Related Party Transactions and Outside Related Director Information

Applied Digital Solutions, Inc. (ADSX)

6/9/2006 Proxy Information

Indebtedness of Management

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

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

In September 2000, when the loans were originated, the Company notified these officers and directors that the Company intended to pay their annual interest as part of their compensation expense/directors remuneration and to provide a gross-up for the associated income taxes. Annual interest payments were due on September 27, 2001 and September 27, 2002. The Company has chosen not to pay the interest and related tax gross-up. In addition, the principal balance and a final interest payment became due on September 27, 2003. The Company, therefore, considered such notes to be in default. In July 2005, the Company foreclosed on the underlying collateral (all of the CompanyÕs common stock) in full satisfaction of the notes with Mr. Penni and Ms. Weaver.

Transactions with Subsidiaries

Digital Angel Corporation

As of December 31, 2005, the Company owned approximately 55.4% of Digital AngelÕs outstanding common stock. VeriChip had a supply and development agreement with Digital Angel dated March 4, 2002 covering the manufacture and supply of the CompanyÕs human implantable microchips. During 2005 and 2004, Digital Angel billed VeriChip approximately $0.7 million and $0.1 million, respectively, for product supplied under the agreement. On December 28, 2005, the VeriChip and Digital Angel entered into a restated supply and development agreement as more fully discussed below under the heading VeriChip Corporation below.

On February 25, 2005, the Company entered into a share exchange agreement with Digital Angel. Pursuant to the agreement, the Company sold 684,543 shares of its common stock to Digital Angel in exchange for 644,140 shares of Digital AngelÕs common stock. The value of the common stock exchanged was $3.5 million. Digital Angel used the CompanyÕs common stock that it received under the agreement as partial consideration for an acquisition.

DSD leases a 13,600 square foot building located in Hvidovre, Denmark. The building is occupied by DSDÕs administrative and production operations. The lease agreement has no expiration but includes a three month termination notice that can be utilized by the owner or DSD. DSD leases the building from LANO Holding Aps. LANO Holding Aps is 100% owned by Lasse Nordfjeld, DSDÕs CEO.

VeriChip Corporation

On December 28, 2005, VeriChip and Digital Angel entered into a restated supply and development agreement for the supply of VeriChip implantable microchips. Digital Angel is VeriChipÕs sole supplier of microchips relating to its human implantable microchip business. Under this agreement, Digital Angel purports to license to VeriChip the right to use the implantable human microchip technology. However, in 1994, the exclusive rights to use the patented technology in applications involving the identification of human beings were licensed to Hughes Aircraft Company and Hughes Identification Devices, Inc. by Destron/IDI, Inc., a predecessor of Digital Angel. Hughes Aircraft Company subsequently changed its name and is now known as Raytheon Company. Raytheon Microelectronics Espa–a, or RME, entered into an agreement, referred to as the 2006 supply agreement, with Digital Angel effective April 26, 2006. VeriChip has been advised that RME is a wholly-owned subsidiary of Raytheon Company. The 2006 supply agreement grants Digital Angel a non-exclusive license to any and all intellectual property held by RME or its affiliates related to the manufacture, distribution or use of the microchip for use in human beings. However, because the 2006 agreement was with RME and not Raytheon Company, it is possible that RME lacks the authority or intellectual property to grant a license that would support VeriChipÕs use of the patented technology for human identification. Based on the 1994 license and the limitations associated with the 2006 supply agreement between RME and Digital Angel, certain rights relating to the license under VeriChipÕs supply agreement with Digital Angel are broader than the rights that Digital Angel has under the 2006 supply agreement. Accordingly, such rights, most notably the rights to independently enforce the patent and to independently manufacture the products, are rendered inoperative by the previously granted right to use the patented technology for human identification. As a result, VeriChipÕs use of the technology might be enjoined and it could be required to pay damages, including enhanced damages, based on the claim that the sale and use of its products conflicts with the exclusive license previously granted to others for the use of the technology for the identification of human beings.

Digital Angel may supply human implantable microchips to other parties unless VeriChip meets certain minimum purchase requirements. Specifically, the minimum purchase requirements are currently $0, $875,000, $1,750,000 and $2,500,000 for each of 2006, 2007, 2008 and 2009, respectively, and $3,750,000 for 2010 and each year thereafter. If during any year VeriChip purchases in excess of its minimum purchase requirement for that year, such excess shall be credited against the minimum purchase requirement for the following year or years. VeriChipÕs rights under its agreement with Digital Angel will not prevent other parties from competing with VeriChip. VeriChipÕs agreement with Digital Angel continues until March 2013, and, as long as it continues to meet the minimum purchase requirements, will automatically renew on an annual basis until the expiration of Digital AngelÕs patents covering the supplied products (if applicable). The agreement may be terminated earlier prior to its stated term under specified events, such as a bankruptcy of the other party or an uncured default in the performance of any obligation under the agreement, including the payment of money.

The terms of the predecessor supply and development agreement and the amended and restated supply and development agreement were negotiated by the executive officers of the respective companies and approved by the independent members of each companyÕs board of directors. Accordingly, the Company believes that the terms of the agreements are comparable to terms that could be obtained from independent third parties.

Loan to VeriChip Corporation

As of December 31, 2005, VeriChip owed the Company approximately $6.9 million in principal and accrued interest. To evidence that indebtedness, on December 27, 2005, the Company entered into an agreement with VeriChip providing for a revolving loan to VeriChip in principal amount of up to $8.5 million. The loan bears interest at the highest prime rate of interest as published from time to time in The Wall Street Journal. The revolving loan and all other obligations of any kind owed by VeriChip to the Company are secured by a lien on all of VeriChipÕs assets. Upon the closing of VeriChipÕs planned initial public offering, it will use a portion of the proceeds to repay the loan. The interest rate negotiated between the parties was based upon the rate that large financial institutions charge their best clients in armÕs-length lending transactions. Depending upon VeriChipÕs future operating performance, such rate may not be comparable to the terms that the Company could obtain from independent third parties.

Transition Services Agreement

On December 27, 2005, the Company entered into a transition services agreement with VeriChip in which the Company agreed to provide VeriChip with certain administrative transition services and payment of expenses requested from time to time by VeriChip, including payroll, legal, finance, accounting, information technology and tax services and services related to VeriChipÕs planned initial public offering. As compensation for these services, VeriChip agreed to pay the Company (i) approximately $62,000 per month for fixed costs allocable to these services, (ii) the CompanyÕs reasonable out-of-pocket direct expenses incurred in connection with providing these services, (iii) the CompanyÕs expenses incurred in connection with services provided to VeriChip in connection with its planned initial public offering and (iv) any charges by third party service providers that may or may not be incurred as part of VeriChipÕs planned initial public offering and that are attributable to transition services provided to or for VeriChip.

The term of the agreement continues until such time as VeriChip requests the Company to cease performing such services, provided that the Company is not obligated to continue to provide the transition services for more than two years. Except for any request by VeriChip that the Company cease to perform transition services, the agreement may not be terminated by either party except in the event of a material default in the CompanyÕs delivery of the transition services or in VeriChipÕs payment for those services. The terms of the transition services agreement were negotiated between certain of the CompanyÕs and VeriChipÕs executive officers, and were based upon historical amounts incurred by the Company for payment of such services to third parties. Accordingly, the Company believes that the terms of the transactions are comparable to terms that one could obtain from independent third parties.

During 2005, the Company paid legal fees of $0.1 million, to VeriChipÕs legal counsel, Akin Gump Strauss Hauer & Feld LLP, referred to as Akin Gump. Tommy G. Thompson, a partner with Akin Gump, has been a member of VeriChipÕs board of directors since July 2005 and holds options to purchase 0.2 million shares of VeriChipÕs common stock.

InfoTech USA, Inc.

As of December 31, 2005, the Company owned approximately 52.5% of InfoTechÕs outstanding common stock. On June 27, 2003, the Company borrowed $1.0 million from InfoTech under the terms of a commercial loan agreement and term note. The loan accrues interest at an annual rate of 16%, and interest is payable monthly. The loan, which was originally due on June 30, 2004, was extended and the principal balance plus accrued interest is due on June 30, 2006. As of December 31, 2005, $1.0 million of principal was outstanding under the note and no interest was due. Under the terms of a Stock Pledge Agreement, the Company pledged 750,000 shares of Digital Angel CorporationÕs common stock that the Company owns as collateral for the loan. The proceeds of the loan were used to fund operations. The terms of the loan agreement were negotiated by the executive officers of the respective companies and approved by the independent members of each companyÕs board of directors. Accordingly, the Company believes that the terms of the agreements are comparable to terms that could be obtained from independent third parties

InfoTech reimburses the Company on a monthly basis for insurance expenses. During 2005 and 2004, InfoTech reimbursed the Company approximately $0.2 million and $0.2 million, respectively, for such expenses.

Changes in Control

The Company has granted its lender, Satellite Senior Income Fund LLC, a first priority security interest in substantially all of the CompanyÕs assets, and the Company has pledged all of the issued and outstanding capital stock owned by the Company in VeriChip, InfoTech and certain other wholly-owned subsidiaries of the Company and a portion of the common stock owned by the Company in Digital Angel. If the Company defaults under the terms of its agreement with Satellite, such default, if uncured, could result in a change in control of the Company.


Messrs. Silverman and Zarriello serve as directors of Digital Angel Corporation (AMEX: DOC), and Mr. Silverman serves as a director of InfoTech USA, Inc. (OTC:IFTH). No other executive officer or director holds directorships in any other company that has a class of securities registered pursuant to Section 12 of the Exchange Act, or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940.