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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission File Number: 000-29037

eMerge Interactive, Inc.
(Exact name of registrant as specified in its charter)

10305 102nd Terrace Sebastian, Florida 32958
(Address of principal executive offices)

(772) 581-9700
Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

The number of shares of the registrant’s common stock, $0.008 par value, outstanding as of November 8, 2002, was 38,729,068. There were 33,034,623 shares of Class A common stock outstanding and 5,694,445 shares of Class B common outstanding as of this date.

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eMerge Interactive, Inc.

FORM 10-Q QUARTERLY REPORT
(For Three Months Ended September 30, 2002)

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PART I. FINANCIAL INFORMATION

eMerge Interactive, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)

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See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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eMerge Interactive, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1)      Description of Business and Summary of Significant Accounting Policies

         (a)      Overview

         (b)      Basis of Presentation

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          (c)    Principles of Consolidation

         (d)      Revenue Recognition

         (e)      Impairment of Long-Lived Assets

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         (f)      Recent Accounting Pronouncements

(2)      Liquidity

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(3)      Restricted Cash

(4)      Inventories

(5)      Related Party Transactions

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(6)      Intangibles

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(7)      Lines of Credit

(8)      Stock Purchase Warrants

(9)      Impairment, Restructuring and Related Charges

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(10)      Discontinued Operations

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(11)      Segment Information

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(12)      Stock Plan

(13)      Subsequent Events

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         The following discussion of our financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included elsewhere in this report.

         During the quarter ended June 30, 2002, we announced that we were divesting our cattle operations and planning to either sell or dispose of these operations. Accordingly, operating results from continuing operations for all periods presented exclude the cattle operations that are held for sale and are classified as discontinued operations in the accompanying financial statements. The remaining cattle operations, which are in the process of being disposed, are considered held and used and are included in the operating results from continuing operations for all periods presented.

Results of Operations

Three months ended September 30, 2002 and September 30, 2001

Revenue

         Revenue decreased to $765,000 for the quarter ended September 30, 2002 from $6.3 million for the quarter ended September 30, 2001. Revenue from cattle sales decreased to $632,000 for the quarter ended September 30, 2002 from $6.1 million for the quarter ended September 30, 2001. This decrease reflects our decision to exit the cattle order-buying business. Revenue from other products and services decreased by 10% to $133,000 for the quarter ended September 30, 2002 from $148,000 for the quarter ended September 30, 2001. This decrease is due primarily to the completion of a three-year contract for benchmarking in early 2002, which has been partially offset by an increase in revenues from Cattlelog™.

Cost of Revenue

         Cost of revenue consists primarily of the direct cost to acquire cattle and cattle-related products. In addition, cost of revenue also includes the indirect overhead costs, such as support personnel, facilities costs, telecommunication charges and material purchases that are primarily associated with supporting our information management and individual-animal tracking products and services. Cost of revenue attributed to cattle sales decreased to $605,000 for the quarter ended September 30, 2002 from $6.0 million for the quarter ended September 30, 2001, corresponding with the decreased cattle sales activity. Cost of revenue attributed to other products and services decreased by 46% to $65,000 for the quarter ended September 30, 2002 from $121,000 for the quarter ended September 30, 2001. This decrease is due primarily to discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001, which contributed costs of approximately $53,000 in the three months ended September 30, 2001, due to the requirements to complete or exit existing contracts related to these products.

         We generated a gross profit of $95,000 and $138,000 for the quarters ended September 30, 2002 and 2001, respectively. The decrease in gross profit is due primarily to the decrease in cattle revenue and a comparable decrease in cost of goods, principally direct cost to acquire cattle.

Selling, General and Administrative Expenses

         Our selling, general and administrative expenses consist primarily of salaries and related benefit costs, insurance program charges, material and supply purchases, professional service fees, telephone, travel, consulting and advertising and media expenses. Selling, general and administrative expenses decreased 45% to $1.4 million for the quarter ended September 30, 2002 from $2.6 million for the quarter ended September 30, 2001. The decrease in selling, general and administrative expenses was primarily associated with the impacts of cost saving initiatives that began during the second quarter of 2001 and continued into 2002, which included several workforce reductions. We anticipate selling, general and administrative expenses to continue to be reduced as the impacts of prior period cost saving initiatives have become fully realized and our divestiture activity is completed.

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Technology and Development

         Our technology and development expenses consist primarily of salaries and related benefit costs, payments to outside consultants, maintenance charges and project material costs. Our expenses decreased by 12% to $824,000 for the quarter ended September 30, 2002 from $933,000 for the quarter ended September 30, 2001. The decrease was primarily associated with the impacts of cost saving initiatives that began during the second quarter of 2001 with additional initiatives taken through the second quarter of 2002, which included several workforce reductions. We anticipate that our technology and development expenses will remain at the current level into the foreseeable future.

Impairment, Restructuring and Related Charges

         In August 2002, we determined that we would discontinue our current interactive web site and replace it with a significantly less expensive website design. As part of this decision, we determined the remaining fair value of the capitalized software expenses incurred to establish the original website design and recorded an impairment of $812,000. In addition, we recorded an impairment of $44,000 to write-off the unamortized goodwill associated with our acquisition of Cyberstockyard, Inc.

Depreciation and Amortization

         Depreciation and amortization expense decreased 6% to $947,000 for the quarter ended September 30, 2002 from $1.0 million for the quarter ended September 30, 2001. The decrease is primarily due to the adoption of SFAS No. 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill amortization charges of $99,000 are included in the three months ended September 30, 2001 compared to $0 in the three months ended September 30, 2002. If we had not adopted SFAS No. 142 we would have recorded $80,000 in amortization expense for the current quarter. The decrease between actual depreciation and amortization for the period ended September 30, 2001 and the expense that would have been recorded for the period ended September 30, 2002 without SFAS 142 is due to the impairment of tangible and intangible assets recorded during 2001 and 2002.

Other Income and Expense

         Interest and other income, net increased to $1.3 million for the quarter ended September 30, 2002 from $9,000 for the quarter ended September 30, 2001. This increase was primarily due to miscellaneous income relating to the settlement of certain consulting and litigation fees, which had been previously accrued. In connection with this settlement, the Company paid $150,000 and has been released from any future obligations.

         Interest expense decreased to $9,000 for the quarter ended September 30, 2002 from $160,000 for the quarter ended September 30, 2001 as a result of the termination of the LOC on May 1, 2002. The interest expense for the current quarter was incurred on our capital lease obligations, which extend through December 2004.

         The impairment of investment in unconsolidated investee consists of a non-cash charge of $2.4 million to write-down our investment in Turnkey Computer Systems to its estimated fair value.

         Due to the losses incurred, we did not recognize income tax expense for the quarter ended September 30, 2002 or the quarter ended September 30, 2001.

Discontinued Operations

         During the quarter ended June 30, 2002, we sold Jordan Cattle Auction that was acquired in June 2000 for $1.2 million of cash and approximately $800,000 of working capital was returned. We also sold the tangible assets of RPT Land and Cattle Company, acquired in September 2000, for $400,000 of cash plus the return of 89,585 shares of eMerge Class A

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common stock. The shares were valued at the closing market price ($0.38 per share) on the date of sale and amounted to $34,042.

         During the quarter ended September 30, 2002, we sold the assets of Eastern Livestock, Inc., acquired in May 2000, for $200,000 of cash and a note receivable of $400,000 to be paid in two equal installments over the next two years plus the return of 1,000,000 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.34 per share) on the date of sale and amounted to $340,000. We also sold J&L Livestock Company, acquired in December 2000, for $100,000 of cash plus the return of 154,270 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.35 per share) on the date of sale and amounted to $53,994. Additionally, we sold the tangible assets of Ed Edens Farms, acquired in July 2000, for $300,000 of cash and Blue Grass Stockyards, acquired in January 2001, for $700,000 of cash. We also divested LeMaster Livestock, Inc., acquired in August 2000, in exchange for the release from an unconditional obligation to pay the two original principals of LeMaster Livestock total compensation of $750,000 over the next three years. Finally, we closed the Austin facility during the third quarter of 2002 and results of operations were classified as discontinued operations for the current quarter, as well as all previous quarters.

         The assets held for sale include only property and equipment. All associated goodwill was reduced to zero. There are no liabilities in the disposal group. The impairment loss, revenue and pretax profit (loss) related to assets held for sale amounted to:

         All assets held for sale are components of the cattle segment.

         In October 2002, the Company completed the sale of assets acquired from Mountain Plains Video Auction in August 2000 for a note receivable of $120,000 due in three equal installments in December 2002, 2003 and 2004. This sale was effective July 1, 2002. Pennell Cattle Company, which was acquired in January 2001, was shut down effective October 25, 2002.

         In addition to the assets held for sale, the Company plans to close the one remaining component of the cattle segment - Runnells Peters Cattle Company acquired in January 2001. This facility does not meet the criteria of held for sale and, accordingly, will be classified as held and used until the date of disposal. At that time, the results of operations will be classified as discontinued operations. The Company expects to complete the closure of this facility in the fourth quarter. The impairment loss is included in continuing operations and amounted to $1.7 million for the nine months ended September 30, 2002.

Nine months ended September 30, 2002 and September 30, 2001

Revenue

         Revenue decreased to $13.3 million for the nine months ended September 30, 2002 from $26.5 million for the nine months ended September 30, 2001. Revenue from cattle sales decreased to $12.9 million for the nine months ended September 30, 2002 from $26.0 million for the nine months ended September 30, 2001. This decrease reflects our decision to

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exit the cattle order-buying business. Revenue from other products and services decreased by 9% to $458,000 for the nine months ended September 30, 2002 from $502,000 for the nine months ended September 30, 2001. This decrease is due primarily to a decrease in revenues related to the discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001. In addition, we completed a three-year contract for benchmarking in early 2002, which has been partially offset by an increase in revenues from Cattlelog™.

Cost of Revenue

         Cost of revenue consists primarily of the direct cost to acquire cattle and cattle-related products. In addition, cost of revenue also includes the indirect overhead costs, such as support personnel, facilities costs, telecommunication charges and material purchases that are primarily associated with supporting our information management and individual-animal tracking products and services. Cost of revenue attributed to cattle sales decreased to $12.7 million for the nine months ended September 30, 2002 from $25.5 million for the nine months ended September 30, 2001, corresponding with the decreased cattle sales activity. Cost of revenue attributed to other products and services decreased by 63% to $288,000 for the nine months ended September 30, 2002 from $775,000 for the nine months ended September 30, 2001. This decrease is due primarily to the discontinuation of on-line product and service offerings such as Interactive Manager and our on-line storefront in the second quarter of 2001, which contributed costs of approximately $580,000 in the nine months ended September 30, 2001 due to the requirements to complete or exit existing contracts related to these products.

         We generated a gross profit of $333,000 and $271,000 for the nine months ended September 30, 2002 and 2001, respectively. The increase in gross profit is due primarily to the decrease in cost of revenues attributed to other products and services, discussed above.

Selling, General and Administrative Expenses

         Our selling, general and administrative expenses consist primarily of salaries and related benefit costs, insurance program charges, material and supply purchases, professional service fees, telephone, travel, consulting and advertising and media expenses. Selling, general and administrative expenses decreased 42% to $6.4 million for the nine months ended September 30, 2002 from $11.0 million for the nine months ended September 30, 2001. The decrease in selling, general and administrative expenses was primarily associated with the impacts of cost saving initiatives that began during the second quarter of 2001 and continued into 2002, which included several workforce reductions. This cost savings was partially offset by a provision against uncollectible receivables/cattle deposits of approximately $863,000 taken in the quarter ended June 30, 2002. Management has implemented significant restructuring efforts over the last year to resize the business to focus on the VerifEYE and supply chain management business models. As a result, the prior periods are not readily comparable to our current and future efforts. We anticipate selling, general and administrative expenses to continue to be reduced as the impact of our cost saving initiatives continue to become fully realized and our divestiture activity is completed.

Technology and Development

         Our technology and development expenses consist primarily of salaries and related benefit costs, payments to outside consultants, maintenance charges and project material costs. Our expenses decreased by 38% to $2.2 million for the nine months ended September 30, 2002 from $3.6 million for the nine months ended September 30, 2001. The decrease was primarily associated with the impacts of cost saving initiatives begun during the second quarter of 2001 and continued into 2002, which included workforce reductions. In addition, approximately $201,000 of involuntary termination costs and related charges were incurred in the three months ended March 31, 2001 and included in technology and development expenses. These charges, primarily related to employee severance and related benefit costs, were associated with a realignment of our corporate operations in connection with our decision to discontinue support of Nutricharge and infrared imaging products. Management has implemented significant restructuring efforts over the last year to resize the business to focus on the VerifEYE and supply chain management business models. The primary focus of our development team is our meat inspection system, VerifEYE. As a result, the prior periods are not readily comparable to our current and future efforts. We anticipate technology and development expenses will remain at the levels incurred for the three months ended September 30, 2002 for the foreseeable future, as we develop and commercialize new products, expand our offerings and adapt our technologies to

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new markets. However, the expenses for the year to date will continue to decrease as the impact of our cost saving initiatives continue to become fully realized.

Impairment, Restructuring and Related Charges

         In April 2002, we began the process of selling or disposing of our cattle operations. The operations we are selling have been evaluated to determine the fair value of the assets held for sale. Both the adjustment to fair value and the results of operations for these cattle operations have been recorded in discontinued operations. The operations we are disposing were also evaluated to determine the fair value of the assets and we recorded impairment of the associated goodwill in the amount of $1.8 million. In August 2002, we determined that we would discontinue our current interactive web site and replace it with a less expensive website design. As part of this decision, we determined the remaining fair value of the capitalized software expenses incurred to establish the original website design and recorded an impairment charge of $812,000. In addition, we recorded an impairment of $44,000 to write-off the unamortized goodwill associated with our acquisition of Cyberstockyard, Inc. The remaining $403,000 consists of severance and related outplacements benefits for the 16 employees who were terminated during the second quarter of 2002 and costs to exit a lease.

Depreciation and Amortization

         Depreciation and amortization expense decreased 24% to $3.0 million for the nine months ended September 30, 2002 from $3.9 million for the nine months ended September 30, 2001. The decrease is primarily due to the adoption of SFAS 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill amortization charges of $742,000 are included in the nine months ended September 30, 2001 compared to $0 in the nine months ended September 30, 2002. If we had not adopted SFAS 142 we would have recorded $240,000 in amortization expense for the current nine months. The decrease between actual depreciation and amortization for the nine month period ended September 30, 2001 and the expense that would have been recorded for the nine month period ended September 30, 2002 without SFAS 142 is due to the impairment of both tangible and intangible assets recorded during 2001 and 2002.

Other Income and Expense

         Interest and other income, net increased to $1.5 million for the nine months ended September 30, 2002 from $172,000 for the nine months ended September 30, 2001. This increase was primarily due to miscellaneous income relating to the settlement of certain consulting and litigation fees, which had been previously accrued. In connection with this settlement, the Company paid $150,000 and has been released from any future obligations.

         Interest expense increased to $436,000 for the nine months ended September 30, 2002 from $161,000 for the nine months ended September 30, 2001 as a result of increased borrowings under the LOC, which was terminated on May 1, 2002.

         The impairment of investment in unconsolidated investee consists of a non-cash charge of $2.4 million to write-down our investment in Turnkey Computer Systems to its estimated fair value.

         Due to the losses incurred, we did not recognize income tax expense for the nine months ended September 30, 2002 or the nine months ended September 30, 2001.

Discontinued Operations

         During the quarter ended June 30, 2002, we sold Jordan Cattle Auction that was acquired in June 2000 for $1.2 million of cash and approximately $800,000 of working capital was returned. We also sold the tangible assets of RPT Land and Cattle Company, acquired in September 2000, for $400,000 of cash plus the return of 89,585 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.38 per share) on the date of sale and amounted to $34,042.

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         During the quarter ended September 30, 2002, we sold the assets of Eastern Livestock, Inc., acquired in May 2000, for $200,000 of cash and a note receivable of $400,000 to be paid in two equal installments over the next two years plus the return of 1,000,000 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.34 per share) on the date of sale and amounted to $340,000. We also sold J&L Livestock Company, acquired in December 2000, for $100,000 of cash plus the return of 154,270 shares of eMerge Class A common stock. The shares were valued at the closing market price ($0.35 per share) on the date of sale and amounted to $53,994. Additionally, we sold the tangible assets of Ed Edens Farms, acquired in July 2000, for $300,000 of cash and Blue Grass Stockyards, acquired in January 2001, for $700,000 of cash. We also divested LeMaster Livestock, Inc., acquired in August 2000, in exchange for the release from an unconditional obligation to pay the two original principals of LeMaster Livestock total compensation of $750,000 over the next three years. Finally, we closed the Austin facility during the third quarter of 2002 and results of operations were classified as discontinued operations for the current quarter, as well as all previous quarters.

         The assets held for sale include only property and equipment. All associated goodwill was reduced to zero. There are no liabilities in the disposal group. The impairment loss, revenue and pretax profit (loss) related to assets held for sale amounted to:

         Included in the pretax loss for the nine months ended September 30, 2002 is a provision for bad debt of $443,000 and a provision for obsolete inventory of $144,000.

         All assets held for sale are components of the cattle segment.

         In October 2002, the Company completed the sale of assets acquired from Mountain Plains Video Auction in August 2000 for a note receivable of $120,000 due in three equal installments in December 2002, 2003 and 2004. This sale was effective July 1, 2002. Pennell Cattle Company, which was acquired in January 2001, was shut down effective October 25, 2002.

         In addition to the assets held for sale, the Company plans to close the one remaining component of the cattle segment - Runnells Peters Cattle Company acquired in January 2001. This facility does not meet the criteria of held for sale and, accordingly, will be classified as held and used until the date of disposal. At that time, the results of operations will be classified as discontinued operations. The Company expects to complete the closure of this facility in the fourth quarter. The impairment loss is included in continuing operations and amounted to $1.8 million for the nine months ended September 30, 2002.

Extraordinary Items

         On May 1, 2002, we terminated our $30 million revolving line of credit agreement from CIT and agreed to pay a termination fee of $425,000. As a result of the termination, we recorded a loss of $1.8 million in the second quarter of 2002 related to the write-off of unamortized financing costs and the termination fee.

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         On January 1, 2001, we adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, and recorded a charge to operations of $232,688, which is included as a cumulative effect of a change in accounting principle in the condensed consolidated financial statements.

Liquidity and Capital Resources

         As of September 30, 2002, our principle sources of liquidity are existing cash balances, working capital and beginning in 2003, sales from our VerifEYE product. We expect that our existing cash balances, working capital and divestiture activities will meet our cash flow needs for the near term. However, if we are unable to complete the divestitures and receive the expected return of working capital, we may need to seek additional sources of liquidity.

         Current restricted cash consists of cash invested in certificates of deposit with maturities of 180 days or less. These certificates of deposit are necessary to support our bond requirement with the U.S. Department of Agriculture Grain Inspection, Packers and Stockyards Administration to buy and sell cattle in the U.S. public market. These balances are considered current as of September 30, 2002 due to the divestiture of the cattle businesses and the resulting reduction in the Company’s bond requirement. As of October 25, 2002, the Company received $870,000 due to a release of the collateral supporting the trust fund agreement associated with the cattle order buying businesses. The balance of $280,000 is expected to be released by December 31, 2002.

         We continue to explore the need for other debt or equity financing alternatives to meet our working capital requirements. If additional funds are raised through the issuance of equity securities or through alternative debt financing that provides for the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, there can be no assurance that any additional funding will be available when needed, or that if available, such financing will include favorable terms. See also “Factors Affecting Our Business, Financial Condition and Results of Operations” below.

         As of September 30, 2002, we had cash and cash equivalents totaling $4.6 million compared to $18.7 million at December 31, 2001. As of September 30, 2002, none of our cash and cash equivalents were held by our leased facilities compared to $9.8 million as of December 31, 2001 and were classified as restricted. Our working capital balance as of September 30, 2002 was $9.0 million compared to $17.9 million as of December 31, 2001.

         As of September 30, 2002, we have a note receivable from Eastern Livestock in the amount of $3.2 million, which bears interest at the prime rate and is to be paid per the following schedule: (a) $500,000 to be paid on or before October 8, 2002; (b) $500,000 to be paid on or before December 2, 2002 and (c) the balance of $2.2 million plus accrued interest to be paid on or before December 31, 2002. The first payment of $500,000 was received on October 8, 2002. In addition, we have a receivable from Eastern Livestock in the amount of $400,000 to be paid in two equal installments on August 5, 2003 and August 5, 2004 in compliance with the asset purchase agreement for the assets of Eastern Livestock.

         We have had significant negative cash flows from operating activities for each fiscal and quarterly period to date. For the nine months ended September 30, 2002, net cash used in operating activities was $5.2 million and primarily consisted of net operating losses offset by decreases in trade accounts receivable, inventories, cattle deposits, accounts payable and accrued liabilities. The decrease in working capital requirements corresponded with a decrease in cattle sales activity and a reduction in the net operating loss.

         Net cash provided by investing activities was $1.5 million for the nine months ended September 30, 2002. Our investing activities include additional acquisition costs paid in compliance with earn-out agreements in the asset purchase agreements executed in January 2001 for Runnells-Peters Stockyards, and Pennell Order Buying for a combined cash payment of $688,000. In addition, we had capital expenditures of $536,000. These payments were offset by $2.7 million provided by the sale of assets associated with the divestiture of two of our cattle operations in the second quarter and four of our cattle operations in the third quarter of 2002. All of the cash used in investing activities was used by the owned operations.

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         Net cash used in financing activities was $10.4 million for the nine months ended September 30, 2002. Of the $10.4 million of net cash used in financing activities, $9.7 million was used by the leased operations, principally due to net repayments on the lines of credit held by these leased operations upon completion of the divestitures of these operations. In disposing of the leased cattle operations, we made a distribution of $513,00, representing the lessee/operators’ minority interest. In addition, we made $315,000 in capital lease payments related to the owned operations.

         Our future working capital requirements will depend on a variety of factors including our ability to successfully implement our current business plan, reduce our net cash outflow and manage the working capital required by seasonal fluctuations in cattle sales, which should have significantly less impact going forward as we complete the divestiture of the cattle operations.

Cattle Order Buying Lease and Operating Agreements

         During the fourth quarter of 2001, we finalized lease and operating agreements with three of our largest order buying businesses. Beginning with the effective date of each agreement, the cattle brokerage operations formerly conducted in wholly-owned facilities are conducted in entities owned solely by employees of eMerge. The lease and operating agreements were generally for a one year term, renewable, and provided for us to receive 70% of the net profits or losses (as defined in the agreements) and have certain control over operating activities while the lessee/operators were responsible for obtaining lines of credit for working capital purposes and were responsible for the day-to-day operations of the facilities, including payroll and operating expenses. Effective May 31, 2002, we divested the first of these facilities, the second was divested effective July 1, 2002 and the third was divested effective July 31, 2002.

Other Matters

         We are not engaged in off-balance sheet arrangements or trading activities that involve non-exchange traded contracts. During the nine months ended September 30, 2002, we engaged in a limited number of cattle futures contracts. As of September 30, 2002, we held $0 in open cattle future positions. We also engaged in both cattle purchase and sale transactions with certain related parties, primarily entities related to or owned by acquired companies. These sales were made on the same credit terms as our other customers and suppliers. We generally purchase from or sell to related parties in order to satisfy sales commitments or balance our inventory position. Purchase and sales prices are negotiated based on current market conditions in the cattle industry.

         Our stock price has been trading below $1 since February 11, 2002 and we are currently not in compliance with the NASDAQ’s listing requirements. We have moved from the NASDAQ National Market to the NASDAQ SmallCap Market, which extends our bid price grace period until March 23, 2003, if we are in compliance with certain listing criteria. This move to the SmallCap market has extended the bid price grace period and provides us with more flexibility and additional time to regain compliance and to execute our plan while being able to maintain NASDAQ listing status.

         An important point to make is that this transition does not impact the method in which our securities are bought and sold. Stock information is available through Yahoo, NASDAQ Online, etc. and the NASDAQ SmallCap listing in the newspaper.

Critical Accounting Policies

         Our critical accounting policies are as follows:

Revenue Recognition

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         We generate the majority of our revenue from cattle sales transactions where we act as either a principal or agent in the purchase and sale of cattle. For cattle sales transactions where we are the principal in the arrangement, we purchase cattle and take title from the seller, record the cattle as inventory until delivered to an accepted buyer and we are exposed to both the inventory and credit risk that results from the transaction. In these types of transactions, we record the gross revenue earned and related product costs incurred. For cattle sales transactions in which we act as an agent, we sell cattle consigned to us on a commission basis, where we are not subject to inventory and credit risk, or we sell cattle on a fee basis and we record the net revenue earned. For all other products and services offered by us, we act as a principal to the transaction and gross revenue and related product cost are recognized as products are shipped or services are provided.

         In December 1999, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 101 was followed by Staff Accounting Bulletin No. 101A, “Implementation Issues Related to SAB 101,” in March 2000 and by Staff Accounting Bulletin No. 101B, “Second Amendment: Revenue Recognition in Financial Statements” (“SAB 101B”), in June 2000. In October 2000, the SEC issued a Frequently Asked Questions and Answers document to provide additional guidance. These documents summarize certain views of the SEC regarding applying generally accepted accounting principles to revenue recognition in financial statements. The SEC has provided this guidance due, in part, to the large number of revenue recognition issues that registrants encounter. We believe that our current revenue recognition policies comply with SAB 101.

Impairment of Long-Lived Assets

         We account for long lived assets in accordance with the provisions of Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS No. 144), which we adopted as of January 1, 2002. This statement addresses the financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supercedes Statement of Financial Accounting Standard No. 121, “Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of” (SFAS No. 121), but retains the fundamental provision of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed by sale. SFAS No. 144 also supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”

         Under SFAS No. 144, long-lived assets to be disposed of by sale are classified as held for sale when six specific criteria are met. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Goodwill is included in an asset group when the asset group is or includes a reporting unit. The results of operations of a component of an entity that has either been disposed of or is classified as held for sale is reported in discontinued operations when the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. A component of an entity comprises operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes from the rest of an entity. In the period in which a component of an entity has been disposed of or is classified as held for sale, the income statement for current and prior periods report the result s of operations of the component, including any gain or loss resulting from adjustments to fair value, in discontinued operations.

         Assets not meeting the criteria of held for sale continue to be classified as held and used until they are disposed of. Impairment losses for assets held and used are measured as the amount by which the carrying amount of the long-lived asset (asset group) exceeds its fair value and are included in continuing operations.

Principles of Consolidation

         The consolidated financial statements include the financial statements of eMerge Interactive, Inc and its wholly owned subsidiaries. The consolidation also includes all activities with related entities, notwithstanding the lack of technical majority ownership, which is necessary to present fairly the financial position and results of operations of the Company,

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because of the existence of a parent-subsidiary relationship by means other than record ownership of voting stock. Specifically, the activities conducted by related party entities related to the lease and operating agreements are consolidated even thought we don’t have a 51% voting control (technical majority ownership). Rather, we have consolidated these activities due to the parent subsidiary relationship created by the lease and operating agreements. Minority interest reflects the lessee/operators’ equity interest in the activities under the lease and operating agreements consolidated in the financial statements. As of September 30, 2002, all lease and operating agreements are no longer effective and the related assets have been sold. Accordingly, the activities conducted by these businesses are no longer consolidated. All intercompany balances and transactions have been eliminated in consolidation.

Factors Affecting Our Business, Financial Condition and Results of Operations

Cautionary Statement

         This Quarterly Report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of predictive, future tense or forward-looking terminology, such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “will” and words of similar meaning. These statements include statements regarding, among other things, our electronic commerce strategy, acquisition and expansion strategy, product and service development, projected capital expenditures, liquidity and capital, development of additional revenue sources, expansion into new market segments, technological advancement, ability to develop “brand” awareness and the market acceptance of the Internet as a medium of commerce. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward-looking statements, including the acceptance by our customers of electronic commerce as a means of conducting business, our ability to grow revenue, our ability to increase margins, the impact of competition on pricing, general economic conditions, employee turnover, the impact of litigation and other factors. Other factors that may cause such a difference include, but are not limited to, those discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed elsewhere in this report and as set forth from time to time in our other public filings and public statements. Readers of this report are cautioned to consider these risks and uncertainties and to not place undue reliance on these forward-looking statements.

         In addition to the other information included in this report and our other public filings and releases, a discussion of factors affecting our business is included in our December 31, 2001 Form 10-K Annual Report and should be considered while evaluating our business, financial condition, results of operations and prospects.

         Our exposure to market risk relates to changes in interest rates and their potential impact on our investment portfolio and debt structure. We invest in marketable debt securities that meet high credit quality standards and limit our credit exposure to any one issue, issuer and type of investment. As of September 30, 2002, our investments consisted of $104,000 in cash equivalents with maturities of less than three months and $1.2 million in certificates of deposit with a maturity of less than six months. Due to the short-term, conservative nature of our investment portfolio, a 10% increase or decrease in interest rates would not have a material effect on our results of operations or the fair value of our portfolio. The impact on our future results of operations and the future value of our portfolio will depend largely on the gross amount of our investments.

         In the ordinary course of business, we enter into purchase and sale contracts for cattle that require delivery at a future date. We have also entered into a limited number of cattle futures transactions. The contract lives are generally less than six months. As of September 30, 2002, there was $0 in open positions.

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         Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

PART II. OTHER INFORMATION

         On January 18, 2002, we were named as a defendant in a lawsuit by Stonebridge Acquisition, Inc. in the County Court of Dallas County at Law No. 2, Dallas County, Texas. On August 22, 2002, we entered into a compromise settlement agreement in which we agreed to pay $150,000 and were released from any and all claims.

         There have been no material developments in any of the other legal proceedings previously reported.

(a)      Exhibits

(a)      Reports on Form 8-K

         There were no reports filed on Form 8-K for the quarter ended September 30, 2002.

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Certificate of Chief Executive Officer

I, David C. Warren, President, Chief Executive Officer and Director, certify that:

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Certificate of Chief Financial Officer

I, Juris Pagrabs, Executive Vice President and Chief Financial Officer, certify that:

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eMerge Interactive, Inc.

Index to Exhibits filed with Form 10-Q dated November 13, 2002