Updated 5/17: Nasdaq halted trading in shares of VeriChip-maker Applied Digital Solutions Friday morning, a day after TechTV reported that the Food and Drug Administration has launched a formal investigation into the company. Tune in tonight on "Tech Live" for more details on the controversy.

The stock exchange stopped Applied Digital Solutions trades at 9:25 a.m. Eastern, and trading will remain halted until the Florida-based company fully satisfies Nasdaq's request for additional information on the FDA probe into the implantable chip. The halt is related to TechTV's report about the federal investigation into the company and its VeriChip, a Nasdaq spokesman told reporters.

The probe centers on whether or not Applied Digital Solutions is marketing the controversial device as a "medical" lifesaver, or whether the chip is touted merely as an identification device, as the company assured FDA officials it would be.

"The agency is in the process of investigating the firm and documenting exactly what is being said, what is being printed, and what is being promoted," said Wally Pellerite, assistant to the director of the FDA Office of Compliance.

Reached late today, Applied Digital Solutions CEO Scott Silverman said, "We've received no formal notification that we're under investigation."

Silverman did say that Pellerite contacted the company last Friday, expressing concern over the way the chip and its capabilities were being portrayed by the media. Silverman said the company's consultants were working with "people much higher in the FDA" over these concerns, and continue to work with them today.

VeriChip's problem, according to Pellerite, is that the FDA was "very clear" in its response to an email from the company seeking FDA approval to sell its chip. At the time, the FDA responded -- informally according to Pellerite -- that as long as "no medical information" of any kind was encoded on the chip, and as long as the chip was not used to link to any kind of medical database, the company was free to go to market.

But instead, Pellerite said, Applied Digital Solutions issued statements saying that its chip had been given governmental approval and that the first implant would be scheduled for May 10.

The Jacobs family of Boca Raton, Florida, became the first family to receive the chip, an event covered by hordes of media from around the world.

Throughout the day, and indeed in the weeks leading up to the implant event, Applied Digital executives constantly reaffirmed the device's lifesaving capabilities since it was linked to a comprehensive database that could store megabytes of information. The implantable chip could essentially speak for a patient who may be unconscious or otherwise incapacitated by providing key medical information to doctors in an emergency situation.

During a demonstration after Leslie Jacobs was implanted, Applied Digital Solutions CTO Keith Bolton ran a scanner over her arm and the scanner displayed her name, her telephone number, and a condition known as "mitral valve prolapse," a heart murmur. This was information, Bolton said, that could be helpful to medical professionals "in the event that she can't speak, to save her life."

Bolton also scanned the arm of Derek Jacobs, Leslie's 14-year-old son, and the display showed Derek's medicine allergies.

According to Pellerite, "It would strongly suggest that [Applied Digital] has something that needs to be required to be regulated as a medical device."

Additionally, Pellerite told TechTV that Applied Digital may have violated the law when Bolton claimed, "There's more information that can be pulled out of the FDA-compliant database."

Pellerite said, "The firm made reference to using an FDA-compliant [database]. It is a violation of the law to use the FDA in such a way that it would be used to endorse your particular product."

The penalties for those violations can be stiff: up to $15,000 for each violation and up to $1 million for the company, as well as for each individual officer of the company.

"Once an identification number is retrieved from the chip, the user can use it to access any information -- without making the product a medical device," said David Hughes, vice president of Technology Sourcing International, a consultant to Applied Digital Solutions helping the company navigate the FDA approval process.

Upon hearing that the FDA expressed concerns about the chip being tied to a medical database, Hughes said, "That is contrary to my conversations with staff members at the FDA. Until we have an opportunity to discuss it with them more, I can't give you any information. The storing of medical data does not make it a medically regulated device."

Applied Digital's problems don't end there. The company has delayed the release of its quarterly financial results after the company's auditor, Grant Thornton, abruptly resigned Wednesday over an accounting dispute. Just three weeks ago, Applied Digital fired another accountant, PricewaterhouseCoopers.

The dispute with its latest auditor is significant since it dealt with a charge the auditor told the company it would have to take in the current quarter. That charge would lead to a quarterly loss that could be devastating to the company.

If Applied reports the charge, it will translate into a loss on the quarter. If Applied reports red ink on the quarter, it violates one of the terms of its restructured credit agreement with IBM Credit, which loaned the company $82.3 million. Applied Digital had violated the requirements of its IBM Credit loan last year.

According to the Miami Herald, Applied has since renegotiated terms and they are tough on the company. Its new IBM credit line carries a 17 percent annual interest rate. Applied must repay 40 percent of the loan plus about $14.45 million in interest on February 28, 2003. Interest and principal payments are suspended until then. If these amounts aren't repaid, the interest rates jump to 25 percent and then to 35 percent in 2004.

The new agreement doesn't allow Applied Digital to borrow from other lenders, and IBM won't advance more funds. If the terms are violated, IBM can demand immediate repayment, which will drive the company into bankruptcy. Applied Digital has not made a profit since the stock began trading publicly in 1996.

Since last Friday's implant, Applied Digital stock has lost 50 percent of its value.