10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number: 000-26020

DIGITAL ANGEL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	43-1641533
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)
490 Villaume Avenue, South St. Paul, Minnesota	55075
(Address of Principal Executive Offices)	(Zip Code)

(651) 455-1621
Registrant’s Telephone Number, Including Area Code

(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Outstanding at August 13, 2010
Common Stock, $.01 par value per share	28,147,703 shares

DIGITAL ANGEL CORPORATION

TABLE OF CONTENTS

	Page
PART I — Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets — As of June 30, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Operations — Three and six-months ended June 30, 2010 and 2009		4
Condensed Consolidated Statement of Changes in Stockholders’ Equity — Six-months ended June 30, 2010		6
Condensed Consolidated Statements of Cash Flows — Six-months ended June 30, 2010 and 2009		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 4T. Controls and Procedures		31
PART II — Other Information
Item 1. Legal Proceedings		32
Item 6. Exhibits		32
Signatures		33
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except par values)

	June 30,			December 31,
	2010			2009
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	2,903		$	1,895
Restricted cash		—			202
Accounts receivable, net of allowance for doubtful accounts of $847 and $906 at June 30, 2010 and December 31, 2009, respectively		6,160			6,370
Note receivable		99			450
Inventories		9,127			8,980
Other current assets		2,412			2,064
Current assets of discontinued operations		1,424			3,735
Total current assets		22,125			23,696
Property and equipment, net		6,068			6,998
Goodwill		3,332			3,343
Intangible assets, net		10,578			11,447
Note receivable		347			596
Other assets, net		791			599
Other assets of discontinued operations		—			365
Total Assets	$	43,241		$	47,044
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable and current maturities of long-term debt	$	6,671		$	9,297
Accounts payable		7,395			7,905
Advances from factors		1,229			1,240
Accrued expenses		6,291			6,580
Deferred gain on sale		1,600			960
Deferred revenue		762			548
Current liabilities of discontinued operations		2,345			2,734
Total current liabilities		26,293			29,264
Long-term debt and notes payable		226			392
Other liabilities		1,688			1,445
Total Liabilities		28,207			31,101
Commitments and contingencies:
Stockholders’ Equity:
Digital Angel Corporation stockholders’ equity:
Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil)		—			—
Common shares ($0.01 par value; shares authorized, 50,000; shares issued and outstanding, 28,087 and 23,479)		281			235
Additional paid-in capital		590,517			588,652
Accumulated deficit		(574,085	)		(571,203	)
Accumulated other comprehensive income (loss) — foreign currency translation		(1,666	)		(1,737	)
Total Digital Angel Corporation stockholders’ equity		15,047			15,947
Noncontrolling interest		(13	)		(4	)
Total Stockholders’ Equity		15,034			15,943
Total Liabilities and Stockholders’ Equity	$	43,241		$	47,044

See Notes to Condensed Consolidated Financial Statements.

3

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)

	For the Three-			For the Three-
	Months Ended			Months Ended
	June 30, 2010			June 30, 2009
Revenue	$	8,678		$	10,297
Cost of sales		5,465			6,354
Gross profit		3,213			3,943
Selling, general and administrative expenses		4,708			5,567
Research and development expenses		235			263
Restructuring, severance and separation expenses		1,074			313
Total operating expenses		6,017			6,143
Operating loss		(2,804	)		(2,200	)
Interest and other income (expense), net		117			114
Interest expense		(318	)		(541	)
Loss from continuing operations before income tax provision		(3,005	)		(2,627	)
Provision for income taxes		(5	)		(52	)
Loss from continuing operations		(3,010	)		(2,679	)
Income from discontinued operations, net of income taxes of nil and $7		1,240			1,786
Net loss		(1,770	)		(893	)
Loss attributable to the noncontrolling interest, continuing operations		16			230
Income attributable to the noncontrolling interest, discontinued operations		(18	)		(247	)
Net loss attributable to Digital Angel Corporation	$	(1,772	)	$	(910	)
(Loss) income per common share attributable to Digital Angel Corporation common stockholders — basic and diluted:
Loss from continuing operations, net of noncontrolling interest	$	(0.10	)	$	(0.14	)
Income from discontinued operations, net of noncontrolling interest		0.04			0.09
Net loss	$	(0.06	)	$	(0.05	)
Weighted average number of common shares outstanding — basic and diluted		28,002			17,857

See Notes to Condensed Consolidated Financial Statements.

4

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)

	For the Six-			For the Six-
	Months Ended			Months Ended
	June 30, 2010			June 30, 2009
Revenue	$	19,592		$	22,726
Cost of sales		11,805			14,067
Gross profit		7,787			8,659
Selling, general and administrative expenses		9,768			11,681
Research and development expenses		509			568
Restructuring, severance and separation expenses		1,215			313
Total operating expenses		11,492			12,562
Operating loss		(3,705	)		(3,903	)
Interest and other income (expense), net		(355	)		135
Interest expense		(671	)		(1,068	)
Loss from continuing operations before income tax provision		(4,731	)		(4,836	)
Provision for income taxes		(15	)		(56	)
Loss from continuing operations		(4,746	)		(4,892	)
Income from discontinued operations, net of income taxes of nil and $15		1,860			2,793
Net loss		(2,886	)		(2,099	)
Loss attributable to the noncontrolling interest, continuing operations		29			233
Income attributable to the noncontrolling interest, discontinued operations		(25	)		(262	)
Net loss attributable to Digital Angel Corporation	$	(2,882	)	$	(2,128	)
(Loss) income per common share attributable to Digital Angel Corporation common stockholders — basic and diluted:
Loss from continuing operations, net of noncontrolling interest	$	(0.18	)	$	(0.28	)
Income from discontinued operations, net of noncontrolling interest		0.07			0.16
Net loss	$	(0.11	)	$	(0.12	)
Weighted average number of common shares outstanding — basic and diluted		26,934			17,558

See Notes to Condensed Consolidated Financial Statements.

5

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
For the Six-Months Ended June 30, 2010
(in thousands)

	Digital Angel Corporation Shareholders
											Accumulated
					Additional						Other						Total
	Common Stock				Paid-In			Accumulated			Comprehensive			Noncontrolling			Stockholders’
	Number		Amount		Capital			Deficit			Income (Loss)			Interest			Equity
Balance, December 31, 2009		23,479	$	235	$	588,652		$	(571,203	)	$	(1,737	)	$	(4	)	$	15,943
Net loss		—		—		—			(2,882	)		—			(4	)		(2,886	)
Comprehensive loss:
Foreign currency translation		—		—		—			—			71			(5	)		66
Total comprehensive loss									(2,882	)		71			(9	)		(2,820	)
Issuance of common stock for services		815		8		458			—			—			—			466
Issuance of common stock and cash for price protection under the terms of a legal settlement		314		3		(43	)		—			—			—			(40	)
Sale of common stock		3,385		34		1,659			—			—			—			1,693
Sale of common stock under the Standby Equity Distribution Agreement		94		1		60			—			—			—			61
Financing fees		—		—		(165	)		—			—			—			(165	)
Share-based compensation		—		—		493			—			—			—			493
Stock issuance costs		—		—		(71	)		—			—			—			(71	)
Issuance of warrants		—		—		(526	)		—			—			—			(526	)
Balance, June 30, 2010		28,087	$	281	$	590,517		$	(574,085	)	$	(1,666	)	$	(13	)	$	15,034

See Notes to Condensed Consolidated Financial Statements.

6

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

	For the Six-			For the Six-
	Months Ended			Months Ended
	June 30, 2010			June 30, 2009
Cash Flows From Operating Activities
Net loss	$	(2,886	)	$	(2,099	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Income from discontinued operations		(1,860	)		(2,793	)
Equity compensation and administrative expenses		505			219
Depreciation and amortization		1,634			1,917
Amortization of debt discount and financing costs		297			300
Allowance for doubtful accounts		(59	)		100
Allowance for inventory excess and obsolescence		(245	)		—
Change in fair value of warrant liability		87			(4	)
Changes in assets and liabilities:
Decrease (increase) in restricted cash		172			(179	)
Decrease in accounts receivable		147			855
Increase in inventories		(298	)		(1,611	)
Decrease in other current assets		268			155
Increase in accounts payable, accrued expenses and other liabilities		139			1,974
Net cash provided by discontinued operations		3,794			2,882
Net Cash Provided by Operating Activities		1,695			1,716
Cash Flows From Investing Activities
Decrease in notes receivable		594			209
Increase in other assets		(291	)		(55	)
Payments for property and equipment		(11	)		(373	)
Net cash used in discontinued operations		(38	)		(145	)
Net Cash Provided by (Used in) Investing Activities		254			(364	)
Cash Flows From Financing Activities
Amounts paid on notes payable		(1,712	)		(2,194	)
Net payments of debt		(730	)		(974	)
Sale of common stock		1,693			127
Sale of common stock under the Standby Equity Distribution Agreement		61			—
Stock issuance costs		(71	)		(43	)
Financing costs		(165	)		—
Net cash provided by discontinued operations		—			864
Net Cash Used in Financing Activities		(924	)		(2,220	)
Net Increase (Decrease) In Cash and Cash Equivalents		1,025			(869	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(17	)		(4	)
Cash and Cash Equivalents — Beginning of Period		1,895			1,414
Cash and Cash Equivalents — End of Period	$	2,903		$	542

See Notes to Condensed Consolidated Financial Statements.

7

DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Digital Angel Corporation, a Delaware corporation, and its subsidiaries, (referred to together as, “Digital Angel,” “the Company,” “we,” “our,” and “us”) develops innovative identification and security products for consumer, commercial and government sectors worldwide. Our unique and often proprietary products provide identification and security for people, animals, food chains, government/military assets, and commercial assets. Included in this diverse product line are applications for radio frequency identification systems (“RFID”), global positioning systems (“GPS”) and satellite communications.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information in this report has not been audited. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair financial statement presentation have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in our Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2010.

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions that we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions about allowances for inventory obsolescence, bad debt reserves, lives of long-lived assets and intangible assets, assumptions used in Black-Scholes valuation models, estimates of the fair value of acquired assets and the determination of whether any impairment is to be recognized on long-lived and intangible assets, among others.

Currently, we operate in two business segments: Animal Identification, which comprises the operations of our wholly-owned subsidiary, Destron Fearing Corporation (“Destron”), and Emergency Identification, which comprises the operations of our 98.5%-owned subsidiary, Signature Industries Limited (“Signature”). Our segments are discussed in Note 6.

Discontinued Operations

In 2008, our board of directors decided to sell our wholly-owned subsidiary Thermo Life Energy Corp. (“Thermo Life”) and in 2009, decided to sell our ownership in Signature’s business unit, McMurdo Limited (“McMurdo”). During the first and second quarter of 2010, we sold our Control Products business unit (“Control Products Group”) and Clifford and Snell business unit (“Clifford & Snell”), respectively, both of which were divisions of Signature. The decisions to sell these businesses were made as part of management’s strategy to streamline our operations to focus our efforts on the Animal Identification segment. As a result, these businesses are presented in discontinued operations for all periods presented. Discontinued operations are more fully discussed in Note 9.

Related Parties

We have in the past entered into various related party transactions. Each of these transactions is described in Note 20 to our Annual Report on Form 10-K for the year ended December 31, 2009. During the six months ended June 30, 2010, we had the following related party transactions:

• On January 21, 2010, we sold the assets of Thermo Life to Ingo Stark, an employee and scientist at Thermo Life.

• On January 25, 2010, we sold our Control Products Group to Gary Lawrence, the former manager of the Control Products Group for the past several years, and another former employee.

Both sales are more fully discussed in Note 9.

8

DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

1. Basis of Presentation (continued)

Liquidity

We believe that we will be able to generate enough cash from operations, our existing revolving credit facility and factoring lines, the sales and potential sales of certain business units, and through other investing and financing sources to operate our business for the next twelve months ending June 30, 2011, including refinancing our revolving credit line, which matures on August 31, 2010 and a mortgage loan which matures on November 1, 2010.

Our goal is to achieve profitability and to generate positive cash flows from operations. During 2008, we restructured our Animal Identification segment which eliminated redundancies, improved gross margins and decreased expenses. In the second quarter of 2010, we determined to substantially complete the restructuring of our Corporate segment which will result in the elimination of our corporate structure and the associated costs of a separate headquarters and several management positions. Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing, and amount of investment required to bring new products on-line; revenue growth or decline; and potential acquisitions or divestitures. We have established a management plan to guide us in our goal of achieving profitability and improving positive cash flows from operations during 2010 although no assurance can be given that we will be successful in implementing the plan. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.

Our historical sources of liquidity have included proceeds from the sale of common stock and preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and proceeds from the exercise of warrants. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms. We will be required to generate funds to repay certain of our debt obligations during 2010. As of June 30, 2010, we had a working capital deficiency, which is primarily due to a number of our debt obligations becoming due or potentially due within the next twelve months. Specifically, these obligations include: (i) our revolving line of credit with Kallina Corporation (“Kallina”), which matures August 31, 2010; (ii) our mortgage note which matures November 1, 2010; (iii) our factoring lines; and (iv) our credit facility with Danske Bank, which are more fully discussed in Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. In addition, our debt obligation to Danske Bank is due on demand and we are required to make monthly principal payments as more fully discussed in Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Our factoring lines may also be amended or terminated at any time by the lenders. These conditions indicate that we may not be able to continue operations as a going concern, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

2. Impact of Recently Issued Accounting Standards

In February 2010, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on subsequent events that removed the requirement for an SEC registrant to disclose the date through which subsequent events are evaluated. It did not change the accounting for or disclosure of events that occur after the balance sheet date but before the financial statements are issued. This amendment was effective upon issuance.

3. Inventories

Inventories, net of writedowns for excess and obsolescence, consist of the following:

	June 30,		December 31,
	2010		2009
	(in thousands)
Raw materials	$	8,578	$	7,446
Work in process		195		738
Finished goods		354		796
Total inventory	$	9,127	$	8,980

We had $7.3 million and $7.1 million of our inventory at foreign locations at June 30, 2010 and December 31, 2009, respectively.

9

DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

4. Loss Per Share

A reconciliation of the numerator and denominator of basic and diluted (loss) income per share is provided as follows, in thousands, except per share amounts:

	Three-Months Ended						Six-Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Numerator for basic and diluted (loss) income per share attributable to Digital Angel Corporation:
Loss from continuing operations, net of noncontrolling interest	$	(2,994	)	$	(2,449	)	$	(4,717	)	$	(4,659	)
Income from discontinued operations, net of noncontrolling interest		1,222			1,539			1,835			2,531
Net loss attributable to common stockholders	$	(1,772	)	$	(910	)	$	(2,882	)	$	(2,128	)
Denominator for basic and diluted (loss) income per share attributable to Digital Angel Corporation:
Basic and diluted weighted-average shares outstanding (1)		28,002			17,857			26,934			17,558
(Loss) income per share attributable to Digital Angel Corporation — basic and diluted:
Continuing operations, net of noncontrolling interest	$	(0.10	)	$	(0.14	)	$	(0.18	)	$	(0.28	)
Discontinued operations, net of noncontrolling interest		0.04			0.09			0.07			0.16
Total — basic and diluted	$	(0.06	)	$	(0.05	)	$	(0.11	)	$	(0.12	)

⁽¹⁾ The following stock options and warrants outstanding as of June 30, 2010 and 2009 were not included in the computation of dilutive (loss) income per share because the net effect would have been anti-dilutive:

	June 30,
	2010		2009
	(in thousands)
Stock options		3,169		2,765
Warrants		1,577		314
Restricted stock		412		25
Total		5,158		3,104

5. Financings

We have entered into various financing agreements as more fully described in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009. The following are descriptions of our financing agreements that have been entered into, modified or terminated during 2010:

Senior Secured Term Notes

In August 2006, we entered into a term note (“2006 Note”) with Laurus Master Fund, Ltd. (“Laurus”) in the original principal amount of $13.5 million. The 2006 Note, as amended, accrued interest at a rate of 12% per annum, was payable monthly and had a maturity date of February 1, 2010. In August 2007, we entered into a $7.0 million term note (“2007 Note”) with Kallina Corporation (“Kallina”) pursuant to the terms of a Securities Purchase Agreement between us and Kallina. The 2007 Note, as amended, accrued interest at a rate of 12% per annum, was payable monthly and had a maturity date of February 1, 2010. In October 2008, we entered into a letter agreement with Laurus, Kallina, Valens U.S. SPV I, LLC, Valens Offshore SPV I Ltd., Valens Offshore SPV II Corp and PSource Structured Debt Limited (collectively referred to as the “Lenders”) and issued a $2.0 million senior secured, non-convertible term note (the “2008 Note”) to the Lenders which accrued interest at a rate equal to 12% and was due in full on February 1, 2010. The 2006 Note, the 2007 Note and the 2008 Note (collectively the “Debt Obligations”) allowed for optional redemption without a prepayment penalty.

At December 31, 2009, the remaining amount owed under our Debt Obligations was approximately $1.4 million. On February 1, 2010, the maturity date, we paid the final balance of approximately $1.4 million on the Debt Obligations.

10

DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

5. Financings (continued)

Registered Direct Offering

On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase price of the securities was $1.7 million in the aggregate. We entered into a placement agent agreement with Chardan Capital Markets, LLC (“Chardan”) relating to our registered direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds from the sale. The net proceeds from the sale, after deducting the placement agent fee and other offering expenses, were approximately $1.6 million and were used primarily to cover the repayment of the Debt Obligations discussed above.

The exercise price of the warrants is $0.50 per share, and the warrants may be immediately exercised and expire seven years from the date of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of its affiliates would beneficially own in excess of 4.9% of our common stock. If at the time of exercise, the registration statement relating to the shares underlying the warrants is not effective, or if the related prospectus is not available for use, then a holder of warrants may elect to exercise warrants using a net exercise (i.e., cashless exercise) mechanism. The warrants are entitled to “full-ratchet” anti-dilution protection. If we grant, issue or sell any options, convertible securities or rights to purchase stock, warrants, other securities or other property pro rata to the record holders of any class of the shares of common stock (the “Purchase Rights”), the holders of warrants are entitled to acquire such Purchase Rights which the holders could have acquired if the holders had held the number of shares of Common Stock acquirable upon the complete exercise of the holder’s warrants. We may not enter into certain fundamental transactions, such as a merger, consolidation, sale of substantially all assets, tender offer or exchange offer with respect to our common stock or reclassification of our common stock, unless the successor entity assumes in writing all of our obligations under the warrants. If certain fundamental transactions occur with respect to us or our “significant subsidiaries” as defined by Rule 1-02 of Regulation S-X, at the holder’s request within fifteen days after each fundamental transaction (“Holder Option Period”), we or the successor entity shall purchase the warrants from the holder for an amount equal to the value of the unexercised portion of the warrants that remain as of the time of such fundamental transaction based on the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. If such redemption option is not exercised by the holder during the Holding Option Period, we have an option to repurchase the unexercised portion of the warrants for the same amount within ten days after the expiration of the Holder Option Period. We have estimated the initial value of the warrants to be approximately $0.5 million based on the Black-Scholes valuation model and using the following assumptions: dividend yield of 0.0%; volatility of 124.14%; expected life of seven years; and a risk-free rate of 3.08%. The value of the warrants is reflected in our consolidated balance sheet as a liability and the warrants are required to be revalued at each reporting period. Based on the valuation at June 30, 2010, we recorded other income (expense) of approximately $0.1 million and $(0.1) million during the three and six-months ended June 30, 2010, respectively. We determined the value at June 30, 2010 to be approximately $0.6 million, based on the Black-Scholes valuation model and using the following assumptions: dividend yield of 0.0%; volatility of 127.4%; expected life of 6.5 years and a risk-free rate of 2.4%. Going forward, changes in the value of the warrants will result in additional increases or decreases in other income (expense) in our consolidated statement of operations.

Termination of Standby Equity Distribution Agreement

On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale of up to $5.0 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we registered 3.0 million shares of our common stock.

The SEDA required payment of a commitment fee to YA SPV in an amount equal to $125,000. We delivered approximately 88 thousand shares of common stock under the Registration Statement to pay the commitment fee. The price of the shares delivered was the average of the daily volume weighted average price for the three trading days after the date of the Agreement. We issued an aggregate of approximately 3.0 million shares of our common stock and received an aggregate of approximately $2.9 million in cash under the SEDA, of which 0.1 million shares of our common stock were issued and approximately $0.1 million in cash was received during the first quarter of 2010. In connection with the registered direct offering discussed above, we terminated the SEDA effective February 4, 2010.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

5. Financings (continued)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources from Continuing Operations,” which are presented below, for a discussion of the availability under our credit facilities.

6. Segment Information

Currently, we operate in two business segments: Animal Identification and Emergency Identification.

Animal Identification

Our Animal Identification segment develops, manufactures and markets visual and electronic identification tags and implantable RFID microchips, primarily for identification, tracking and location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide, and, more recently, for animal bio-sensing applications, such as temperature reading for companion pet and equine applications. Our Animal Identification segment’s proprietary products focus on pet identification and safeguarding and the positive identification and tracking of livestock and fish, which we believe are crucial for asset management and for disease control and food safety. This segment’s principal products are visual and electronic ear tags for livestock and implantable microchips and RFID scanners for the companion pet, livestock, horses, fish and wildlife industries.

Emergency Identification

Our Emergency Identification segment develops, manufactures and markets GPS and GPS-enabled products used for emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations. This segment’s principal products are GPS-enabled search and rescue equipment and intelligent communications products and services for telemetry, mobile data and radio communications applications, including our SARBE^TM brand, which serve military and commercial markets.

Corporate and Eliminations

Our Corporate and Eliminations category includes all amounts recognized upon consolidation of our subsidiaries, such as the elimination of inter-segment expenses, assets and liabilities. This category also includes certain selling, general and administrative expenses associated with corporate activities and interest expense and interest and other income associated with corporate activities and functions. Included in the Corporate and Eliminations category as of June 30, 2010 are approximately $0.8 million of liabilities related to companies that we sold or closed in 2001 and 2002. It is expected that these liabilities will be reversed during 2011 to 2016, as they will no longer be considered our legal obligations.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K, except that inter-segment sales and transfers are generally accounted for as if the sales or transfers were to third parties at current market prices. It is on this basis that management utilizes the financial information to assist in making internal operating decisions. We evaluate performance based on segment income as presented below.

The following is selected segment data as of and for the periods ended (in thousands):

										Total From
	Animal			Emergency			Corporate/			Continuing
	Identification			Identification			Eliminations			Operations
As of and For the Three-Months Ended June 30, 2010
Revenue	$	7,385		$	1,293		$	—		$	8,678
Operating income (loss)		295			(1,099	)		(2,000	)		(2,804	)
Income (loss) from continuing operations before income tax provision		16			(1,110	)		(1,911	)		(3,005	)
Total assets of continuing operations	$	23,608		$	12,807		$	5,402		$	41,817
As of and For the Three-Months Ended June 30, 2009
Revenue	$	7,499		$	2,798		$	—		$	10,297
Operating loss		(503	)		(676	)		(1,021	)		(2,200	)
Loss from continuing operations before income tax provision		(995	)		(691	)		(941	)		(2,627	)
Total assets of continuing operations	$	26,876		$	17,103		$	7,897		$	51,876

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

6. Segment Information (continued)

										Total From
	Animal			Emergency			Corporate/			Continuing
	Identification			Identification			Eliminations			Operations
As of and For the Six-Months Ended June 30, 2010
Revenue	$	16,375		$	3,217		$	—		$	19,592
Operating income (loss)		1,428			(2,001	)		(3,132	)		(3,705	)
Income (loss) from continuing operations before income tax provision		790			(2,023	)		(3,498	)		(4,731	)
Total assets of continuing operations	$	23,608		$	12,807		$	5,402		$	41,817
As of and For the Six-Months Ended June 30, 2009
Revenue	$	16,259		$	6,467		$	—		$	22,726
Operating loss		(666	)		(819	)		(2,418	)		(3,903	)
Loss from continuing operations before income tax provision		(1,709	)		(854	)		(2,273	)		(4,836	)
Total assets of continuing operations	$	26,876		$	17,103		$	7,897		$	51,876

7. Stock Options and Restricted Stock

Stock Option Plans

We and our subsidiaries have stock-based employee plans, which were outstanding as of December 31, 2009, and are more fully described in Note 11 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

During the second quarter of 2010, our shareholders approved an amendment to our 2003 Flexible Stock Plan to increase the number of authorized shares of common stock issuable under the plan from 2,875,000 to 4,000,000. No other changes were made.

During the three-months ended June 30, 2010 and 2009, we recorded approximately $0.1 million and $0.1 million, respectively, in compensation expense related to stock options granted to our employees. During the six-months ended June 30, 2010 and 2009, we recorded approximately $0.2 million and $0.2 million, respectively, in compensation expense related to stock options granted to our employees.

Stock Option Activity

There were no options granted during the six-months ended June 30, 2010 and 2009. A summary of our stock option activity as of June 30, 2010, and changes during the six-months then ended, is presented below (in thousands, except per share amounts):

			Weighted		Weighted
			Average		Average		Aggregate
	Stock		Exercise		Contractual		Intrinsic
	Options		Price		Term		Value
Outstanding at January 1, 2010		3,189	$	15.05
Granted		—		—
Exercised		—		—
Forfeited or expired		20		61.57
Outstanding at June 30, 2010		3,169		14.75		5.4	$	11	*
Vested or expected to vest at June 30, 2010		3,029	$	13.88		4.5	$	11	*
Exercisable at June 30, 2010		2,349	$	19.44		4.1	$	11	*

^* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of our common stock was $0.50 per share at June 30, 2010.

There were no option exercises during the six-months ended June 30, 2010 and 2009. At June 30, 2010, we had approximately 1.7 million options available for issuance in our plans. The total cash value of potential option exercises at June 30, 2010 was approximately $20 thousand and would have a de minimus dilution impact to our stockholders’ ownership.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

7. Stock Options and Restricted Stock (continued)

As of June 30, 2010, there was approximately $0.3 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under our plans. That cost is expected to be recognized over a weighted-average period of approximately 1.5 years. The total fair value of shares vested during the three-months ended June 30, 2010 and 2009, was approximately $34 thousand and $34 thousand, respectively. The total fair value of shares vested during the six-months ended June 30, 2010 and 2009, was approximately $0.2 million and $0.2 million, respectively.

A summary of the status of our nonvested stock options as of June 30, 2010 and changes during the six-months ended June 30, 2010, is presented below (in thousands, except per share amounts):

				Weighted
				Average
	Stock			Grant-Date
	Options			Fair Value
Nonvested at January 1, 2010		889		$	1.14
Granted		—			—
Vested		(70	)		2.84
Forfeited or expired		—			—
Nonvested at June 30, 2010		820		$	1.00

In addition to the stock options presented above, Thermo Life has approximately 4.4 million fully vested stock options outstanding. These stock options have no intrinsic value as of June 30, 2010 and Thermo Life’s two options plans have been discontinued with respect to future grants. On January 21, 2010, we sold the assets of Thermo Life as more fully discussed in Note 9.

Restricted Stock

In October 2009, we issued approximately 0.5 million shares of our restricted common stock to our directors and executive and senior management. We determined the value of the stock to be approximately $0.5 million based on the closing price of our stock on the date of the grant. The value of the restricted stock is being amortized as compensation expense over the vesting period which is three years. In January 2008, we issued approximately 31 thousand shares of our restricted common stock to our directors. We determined the value of the stock to be approximately $0.2 million based on the closing price of our stock on the date of the grant. The value of the restricted stock is being amortized as compensation expense over the vesting period which is five years. As a result, we recorded compensation expense of approximately $0.1 million and $10 thousand in the three-months ended June 30, 2010 and 2009, respectively, associated with such restricted stock grants. We recorded compensation expense of approximately $0.2 million and $22 thousand in the six-months ended June 30, 2010 and 2009, respectively, associated with such restricted stock grants.

8. Income Taxes

Differences in the effective income tax rates from the statutory federal income tax rate arise from state and foreign income taxes (benefits), net of federal tax effects, and the increase or reduction of valuation allowances related to net operating loss carryforwards, non-deductible intangible amortization associated with acquisitions and other deferred tax assets. At June 30, 2010, we had aggregate net operating loss carryforwards of approximately $276.0 million for income tax purposes that expire in various amounts from 2013 through 2029. Through December 28, 2007, Destron Fearing filed a separate federal income tax return. Of the aggregate U.S. net operating loss carryforwards of $266.1 million, $69.2 million relates to Destron Fearing and approximately $9.9 million relates to foreign loss carryforwards. These foreign net operating loss carryforwards are available to only offset future taxable income earned in the home country of the foreign entity. As of June 30, 2010, we have provided a valuation allowance to fully reserve our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax assets, primarily as a result of our recent losses and our current projections of future taxable U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not record a benefit related to our net U.S. losses during the six-months ended June 30, 2010 and 2009.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

8. Income Taxes (continued)

The amount of any benefit from our US net operating losses is dependent on: (1) our ability to generate future taxable income and (2) the unexpired amount of net operating loss carryforwards available to offset amounts payable on such taxable income. Any greater than fifty percent change in ownership under Internal Revenue Code (“IRC”) section 382 would place significant annual limitations on the use of such net operating losses to offset any future taxable income we may generate. Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate our ability to use a substantial portion of our net operating loss carryforwards to offset future taxable income. Based on our current cumulative three-year change in ownership, we exceeded the fifty percent threshold during 2009, thus approximately $192.7 million is limited under IRC section 382. As a result of this limitation, we estimate that approximately $18.7 million of these losses will be available to offset future taxable income, with the remainder being available to offset certain built-in gains, with both amounts subject to expiration provisions. Certain transactions could cause an additional ownership change in the future, including (a) additional issuances of shares of common stock by us or our subsidiaries or (b) acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or accumulate in the future five percent or more of our outstanding stock.

We, in combination with our subsidiary, Destron Fearing, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions in which we operate. In general, we and Destron Fearing are no longer subject to U.S. federal, state or local income tax examinations for years before 2005, Danish tax examinations for years before 2005 and U.K. tax examinations for years before 2001. At June 30, 2010, we had a liability for unrecognized tax benefits of $0.2 million primarily related to state income tax positions.

9. Discontinued Operations

We sold our ownership of McMurdo during the three-months ended December 31, 2009, our Control Products Group and Thermo Life during the three-months ended March 31, 2010 and Clifford & Snell during the three-months ended June 30, 2010. McMurdo is a manufacturer of emergency locator beacons; Thermo Life is a development company with patented rights to a thin-film thermoelectric generator; Control Products Group manufactures and distributes electronic relay switches for nuclear power applications; and Clifford & Snell manufactures electronic alarm sounders which are used to provide audible and or visual signals which alert personnel in hazardous areas, including the oil and petrochemical industry, and in the fire and security market. The decisions to sell these businesses were made as part of management’s strategy to streamline our operations to focus our efforts on the Animal Identification segment.

As a result of the board of directors’ decision and the subsequent sale of the operations of Thermo Life, McMurdo, Control Products Group and Clifford & Snell, the financial condition, results of operations and cash flows of each of these businesses have been reported as discontinued operations in our financial statements, and prior period information has been reclassified accordingly.

Sale of McMurdo

On November 2, 2009, we, together with Signature and McMurdo, entered into a definitive agreement to sell substantially all of the assets of Signature’s U.K.-based McMurdo business unit for $10.0 million in cash (“the McMurdo Purchase Agreement”). The purchaser was France-based Orolia Group (“Orolia”), a high-technology firm specializing in positioning, navigation and timing solutions for critical operations.

On November 20, 2009, pursuant to the terms of the McMurdo Purchase Agreement, we completed the sale of McMurdo. At closing, the parties amended the McMurdo Purchase Agreement to reduce the amount to be held in escrow to $1.0 million, to assign to the buyer the obligation for certain trade and vendor payables in existence at the time of closing, and to exclude certain product lines and related assets from the transaction (which product lines and assets were retained by Signature in exchange for a $250,000 credit against the purchase price). As a result of these amendments and the adjustment for actual inventory levels at the time of closing, the consideration paid at closing totaled approximately $9.6 million, of which approximately $8.8 million was paid to Signature in cash and approximately $0.8 million was retained by the buyer to pay the retained trade and vendor payables. The remaining $1.0 million of the proceeds will be held in escrow for 12 months. The proceeds were used to pay debt obligations and to fund working capital. Both the Company and Orolia guaranteed performance to the other, thus we have guaranteed Signature’s obligations under the McMurdo Purchase Agreement, on a fully subordinated basis to the senior notes.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

9. Discontinued Operations (continued)

In the fourth quarter of 2009, we recorded a gain on the sale of McMurdo of approximately $2.1 million, net of U.K. income taxes of $0.5 million. Upon the receipt of the funds held in escrow in connection with the McMurdo sale, if any, such proceeds will be recorded as additional gain on sale.

Sale of Thermo Life

On January 21, 2010, we entered into agreements with Ingo Stark, the employee and scientist who was chiefly responsible for the development of Thermo Life’s patented technology, to sell him the remaining assets of Thermo Life for nil and granting him a license on the patents in exchange for any future royalty payments on any products that become commercialized using the patents. Thermo Life has never generated any revenue and has been included in our discontinued operations since 2008. The loss on this transaction was not significant.

Sale of Control Products Group

On January 25, 2010, we entered into an agreement to sell substantially all of the assets of a small division known as the Control Products Group, a group within the Clifford & Snell business unit of Signature. The buyer, C&S Controls Limited, is a U.K. entity controlled by Gary Lawrence, the former manager of the Control Products Group for the past several years, and another former employee. The purchase price of £0.4 million (approximately $0.6 million) was represented, in part, by a non-interest bearing promissory note in the original principal amount of £0.4 million (approximately $0.6 million) issued from the buyer to Signature, which calls for monthly cash payments for approximately 5 years. As of June 30, 2010, approximately $20 thousand has been collected on the promissory note. The promissory note is secured but subordinated to a £30 thousand (approximately $45 thousand) working capital loan issued by a third party to the buyers. We have imputed interest at a rate of 8.0% per annum which represents a discount of £67 thousand (approximately $0.1 million) which will be amortized as additional interest income as cash is collected over the life of the promissory note. Based on the small scale of this entity, we believe that our treatment of this transaction as a sale for accounting purposes is not materially different from treatment that does not recognize the legal transfer of the ownership of the business. The gain on sale of approximately $0.1 million was deferred and will be recognized in the future when circumstances have changed sufficiently to so warrant.

Sale of Clifford & Snell

On April 30, 2010, we entered into a definitive agreement to sell the assets of Clifford & Snell for £2.3 million in cash (approximately $3.5 million at current exchange rates) (“the Clifford & Snell Purchase Agreement”). The purchaser was R.Stahl Ltd., a subsidiary of R.Stahl AG, a public company based in Waldenburg, Germany (“R.Stahl”). R.Stahl develops, manufactures and markets explosion-protection products worldwide for industrial customers. During the three-months ended March 31, 2010 and 2009, Clifford & Snell’s revenues were approximately £0.5 million (approximately $0.8 million) and approximately £1.0 million (approximately $1.4 million), respectively, and did not represent a significant disposition in accordance with Article 1 of Regulation S-X.

Clifford & Snell’s assets were sold for a cash consideration of £2.3 million (approximately $3.5 million). The purchase price was structured into two payments; £2.1 million (approximately $3.1 million) upon closing of the Clifford & Snell Purchase Agreement and £0.2 million (approximately $0.4 million) on October 30, 2010 following a six-month supply agreement during which R.Stahl will purchase products from Signature. On April 30, 2010, we received approximately £1.2 million (approximately $1.7 million) in net cash proceeds, which represented the first payment of £2.1 million less £0.3 million (approximately $0.5 million) of repayment on our Bibby invoice discounting line, £0.2 million (approximately $0.3 million) in closing and transaction costs and £0.4 million (approximately $0.6 million) which is to be held in escrow and paid out in two equal installments, net of any claims, on January 30, 2011 and October 30, 2011. Both the Company and R.Stahl AG issued guarantees of subsidiary performance to the other.

In the second quarter of 2010, we recorded a gain on the sale of Clifford & Snell of approximately £0.7 million (approximately $1.0 million). Upon the receipt of the funds held in escrow in connection with the Clifford & Snell sale, if any, such proceeds will be recorded as additional gain on sale.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

9. Discontinued Operations (continued)

The following table, in thousands, presents the results of operations of our discontinued operations, excluding any allocated or common overhead expenses, for the three and six-months ended June 30, 2010 and 2009:

	Three-Months Ended				Six-Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Revenue	$	1,360	$	6,925	$	2,771	$	12,302
Cost of sales		1,025		3,797		1,601		6,637
Gross profit		335		3,128		1,170		5,665
Selling, general and administrative expenses		118		1,665		480		3,087
Research and development expenses		—		184		—		344
Operating income		217		1,279		690		2,234
Interest and other income (expense), net		4		500		151		544
Gain on sale		1,019		—		1,019		—
Benefit for income taxes		—		7		—		15
Income from discontinued operations	$	1,240	$	1,786	$	1,860	$	2,793
Income from discontinued operations per common share — basic and diluted	$	0.04	$	0.10	$	0.07	$	0.16
Weighted average number of common shares outstanding — basic and diluted		28,002		17,857		26,934		17,558

The net (liabilities) assets of discontinued operations as of June 30, 2010 and December 31, 2009, which represented the net liabilities of McMurdo, Thermo Life, Control Products Group and Clifford & Snell, were comprised of the following (in thousands):

	June 30,			December 31,
	2010			2009
Cash	$	—		$	66
Accounts receivable		731			2,813
Inventory		693			856
Total current assets		1,424			3,735
Fixed assets		—			365
Total assets	$	1,424		$	4,100
Accounts payable	$	368		$	478
Accrued expenses and other current liabilities		1,977			2,256
Total liabilities	$	2,345		$	2,734
Net (liabilities) assets of discontinued operations	$	(921	)	$	1,366

10. Comprehensive Loss

Comprehensive loss represents all non-owner changes in preferred stock, common stock and other stockholders’ equity and consists of the following:

	Three-Months Ended						Six-Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(in thousands)
Net loss	$	(1,770	)	$	(893	)	$	(2,886	)	$	(2,099	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		159			1,234			66			1,111
Total comprehensive (loss) income	$	(1,611	)	$	341		$	(2,820	)	$	(988	)

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

10. Comprehensive Loss (continued)

The other comprehensive (loss) income during the three and six-months ended June 30, 2010 related to the change in the foreign currency exchange rates of the British Pound, which is Signature’s functional currency, and the Danish Krone, which is Destron Fearing A/S’s functional currency. Approximately nil and $42 thousand of the foreign currency translation adjustments related to the noncontrolling interest during the three-months ended June 30, 2010 and 2009, respectively. Approximately $5 thousand and $2 thousand of the foreign currency translation adjustments related to the noncontrolling interest during the six-months ended June 30, 2010 and 2009, respectively.

11. Supplemental Cash Flow Information

In the six-months ended June 30, 2010 and 2009, we had the following non-cash financing activities:

	Six-Months Ended June,
	2010		2009
	(in thousands)
Non-cash operating activities:
Issuance of shares of common stock for settlement of payables	$	454	$	—
Non-cash financing activities:
Issuance of shares of common stock for purchase of equipment	$	—	$	186
Cash paid for:
Interest	$	400	$	768
Taxes		15		42

12. Restructuring Accrual

During the second quarter of 2008, we initiated restructuring efforts to develop a strategic long-range plan focusing on restoring growth and profitability. With our restructuring, we sought to generate annual costs savings by exiting some costly facilities, outsourcing some manufacturing to lower cost suppliers, moving some operations to lower cost countries and reducing headcount. Our purpose in taking these actions was to increase profitability at the gross margin level, which management believes is necessary to competitively price products and achieve positive earnings. Our restructuring plan has been substantially implemented. Restructuring activities were recorded in accordance with the Exit or Disposal Cost Obligation Topic and the Compensation — Nonretirement Postemployment Benefit Topic of the Codification. During the three and six-months ended June 30, 2010, we recorded approximately $1.1 million and $1.2 million, respectively, of severance expenses. During the three and six-months ended June 30, 2009, we recorded approximately $0.2 million of severance expenses and $0.1 million of contract termination costs.

As of June 30, 2010, our restructuring accrual was as follows (in thousands):

				Lease and
	Severance			Building Costs			Total
Balance, January 1, 2010	$	303		$	232		$	535
Additional expense		1,215			—			1,215
Cash payments		(511	)		(128	)		(639	)
Balance, June 30, 2010	$	1,007		$	104		$	1,111

We anticipate that cash covering the remaining restructuring costs will be expended over the next eighteen months.

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DIGITAL ANGEL CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)

13. Legal Proceedings

Former Officer

On June 19, 2009, Michael Krawitz, a former executive officer of ours, filed a lawsuit (Michael Krawitz v. Digital Angel Corporation Case No. 09-80910-CIV-RYSKAMP/VITUNAC in the U.S. District Court for the Southern District of Florida) against us and several members of our board of directors. The lawsuit alleged a variety of claims relating to the amounts owed to him under his employment agreement. We filed a Motion to Dismiss all claims except the breach of contract claim, which we are prepared to defend on the merits. In December 2009, the federal court granted our Motion to Dismiss in its entirety and granted Mr. Krawitz leave to re-file his lawsuit in light of the court’s decision. In January 2010, Mr. Krawitz amended his Complaint to re-file the breach of contract claim against us and filed notice that he voluntarily dismissed all other claims against us and the members of our board of directors. On the remaining breach of contract claim, we intend to vigorously defend against his claims.

Additionally, we are party to various legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on our business, financial condition or results of operations.

19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes included in Item 1 of this report as well as our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

We currently operate in two business segments and engage in the following principal business activities:

Animal Identification — We develop, manufacture and market visual and radio frequency identification (“RFID”) products under the brand name Destron Fearing to customers worldwide. Destron Fearing products include visual and electronic tags and implantable RFID microchips that identify, track and locate animals, including bio-sensing chips that measure an animal’s temperature. These products promote recovery of lost pets, livestock herd management, environmental protection, and animal health while fulfilling the requirements of certain government regulations aimed at insuring the safety of food supplies throughout the world. Our Animal Identification business is headquartered in Minnesota, with direct and indirect, wholly and majority-owned subsidiaries located in Europe and South America.

Emergency Identification — We develop, manufacture and market emergency identification products that are enabled through global positioning system (“GPS”) technology, and sold worldwide under the brand name SARBE™. This segment’s principal products are search and rescue beacons that safeguard people and high-value assets utilizing intelligent communications and emergency messaging services for telemetry, mobile data and satellite radio communications. SARBE safety products are sold to government and military customers worldwide. The Emergency Identification segment includes our 98.5% owned subsidiary, Signature Industries Limited (“Signature”), which is headquartered in the United Kingdom.

Our business segments are more fully discussed in Note 6 to our accompanying condensed consolidated financial statements.

Summary of our Results of Continuing Operations

During the three-months ended June 30, 2010, as compared to the three-months ended June 30, 2009, our consolidated revenue decreased approximately $1.6 million, or 15.7%, to $8.7 million. The decrease is primarily due to our Emergency Identification segment discussed further below. Our consolidated operating loss was $2.8 million in the three-months ended June 30, 2010 as compared to $2.2 million in the three-months ended June 30, 2009. Excluding approximately $1.1 million of restructuring, severance and separation expenses, our consolidated operating loss was $1.7 million for the three-months ended June 30, 2010. Excluding approximately $0.3 million of restructuring, severance and separation expenses, our consolidated operating loss was $1.9 million for the three-months ended June 30, 2009. We primarily attribute the improvement in our consolidated operating loss to the decrease in selling, general and administrative expenses company wide. During the six-months ended June 30, 2010, as compared to the six-months ended June 30, 2009, our consolidated revenue decreased approximately $3.1 million, or 13.8%, to $19.6 million. The decrease in consolidated revenue is primarily due to our Emergency Identification segment discussed further below. Our consolidated operating loss was $3.7 million in the six-months ended June 30, 2010 as compared to $3.9 million in the six-months ended June 30, 2009. Excluding approximately $1.2 million of restructuring, severance and separation expenses, our consolidated operating loss was $2.5 million for the six-months ended June 30, 2010. Excluding approximately $0.3 million of restructuring, severance and separation expenses, our consolidated operating loss was $3.6 million for the six-months ended June 30, 2009. We primarily attribute the improvement to the decrease in selling, general and administrative expenses company wide.

Critical Accounting Policies

Our Annual Report on Form 10-K for the year ended December 31, 2009 contains further information regarding our critical accounting policies.

Impact of Recently Issued Accounting Standards

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 2 to our accompanying condensed consolidated financial statements.

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Consolidated Results of Operations

The following table summarizes our results of operations as a percentage of net operating revenues and is derived from the accompanying unaudited condensed consolidated statements of operations in Part I, Item 1 of this quarterly report (in thousands except percentages).

	For the Three-Months Ended						For the Six-Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		63.0			61.7			60.3			61.9
Gross profit		37.0			38.3			39.7			38.1
Selling, general and administrative expenses		54.2			54.1			49.9			51.4
Research and development expenses		2.7			2.6			2.5			2.5
Restructuring, severance and separation expenses		12.4			3.0			6.2			1.4
Operating loss		(32.3	)		(21.4	)		(18.9	)		(17.2	)
Interest and other (expense) income, net		1.4			1.1			(1.8	)		0.6
Interest expense		(3.7	)		(5.2	)		(3.4	)		(4.7	)
Loss from continuing operations before income tax provision		(34.6	)		(25.5	)		(24.1	)		(21.3	)
Provision for income taxes		(0.1	)		(0.5	)		(0.1	)		(0.2	)
Loss from continuing operations		(34.7	)		(26.0	)		(24.2	)		(21.5	)
Income from discontinued operations		14.3			17.3			9.5			12.3
Net loss		(20.4	)		(8.7	)		(14.7	)		(9.2	)
Loss attributable to the noncontrolling interest, continuing operations		0.2			2.3			0.1			1.0
Income attributable to the noncontrolling interest, discontinued operations		(0.2	)		(2.4	)		(0.1	)		(1.2	)
Net loss attributable to Digital Angel Corporation		(20.4	)%		(8.8	)%		(14.7	)%		(9.4	)%

Results of Operations by Segment

Three-Months Ended June 30, 2010 Compared to Three-Months Ended June 30, 2009

Animal Identification

	Three-Months Ended June 30,
			% of						% of
	2010		Revenue			2009			Revenue			Change
	(in thousands, except percentages)
Revenue	$	7,385		100.0	%	$	7,499			100.0	%	$	(114	)	(1.5	)%
Cost of sales		4,823		65.3			4,915			65.5			(92	)	(1.9	)
Gross profit		2,562		34.7			2,584			34.5			(22	)	(0.9	)
Selling, general and administrative expenses		2,018		27.3			2,511			33.5			(493	)	(19.6	)
Research and development expenses		235		3.2			263			3.5			(28	)	(10.6	)
Restructuring, severance and separation expenses		14		0.2			313			4.2			(299	)	(95.5	)
Operating income (loss)	$	295		4.0	%	$	(503	)		(6.7	)%	$	798		(158.6	)

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Revenues

Our Animal Identification segment’s revenue decreased approximately $0.1 million for the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease was primarily due to lower volumes of our fish chips sold compared to the first quarter of 2009 as well as decreased livestock sales in South America. The decrease was slightly offset by higher sales of our LifeChip product and electronic tag sales.

Gross Profit and Gross Profit Margin

Our Animal Identification segment’s gross profit decreased approximately $22 thousand in the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The slight decrease in gross profit was primarily due to lower sales levels. The gross profit margin remained relatively constant at 34.7% in the three-months ended June 30, 2010 as compared to 34.5% in the three-months ended June 30, 2009.

Selling, General and Administrative Expenses

Our Animal Identification segment’s selling, general and administrative expenses decreased approximately $0.5 million in the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease in selling, general and administrative expenses was primarily the result of decreased salaries, legal and accounting costs, depreciation and amortization and travel. Selling, general and administrative expenses as a percentage of revenue decreased from 33.5% to 27.3% primarily due to the items discussed above.

Research and Development Expenses

Our Animal Identification segment’s research and development expenses remained relatively constant during the three-months ended June 30, 2010 as compared to the three-months ended June 30, 2009. Research and development expenses relate to new product development associated with RFID microchips and related scanners.

Restructuring, Severance and Separation Expenses

Our Animal Identification segment’s restructuring, severance and separation expenses recorded in the second quarter of 2010 related to additional severance expenses and the expenses recorded in the second quarter of 2009 related to approximately $0.2 million of severance expenses and $0.1 million of contract termination costs.

Outlook and Trends

We anticipate our Animal Identification segment’s sales and profits to increase in 2010 as compared to 2009. We expect to achieve higher gross profits and to reduce selling, general and administrative expenses as we continue to control costs and implement cost savings measures. However, we are unable to quantify such possible operating efficiencies at this time.

We believe our investment in technology and product development, such as the rTag™ and BioThermo^®, will enable future growth for our Animal Identification segment. We also believe that we face favorable long-term market trends, such as the technology migration from visual to electronic identification and increased government regulation in the area of food safety and traceability.

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Emergency Identification

	Three-Months Ended June 30,
				% of						% of
	2010			Revenue			2009			Revenue			Change
	(in thousands, except percentages)
Revenue	$	1,293			100.0	%	$	2,798			100.0	%	$	(1,505	)	(53.8	)%
Cost of sales		642			49.6			1,439			51.4			(797	)	(55.4	)
Gross profit		651			50.4			1,359			48.6			(708	)	(52.1	)
Selling, general and administrative expenses		1,750			135.4			2,035			72.7			(285	)	(14.0	)
Operating loss	$	(1,099	)		(85.0	)%	$	(676	)		(24.1	)%	$	(423	)	(62.6	)

Revenues

Our Emergency Identification segment’s revenue decreased approximately $1.5 million in the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease in revenue was primarily due to a decrease in sales at our Sarbe division of approximately $1.4 million due to lower PELS and G2R sales resulting from the mandatory transition to higher satellite frequency beacons in the prior year. In addition, we experienced lower sales at our Communications division.

Gross Profit and Gross Profit Margin

Our Emergency Identification segment’s gross profit decreased approximately $0.7 million in the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease was primarily due to the related decrease in sales during the second quarter of 2010. Second quarter gross profit margin was 50.4% in the three-months ended June 30, 2010 as compared to 48.6% in the second quarter of 2009. Gross profit margin increased due to slightly higher margins at our Sarbe and Glasgow Communications divisions which were slightly offset by lower margins at our Aberdeen Communications division.

Selling, General and Administrative Expenses

Our Emergency Identification segment’s selling, general and administrative expenses decreased approximately $0.3 million in the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. This decrease in selling, general and administrative expenses relates primarily to a decrease in personnel costs as a result of the restructuring implemented in the prior year, lower audit and legal fees, decreased engineering consumables and lower marketing expenses. As a percentage of revenue, selling, general and administrative expenses increased to 135.4% in the three-months ended June 30, 2010 from 72.7% in the three-months ended June 30, 2009. The increase in selling, general and administrative expenses as a percentage of revenue resulted primarily from the decrease in sales discussed above.

Outlook and Trends

We anticipate our Emergency Identification segment’s sales to decrease in 2010 as compared to 2009 primarily due to a reduction in sales of Sarbe products. Prior year’s sales were positively impacted by the required transition to higher satellite frequency beacons. Some of this reduction may be offset by late year sales of products to the U.K. Ministry of Defense, which sales have been delayed as a result of extended testing and certification requirements. However, we expect operating profits to improve in 2010 as compared to 2009 primarily as a result of reduced asset impairments and selling, general and administrative expenses. However, we are unable to quantify such possible operating efficiencies at this time.

We believe that the future will bring both military and commercial market opportunities. However, going forward, we intend to focus on growing our Animal Identification business.

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Corporate/Eliminations

	Three-Months Ended June 30,
	2010			2009			Change
	(in thousands, except percentages)
Revenue	$	—		$	—		$	—			—	%
Cost of sales		—			—			—			—
Gross profit		—			—			—			—
Selling, general and administrative expenses		940			1,021			(81	)		(7.9	)
Restructuring, severance and separation expenses		1,060			—			1,060		NM
Operating loss	$	(2,000	)	$	(1,021	)	$	(979	)		(95.9	)

NM — Not meaningful

Selling, General and Administrative Expenses

Corporate’s selling, general and administrative expenses decreased approximately $0.1 million for the three-months ended June 30, 2010 compared to the three-months ended June 30, 2009. The decrease was primarily due to the result of a decrease in the bonus accrual and lower insurance expense during the second quarter of 2010. Slightly offsetting the decrease was an increase in printing and other professional service fees due to the annual shareholders meeting taking place in the second quarter of 2010 compared to the third quarter of 2009 as well as an increase in non-cash compensation expense resulting from the granting of options and restricted stock to certain executives and management in October 2009.

Restructuring, Severance and Separation Expenses

Corporate’s severance and separation expenses in the three-months ended June 30, 2010 related to the accrual of costs associated with certain headcount reductions.

Consolidated

Interest and Other Income (Expense), Net

Interest and other income (expense) was approximately $0.1 million in the three-months ended June 30, 2010 compared to $0.1 million in the three-months ended June 30, 2009. The income in the three-months ended June 30, 2010 was due to recording income of approximately $0.1 million as a result of revaluing our outstanding warrants in accordance with the Contracts in Entity’s Own Equity Subtopic of the Derivatives and Hedging Topic of the Codification. The income in the three-months ended June 30, 2009 resulted from royalty payments received by our Animal Identification segment.

Interest Expense

Interest expense was $0.3 million and $0.5 million for the three-months ended June 30, 2010 and 2009, respectively. The decrease was primarily due to the final payment of $1.4 million of our Term Debt Obligations with Laurus and affiliates on February 1, 2010.

Income Taxes

We had an income tax provision of $5 thousand for the three-months ended June 30, 2010 compared to a provision of $52 thousand in the same period of 2009. We have recorded certain state and foreign income taxes during the three-months ended June 30, 2010 and 2009. Differences in the effective income tax rates from the statutory federal income tax rate arise from state taxes (benefits) net of federal tax effects, and the increase or reduction of valuation allowances related to net operating loss carry forwards, non-deductible intangible amortization associated with acquisitions and other deferred tax assets. As of June 30, 2010, we have provided a valuation allowance to fully reserve our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax assets, primarily as a result of our recent losses and our current projections of future taxable U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not record a benefit related to our net U.S. losses during the three-months ended June 30, 2010.

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Loss from Continuing Operations

During the three-months ended June 30, 2010 and 2009, we reported a loss from continuing operations of approximately $3.0 million and $2.7 million, respectively. The increase in the loss for the three-months ended June 30, 2010 compared to June 30, 2009 relates primarily to the decrease in gross margin at our Emergency Identification segment and increase in restructuring, severance and separation expenses. These increases were slightly offset by the company-wide reduction in selling, general and administrative expenses. Each of these items is more fully discussed above in the context of the appropriate segment.

Six-Months Ended June 30, 2010 Compared to Six-Months Ended June 30, 2009

Animal Identification

	Six-Months Ended June 30,
			% of						% of
	2010		Revenue			2009			Revenue			Change
	(in thousands, except percentages)
Revenue	$	16,375		100.0	%	$	16,259			100.0	%	$	116		0.7	%
Cost of sales		10,169		62.1			10,896			67.0			(727	)	(6.7	)
Gross profit		6,206		37.9			5,363			33.0			843		15.7
Selling, general and administrative expenses		4,255		26.0			5,148			31.7			(893	)	(17.3	)
Research and development expenses		509		3.1			568			3.5			(59	)	(10.4	)
Restructuring, severance and separation expenses		14		0.1			313			1.9			(299	)	(95.5	)
Operating income (loss)	$	1,428		8.7	%	$	(666	)		(4.1	)%	$	2,094		(314.9	)

Revenues

Our Animal Identification segment’s revenue increased approximately $0.1 million for the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The increase was primarily due to higher sales of our LifeChip product and electronic tags. The increase was slightly offset by lower fish and wildlife sales compared to the prior year as well as decreased sales in South America primarily due to a lower volume of sales in Argentina.

Gross Profit and Gross Profit Margin

Our Animal Identification segment’s gross profit increased approximately $0.8 million in the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The increase in gross profit was primarily due to lower material costs for companion animal transponders and readers as well as lower overhead costs relating to decreased salaries and brokerage, slightly offset by an increase in inbound freight costs. The gross profit margin increased to 37.9% in the six-months ended June 30, 2010 as compared to 33.0% in the six-months ended June 30, 2009. We primarily attribute the increase in gross profit margin to the items discussed above. Gross profit margin may vary period-to-period because of changes in the product mix and in the ratio of fixed and variable costs.

Selling, General and Administrative Expenses

Our Animal Identification segment’s selling, general and administrative expenses decreased approximately $0.9 million in the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease in selling, general and administrative expenses was primarily the result of decreased salaries, legal and accounting costs, depreciation and amortization and travel. Selling, general and administrative expenses as a percentage of revenue decreased from 31.7% to 26.0% primarily due to the decrease in the aforementioned expenses.

Research and Development Expenses

Our Animal Identification segment’s research and development expenses remained relatively constant during the six-months ended June 30, 2010 as compared to the six-months ended June 30, 2009. Research and development expenses relate to new product development associated with RFID microchips and related scanners.

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Restructuring, Severance and Separation Expenses

Our Animal Identification segment’s restructuring, severance and separation expenses recorded in the six-months ended June 30, 2010 related to severance expenses and the expenses recorded in the six-months ended June 30, 2009 related to severance expenses of $0.2 million and $0.1 million of contract termination costs at the St. Paul, Minnesota location.

Emergency Identification

	Six-Months Ended June 30,
				% of						% of
	2010			Revenue			2009			Revenue			Change
	(in thousands, except percentages)
Revenue	$	3,217			100.0	%	$	6,467			100.0	%	$	(3,250	)	(50.3	)%
Cost of sales		1,636			50.9			3,171			49.0			(1,535	)	(48.4	)
Gross profit		1,581			49.1			3,296			51.0			(1,715	)	(52.0	)
Selling, general and administrative expenses		3,582			111.3			4,115			63.6			(533	)	(13.0	)
Operating loss	$	(2,001	)		(62.2	)%	$	(819	)		(12.6	)%	$	(1,182	)	144.3

Revenues

Our Emergency Identification segment’s revenue decreased approximately $3.3 million in the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease in revenue was primarily due to a decrease in sales at our Sarbe division of approximately $2.8 million due to lower PELS and G2R sales as well as decreased sales to the U.S. Air Force. The Sarbe product sales decrease was primarily related to the mandatory transition to higher satellite frequency beacons in the prior year. In addition, we experienced lower sales at our Communications division due to market conditions.

Gross Profit and Gross Profit Margin

Our Emergency Identification segment’s gross profit decreased approximately $1.7 million in the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease was primarily due to the related decrease in sales during the six-months ended June 30, 2010. The gross profit margin was 49.1% in the six-months ended June 30, 2010 as compared to 51.0% in six-months ended June 30, 2009. Gross profit margin decreased primarily due to the write off of approximately $0.1 million of costs associated with a U.S. Air Force contract which was slightly offset by higher margins at our Sarbe division.

Selling, General and Administrative Expenses

Our Emergency Identification segment’s selling, general and administrative expenses decreased approximately $0.5 million in the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. This decrease in selling, general and administrative expenses relates primarily to a decrease in personnel costs as a result of the restructuring implemented in the prior year. In addition, there were decreases in engineering consumables, advertising costs as well as audit and legal fees. As a percentage of revenue, selling, general and administrative expenses increased to 111.3% in the six-months ended June 30, 2010 from 63.6% in the six-months ended June 30, 2009. The increase in selling, general and administrative expenses as a percentage of revenue resulted primarily from the decrease in sales as discussed above.

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Corporate/Eliminations

	Six-Months Ended June 30,
	2010			2009			Change
	(in thousands, except percentages)
Revenue	$	—		$	—		$	—			—	%
Cost of sales		—			—			—			—
Gross profit		—			—			—			—
Selling, general and administrative expenses		1,931			2,418			(487	)		(20.1	)
Restructuring, severance and separation expenses		1,201			—			1,201		NM
Operating loss	$	(3,132	)	$	(2,418	)	$	(714	)		(29.5	)

NM — Not meaningful

Selling, General and Administrative Expenses

Corporate’s selling, general and administrative expenses decreased approximately $0.5 million for the six-months ended June 30, 2010 compared to the six-months ended June 30, 2009. The decrease was primarily due to the result of a decrease in the bonus accrual, lower insurance expense and accounting fees during the six-months ended June 30, 2010. Slightly offsetting the decrease was an increase in legal fees, consulting expenses, printing fees due to the annual shareholders meeting taking place in the second quarter of 2010 compared to the third quarter of 2009 as well as an increase in non-cash compensation expense resulting from the granting of options and restricted stock to certain executives and management in October 2009.

Restructuring, Severance and Separation Expenses

Corporate’s severance and separation expenses in the six-months ended June 30, 2010 related to the accrual of costs associated with certain headcount reductions.

Consolidated

Interest and Other Income (Expense), Net

Interest and other income (expense) was approximately $(0.4) million in the six-months ended June 30, 2010 compared to $0.1 million in the six-months ended June 30, 2009. The expense in the six-months ended June 30, 2010 was due to recording an expense of approximately $0.1 million as a result of revaluing our outstanding warrants in accordance with the Contracts in Entity’s Own Equity Subtopic of the Derivatives and Hedging Topic of the Codification. We also recorded approximately $0.2 million of other expense due to the write off of the discounted portion of a note receivable during the first quarter of 2010. The income in the six-months ended June 30, 2009 resulted from royalty payments received by our Animal Identification segment.

Interest Expense

Interest expense was $0.7 million and $1.1 million for the six-months ended June 30, 2010 and 2009, respectively. The decrease was primarily due to final payment of $1.4 million of our Term Debt Obligations with Laurus and affiliates on February 1, 2010.

Income Taxes

We had an income tax provision of $15 thousand for the six-months ended June 30, 2010 compared to a provision of $56 thousand in the same period of 2009. We have recorded certain state and foreign income taxes during the six-months ended June 30, 2010 and 2009. Differences in the effective income tax rates from the statutory federal income tax rate arise from state taxes (benefits) net of federal tax effects, and the increase or reduction of valuation allowances related to net operating loss carry forwards, non-deductible intangible amortization associated with acquisitions and other deferred tax assets. As of June 30, 2010, we have provided a valuation allowance to fully reserve our U.S. net operating loss carryforwards and our other existing U.S. net deferred tax assets, primarily as a result of our recent losses and our current projections of future taxable U.S. income. As a result of fully reserving our U.S. deferred tax assets, we did not record a benefit related to our net U.S. losses during the six-months ended June 30, 2010.

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Loss from Continuing Operations

During the six-months ended June 30, 2010 and 2009, we reported a loss from continuing operations of approximately $4.7 million and $4.9 million, respectively. The decrease in the loss for the six-months ended June 30, 2010 compared to June 30, 2009 relates primarily to the slight increase in gross margin at our Animal Identification segment as well as the company-wide reduction in selling, general and administrative expenses and interest expense. Slightly offsetting these changes was a decrease in gross margin at our Emergency Identification segment and an increase in restructuring, severance and separation expenses. Each of these items is more fully discussed above in the context of the appropriate segment.

Liquidity and Capital Resources from Continuing Operations

Cash and cash equivalents totaled $2.9 million and $1.9 million at June 30, 2010 and December 31, 2009, respectively.

Operating activities provided cash of $1.7 million during the six-months ended June 30, 2010 and 2009. During the six-months ended June 30, 2010, cash was primarily provided by discontinued operations. During the six-months ended June 30, 2009, cash was primarily provided by the increase in accounts payable and discontinued operations.

Adjustments to reconcile operating losses to net cash used in operating activities included the following:

• Accounts and unbilled receivables, net of allowance for doubtful accounts, decreased $0.2 million, or 3.3%, to $6.2 million at June 30, 2010, from $6.4 million at December 31, 2009. The decrease was primarily due to the payment on the U.S. Air Force contract. We anticipate our accounts receivable to increase going forward as we begin shipping on a large PELS contract.

• Inventories increased 1.6% to $9.1 million at June 30, 2010 from $9.0 million at December 31, 2009. The increase was principally due to our Emergency Identification segment related to general inventory level fluctuations. We expect our inventory levels to decrease due to the shipments on a large PELS contract.

• Accounts payable decreased $0.5 million, or 6.5%, to $7.4 million at June 30, 2010, from $7.9 million at December 31, 2009. Our accounts payable decreased due to the general timing of billings and payments. We anticipate our accounts payable to decrease during 2010.

• Accrued expenses decreased 4.4% to $6.3 million at June 30, 2010 from $6.6 million at December 31, 2009. Accrued expenses decreased at both our Animal Identification and Emergency Identification segments due to payment of accrued wages and legal and professional fees, respectively. The decrease was slightly offset by an increase in accrued severance expenses at our Corporate segment. We expect our accrued expenses to decrease in 2010 as we make payments for accrued bonuses, severance and other accrued liabilities.

Investing activities provided (used) cash of $0.3 million and $(0.4) million during the six-months ended June 30, 2010 and 2009, respectively. The amounts provided (used) in 2010 and 2009 were primarily from the decrease of notes receivable and payments for purchases of fixed assets, respectively.

Financing activities used cash of $0.9 million and $2.2 million during the six-months ended June 30, 2010 and 2009, respectively. In 2010, cash was primarily used for payments on debt which was slightly offset by the sale of common stock to two investors for approximately $1.7 million. The use of cash in 2009 was primarily due to payments on debt.

Financial Condition

As of June 30, 2010, we had a working capital deficit of approximately $4.2 million. However, included in current liabilities are approximately $0.8 million of liabilities associated with subsidiaries we closed in 2001 and 2002 and other liabilities that were not guaranteed by us and which we believe we will not be required to pay.

In addition to our cash on hand, at June 30, 2010 we had approximately $0.2 million available for borrowing under our revolving credit, invoice discount, factoring and line of credit agreements. These credit facilities consist of a (i) a $6.0 million revolving asset-based facility with Kallina; (ii) an invoice discounting agreement with Bibby; (iii) a factoring agreement with Nordisk Factoring A/S; and (iv) a line of credit with Danske Bank. Each of these facilities are more fully described in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

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As of June 30, 2010, the amount of borrowings and availability under these facilities was as follows:

	Outstanding		Availability
	(in thousands)
Revolving facility	$	2,156	$	85
Bibby invoice discounting agreement		833		62
Nordisk factoring agreement		395		—
Danske Bank line of credit		1,961		7
	$	5,345	$	154

Our credit agreements provide for certain events of default, including, among others (i) failure to pay principal and interest when due; (ii) violation of covenants; (iii) any material misrepresentation made in the note or a related agreements; (iv) bankruptcy or insolvency; and (v) a change of control as defined, among others. The covenants in our agreement include, among others, (i) the maintenance of listing or quotation of our common stock on a principal market; (ii) monthly, quarterly and annual financial reporting requirements; (iii) maintenance of adequate insurance; and (iv) approvals for certain events such as declaring dividends, and creating new indebtedness not specifically allowed under the terms of the agreements, among others. We can terminate the Dankse Bank line of credit and pay the outstanding balance, or Danske Bank may demand the credit line be settled immediately, at any given time, without prior notice. Our Nordisk factoring agreement provides that either party may terminate the agreement by giving a three month notice. During the term of notice, Nordisk is entitled to reduce the financing availability at its discretion. As of June 30, 2010, we were in compliance with the covenants under our credit agreements.

The foregoing discussion of our credit facilities and related agreements is a summary of the material terms of those agreements and is qualified in its entirety by reference to the terms and provisions of those agreements.

Liquidity

We believe that we will be able to generate enough cash from operations, our existing revolving credit facility and factoring lines, the sales and potential sales of certain business units, and through other investing and financing sources to operate our business for the next twelve months ending June 30, 2011, including refinancing our revolving credit line, which matures August 31, 2010 and a mortgage loan which matures November 1, 2010.

Our goal is to achieve profitability and to generate positive cash flows from operations. During 2008, we restructured our Animal Identification segment which eliminated redundancies, improved gross margins and decreased expenses. In the second quarter of 2010, we determined to substantially complete the restructuring of our Corporate segment which will result in the elimination of our corporate structure and the associated costs of a separate headquarters and several management positions. Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing, and amount of investment required to bring new products on-line; revenue growth or decline; and potential acquisitions or divestitures. We have established a management plan to guide us in our goal of achieving profitability and improving positive cash flows from operations during 2010 although no assurance can be given that we will be successful in implementing the plan. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.

Our historical sources of liquidity have included proceeds from the sale of common stock and preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and proceeds from the exercise of warrants. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms. We will be required to generate funds to repay certain of our debt obligations during 2010. As of June 30, 2010, we had a working capital deficiency, which is primarily due to a number of our debt obligations becoming due or potentially due within the next twelve months. Specifically, these obligations include: (i) our revolving line of credit with Kallina, which matures August 31, 2010; (ii) our mortgage note which matures November 1, 2010; (iii) our factoring lines; and (iv) our credit facility with Danske Bank, which are more fully discussed in Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. In addition, our debt obligation to Danske Bank is due on demand and we are required to make monthly principal payments as more fully discussed in Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Our factoring lines may also be amended or terminated at any time by the lenders. These conditions indicate that we may not be able to continue operations as a going concern, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

29

Outlook

We are constantly looking for ways to maximize stockholder value. As such, we are continually seeking operational efficiencies and synergies within our operating segments as well as evaluating acquisitions of businesses and customer bases which complement our operations and strategic focus. These strategic initiatives may include acquisitions, raising additional funds through debt or equity offerings, or the divestiture of business units that are not critical to our long-term strategy or other restructuring or rationalization of existing operations. We will continue to review all alternatives to ensure maximum appreciation of our stockholders’ investments. However, initiatives may not be found, or if found, they may not be on terms favorable to us.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements including, but not limited to:

• our growth strategies including, without limitation, our ability to deploy our products and services including rTag and Bio-Thermo™;

• anticipated trends in our business and demographics;

• the ability to hire and retain skilled personnel;

• relationships with and dependence on technological partners;

• our reliance on government contractors;

• uncertainties relating to customer plans and commitments;

• our future profitability and liquidity;

• our ability to refinance our revolving credit facility and mortgage note, both of which mature in 2010;

• our ability to maintain compliance with covenants under our credit facilities, including our ability to make principal and interest payments when due;

• our ability to obtain patents, enforce those patents, preserve trade secrets, and operate without infringing on the proprietary rights of third parties;

• governmental export and import policies, global trade policies, worldwide political stability and economic growth;

• expectations about the outcome of litigation and asserted claims;

• regulatory, competitive or other economic influences;

• our ability to successfully mitigate the risks associated with foreign operations;

• our ability to successfully implement our business strategy;

• our expectation that we can achieve profitability in the future;

• our ability to fund our operations;

• our expectations for the borrowings under the Danske Bank line of credit, the Nordisk Factoring Agreement as well as the Bibby invoice discounting agreement, which are payable on demand and/or could be terminated at any time without notice;

30

• our reliance on third-party dealers to successfully market and sell our products;

• our reliance on a single source of supply for certain of our implantable microchips;

• we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;

• our ability to comply with current and future regulations relating to our businesses;

• the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another party’s intellectual property rights. If any such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages;

• our ability to comply with the obligations in various registration rights and price protection agreements;

• the impact of new accounting pronouncements;

• our ability to establish and maintain proper and effective internal accounting and financial controls;

• our ability to maintain our listing on the Nasdaq Capital Market and the effect of a delisting;

• our ability to continue operations at the current level; and

• our actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk factors described under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on April 1, 2010 and in our other public filings, (ii) general economic, market or business conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us, (iv) competitive actions by other companies, (v) changes in laws, and (vi) other factors, many of which are beyond our control.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “could,” “would,” “anticipates,” “expects,” “attempt,” “intends,” “plans,” “hopes,” “believes,” “seeks,” “estimates” and similar expressions intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Some of these risks and uncertainties are beyond our control. Also, these forward-looking statements represent our estimates and assumptions only as of the date the statement was made.

The information in this quarterly report is as of June 30, 2010, or, where clearly indicated, as of the date of this filing. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We also may make additional disclosures in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the SEC. Please also note that we provide a cautionary discussion of risks and uncertainties under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. These are factors that could cause our actual results to differ materially from expected results and they should be reviewed carefully. Other factors besides those listed could also adversely affect us.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a - 15(e) and 240.15d - 15(e)) as of the end of the quarter ended June 30, 2010. Based on that evaluation, they have concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective in timely providing them with material information relating to us required to be disclosed in the reports we file or submit under the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurances of achieving our objectives and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in reaching that level of reasonable assurance.

31

Change in Internal Control Over Financial Reporting

There have not been any changes in our internal controls over financial reporting identified in connection with an evaluation thereof that occurred during our second fiscal quarter of 2010 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses, and therefore no corrective actions were taken.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 13 to the Condensed Consolidated Financial Statements in Part I, Item I is incorporated herein by reference.

ITEM 6. EXHIBITS

We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this report.

32

SIGNATURES

Pursuant to the requirements 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.

	DIGITAL ANGEL CORPORATION (Registrant)
Date: August 16, 2010	By:	/s/ Jason G. Prescott
		Name:	Jason G. Prescott
		Title:	Chief Financial Officer (Duly Authorized Officer)

33

INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
10.1	Position Elimination Letter to Lorraine Breece
10.2	Form of General Release and Waiver
31.1	Certification by Joseph J. Grillo, Chief Executive Officer and President, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)*
31.2	Certification by Jason G. Prescott, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* Filed herewith

34

EX-10.1

Exhibit 10.1

Digital Angel Corporation
490 Villaume Avenue
South St. Paul, MN 55075-2443 U.S.A
651-445-1621 Facsimile: 651-455-0217
www.digitalangel.com
Nasdaq. DIGA

June 30, 2010

Ms. Lorraine Breece

Dear Lorraine:

I deeply regret to inform you that, as part of the Company’s restructuring effort, the decision has been made to significantly downsize the corporate group. This letter serves as formal notification that your position will be eliminated and that you will be laid off from the Company effective June 30, 2010 (“Termination Date”).

To assist you in your employment transition, the Company offers you the benefits outlined below consistent with your agreement:

• Salary Severance: You will receive severance compensation equal to one year’s salary ($189,000) upon termination of your employment. Such severance shall be paid to you during the 12 months following your Termination Date in bi-weekly payments via the Company’s regular payroll system, which payments shall commence in the next regular payroll cycle following the expiration of the rescission periods in your General Release and Waiver Agreement.

• Bonus Severance: You will receive additional severance compensation equal to 60% of one year’s salary ($113,400), which may be paid to you in cash or in stock at the Company’s discretion no later than December 31, 2010.

• Accrued Bonuses: You will receive the accrued and unpaid bonuses from 2008 and 2009, in the total amount of $92,680, which may be paid to you in cash or in stock at the Company’s discretion no later than December 31, 2010.

• Stock Payment: In the event that the Company elects to pay the Bonus Severance and/or Accrued Bonuses described above in stock, the Company will withhold required taxes and other withholdings and will pay the net amount to you in the form of unrestricted Company stock. Any such stock payment shall be in freely tradeable shares of Company common stock. If the Company’s common stock is not, at the time of issuance, traded on an electronic exchange, then such payments will be made in cash. The Company will price protect the issued stock for a period of three months, as follows: on the three-month anniversary of the issuance of the shares, the value of any such shares that have not been sold and that are still held by you in your brokerage account will be compared to the value of those shares on the issuance date. Any shortfall in the aggregate value of such shares will be paid to you either in additional registered shares or in cash at the Company’s election.

• Health Benefits: During the 12-month severance period, the Company will reimburse to you 100% of your medical insurance premiums, less that amount equivalent to employee contributions for such coverage, for continued coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), provided that you do not have access to coverage from a new employer. After expiration of the severance period, you may continue COBRA coverage at your election and at your own cost (less mandated employer contributions).

• Stock Options: Upon termination of employment, all of your stock options that are vested as of your last date of employment will be exercisable by you for the full term of the option grant. Any unvested options or restricted stock will be treated in accordance with the terms of the agreement covering that issuance.

The severance compensation and benefits set forth above are subject to execution of the attached General Release and Waiver Agreement in accordance with its terms. All severance compensation and benefits are subject to applicable taxes and withholdings as may be required by law.

Finally, in the next regular payroll following your termination, you will be paid any amounts due to you for earned but unused PTO. You will also be permitted to keep your computer, monitor, and laptop (subject to IT clearing any company proprietary data).

We are very sorry that the needs of the business have resulted in the elimination of your position. We thank you for your service and professionalism and we wish you great success in your employment transition.

Best regards,

Joseph Grillo
President and CEO

EX-10.2

Exhibit 10.2

GENERAL RELEASE AND WAIVER AGREEMENT

This General Release and Waiver Agreement (“Agreement”) is entered into by and between the undersigned employee (“Employee”), and Digital Angel Corporation and its parent, partners, subsidiaries and affiliated companies (“Company”).

Employee acknowledges that his/her employment with the Company ends officially effective                     .

In consideration for the agreements made herein, the Employee will receive severance compensation and benefits as set forth in the Termination Letter provided to Employee dated                     .

In exchange for such severance compensation and benefits as described in the Termination Letter, Employee does hereby release and forever discharge COMPANY and its parent, and each of its and their subsidiaries, affiliates, agents, directors, officers, shareholders, employees, attorneys, successors, and assigns (“Releasees”) from any and all claims, litigation, demands and causes of action, known or unknown, fixed or contingent, including but not limited to any actions brought in tort or for breach of contract, or under any federal or state statute, law or regulation relating to employment, discrimination, retaliation or whistleblowing activity, which Employee may have or claim to have against Releasees arising from or connected with Employee’s employment by, or termination from COMPANY. Employee hereby promises not to file a lawsuit or claim for monetary damages to assert such claims, including but not limited to, claims under the Age Discrimination in Employment Act (“ADEA”), as amended by the Older Worker Benefit Protection Act; the Minnesota Human Rights Act (“MHRA”); the Americans with Disabilities Act; Title VII of the Civil Rights Act of 1964, as amended; or other federal, state, or local civil rights laws; claims for breach of contract, fraud or misrepresentation, defamation, intentional or negligent infliction of emotional distress, breach of covenant of good faith and fair dealing, promissory estoppel, negligence, wrongful termination of employment, and any other claims for unlawful employment practices. Notwithstanding any language in this Agreement to the contrary, Employee does not waive any claims which cannot be waived by law, including, without limitation, the right to file a charge with or participate in any investigation conducted by the Equal Employment Opportunity Commission (“EEOC”) or any state or local agency. Employee agrees to waive, however, his/her right to any monetary recovery should the EEOC or any state or local agency pursue any claims on Employee’s behalf.

The Parties agree that except as set forth in this Agreement, the signing of this Agreement does not affect Employee’s existing right to receive future benefits/payments under the Company’s welfare or other compensation plans according to the terms of the applicable plan.

In addition, the Parties further agree that this Agreement does not apply to or cover claims for unemployment or workers’ compensation benefits.

In accordance with the Older Workers Benefit Protection Act of 1990, Employee is aware of the following with respect to Employee’s release of any claims under the ADEA:

1.	Employee has the right to consult with an attorney before signing this Agreement;
2.	Employee has forty-five (45) days to consider this Agreement and Employee’s release of any ADEA claim; and
3.	Employee has seven (7) days after signing this Agreement to rescind Employee’s release as to any ADEA claim (“ADEA Rescission Period”).

Employee has fifteen (15) days after signing this Agreement to rescind Employee’s release as to any claim arising under the Minnesota Human Rights Act (“MHRA Rescission Period”). The ADEA Rescission Period and the MHRA Rescission Period are collectively referred to as the “Rescission Periods.” To be effective, rescission must be in writing, delivered to COMPANY at 490 Villaume Avenue, South St. Paul Minnesota 55075-2443 within the applicable rescission periods, or sent to COMPANY, at such address, by certified mail, return receipt requested, postmarked within the applicable rescission period.

This Agreement will not become effective until the expiration of the Rescission Periods. Benefits and payments conditioned upon the execution of this Agreement shall commence after the expiration of the Rescission Periods, provided Employee has not exercised his/her rescission rights as to the release of any ADEA or MHRA claim, as described herein, and continuing benefits and payments are expressly conditioned on Employee’s continued compliance with his/her obligations as set forth herein.

Employee agrees that he/she shall not use any confidential information or trade secrets acquired during Employee’s employment with COMPANY for any other business or employment without the prior written consent of COMPANY, and to return all COMPANY property and the original and all copies of COMPANY documents. Employee further agrees that he/she will not now or in the future disrupt, damage, impair or interfere with the business of COMPANY by disclosing confidential information or making disparaging public remarks about COMPANY or its employees, officers and directors. Employee hereby assigns to COMPANY all rights to any invention(s) he/she has developed or will develop relating at the time of conception or reduction to practice to COMPANY’s business or resulting from work Employee performed for COMPANY. Employee agrees that he/she will not disparage Employer so long as Employer does not disparage him/her. Any breach of this Agreement, including the provisions in this paragraph, by Employee shall result in the immediate termination of all benefits and payments provided for hereunder and shall give rise to COMPANY’s right to seek reimbursement of all sums paid hereunder and other remedies and damages provided by law.

The Parties hereby agree to submit any and all disputes regarding any aspect of this Agreement or any act which allegedly has or would violate any provision of this Agreement, including but not limited to, COMPANY’s decision not to agree to the cancellation of this Agreement, to final and binding arbitration.

It is understood and agreed that this is a compromise settlement of an existing or potential claim and that the furnishing by COMPANY of the consideration for this Agreement shall not be deemed or construed as an admission of liability or wrongdoing. The liability for any and all claims is expressly denied by COMPANY.

The provisions of this Agreement are severable, and if any part of it is found to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way.

Employee affirms and represents that he/she is entering into this Agreement freely and voluntarily, that he/she has received adequate opportunity to read and consider this Agreement, that he/she has been given the opportunity, whether exercised or not, to consult an attorney, and that Employee is not acting under any other inducement, or under any coercion, threat or duress. Employee acknowledges that the contents of this document have been explained to Employee and he/she understands the meaning and legal effect of this Agreement. Employee further acknowledges that the promises COMPANY has made in this Agreement constitute fair and adequate consideration for the promises, releases, and agreements made by Employee in this Agreement.

This Agreement represents the sole and entire agreement between COMPANY and Employee and supersedes all prior agreements, negotiations and discussions, whether written or oral, between the parties with respect to the subject matter covered hereby. There shall be no amendments to this Agreement.

This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota.

Digital Angel Corporation Employer	Employee
By:
Dated:	Dated:

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Joseph J. Grillo, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Digital Angel Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Joseph J. Grillo  

Joseph J. Grillo 

President and Chief Executive Officer 

Dated: August 16, 2010

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Jason G. Prescott, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Digital Angel Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Jason G. Prescott  

Jason G. Prescott 

Chief Financial Officer 

Dated: August 16, 2010

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Digital Angel Corporation (the “Company”) for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph J. Grillo, President and Chief Executive Officer of the Company, and I, Jason G. Prescott, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Joseph J. Grillo  

Joseph J. Grillo 

President and Chief Executive Officer 

Dated: August 16, 2010 

/s/ Jason G. Prescott  

Jason G. Prescott 

Chief Financial Officer 

Dated: August 16, 2010 

A signed original of this written statement required by Section 906 has been provided to Digital Angel Corporation and will be retained by Digital Angel Corporation and furnished to the Securities and Exchange Commission or its staff upon request.