2001 39,000 0.15 2.75 0.15 60 months
September 21, 2001 75,000 0.15 0.69 0.15 63 months

Peter Zhou September 21, 2001 16,667 0.15 6.34 0.15 51.5 months
September 21, 2001 16,667 0.15 6.34 0.15 63.5 months
September 21, 2001 16,666 0.15 6.34 0.15 75.5 months
September 21, 2001 79,000 0.15 2.75 0.15 60 months
September 21, 2001 100,000 0.15 0.69 0.15 63 months

INCENTIVE PLANS

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

Stock Options Granted under the 1996 Non-Qualified Stock Option Plan
and the 1999 Flexible Stock Plan. The 1996 Non-Qualified Stock Option Plan
and the 1999 Flexible Stock Plan are long-term plans designed to link
rewards with shareholder value over time. Stock options are granted to aid
in the retention of employees and to align the interests of employees with
shareholders. The value of the stock options to an employee increases as the
price of the Company's stock increases above the fair market value on the
grant date, and the employee must remain

in the Company's employ for the period required for the stock option to be
exercisable, thus providing an incentive to remain in the Company's employ.

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

COMPENSATION OF DIRECTORS

Prior to the fourth quarter of 1998, the Company's non-employee
directors received a fee of $250 per meeting, for their attendance at
meetings of the Company's Board of Directors. Beginning in the fourth
quarter of 1998, the non-employee director compensation was changed to fixed
quarterly fees in the amount of $5,000 per non-employee director. In
addition, non-employee directors receive a quarterly fee in the amount of
$1,000 for each committee on which they are a member. Reasonable travel
expenses are reimbursed when incurred. Individuals who become directors are
automatically granted an initial option to purchase 25,000 shares of common
stock on the date they become directors. Each of such options is granted
pursuant to the Company's 1996 Non-Qualified Stock Option Plan or the
1999 Flexible Stock Plan on terms and conditions determined by the Board
of Directors. During 2001, Mssrs. Friedland, Noterman and Penni and
Ms. Sullivan and Ms. Weaver were granted 275,000, 275,000, 275,000, 250,000
and 275,000 options to purchase shares of common stock, respectively. In
addition, on September 21, 2001, options held by Mssrs. Friedland, Noterman
and Penni and Ms. Sullivan and Ms. Weaver to acquire 464,000, 714,000,
714,000, 350,000 and 624,000 shares of common stock, respectively, were
repriced to $0.15 per share, which was the closing price on that date. The
repriced options had original exercise prices ranging from $0.69 to $4.25
per share and had remaining terms of up to 104.5 months. Directors who are
not also executive officers are not eligible to participate in any of the
Company's other benefit plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Richard Friedland, a member of the Company's Compensation Committee,
was appointed interim President and Chief Executive Officer of Advanced
Power Solutions, Inc., a subsidiary the Company created in October 2001.
Mr. Friedland does not currently receive any compensation from Advanced Power
Solutions for acting in this capacity.

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

The Company, or its subsidiary, has entered into an employment
agreement with the following named executive officers:

Name Length Commencing Base Salary
- ------------------------------------- -------------- ----------------------- ---------------------

Richard J. Sullivan 5 Years (1) March 1, 2000 $ 450,000 (2)

Garrett A. Sullivan 5 Years (3) March 1, 2000 165,000

Jerome C. Artigliere 5 Years November 22, 2000 175,000

Michael E. Krawitz 5 Years April 12, 1999 160,000 (4)

Kevin McLaughlin 2 Years June 12, 2000 150,000 (5)

Peter Zhou 3 Years January 17, 2000 135,000 (6)

<FN>
- -------------------------------------
(1) Automatically renewed for successive additional one-year terms on each
anniversary.
(2) Provides for a minimum annual bonus of $140,000.
(3) Automatically renewed for successive additional one-year terms on each
anniversary. Mr. Sullivan retired and resigned effective December 31,
2001.
(4) Effective April 1, 2000.
(5) Provided for options to purchase up to 100,000 shares of the Company's
common stock at an exercise price equal to 85% of the fair market value
of the Company's common stock on June 12, 2000, as determined pursuant
to the Company's 1999 Flexible Stock Plan.
(6) Provided for options to purchase up to 50,000 shares of the Company's
common stock at an exercise price equal to 85% of the fair market value
of the Company's common stock on December 31, 1999, as determined
pursuant to the 1999 Flexible Stock Plan.

The Company has not entered into employment contracts with Messrs.
Scott R. Silverman and Evan C. McKeown.

In 1997, the Company entered into employment agreements with Richard J.
Sullivan, Chairman, and Garrett A. Sullivan. These agreements were amended
and restated effective March 1, 2000. In addition, during 2000, the Company
entered into an employment agreement with Jerome Artigliere. Such employment
agreements include certain "change of control" provisions. Upon a change of
control all unvested stock options become immediately exercisable. Also, at
the employee's option, he may terminate his employment under the agreement
at any time within one year after such change of control. In such event, the
Company shall pay to the employee a severance payment equal to the maximum
amount which would not result in such payment being an excess parachute
payment as defined in the Internal Revenue Code of 1986, as amended (the
"Code") which would be subject to an excise tax. Additionally, upon
termination of employment for any reason other than for breach under the
agreement, Mr. Richard Sullivan shall receive 60 monthly payments of $37,500
each. These payments are reduced by any severance payments. Such employment
agreements also provide that, if any payments from the Company are subject
to the excise tax described above, the Company will make a gross up payment
in an amount which covers the excise tax due plus the excise and income
taxes payable on the gross up payment. Mr. Richard Sullivan's agreement
provides that he may elect to receive a percentage of his salary for each
12-month period in the Company's common stock. For the twelve-month period
commencing January 1, 2000, Mr. Sullivan did not elect to receive any of his
compensation in stock. In addition, the Company agreed to transfer to
Richard Sullivan certain other property valued at approximately $0.5 million
upon his relocation to the Palm Beach, Florida area. The Company would also
be required to make a gross up payment that covers all U.S. federal and
state income taxes payable by Mr. Sullivan, if any, as a result of the
transfer.

Additionally, the agreements for both Richard Sullivan and Garrett
Sullivan provide for certain "triggering events" which include a change in
control, the termination of Richard Sullivan's employment other than for a
material breach of the terms of his employment agreement, or if Richard
Sullivan ceases to hold his current positions with the Company for any
reason other than a material breach of the terms of his employment
agreement. Within ten days of the occurrence of a triggering event, the
Company shall pay, in cash or in stock, or in a combination thereof,
$12.1 million and $3.5 million, respectively, to Richard Sullivan and to
Garrett Sullivan.

Effective December 31, 2001, Garrett Sullivan retired and resigned from
the Company's Board of Directors. As part of Mr. Sullivan's termination
agreement with the Company, the Company agreed to grant Mr. Sullivan
2,500,000 shares of the Company's common stock. In addition, all of
Mr. Sullivan's options to acquire the Company's common stock became vested
on the date of the termination agreement, and the Company has agreed to

continue to provide certain medical coverage to Mr. Sullivan through
December 31, 2005. The Company also has agreed to make the payment of
$3.5 million, referred to above, upon the occurrence of certain "triggering
events" previously included in Mr. Sullivan's employment agreement with the
Company.

In November 2000, the Company entered into an employment agreement with
Jerome C. Artigliere, Senior Vice President, Chief Financial Officer and
Assistant Treasurer. The employment agreement includes certain "change of
control" provisions. Upon a change of control, all unvested stock options
become immediately vested exercisable. Also, at Mr. Artigliere's option, he
may terminate his employment under the agreement at any time within one year
after such change of control. In such event, the Company shall pay to
Mr. Artigliere a severance payment equal to three times Mr. Artigliere's
"base amount" as defined in Section 280G of the Code minus one dollar. The
employment agreement also provides that, if any payments from the Company
are subject to the excise tax on excess parachute payments, the Company will
make a gross up payment in an amount which covers the excise tax due plus
the excise and income taxes payable on the gross up payment.

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

In June 2000, the Company entered into an employment agreement with
Kevin McLaughlin, Vice President of Sales and Marketing. The agreement
provides that in the event Mr. McLaughlin's employment is terminated by the
Company other than for "cause", Mr. McLaughlin will continue to receive his
base compensation for the remainder of the employment term under the
agreement as if such termination had not occurred. Upon any such
termination, the payment of any other benefits will be determined by the
Board in accordance with the Company's plans, policies and practices.

In January 2000, the Company entered into an employment agreement with
Dr. Peter Zhou, Vice President and Chief Scientist. The agreement provides
that in the event Dr. Zhou's employment is terminated by the Company other
than for "cause", Dr. Zhou will continue to receive his base compensation
for the remainder of the employment term under the agreement as if such
termination had not occurred. Upon any such termination, the payment of any
other benefits will be determined by the Board in accordance with the
Company's plans, policies and practices.

The credit agreement with IBM Credit limits the amount of salary the
Company may pay Richard Sullivan in cash and prevents the Company from
making certain cash incentive and perquisite payments to various executive
officers, including cash payments to Richard Sullivan, Garrett Sullivan and
Jerome Artigliere described above which may arise upon a change of control.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

INDEBTEDNESS OF MANAGEMENT

Daniel E. Penni, a member of the Company's Board of Directors, has
executed a revolving line of credit promissory note in favor of Applied
Digital Solutions Financial Corp., the Company's subsidiary, in the amount
of $450,000. The promissory note is payable on demand, with interest payable
monthly on the unpaid principal balance at the rate equal to one percentage
point above the base rate announced by State Street Bank and Trust Company
(which interest rate shall fluctuate contemporaneously with changes in such
base rate). The largest amount outstanding under the promissory note during
2001 was $420,000, and as of April 5, 2002, $420,000 had been advanced under
this note.

On September 27, 2000, the following named executive officers and
directors exercised options granted to them under the Company's 1999
Flexible Stock Plan to purchase shares of the Company's common stock. Under
the terms of the grant, the named executive officers each executed and
delivered an interest bearing promissory note and stock pledge agreement to
the Company in consideration for the purchase of the shares, as follows:

Named Executive Officer Amount Interest Rate Due Date
- ----------------------- ------ ------------- --------

Richard J. Sullivan $1,375,000 6.0% September 27, 2003

Jerome C. Artigliere 57,750 6.0 September 27, 2003

Michael E. Krawitz 57,750 6.0 September 27, 2003

Kevin McLaughlin 30,250 6.0 September 27, 2003

Peter Zhou 57,750 6.0 September 27, 2003

Directors Amount Interest Rate Due Date
- --------- ------ ------------- --------

Richard S. Friedland $ 236,500 6.0% September 27, 2003

Arthur F. Noterman 236,500 6.0 September 27, 2003

Daniel E. Penni 236,500 6.0 September 27, 2003

Constance K. Weaver 236,500 6.0 September 27, 2003

Marc Sherman, the former Chief Executive Officer of Intellesale, Inc.
and brother-in-law of Constance Weaver, a member of the Company's Board of
Directors, has executed six promissory notes in the aggregate amount of
$595,000. The promissory notes are due on demand and bear interest at the
rate of 6% per annum. Mr. Sherman was also indebted to the Company under a
mortgage note with a principal balance of $825,000. During 2001, the highest
balance outstanding on the note was $345,119. The note, which had an
interest rate equal to the prime rate published by the Wall Street Journal
plus 1%, was paid in full in May 2001. In addition, Mr. Sherman is indebted
to the Company under a non-interest bearing promissory note in the amount of
$200,000, the proceeds of which were used by Mr. Sherman to acquire 100,000
shares of the Company's common stock. This note is due upon the sale of the
Company's common stock by Mr. Sherman.

CHANGE IN CONTROL

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

The Company has made previous filings under the Securities Act of 1933,
as amended, or the Exchange Act, that incorporate future filings, including
this Proxy Statement, in whole or in part. However, the following
"Performance Graph" and "Report of the Audit Committee" shall not be
incorporated by reference into any such filings.

PERFORMANCE GRAPH

The following performance graph compares the changes, for the period
indicated, in the cumulative total value of $100 hypothetically invested in
each of (a) the Company's common stock, (b) the Russell 2000 Stock Index,
(c) the Nasdaq Stock Market(R) and (d) the AMEX. Historically, the Company
have included in its performance graph, various companies that the Company
believed operated within its peer group. Due to the changes in the Company's
business, the Company believes that the comparisons to the previous peer
group data are no longer meaningful, and, as a result, has removed the
information related to the peer group.

CUMULATIVE TOTAL RETURN
BASED ON INVESTMENT OF $100
DECEMBER 31, 1996 - DECEMBER 31, 2001

[GRAPH]

DOLLAR VALUE OF $100 INVESTMENT AT
-------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------

The Company $ 100.00 $ 85.71 $ 67.87 $142.86 $ 13.10 $ 8.25
Russell 2000 Index $ 100.00 $120.52 $116.37 $139.20 $133.35 $134.72
Nasdaq Stock Market Total Return Index $ 100.00 $122.48 $172.68 $320.89 $193.01 $153.15
AMEX $ 100.00 $121.10 $121.05 $160.57 $154.13 $142.41

REPORT OF THE AUDIT COMMITTEE

The Audit Committee oversees the Company's financial reporting process
on behalf of the Board of Directors. The Committee is comprised of four
Directors and operates under a written charter adopted by the Board of
Directors. With the exception of Richard S. Friedland, who has acted as
interim President and Chief Executive Officer of Advanced Power Solutions,
Inc., a subsidiary the Company, since October 2001, all of the members of
the Audit Committee are independent within the meaning of Rule 4200(a)(14)
of the NASD listing standards. Management has the primary responsibility for
the financial statements and the reporting process, including the Company's
systems of internal controls. In fulfilling its responsibilities, the
Committee reviewed the audited financial statements in the Annual Report on
Form 10-K, as amended, with management, including a discussion of the
quality and acceptability of the Company's financial reporting and controls.

The Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting standards, their
judgments as to the quality and acceptability of the Company's financial
reporting and such other matters as are required to be discussed with the
Committee under generally accepted auditing standards, including the matters
required to be discussed by SAS 61 (Communication with Audit Committees). In
addition, the Committee has discussed with the independent auditors the
auditors' independence from management and the Company, including the
matters in the auditors' written disclosures required by Independent
Standards Board Standard No. 1 (Independence Discussions with Audit
Committees).

The Committee also discussed with the Company's independent auditors
the overall scope and plans for its audit. The Committee meets periodically
with the independent auditors, with or without management present, to
discuss the results of its examination, its evaluation of the Company's
internal controls and the overall quality of the Company's financial
reporting.

In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, for filing with the Securities and
Exchange Commission.

Management is responsible for the Company's financial reporting process
including its system of internal control, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. The Company's independent auditors are responsible
for auditing those financial statements. Our responsibility is to monitor
and review these processes. It is not the Committee's duty or responsibility
to conduct auditing or accounting reviews or procedures. The members of the
Committee may not be, and do not represent themselves to be or to serve as,
accountants or auditors by profession or experts in the fields of accounting
or auditing. Therefore, the Committee has relied, without independent
verification, on management's representation that the financial statements
have been prepared with integrity and objectivity and in conformity with
accounting principles generally accepted in the United States of America and
on the representations of the independent auditors included in their report
on the Company's financial statements. The Committee's oversight does not
provide it with an independent basis to determine that management has
maintained appropriate accounting and financial reporting principles or
policies, or appropriate internal controls and procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, the Committee's considerations and discussions with management
and the independent auditors do not assure that the Company's financial
statements are presented in accordance with generally accepted accounting
principles, that the audit of the Company's financial statements has been
carried out in accordance with generally accepted auditing standards or that
the Company's independent accountants are in fact "independent."

The Audit Committee is pleased to submit this report to the
shareholders with regard to the above matters.

Richard S. Friedland, Chairman
Arthur F. Noterman
Daniel E. Penni
Constance K. Weaver

APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1999 FLEXIBLE STOCK PLAN
AND RATIFICATION OF OPTIONS GRANTED THEREUNDER

(ITEM 2)

The Board of Directors has proposed an amendment to the 1999 Flexible
Stock Plan (the "Plan") increasing the number of shares of common stock
which may be issued under the Plan to 36,000,000. As of April 5, 2002, no
shares are available under the Plan.

The Plan currently permits the Company to issue 30,000,000 shares of
common stock.

The Plan is intended to attract, retain, motivate and reward employees
and other individuals and to encourage ownership by employees and other
individuals of the Company's common stock. The Plan provides for benefits to
be awarded in the form of Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Restricted Stock, Performance Shares,
Cash Awards, and Other Stock Based Awards, each of which is defined in the
Amended and Restated 1999 Flexible Stock Plan attached hereto.

Under the Plan, as amended, options which would allow the holders
thereof to acquire a total of 12,287,000 shares of common stock have been
granted in 2001 by the committee designated for such purpose. No further
shareholder approval is required for the issuance of such options. However,
shareholder ratification of such options at the Annual Meeting will allow
the holders of these stock awards and options to have the benefit of
Rule 16b-3 under the Exchange Act, which, among other things, exempts certain
grants of options to officers and directors of the Company from the
provisions of Section 16(b) of such Exchange Act.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO THE COMPANY'S 1999 FLEXIBLE STOCK PLAN AND RATIFICATION OF OPTIONS
GRANTED UNDER THE COMPANY'S 1999 FLEXIBLE STOCK PLAN. UNLESS A CONTRARY
CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE
VOTED FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S FLEXIBLE STOCK PLAN AND
RATIFICATION OF OPTIONS GRANTED UNDER THE COMPANY'S 1999 FLEXIBLE STOCK
PLAN.

Set forth below is a description of the essential features of the Plan
as proposed to be amended. This description is subject to and qualified in
its entirety by the full text of the Plan which is attached to this Proxy
Statement as Exhibit A.

DESCRIPTION OF THE PLAN

NUMBER OF SHARES

Under the proposed amendment, the number of shares of common stock
which may be issued under the Plan shall be 36,000,000 shares. Such shares
may be authorized but unissued shares, shares held in the Company's
treasury, or both. If an option or SAR expires or is terminated, surrendered
or canceled, without having been fully exercised, if Restricted Stock or
Performance Shares are forfeited, or if any other grant results in shares of
common stock not being issued, the shares covered by such option or SAR,
grant of shares of Restricted Stock, Performance Shares or other grant, as
the case may be, shall again be available for use under the Plan.

If there is any change in the common stock of the Company by reason of
any stock dividend, spin-off, split-up, spin-out, recapitalization, merger,
consolidation, reorganization, combination or exchange of shares, the number
of SARs and number and class of shares available for options and grants of
Restricted Stock, Performance Shares and Other Stock Based Awards and the
number of shares subject to any outstanding options, SARs, grants of
Restricted Stock Performance Shares which are not yet vested, and Other
Stock Based Awards, and the price thereof, as applicable, will be
appropriately adjusted.

ADMINISTRATION

The Plan is administered by a committee ("Committee"). The Committee
shall consist of the Board, unless the Board appoints a Committee of two or
more but less than all of the Board. If the Committee does not include the
entire Board, it shall serve at the pleasure of the Board, which may from
time to time appoint members in substitution for members previously
appointed and fill vacancies, however caused, in the Committee.

Subject to the express provisions of the Plan, the Committee has
complete authority to: (i) determine when and to whom Benefits are granted
and the type and amounts of Benefits; (ii) determine the terms, conditions
and

provisions of, and restrictions relating to, each Benefit granted;
(iii) interpret and construe the Plan and any agreement ("Agreement")
evidencing and describing a Benefit; (iv) prescribe, amend and rescind rules
and regulations relating to the Plan; (v) determine the form and contents of
all Agreements; (vi) determine all questions relating to Benefits under the
Plan; and (vii) take any other action which it considers necessary or
appropriate for the administration of the Plan and to carry out the purposes
of the Plan.

Except as required by Rule 16b-3 with respect to Benefits granted to
persons who are subject to Section 16 of the Exchange Act (consisting of
directors and officers), the Committee may delegate its authority to any
employee, employees or committee.

AMENDMENT, TERMINATION AND CHANGE IN CONTROL

The Board may amend the Plan at any time. However, the Board may not
amend the Plan without shareholder approval if such amendment (i) would
cause options which are intended to qualify as Incentive Stock Options to
fail to qualify as such, (ii) would cause the Plan to fail to meet the
requirements of Rule 16b-3, or (iii) would violate applicable law. The Plan
has no fixed termination date and shall continue in effect until terminated
by the Board.

The amendment or termination of the Plan will not adversely affect any
Benefit granted prior to such amendment or termination. However, any Benefit
may be modified or canceled by the Committee if and to the extent permitted
by the Plan or Agreement or with the consent of the participant to whom such
Benefit was granted.

In the event of a Change in Control, as defined below, all Incentive
Stock Options and Non-Qualified Stock Options shall become fully
exercisable, all Stock Appreciation Rights shall become immediately payable,
all Restricted Stock shall become vested, all Performance Shares shall be
deemed fully earned, and all Cash Awards, Other Stock Based Awards, and
other Benefits shall become fully vested, exercisable or payable. In
addition, the Committee may, to the extent not inconsistent with the above,
provide such protection as it deems necessary to maintain a participant's
rights, including, without limitation: (i) providing for purchase of a
benefit for an amount in cash equal to the amount which could have been
attained upon the exercise or realization of such benefit; (ii) making such
adjustment to the outstanding benefits as the Committee deems appropriate;
and/or (iii) causing the outstanding benefits to be assumed, or new benefits
substituted therefor, by the surviving corporation. "Change in Control"
means: (a) the acquisition by any person or group, other than the Company
and certain related entities, of more than 20% of the outstanding shares of
common stock; (b) a change in the majority of the members of the Board
during any two year period which is not approved by at least two-thirds of
the members of the Board who were members at the beginning of the two year
period; (c) a merger or consolidation involving the Company in which the
shareholders of the Company prior to the effective date of the transaction
do not have more than 50% of the voting power of the surviving entity
immediately following the transaction; or (d) the liquidation or dissolution
of the Company, or (e) a sale or other disposition of all or substantially
all of its assets.

ELIGIBILITY FOR BENEFITS

Benefits may be awarded to individuals selected by the Committee.
Benefits may be awarded only to employees, members of the Board, employees
and owners of entities which are not affiliates but which have a direct or
indirect ownership interest in an employer, individuals who, and employees
and owners of entities which, are customers or suppliers of an employer,
individuals who, and employees and owners of entities which, render services
to an employer, and individuals who, and employees and owners of entities
which, have ownership or business affiliations with any individual or entity
previously described.

TYPES OF BENEFITS

Under the Plan, the Committee may grant a number of different types of
Benefits. A summary of the principal characteristics of various types of
Benefits which may be granted is set forth below.

Stock Options. Two types of stock options may be granted under the
Plan. Stock options intended to qualify for special tax treatment under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
are referred to as "Incentive Stock Options," and options not intended to so
qualify are referred to as "Non-Qualified Stock Options." In the case of
Non-Qualified Stock Options, the option price shall be determined by the
Committee but shall be no less than 85% of the fair market value of the
shares of common stock on the date the option is granted, and, in the case
of Incentive Stock Options, the price shall be determined by the Committee
but shall be no less than the fair market value of the shares of common
stock on the date the option is granted.

The other terms of options shall be determined by the Committee.
However, in the case of options intended to qualify as Incentive Stock
Options, such terms must meet all requirements of Section 422 of the Code.
Currently, such requirements are (i) the option must be granted within
10 years from the adoption of the Plan, (ii) the option may not have a term
longer than 10 years, (iii) the option must be not transferable other than
by will or the laws of

descent and distribution and may be exercised only by the optionee during
his/her lifetime, (iv) the maximum aggregate fair market value of common
stock with respect to which such options are first exercisable by an
optionee in any calendar year may not exceed $100,000; and (v) the option
must be granted to an employee. In addition, if the optionee owns more than
10% of the Company's common stock or more than 10% of the total combined
voting power of all classes of stock of any subsidiary, the option price
must be at least 110% of fair market value of the shares of common stock on
the date the option is granted, and the option may not have a term longer
than five years.

SARs. An SAR is the right to receive an amount equal to the
appreciation in value of one share of common stock from the time the SAR is
granted until the time the grantee elects to receive payment. Participants
who elect to receive payment of SARs shall receive payment in cash, in
common stock or in any combination of cash and common stock, as determined
by the Committee. When SARs are granted in tandem with an Incentive Stock
Option, the SARs must contain such terms and conditions as are necessary for
the related option to qualify as an Incentive Stock Option. In addition, if
SARs are granted in tandem with a stock option: the exercise of the option
shall cause a correlative reduction in the SARs; and the payment of SARs
shall cause a correlative reduction in the shares under the option.

Restricted Stock. Restricted Stock is common stock which is subject to
forfeiture until a period of time has elapsed or certain conditions have
been fulfilled. Unless the Committee determines otherwise, shares of
Restricted Stock shall be granted at a cost equal to par value (presently
$.001 per share). Certificates representing shares of Restricted Stock shall
bear a legend referring to the Plan, noting the risk of forfeiture of the
shares and stating that such shares are non-transferable until all
restrictions have been satisfied and the legend has been removed. As of the
date Restricted Stock is granted, the grantee shall be entitled to full
voting and dividend rights with respect to all shares of such stock.

Performance Shares. Performance Shares are the right to receive common
stock or cash equal to the fair market value of the common stock at a future
date in accordance with the terms of the grant. Generally, such right shall
be based upon the attainment of targeted profit and/or other performance
objectives.

Cash Awards. A Cash Award is a Benefit payable in cash. The maximum
cash award that an individual who is subject to Section 16 of the Exchange
Act may receive in any calendar year in the aggregate is the greater of
$100,000 or 100% of his or her compensation (excluding any Cash Award) for
such year.

Other Stock Based Awards. An Other Stock Based Award is an award that
is valued in whole or in part by reference to, or is otherwise based on,
common stock.

GENERAL PROVISIONS APPLICABLE TO BENEFITS

Under the Plan, the following provisions are applicable to one or more
types of Benefits.

Agreement and Terms of Benefits. The grant of any Benefit may be
evidenced by an Agreement which describes the specific Benefit granted and
the terms, conditions and provisions of, and restrictions relating to, such
Benefit. Any Agreement shall contain such provisions as the Committee shall
determine to be necessary, desirable and appropriate.

Transferability. Unless otherwise specified in an agreement or
permitted by the Committee, each Benefit shall be non-transferable other
than by will or the laws of descent and distribution and shall be
exercisable during a participant's lifetime only by him/her.

Tandem Awards. Awards may be granted by the Committee in tandem.
However, no Benefit may be granted in tandem with an Incentive Stock Option
except SARs.

Payment. Upon the exercise of an option or in the case of any other
Benefit that requires a payment to the Company, payment may be made either
(i) in cash, including a so-called "cashless exercise," or (ii) with the
consent of the Committee, (a) by the tender of shares of common stock having
an aggregate fair market value equal to the amount due the Company, (b) in
other property, (c) by the surrender of all or part of a Benefit (including
the Benefit being exercised or acquired), or (d) by any combination of the
foregoing.

Dividend Equivalents. Grants of Benefits in common stock or common
stock equivalents may include dividend equivalent payments or dividend
credit rights.

Deferral. The right to receive a Benefit may, upon the request of the
request of the recipient, be deferred for such period and upon such
conditions as the Committee may determine.

Withholding. At the time any Benefit is distributed under the Plan, the
Company may withhold, in cash or in shares of common stock, from such
distribution any amount necessary to satisfy income withholding requirements
applicable to such distribution.

Limitation on Benefits. Under the Plan, the number of shares covered by
options where the purchase price is no less than fair market value on the
date of grant plus SARs which may be granted to any one individual in any
calendar year shall not exceed 5,000,000.

RESTRICTIONS ON SHARES

The Committee may require each person purchasing common stock pursuant
to an option or receiving common stock pursuant to any other form of Benefit
under the Plan to represent to and agree with the Company in writing that
such person is acquiring the shares for investment and without a view to
distribution or resale. In addition, shares issued under the Plan may be
subject to restrictive agreements between the Company or a subsidiary and
the participant. The Committee may require that a legend reflecting any
restriction described above be placed on any certificate for shares.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN

The following is a summary of the U.S. federal income tax consequences
of the Plan, based on current income tax laws, regulations and rulings.

INCENTIVE STOCK OPTIONS

Subject to the effect of the Alternative Minimum Tax, discussed below,
an optionee does not recognize income on the grant of an Incentive Stock
Option. If an optionee exercises an Incentive Stock Option in accordance
with the terms of the option and does not dispose of the shares acquired
within two years from the date of the grant of the option nor within one
year from the date of exercise, the optionee will not realize any income by
reason of the exercise, and the Company will be allowed no deduction by
reason of the grant or exercise. The optionee's basis in the shares acquired
upon exercise will be the amount paid upon exercise. Provided the optionee
holds the shares as a capital asset at the time of sale or other disposition
of the shares, his/her gain or loss, if any, recognized on the sale or other
disposition will be capital gain or loss. The amount of his/her gain or loss
will be the difference between the amount realized on the disposition of the
shares and his/her basis in the shares.

If an optionee disposes of the shares within two years from the date of
grant of the option or within one year from the date of exercise ("Early
Disposition"), the optionee will realize ordinary income at the time of such
Early Disposition which will equal the excess, if any, of the lesser of
(i) the amount realized on the Early Disposition, or (ii) the fair market
value of the shares on the date of exercise, over the optionee's basis in the
shares. The Company will be entitled to a deduction in an amount equal to
such income. The excess, if any, of the amount realized on the Early
Disposition of such shares over the fair market value of the shares on the
date of exercise will be long-term or short-term capital gain, depending
upon the holding period of the shares, provided the optionee holds the
shares as a capital asset at the time of Early Disposition. If an optionee
disposes of such shares for less than his/her basis in the shares, the
difference between the amount realized and his/her basis will be a long-term
or short-term capital loss, depending upon the holding period of the shares,
provided the optionee holds the shares as a capital asset at the time of
disposition.

The excess of the fair market value of the shares at the time the
Incentive Stock Option is exercised over the exercise price for the shares
is an item of tax preference ("Stock Option Preference") which is discussed
below.

NON-QUALIFIED STOCK OPTIONS

Non-Qualified Stock Options do not qualify for the special tax
treatment accorded to Incentive Stock Options under the Code. Although an
optionee does not recognize income at the time of the grant of the option,
he recognizes ordinary income upon the exercise of a Non-Qualified Option in
an amount equal to the difference between the fair market value of the stock
on the date of exercise of the option and the amount of cash paid for the
stock.

As a result of the optionee's exercise of a Non-Qualified Stock Option,
the Company will be entitled to deduct as compensation an amount equal to
the amount included in the optionee's gross income. The Company's deduction
will be taken in the Company's taxable year in which the option is
exercised.

The excess of the fair market value of the stock on the date of
exercise of a Non-Qualified Stock Option over the exercise price is not a
Stock Option Preference.

SARS

Recipients of SARs do not recognize income upon the grant of such
rights. When a participant elects to receive payment of an SAR, he
recognizes ordinary income in an amount equal to the cash and fair market
value of shares of common stock received, and the Company is entitled to a
deduction equal to such amount.

RESTRICTED STOCK; PERFORMANCE SHARES

Grantees of Restricted Stock and Performance Shares do not recognize
income at the time of the grant of such stock. However, when shares of
Restricted Stock become free from any restrictions or when Performance
Shares are paid, grantees recognize ordinary income in an amount equal to
the fair market value of the stock on the date all restrictions are
satisfied, less, in the case of Restricted Stock, the amount paid for the
Stock. Alternatively, the grantee of Restricted Stock may elect to recognize
income upon the grant of the stock and not at the time the restrictions
lapse, in which case the amount of income recognized will be the fair market
value of the stock on the date of grant. The Company will be entitled to
deduct as compensation the amount includible in the grantee's income in its
taxable year in which the grantee recognizes the income.

CASH AWARDS

Cash Awards are taxable as ordinary income when received or
constructively received by a participant. The Company is entitled to deduct
the amount of a Cash Award when the award is taxable to the recipient.

TAXATION OF PREFERENCE ITEMS

Section 55 of the Code imposes an Alternative Minimum Tax equal to
the excess, if any, of (i) 26% of the optionee's "alternative minimum
taxable income" up to $175,000 plus 28% of such income over $175,000 over
(ii) his/her "regular" U.S. federal income tax. Alternative minimum taxable
income is determined by adding the optionee's Stock Option Preference and
any other items of tax preference to the optionee's adjusted gross income
and then subtracting certain allowable deductions and an exemption amount.
The exemption amount is $35,750 for single taxpayers, $49,000 for married
taxpayers filing jointly and $24,500 for married taxpayers filing
separately. However, these exemption amounts are phased out beginning at
certain levels of alternative minimum taxable income.

CHANGE OF CONTROL

If there is an acceleration of the vesting or payment of Benefits
and/or an acceleration of the exercisability of stock options upon a Change
of Control, all or a portion of the accelerated benefits may constitute
"Excess Parachute Payments" under Section 280G of the Code. The employee
receiving an Excess Parachute Payment incurs an excise tax of 20% of the
amount of the payment in excess of the employee's average annual
compensation over the five calendar years preceding the year of the Change
of Control, and the Company is not entitled to a deduction for such payment.

LIMITATION ON DEDUCTION

Section 162(m) of the Code provides that no deduction will be allowed
for certain remuneration with respect to a covered employee to the extent
such remuneration exceeds $1,000,000. Under the regulations interpreting
Code Section 162(m), an employee is a covered employee if his/her
compensation is required to be reported under the SEC's disclosure rules and
he is employed as of the last day of the taxable year. Code Section 162(m)
does not apply to: (a) compensation payable solely on account of the
attainment of one or more performance goals if (i) the goals are determined
by a committee of two or more outside directors, (ii) the material terms
under which the remuneration will be paid, including the goals, is disclosed
to shareholders and approved by a majority of the shareholders, and
(iii) except in the case of SARs and certain stock options (as described
below), the committee certifies that the goals have been met; and (b)
compensation payable under a binding contract in effect on February 17, 1993
which is not thereafter modified in any material respect. Compensation arising
from SARs and stock options where the price from which appreciation is
calculated or exercise price, as the case may be, is no less than fair market
value on the date of grant constitute compensation on amount of attainment
of a performance goal as long as the committee described above grants the
SARs or options and the shareholders approve the maximum number of shares per
participant over a specific time period. The $1,000,000 limitation is
reduced by any remuneration subject to such limitation for which a deduction
is disallowed under the Change of Control provisions set forth above.

SUMMARY ONLY

The foregoing statement is only a summary of the U.S. federal income
tax consequences of the Plan and is based on the Company's understanding of
present U.S. federal tax laws and regulations.

APPROVAL OF AN AMENDMENT TO THE COMPANY'S
1999 EMPLOYEES STOCK PURCHASE PLAN

(ITEM 3)

The Board of Directors has proposed an amendment to the 1999 Employees
Stock Purchase Plan (the "Stock Purchase Plan") increasing the number of
shares of common stock which may be issued under the Stock Purchase Plan to
9,000,000. As of April 5, 2002, 1,261,689 shares are available under the
Stock Purchase Plan, of which 1,738,311 have previously been granted by the
Committee.

The Stock Purchase Plan currently permits the Company to issue
3,000,000 shares of common stock.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENTS
TO THE COMPANY'S 1999 EMPLOYEES STOCK PURCHASE PLAN. UNLESS A CONTRARY
CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE
VOTED FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S 1999 EMPLOYEES STOCK
PURCHASE PLAN.

Set forth below is a description of the essential features of the Stock
Purchase Plan. This description is subject to and qualified in its entirety
by the full text of the Stock Purchase Plan which is attached to this Proxy
Statement as Exhibit B.

DESCRIPTION OF THE PLAN

The Stock Purchase Plan provides for the granting of options
("Options") to employees of the Company and its subsidiaries who are
eligible to participate in the Stock Purchase Plan and who elect to
participate ("Participants"). The Stock Purchase Plan is intended to qualify
as an "Employee Stock Purchase Plan" under Section 423 of the Code.

Options granted under the Stock Purchase Plan are not transferable
other than by will or under the laws of descent and distribution and are
exercisable, during the Participant's lifetime, only by him/her.

NUMBER OF SHARES

Under the proposed amendment, the number of shares for which Options
may be granted under the Stock Purchase Plan shall be 9,000,000 shares of
Common Stock. Such shares may be authorized but unissued shares, shares held
in the Company's treasury, or both.

If the Common Stock of the Company is changed by reason of any stock
dividend, spin-off, split-up, recapitalization, merger, consolidation,
reorganization, combination or exchange of shares, the number and class of
shares available for Options and the price of such shares, as applicable,
shall be appropriately adjusted.

ADMINISTRATION

The Stock Purchase Plan is administered by a committee ("Committee").
The Committee shall consist of the Board, unless the Board appoints a
Committee of two or more but less than all of the Board. If the Committee
does not include the entire Board, it shall serve at the pleasure of the
Board, which may from time to time appoint members in substitution for
members previously appointed and fill vacancies, however caused, in the
Committee.

Subject to the express provisions of the Stock Purchase Plan, the
Committee has authority to: (i) determine when and to whom Options are
granted; (ii) determine the terms and conditions of each offering, as
defined below; (iii) interpret the Stock Purchase Plan; (iv) prescribe,
amend, and rescind rules and regulations relating to the Stock Purchase
Plan; and (v) take any other action which it considers necessary or
appropriate for the administration of the Stock Purchase Plan.

AMENDMENT OR TERMINATION

The Board may amend or terminate the Stock Purchase Plan at any time.
However, the Board may not amend the Stock Purchase Plan without shareholder
approval if such amendment (i) would cause the Stock Purchase Plan to

fail to meet the requirements of Code Section 423 or (ii) would violate
applicable law or administrative regulation or rule. No such amendment or
termination may adversely affect any Option previously granted.

ELIGIBILITY FOR PARTICIPATION

The Committee determines which entities among the Company and its
subsidiaries are eligible to participate in each offering. Generally, if any
of an entity's employees are eligible to participate in an offering, all of
its employees must be eligible. However, the Committee may, in its sole
discretion, exclude from participation in any offering: (i) employees who
have been employed for less than two years; (ii) employees whose customary
employment is 20 hours or less per week; (iii) employees whose customary
employment is for not more than five months in any calendar year; and
(iv) highly compensated employees (within the meaning of Section 414(q) of the
Code). In addition, no employee may be granted an Option: (i) if immediately
after the grant of the Option the employee would own, within the meaning of
Section 423(b)(3) of the Code, stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or of
any subsidiary; or (ii) which permits the employee's rights to purchase
stock under all employee stock purchase plans of the Company and its
subsidiaries to accrue at a rate which exceeds $25,000 of fair market value
of such stock, determined at the time the Option is granted, for any
calendar year.

OFFERINGS UNDER THE STOCK PURCHASE PLAN

The Committee shall select each date for the granting of Options to
purchase shares under the Stock Purchase Plan ("Offering"). Each Offering
will commence on such date and continue for a period set by the Committee
("Offering Period").

The Committee determines all of the terms and conditions of each
Offering, including the entities whose employees may participate in the
Offering, whether any employees of any such entity who may be excluded are
to be excluded, the number of shares to be offered, the maximum number of
shares any Participant may purchase, each date Options are exercised
("Exercise Date"), the length of the Offering Period, the price per share to
be paid by the Participant ("Exercise Price"), and whether interest will be
paid on Participants' Accounts, as defined below. The Exercise Price may not
be less than the lower of: (i) 85% of the fair market value of the shares on
the date the Option is granted; or (ii) 85% of the fair market value of the
shares on the date the Option is exercised.

Each eligible employee may elect to participate in the Stock Purchase
Plan as of a date determined by the Committee ("Entry Date") and become a
Participant by delivering to the Company an executed agreement in the form
approved by the Committee. Payment for the shares is made (i) through
payroll deductions, and (ii) if permitted by the Committee, by separate cash
payments and in shares of Common Stock to be valued on the Exercise Date. An
account ("Account") is established on the books of the Company in the name
of each Participant. All payroll deductions, separate cash payments or
tenders of shares made by or on behalf of such Participant are credited to
the Account.

A Participant's Option is automatically exercised on each Exercise Date
for that number of full shares which may be purchased at the applicable
Exercise Price with the aggregate payroll deductions and, if permitted by
the Committee, separate cash payments and tendered shares as of the Exercise
Date, unless the Participant withdraws from the Stock Purchase Plan. Any
balance remaining in the Participant's Account after any exercise of an
Option remains in such Account unless the Offering is over, in which case it
is refunded to the Participant.

A Participant may withdraw from the Stock Purchase Plan at such times
and upon such conditions as the Committee may determine.

In the event of a Participant's retirement, death or other termination
of employment, the amount in his/her Account shall be applied as of the next
Exercise Date to purchase Common Stock unless the employee, or, in the event
of his/her death, his/her successor, requests that the amount in his/her
Account be refunded. However, if the retirement, death or other termination
of employment occurs more than three months prior to the next Exercise Date,
such amount shall automatically be refunded.

An employee of a subsidiary of the Company which ceases to be a
subsidiary will be deemed to have terminated his/her employment as of the
date such corporation ceases to be a subsidiary unless, as of such date, the
employee becomes an employee of the Company or a subsidiary of the Company
whose employees are eligible to participate in the Offering.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN

The amount which a Participant contributes to the Stock Purchase Plan
through payroll deductions or otherwise is not deductible by the Participant
for U.S. federal income tax purposes. The Participant does not recognize
income

on either the granting or exercise of an Option. However, if the acquired
shares are sold within two years from the date the Option was granted or
within one year from the date the shares were purchased, he/she will
recognize ordinary income equal to the difference between the fair market
value of the shares on the Exercise Date over the Exercise Price. Any
further gain is a capital gain. The tax basis in any such shares, for
purposes of computing gain or loss upon their disposition, will be the fair
market value of the shares on the Exercise Date. The early disposition of
the shares by the Participant entitles the Company to a deduction to the
extent that any gain to the Participant is treated as ordinary income.

If the Participant sells the shares more than two years after the
Option was granted and more than one year after the shares were purchased,
or if the Participant dies without having disposed of the shares, the
Participant will recognize ordinary income in an amount equal to the lesser
of (i) the excess of the fair market value of the shares on the date the
Option was granted over the Exercise Price, or (ii) the excess of the fair
market value of the shares on the date of disposition or death over the
Exercise Price. Any further gain is a capital gain. Any loss is treated as a
capital loss. The basis of the shares will be the sum of the Exercise Price
and the amount of any such recognized income. The Company will have no tax
consequences.

Any interest on the Participant's funds held by the Company which is
paid to the Participant is ordinary income to the Participant.

SUMMARY ONLY

The foregoing statement is only a summary of the U.S. Federal income
tax consequences of the Plan and is based on the Company's understanding of
present U.S. federal tax laws and regulations.

APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK

(ITEM 4)

The Company's shareholders are asked to act upon a proposal to amend
the Company's Second Restated Articles of Incorporation, as amended, to
increase the number of authorized shares of common stock from 345,000,000
shares to 435,000,000 shares. Pursuant to this proposal, the first sentence
of Article Three of the Company's Second Restated Articles of Incorporation,
as amended, is amended in its entirety to read as follows:

The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is Four Hundred Forty
Million (440,000,000) shares, of which Five Million (5,000,000)
shares shall be preferred stock ("Preferred Stock") having a par
value of $10.00 per share and Four Hundred Thirty-Five Million
(435,000,000) shares shall be common stock ("Common Stock") having
a par value of $.001 per share.

The Company's Second Restated Articles of Incorporation, as amended,
currently authorizes the Company to issue up to 345,000,000 shares of common
stock and 5,000,000 shares of preferred stock. As of April 5, 2002, the
Company had outstanding 268,604,867 shares of common stock. The Board of
Directors believes the proposed increase in the authorized number of shares
of common stock is necessary to provide the Company with the flexibility to
meet business needs as they arise, to take advantage of favorable
opportunities and to respond to a changing environment.

The additional shares of common stock would be available for issuance
from time to time and for such purposes as the Board of Directors may deem
advisable without further action by the shareholders, except as may be
required by applicable laws or regulations. These purposes may include
acquisitions of property and securities, additional stock dividends, stock
splits, retirement of indebtedness, employee benefit programs, corporate
business combinations or other corporate purposes. The Board of Directors
has no immediate plans or commitments to issue any additional shares of
common stock in excess of the amount currently authorized. However, the
Board of Directors believes that an increase in the number of authorized
shares would provide the Company with the ability to issue such additional
new shares of common stock should the opportunity be presented in the
future.

Each additional share of common stock authorized by the amendment to
the Article Three of the Amended Articles of Incorporation described in this
proposal would have the same rights and privileges under the Amended
Articles of Incorporation as each share of common stock currently
authorized. Shareholders have no preemptive rights with respect to common
stock and the issuance of common stock, other than on a pro-rata basis,
would result in dilution of a shareholder's interest.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE AMENDED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 345,000,000 SHARES TO 435,000,000
SHARES. UNLESS A CONTRARY CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE
BOARD OF DIRECTORS WILL BE VOTED FOR APPROVAL OF THE AMENDMENT TO THE
AMENDED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL

The Company's authorized capital stock consists of 345,000,000 shares
of common stock, $.001 par value, and 5,000,000 shares of preferred stock,
$10.00 par value. Holders of the Company's common stock have no preemptive
or other subscription rights.

COMMON STOCK

As of April 5, 2002, there were 268,604,867 shares of the Company's
common stock outstanding and approximately 2,108 holders of record of the
Company's common stock.

The holders of the Company's common stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. Holders of the
Company's common stock do not have cumulative voting rights. Therefore,
holders of more than 50% of the shares of the Company's common stock are
able to elect all directors eligible for election each year. The holders of
common stock are entitled to dividends and other distributions out of assets
legally available if and when declared by the Company's board of directors.
Upon the Company's liquidation, dissolution or winding up, the holders of
the Company's common stock are entitled to share pro rata in the
distribution of all of the Company's assets remaining available for
distribution after satisfaction of all liabilities, including any prior
rights of any preferred stock which may be outstanding. There are no
redemption or sinking fund provisions applicable to the Company's common
stock.

The transfer agent and registrar for the common stock is The Registrar
and Transfer Co.

PREFERRED STOCK

Series C Convertible Preferred Stock.

As of April 5, 2002, there were no shares of Series C preferred stock
outstanding. The initial purchase price of the 26,000 shares of Series C
preferred stock originally issued and the related warrants was an aggregate
of $20 million. All of the shares of Series C preferred stock originally
issued have been converted into shares of the Company's common stock. The
detailed terms of the Series C preferred stock are set forth in the
certificate of designation relating to the Series C preferred stock.

Other Preferred Stock

Additional series of preferred stock may be created and issued from
time to time by the Company's board of directors, with such rights and
preferences as it may determine. Because of its broad discretion with
respect to the creation and issuance of any series of preferred stock
without shareholder approval, the Company's board of directors could
adversely affect the voting power of the Company's common stock. The
issuance of preferred stock may also have the effect of delaying, deferring
or preventing a change in control of the Company.

OPTIONS AND WARRANTS

As of April 5, 2002, there were:

o issued and outstanding warrants to purchase 3,561,414 shares
of the Company's common stock at a weighted average exercise
price of $0.96 per share;

o warrants issued in connection with the sale of Series C
preferred stock to purchase up to 800,000 shares of the
Company's common stock at $4.73 per share over the next five
years, subject to adjustment; and

o options held by the Company's employees and others to
purchase 30,643,275 shares of the Company's common stock at a
weighted average exercise price of $0.83 per share.

All of the warrants are currently exercisable. Of the outstanding
options, 21,372,121 options are now exercisable at a weighted average
exercise price of $0.98 per share, and the rest become exercisable at
various times over the next three years.

The exercise price of the warrants issued in connection with the
Series C preferred stock is $4.73 per share, subject to adjustment upon:

o the issuance of shares of common stock, or options or other
rights to acquire common stock, at an issuance price lower
than the exercise price under the warrants;

o the declaration or payment of a dividend or other
distribution on the Company's common stock;

o issuance of any other of the Company's securities on a basis
which would otherwise dilute the purchase rights granted by
the warrants.

The exercise price may be paid in cash, in shares of common stock or by
surrendering other warrants.

SHAREHOLDER PROPOSALS

Pursuant to the applicable rules under the Exchange Act, some
shareholder proposals may be eligible for inclusion in the Company's 2003
Proxy Statement. Proposals by shareholders intended to be included in the
Company's 2003 Proxy Statement must be submitted in writing to the Secretary
of the Company no later than December 25, 2002. Shareholders interested in
submitting such a proposal are advised to contact knowledgeable counsel with
regard to the detailed requirements of such securities rules. Proposals by
shareholders to be presented at the Company's 2003 Annual Meeting (but not
intended to be included in the Company's 2003 Proxy Statement) must be
submitted in writing to the Secretary of the Company no earlier than
January 24, 2003 but no later than February 23, 2003, in accordance with the
Company's bylaws. Otherwise, the proxies named by the Company's Board of
Directors may exercise discretionary voting authority with respect to the
shareholder proposal, without any discussion of the proposal in the
Company's proxy material.

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP has audited the Company's consolidated
financial statements since the year ended December 31, 1998. Audit services of
PricewaterhouseCoopers LLP in 2001 included the examination of the
consolidated financial statements of the Company, certain services relating to
filings with the Securities and Exchange Commission as well as certain
services relating to the Company's consolidated quarterly reports. A
representative of PricewaterhouseCoopers LLP is not expected to be present at
the Meeting. The Company will gather any questions for PricewaterhouseCoopers
LLP raised at the Meeting and will provide them to PricewaterhouseCoopers LLP
after the Meeting for its response.

AUDIT AND NON-AUDIT FEES

For the fiscal year ended December 31, 2001, fees for services provided
by PricewaterhouseCoopers LLP were as follows:

(Dollars in thousands)
A. Audit Fees $392.1
B. Financial Information Systems --
Design and Implementation
C. All Other (acquisition and divestiture support
and other services) 399.2
------
$791.3
======

OTHER MATTERS

Financial Statements. The Company's consolidated financial statements
for the year ended December 31, 2001 are included in the Company's 2001
Annual Report to Shareholders. Copies of the Annual Report are being sent to
the Company's shareholders concurrently with the mailing of this Proxy
Statement. The Annual Report does not form any part of the material for the
solicitation of proxies.

Other Matters. At the date hereof, there are no other matters which the
Board of Directors intends to present or has reason to believe others will
present at the Meeting. If other matters come before the Meeting, the
persons named in the accompanying form of proxy will vote in accordance with
their best judgment with respect to such matters.

Proxy Solicitation. The expense of solicitation of proxies will be
borne by the Company.

Proxies may be solicited by certain of the Company's directors, officers and
other employees, without additional compensation, personally or by written
communication, telephone or other electronic means. The Company is required
to request brokers and nominees who hold stock in their name to furnish the
Company's proxy material to beneficial owners of the stock and will
reimburse such brokers and nominees for their reasonable out-of-pocket
expenses in so doing.

The form of proxy and this Proxy Statement have been approved by the
Board of Directors and are being mailed and delivered to shareholders by its
authority.

RICHARD J. SULLIVAN
Secretary
Palm Beach, Florida
April 24, 2002

EXHIBIT A

APPLIED DIGITAL SOLUTIONS, INC.

1999 FLEXIBLE STOCK PLAN

(AS AMENDED THROUGH SEPTEMBER 1, 2000)

APPLIED DIGITAL SOLUTIONS, INC.

1999 FLEXIBLE STOCK PLAN
(AS AMENDED THROUGH SEPTEMBER 1, 2000)

TABLE OF CONTENTS

Page
----

1. NAME AND PURPOSE A-1
1.1. Name......................................................A-1
1.2. Purpose...................................................A-1

2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION A-1
2.1. General Definitions.......................................A-1
2.1.1. Affiliate......................................A-1
2.1.2. Agreement......................................A-1
2.1.3. Benefit........................................A-1
2.1.4. Board..........................................A-1
2.1.5. Cash Award.....................................A-1
2.1.6. Change of Control..............................A-1
2.1.7. Code...........................................A-2
2.1.8. Company........................................A-3
2.1.9. Committee......................................A-3
2.1.10. Common Stock..................................A-3
2.1.11. Effective Date................................A-3
2.1.12. Employee......................................A-3
2.1.13. Employer......................................A-3
2.1.14. Exchange Act..................................A-3
2.1.15. Fair Market Value.............................A-3
2.1.16. Fiscal Year...................................A-3
2.1.17. ISO...........................................A-3
2.1.18. NQSO..........................................A-3
2.1.19. Option........................................A-3
2.1.20. Other Stock Based Award.......................A-3
2.1.21. Parent........................................A-3
2.1.22. Participant...................................A-4
2.1.23. Performance Based Compensation................A-4
2.1.24. Performance Share.............................A-4
2.1.25. Plan..........................................A-4
2.1.26. Reload Option.................................A-4
2.1.27. Restricted Stock..............................A-4
2.1.28. Rule 16b-3....................................A-4
2.1.29. SEC...........................................A-4
2.1.30. Share.........................................A-4
2.1.31. SAR...........................................A-4
2.1.32. Subsidiary....................................A-4
2.2. Other Definitions.........................................A-5
2.3. Conflicts.................................................A-5

3. COMMON STOCK A-5
3.1. Number of Shares..........................................A-5

A-i

3.2. Reusage...................................................A-5
3.3. Adjustments...............................................A-5

4. ELIGIBILITY A-5
4.1. Determined By Committee...................................A-5

5. ADMINISTRATION A-5
5.1. Committee.................................................A-5
5.2. Authority.................................................A-6
5.3. Delegation................................................A-6
5.4. Determination.............................................A-6

6. AMENDMENT A-6
6.1. Power of Board............................................A-6
6.2. Limitation................................................A-6

7. TERM AND TERMINATION A-7
7.1. Term......................................................A-7
7.2. Termination...............................................A-7

8. MODIFICATION OR TERMINATION OF BENEFITS A-7
8.1. General...................................................A-7
8.2. Committee's Right.........................................A-7

9. CHANGE OF CONTROL A-7
9.1. Vesting and Payment.......................................A-7
9.2. Other Action..............................................A-7

10. AGREEMENTS AND CERTAIN BENEFITS A-8
10.1. Grant Evidenced by Agreement.............................A-8
10.2. Provisions of Agreement..................................A-8
10.3. Transferability..........................................A-8

11. REPLACEMENT AND TANDEM AWARDS A-8
11.1. Replacement..............................................A-8
11.2. Tandem Awards............................................A-8

12. PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING A-8
12.1. Payment..................................................A-8
12.2. Dividend Equivalents.....................................A-9
12.3. Deferral.................................................A-9
12.4. Withholding..............................................A-9

13. OPTIONS A-9
13.1. Types of Options.........................................A-9
13.2. Grant of ISOs and Option Price...........................A-9
13.3. Other Requirements for ISOs..............................A-9
13.4. NQSOs....................................................A-9
13.5. Determination by Committee...............................A-9

A-ii

14. SARS A-10
14.1. Grant and Payment.......................................A-10
14.2. Grant of Tandem Award...................................A-10
14.3. ISO Tandem Award........................................A-10
14.4. Payment of Award........................................A-10

15. ANNUAL LIMITATIONS A-10
15.1. Limitation on Options and SARs..........................A-10
15.2. Computations............................................A-10

16. RESTRICTED STOCK AND PERFORMANCE SHARES A-10
16.1. Restricted Stock........................................A-10
16.2. Cost of Restricted Stock................................A-10
16.3. Non-Transferability.....................................A-10
16.4. Performance Shares......................................A-11
16.5. Grant...................................................A-11

17. CASH AWARDS A-11
17.1. Grant...................................................A-11
17.2. Rule 16b-3..............................................A-11
17.3. Restrictions............................................A-11

18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS A-11
18.1. Other Stock Based Awards................................A-11
18.2. Other Benefits..........................................A-11

19. MISCELLANEOUS PROVISIONS A-11
19.1. Underscored References..................................A-11
19.2. Number and Gender.......................................A-11
19.3. Unfunded Status of Plan.................................A-11
19.4. Termination of Employment...............................A-12
19.5. Designation of Beneficiary..............................A-12
19.6. Governing Law...........................................A-12
19.7. Purchase for Investment.................................A-12
19.8. No Employment Contract..................................A-12
19.9. No Effect on Other Benefits.............................A-12

A-iii

APPLIED DIGITAL SOLUTIONS, INC.

1999 FLEXIBLE STOCK PLAN
(AS AMENDED THROUGH SEPTEMBER 1, 2000)

1. NAME AND PURPOSE
----------------

1.1. Name.
----

The name of this Plan is the "Applied Digital Solutions,
Inc. 1999 Flexible Stock Plan."

1.2. Purpose.
-------

The Company has established this Plan to attract, retain,
motivate and reward Employees and other individuals, to encourage ownership
of the Company's Common Stock by Employees and other individuals, and to
promote and further the best interests of the Company by granting cash and
other awards. This Plan is intended to be "Broadly Based" (as such term is
used for purposes of rules promulgated by The National Association of
Securities Dealers).

2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
----------------------------------------------

2.1. General Definitions.
-------------------

The following words and phrases, when used in the Plan,
unless otherwise specifically defined or unless the context clearly
otherwise requires, shall have the following respective meanings:

2.1.1. Affiliate.
---------

A Parent or Subsidiary of the Company.

2.1.2. Agreement.
---------

The document which evidences the grant of any
Benefit under the Plan and which sets forth the Benefit and the
terms, conditions and provisions of, and restrictions relating to,
such Benefit.

2.1.3. Benefit.
-------

Any benefit granted to a Participant under the
Plan.

2.1.4. Board.
-----

The Board of Directors of the Company.

2.1.5. Cash Award.
----------

A Benefit payable in the form of cash.

2.1.6. Change of Control.
-----------------

The occurrence of any of the following:

(a) An acquisition of any Common Stock or other
voting securities of the Company entitled to vote generally for the
election of directors (the "Voting Securities") by any "Person" or
"Group" (as each such term is used for purposes of Section 13(d) or
14(d) of the Exchange Act), immediately after which such Person or
Group, as the case may be, has "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of more
than 20% of the then outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, that in determining whether a Change
of Control has occurred, shares of Common Stock or Voting
Securities that are acquired in a Non-Control Acquisition (as
defined below) shall not constitute an acquisition which would
cause a Change of Control. A "Non-Control Acquisition" shall mean
an acquisition by (i) the Company, (ii) any

A-1

Subsidiary or (ii) any employee benefit plan maintained by the
Company or any Subsidiary, including a trust forming part of any
such plan (an "Employee Benefit Plan");

(b) When, during any 2-year period, individuals who,
at the beginning of the 2-year period, constitute the Board (the
"Incumbent Board"), cease for any reason to constitute at least 50%
of the members of the Board; provided, however, that (i) if the
election or nomination for election by the Company's shareholders
of any new director was approved by a vote of at least two-thirds
of the Incumbent Board, such new director shall, for purposes
hereof, be deemed to be a member of the Incumbent Board; and
(ii) no individual shall be deemed to be a member of the Incumbent
Board if such individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as described in
Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person or Group other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest;

(i) a merger, consolidation or
reorganization involving the Company or any Subsidiary,
unless the merger, consolidation or reorganization is a
Non-Control Transaction. A "Non-Control Transaction" shall
mean a merger, consolidation or reorganization of the
Company or any Subsidiary where:

(A) the shareholders of the Company
immediately prior to the merger, consolidation or
reorganization own, directly or indirectly,
immediately following such merger, consolidation
or reorganization, at least 50% of the combined
voting power of the outstanding voting securities
of the corporation resulting from such merger,
consolidation or reorganization (the "Surviving
Corporation") in substantially the same
proportion as their ownership of the Common Stock
or Voting Securities, as the case may be,
immediately prior to the merger, consolidation or
reorganization,

(B) the individuals who were members
of the Incumbent Board immediately prior to the
execution of the agreement providing for the
merger, consolidation or reorganization
constitute at least two-thirds of the members of
the board of directors of the Surviving
Corporation, or a corporation beneficially
owning, directly or indirectly, a majority of the
voting securities of the Surviving Corporation,
and

(C) no Person or Group, other than
(1) the Company, (2) any Subsidiary, (3) any
Employee Benefit Plan or (4) any other Person or
Group who, immediately prior to the merger,
consolidation or reorganization, had Beneficial
Ownership of not less than 20% of the then
outstanding Voting Securities or Common Stock,
has Beneficial Ownership of 20% or more of the
combined voting power of the Surviving
Corporation's then outstanding voting securities
or common stock;

(d) A complete liquidation or dissolution of the
Company; or

(e) The sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Subsidiary).

Notwithstanding the foregoing, a Change of Control shall
not be deemed to have occurred solely because any Person or Group (the
"Subject Person") acquired Beneficial Ownership of more than the permitted
amount of the then outstanding Voting Securities or Common Stock of the
Company as a result of an acquisition of Voting Securities or Common Stock
by the Company which, by reducing the number of shares of Voting Securities
or Common Stock then outstanding, increases the proportional number of
shares beneficially owned by the Subject Person; provided, however, that if
a Change of Control would have occurred (but for the operation of this
sentence) as a result of the acquisition of Voting Securities or Common
Stock by the Company, and after such acquisition by the Company, the Subject
Person becomes the beneficial owner of any additional shares of Voting
Securities or Common Stock, which increases the percentage of the then
outstanding shares of Voting Securities or Common Stock beneficially owned
by the Subject Person, then a Change of Control shall be deemed to have
occurred.

2.1.7. Code.
----

The Internal Revenue Code of 1986, as amended.
Any reference to the Code includes the regulations promulgated
pursuant to the Code.

A-2

2.1.8. Company.
-------

Applied Digital Solutions, Inc.

2.1.9. Committee.
---------

The Committee described in Section 5.1.

2.1.10. Common Stock.
------------

The Company's common stock which presently has a
par value of $.001 per Share.

2.1.11. Effective Date.
--------------

The date that the Plan is approved by the
shareholders of the Company which must occur within one year before
or after approval by the Board. Any grants of Benefits prior to the
approval by the shareholders of the Company shall be void if such
approval is not obtained.

2.1.12. Employee.
--------

Any person employed by the Employer.

2.1.13. Employer.
--------

The Company and all Affiliates.

2.1.14. Exchange Act.
------------

The Securities Exchange Act of 1934, as amended.

2.1.15. Fair Market Value.
-----------------

The closing price of Shares on the Nasdaq
National Market on a given date, or, in the absence of sales on a
given date, the closing price on the Nasdaq National Market on the
last day on which a sale occurred prior to such date.

2.1.16. Fiscal Year.
-----------

The taxable year of the Company which is the
calendar year.

2.1.17. ISO.
---

An Incentive Stock Option as defined in Section
422 of the Code.

2.1.18. NQSO.
----

A non-qualified stock Option, which is an Option
that does not qualify as an ISO.

2.1.19. Option.
------

An option to purchase Shares granted under the
Plan.

2.1.20. Other Stock Based Award.
-----------------------

An award under Section 18 that is valued in whole
or in part by reference to, or otherwise based on, Common Stock.

2.1.21. Parent.
------

Any corporation (other than the Company or a
Subsidiary) in an unbroken chain of corporations ending with the
Company, if, at the time of the grant of an Option or other
Benefit, each of the corporations (other than the

A-3

Company) owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.

2.1.22. Participant.
-----------

An individual who is granted a Benefit under the
Plan. Benefits may be granted only to Employees, members of the
Board, employees and owners of entities which are not Affiliates
but which have a direct or indirect ownership interest in an
Employer or in which an Employer has a direct or indirect ownership
interest, individuals who, and employees and owners of entities
which, are customers and suppliers of an Employer, individuals who,
and employees and owners of entities which, render services to an
Employer, and individuals who, and employees and owners of
entities, which have ownership or business affiliations with any
individual or entity previously described.

2.1.23. Performance Based Compensation.
------------------------------

Compensation which meets the requirements of
Section 162(m)(4)(C) of the Code.

2.1.24. Performance Share.
-----------------

A Share awarded to a Participant under Section 16
of the Plan.

2.1.25. Plan.
----

The Applied Digital Solutions, Inc. 1999 Flexible
Stock Plan and all amendments and supplements to it.

2.1.26. Reload Option.
-------------

An Option to purchase the number of Shares used
by a Participant to exercise an Option and to satisfy any
withholding requirement incident to the exercise of such Option.

2.1.27. Restricted Stock.
----------------

Shares issued under Section 15 of the Plan.

2.1.28. Rule 16b-3.
----------

Rule 16b-3 promulgated by the SEC, as amended, or
any successor rule in effect from time to time.

2.1.29. SEC.
---

The Securities and Exchange Commission.

2.1.30. Share.
-----

A share of Common Stock.

2.1.31. SAR.
---

A stock appreciation right, which is the right to
receive an amount equal to the appreciation, if any, in the Fair
Market Value of a Share from the date of the grant of the right to
the date of its payment.

2.1.32. Subsidiary.
----------

Any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if, at
the time of grant of an Option or other Benefit, each of the
corporations, other than the last corporation in the unbroken
chain, owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.

A-4

2.2. Other Definitions.
-----------------

In addition to the above definitions, certain words and
phrases used in the Plan and any Agreement may be defined in other portions
of the Plan or in such Agreement.

2.3. Conflicts.
---------

In the case of any conflict in the terms of the Plan
relating to a Benefit, the provisions in the section of the Plan which
specifically grants such Benefit shall control those in a different section.
In the case of any conflict between the terms of the Plan relating to a
Benefit and the terms of an Agreement relating to a Benefit, the terms of
the Plan shall control.

3. COMMON STOCK
------------

3.1. Number of Shares.
----------------

The number of Shares which may be issued or sold or for
which Options, SARs or Performance Shares may be granted under the Plan
shall be 17,000,000 Shares, plus an annual increase, effective as of the
first day of each calendar year, commencing with 2001, equal to 10% of the
number of outstanding Shares as of the first day of such calendar year, but
in no event more than 30,000,000 Shares in the aggregate. Such Shares may be
authorized but unissued Shares, Shares held in the treasury, or both. The
full number of Shares available may be used for any type of Option or other
Benefit; provided, however, that the number of Shares that may be issued
under ISOs shall not exceed 15,000,000.

3.2. Reusage.
-------

If an Option or SAR expires or is terminated, surrendered,
or canceled without having been fully exercised, if Restricted Shares or
Performance Shares are forfeited, or if any other grant results in any
Shares not being issued, the Shares covered by such Option or SAR, grant of
Restricted Shares, Performance Shares or other grant, as the case may be,
shall again be available for use under the Plan. Any Shares which are used
as full or partial payment to the Company upon exercise of an Option or for
any other Benefit that requires a payment to the Company shall be available
for purposes of the Plan.

3.3. Adjustments.
-----------

If there is any change in the Common Stock of the Company
by reason of any stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination or
exchange of shares, or otherwise, the number of SARs and number and class of
shares available for Options and grants of Restricted Stock, Performance
Shares and Other Stock Based Awards and the number of Shares subject to
outstanding Options, SARs, grants of Restricted Stock which are not vested,
grants of Performance Shares which are not vested, and Other Stock Based
Awards, and the price thereof, as applicable, shall be appropriately
adjusted by the Committee.

4. ELIGIBILITY
-----------

4.1. Determined By Committee.
-----------------------

The Participants and the Benefits they receive under the
Plan shall be determined solely by the Committee. In making its
determinations, the Committee shall consider past, present and expected
future contributions of Participants and potential Participants to the
Employer, including, without limitation, the performance of, or the
refraining from the performance of, services. Unless specifically provided
otherwise herein, all determinations of the Committee in connection with the
Plan or an Agreement shall be made in its sole discretion.

5. ADMINISTRATION
--------------

5.1. Committee.
---------

The Plan shall be administered by the Committee. The
Committee shall consist of the Board, unless the Board appoints a Committee
of two or more but less than all of the Board. If the Committee does not
include the entire Board, it shall serve at the pleasure of the Board, which
may from time to time appoint members in substitution for members previously
appointed and fill vacancies, however caused, in the Committee. The
Committee may select one of its members as its Chairman and shall hold its
meetings at such times and places as it may determine. A majority of its
members shall constitute a quorum. All determinations of the Committee made
at a meeting at which a quorum is present shall be made by a majority of its
members present at the meeting. Any

A-5

decision or determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority
vote at a meeting duly called and held.

5.2. Authority.
---------

Subject to the terms of the Plan, the Committee shall have
discretionary authority to:

(a) determine the individuals to whom Benefits are
granted, the type and amounts of Benefits to be granted and the
date of issuance and duration of all such grants;

(b) determine the terms, conditions and provisions
of, and restrictions relating to, each Benefit granted;

(d) prescribe, amend and rescind rules and
regulations relating to the Plan;

(e) determine the content and form of all Agreements;

(f) determine all questions relating to Benefits
under the Plan;

(g) maintain accounts, records and ledgers relating
to Benefits;

(h) maintain records concerning its decisions and
proceedings;

(i) employ agents, attorneys, accountants or other
persons for such purposes as the Committee considers necessary or
desirable;

(j) take, at any time, any action described in
Section 9.1 or permitted by Section 9.2(a), irrespective of whether
any Change of Control has occurred or is imminent;

(k) determine, except to the extent otherwise
provided in the Plan, whether and the extent to which Benefits
under the Plan will be structured to conform to the requirements
applicable to Performance-Based Compensation, and to take such
action, establish such procedures, and impose such restrictions at
the time such Benefits are granted as the Committee determines to
be necessary or appropriate to conform to such requirements; and

(l) do and perform all acts which it may deem
necessary or appropriate for the administration of the Plan and
carry out the purposes of the Plan.

5.3. Delegation.
----------

Except as required by Rule 16b-3 with respect to grants of
Options, Stock Appreciation Awards, Performance Shares, Other Stock Based
Awards, or other Benefits to individuals who are subject to Section 16 of
the Exchange Act or as otherwise required for compliance with Rule 16b-3 or
other applicable law, the Committee may delegate all or any part of its
authority under the Plan to any Employee, Employees or committee.

5.4. Determination.
-------------

All determinations of the Committee shall be final.

6. AMENDMENT
---------

6.1. Power of Board.
--------------

Except as hereinafter provided, the Board shall have the
sole right and power to amend the Plan at any time and from time to time.

6.2. Limitation.
----------

The Board may not amend the Plan, without approval of the
shareholders of the Company:

A-6

(a) in a manner which would cause Options which are
intended to qualify as ISOs to fail to qualify;

(b) in a manner which would cause the Plan to fail to
meet the requirements of Rule 16b-3; or

7. TERM AND TERMINATION
--------------------

7.1. Term.
----

The Plan shall commence as of the Effective Date and,
subject to the terms of the Plan, including those requiring approval by the
shareholders of the Company and those limiting the period over which ISOs or
any other Benefits may be granted, shall continue in full force and effect
until terminated.

7.2. Termination.
-----------

The Plan may be terminated at any time by the Board.

8. MODIFICATION OR TERMINATION OF BENEFITS
---------------------------------------

8.1. General.
-------

Subject to the provisions of Section 8.2, the amendment or
termination of the Plan shall not adversely affect a Participant's right to
any Benefit granted prior to such amendment or termination.

8.2. Committee's Right.
-----------------

Any Benefit granted may be converted, modified, forfeited
or canceled, in whole or in part, by the Committee if and to the extent
permitted in the Plan or applicable Agreement or with the consent of the
Participant to whom such Benefit was granted. Except as may be provided in
an Agreement, the Committee may, in its sole discretion, in whole or in
part, waive any restrictions or conditions applicable to, or accelerate the
vesting of, any Benefit.

9. CHANGE OF CONTROL
-----------------

9.1. Vesting and Payment.
-------------------

In the event of a Change of Control:

(a) all outstanding Options shall become fully
exercisable, except to the extent that the right to exercise the
Option is subject to restrictions established in connection with an
SAR that is issued in tandem with the Option;

(b) all outstanding SARs shall become immediately
payable, except to the extent that the right to exercise the SAR is
subject to restrictions established in connection with an Option
that is issued in tandem with the SAR;

(d) all Performance Shares shall be deemed to be
fully earned and shall be paid out in such manner as determined by
the Committee; and

(e) all Cash Awards, Other Stock Based Awards and
other Benefits shall become fully vested and/or earned and paid out
in such manner as determined by the Committee.

9.2. Other Action.
------------

In the event of a Change of Control, the Committee, in its
sole discretion, may, in addition to the provisions of Section 9.1 above and
to the extent not inconsistent therewith:

(a) (a) provide for the purchase of any Benefit for
an amount of cash equal to the amount which could have been
attained upon the exercise or realization of such Benefit;

A-7

(b) (b) make such adjustment to the Benefits then
outstanding as the Committee deems appropriate to reflect such
transaction or change; and/or

(c) (c) cause the Benefits then outstanding to be
assumed, or new Benefits substituted therefor, by the surviving
corporation in such change.

10. AGREEMENTS AND CERTAIN BENEFITS
-------------------------------

10.1. Grant Evidenced by Agreement.
----------------------------

The grant of any Benefit under the Plan may be evidenced
by an Agreement which shall describe the specific Benefit granted and the
terms and conditions of the Benefit. The granting of any Benefit shall be
subject to, and conditioned upon, the recipient's execution of any Agreement
required by the Committee. Except as otherwise provided in an Agreement, all
capitalized terms used in the Agreement shall have the same meaning as in
the Plan, and the Agreement shall be subject to all of the terms of the
Plan.

10.2. Provisions of Agreement.
-----------------------

Each Agreement shall contain such provisions that the
Committee shall determine to be necessary, desirable and appropriate for the
Benefit granted which may include, but not necessarily be limited to, the
following with respect to any Benefit: description of the type of Benefit;
the Benefit's duration; its transferability; if an Option, the exercise
price, the exercise period and the person or persons who may exercise the
Option; the effect upon such Benefit of the Participant's death, disability,
changes of duties or termination of employment; the Benefit's conditions;
when, if, and how any Benefit may be forfeited, converted into another
Benefit, modified, exchanged for another Benefit, or replaced; and the
restrictions on any Shares purchased or granted under the Plan.

10.3. Transferability.
---------------

Unless otherwise specified in an Agreement or permitted by
the Committee, each Benefit granted shall be not transferable other than by
will or the laws of descent and distribution and shall be exercisable during
a Participant's lifetime only by him.

11. REPLACEMENT AND TANDEM AWARDS
-----------------------------

11.1. Replacement.
-----------

The Committee may permit a Participant to elect to
surrender a Benefit in exchange for a new Benefit.

11.2. Tandem Awards.
-------------

Awards may be granted by the Committee in tandem. However,
no Benefit may be granted in tandem with an ISO except SARs.

12. PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING
--------------------------------------------

12.1. Payment.
-------

Upon the exercise of an Option or in the case of any other
Benefit that requires a payment by a Participant to the Company, the amount
due the Company is to be paid:

(a) in cash, including by means of a so-called
"cashless exercise" of an Option;

(b) by the surrender of all or part of a Benefit
(including the Benefit being exercised);

(c) by the tender to the Company of Shares owned by
the optionee and registered in his name having a Fair Market Value
equal to the amount due to the Company;

(d) in other property, rights and credits deemed
acceptable by the Committee, including the Participant's promissory
note;

A-8

(e) by any combination of the payment methods
specified in (a), (b), (c) and (d) above.

Notwithstanding, the foregoing, any method of payment
other than (a) may be used only with the consent of the Committee or if and
to the extent so provided in an Agreement. The proceeds of the sale of
Shares purchased pursuant to an Option and any payment to the Company for
other Benefits shall be added to the general funds of the Company or to the
Shares held in treasury, as the case may be, and used for the corporate
purposes of the Company as the Board shall determine.

12.2. Dividend Equivalents.
--------------------

Grants of Benefits in Shares or Share equivalents may
include dividend equivalent payments or dividend credit rights.

12.3. Deferral.
--------

The right to receive any Benefit under the Plan may, at
the request of the Participant, be deferred for such period and upon such
terms as the Committee shall determine, which may include crediting of
interest on deferrals of cash and crediting of dividends on deferrals
denominated in Shares.

12.4. Withholding.
-----------

The Company may, at the time any distribution is made
under the Plan, whether in cash or in Shares, or at the time any Option is
exercised, withhold from such distribution or Shares issuable upon the
exercise of an Option, any amount necessary to satisfy federal, state and
local income and/or other tax withholding requirements with respect to such
distribution or exercise of such Options. The Committee or the Company may
require a participant to tender to the Company cash and/or Shares in the
amount necessary to comply with any such withholding requirements.

13. OPTIONS
-------

13.1. Types of Options.
----------------

It is intended that both ISOs and NQSOs, which may be
Reload Options, may be granted by the Committee under the Plan.

13.2. Grant of ISOs and Option Price.
------------------------------

Each ISO must be granted to an Employee and granted within
ten years from the earlier of the date of adoption by the Board or the
Effective Date. The purchase price for Shares under any ISO shall be no less
than the Fair Market Value of the Shares at the time the Option is granted.

13.3. Other Requirements for ISOs.
---------------------------

The terms of each Option which is intended to qualify as
an ISO shall meet all requirements of Section 422 of the Code.

13.4. NQSOs.
-----

The terms of each NQSO shall provide that such Option will
not be treated as an ISO. The purchase price for Shares under any NQSO shall
be no less than 85% of the Fair Market Value of the Shares at the time the
Option is granted.

13.5. Determination by Committee.
--------------------------

Except as otherwise provided in Section 13.2 through
Section 13.4, the terms of all Options shall be determined by the Committee.

A-9

14. SARS
----

14.1. Grant and Payment.
-----------------

The Committee may grant SARs. Upon electing to receive
payment of a SAR, a Participant shall receive payment in cash, in Shares, or
in any combination of cash and Shares, as the Committee shall determine.

14.2. Grant of Tandem Award.
---------------------

The Committee may grant SARs in tandem with an Option, in
which case: the exercise of the Option shall cause a correlative reduction
in SARs standing to a Participant's credit which were granted in tandem with
the Option; and the payment of SARs shall cause a correlative reduction of
the Shares under such Option.

14.3. ISO Tandem Award.
----------------

When SARs are granted in tandem with an ISO, the SARs
shall have such terms and conditions as shall be required for the ISO to
qualify as an ISO.

14.4. Payment of Award.
----------------

SARs shall be paid by the Company to a Participant, to the
extent payment is elected by the Participant (and is otherwise due and
payable), as soon as practicable after the date on which such election is
made.

15. ANNUAL LIMITATIONS
------------------

15.1. Limitation on Options and SARs.
------------------------------

The number of (a) Shares covered by Options where the
purchase price is no less than the Fair Market Value of the Shares on the
date of grant plus (b) SARs which may be granted to any Participant in any
Fiscal Year shall not exceed 5,000,000.

15.2. Computations.
------------

For purposes of Section 15.1: Shares covered by an Option
that is canceled shall count against the maximum, and, if the exercise price
under an Option is reduced, the transaction shall be treated as a
cancellation of the Option and a grant of a new Option; and SARs covered by
a grant of SARs that is canceled shall count against the maximum, and, if
the Fair Market Value of a Share on which the appreciation under a grant of
SARs will be calculated is reduced, the transaction will be treated as a
cancellation of the SARs and the grant of a new grant of SARs.

16. RESTRICTED STOCK AND PERFORMANCE SHARES
---------------------------------------

16.1. Restricted Stock.
----------------

The Committee may grant Benefits in Shares available under
Section 3 of the Plan as Restricted Stock. Shares of Restricted Stock shall
be issued and delivered at the time of the grant or as otherwise determined
by the Committee, but shall be subject to forfeiture until provided
otherwise in the applicable Agreement or the Plan. Each certificate
representing Shares of Restricted Stock shall bear a legend referring to the
Plan and the risk of forfeiture of the Shares and stating that such Shares
are nontransferable until all restrictions have been satisfied and the
legend has been removed. At the discretion of the Committee, the grantee may
or may not be entitled to full voting and dividend rights with respect to
all shares of Restricted Stock from the date of grant.

16.2. Cost of Restricted Stock.
------------------------

Unless otherwise determined by the Committee, grants of
Shares of Restricted Stock shall be made at a per Share cost to the
Participant equal to par value.

16.3. Non-Transferability.
-------------------

Shares of Restricted Stock shall not be transferable until
after the removal of the legend with respect to such Shares.

A-10

16.4. Performance Shares.
------------------

Performance Shares are the right of an individual to whom
a grant of such Shares is made to receive Shares or cash equal to the Fair
Market Value of such Shares at a future date in accordance with the terms
and conditions of such grant. The terms and conditions shall be determined
by the Committee, in its sole discretion, but generally are expected to be
based substantially upon the attainment of targeted profit and/or
performance objectives.

16.5. Grant.
-----

The Committee may grant an award of Performance Shares.
The number of Performance Shares and the terms and conditions of the grant
shall be set forth in the applicable Agreement.

17. CASH AWARDS
-----------

17.1. Grant.
-----

The Committee may grant Cash Awards at such times and
(subject to Section 17.2) in such amounts as it deems appropriate.

17.2. Rule 16b-3.
----------

The amount of any Cash Award in any Fiscal Year to any
Participant who is subject to Section 16 of the Exchange Act shall not
exceed the greater of $100,000 or 100% of his cash compensation (excluding
any Cash Award under this Section 17) for such Fiscal Year.

17.3. Restrictions.
------------

Cash Awards may be subject or not subject to conditions
(such as an investment requirement), restricted or nonrestricted, vested or
subject to forfeiture and may be payable currently or in the future or both.

18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS
-------------------------------------------

18.1. Other Stock Based Awards.
------------------------

The Committee shall have the right to grant Other Stock
Based Awards which may include, without limitation, the grant of Shares
based on certain conditions, the payment of cash based on the performance of
the Common Stock, and the grant of securities convertible into Shares.

18.2. Other Benefits.
--------------

The Committee shall have the right to provide types of
Benefits under the Plan in addition to those specifically listed, if the
Committee believes that such Benefits would further the purposes for which
the Plan was established.

19. MISCELLANEOUS PROVISIONS
------------------------

19.1. Underscored References.
----------------------

The underscored references contained in the Plan are
included only for convenience, and they shall not be construed as a part of
the Plan or in any respect affecting or modifying its provisions.

19.2. Number and Gender.
-----------------

The masculine and neuter, wherever used in the Plan, shall
refer to either the masculine, neuter or feminine; and, unless the context
otherwise requires, the singular shall include the plural and the plural the
singular.

19.3. Unfunded Status of Plan.
-----------------------

The Plan is intended to constitute an "unfunded" plan for
incentive and deferred compensation. With respect to any payments or
deliveries of Shares not yet made to a Participant by the Company, nothing
contained herein shall give any rights that

A-11

are greater than those of a general creditor of the Company. The Committee
may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Shares or payments hereunder
consistent with the foregoing.

19.4. Termination of Employment.
-------------------------

If the employment of a Participant by the Company
terminates for any reason, except as otherwise provided in an Agreement, all
unexercised, deferred, and unpaid Benefits may be exercisable or paid only
in accordance with rules established by the Committee. These rules may
provide, as the Committee may deem appropriate, for the expiration,
forfeiture, continuation, or acceleration of the vesting of all or part of
the Benefits.

19.5. Designation of Beneficiary.
--------------------------

A Participant may file with the Committee a written
designation of a beneficiary or beneficiaries (subject to such limitations
as to the classes and number of beneficiaries and contingent beneficiaries
as the Committee may from time to time prescribe) to exercise, in the event
of the death of the Participant, an Option, or to receive, in such event,
any Benefits. The Committee reserves the right to review and approve
beneficiary designations. A Participant may from time to time revoke or
change any such designation of beneficiary and any designation of
beneficiary under the Plan shall be controlling over any other disposition,
testamentary or otherwise; provided, however, that if the Committee shall be
in doubt as to the right of any such beneficiary to exercise any Option or
to receive any Benefit, the Committee may determine to recognize only an
exercise by the legal representative of the recipient, in which case the
Company, the Committee and the members thereof shall not be under any
further liability to anyone.

19.6. Governing Law.
-------------

This Plan shall be construed and administered in
accordance with the laws of the State of Missouri.

19.7. Purchase for Investment.
-----------------------

The Committee may require each person purchasing Shares
pursuant to an Option or other award under the Plan to represent to and
agree with the Company in writing that such person is acquiring the Shares
for investment and without a view to distribution or resale. The
certificates for such Shares may include any legend which the Committee
deems appropriate to reflect any restrictions on transfer. All certificates
for Shares delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under all
applicable laws, rules and regulations, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate references
to such restrictions.

19.8. No Employment Contract.
----------------------

Neither the adoption of the Plan nor any Benefit granted
hereunder shall confer upon any Employee any right to continued employment
nor shall the Plan or any Benefit interfere in any way with the right of the
Employer to terminate the employment of any of its Employees at any time.

19.9. No Effect on Other Benefits.
---------------------------

The receipt of Benefits under the Plan shall have no
effect on any benefits to which a Participant may be entitled from the
Employer, under another plan or otherwise, or preclude a Participant from
receiving any such benefits.

A-12

EXHIBIT B

APPLIED DIGITAL SOLUTIONS, INC.

1999 EMPLOYEES STOCK PURCHASE PLAN

(AS AMENDED THROUGH SEPTEMBER 23, 1999)

APPLIED DIGITAL SOLUTIONS, INC.
1999 EMPLOYEES STOCK PURCHASE PLAN
(AS AMENDED THROUGH SEPTEMBER 23, 1999)
---------------------------------------

TABLE OF CONTENTS
-----------------

Page
----
1. NAME AND PURPOSE........................................................B-1
1.1. Name.........................................................B-1
1.2. Purpose and Construction.....................................B-1

2. DEFINITION OF TERMS.....................................................B-1
2.1. General Definitions..........................................B-1
2.1.1. Board.............................................B-1
2.1.2. Code..............................................B-1
2.1.3. Company...........................................B-1
2.1.4. Committee.........................................B-1
2.1.5. Common Stock......................................B-1
2.1.6. Compensation......................................B-1
2.1.7. Effective Date....................................B-1
2.1.8. Employee..........................................B-1
2.1.9. Eligible Employee.................................B-2
2.1.10. Employer.........................................B-2
2.1.11. Entry Date.......................................B-2
2.1.12. Exercise Date....................................B-2
2.1.13. Fair Market Value................................B-2
2.1.14. Offering.........................................B-2
2.1.15. Offering Date....................................B-2
2.1.16. Offering Period..................................B-2
2.1.17. Option...........................................B-2
2.1.18. Parent...........................................B-2
2.1.19. Participant......................................B-2
2.1.20. Plan.............................................B-2
2.1.21. Share............................................B-3
2.1.22. Subsidiary.......................................B-3
2.1.23. Termination Date.................................B-3
2.1.24. Participation Agreement..........................B-3
2.2. Other Definitions............................................B-3

3. SHARES TO BE OFFERED....................................................B-3
3.1. Number of Shares.............................................B-3
3.2. Reusage......................................................B-3
3.3. Adjustments..................................................B-3

4. ADMINISTRATION..........................................................B-3
4.1. Committee....................................................B-3
4.2. Authority....................................................B-3
4.3. Determination................................................B-4
4.4. Delegation...................................................B-4

5. AMENDMENT AND TERMINATION...............................................B-4
5.1. Power of Board...............................................B-4
5.2. Limitation...................................................B-4
5.3. Term.........................................................B-4
5.4. Termination..................................................B-4

B-i

5.5. Effect.......................................................B-4

6. OFFERINGS...............................................................B-5
6.1. Offerings....................................................B-5
6.2. Terms of Offering............................................B-5

7. GRANTS, PARTICIPATION AND WITHDRAWAL....................................B-5
7.1. Grant of Options.............................................B-5
7.2. Options Not Transferable.....................................B-6
7.3. Election to Participate......................................B-6
7.4. Method of Payment and Stock Purchase Accounts................B-6
7.5. Withdrawal from the Plan.....................................B-6

8. PURCHASE OF STOCK.......................................................B-6
8.1. Exercise of Option...........................................B-6
8.2. Allotment of Shares..........................................B-6
8.3. Rights on Retirement, Death or Termination of Employment.....B-6
8.4. Delivery of Stock............................................B-7

9. MISCELLANEOUS PROVISIONS................................................B-7
9.1. Underscored References.......................................B-7
9.2. Number and Gender............................................B-7
9.3. Governing Law................................................B-7
9.4. Purchase for Investment......................................B-7
9.5. Restricted Shares............................................B-7
9.6. No Employment Contract.......................................B-7
9.7. Offset.......................................................B-7
9.8. No Effect on Other Benefits..................................B-7
9.9. Notice to Company............................................B-8

B-ii

APPLIED DIGITAL SOLUTIONS, INC.
1999 EMPLOYEES STOCK PURCHASE PLAN
(AS AMENDED THROUGH SEPTEMBER 23, 1999)
---------------------------------------

1. NAME AND PURPOSE.
----------------

1.1. Name.
----

The name of this Plan is the "Applied Digital Solutions,
Inc. 1999 Employees Stock Purchase Plan".

1.2. Purpose and Construction.
------------------------

The Company has established this Plan to encourage and
facilitate the purchase of its Common Stock by Eligible Employees. This Plan
is intended to qualify as an "Employee Stock Purchase Plan" under Section
423 of the Code. Consequently, the provisions of this Plan shall be
construed in a manner consistent with the requirements of Section 423 of the
Code. Any term or provision of this Plan which is inconsistent with the
requirements of Section 423 of the Code shall be inapplicable.

2. DEFINITION OF TERMS.
-------------------

2.1. General Definitions.
-------------------

The following words and phrases, when used in the Plan,
unless otherwise specifically defined or unless the context clearly
otherwise requires, shall have the following respective meanings:

2.1.1. Board.
-----

The Board of Directors of the Company.

2.1.2. Code.
----

The internal Revenue Code of 1986, as amended.
Any reference to the Code includes the regulations promulgated
pursuant to the Code.

2.1.3. Company.
-------

Applied Digital Solutions, Inc.

2.1.4. Committee.
---------

The Committee described in Section 4.1.

2.1.5. Common Stock.
------------

The Company's $.001 par value common stock.

2.1.6. Compensation.
------------

The gross salary and wages earned by an Employee
for services rendered to an Employer plus any other remuneration so
earned as the Committee shall determine.

2.1.7. Effective Date.
--------------

The date the Plan is approved by the shareholders
of the Company which must occur within one year before or after
approval by the Board. Any Offerings made prior to the approval by
the shareholders of the Company and Options granted under such
Offerings shall be void if such approval is not obtained.

2.1.8. Employee.
--------

A person employed by the Employer.

B-1

2.1.9. Eligible Employee.
-----------------

With respect to each Offering, an Employee who is
eligible to be granted an Option under the terms of such Offering.
Notwithstanding the foregoing, with respect to any Offering, all
Employees must be Eligible Employees except Employees who may be
excluded under Section 423(b)(4) of the Code. Unless otherwise
determined by the Committee, eligibility for an Offering shall be
determined as of the Offering Date. For purposes of determining an
Employee's eligibility under the Plan, the Committee shall have the
right to determine that employment for an entity which is acquired
by an Employer or whose assets are acquired by an Employer is
employment by the Employer.

2.1.10. Employer.
--------

With respect to each Offering, the Company and
all of its Parents and Subsidiaries whose Employees are eligible to
be granted Options to purchase Common Stock in such Offering.

2.1.11. Entry Date.
----------

The Offering Date and any other dates selected by
the Committee as of which an Eligible Employee may become a
Participant.

2.1.12. Exercise Date.
-------------

Each date on which an Option is exercised.

2.1.13. Fair Market Value.
-----------------

The closing price of Shares on the NASDAQ on a
given date or in the absence of sales on a given date, the closing
price on the NASDAQ on the last day on which a sale occurred prior
to such date.

2.1.14. Offering.
--------

An offering consisting of grants of Options to
purchase Shares under the Plan.

2.1.15. Offering Date.
-------------

Each date selected by the Committee for the
initial granting of Options to purchase Shares in an Offering.

2.1.16. Offering Period.
---------------

With respect to each Offering, the period
beginning on the Offering Date and ending on the Termination Date.

2.1.17. Option.
------

An option granted under the Plan to purchase
Shares.

2.1.18. Parent.
------

Any corporation (other than the Company or a
Subsidiary) in an unbroken chain of corporations ending with the
Company, if, at the time of the grant of an Option, each of the
corporations (other than the Company) owns stock possessing 50% or
more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.

2.1.19. Participant.
-----------

An Eligible Employee who has elected to
participate in the Plan.

2.1.20. Plan.
----

The Applied Digital Solutions, Inc. 1999 Employee
Stock Purchase Plan and all amendments and supplements to it.

B-2

2.1.21. Share.
-----

A share of Common Stock.

2.1.22. Subsidiary.
----------

Any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if, at
the time of grant of an Option, each of the corporations, other
than the last corporation in the unbroken chain, owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

2.1.23. Termination Date.
----------------

The date on which an Offering expires.

2.1.24. Participation Agreement.
-----------------------

The written agreement pursuant to which an
Eligible Employee becomes a Participant and elects such matters
provided for in the Plan and as the Committee shall determine from
time to time.

2.2. Other Definitions.
-----------------

In addition to the above definitions, certain words and
phrases used in the Plan and in any Offering may be defined in other
portions of the Plan or in such Offering.

3. SHARES TO BE OFFERED.
--------------------

3.1. Number of Shares.
----------------

The number of Shares for which Options may be granted
under the Plan shall be 1,500,000, plus an annual increase, effective as of
the first day of each calendar year, commencing with 2000, equal to 5% of
the number of outstanding Shares as of the first day of such calendar year,
but in no event more than 3,000,000 Shares in the aggregate. Such Shares may
be authorized but unissued Shares, Shares held in the treasury, or both.

3.2. Reusage.
-------

If an Option expires or is terminated, surrendered or
canceled without having been fully exercised, the Shares covered by such
Option which were not purchased shall again be available for use under the
Plan.

3.3. Adjustments.
-----------

If there is any change in the Common Stock of the Company
by reason of any stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination or
exchange of shares, or otherwise, the class of stock and number of shares of
such class available for Options, the class of stock and maximum number of
shares of such class that may be purchased in the current Offering Period,
and the price per share, as applicable, shall be appropriately adjusted by
the Committee.

4. ADMINISTRATION.
--------------

4.1. Committee.
---------

4.2. Authority.
---------

Subject to the terms of the Plan, the Committee shall have
complete authority to:

B-3

(a) determine the terms and conditions of, and the
Employers and the Eligible Employees under, each Offering, as
described in Section 6;

(b) interpret and construe the Plan;

(d) maintain accounts, records and ledgers relating
to Options;

(e) maintain records concerning its decisions and
proceedings;

(f) determine all questions relating to Options under
the Plan;

(g) employ agents, attorneys, accountants or other
persons for such purposes as the Committee considers necessary or
desirable; and

(h) do and perform all acts which it may deem
necessary or appropriate for the administration of the Plan and
carry out the purposes of the Plan.

4.3. Determination.
-------------

All determinations of the Committee shall be final.

4.4. Delegation.
----------

The Committee may delegate all or any part of its
authority under the Plan to any Employee, Employees or committee.

5. AMENDMENT AND TERMINATION.
-------------------------

5.1. Power of Board.
--------------

Except as hereinafter provided, the Board shall have the
sole right and power to amend the Plan at any time and from time to time.

5.2. Limitation.
----------

The Board may not amend the Plan, without approval of the
shareholders of the Company:

(a) in a manner which would cause the Plan to fail to
meet the requirements of Section 423 of the Code; or

(b) in a manner which would violate applicable law or
administrative regulation or rule.

5.3. Term.
----

The Plan shall commence as of the Effective Date and,
subject to the terms of the Plan including those requiring approval by the
shareholders of the Company, shall continue in full force and effect until
terminated.

5.4. Termination.
-----------

The Plan may be terminated at any time by the Board. The
Plan shall automatically terminate when all of the Shares available for
purchase under the Plan have been sold. Upon termination of the Plan, and
the exercise or lapse of all outstanding Options, any balances remaining in
each Participant's stock purchase account shall be refunded to him.

5.5. Effect.
------

The amendment or termination of the Plan shall not
adversely affect any Options granted prior to such amendment or termination.

B-4

6. OFFERINGS.
---------

6.1. Offerings.
---------

There may be one or more Offerings under the Plan, which
shall occur at such time or times, if any, as the Committee shall determine.
Offerings may run concurrently and/or consecutively. Except as otherwise
provided in an Offering, all capitalized terms used in the Offering shall
have the same meaning as in the Plan, and the Offering shall be subject to
all of the terms and conditions of the Plan.

6.2. Terms of Offering.
-----------------

At the time each Offering is made, the Committee will
determine all of the terms and conditions of the Offering, which terms and
conditions shall include, but not be limited to, the following:

(a) The number of Shares to be offered, which in no
event shall exceed the maximum number of Shares then available
under the provisions of Section 3.

(b) The Offering Period, which in no event shall
exceed the maximum period permitted under Section 423 of the Code.

(c) The price per Share for which Common Stock will
be sold to Participants who exercise Options, which price shall not
be less than the lower of the following:

(i) 85% of the Fair Market Value on the date
upon which the Option was granted; or

(ii) 85% of the Fair Market Value on the
Exercise Date upon which the Option is exercised.

Notwithstanding the foregoing, in no event shall the price per Share be less
than the par value.

(d) The Employers and Eligible Employees with respect
to the Offering. However, no Employee shall be granted an Option:

(i) if, immediately after the grant, such
Employee would own (within the meaning of Section
423(b)(3) of the Code) stock possessing 5% or more of the
total combined voting power or value of all classes of
stock of the Company or of any Parent or Subsidiary; or

(ii) which permits his rights to purchase
stock under all employees stock purchase plans (as defined
in Section 423(b) of the Code) of the Company and its
Parents and Subsidiaries to accrue at a rate which exceeds
$25,000 of fair market value of such stock, determined as
of the time such Option is granted, for each calendar year
in which such Option is outstanding at anytime.

(e) The number of Entry Dates and the date of each
Entry Date.

(f) The number of Exercise Dates and the date of each
Exercise Date.

(g) The maximum number of Shares, if any, that may be
purchased in the Offering Period by a Participant.

(h) The maximum number of Shares, if any, which may
be purchased in an Offering Period by a Participant as a percentage
of his Compensation.

(i) Whether or not interest will be paid on balances
in Participant's stock purchase accounts, and, if interest is to be
paid, the rate of interest or method of determining the rate of
interest, and whether interest is to be used to purchase Shares or
paid to the Participant.

(j) If, when, and the extent to which a Participant
may change or cease payroll deductions during an Offering Period.

7. GRANTS, PARTICIPATION AND WITHDRAWAL.
------------------------------------

7.1. Grant of Options.
----------------

On each Offering Date, each Eligible Employee shall be
granted an Option to purchase Shares in accordance with the provisions of
the Plan, and, if so permitted by the terms of the Offering, on each
subsequent Entry Date within an Offering Period, if

B-5

any, each Eligible Employee, who was not an Eligible Employee on the
Offering Date, shall be granted an Option to purchase Shares in accordance
with the provisions of the Plan. An Eligible Employee becomes a Participant
for the Offering Period or the remainder of the Offering Period, as the case
may be, by executing and delivering to the Company a Participation
Agreement.

7.2. Options Not Transferable.
------------------------

Each option shall not be transferable by the grantee other
than by will or under the laws of descent and distribution and shall be
exercisable, during his lifetime, only by him.

7.3. Election to Participate.
-----------------------

An Eligible Employee who wishes to participate in the Plan
as of an Entry Date must deliver his executed Participation Agreement to the
Company no later than required by the Committee.

7.4. Method of Payment and Stock Purchase Accounts.
---------------------------------------------

Payment for Shares shall be made through payroll
deductions from the Participant's Compensation, such deductions to be
authorized by a Participant in the Participation Agreement, by separate cash
payments which may be made by a Participant from time to time, if permitted
by the Committee, and if permitted, in accordance with rules and limitations
set by the Committee, and, with the consent of the Committee, and upon such
terms as it shall require, in Shares which shall be valued at Fair Market
Value on the Exercise Date. A stock purchase account shall be set up on the
books of the Company in the name of each Participant. The amount of all
payroll deductions, separate cash payments, and tender of Shares shall be
credited to the respective stock purchase accounts of the Participants on
the Company's books. The funds deducted and withheld by the Company through
payroll deductions, the funds received by the Company from separate cash
payments, and the tendered Shares may be used by the Company for any
corporate purposes as the Board shall determine, and the Company shall not
be obligated to segregate said funds or Shares in any way.

7.5. Withdrawal from the Plan.
------------------------

A Participant may not withdraw from the Plan unless
permitted by the Committee and, if so permitted, only at such times and upon
such conditions as the Committee shall determine.

8. PURCHASE OF STOCK.
-----------------

8.1. Exercise of Option.
------------------

Unless a Participant shall have withdrawn from the Plan as
provided in Section 7.5, his Option to purchase Shares will be automatically
exercised for him on each Exercise Date for the number of full Shares or, in
the event a custodial account described in Section 8.4 is established and
such account may hold fractional shares, for the number of full and
fractional Shares which the accumulated payroll deductions, separate cash
payments (plus, if so permitted by the Committee pursuant to paragraph (i)
of Section 6.2, interest on such cash deductions and payments) and tendered
Shares as of the Exercise Date will purchase at the applicable Option price,
subject to the limitations set forth in the Plan and the Offering and
subject to allotment in accordance with Section 8.2. Any balance remaining
in a Participant's stock purchase account after the exercise of an Option
will remain in such account unless the Offering is over and there is no
Offering which begins immediately after the Termination Date of the Offering
or the Participant is not a Participant in such subsequent Offering.

8.2. Allotment of Shares.
-------------------

In the event that, on any Exercise Date, the aggregate
funds and Shares available for the purchase of Shares, pursuant to the
provisions of Section 8.1, would purchase a greater number of Shares than
the number of Shares then available for purchase under the Plan on such
Exercise Date, the Company shall issue to each Participant, on a pro rata
basis, such number of Shares as, when taken together with the Shares issued
to all other Participants, will result in the issuance of Shares totaling no
more than the number of Shares then remaining available for issuance under
the Plan on such Exercise Date.

8.3. Rights on Retirement, Death or Termination of Employment.
--------------------------------------------------------

In the event of a Participant's retirement, death or
termination of employment, no payroll deduction shall be taken from any
Compensation due and owing to him at such time, and the amount in the
Participant's stock purchase account shall be applied as of the next
Exercise Date in the manner set forth in Section 8.1, as if the retirement,
death or termination of employment had not occurred, unless the former
Employee or, in the event of his death, the person or persons to whom his
rights pass by will or the laws of the descent and distribution (including
his estate during the period of administration) requests in writing prior to
the Exercise Date that such amount be refunded; provided, however, if the
retirement, death or termination of employment occurs more than three months

B-6

prior to the next Exercise Date, such amount shall automatically be
refunded. An Employee of a Subsidiary or a Parent which ceases to be a
Subsidiary or a Parent shall be deemed to have terminated his employment for
purposes of this Section 8.3 as of the date such corporation ceases to be a
Subsidiary or a Parent, as the case may be, unless, as of such date, the
Employee shall become an Employee of the Company or any Subsidiary or
Parent.

8.4. Delivery of Stock.
-----------------

Unless the Committee establishes an account custodian, as
described below, certificates for Shares purchased will be issued and
delivered as soon as practicable. None of the rights or privileges of a
shareholder of the Company shall exist with respect to Shares purchased
under the Plan until the certificates representing such Shares are issued.
Notwithstanding the foregoing, if so determined by the Committee, Shares
acquired on the Exercise Date shall be credited to an account maintained for
the benefit of the Participant by the custodian selected by the Committee.
If such an arrangement is established, it will be governed by and subject to
the terms and conditions of the agreement between the Company or the
Committee and the custodian, and each Participant, by enrolling in the Plan,
shall be deemed to have consented to such terms and conditions.

9. MISCELLANEOUS PROVISIONS.
------------------------

9.1. Underscored References.
----------------------

The underscored references contained in the Plan are
included only for convenience, and they shall not be construed as a part of
the Plan or in any respect affecting or modifying its provisions.

9.2. Number and Gender.
-----------------

9.3. Governing Law.
-------------

This Plan shall be construed and administered in
accordance with the laws of the State of Missouri.

9.4. Purchase for Investment.
-----------------------

The Committee may require each person purchasing Shares
pursuant to an Option to represent to and agree with the Company in writing
that such person is acquiring the Shares for investment and without a view
to distribution or resale. The certificates for such shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
transfer. All certificates for Shares delivered under the Plan shall be
subject to such stock transfer orders and other restrictions as the
Committee may deem advisable under all applicable laws, rules, and
regulations, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate references to such restrictions.

9.5. Restricted Shares.
-----------------

Shares purchased under the Plan may be subject to
restrictive agreements between an Employer and a Participant. In such case,
the Employer shall have the right to include a legend reflecting any such
restriction on any certificate for such Shares.

9.6. No Employment Contract.
----------------------

The adoption of the Plan shall not confer upon any
Employee any right to continued employment nor shall it interfere in any way
with the right of the Company, a Parent or Subsidiary to terminate the
employment of any of its employees at any time.

9.7. Offset.
------

In the event that any Participant wrongfully appropriates
funds or other property of an Employer and thereby becomes indebted to such
Employer, any funds or Shares in his stock purchase account may be applied
against and used to satisfy such indebtedness.

9.8. No Effect on Other Benefits.
---------------------------

The grant of Options under the Plan shall have no effect
on any benefits to which a Participant may be entitled from the Employer,
under another plan or otherwise, or preclude a Participant from receiving
any such benefits.

B-7

9.9. Notice to Company.
-----------------

Each Participant shall promptly give the Company prior
written notice of any disposition of Shares purchased under the Plan which
occurs within 2 years of the date of grant of the Option pursuant to which
such Shares were purchased.

B-8

THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
APPLIED DIGITAL SOLUTIONS, INC.

Richard J. Sullivan and Scott R. Silverman, and each of them, are
appointed by the undersigned as proxies, each with power of substitution, to
represent and vote in accordance with the instructions set forth herein, the
shares of stock of Applied Digital Solutions, Inc. (the "Company") which the
undersigned would be entitled to vote at the Annual Meeting of Shareholders
of the Company to be held on June 8, 2002, at 8:30 a.m. Eastern Daylight
Time, at the Brazilian Court Hotel, 301 Australian Avenue, Palm Beach,
Florida 33480 and at any postponements or adjournments thereof (the "Annual
Meeting") as if the undersigned were present and voting at the Annual
Meeting.

1. Election of Two Directors and Ratification of Appointment of One
Director
NOTE: UNLESS OTHERWISE INDICATED, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED FOR EACH NOMINEE AND THE APPOINTEE NAMED BELOW.

NOMINEES:

DANIEL E. PENNI AND ANGELA M. SULLIVAN

APPOINTEE:

SCOTT R. SILVERMAN

FOR all / /
WITHHOLD all / /
For all EXCEPT / /

(TO WITHHOLD AUTHORITY TO VOTE, MARK "FOR ALL EXCEPT" AND WRITE
THE NOMINEES' OR APPOINTEE'S NAME(S) ON THE LINE BELOW.)

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

2. Approval of amendment to the Company's 1999 Flexible Stock Plan
and ratification of options granted thereunder.
FOR / / AGAINST / / ABSTAIN / /

3. Approval of amendment to the Company's 1999 Employees Stock
Purchase Plan.
FOR / / AGAINST / / ABSTAIN / /

4. Approval of amendment to the Company's Second Restated Articles
of Incorporation, as amended, to increase the number of authorized
shares of common stock.
FOR / / AGAINST / / ABSTAIN / /

5. To transact such other business as may properly come before the
Meeting and at any adjournments or postponements of the Meeting.

THE SHARES REPRESENTED HEREBY WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTIONS SET FORTH ABOVE AND, WHERE NO DIRECTIONS ARE GIVEN, SUCH SHARES
WILL BE VOTED FOR THE NOMINEES AND APPOINTEE FOR DIRECTOR NAMED ABOVE AND
FOR EACH PROPOSAL REFERRED TO ABOVE.

If you plan on attending the meeting, please check box to the right. / /

Please sign, date and return this proxy in the enclosed envelope.
Joint Owners should each sign this proxy. Attorneys-in-fact, executors,
administrators, trustees, guardians or corporation officers should give
their full title.

------------------------------------------------
Signature [Please sign within box] Date

------------------------------------------------
Signature (Joint Owners) Date

APPENDIX

Page 15 of the printed Proxy for Applied Digital Solutions contains a
performance graph. The information contained in the graph has been presented
in a tabular format which may be processed by the EDGAR system.