APPLIED DIGITAL SOLUTIONS, INC. DIGITAL ANGEL SHARE TRUST FORBEARANCE AGREEMENT Summary of Terms and Conditions March 24, 2003

1.             Parties to Forbearance Agreement

Borrowers:

Digital Angel Share Trust, a Delaware statutory business trust (in such capacity, the “Trust” and in its capacity as a Borrower, the “Tranche A Borrower”); and

Applied Digital Solutions, Inc., a Missouri corporation (“ADS” or the “Tranche B Borrower”).

Guarantors:

Each of the Tranche B Borrower and its Subsidiaries (other than Digital Angel Corporation), as a guarantor for the Tranche A Borrower’s obligations under the Tranche A Facility (as described below) (in such capacity, the “Tranche A Guarantors”); and

The Tranche A Borrower, as a guarantor for the Tranche B Borrower’s obligations under the Tranche B Facility (as described below) (in such capacity, the “Tranche B Guarantor”; together

with the Tranche A Guarantors, the “Guarantors”).

Lender:

IBM Credit LLC, a Delaware limited liability company (“IBM Credit”).

2.             Forbearance Provisions

Forbearance:

Notwithstanding the occurrence and continuance of the Specified Events of Default (as defined below), subject to the terms and conditions hereof and of the Forbearance Agreement, IBM Credit will agree to forbear, during the Forbearance Period, from the exercise of any or all rights and remedies under the Credit Agreement, the other applicable Restructuring Documents and applicable law solely in respect of the Specified Events of Default; it being understood that the foregoing is not and shall not be construed as an amendment, waiver or modification of the Credit Agreement except as expressly provided herein and in the Forbearance Agreement.

Forbearance Period:

The period beginning on the Effective Date (as defined below) and ending on the Termination Date (as defined below).

Specified Events of Default:

“Specified Events of Default” are: (i) the Events of Default occurring and continuing under Section 8.1(A) of the Credit Agreement as a result of the Borrowers’ failure to pay to IBM Credit in immediately available funds the amounts due and payable in accordance with Section 2.3(B) and 2.4(B), respectively, of the Credit Agreement or, alternatively, forty percent (40%) of the original principal amount of the Loans and interest and expenses ($46,228,415.89) due and payable since February 28, 2003, in accordance with Section 2.8 of the Credit Agreement and IBM Credit’s letter to the Borrowers, dated March 3, 2003 and (ii) any Events of Default existing on the date hereof which IBM Credit is aware of (including the Events of Default resulting from the failure to comply with the financial conditions covenants set forth in Section 7.1 of the Credit Agreement for the applicable period ending December 31, 2002).

In the Notice of Default, dated March 6, 2003, IBM Credit notified the Borrowers and the other Loan Parties of the Specified Events of Default and that all Obligations are immediately due and payable in accordance with Section 8.2 of the Credit Agreement.

All the Loans and other Obligations remain outstanding and continue to be due and payable.

Termination Date:

The earlier to occur of (i) the date on which the Loans and other Obligations are repaid in full or otherwise satisfied under “Payment Provisions” or (ii) a Termination Event.

Termination Events:

The occurrence of any of the following events is a “Termination Event”: (i) failure of ADS to be cash flow positive on a consolidated operational basis (excluding Digital Angel) at all times on and after the 30-day anniversary of the Effective Date; or (ii) failure to deliver the Budget (as defined below) to IBM Credit within one (1) Business Day of the date when due in form and substance satisfactory to IBM Credit; or (iii) the filing of any ADS or Digital Angel shareholder lawsuit deemed to be material, as determined by IBM Credit in its sole and absolute discretion, or any lawsuit by or on behalf of ADS or Digital Angel or any other Loan Party against the Tranche A Borrower, IBM Credit, IBM or any Affiliate thereof; or (iv) the occurrence of an Event of Default other than a Specified Event of Default after the date hereof or an Event of Default existing on or prior to the date hereof and continuing after the date hereof which IBM Credit is not aware of; or (v) failure to repay the Loans when due as set forth under “Payment Provisions” below (subject to the exercise of purchase rights set forth under “Purchase Rights” thereunder); or (vi) breach of any other covenant or agreement set forth herein or in the Forbearance Agreement and the Restructuring Documents.

3.             Payment Provisions

Repayment:

The Tranche A Loan must be repaid in full no later than September 30, 2003 provided that all but $3 million of the Tranche A Loan (the “Tranche A Deficiency Amount”) will be deemed to be paid in full on such date if less than the full amount of the Tranche A Loan is repaid but all of the net cash proceeds of the Digital Angel Share Sale (as defined below) on terms satisfactory to IBM Credit are applied to the repayment of the Tranche A Loan. The Tranche A Deficiency Amount (if any) must be repaid no later than March 31, 2004.

The Tranche B Loan must be repaid in full no later than March 31, 2004.  All legal fees incurred by IBM Credit as set forth in “Expenses” will be capitalized as additional principal under the Tranche B Loan.  From and after the date of this Term

Sheet, the Tranche B Loan will bear interest at seven percent (7%) per annum.

Purchase Rights:

The Loans may be purchased by or on behalf of the Borrowers as follows:

1.  The Loans and all the other Obligations may be purchased on or before June 30, 2003 for $30 million cash.

2.  The Loans and all the other Obligations may be purchased on or before September 30, 2003 for $50 million cash.

3.  Notwithstanding anything to the contrary stated above, the Tranche A Loan may be purchased on or before September 30, 2003 for $40 million cash with an additional $10 million cash payment in respect of the Tranche A Deficiency Amount and the Tranche B Loan due on or before December 31, 2003.  Payment of $50 million in aggregate by the date set forth above shall constitute satisfaction of the Obligations.

4.             Digital Angel Share Sale

The following conditions must be satisfied in respect of the sale under the Trust Agreement of the Digital Angel shares held by the Trust (the “Digital Angel Share Sale”).  Such engagement will include provision of a fairness opinion, if requested by the Trust.

1.  Promptly, and in any event within 30 days of the Effective Date, the Trust shall engage an investment bank (the “Investment Bank”) reasonably acceptable to IBM Credit to conduct the Digital Angel Share Sale.

2.  The Investment Bank fee structure will be on customary terms and based upon the success of the Digital Angel Share Sale, such fees to be reasonably acceptable to IBM Credit.  IBM Credit will not be required to indemnify the Investment Bank.

3.  Within 30 days of the Effective Date, the Investment Bank will have prepared and delivered to IBM Credit, the Trust and ADS a report, in form and substance satisfactory to IBM Credit in its reasonable discretion, in respect of the Digital Angel Share Sale process (including, without limitation, a timetable to conduct such sale, the persons responsible for managing such process, the parameters of the expected transaction terms and the Investment Bank’s expected range of proceeds).  Any Digital Angel Share Sale must be consummated without any indemnification claims or

contingencies against the proceeds.

4.  (a) Unanimous written consent of the Advisory Board Members (as defined in the Trust Agreement) approving pursuit of the Digital Angel Share Sale on the terms proposed by the Investment Bank will have been delivered to IBM Credit.  Upon such approval, the Trust will diligently and expeditiously pursue the Digital Angel Share Sale consistent with its obligations under the Trust Agreement.

     (b) Other required consents to the Digital Angel Share Sale (including any consents required under the Digital Angel/▇▇▇▇▇ Fargo Credit Agreement, dated as of October 30, 2002) will have been obtained.

5.  Digital Angel will agree to cooperate (including, without limitation, assisting and preparation of road show materials and making senior management of Digital Angel available to participate in meetings with any prospective investors in a road show) with the Investment Bank and the Trust to facilitate the Digital Angel Share Sale.

6.  All proceeds of the Digital Angel Share Sale will be applied to the Loans and other Obligations to the extent required under the “Repayment” paragraph of the “Payment Provisions” section above.

5.             Cash Collateral

Budget:

On a weekly basis, IBM Credit will receive a detailed budget (the “Budget”) in respect of each operating company of ADS (including Digital Angel, SysComm and Computer Equity) on both a consolidated and an entity-by-entity basis.  The Budget will be provided to IBM Credit on a rolling 13-week basis itemizing all revenues projected to be received and all expenses proposed to be made in the ordinary course of business of such entities, such as expenses incurred or payable in respect of vendors, materialmen and payroll (it being expressly understood by the parties hereto that any legal and other professional fees (including, without limitation, retainers and expenses incurred or paid) in connection with a defense of any shareholder suit are not ordinary course business expenses) during such periods and other cash flow and financial projections, all in form and substance satisfactory to IBM Credit in its reasonable discretion.

Deposit Accounts:

Collateral consisting of collected funds deposited (whether directly or transmitted from lockboxes) in Deposit Accounts shall remain subject to the control of IBM Credit in accordance with the Contingent Blocked Account Agreement or the other Deposit Account Control Agreements, as applicable (including, without limitation, any Deposit Account and related Deposit Account Control Agreement replacing or in substitution of the Contingent Blocked Account Agreement and the Deposit Accounts thereunder) (such Collateral, the “Cash Collateral”).

Usage:

IBM Credit will make available Cash Collateral from the Deposit Accounts to ADS to pay expenses of ADS and its Subsidiaries (excluding Digital Angel and SysComm) in accordance with the Budget.  The Budget (excluding the budget in respect of Digital Angel and SysComm) may be adjusted on a week-to-week basis by an amount equal to 10% of permitted expenditures in the aggregate (the “Maximum Adjustment Amount”) provided that no single line item for permitted expenditures in the Budget may be adjusted on a week-to-week basis by an amount in excess of 20% of the Maximum Aggregate Adjustment Amount.

6.             Other Collateral

Tranche A Facility:  The Borrowers and the other Loan Parties hereby confirm and reaffirm that the Tranche A Facility and the Obligations will continue to be secured by a perfected first priority security interest in the Digital Angel shares held by the Trust for the benefit of IBM Credit up to the aggregate amount of the outstanding Tranche A Loan and Tranche B Loan.

Tranche B Facility:  The Borrowers and the other Loan Parties hereby confirm and reaffirm that the Tranche B Facility and the Obligations will continue to be secured by a perfected, first priority security interest in (i) substantially all the assets of the Tranche B Borrower and its Subsidiaries, excluding the assets of Digital Angel or its Subsidiaries, (ii) all Capital Stock in Subsidiaries and other investments held by the Tranche B Borrower, and (iii) any notes or other securities held by the Tranche B Borrower in connection with the sale of assets or investments.

The Borrowers and the other Loan Parties hereby confirm and reaffirm that they will take all necessary or reasonably desirable actions to maintain and preserve IBM Credit’s prior perfected security interest in the Collateral (including, without limitation, in respect of any Collateral consisting of Deposit Accounts pursuant

to any replacement or substitute cash management system or arrangement).

7.             Certain Conditions

The Forbearance Agreement will be effective on the date (the “Effective Date”) on which all of the following conditions precedent to the Forbearance Agreement are satisfied (such date to occur on or before March 31, 2003):

(a) IBM Credit shall have received a copy of the Forbearance Agreement, all the material terms of which shall be substantially the same as the material terms set forth in this Term Sheet and otherwise in form and substance satisfactory to IBM Credit, duly executed by the parties thereto.

(b) IBM Corporation (“IBM”) and IBM Credit shall have received releases from each of ADS (on behalf of itself and its officers and directors), Digital Angel, the other Loan Parties, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ (in all capacities relating to the Restructuring Documents), ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and the Advisory Board Members (as defined in the Trust Agreement) (collectively, the “Releasing Parties”) satisfactory to IBM and IBM Credit forever releasing and discharging IBM and IBM Credit or any affiliate thereof, together with their past and present officers, directors, stockholders, employees, subsidiaries, affiliates, related companies, predecessors, successors, assigns, agents, trustees, attorneys, or other representatives and each of them from all actions, causes of action, proceedings, charges, complaints, claims, demands, damages, costs, liabilities, agreements, and obligations of every kind, which they have ever had, now have or may have in the future in respect of any matter under, arising out of or relating to the Restructuring Documents, this Term Sheet, the Forbearance Agreement and the Lawsuit (as defined below).  Such releases shall contain covenants not to ▇▇▇ IBM Credit, IBM or any affiliate thereof in respect of any matter under, arising out of or relating to the Restructuring Documents, this Term Sheet and the Forbearance Agreement and the Lawsuit.  Such releases shall be duly authorized by all organizational action (including Board resolutions) as applicable, executed and delivered by each of the Releasing Parties.

(c) The Advisory Board Members (as defined in the Trust Agreement) will be satisfactory to IBM Credit and duly authorized by all applicable organizational action of the Trust (including applicable resolutions).

(d) The Advisory Board and Digital Angel shall have agreed in writing that IBM Credit is a third party beneficiary in the Digital Angel Share Sale process.

(e) Each of ADS, Digital Angel, the Advisory Board, the Trust and the other Loan Parties shall have taken all necessary organizational action (including applicable applicable Board resolutions) authorizing the transactions contemplated by this Term Sheet and the Forbearance Agreement (including, without limitation, any releases and the Digital Angel Share Sale).

(f) ADS shall have delivered to IBM Credit an initial Budget, satisfactory in form and substance to IBM Credit in its reasonable discretion.

(g) ADS shall take any actions requested by IBM Credit to enable IBM Credit to continue its “control” of Deposit Accounts.

8.             Certain Additional Covenants

Dismissal of Lawsuit:

ADS will cause the lawsuit, initially filed on March 7, 2003, as ▇▇▇▇ ▇▇. ▇▇ ▇▇-▇▇▇▇▇▇▇ in the Fifteenth Judicial Circuit in and for Palm Beach County, Florida and removed to the Southern District of Florida, Case No. 03-80186-CIV-▇▇▇▇▇ on March 12, 2003 (the “Lawsuit”), to be dismissed with prejudice within one (1) Business Day of execution of this term sheet by the parties hereto.

Press Releases:

ADS and the other applicable Loan Parties will deliver to IBM Credit prior to the issuance thereof, any press releases relating to the transactions contemplated hereby (including, without limitation, the Digital Angel Share Sale).  IBM Credit will review such press releases solely for accuracy of the transactions contemplated hereby.  The Borrowers will have sole liability in respect of any such press releases.

9.             Assignments

IBM Credit may assign its Loans and other Obligations to any affiliate or any other Person; provided that such Person agrees to be bound by the terms of the Forbearance Agreement.

10.          Expenses

Each Borrower and each other Loan Party agrees to pay and reimburse IBM Credit for all its reasonable costs and expenses incurred in connection with the preparation and delivery of this Term Sheet, the Digital Angel Share Sale and the Forbearance Agreement, including, without limitation, the reasonable fees and disbursements of ▇▇▇▇▇ Day, counsel to IBM Credit, and the reasonable fees and costs and expenses of the Investment Bank.  Each Borrower and each other Loan Party further agree to pay all reasonable costs and expenses incurred in connection with the Digital Angel Share Sale (including, without limitation, the reasonable fees and disbursements of the Investment Bank and ▇▇▇▇▇ Day, counsel to IBM Credit) regardless of any purchase of the Loans and other Obligations under “Payment Provisions - Purchase Rights.”  Legal fees will be payable in accordance with the provisions of “Payment Provisions - Repayment.”

11.          Indemnification

Each Borrower and each other Loan Party hereby agree to indemnify and hold harmless IBM, IBM Credit and their respective officers, directors, consultants, advisors, agents and assigns (collectively, the “Indemnified Persons”) against all losses, claims, damages, liabilities or other expenses (including reasonable attorneys’ fees and court costs now or hereinafter arising from the enforcement of this Term Sheet and the Forbearance Agreement and the documentation relating hereto, the “Losses”) to which any of them may become subject insofar as such Losses arise out of or are based upon any event, circumstance or condition (a) occurring or existing on or before the date of this Term Sheet and the Forbearance Agreement relating to any financing arrangements IBM Credit may from time to time have with (i) such Borrower, (ii) any Person that shall be acquired by such Borrower or (iii) any Person that such Borrower may acquire all or substantially all of the assets of, or (b) directly or indirectly relating to the execution, delivery or performance of this Term Sheet and the Forbearance Agreement or the consummation of the transactions contemplated hereby or thereby or to any of the Collateral or to any act or omission of the Borrower in connection therewith.  Such indemnification will include any Losses arising out of or relating to any press releases as described under “Certain Additional Covenants - Press Releases.”  Notwithstanding the foregoing, a Loan Party shall not be obligated to indemnify IBM or IBM Credit for any Losses incurred by IBM or IBM Credit which are a result of IBM’s or IBM Credit’s gross negligence or willful misconduct.  The

indemnity provided herein shall survive the termination of this Term Sheet and the Forbearance Agreement and shall be in addition to the indemnity provisions set forth in Section 9.2 of the Credit Agreement.

12.          Counterparts

This Term Sheet may be executed by one or more of the parties to this Term Sheet on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.  A set of the copies of this Term Sheet signed by the parties hereto shall be delivered to each Borrower and IBM Credit.

13.          GOVERNING LAW

THIS TERM SHEET AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS TERM SHEET SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

14.          Limitation of Trustee Liability

It is expressly understood and agreed by the parties that (a) this document is executed and delivered by Wilmington Trust Company, not individually or personally, but solely as Trustee, in the exercise of the powers and authority conferred and vested in it, pursuant to the Trust Agreement, (b) each of the representations, undertakings and agreements herein made on the part of the Trust is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose for binding only the Trust, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any person claiming by, through or under the parties hereto, and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Trust under this Term Sheet or any other related documents.

15.          Interpretation

Continuing Effect of the Credit Agreement:

The Borrowers and each other Loan Party hereby acknowledge and agree that the Credit Agreement shall continue to be and shall remain unchanged and in full force and effect in accordance with its terms, except as expressly modified hereby and by the Forbearance Agreement.

No Limitation on Remedies after Forbearance Period:

The Borrowers and each Loan Party hereby acknowledge and agree that, at the end of the Forbearance Period, the provisions hereof and of the Forbearance Agreement shall become of no force and effect and IBM Credit shall be free, in accordance with the Credit Agreement and the other Restructuring Documents, to exercise and enforce, or to take steps to exercise and enforce, all rights, powers, privileges and remedies available to them under the Credit Agreement, any other Restructuring Document or applicable law on account of the Specified Events of Default (or any other Default or Event of Default) as if the Forbearance Agreement had not been entered into by the parties hereto.

Reservation of Rights:

Notwithstanding anything contained in this Term Sheet or the Forbearance Agreement to the contrary, the Borrowers and each other Loan Party acknowledge that IBM Credit does not waive, and expressly reserves, the right to exercise, at any time during the Forbearance Period, any and all of its rights and remedies under (a) the Credit Agreement, any other Restructuring Document and applicable law in respect of the Specified Events of Default against any Person other than the Borrowers or any such Loan Party and (b) the Credit Agreement, any other Restructuring Document and applicable law in respect of any Default or Event of Default other than the Specified Events of Default.

16.          Consent

Notwithstanding any provisions to the contrary in the Credit Agreement, IBM Credit hereby agrees to consent to the buy out by ADS of the respective Employment Agreements of each respective Employee with ADS common stock with a current market value not to exceed the required buyout amount under the applicable Employment Agreement.

IBM CREDIT CORPORATION,
as Lender

APPLIED DIGITAL SOLUTIONS, INC.,
as Tranche B Borrower and Tranche A Guarantor

By:

By:

Name:

Name:

Title:

Title:

DIGITAL ANGEL SHARE TRUST,
as Tranche A Borrower and Tranche B
Guarantor

ADS MONTEREY, INC.

By:

By:    Wilmington Trust Company, not in its individual capacity but solely as Trustee

Name:

By:

Title:

Name:     Wilmington Trust Company

Title:       Trustee

ADVANCED POWER SOLUTIONS, INC.

THE AMERICOM GROUP, INC.

By:

By:

Name:

Name:

Title:

Title:

APPLIED DIGITAL SOLUTIONS
FINANCIAL CORP.

BALVA FINANCIAL CORPORATION

By:

By:

Name:

Name:

Title:

Title:

COMPUTER EQUITY CORPORATION

DIGITAL ANGEL CORPORATION

By:

By:

Name:

Name:

Title:

Title:

DIGITAL ANGEL HOLDINGS, LLC

FEDERAL CONVENTION
CONTRACTORS, INC. 

By:

By:

Name:

Name:

Title:

Title:

FEDERAL SERVICES, INC.

GOVERNMENT
TELECOMMUNICATIONS, INC. 

By:

By:

Name:

Name:

Title:

Title:

INFORMATION TECHNOLOGY SERVICES, INC.

INFOTECH USA, INC. 

By:

By:

Name:

Name:

Title:

Title:

PDS ACQUISITION CORP.

PERIMETER ACQUISITION CORP.

By:

By:

Name:

Name:

Title:

Title:

PRECISION POINT CORPORATION

SYSCOMM INTERNATIONAL
CORPORATION

By:

By:

Name:

Name:  ▇▇▇ ▇▇▇▇▇▇▇▇▇

Title:

Title:  President

U.S. ELECTRICAL PRODUCTS CORP.

VERICHIP CORPORATION

By:

By:

Name:

Name:

Title:

Title:

WEBNET SERVICES, INC.

ACT COMMUNICATIONS INC.

By:

By:

Name:

Name:

Title:

Title:

ACT-GFX CANADA, INC.

ADS BAY AREA, INC.

By:

By:

Name:

Name:

Title:

Title:

ADSI TELECOMM SERVICES, INC.

ADSI TELECOMM SERVICES OF
MARYLAND, INC.

By:

By:

Name:

Name:

Title:

Title:

ADVANCED TELECOMM OF
MARYLAND, INC.

ADVANCED TELECOMM OF
PITTSBURGH

By:

By:

Name:

Name:

Title:

Title:

ADVANCED TELECOMMUNICATIONS, INC.

APPLIED DIGITAL ORACLE
PRACTICE, INC.

By:

By:

Name:

Name:

Title:

Title:

ARJANG, INC. 

BLUE STAR ELECTRONICS, INC.

By:

By:

Name:

Name:

Title:

Title:

BOSTEK, INC.

CYBERTECH STATION, INC.

By:

By:

Name:

Name:

Title:

Title:

ELITE COMPUTER SERVICES, INC.

INDEPENDENT ACQUISITION, INC.

By:

By:

Name:

Name:

Title:

Title:

INTELLESALE, INC.

MICRO COMPONENTS
INTERNATIONAL INCORPORATED

By:

By:

Name:

Name:

Title:

Title:

NEIRBOD CORP.

NORCOM RESOURCES
INCORPORATED

By:

By:

Name:

Name:

Title:

Title:

▇▇▇▇▇▇▇ RE-MARKETING, INC.

SERVICE TRANSPORT COMPANY

By:

By:

Name:

Name:

Title:

Title:

TELEDATA CONCEPTS, INC.

WYR, INC.

By:

By:

Name:

Name:

Title:

Title:

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