10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

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 incorporation or organization)	(I.R.S. Employer Identification No.)

490 Villaume Avenue
South Saint Paul, Minnesota 55075
(Address of principal executive offices, including zip code)

(651) 455-1621
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)	(Name of each exchange on which registered)
Common Stock, $0.01 par value	NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: Not applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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.

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a 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

At June 30, 2009, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $25.1 million, computed by reference to the price at which the stock was last sold on that date of $1.44 per share reported on the National Association of Securities Dealers Automated Quotation System.

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

Class	Outstanding at March 30, 2010
Common Stock, $.01 par value per share	27,576,381 shares

Documents Incorporated by Reference: Parts of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders which the Registrant intends to file with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2009, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described herein. If the Registrant does not file its Proxy Statement with the Commission on or before 120 days after the end of its 2009 fiscal year, the Registrant will file the required information in an amendment to this Annual Report on Form 10-K.

DIGITAL ANGEL CORPORATION
TABLE OF CONTENTS

Item	Description	Page
	PART I
1.	Business	3
1A.	Risk Factors	11
2.	Properties	17
3.	Legal Proceedings	17
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
8.	Financial Statements	32
9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	32
9A(T).	Controls and Procedures	32
	PART III
10.	Directors, Executive Officers and Corporate Governance	33
11.	Executive Compensation	33
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
13.	Certain Relationships and Related Transactions, and Director Independence	33
14.	Principal Accountant Fees and Services	33
	PART IV
15.	Exhibits and Financial Statements	33
	Signatures	34
Exhibit 10.81 Asset Sale and Purchase Agreement
Exhibit 21.1 List of Subsidiaries
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
Exhibit 31.1 302 Certificate of Chief Executive Officer
Exhibit 31.2 302 Certificate of Chief Financial Officer
Exhibit 32.1 906 Certificate of Chief Executive Officer
Exhibit 32.2 906 Certificate of Chief Financial Officer

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PART 1

ITEM 1. BUSINESS

Unless the context otherwise provides, when we refer to the “Company,” “we,” “Digital Angel,” or “us,” we are referring to Digital Angel Corporation and its subsidiaries (either wholly- or majority-owned).

Overview

As of December 31, 2009, our business operations consisted primarily of the operations of our wholly-owned subsidiary, Destron Fearing Corporation and its wholly-owned subsidiaries, which collectively we refer to in this Annual Report as Destron Fearing, and our 98.5% owned subsidiary, Signature Industries Limited (“Signature”). Currently we operate in two business segments: Animal Identification, which comprises the operations of Destron Fearing; and Emergency Identification, which comprises the operations of Signature.

We currently engage in the following principal business activities:

• Our Animal Identification segment develops, manufactures and markets visual and electronic identification tags and implantable radio frequency identification (“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 livestock applications; and

• Our Emergency Identification segment develops, manufactures and markets global position systems (“GPS”) and GPS-enabled products used for emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms.

Discontinued Operations

During the years ended December 31, 2009 and 2008, we sold several non-core businesses and we discontinued one business, Thermo Life Energy Corp. (“Thermo Life”), which was sold on January 21, 2010. On November 12, 2008, we sold all of the common stock that we owned in PositiveID Corporation, formerly, VeriChip Corporation, (“PSID”) (Nasdaq:PSID), which was approximately 45.6% of PSID’s then issued and outstanding shares of common stock. In addition, on November 20, 2009, we sold the assets and equity of one of Signature’s business units, McMurdo Limited (“McMurdo”). Accordingly, the financial results of these businesses are now classified as discontinued operations for all periods presented in this Annual Report. Our decision to sell/discontinue these businesses was a result of management’s strategy to streamline operations. Going forward, our strategy is to focus our efforts on the business operations of our Animal Identification segment. Discontinued operations are more fully discussed in Note 14 to our consolidated financial statements.

Internet Website

Our Internet website address is www.digitalangel.com. Our segments’ internet website addresses are: www.destronfearing.com and www.signatureindustries.com. The information on these websites is not incorporated by reference into this Annual Report on Form 10-K. We make available free of charge through our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to those reports and filings as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

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Effective April 20, 2007, we became a Delaware corporation. We initially incorporated in the state of Missouri on May 11, 1993. Currently, our principal executive offices are located at 490 Villaume Avenue, South Saint Paul, Minnesota 55075 (651-455-1621).

Recent Events

Notice of Nasdaq Delisting

On December 10, 2009, we received a letter from the Nasdaq Stock Market (the “Nasdaq”) indicating that we are not in compliance with Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, we have been provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that we are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Since December 10, 2009, our stock has traded below $1.00. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement based on the closing price of our common stock on March 31, 2010.

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Repayment of Existing Term Debt Obligations

On December 14, 2009, we, and certain of our subsidiaries, entered into an amendment to a letter agreement with Laurus Master Fund, Ltd. and certain of its affiliates, including, Kallina Corporation and LV Administrative Services, Inc., (the “Lenders”), to amend, among other things, the repayment schedule of all amounts owed pursuant to certain existing term debt obligations. Under the terms of the amended letter amendment, we were obligated to pay $3.8 million of the existing term debt obligations to the Lenders, of which $3.0 million was paid in cash (which included the November 2009 monthly payment) and $0.8 million was paid within three days of the date of the letter agreement through the issuance of approximately 1.4 million shares of our common stock in accordance with the terms of a previous 2008 agreement. After the prepayment, the balance of the existing debt obligations, which was approximately $1.4 million, was payable in full to the Lenders on or before the original maturity date of February 1, 2010. On February 1, 2010, the outstanding principal and interest due under the existing debt obligations were paid in full.

Registered Direct Offering and Sale of Common Stock and Warrants

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. 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. 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 replenish the funds used for the repayment of existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

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 payable 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 (“VWAP”) for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. In connection with the registered direct offering, we terminated the SEDA effective February 4, 2010.

Industry Overview

Our principal activities encompass the development and marketing of RFID and GPS-enabled identification and location products.

RFID technology continues to grow in its importance to the animal identification industry. RFID systems identify objects using radio frequency transmissions, typically achieved with communication between a microchip or tag and a scanner or reader. Historically, RFID has been used to identify objects in retail, transportation and logistics industries, as well as to identify and locate livestock and companion pets. Prior to the adoption of RFID, users identified and tracked objects manually as well as through the use of bar code technology. These solutions were limited because of the need for ongoing human intervention and the lack of instantaneous location capabilities. RFID technology possesses greater range, accuracy, speed and lower line-of-sight requirements than bar code technology.

Our RFID businesses focus on companion pet and equine identification and safeguarding, livestock/fish identification tracking and food safety and traceability (e.g., livestock tracking).

The basic components of an RFID system consist of:

• a “tag,” containing a microchip-equipped transponder, an antenna and a capacitor, attached to the item to be identified, located or tracked, which wirelessly transmits stored information to a receiver;

• one or more receivers, also referred to as “readers” or “scanners”, which are devices that read the tag by sending out an RF signal to which a tag, in the range of the signal, responds; and

• the equipment, cabling, computer network and software applications to use the processed data for one or more applications.

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Most RFID systems use either “active” or “passive” tags, with the choice reflecting the different characteristics of the tags and the nature of the RFID system application. The key difference in the technology is that active RFID systems deploy tags with battery-powered microchips that emit a signal at regular intervals or continuously and do not rely on power from the reader to operate, while passive RFID systems deploy tags with microchips that have no attached power supply and receive an activating charge from the reader’s signal. Applications that require receipt of signals between the tag and the reader beyond approximately 10 meters in range usually require a battery in the tags. Currently, we sell passive RFID tags.

Pet Identification and Safeguarding

Pet identification and safeguarding systems involve the insertion of a microchip with identifying information in the animal. Readers at animal shelters, veterinary clinics and other locations can determine the animal’s owner and other information through RFID scanners. The pet identification and safeguarding market is expanding at accelerated levels. In the USA, more and more shelters promote the use of microchipping as a way to insure that a lost pet can be reunited with its owner. With only an estimated 10% of pets chipped, the U.S. pet market has significant growth potential. As a result of the recent expansion of the capabilities of the electronic chips (e.g., providing feedback on the health of the animal, such as a temperature reading), we believe the market will expand even further. In Europe, microchips are required for any pets traveling across borders. These “pet passports” allow the animal to travel freely throughout Europe without quarantine, and in some European countries, as many as 40% of the pets have electronic identification.

Livestock/Fish Identification and Tracking and Food Safety and Traceability

The use of RFID technology in the tracking of livestock in the U.S. is currently limited to utilization for herd management (breeding, performance, etc), USDA disease control programs (Brucellosis, Tuberculosis, etc.) and Marketing programs (Non-Hormone Treated Cattle and limited use for the Beef Export Verification Program). Recently the US federal government announced that it would discontinue the USDA’s National Animal Identification System (NAIS), moving traceability responsibilities to the state and tribal levels. The USDA will work with the states to establish a common system for animals transported across state lines. While NAIS at the federal level has been discontinued, 48-hour trace-back, and age and source verification will remain a central part of the livestock industry’s processes. Destron Fearing products have been widely adopted for these requirements, and we continue to see more opportunities from growth in these segments. At Destron Fearing, our business model has always been to develop and sell innovative herd management products to producers that add value to their businesses. We have developed programs that make it easier for producers to do business with us, and to provide them with products that enhance their productivity and business success. Our RFID products are focused on gaining information, such as monitored animal behavior, and yielding data that can achieve early detection of potential illnesses in their herds.

Internationally, the market place for electronic identification tags continues to grow. The need to combat animal disease has the European Union (EU) focusing on improved traceability of livestock. Beginning on December 31, 2009, the EU has mandated the use of electronic tags for all sheep and goats, which is a forerunner to eventually requiring all large animal livestock to have electronic tags in the future. It is planned to be implemented in the entire European herd over the next few years. In South America, Brazil, with approximately 200 million cattle, has implemented a mandatory electronic identification of all feed lot cattle on January 1, 2010. Effective December 31, 2010, all new born cattle in Brazil will be required to have electronic tags, with the objective to move the entire herd to electronic tags over the next three years. Similar implementations are occurring in other South American countries, such as Colombia and Chile. These are all favorable signs for our Animal Identification segment, and the outlook shows signs of growth.

Emergency Identification

Global Navigation Satellite System (“GNSS”) is the standard generic term for satellite navigation systems that provide autonomous geospatial positioning with global coverage. The Navigation Satellite Timing and Ranging Global Position System (“NAVSTAR GPS”), which was developed by the U.S. Department of Defense, is the only fully operational GNSS. The satellite constellation is managed by the U.S. Air Force 50th Space Wing. Although the cost of maintaining the system is approximately $400 million per year, including the replacement of aging satellites, GPS is free for civilian use as a public good. In addition to NAVSTAR GPS, there is some indication that other nations may begin deploying GNSS. The Russian GLONASS is a GNSS in the process of being restored to full operation. The European Union Galileo positioning system is a next generation GNSS in the initial deployment phase, scheduled to be operational in a few years, and China has indicated it may expand its regional Beidou navigation system into a global system.

A GPS receiver calculates its position by measuring the distance between itself and three or more GPS satellites. Measuring the time delay between transmission and reception of each GPS radio signal gives the distance to each satellite, since the signal travels at a known speed. The signals also carry information about the satellites’ location. By determining the position of, and distance to, at least three satellites, the receiver can compute its position using trilateration. Receivers typically do not have perfectly accurate clocks and, therefore, track one or more additional satellites to correct the receiver’s clock error.

The original motivation for satellite navigation was for military applications. Today, GNSS systems have a wide variety of civilian uses such as:

• navigation, ranging from personal hand-held devices for trekking, to devices fitted to cars, trucks, ships and aircraft;

• synchronization;

• location-based services such as enhanced 911;

• surveying;

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• entering data into a geographic information system;

• search and rescue;

• geophysical sciences; and

• tracking devices used in wildlife management.

Our focus is in the areas of search and rescue and locator beacons and tracking systems which include mobile satellite data communications service and software for messaging for a variety of markets including the military, law enforcement and energy market. We believe that there is excellent growth potential in each of our markets and particularly, for us, in sales of our military personal location beacons due to recent technology improvements. However, each market in which we compete is highly competitive.

Operating Segments

Financial Information About Our Segments

Revenues from our two segments over the past two years were as follows:

	For the years ended December 31,
	2009		2008
	(in thousands)
Animal Identification	$	30,774	$	38,501
Emergency Identification		18,689		23,759
Total	$	49,463	$	62,260

Refer to the segment information in Note 19 to our consolidated financial statements.

Animal Identification Segment

Principal Products and Services

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 livestock applications. Our Animal Identification segment’s proprietary products focus on pet identification and safeguarding, as well as the positive identification and tracking of livestock and fish, which is 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.

The Animal Identification segment consists of Destron Fearing’s operations located in Minnesota and its wholly-owned subsidiaries: DSD Holding A/S and Destron Fearing A/S and its subsidiaries, which have operations in Denmark and Poland (collectively referred to as “Destron Fearing A/S”); and Digital Angel International, Inc. and its subsidiaries located in Argentina, Brazil, Chile, Paraguay and Uruguay.

We hold patents on our syringe-injectable microchip for use in animals. Each microchip is individually inscribed and programmed to store a unique, permanent 10 to 16-digit alphanumeric identification code. These microchips are tiny, passive electronic devices ranging in size from 8 to 28 millimeters in length and 2.1 to 3.5 millimeters in diameter. The smallest microchip is about the size of a grain of rice. The microchip is coupled with an antenna and placed either in a two-piece plastic e.Tag™ or in a glass-like injectable capsule. The e.Tag™ is typically affixed to the ear of the animal. The implantable microchip is injected under the skin using a hypodermic syringe, without requiring surgery. Each capsule is coated with a polymer, BioBond^TM, to form adherence to tissue, thereby preventing migration in the host’s body. An associated scanner device uses radio frequency to interrogate the microchips and read the code. Our patented Bio-Thermo^® implantable microchip product provides temperature readings of animals by simply passing an RFID handheld scanner over the animal or by having the animal walk through a portal scanner.

Our pet identification and location system involves the insertion of a microchip, with identifying information, in the animal. Scanners located at animal shelters, veterinary clinics and other locations can determine the animal’s owner and other information. Presently, there is an established infrastructure with RFID scanners placed in approximately 70,000 global animal shelters and veterinary clinics. We believe that approximately 4.0 million companion animals in the U.S. have been enrolled in our distributor’s database, and a pet is recovered in the U.S. by that system approximately every six minutes.

Our miniature RFID microchips are also used for the tagging of fish, especially salmon, for identification by biologists and governments in environmental programs and studies, migratory studies and other purposes. These microchips are accepted as a safe, reliable alternative to traditional identification methods because once the fish are implanted with the microchips, they can be identified without recapturing or sacrificing the fish. In 2006, we installed what is believed to be the world’s largest RFID ready system, a 16-foot by 16-foot RFID antenna designed to electronically track indigenous salmon populations. In addition, we launched our second generation unitary core transponders. These updated transponders are designed to provide greater reader reliability while increasing reader range.

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In addition to pursuing the market for permanent identification of companion animals and tracking microchips for fish, we also produce visual and RFID identification products, for livestock producers. The tracking of cattle and hogs is crucial in order to provide security both for asset management and for disease control and food safety. Destron Fearing has marketed visual identification products for livestock since the 1940s. Visual identification products typically include numbered ear tags. Electronic identification products for livestock are currently being utilized by livestock producers and as part of various pilot studies for the USDA’s and other state and governmental cattle identification programs. Currently, sales of visual products represent a substantial percentage of our sales to livestock producers.

Growth Strategy

The principal components of our Animal Identification segment’s growth strategy are to:

• focus on animal identification products in the growing livestock, fish and wildlife industries;

• become a major player in the food source traceability and safety tracking systems arena; and

• increase our market share in the pet identification and equine markets with enhanced products such as our temperature-sensing Bio-Thermo^® product.

Through our Animal Identification segment, we are one of the leading suppliers in the U.S. of RFID-enabled implantable microchip products for companion animals, laboratory animals, wildlife, and visual identification tags for livestock. The “chipping” of companion pets has increased in Europe, in part, because in 2004, several European countries began requiring that all pets crossing their borders be identified with a either a tattoo or a microchip. In addition, world-wide standardization of the frequency on which the microchips operate will most likely lead to higher world-wide chipping rates. Our chips can be read by the world standard, which is 134.2 kilohertz.

During 2006, we began a national initiative to target the use of our microchips to address the more than $100 million estimated U.S. equine market for identification products. There are approximately 9.2 million horses in the U.S. We believe that approximately 6.0 million are competition horses requiring identification by local and state equine animal health rules and regulations. In addition, USDA’s NAIS business plan categorizes equines as medium priority for permanent identification. Since late 2005, the California Horseracing Board, a division of the California Department of Agriculture, has been implanting all new, in-coming young horses entering their racing career with our microchips, which we call LifeChips^®. The State of Louisiana has also been utilizing our LifeChips^® to identify horses that have been Coggins tested which checks for Equine Infectious Anemia. The New York State Horse Health Assurance Program implemented a comprehensive health campaign that utilizes our microchips, and other state agencies are expected to launch similar programs. In addition, in March 2008, we entered into a non-exclusive distribution agreement with The Jockey Club, the official registry for North American Thoroughbred horses. The coming of the 2010 World Equestrian Games in October is expected to boost LifeChip sales both domestically and abroad. Additional growth in LifeChip sales is expected to come from the recent requirement in Mexico, where all horses entering their country must have microchips.

New Products

In July 2009, we introduced the DTR-4 handheld reader enhancing the feature set of the already robust DTR-3 reader. The DTR-4 reader added an LCD display, providing easy to read ID numbers, and body temperatures when coupled with our Bio-Thermo^® tags. Useful in cattle, swine, and equine applications, the display provides the user with the ability to see tag data without having to communicate with a host computer.

In December of 2009, we finished phase three of the development of the new reader for the fisheries business. This reader advances the ability for stream and river applications, replacing older multiplexing technologies providing communication with multiple antennas designed from low cost materials that can be found at a local hardware store, reducing the overall cost to monitor fish migrations in all conditions. Field testing begins during the spawning season in early 2010.

We also introduced in 2009 our Rapid Response program, where customers can place orders for identification tags in the morning and we will ship that same afternoon, eliminating long waiting periods when tags are urgently needed. Various other sales programs were introduced to make it easy for customers to do business with us. Examples include on-line order capabilities and credit card ordering.

Sales, Marketing and Distribution

Our companion pet identification and location system is marketed in the U.S. by Schering-Plough Animal Health Corporation (“Schering-Plough”) under the brand name Home Again^® Pet Recovery Service. In February 2007, we signed an exclusive product supply and distribution agreement with Schering-Plough Home Again LLC, a wholly owned subsidiary of Schering-Plough, to provide electronic identification microchips and scanners as part of the Home Again^® Proactive Pet Recovery Network. Schering-Plough’s network, which markets the complete electronic pet identification system under the brand name HomeAgain^®, is the nation’s first comprehensive system to assist in the search for lost pets. In January, 2010, we entered into an amendment to the February 2007 agreement, which extends our agreement to provide Schering-Plough electronic identification microchips and scanners as part of the Home Again^® Proactive Pet Recovery Network through June 2010. During the term of the amended agreement, we will exclusively manufacture, supply and sell to Schering-Plough and Schering-Plough will exclusively purchase from us certain products (as defined in the amended agreement). The amended agreement contains, among other things, minimum purchase requirements by Schering-Plough. The amended agreement also prohibits us from manufacturing, supplying or selling the products to any other person, governmental authority or entity in the territory (as defined in the amended agreement). The amended agreement also grants to Schering-Plough exclusive distribution, marketing and sale rights to our RFID products in the companion animal market in the U.S. and non-exclusive distribution, marketing and sale rights to our RFID Bio Thermo product in the designated animal markets and territories, subject to a maximum amount of units of such RFID Bio Thermo products.

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Currently our companion pet/equine product is also marketed by various other companies, including, but not limited to, (i) in some countries in Europe by Merial Pharmaceutical under the Indexel^® brand; (ii) in the United Kingdom (U.K.) and Ireland by Animalcare under the idENTICHIP^® brand; and (iii) in other European countries and in Australia, New Zealand and Japan by various distributors under the LifeChip^® brand.

BioMark, Inc. is our exclusive U.S. distributor for our fish and wildlife RFID microchip products. Electronic identification products for livestock are sold directly to our customers under the Destron brand. We have multi-year supply and distribution agreements with certain of our customers, which have varying expiration dates. The remaining terms of such agreements are between one and eight years. The supply and distribution agreements describe products, delivery and payment terms and distribution territories. Our agreements generally do not have minimum purchase requirements and can be terminated without penalty. Our principal customers for electronic identification devices for fish are Pacific States Marine and the U.S. Army Corps of Engineers. The loss of, or a significant reduction in, orders from either of these customers could have a material adverse effect on our financial condition and results of operations.

Competition

The animal identification market is highly competitive. The principal competitors in the U.S. visual identification market are Allflex USA, Inc. and Y-Tex Corporation, and the principal competitors in the U.S. RFID identification market are Allflex, USA, Inc., Datamars SA and Avid Identification Systems, Inc. We believe that our intellectual property position and our reputation for high quality products are our competitive advantages.

Our principal competitor in Europe is Allflex, with the remainder of the market quite fragmented with regional players. We believe that our efficient low cost production, reputation for high quality ear tags and our clear focus on the market are our competitive advantages. We expect our competitors to continue to improve the performance of and support for their current products. We also expect that, like us, they will introduce new products, technologies or services. Our competitors’ new or upgraded products could adversely affect sales of our current and future products.

Manufacturing; Supply Arrangements

Our Animal Identification segment has not been materially or adversely affected by the inability to obtain raw materials or products during the past three years. We rely on a production arrangement with Raytheon Microelectronics Espana (“RME”), a subsidiary of Raytheon Company, for the assembly of certain of our patented syringe-injectable transponders. The term of that agreement ends on June 30, 2010, subject to earlier termination by either party if, among other things, the other party breaches the agreement and does not remedy the breach within 30 days of receiving notice. Under the agreement, RME is our preferred supplier of the glass encapsulated, syringe-implantable transponders, provided that RME’s pricing remains market competitive. Certain of the automated equipment and tooling used in the production of the transponders is owned by us; other automated equipment and tooling is owned by RME. We are currently in discussions to establish a new long term agreement with RME.

Besides RME, our Animal Identification segment’s other principal suppliers are TSI Molding, Inc., Feature Products and Creation Technologies. We generally do not enter into contracts with these suppliers.

Emergency Identification Segment

Principal Products and Services

Our Emergency Identification segment’s proprietary products provide emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms. This segment’s principal products are:

• GPS enabled search and rescue equipment and intelligent communications products and services for mobile data and radio communications applications, including our SARBE^TM brand which serves commercial and military markets; and

• alarm sounders for industrial use and other electronic components.

GPS Enabled Search and Rescue Equipment and Intelligent Communications Products

Our personal locator beacons (“PLBs”) are sold under the SARBE™ brand name. SARBE products are primarily used by military air crew in the event of an ejection or other event requiring emergency evacuation of an aircraft in a remote, possibly hostile location. SARBE equipment is also used by land and naval forces. Signature is based in the U.K. and has been developing and manufacturing PLBs for five decades. Reports of Second World War airmen and sailors at sea awaiting rescue with little more than the faint hope that a passing ship would find them was the catalyst that inspired Signature to develop a new way of saving lives by making the search part of search and rescue more effective. Today, we believe that we are a world-leading supplier of PLBs and our SARBE trademark is a common term for these devices, which are now found on ships, aircraft and submarines in the armed forces of over 40 countries. U.K. airmen were among the first to carry these lifesaving devices. Today every U.K. Royal Air Force, Royal Navy and Army airman carries a SARBE. PLBs are also packed in the survival packs of life rafts on military ships. Our latest generation SARBE™ for military personnel is the software programmable SARBE G2R, which provides true global reach and recovery. This flexible radio features peacetime and combat modes. As with previous PLBs, G2R can be configured to operate with any fast jet ejection seat and incorporates a specially designed system that automatically activates the beacon and deploys the antenna to the optimum position. This ensures that even if aircrew are unconscious or injured, the SARBE transmission will be initiated immediately as no human intervention is required, reducing the time it takes to initiate a search. Our SARBE^TM G2R has been approved to operate on the COSPAS-SARSAT Satellite System. COSPAS-SARSAT is the internationally funded satellite system operator that detects activated search and rescue beacons and is responsible for approving all rescue beacons. Beginning February 1, 2009, COSPAS-SARSAT no longer monitored beacons using 121.5 MHz and 243 MHz satellite frequencies. The outdated beacons need to be replaced by the new generation of 406 MHz beacons, such as our SARBE G2R. We anticipate that this new requirement will have a favorable impact on our revenue in 2010 and beyond.

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We are also a distributor of two-way communications equipment in the U.K. Our products range from conventional radio systems for the majority of radio users, for example, safety and security, construction, manufacturing, to trunked radio systems for large scale users, such as local authorities and public utilities. We also offer marine radios, air band radios and satellite communication equipment for use on a global basis.

Alarm Sounders

We manufacture electronic alarm sounders under the Clifford & Snell name. These products 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. Our recent Yodalex explosion proof sounders and strobes include an omni-directional, high-sound output with sounder/strobe combination all sharing a common explosion proof enclosure.

Growth Strategy

We believe that our SARBE PLBs offer the greatest source of growth for our Emergency Identification segment. COSPAS-SARSAT forecasts that the global population of the new generation of digital beacons will grow from 400,000 today, to 900,000 by 2012, providing us with opportunities to upgrade existing customers’ equipment and sell into new markets. We expect to see an increase in the demand for our beacons as air forces upgrade their PLBs to new digital standards. Air forces in the U.K. and the U.S. will be required to replace their existing beacons with the new generation 406 MHz beacons in the future. SARBE has developed a specific new product, the AAPLB, for the USAF and UK Ministry of Defense (“MoD”). In September 2008, the UK MoD selected our AAPLB for tri-service use. We expect to begin shipping our AAPLBs to the MoD in the latter part of 2010.

Sales and Distribution

We sell our PLBs directly to our customers worldwide through a direct sales force of approximately four personnel and through supply and distribution agreements, which have varying expiration dates. The remaining terms of such agreements are between one and three years.

We sell our alarm sounders through various distributors located in Europe, Australia, New Zealand, Hong Kong, Japan, South Africa, Singapore and the U.S. We are also a distributor of two-way communication equipment in the U.K.. Our agreements with these distributors have varying expiration dates.

Competition

Principal methods of competition in our Emergency Identification segment include geographic coverage, service and product performance. The principal competitors for our PLBs are Boeing North American Inc., General Dynamics Decision Systems, Tadiran, Spectralink Ltd., Becker Avionic Systems, and ACR Electronics, Inc. We believe that introducing new leading edge products in the search and rescue beacon market and the use of our search and rescue beacons in over forty countries are competitive advantages. In addition, the barriers to entry in this market are high due to the technical demands of the market.

Manufacturing; Supply Arrangements

Our Emergency Identification segment has not been materially or adversely affected by the inability to obtain raw materials or products during the past three years. This segment’s principal suppliers are Contact Components Ltd., Motorola Ltd., and Delta Impact Ltd. We generally do not enter into contracts with these suppliers.

Government Regulation

Animal Identification Laws and Regulations

Our passive RFID systems rely on low-power, localized use of the radio frequency spectrum to operate. As a result, we must comply with U.S. Federal Communications Commission (“FCC”) and Industry Canada (“IC”) regulations, as well as the laws and regulations of other jurisdictions in which we sell our products, governing the design, testing, marketing, operation and sale of RFID devices. Accordingly, all of our products and systems have the FCC equipment authorization, the IC equipment authorization, or other jurisdictions’ authorizations, as appropriate.

U.S. Federal Communications Commission Regulations

Under FCC rules and regulations and Section 302 of the Communications Act, RFID devices, including those we market and sell, must be authorized and comply with all applicable technical standards and labeling requirements prior to being marketed in the U.S. The FCC’s rules prescribe technical, operational and design requirements for devices that operate on the electromagnetic spectrum at very low power levels. The rules ensure that such devices do not cause interference to licensed spectrum services, mislead consumers regarding their operational capabilities or produce emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined in the FCC’s rules. As such, our devices may not cause harmful interference to licensed services and must accept any interference received. Additionally, we must construct all equipment in accordance with good engineering design and manufacturers’ practices. The FCC rules also establish standards for labeling, user manuals, recordkeeping and testing. We believe that we are in substantial compliance with all FCC requirements applicable to our products and systems.

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Industry Canada Regulations

Industry Canada regulates the design, sale and use of radio communications devices in accordance with its Radio Standards Specifications (“RSS”) and Radio Standards Procedures (“RSP”). As intentional emitters, our RFID devices are subject to Industry Canada’s RSP-100, which establishes the procedures by which RFID communications equipment receives certification by Industry Canada. The RSP-100 certification procedure and RSS standards ensure that RFID radio devices do not cause interference to licensed spectrum services and that the devices do not produce emissions that are harmful to human health.

Manufacturers of RFID devices must demonstrate compliance with RSP-100 and RSS-210, which establish standards for obtaining certification of services, obtaining unique certification/registration numbers, display and label requirements on the equipment, user manuals, recordkeeping and testing. We believe we are in substantial compliance with all Industry Canada requirements applicable to our products and systems.

Emergency Identification Laws and Regulations

The manufacture and distribution of our emergency identification products are subject to compliance with applicable regulatory requirements in both the country of manufacture and in those countries where these products are sold. We must comply with local, state, federal/national, and international laws and regulations in the countries in which we do business, including environmental, technical, communications, and other laws and regulations governing the manufacture of our products, their technical specifications, their labeling and communications protocols, user manuals, and recordkeeping and testing. We believe that we are in substantial compliance with all FCC requirements applicable to our emergency identification products and systems.

Intellectual Property

In both our Animal Identification and Emergency Identification segments, we rely on a combination of patents, copyrights, trademarks, trade secrets (including know-how), employee intellectual property agreements, and third-party agreements to establish and protect proprietary rights in our products and technologies. It is our practice to seek protections in all jurisdictions where such protections are deemed useful and desirable to our business and competitive interests.

We believe our global patent portfolio will continue to provide a competitive advantage in protecting innovation, although our competitors in each business are actively seeking patent protection as well.

In the Animal Identification segment, some of our more important patents and intellectual property rights include those relating to the design and manufacture of RFID tags and readers, including their communications protocols, reader scanning algorithms, reader self testing methods, manufacturing methods for unitary antenna cores, improved antenna designs, injection molding techniques, and temperature sensing and communication capabilities. No one patent is considered material to this business segment.

In the Emergency Identification segment, some of our more important patents and intellectual property rights include those relating to the design and manufacture of locator beacons, sensing and alarm devices, and their communications protocols. No one patent is considered material to this business segment.

Our trademarks include the following: Digital Angel, Destron Fearing, Bio-Thermo and SARBE.

Seasonality

No significant portion of our business is considered to be seasonal; however, our Animal Identification and Emergency Identification segments’ revenue, while not considered to be seasonal, may vary significantly based on government procurement cycles and technological development, and our Animal Identification segment’s revenues and operating income can be affected by the timing of animal reproduction cycles.

Employees

At March 19, 2010, we and our subsidiaries employed approximately 244 employees, of which 223 are full-time. Our Animal Identification segment’s production workforce located in South Saint Paul, Minnesota is party to a collective bargaining agreement covering wage rates and benefits for certain union employees, which expires on April 30, 2010. Upon termination there are no future obligations other than payments of accrued wages.

Geographic Areas

We have operations and sales in various regions of the world. Additionally, we export and import to and from other countries. Our operations may, therefore, be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Sales and expenses are denominated in local currencies and may be affected as currency fluctuations affect our product prices and operating costs or those of our competitors.

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Currently, we operate in three geographic areas: the U.S. and Europe (both of which comprise the majority of our operations) and South America. The majority of our revenues and expenses in each geographic area were generated in the same currencies during the two-years ended December 31, 2009, and accordingly, we did not incur any significant foreign currency gains or losses during those years.

Revenues from continuing operations are attributed to geographic areas based on the location of the assets producing the revenue. Information concerning revenues by principal geographic areas as of and for the years ended December 31, 2009 and 2008 was as follows (in thousands):

	United				South
	States		Europe		America		Total
2009
Net revenue	$	21,694	$	27,074	$	695	$	49,463
Property and equipment, net		4,854		2,390		119		7,363
2008
Net revenue	$	29,275	$	31,927	$	1,058	$	62,260
Property and equipment, net		5,764		2,544		241		8,549

For a discussion of risks associated with our foreign operations, please see Item 1A. Risk Factors.

Each of our segment’s operating income (loss) is presented below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and each of their assets is presented in Note 19 to our consolidated financial statements.

ITEM 1A. RISK FACTORS

We have a history of operating losses and we may not become profitable in the future, which could ultimately result in our inability to continue operations in the normal course of business.

We incurred a consolidated loss from continuing operations of $15.4 million and $59.6 million in the years ended December 31, 2009 and 2008, respectively. Our consolidated operating activities (used) provided cash of $(3.9) million and $1.3 million during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, we had an accumulated deficit of approximately $571.2 million. There is no assurance that our operating activities will be able to fund our cash requirements in the future if our investing and/or financing activities cannot.

Historical losses and maturity of debt have raised concerns about our ability to continue operations at the current level.

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 stock options and 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 especially if we continue to incur losses. We will be required to generate funds to repay certain of our debt obligations during 2010. We recently used a portion of the proceeds from the sale of our McMurdo business unit, which we sold on November 30, 2009, as more fully discussed in Note 14 to our consolidated financial statements, to repay a portion of our term debt and in February 2010, we fully repaid our term debt obligations with proceeds from the sale of shares of our common stock and warrants. As of December 31, 2009, we had a working capital deficiency, which is partially due to a number of our debt obligations becoming due or potentially due within the next twelve months, including the maturity on August 31, 2010 of a revolving line of credit which had a balance of approximately $2.2 million at December 31, 2009, and a mortgage loan of approximately $2.0 million, which matures on November 1, 2010. Our credit facility with Danske Bank, which is more fully discussed in Note 9 to our consolidated financial statements, is due on demand and we are required to make monthly principal payments of approximately $0.1 million. 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 at the current level, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. Our ability to continue operations at the current level is also discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our ability in the future to achieve or sustain profitability is based on a number of factors, many of which are beyond our control, including the future demand for our RFID and GPS satellite-based systems and the technical requirements associated with the manufacture of our GPS products. If demand for such systems does not reach anticipated levels, or if we fail to manage our cost structure or to develop technologically viable products, we may not achieve profitability.

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 achieving profitability and positive cash flows from operations during 2010. 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.

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If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our stock could be delisted by the Nasdaq Capital Market. If delisting occurs, it could adversely affect the market liquidity of our common stock and harm our businesses.

Our common stock is currently traded on the Nasdaq Capital Market under the symbol “DIGA.” On December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance with the Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, the Company has been provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that were are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement, based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it would likely trade on the OTC Bulletin Board, an electronic bulletin board established for unlisted securities. Such delisting could adversely affect the market liquidity, our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

In addition, if we fail to meet any of the other continued listing standards of the Nasdaq Capital Market, our common stock could be delisted from the Nasdaq Capital Market. These continued listing standards include specifically enumerated criteria, such as:

• shareholders’ equity of $2.5 million, market value of publicly-held shares of $35 million, or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years;

• 500,000 shares of publicly-held common stock with a market value of at least $1 million;

• 300 round-lot stockholders; and

• compliance with Nasdaq’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of Nasdaq’s discretionary authority.

We have substantial debt and debt service.

As of December 31, 2009, our indebtedness, totaled approximately $9.7 million, and we had advances on our factoring lines of approximately $1.2 million. As a result, we incur significant interest expense. In addition, we are obligated to make monthly principal payments on certain of our notes. Our revolving line of credit, which had an outstanding balance of approximately $2.2 million at December 31, 2009, matures on August 31, 2010 and our outstanding mortgage debt of approximately $2.0 million matures on November 1, 2010. In addition, we are obligated to make monthly principal payments of approximately $0.1 million on our outstanding credit line with Danske Bank. On February 1, 2010, we repaid the remaining outstanding balance of approximately $1.4 million of our term debt that matured in February 2010. For further discussion on our debt, see Note 9 to the consolidated financial statements.

Our debt agreements contain certain events of default, including, among other things, failure to pay, violation of covenants, and certain other expressly enumerated events. Additionally, we guaranteed Destron Fearing’s debt with Kallina Corporation (approximately $2.2 million at December 31, 2009) as well as granted Kallina Corporation a security interest in substantially all of our U.S. assets, and pledged all of the issued and outstanding capital stock we own in certain of our subsidiaries to secure such debt.

The degree to which we are leveraged could have important consequences, including the following:

• our ability to obtain additional or replacement financing in the future for operations, capital expenditures, potential acquisitions, and other purposes may be limited, or financing may not be available on terms favorable to us or at all;

• a substantial portion of our cash flows from operations must be used to pay our interest expense and repay our debt, which reduces the funds that would otherwise be available to us for our operations and future business opportunities; and

• our ability to continue operations at the current level could be negatively affected if we cannot refinance our obligations before their due date.

A default under any of our debt agreements could result in acceleration of debt payments and it could permit the lender to foreclose on our assets and the stock we have pledged in our subsidiaries. We cannot assure you that we will be able to maintain compliance with these covenants. Failure to maintain compliance could have a material adverse impact on our financial position, results of operations and cash flow.

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We have effected or entered into (and will likely continue to effect or enter into) capital raising transactions, acquisitions, legal settlements and contracts for services that involve the issuance of shares of our common stock (or securities convertible into or exchangeable for such shares) and, if such transactions occur, investments in our common stock will be further diluted.

We currently have a legal settlement and an earn-out obligation aggregating approximately $3.3 million, both of which we currently intend to settle in shares of our common stock. The legal settlement may be settled in unregistered shares of our common stock and the earn-out obligation (to the extent we owe any) must be settled in registered shares of our common stock. During 2009, we sold approximately 2.9 million shares to YA SPV under the SEDA and on February 9, 2010, we sold approximately 3.4 million shares of our common stock and warrants to purchase approximately 1.4 million shares of our common stock in a registered direct offering. Such share issuances have in the past been and we expect will in the future be dilutive to the value of our common stock. As a result, your investment in our common stock will be further diluted if such transactions occur.

Certain events over which you will have no control could result in the issuance of additional shares of our common stock or other securities, which could dilute the value of shares of our common stock. We may issue additional shares of common stock:

• to raise additional capital;

• upon the exercise of outstanding options and stock purchase warrants or additional options and warrants issued in the future;

• in connection with severance agreements;

• in connection with loans or other capital raising transactions; and

• in connection with acquisitions of other businesses or assets.

As of March 19, 2010, there were 1,667,674 outstanding warrants, with exercise prices per share ranging from $0.50 to $25.443, and 3,188,747 options to acquire additional shares of our common stock, with exercise prices per share ranging from $0.32 to $216.60. If exercised, these securities could dilute the value of shares of our common stock. In addition, we have the authority to issue up to a total of 50,000,000 shares of common stock and up to 5,000,000 shares of preferred stock without further shareholder approval, including shares that could be convertible into our common stock, subject to applicable Nasdaq requirements for issuing additional shares of stock. Were we to issue any such shares, or enter into any other financing transactions, the terms may have the effect of significantly diluting or adversely affecting the holdings or the rights of the holders of our common stock.

Volatility in economic conditions and the financial markets may adversely affect our industry, business and financial performance.

We have witnessed unprecedented disruptions in financial markets, including volatility in asset values and constraints on the availability of credit. In response to these developments, the U.S. government has taken, and may take further, steps designed to stabilize markets generally and strengthen financial institutions in particular. The impact, if any, that these financial market events or these governmental actions might have on us and our business is uncertain and cannot be estimated at this time. If current economic conditions deteriorate or legislation or regulatory action adversely affects the U.S. economy, there could be an adverse impact on our access to capital and to our results of operations.

Our stock price has reflected a great deal of volatility, including a significant decrease over the past few years. The volatility may mean that, at times, our stockholders may be unable to resell their shares at or above the price at which they acquired them.

From January 1, 2007 to March 19, 2010, the price per share of our common stock has ranged from a high of $18.00 to a low of $0.39. The price of our common stock has been, and may continue to be, highly volatile and subject to wide fluctuations. The market value of our common stock has declined in the past, in part, due to our operating performance. In the future, broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. Recent declines in the market price of our common stock could affect our access to capital, and may, if continuing, impact our ability to continue operations at the current level. In addition, any continuation of the recent declines in the price of our common stock may harm employee morale and retention, curtail investment opportunities presented to us, and negatively impact other aspects of our business. As a result of any such declines, many stockholders have been or may become unable to resell their shares at or above the price at which they acquired them.

We rely heavily on revenues derived from sales to various governmental agencies, and the loss of, or a significant reduction in, orders from government agencies could result in significant losses and negative changes to cash flows from operations.

Our principal customers for electronic identification devices for fish are Pacific States Marine, a government contractor that relies on funding from the U.S. government, and the U.S. Army Corps of Engineers. Our Emergency Identification segment is heavily dependent on contracts with domestic government agencies and foreign governments, including the U.K., primarily relating to military applications. Because we rely on revenues and cash flows generated from contracts, directly or indirectly, with governmental agencies, the loss of any such contract would result in a decrease in revenues and cash flows, and such a decrease may be significant and thereby have a material adverse effect on our financial condition and results of operations.

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Our Animal Identification segment relies heavily on revenue from a principal distributor and two customers and the loss of the principal distributor and customers could negatively affect our revenue, cash flows and results of operations.

Our pet identification and location system is marketed in the U.S. by Schering-Plough. For the years ended December 31, 2009 and 2008, Schering-Plough accounted for approximately 8% and 19%, respectively, of our Animal Identification segment’s revenues. It may be difficult and time-consuming for us to arrange for distribution of the implantable microchip by a third party. The loss of Schering-Plough as our exclusive distributor could negatively affect future sales. In January 2010, we amended our exclusive product supply and distribution agreement with Schering-Plough to extend the agreement through June 2010. There is no assurance that Schering-Plough and Destron Fearing will extend the contract beyond June 2010. Our principal customers for electronic identification devices for fish are Pacific States Marine and the U.S. Army Corps of Engineers. The loss of, or a significant reduction in, orders from these customers could have a material adverse effect on our financial condition and results of operations.

We depend on a small team of senior management and key employees, and we may have difficulty attracting and retaining additional personnel.

Our future success will depend in large part upon the continued services and performance of key senior management and other key personnel. If we lose the services of any key member of our senior management team, our overall operations could be materially and adversely affected. In addition, our future success will depend on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing, purchasing and customer service personnel when they are needed. Competition for qualified individuals to fill these positions is intense. We cannot ensure that we will be able to successfully attract, integrate or retain sufficiently qualified personnel when the need arises. Any failure to attract and retain the necessary technical, managerial, marketing, purchasing and customer service personnel could have a material adverse effect on our financial condition and results of operations.

The loss of any key senior executive could materially adversely affect our financial results. Our senior executives, in many cases, have strong relationships with our customers, suppliers and lenders. Therefore, the loss of the services of such senior executives or any general instability in the composition of our senior management could have a negative impact on our relationship with these customers and suppliers.

Over the past few years, we have made significant changes in the nature and scope of our businesses.

If we are not successful in implementing our business model and developing and marketing our products or if these products do not gain sufficient market acceptance, we may not be able to achieve or sustain profitable operations. In that case, the market price of our stock would likely decrease.

Management continues to review strategic alternatives to increase shareholder value, which may result in a further decrease in consolidated revenue and the overall size of our operations.

Management is focusing on various strategic alternatives, which include the possibility of selling additional business units in our Emergency Identification segment. If we are successful in further streamlining our business to focus our attention solely on our Animal Identification business segment, it would, at least in the short term, result in a further decrease in our revenue and the size of our operations. Such a decrease could negatively impact the price of our common stock.

Technological change could cause our products and technology to become obsolete or require the redesign of our products, which could have a material adverse effect on our businesses.

Technological changes within the industries in which we conduct business may require us to expend substantial resources in an effort to develop new products and technology. We may not be able to anticipate or respond to technological changes in a timely manner, and our response may not result in successful product development and timely product introductions. If we are unable to anticipate or respond to technological changes, our businesses could be adversely affected.

We may be subject to costly product liability claims from the use of our systems, which could damage our reputation, impair the marketability of our systems and force us to pay costs and damages that may not be covered by adequate insurance.

Manufacturing, marketing, selling, testing and operation of our systems entail a risk of product liability. We could be subject to product liability claims in the event our systems fail to perform as intended. Even unsuccessful claims against us could result in the expenditure of funds in litigation, the diversion of management time and resources, damage to our reputation and impairment in the marketability of our systems. While we maintain liability insurance, it is possible that a successful claim could be made against us, that the amount of our insurance coverage would not be adequate to cover the costs of defending against or paying such a claim, or that damages payable by us would harm our business.

If others assert that our products infringe their intellectual property rights, we may be drawn into costly disputes and risk paying substantial damages or losing the right to sell our products.

We face the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. If infringement claims are brought against us or our suppliers, these assertions could distract management and necessitate our expending potentially significant funds and resources to defend or settle such claims. We cannot be certain that we will have the financial resources to defend ourselves against any patent or other intellectual property litigation. If we or our suppliers are unsuccessful in any challenge to our rights to market and sell our products, we may, among other things, be required to:

• pay actual damages, royalties, lost profits and/or increased damages and the third party’s attorneys’ fees, which may be substantial;

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• cease the development, manufacture, use and/or sale of products that use the intellectual property in question through a court-imposed sanction called an injunction;

• expend significant resources to modify or redesign our products, manufacturing processes or other technology so that it does not infringe others’ intellectual property rights or to develop or acquire non-infringing technology, which may not be possible; or

• obtain licenses to the disputed rights, which could require us to pay substantial upfront fees and future royalty payments and may not be available to us on acceptable terms, if at all, or to cease marketing the challenged products.

Ultimately, we could be prevented from selling a product or otherwise be forced to cease some aspect of our business operations as a result of any intellectual property litigation. Even if we or our suppliers are successful in defending an infringement claim, the expense, time delay, and burden on management of litigation and negative publicity could have a material adverse effect on our business.

We obtain the implantable microchip used in certain of our Animal Identification segment’s products from a single supplier, making us vulnerable to supply disruptions that could constrain our sales of such systems and/or increase the per-unit cost of production of the microchip.

At present, we source the microchip for certain of our products from Raytheon Microelectronics España S.A. (“RME”), the actual manufacturer, under a supply agreement between us and RME for use in our Animal Identification segment’s products. The term of that agreement expires on June 30, 2010, subject to earlier termination by either party if, among other things, the other party breaches the agreement and does not remedy the breach within 30 days of receiving notice. We and RME each own certain of the automated equipment and tooling used in the manufacture of the microchip. Accordingly, it would be difficult for us to arrange for a third party other than RME to manufacture the implantable microchip to satisfy our requirements. Even if we were able to arrange to have the implantable microchip manufactured in another facility, we believe that making such arrangements and commencement of production could take at least three to six months. A supply disruption of this length could cause customers to cancel orders, negatively affect future sales and damage our business reputation. In addition, the per-unit cost of production at another facility could be more than the price per unit that we currently pay.

The expiration or invalidation of patents covering products and technologies in our Animal Identification segment could expose us to potential competition that may have a material adverse effect on our sales and results of operations.

We rely on various patents covering microchip and reader products used in our Animal Identification segment. Without patent protection, our competitors may be able to independently develop similar technology or duplicate our systems, or the value of our products could be diminished which could have a material adverse effect on our sales and results of operations.

Our inability to safeguard our intellectual property may adversely affect our business by causing us to lose a competitive advantage or by forcing us to engage in costly and time-consuming litigation to defend or enforce our rights.

We rely on copyrights, trademarks, trade secret protections, know-how and contractual safeguards to protect our non-patented intellectual property, including our software technologies. Our employees, consultants and advisors are required to enter into confidentiality agreements that prohibit the disclosure or use of our confidential information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. There can be no assurance that we will be able to effectively enforce these agreements, the confidential information will not be disclosed, others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information, or that we can meaningfully protect our confidential information. Costly and time-consuming litigation could be necessary for enforcement and failure to maintain the confidentiality of our confidential information could adversely affect our business by causing us to lose a competitive advantage maintained through such confidential information.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with third parties. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could have a material adverse effect on our business, financial condition and results of operations by delaying our ability to commercialize innovations or by diverting our resources away from revenue-generating projects.

We compete with other companies in the visual and electronic identification and locator markets, and the products sold by our competitors could become more popular than our products or render our products obsolete.

The markets for visual and electronic identification and beacon products are highly competitive. We believe that our principal competitors in the visual identification market for livestock are AllFlex USA and Y-Tex Corporation, that our principal competitors in the electronic identification market are AllFlex USA, Datamars SA and Avid Identification Systems, Inc., and that our principal competitors in the beacon market are Boeing North American Inc., General Dynamics Decision Systems, Tadiran Spectralink Ltd., and Becker Avionic Systems.

In addition, other companies could enter these lines of business in the future. Many of our competitors have substantially greater financial and other resources than us. We may not be able to compete successfully with our competitors, and our competitors may develop or market technologies and products that are more widely accepted than our products or that would render our products obsolete or noncompetitive.

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Infringement by third parties on our intellectual property or development of substantially equivalent proprietary technology by our competitors could negatively affect our businesses.

Our success depends significantly on our ability to:

• maintain patent and trade secret protection;

• obtain future patents and licenses; and

• operate without infringing on the proprietary rights of third parties.

There can be no assurance that the measures we have taken to protect our intellectual property will prevent the misappropriation or circumvention of our intellectual property. In addition, there can be no assurance that any patent application, when filed, will result in an issued patent, or that our existing patents, or any patents that may be issued in the future, will provide us with significant protection against competitors. Moreover, there can be no assurance that any patents issued to or licensed by us will not be infringed upon or circumvented by others. Litigation to establish the validity of patents and to assert infringement claims against others can be expensive and time-consuming, even if the outcome, which is often uncertain, is in our favor. Infringement of our intellectual property or the development of substantially equivalent technology by competitors could have a material adverse effect on our business.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the U.S.

The laws of some foreign countries do not protect intellectual property to as great an extent as do the laws of the U.S. Policing unauthorized use of the intellectual property utilized in our systems and system components is difficult, and there is a risk that our means of protecting our intellectual property may prove inadequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our systems, which would likely reduce our sales in these countries. Furthermore, some of our patent rights may be limited in enforceability to the U.S. or certain other select countries, which may limit our intellectual property protection abroad.

Domestic and foreign government regulation and other factors could impair our ability to develop and sell our products in certain markets.

The electronic animal identification market can be negatively affected by such factors as food safety concerns, price, consumer perceptions regarding cost and efficacy, international technology standards, government regulation and slaughterhouse removal of microchips.

We are also subject to federal, state and local regulation in the U.S., including regulation by the FDA, the FCC and the USDA, and similar regulatory bodies in other countries. We cannot predict the extent to which we may be affected by further legislative and regulatory developments concerning our products and markets. We are required to obtain regulatory approval before marketing most of our products. The regulatory process can be very time-consuming and costly, and there is no assurance that we will receive the regulatory approvals necessary to sell our products under development. Regulatory authorities also have the authority to revoke approval of previously approved products for cause, to request recalls of products and to close manufacturing plants in response to violations. Any such regulatory action, including the failure to obtain such approval, could prevent us from selling, or materially impair our ability to sell, our products in certain markets and could negatively affect our businesses.

Our results of operations may be adversely affected if we write-off additional goodwill and other intangible assets.

During the fourth quarter of 2009, we recorded an impairment charge of $7.1 million for goodwill and intangible assets associated with our Emergency Identification reporting unit. During the third quarter and fourth quarter of 2008, we recorded impairment charges of $26.2 million and $4.1 million, respectively, for goodwill associated with our Animal Identification segment. As of December 31, 2009, we had approximately $14.8 million of goodwill and intangible assets. We assess the fair value of our goodwill and other intangible assets annually or earlier if events occur or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value. If we determine that significant additional impairment has occurred, we will be required to write off the impaired portion of goodwill and our other intangible assets. Additional impairment charges could have a material adverse effect on our operating results and financial condition.

We face the risk that the value of our inventory may decline before it is sold or that our inventory may not be able to be sold at anticipated prices.

On December 31, 2009, the book value of our inventory was $9.8 million. Our inventory could decline in value as a result of technological obsolescence or a change in the product. Our success depends in part on our ability to minimize the cost to purchase/produce inventory and turn that inventory rapidly through sales. The failure to turn such inventory may require us to sell such inventory at a discount or at a loss or write down its value, which could result in significant losses and decreases in our cash flows.

Our foreign operations pose additional risks.

We operate our businesses and market our products internationally. During the years ended December 31, 2009 and 2008, approximately 60% and 55% of our sales were to private and public businesses in non U.S. countries. Our foreign operations are subject to the risks described herein, as well as risks related to compliance with foreign laws and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, currency exchange rate fluctuations, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws and foreign corrupt practices act, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could have an adverse effect on our financial results.

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Currency exchange rate fluctuations could have an adverse effect on our sales and financial results.

During the years ended December 31, 2009 and 2008, we generated approximately 56% and 53%, respectively, of our sales and incurred a portion of our expenses in currencies other than U.S. dollars. We incurred approximately $0.6 million and $(2.3) million of other comprehensive income (loss) due to fluctuations in foreign currency exchange rates. To the extent that going forward we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price.

During the course of our testing of our internal controls, we may identify, and have to disclose, material weaknesses or significant deficiencies in our internal controls that will have to be remediated. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may negatively affect our stock price.

ITEM 2. PROPERTIES

At December 31, 2009, we were obligated under leases for approximately 82,720 square feet of facilities, of which 29,931 square feet was for office facilities and 52,789 square feet was for factory and warehouse space. These leases expire at various dates through 2042. In addition, we own 31,892 square feet of office space and 47,800 square feet of factory and warehouse facilities at the locations below. Our owned property is subject to a mortgage as discussed in Note 9 to our consolidated financial statements.

The following table sets forth our owned and leased properties by business segment (amounts in square feet):

					Factory /
	Office				Warehouse				Total
	Owned		Leased		Owned		Leased		Owned		Leased
Animal Identification		31,892		4,464		47,800		8,005		79,692		12,469
Emergency Identification		—		25,467		—		44,784		—		70,251
Total		31,892		29,931		47,800		52,789		79,692		82,720

The following table sets forth the principal locations of our properties (amounts in square feet):

					Factory /
	Office				Warehouse				Total
	Owned		Leased		Owned		Leased		Owned		Leased
Europe		—		4,416		—		8,005		—		12,421
Minnesota		31,892		—		47,800		—		79,692		—
South America		—		48		—		—		—		48
Texas		—		4,966		—		—		—		4,966
United Kingdom		—		20,501		—		44,784		—		65,285
Total		31,892		29,931		47,800		52,789		79,692		82,720

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings from time to time. We have accrued to the extent practicable our estimate of the probable costs for the resolution of these claims. Our estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by changes in our estimates. See Note 18 to our consolidated financial statements for a description of certain legal proceedings.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol “DIGA.”

The following table shows, for the periods indicated, the high and low sales prices per share of our common stock based on published financial sources.

	High		Low
2009
First Quarter	$	0.68	$	0.40
Second Quarter		1.70		0.69
Third Quarter		1.49		1.03
Fourth Quarter		1.25		0.62
2008
First Quarter	$	7.36	$	4.16
Second Quarter		6.88		4.88
Third Quarter		6.16		2.64
Fourth Quarter		2.88		0.36

On March 19, 2010, the closing sale price of our common stock on the Nasdaq Capital Market was $0.46 per share.

On December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance with the Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, the Company was provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule. If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that were are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it will likely trade on the OTC Bulletin Board.

Holders

According to the records of our transfer agent, as of March 19, 2010, there were approximately 1,624 holders of record of our common stock.

Dividends

We have never paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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Securities Authorized for Issuance Under Equity Compensation Plans

During 2009, we granted 471,033 shares of restricted common stock for executive compensation under our 2003 Flexible Stock Plan and DAC Stock Option Plan. We granted 498,581 options during 2009 under our equity compensation plans. As of December 31, 2009, the following shares of our common stock were authorized for issuance under our equity compensation plans:

	Equity Compensation Plan Information
					(c)
	(a)		(b)		Number of securities
	Number of securities		Weighted-average		remaining available for
	to be issued		exercise price		future issuance under
	upon exercise of		per share of		equity compensation plans
	outstanding options,		outstanding options,		(excluding securities
Plan Category (1)	warrants and rights		warrants and rights		reflected in column (a))
Equity compensation plans approved by security holders		3,206,109	$	16.32		1,199,080	(2)
Equity compensation plans not approved by security holders (3)		296,874		11.33		—
Total		3,502,983		15.90		1,199,080

(1)	A narrative description of the material terms of our equity compensation plans is set forth in Note 11 to our consolidated financial statements.
(2)	Includes 119 shares available for future issuance under our 1999 Employees Stock Purchase Plan.
(3)	We have made grants outside of our equity plans and have outstanding options exercisable for shares of our common stock. These options were granted as an inducement for employment or for the rendering of consulting services.

Recent Sales of Unregistered Securities / Recent Purchases of Securities

On January 11, 2010, we issued 205,479 shares of our restricted common stock to Randolph Geissler in connection with the payment of a settlement of an employment contract in the amount of $150,000 (based on the closing stock price of $0.73 per share on January 8, 2010). The securities were issued in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

We did not repurchase any shares of our common stock during the year ended December 31, 2009.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate. This Annual Report on Form 10-K also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K and include:

• our growth strategies including, without limitation, our ability to deploy our products and services including 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 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;

• borrowings under DSD Holding’s existing bank and credit facilities as well as Signature’s invoice discounting facility are payable on demand and/or the facilities could be terminated at any time without notice;

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

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

• 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;

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• 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 our various registration rights 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” beginning on page 12 of this Annual Report 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.

Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “projects,” “target,” “goal,” “plans,” “objective,” “may,” “should,” “could,” “would,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “hopes,” 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 (including those described under “Risk Factors” in this Annual Report) that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. Other than as required by law, we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which we hereafter become aware.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual Report.

Overview

We currently engage in the following principal business activities:

• developing, manufacturing and marketing of 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 livestock applications; and

• developing, manufacturing and marketing global position systems (“GPS”) and GPS-enabled products used for emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms.

Our discontinued operations presented in the accompanying consolidated financial statements consisted of the operations of four wholly-owned subsidiaries, Computer Equity Corporation (“Computer Equity”), Perimeter Acquisition Corp. (“Perimeter”), Florida Decision Corporation (“FDC,” formerly Pacific Decision Sciences Corporation) and ThermoLife Energy Corp. (“Thermo Life”), and two equity investments, IFTH Acquisition Corp. which is now part of PositiveID Corporation (“IFTH”) and PositiveID Corporation, formerly, VeriChip Corporation (“PSID”) (NASDAQ: PSID). Also included in discontinued operations are the operations of McMurdo Limited (“McMurdo”) which was sold by Signature, a subsidiary of our wholly-owned subsidiary Destron Fearing, on November 20, 2009. As of December 31, 2007, we owned a majority interest in PSID and IFTH. However, during the first quarter of 2008, our ownership percentages of both companies fell below 50%. Therefore, during the three-months ended March 31, 2008, we began accounting for PSID and IFTH under the equity method of accounting. All of our discontinued operations, excluding Thermo Life, have been sold as of December 31, 2008. Thermo Life was sold on January 21, 2010. Discontinued operations are more fully discussed in Note 14 to our consolidated financial statements.

Recent and other Significant Events Affecting Our Results of Operations and Financial Condition

Repayment of Existing Term Debt Obligations

On December 14, 2009, we paid $3.8 million of the existing term debt obligations to Laurus Master Fund Ltd. (“Laurus”) and Kallina Corporation (“Kallina”), of which $3.0 million was paid in cash (which included the November 2009 monthly payment) and $0.8 million was paid through the issuance of our common stock. After the prepayment, the balance of the existing debt obligations, which was approximately $1.4 million, was payable in full to the Lenders on or before the original maturity date of February 1, 2010. On February 1, 2010, the outstanding principal and interest due under the existing term debt obligations to Laurus and Kallina was paid in full.

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Registered Direct Offering and Sale of Common Stock and Warrants

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. 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. 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 replenish the funds used for the repayment of existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

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 payable 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 VWAP for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. On February 4, 2010, in connection with the registered direct offering discussed above, we terminated the SEDA.

Notice of Nasdaq Delisting

On December 10, 2009, we received a letter from the Nasdaq Stock Market (the “Nasdaq”) indicating that we are not in compliance with Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, we were provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that we are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Since December 10, 2009, our stock has traded below $1.00. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement, based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it will likely trade on the OTC Bulletin Board.

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 1 to our consolidated financial statements.

Business Segment Overview

We operate in two business segments: Animal Identification and Emergency Identification.

Our Animal Identification segment’s revenue decreased to $30.8 million for the year ended December 31, 2009 compared to $38.5 million for the year ended December 31, 2008. The decrease in the Animal Identification segment’s revenue was primarily due to decreased sales of our syringe assemblies and electronic tags. For extended discussion, see the Animal Identification revenue discussion below. Our Animal Identification segment experienced a smaller operating loss in the year ended December 31, 2009 compared to 2008 and we expect this segment to achieve operating income in 2010. See page 28 for a discussion of our outlook and trends for our Animal Identification segment.

Our Emergency Identification segment’s revenue decreased to $18.7 million for the year ended December 31, 2009 compared to $23.8 million for the year ended December 31, 2008. The decrease in revenue was primarily due to exchange rate variances during 2009 compared to 2008. In local currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales decreased at our Radio Communications and Clifford and Snell divisions, which were slightly offset by increased sales at our Sarbe division. Our Emergency Identification segment experienced operating losses for the years ended December 31, 2009 and 2008. We expect that our Emergency Identification segment will achieve operating income in 2010. See page 28 for a discussion of our outlook and trends for our Emergency Identification segment.

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The tables below provide a percentage breakdown of the significant sources of our consolidated revenues and gross profits over the past two fiscal years and, as such, reflect certain trends in the composition of such revenues and gross profits:

	2009			2008
Sources of Revenue:
Visual and electronic identification tags and implantable microchips for companion pets, horses, livestock, fish and wildlife markets from our Animal Identification segment		62.2	%		61.8	%
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and maritime vehicles in remote locations from our Emergency Identification segment		37.8			38.2
Total		100.0	%		100.0	%

	2009			2008
Sources of Gross Profit:
Visual and electronic identification tags and implantable microchips for companion pets, horses, livestock, fish and wildlife markets from our Animal Identification segment		52.5	%		41.9	%
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and maritime vehicles in remote locations from our Emergency Identification segment		47.5			58.1
Total		100.0	%		100.0	%

The table below sets forth data from our consolidated statements of operations for the past two fiscal years, expressed as a percentage of total revenues from continuing operations:

	2009			2008
Revenue		100.0	%		100.0	%
Cost of sales		59.0			68.0
Gross profit		41.0			32.0
Selling, general and administrative expenses		49.8			48.8
Research and development expenses		2.4			3.2
Restructuring, severance and separation expenses		1.4			5.9
Goodwill and asset impairment charges		14.9			57.0
Total operating costs and expenses		68.5			114.9
Operating loss		(27.5	)		(82.9	)
Interest and other income (expense), net		0.6			4.3
Interest expense		(4.3	)		(17.5	)
Loss from continuing operations before income tax benefit		(31.2	)		(96.1	)
Benefit from income taxes		—			0.3
Loss from continuing operations		(31.2	)		(95.8	)
Income from discontinued operations, net of income taxes		6.1			2.6
Net loss		(25.1	)		(93.2	)
(Income) loss attributable to the noncontrolling interest, continuing operations		0.2			(0.2	)
(Income) loss attributable to the noncontrolling interest, discontinued operations		(0.1	)		—
Net loss attributable to Digital Angel Corporation		(25.0	)%		(93.4	)%

Our consolidated operating activities (used) provided cash of $(3.9) million and $1.3 million during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our cash and cash equivalents totaled $1.9 million, compared to $1.4 million as of December 31, 2008. As of December 31, 2009, our stockholders’ equity was $15.9 million, as compared to $22.7 million as of December 31, 2008, and as of December 31, 2009, we had an accumulated deficit of $571.2 million. Our consolidated operating loss was approximately $13.6 million and $51.6 million for the years ending December 31, 2009 and 2008, respectively. The decrease in our 2009 operating loss was due, in large part, to approximately $35.5 million of goodwill and asset impairments, $3.7 million of restructuring expenses, $1.4 million of inventory reserves related to our restructuring efforts that were recorded in 2008 as well as an overall reduction in selling, general and administrative expenses in 2009.

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Our profitability and liquidity depend on many factors, including the success of our marketing programs, the maintenance and reduction of expenses, our ability to successfully develop and bring to market our new products and technologies and the protection of our intellectual property rights. We have established a management plan intended to guide us in achieving profitability in future periods. The major components of our plan are as follows:

• To streamline our segments’ operations and improve our supply chain management;

• To streamline and consolidate our corporate structure and minimize overhead costs;

• To divest of non-core assets and businesses;

• To attempt to produce additional cash flow and revenue from our technology products;

• To transition portions of our in-house manufacturing to lower-cost countries;

• To instill a pay for performance culture; and

• To seek growth through strategic acquisitions or partnerships.

Our management believes that the above plan can be effectively implemented.

Critical Accounting Policies and Estimates

Listed below are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity, and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions were changed significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For more detailed information on our significant accounting policies, see Note 1 to our consolidated financial statements.

Revenue Recognition

Our revenue recognition policies, which are listed in Note 1 to our consolidated financial statements, determine the timing and recognition of certain expenses, such as sales commissions. We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with our revenue recognition policies affect the amounts reported in our financial statements. A number of internal and external factors affect the timing of our revenue recognition, including estimates of customer service/warranty periods, estimates of customer returns and the timing of customer acceptance. Our revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year.

Goodwill and Other Intangible Assets

As of December 31, 2009, our consolidated goodwill was $3.3 million and our intangible assets were $11.4 million. We had no intangible assets with indefinite lives. We test our goodwill and intangible assets for impairment annually as a part of our annual business planning cycle during the fourth quarter of each fiscal year or earlier depending on specific changes in conditions surrounding our business units. The determination of the value of our intangible assets requires management to make estimates and assumptions about the future operating results of our operating units. In the fourth quarter of 2009, we recorded an impairment charge of approximately $7.1 million related to our Emergency Identification reporting unit; $3.8 million relating to goodwill and $3.3 million (net of approximately $(1.4) million of related deferred tax liabilities) related to intangible assets. As a result of the declines in our equity market capitalization, which fell below our stockholders’ equity, we performed an interim goodwill assessment in the third quarter of 2008. This assessment resulted in a $25.0 million goodwill impairment charge in the quarter. In performing our impairment assessments in 2009 and 2008, we placed emphasis on current trading values, including those of our competitors, as well as higher market-risk discount rates. In the fourth quarter of 2008, we recorded approximately $4.4 million of impairment charges relating to our Animal Identification segment of which $4.1 million was related to goodwill and $0.3 million was related to trademarks and customer relationships. Future events, such as market conditions or operational performance of our businesses, could cause us to conclude that additional impairment exists, which could have a material impact on our financial condition and results of operations.

Principles of Consolidation

We consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires that we include the revenue, expenses, assets and liabilities of such subsidiaries in our financial statements. Currently, we own a majority of each of our subsidiaries. However, if in the future we were to own less than 50% but equal to or more than 20% of the voting interest of any investee, we will account for such investee under the equity method. All intercompany transactions and balances between or among us and our subsidiaries have been eliminated in consolidation.

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Stock-Based Compensation

In accordance with the Compensation — Stock Compensation Topic of the Codification, stock-based awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. See Note 11 for further information concerning our stock option plans.

In the years ended December 31, 2009 and 2008, we incurred stock-based compensation expense of approximately $0.5 million and $0.4 million, respectively. This stock-based compensation expense is reflected in our consolidated statements of operations in selling, general and administrative expense.

Inventory Obsolescence

Estimates are used in determining the likelihood that inventory on hand can be sold. Historical inventory usage and current revenue trends are considered in estimating both obsolescence and slow-moving inventory. Inventory is stated at lower of cost (determined by the first-in, first-out method) or market, net of any reserve for obsolete or slow-moving inventory. As of December 31, 2009 and 2008, inventory reserves were $2.2 million and $1.3 million, respectively. The estimated market value of our inventory is based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse affect on our financial condition and results of operations.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our net deferred tax assets in each tax jurisdiction will be recovered from future taxable income in the applicable jurisdiction and, to the extent we believe that recovery is not more likely than not or is unknown, we must establish a valuation allowance.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax assets. As of December 31, 2009 and 2008, we had recorded a full valuation allowance against our U.S. net deferred tax assets due to uncertainties related to our ability to utilize these deferred tax assets, primarily consisting of net operating losses carried forward. The valuation allowance is based on our historical operating performance and estimates of taxable income in the U.S. and the period over which our deferred tax assets will be recoverable. As of December 31, 2009, we have not provided a valuation allowance against certain of our United Kingdom deferred tax assets as we have deemed it more likely than not that these assets will be realized.

If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we may be required to increase our valuation allowance against previously recognized deferred tax assets, which could result in a material adverse impact on our operating results. Conversely, if we become profitable in the future or if we realize certain built-in-gains, we may reduce a significant portion of our valuation allowance, which could result in a significant tax benefit and a favorable impact on our financial condition and operating results. As of December 31, 2009, we had an aggregate valuation allowance against our net deferred tax assets of approximately $116.4 million.

The amount of any benefit from our US tax 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 a fifty percent change in ownership under IRC section 382 places 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, effectively eliminates 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 the year ended December 31, 2009. As a result, approximately $197.9 million of the U.S. net operating loss carryforwards is limited under IRC section 382. 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. See Note 13 for further information concerning our income taxes.

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Results of Operations from Continuing Operations

We evaluate the performance of our two operating segments based on stand-alone segment operating loss, as presented below. Operating loss from each of our segments during 2009 and 2008 was as follows:

	For the years ended December 31,
	2009			2008
	(in thousands)
Animal Identification	$	(757	)	$	(41,716	)
Emergency Identification		(9,207	)		(1,257	)
Corporate (1)		(3,626	)		(8,662	)
Total	$	(13,590	)	$	(51,635	)

⁽¹⁾ Our Corporate segment includes all amounts given effect to in the consolidation of our subsidiaries, such as the elimination of inter-segment revenues expenses, assets and liabilities. Corporate also includes certain selling, general and administrative expense and interest expense and other expenses associated with corporate activities and functions.

Animal Identification Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

				% of						% of			Change
	2009			Revenue			2008			Revenue			Increase (Decrease)
	(dollar amounts in thousands)
Revenue	$	30,774			100.0	%	$	38,501			100.0	%	$	(7,727	)	(20.1	)%
Gross profit		10,635			34.5			8,355			21.7			2,280		27.3
Selling, general and administrative expenses		9,492			30.8			11,550			30.0			(2,058	)	(17.8	)
Research and development expenses		1,206			3.9			1,993			5.2			(787	)	(39.5	)
Restructuring, severance and separation expenses		497			1.6			2,357			6.1			(1,860	)	(78.9	)
Goodwill and asset impairment charges		197			0.6			34,171			87.2			(33,974	)	(99.4	)
Operating loss	$	(757	)		(2.4	)%	$	(41,716	)	NM		%	$	40,959		98.2

Revenue — Our Animal Identification segment’s revenue decreased approximately $7.7 million, or 20.1%, in the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease was primarily due to a decrease in demand for companion animal sales resulting in approximately 1.4 million less syringe assemblies sold to Schering Plough, our exclusive distributor in the U.S. of our companion pet implantable microchips. In addition, we experienced lower electronic tag sales due to the fulfillment of a contract with the U.S. Department of Agriculture in the first quarter of 2008, decreased electronic tag sales in Canada during the fourth quarter of 2009 compared to the fourth quarter of 2008 and fewer sales in Europe primarily due to a lower volume of sales to Austria and a negative exchange rate impact from the prior year. These decreases were slightly offset by an increase in sales of fish chips due to an increase in government demand.

Gross Profit and Gross Profit Margin — Our Animal Identification segment’s gross profit increased approximately $2.3 million, or 27.3%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase primarily relates to a lower gross profit margin in 2008 resulting from an inventory provision recorded in 2008 of approximately $1.8 million related to slow moving and obsolete inventory and inventory identified as a result of our restructuring activities in 2008 as well as headcount reductions and a reduction in material and freight expenses. The gross profit margin was 34.5% in the year ended December 31, 2009 compared to 21.7% in the year ended December 31, 2008. We primarily attribute the increase in gross profit margin to the causes discussed above.

Selling, General and Administrative Expenses — Our Animal Identification segment’s selling, general and administrative expenses decreased approximately $2.1 million, or 17.8% in the year ended December 31, 2009 compared to the year ended December 31, 2008. This was primarily attributable to lower sales and marketing costs due to less media and advertising expenses as a result of our cost control efforts, reduced salaries from headcount reductions resulting from our restructuring efforts in 2008 as well as decreased legal costs associated with intellectual property compliance. Selling, general and administrative expenses as a percentage of revenue remained relatively constant during the years ended December 31, 2009 and 2008.

Research and Development Expenses — Our Animal Identification segment’s research and development expenses decreased approximately $0.8 million in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease was primarily due to a reduction of costs associated with the rTag^TM development and decreased salary and benefits expenses due to headcount reductions as a result of our restructuring efforts. 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 were approximately $0.5 million and $2.4 million in the years ended December 31, 2009 and 2008, respectively. The costs in both 2009 and 2008 primarily related to severance and facilities and production relocation costs at the St. Paul, Denmark and South American locations.

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Goodwill and Asset Impairment Charges — Our Animal Identification segment recorded goodwill and asset impairment charges of $0.2 million and $34.2 million for the years ended December 31, 2009 and 2008, respectively. The goodwill and asset impairment charges in 2009 related to fixed asset impairments at the St. Paul location. In 2008, as a result of the declines in our equity market capitalization, which fell below our stockholders’ equity, we performed an interim goodwill assessment in the third quarter of 2008. This assessment resulted in a $25.0 million goodwill impairment charge in the quarter. In performing our assessments, we placed greater emphasis on current trading values, including those of our competitors, as well as higher market-risk discount rates. In addition, during our annual impairment review in the fourth quarter of 2008, we recorded goodwill impairment of approximately $4.1 million related to Geissler Technologies Corporation (“GTC”) and recorded an impairment of intangibles at South America of approximately $0.3 million. The remaining impairment in 2008 related to our restructuring and is due to: (i) fixed asset impairments of $1.8 million ($0.4 million in St. Paul and $1.4 million in Denmark); (ii) goodwill impairment in Denmark of $1.9 million; (iii) intangible asset impairments of $0.8 million in Denmark; and (iv) other asset impairments of $0.2 million. If in the future we fail to perform as expected, we could face additional goodwill and intangible asset impairment charges.

Outlook and Trends

We anticipate our Animal Identification segment’s sales and gross profits to remain relatively constant in 2010 and our operating expenses to decrease slightly in 2010. 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 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.

Emergency Identification Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

				% of						% of			Change
	2009			Revenue			2008			Revenue			Increase (Decrease)
	(dollar amounts in thousands)
Revenue	$	18,689			100.0	%	$	23,759			100.0	%	$	(5,070	)		(21.3	)%
Gross profit		9,636			51.6			11,563			48.7			(1,927	)		(16.7	)
Selling, general and administrative expenses		11,520			61.6			12,224			54.5			(704	)		(5.8	)
Restructuring, severance and separation expenses		181			1.0			596			2.5			(415	)		(69.6	)
Goodwill and asset impairment		7,142			38.3			—			—			7,142		NM
Operating loss	$	(9,207	)		(49.3	)%	$	(1,257	)		(5.3	)%	$	(7,950	)	NM

⁽¹⁾ NM = Not meaningful

Revenue — Our Emergency Identification segment’s revenue decreased approximately $5.1 million, or 21.3%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in revenue is primarily due to exchange rate variances during 2009 compared to 2008. In local currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales decreased at our Radio Communications and Clifford and Snell divisions, which were slightly offset by increased sales at our Sarbe division.

Gross Profit and Gross Profit Margin — Our Emergency Identification segment’s gross profit decreased approximately $1.9 million, or 16.7%, in the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease was primarily attributable to exchange rate variances during 2009 compared to 2008. In local currency, gross profit remained relatively constant. Gross profit margin was 51.6% in the year ended December 31, 2009 as compared to 48.7% during the year ended December 31, 2008. The increase in gross profit margin relates primarily to improved margins at our Sarbe division.

Selling, General and Administrative Expenses — Our Emergency Identification segment’s selling, general and administrative expenses decreased approximately $0.7 million, or 5.8%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. This decrease in selling, general and administrative expenses is primarily due to exchange rate variances during 2009 and 2008. In local currency, selling, general and administrative expenses increased approximately £0.7 million. The increase relates primarily to an increase in legal and accounting fees due to the implementation in 2009 of an allocation of such expenses from our corporate division, an increase in temporary staffing costs and depreciation, as well as an executive compensation and travel cost allocation from our corporate division in the fourth quarter of 2009. These increases were slightly offset by decreases in other personnel costs. As a percentage of revenue, selling, general and administrative expenses increased to 61.6% in the year ended December 31, 2009 from 54.5% in the year ended December 31, 2008. The increase in selling, general and administrative expenses as a percentage of revenue resulted primarily from the factors discussed above.

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Restructuring, Severance and Separation Expenses — Our Emergency Identification segment’s restructuring, severance and separation expenses were approximately $0.2 million in the year ended December 31, 2009 and $0.6 million in the year ended December 31, 2008 and primarily related to severance at our U.K. locations as we continue our efforts to reduce expenses and streamline operations.

Goodwill and Asset Impairment — Our Emergency Identification segment’s goodwill and asset impairment expense of approximately $7.1 million during the year ended December 31, 2009 related to impairments of approximately $3.8 million of goodwill and approximately $3.3 million (net of approximately $(1.4) million of related deferred tax liabilities) related to intangible assets. The impairments were recorded as a result of our annual testing during the fourth quarter of 2009.

Outlook and Trends

We anticipate our Emergency Identification segment’s sales and gross profits to increase and our operating expenses to decrease in 2010. We believe that the future will bring market opportunities due to increasing demand for recreational PLBs, expansion into the North American market and our belief that PLBs will become a highly desired product during peacetime for many of our current, and potentially new, world wide armed forces customers.

Corporate Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

							Change
	2009			2008			Increase (Decrease)
	(dollar amounts in thousands)
Revenue	$	—		$	—		$	—		—	%
Gross profit		—			—			—		—
Selling, general and administrative expenses		3,626			6,641			(3,015	)	(45.4	)
Restructuring expenses		—			725			(725	)	(100.0	)
Goodwill and asset impairment charges		—			1,296			(1,296	)	(100.0	)
Operating loss	$	(3,626	)	$	(8,662	)	$	5,036		40.4

Selling, General and Administrative Expenses — Our Corporate segment’s selling, general and administrative expenses decreased approximately $3.0 million in 2009 as compared to 2008. The decrease primarily relates to lower salary expenses resulting from fewer Corporate employees in 2009, the implementation of the allocation of executive management compensation and audit, accounting and legal expenses to our Animal Identification and Emergency Identification segments, a reduction in accrued bonuses, and decreased outside professional fees.

Restructuring Expenses — Our Corporate segment’s restructuring expense in 2008 consisted of approximately $0.4 million related to accrued severance and stay bonuses and related payroll expenses, and approximately $0.3 million related to accrued rent expense for our corporate office in Florida. As a part of the restructuring plan, we eliminated approximately five headcount in 2008 and we closed our offices in Delray Beach, Florida in September 2008.

Goodwill and Asset Impairment Charges — Our Corporate segment’s impairment charges of approximately $1.3 million for the year ended December 31, 2008 was due to $1.2 million impairment of our investment in PSID and the write off of assets in connection with the closing of our corporate offices in Florida.

Consolidated

Interest and Other Income, net

Interest and other income, net decreased approximately $2.4 million in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease was primarily the result of $3.2 million of income recognized in 2008 from the reversal of liabilities of companies that were sold or closed in 2001 and 2002, and for which we no longer had a legal obligation to pay, $0.7 million of gain on sale of patents in 2008 and approximately $0.5 million of interest income recognized on investments. These increases in 2008 were partially offset by a loss on settlement of PSID’s debt to us of $2.5 million.

Interest Expense

Interest expense was $2.2 million and $10.9 million for the years ended December 31, 2009 and 2008, respectively. The decrease in interest expense from 2008 is primarily due to approximately $2.0 million of additional amortization of debt issuance costs and discount on original debt issued as the result of prepayments of debt during 2008, approximately $1.5 million write-off of the remaining debt issuance costs and discount on original debt issued and debt modification expense as a result of the substantial modification of debt during 2008, an additional $1.1 million of interest expense associated with the re-pricing of common stock warrants during 2008 and an additional $0.5 million of interest expense related to the issuance of stock in connection with a $2.0 million note entered into during the fourth quarter of 2008. Interest expense in 2009 primarily relates to interest incurred on our outstanding debt as well as $0.5 million of interest expense related to Destron Fearing’s amortization of debt discount and debt issuance costs. Based on our current level of debt we estimate that our interest expense will be approximately $1 million for the year ended December 31, 2010.

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Total cash paid for interest was approximately $1.5 million and $2.1 million, or 68% and 19% of total interest expense, for the years ended December 31, 2009 and 2008, respectively.

Income Taxes

Differences in the effective income tax rates from the statutory federal income tax rate arise from state taxes net of federal benefits, the increase or reduction of valuation allowances related to net operating loss carry forwards and other deferred tax assets. As of December 31, 2009, we have provided a valuation allowance to fully reserve our U.S. net operating losses carried forward and our other U.S. existing net deferred tax assets, primarily as a result of our recent losses. Our tax provisions for 2009 and 2008 were primarily related to our foreign operations.

Net Loss from Continuing Operations

During the years ended December 31, 2009 and 2008, we reported a loss from continuing operations of approximately $15.4 million and $59.6 million, respectively. The decrease in the loss for the year ended December 31, 2009 compared to December 31, 2008 principally relates to higher goodwill and assets impairment charges, additional non-cash interest expense and additional restructuring expenses and severance charges, in the year ended December 31, 2008 as compared to the amounts incurred during 2009. Also contributing to the reduction in the loss from continuing operations in 2009 was a reduction in selling, general and administrative expenses of approximately $5.8 million. Each of these items is more fully discussed above in the context of the appropriate segment.

LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

As of December 31, 2009, cash and cash equivalents totaled $1.9 million, an increase of $0.5 million, or 35.7%, from $1.4 million at December 31, 2008.

Net cash (used in) provided by operating activities totaled $(3.9) million and $1.3 million in 2009 and 2008, respectively. In 2009, cash used by operating activities was primarily the net loss and the net change in operating assets and liabilities. In 2008, cash was provided primarily by the net change in operating assets and liabilities.

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, were $7.4 million and $8.9 million at December 31, 2009 and 2008, respectively. The decrease is primarily due to lower companion animal and electronic tag sales during the fourth quarter of 2009 compared to the fourth quarter of 2008. We anticipate accounts receivable to decrease slightly during 2010.

• Inventories increased to $9.8 million at December 31, 2009, compared to $7.1 million at December 31, 2008. The increase was primarily due to our Emergency Identification segment which continued to build inventory levels during 2009 in preparation for production on a large PELS contract. The increase is slightly offset by a decrease in inventory at our Animal Identification segment due to a reduction of transponders. We expect inventory levels to decrease in 2010 as we fulfill the PELS contract.

• Accounts payable decreased $0.3 million to $8.1 million at December 31, 2009, from $8.4 million at December 31, 2008. The decrease was primarily due to our Emergency Identification segment resulting from fewer purchases in the fourth quarter of 2009. The decrease was slightly offset by an increase in accounts payable at our Animal Identification segment due to the general timing of billings and payments of purchases. We anticipate accounts payable levels to decrease throughout 2010.

• Accrued expenses decreased $1.2 million to $6.6 million at December 31, 2009, from $7.7 million at December 31, 2008. The decrease was primarily related to the reclassification of certain bonuses to long-term liabilities based on our plans and expectations of the timing of the payments as well as payments of accrued severance at our Emergency Identification segment during 2009. We expect accrued expenses to increase in 2010.

Investing activities provided cash of $8.1 million and $13.3 million in 2009 and 2008, respectively. In 2009, cash provided by investing activities was primarily related to the sale of McMurdo. In 2008, cash provided by investing activities was primarily related to proceeds of approximately $9.5 million received on a note receivable from PSID and approximately $7.2 million received from PSID as a special dividend, offset slightly by payments on a note receivable and purchases of equipment.

Financing activities (used) cash of $(3.8) million and $(15.0) million in 2009 and 2008, respectively. In 2009, we paid a total of approximately $6.6 million on our debt which was slightly offset by the cash received from the issuance of shares of our common stock under the SEDA. In 2008, we made net payments on our debt of approximately $16.3 million which was offset slightly by approximately $2.3 million in proceeds from warrant exercises.

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Financial Condition

Financing Agreements and Debt Obligations

We are party to certain financing agreements and debt obligations, which total approximately $9.7 million as of December 31, 2009, and are discussed in detail in Note 9 to our consolidated financial statements. The following is a discussion of our liquidity, and therefore, focuses on our revolving debt and advances from factors which represent approximately $5.1 million and $1.3, respectively. We do not have any financial covenants under any of our debt agreements. For discussion of our non-financial covenants and outstanding debt, see Note 9 to our consolidated financial statements.

Destron Fearing’s Revolving Facility

On August 31, 2007, Destron Fearing and certain of its wholly-owned subsidiaries, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International (collectively, the “Eligible Subsidiaries”) entered into a $6.0 million revolving asset-based financing transaction with Kallina pursuant to the terms of a Security Agreement. Under the terms of the Security Agreement, Destron Fearing may borrow, from time to time, an amount equal to the lesser of the amount of availability under the borrowing base and $6.0 million, subject to certain reserves that Kallina is authorized to take in its reasonable commercial judgment (the “Revolving Facility”). The borrowing base is calculated as a percentage of the total amount of eligible accounts receivable and inventory owned by Destron Fearing and its Eligible Subsidiaries. Amounts outstanding under the Revolving Facility accrue interest at a rate equal to the prime rate plus 2.0%, but not less than 10.0% at any time. At December 31, 2009, approximately $2.2 million was outstanding under the Revolving Facility, there was $0.3 million available for borrowing and the interest rate was 10.0%.

The Revolving Facility matures on August 31, 2010. Destron Fearing and its Eligible Subsidiaries have pledged all of their respective assets, excluding the stock of all foreign subsidiaries other than Signature, in support of the obligations under the Revolving Facility. In connection with the Revolving Facility, Destron Fearing issued to Kallina seven-year warrants, which, as a result of our acquisition of the minority owners’ interest in Destron Fearing in 2007, were converted into warrants to purchase shares of our common stock. The value of the warrants of approximately $1.0 million was recorded as a discount to the Revolving Facility and is being amortized to interest expense over the life of the Revolving Facility. Destron Fearing paid Kallina an upfront fee equal to 3.5% of the $6.0 million Revolving Facility, which is also being amortized over the life of the Revolving Facility as interest expense.

Signature’s Invoice Discounting Factoring Agreements

Signature had an Invoice Discounting Agreement, (as amended, the “RBS Invoice Discounting Agreement”) with The Royal Bank of Scotland Commercial Services Limited (“RBS”). The RBS Invoice Discounting Agreement provided for Signature to sell with full title guarantee most of its receivables, as defined in the RBS Invoice Discounting Agreement. Under the RBS Invoice Discounting Agreement, as amended in December 2008, RBS prepaid up to 70% of the receivables sold in the United Kingdom (“U.K.”) and up to 70% of the receivables sold in the rest of the world, not to exceed an outstanding balance of £1.5 million at any given time, subject to restrictions on the use of proceeds. RBS paid Signature the remainder of the receivable upon collection. Receivables which remained outstanding 90 days from the end of the invoice month became ineligible and RBS could require Signature to repurchase the receivable. The discounting charge accrued at an annual rate of 1.5% above the base rate as defined in the RBS Invoice Discounting Agreement. Signature paid a commission charge to RBS of 0.16% of each receivable balance sold. The RBS Invoice Discounting Agreement required a minimum commission charge of £833 per month. Discounting charges of $35 thousand and $0.1 million are included in interest expense for the years ended December 31, 2009 and 2008, respectively. In July 2009, we terminated the RBS Invoice Discounting Agreement and replaced it with the Bibby Invoice Discounting Agreement as discussed below.

In July 2009, Signature entered into an invoice discounting factoring agreement (the “Bibby Invoice Discounting Agreement”) with Bibby Financial Services (“Bibby”), which replaced the RBS Invoice Discounting Agreement as discussed above. The Bibby Invoice Discounting Agreement provides for Signature to sell, with full title guarantee, certain of its receivables as defined in the Bibby Invoice Discounting Agreement. Bibby prepays 80% of the receivables sold in the U.K. and 70% of receivables sold in the rest of the world, not to exceed a balance of £2.5 million (approximately $4.0 million at December 31, 2009). Subsequent to continued satisfactory operation of the invoice discounting facility and Signature’s financial progress, Bibby will increase funding in two further tranches of £500 thousand each (approximately $0.8 million at December 31, 2009), up to a total balance of £3.5 million (approximately $5.6 million at December 31, 2009), based upon the cash needs of the business and ability to generate the required level of receivable funding. Bibby repays Signature the remainder of the receivable upon collection.

Receivables which remain outstanding 90 days from the invoice date become ineligible and Signature is required to repurchase the receivable. The Bibby Invoice Discounting Agreement requires a fee of 0.25% for each U.K. receivable sold and 0.3% for each receivable sold in the rest of the world. If the total of the yearly fee is less than £60,000, Signature is required to pay Bibby the amount of such deficit. Signature is also required to pay a discounting charge of 2.0% above the higher of Barclays Bank Plc base rate or 3 month LIBOR subject to a minimum of 3.5% (3.5% at December 31, 2009). Discounting charges of approximately $0.1 million are included in interest expense for the year ended December 31, 2009. Either Signature or Bibby can terminate the Bibby Invoice Discounting Agreement by providing written notice to the other party six months prior to the intended termination date but neither party can terminate for eighteen months following the commencement date. As of December 31, 2009, we had approximately £0.4 million outstanding (approximately $0.6 million) and approximately £0.3 million available (approximately $0.5 million) for borrowing under the Bibby Invoice Discounting Agreement.

30

Destron Fearing A/S’s Line of Credit

Destron Fearing A/S is party to a credit agreement with Danske Bank (the “Credit Facility”). On June 1, 2006, Destron Fearing A/S amended the borrowing availability from DKK 12.0 million to DKK 18.0 million (approximately $3.5 million at December 31, 2009). In connection with the amendment, Destron Fearing executed a Letter of Support which confirms that it will maintain its holding of 100% of the share capital of Destron Fearing A/S, and will neither sell, nor pledge, nor in any way dispose of any part of Destron Fearing A/S or otherwise reduce Destron Fearing’s influence on Destron Fearing A/S without the prior consent of Danske Bank. Interest is determined quarterly and is based on the international rates Danske Bank can establish on a loan in the same currency on the international market plus 2.0%. At December 31, 2009, the annual interest rate on the Credit Facility was 6.6%. Borrowing availability under the Credit Facility considers guarantees outstanding. The Credit Facility will remain effective until further notice. Destron Fearing A/S can terminate the Credit Facility and pay the outstanding balance, or Danske Bank may demand the credit line be settled immediately at any given time, without prior notice. Beginning in July 2009, Destron Fearing A/S and Danske Bank agreed to reduce the borrowing availability on the Credit Facility each month by DKK 500 thousand (approximately $0.1 million). As of December 31, 2009, total availability had been reduced from DKK 18.0 million (approximately $3.5 million at December 31, 2009) to DKK 15.0 million (approximately $2.9 million at December 31, 2009). DKK 15.2 million (approximately $2.9 million) was outstanding at December 31, 2009 and there was no availability under the credit line.

Nordisk Factoring Agreement

In March 2008, our wholly-owned European subsidiary, Destron Fearing A/S, entered into a factoring agreement (the “Nordisk Factoring Agreement”) with Nordisk Factoring A/S (“Nordisk”). Under the Nordisk Factoring Agreement, Nordisk advances 80% of Destron Fearing A/S’s eligible receivables, not to exceed a balance of DKK 6.0 million (approximately $1.2 million at December 31, 2009) at any given time. As security, Destron Fearing A/S assigns all invoice balances to Nordisk, regardless of whether advances were made on them, and warrants payments by its customers. Destron Fearing A/S pays a factoring commission charge to Nordisk of 0.15% of the gross volume of receivables factored. The Nordisk Factoring Agreement requires a minimum commission charge of DKK 36,000 (approximately $7 thousand) per year. Discounting charges of approximately $34 thousand and $31 thousand are included in interest expense for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, Destron Fearing A/S had assigned approximately DKK 3.5 million receivables (approximately $0.7 million) to Nordisk and had no additional availability under the agreement.

Registered Direct Offering and Sale of Common Stock and Warrants

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. 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. 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 existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

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 payable 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 VWAP for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. In connection with the registered direct offering, we terminated the SEDA effective February 4, 2010.

Liquidity

As of March 19, 2010, our consolidated cash and cash equivalents totaled approximately $2.2 million. In addition, we had an aggregate of $0.7 million available under our credit facilities.

Although we had negative working capital at December 31, 2009, we believe that we will be able to generate enough cash from operations, our existing revolving credit facility and factoring lines, the sales of certain business units and through other investing and financing sources, as well as our ability to delay certain bonus payments to senior management until funds are available and to undertake other cash management initiatives to operate our business for the twelve months ending December 31, 2010. Our goal is to achieve profitability and to generate positive cash flows from operations. In addition, during 2008 we restructured our Animal Identification business which eliminated redundancies, improved gross margins and decreased expenses. Also, we generated positive cash flows from operations during the year ended December 31, 2008. 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 achieving profitability and positive cash flows from operations during 2010. No assurance can be given that we will be successful in implementing the plan. Failure to generate positive cash flow from operations might require us to substantially reduce our level of operations and will have a material adverse effect on our business, financial condition and results of operations.

31

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 stock options and 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/refinance/extend our revolving credit facility and mortgage loan obligations during 2010. As of December 31, 2009, we had a working capital deficiency, which is partially due to having to classify our revolving line of credit and our mortgage loan as well as our factoring lines and our credit facility with Danske Bank, which are more fully discussed above and in Note 9 to our consolidated financial statements, as current liabilities on our consolidated balance sheet. Our debt obligation to Danske Bank is due on demand and we are required to reduce the amount available on the credit facility by approximately $0.1 million a month. Our factoring lines may also be amended or terminated by the lenders. These conditions indicate that we may not be able to continue operations at the current level, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business.

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. These strategic initiatives may include acquisitions, raising additional funds through debt or equity offerings, refinancing existing debt obligations 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.

ITEM 8. FINANCIAL STATEMENTS

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls and procedures includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

Report of Management on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control system was designed 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 in the U.S. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

32

(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
(iii)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2009 that have materially affected, or are reasonably 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 III

The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) will be filed by amendment to this Annual Report on or before April 30, 2010 or incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders to be filed with the SEC.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS

(a)(1)	The financial statements listed below are included in this report
	Report of Independent Registered Public Accounting Firm
	Financial Statements
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Stockholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
(a)(3)	Exhibits
	See the Exhibit Index filed as part of this Annual Report on Form 10-K.

33

SIGNATURES

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

	DIGITAL ANGEL CORPORATION
Date: April 1, 2010	By:	/s/ Joseph J. Grillo
		Joseph J. Grillo
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Joseph J. Grillo	President, Chief Executive Officer and Director	April 1, 2010
(Joseph J. Grillo)	(Principal Executive Officer)
/s/ Lorraine M. Breece	Senior Vice President and Chief Financial Officer	April 1, 2010
(Lorraine M. Breece)	(Principal Accounting Officer)
/s/ Daniel E. Penni	Chairman of the Board of Directors	April 1, 2010
(Daniel E. Penni)
/s/ John R. Block	Director	April 1, 2010
(John R. Block)
/s/ Dennis G. Rawan	Director	April 1, 2010
(Dennis G. Rawan)
/s/ Michael S. Zarriello	Director	April 1, 2010
(Michael S. Zarriello)

34

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-3
Consolidated Statements of Operations for each of the years in the two-year period ended December 31, 2009		F-4
Consolidated Statements of Stockholders’ Equity for each of the years in the two-year period ended December 31, 2009		F-5
Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31, 2009		F-7
Notes to Consolidated Financial Statements		F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Digital Angel Corporation

We have audited the accompanying consolidated balance sheets of Digital Angel Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting as of December 31, 2009. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Digital Angel Corporation and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States.

/s/ Eisner LLP
New York, New York
March 31, 2010

F-2

Digital Angel Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value)

	December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,895		$	1,413
Restricted cash		202			—
Accounts receivable, net of allowance for doubtful accounts of $906 in 2009 and $476 in 2008		7,396			8,875
Note receivable		450			450
Inventories		9,836			7,143
Deferred taxes		—			130
Other current assets		2,064			1,433
Current assets of discontinued operations		1,853			4,345
Total current assets		23,696			23,789
Property and equipment, net		7,363			8,549
Goodwill, net		3,343			6,848
Intangibles, net		11,447			18,508
Note receivable		596			1,015
Other assets, net		599			322
Other assets of discontinued operations		—			5,175
Total assets	$	47,044		$	64,206
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	9,297		$	8,581
Accounts payable		8,124			8,385
Advances from factors		1,241			1,494
Accrued expenses		6,580			7,737
Deferred gain on sale		960			—
Deferred revenue		548			840
Current liabilities of discontinued operations		2,514			2,705
Total current liabilities		29,264			29,742
Commitments and contingencies:
Long-term debt and notes payable		392			6,942
Deferred taxes		—			1,227
Other liabilities		1,445			2,223
Other liabilities of discontinued operations		—			1,367
Total liabilities		31,101			41,501
Stockholders’ equity:
Digital Angel Corporation stockholders’ equity:
Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil)		—			—
Common shares ($.01 par value; shares authorized 50,000; shares issued, 23,479 and 16,080; shares outstanding, 23,479 and 15,950)		235			161
Additional paid-in-capital		588,652			584,466
Accumulated deficit		(571,203	)		(558,839	)
Accumulated other comprehensive (loss) income — foreign currency translation		(1,737	)		(2,308	)
Subtotal		15,947			23,480
Treasury stock (carried at cost, nil and 130 shares)		—			(820	)
Total Digital Angel Corporation stockholders’ equity		15,947			22,660
Non-controlling interest		(4	)		45
Total stockholders’ equity		15,943			22,705
Total liabilities and stockholders’ equity	$	47,044		$	64,206

See the accompanying notes to consolidated financial statements.

F-3

Digital Angel Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

	For the years ended
	December 31,
	2009			2008
Revenue	$	49,463		$	62,260
Cost of sales		29,192			42,342
Gross profit		20,271			19,918
Selling, general and administrative expenses		24,638			30,415
Research and development expenses		1,206			1,993
Restructuring, severance and separation expenses		678			3,678
Goodwill and asset impairments		7,339			35,467
Operating loss		(13,590	)		(51,635	)
Interest and other income (expense), net		319			2,722
Interest expense		(2,176	)		(10,892	)
Loss from continuing operations before income tax benefit		(15,447	)		(59,805	)
Benefit from income taxes		24			165
Loss from continuing operations		(15,423	)		(59,640	)
Income from discontinued operations, net of income taxes of $608 and $0 (attributable to Digital Angel Corporation)		2,993			1,629
Net loss		(12,430	)		(58,011	)
Loss (income) attributable to the noncontrolling interest, continuing operations		110			(102	)
Income attributable to the noncontrolling interest, discontinued operations		(44	)		(20	)
Net loss attributable to Digital Angel Corporation	$	(12,364	)	$	(58,133	)
(Loss) income per common share attributable to Digital Angel Corporation common stockholders — basic and diluted:
Loss from continuing operations, net of noncontrolling interest	$	(0.82	)	$	(3.94	)
Income from discontinued operations, net of noncontrolling interest		0.16			0.11
Net loss	$	(0.66	)	$	(3.83	)
Weighted average number of common shares outstanding — basic and diluted		18,768			15,156

See the accompanying notes to consolidated financial statements.

F-4

Digital Angel Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2009 and 2008

(in thousands)

	Digital Angel Corporation Stockholders
												Accumulated
						Additional						Other									Total
	Common Stock					Paid-In			Accumulated			Comprehensive			Treasury			Noncontrolling			Stockholders’
	Number			Amount		Capital			Deficit			Income (Loss)			Stock			Interest			Equity
Balance, December 31, 2007		13,135		$	131	$	573,565		$	(500,706	)	$	428		$	(2,423	)	$	13,365		$	84,360
Net loss		—			—		—			(58,133	)		—			—			122			(58,011	)
Comprehensive loss:
Foreign currency translation		—			—		—			—			(2,736	)		—			53			(2,683	)
Total comprehensive loss										(58,133	)		(2,736	)					175			(60,694	)
Acquisition of Geissler Technologies Corporation		1,488			15		6,864			—			—			—			—			6,879
Issuance of common stock for services		262			3		1,443			—			—			—			—			1,446
Issuance of common stock for financing		216			2		742			—			—			—			—			744
Issuance of restricted stock and stock options for services		31			—		441			—			—			—			—			441
Issuance of shares in connection with warrants exercised		22			—		—			—			—			—			—			—
Issuance of common stock for legal settlement		162			2		498			—			—			—			—			500
Re-pricing of common stock warrants		—			—		1,112			—			—			—			—			1,112
Exercise of common stock warrants		778			8		2,307			—			—			—			—			2,315
Stock issuance costs		—			—		(73	)		—			—			—			—			(73	)
Treasury shares issued to affiliate		—			—		(646	)		—			—			646			—			—
Retirement of treasury shares		—			—		(1,777	)		—			—			1,777			—			—
Treasury shares acquired under severance agreement		—			—		—			—			—			(820	)		—			(820	)
Partial share repurchase		(14	)		—		(10	)		—			—			—			—			(10	)
Changes in noncontrolling interest as a result of other capital transactions by subsidiaries		—			—		—			—			—			—			(13,495	)		(13,495	)
Balance, December 31, 2008		16,080		$	161	$	584,466		$	(558,839	)	$	(2,308	)	$	(820	)	$	45		$	22,705

See the accompanying notes to consolidated financial statements.

F-5

Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (continued)
For the Years Ended December 31, 2009 and 2008
(in thousands)

	Digital Angel Corporation Stockholders
												Accumulated
						Additional						Other									Total
	Common Stock					Paid-In			Accumulated			Comprehensive			Treasury			Noncontrolling			Stockholders’
	Number			Amount		Capital			Deficit			Income (Loss)			Stock			Interest			Equity
Balance, December 31, 2008 (brought forward)		16,080		$	161	$	584,466		$	(558,839	)	$	(2,308	)	$	(820	)	$	45		$	22,705
Net loss		—			—		—			(12,364	)		—			—			(66	)		(12,430	)
Comprehensive loss:
Foreign currency translation		—			—		—			—			571			—			17			588
Total comprehensive loss										(12,364	)		571						(49	)		(11,842	)
Issuance of common stock under the Standby Equity Distribution Agreement		2,880			29		2,776			—			—			—			—			2,805
Issuance of common stock for equipment purchase		296			3		183			—			—			—			—			186
Issuance of common stock in a private placement sale		255			2		125			—			—			—			—			127
Issuance of common stock for price protection under the terms of a legal settlement		960			10		(10	)		—			—			—			—			—
Issuance of common stock under the terms of a legal settlement		357			4		396			—			—			—			—			400
Issuance of common stock for Geissler Technologies Corporation earn out		330			3		297			—			—			—			—			300
Retirement of treasury stock		295			3		(823	)		—			—			820			—			—
Issuance of common stock for services		101			1		125			—			—			—			—			126
Issuance of common stock for financing		1,393			14		786			—			—			—			—			800
Issuance of restricted stock and stock options for services		453			4		(4	)		—			—			—			—			—
Partial share repurchase		(8	)		—		—			—			—			—			—			—
Retirement of common stock		(1	)		—		—			—			—			—			—			—
Share-based compensation expense		—			—		519			—			—			—			—			519
Stock issuance costs							(129	)		—			—			—			—			(129	)
Issuance of common stock for SEDA commitment fee		88			1		124			—			—			—			—			125
Amortization of SEDA commitment fee		—			—		(125	)		—			—			—			—			(125	)
Reclassification of warrant as liability per EITF 07-5		—			—		(54	)		—			—			—			—			(54	)
Balance, December 31, 2009		23,479		$	235	$	588,652		$	(571,203	)	$	(1,737	)	$	—		$	(4	)	$	15,943

See the accompanying notes to consolidated financial statements.

F-6

Digital Angel Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

	For the years ended December 31,
	2009			2008
Cash flows from operating activities:
Net loss	$	(12,430	)	$	(58,011	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Income from discontinued operations		(2,993	)		(1,629	)
Equity compensation and administrative expenses		645			1,875
Depreciation and amortization		4,068			4,010
Amortization of debt discount and financing costs		595			8,049
Allowance for doubtful accounts		430			334
Provision for inventory excess and obsolescence		(138	)		2,049
Loss on settlement of debt		—			2,512
Impairment of goodwill and assets		7,339			35,467
Change in fair value of warrant liability		(49	)		—
Other		—			221
(Increase) decrease in restricted cash		(202	)		90
Net change in operating assets and liabilities		(2,517	)		4,648
Net cash provided by discontinued operations		1,352			1,689
Net cash (used in) provided by operating activities		(3,900	)		1,304
Cash flows from investing activities:
Decrease (increase) in notes receivable		419			(1,452	)
Proceeds from note receivable with PSID		—			9,500
Payment for investment in subsidiary		—			(241	)
Proceeds from special dividend received		—			7,230
Payments for property and equipment		(420	)		(2,080	)
Payment for costs of business acquisition		—			(261	)
Increase in other assets		(134	)		(416	)
Net cash provided by discontinued operations (including cash of $8,260 in 2009 from sale of McMurdo)		8,260			1,051
Net cash provided by investing activities		8,125			13,331
Cash flows from financing activities:
Net amounts paid on notes payable		(1,217	)		(1,341	)
Net payments of long-term debt		(5,343	)		(15,001	)
Proceeds from warrant exercise		—			2,315
Treasury stock acquired from Rabbi Trust		—			(820	)
Issuance of common shares and warrants		127			—
Sale of common shares under the Standby Equity Distribution Agreement		2,805			—
Payments of dividends to subsidiary’s noncontrolling shareholder		—			(34	)
Stock issuance costs		(129	)		(83	)
Net cash used in discontinued operations		—			(25	)
Net cash used in financing activities		(3,757	)		(14,989	)
Net increase (decrease) in cash and cash equivalents		468			(354	)
Effect of exchange rate changes on cash and cash equivalents		14			(9	)
Cash and cash equivalents — Beginning of year		1,413			1,776
Cash and cash equivalents — End of year	$	1,895		$	1,413
Supplemental disclosure of cash flow information:
Income taxes paid	$	58		$	113
Interest paid		1,487			2,070

See the accompanying notes to consolidated financial statements.

F-7

Digital Angel Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands, except per share data)

1. Organization and Summary of Significant Accounting Policies

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 and government/military assets. Included in this diverse product line are applications for radio frequency identification systems (“RFID”), global positioning systems (“GPS”) and satellite communications.

On November 10, 2008, we effected a one-for-eight reverse stock split. As a result, all per share amounts and market price information have been adjusted to reflect the reverse stock, except where otherwise stated.

Business Segments

We operate in two business segments: Animal Identification and Emergency Identification. Our Animal Identification segment comprises the operations of our wholly-owned subsidiary, Destron Fearing Corporation (“Destron Fearing”) and our Emergency Identification segment comprises the operations of our 98.5%-owned subsidiary, Signature Industries Limited (“Signature”).

Animal Identification Segment

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 livestock 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 Segment

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 as well as sound horn alarms. 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;

• alarm sounders for industrial use and other electronic components.

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, other expense reductions associated with companies whose assets were sold or closed in 2001 and 2002, and interest expense and interest and other income associated with corporate activities and functions. Included in Corporate and Eliminations as of December 31, 2009 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.

Discontinued Operations

During the years ended December 31, 2009 and 2008, we sold several non-core businesses and we discontinued one business, Thermo Life Energy Corp. (“Thermo Life”), which was sold on January 21, 2010. On November 20, 2009, we sold the assets of our business unit, McMurdo Limited (“McMurdo”) which is more fully discussed in Note 14. In addition, on November 12, 2008, we sold all of the common stock that we owned in PositiveID Corporation, formerly known as VeriChip Corporation, (“PSID”) (Nasdaq:PSID), which was approximately 45.6% of PSID’s then issued and outstanding shares of common stock. Accordingly, the financial results of these businesses are now classified as discontinued operations for all periods presented in this Annual Report. Our decision to sell/discontinue these businesses was a result of management’s strategy to streamline operations in order to focus our efforts on our Animal Identification business. Discontinued operations are more fully discussed in Note 14.

F-8

Summary of Significant Accounting Policies

Liquidity

Our consolidated operating activities used cash of $3.9 million and provided cash of $1.3 million during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our cash and cash equivalents totaled $1.9 million, compared to $1.4 million as of December 31, 2008. As of December 31, 2009, we had an accumulated deficit of $571.2 million.

Although we had negative working capital at December 31, 2009, we believe that we will be able to generate enough cash from operations, our existing revolving credit facility and factoring lines, the sales of certain business units and through other investing and financing sources as well as our ability to delay certain bonus payments to senior management until funds are available and to undertake other cash manager initiatives to operate our business for the twelve months ending December 31, 2010. In addition, during 2008 we restructured our Animal Identification business which eliminated redundancies, improved gross margins and decreased expenses. Also, we generated positive cash flows from operations during the year ended December 31, 2008. 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 achieving profitability and positive cash flows from operations during 2010. Failure to generate positive cash flow from operations might require us to substantially reduce our level of operations and 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 stock options and 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/refinance our revolving credit facility and mortgage loan obligations during 2010. As of December 31, 2009, we had a working capital deficiency, which is partially due to having to classify our revolving line of credit and our mortgage loan as well as our factoring lines and our credit facility with Danske Bank, which are more fully discussed in Note 9, as current liabilities on our consolidated balance sheet. In addition, our debt obligation to Danske Bank is due on demand and we are required to make $0.1 million a month in principal payments to reduce the credit facility. Our factoring lines may also be amended or terminated by the lenders. These conditions indicate that we may not be able to continue operations at the current level, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business.

Principles of Consolidation

The financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries. The non-controlling interest represents the outstanding voting stock of the subsidiaries not wholly-owned by us. All significant intercompany accounts and transactions have been eliminated in consolidation.

In December 2007, the Financial Accounting Standards Board (“FASB”) modified certain requirements of the Business Combination Topic of the Accounting Standards Codification (“Codification”). The changes provided new guidance that defines the acquirer as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. It also requires that an acquirer recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In addition, the guidance requires that the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. We adopted the new requirements on January 1, 2009 and in order to conform, we have restated our consolidated statement of operations for the year ended December 31, 2008 to include the income attributable to the noncontrolling interest in consolidated net income, our consolidated balance sheet at December 31, 2008 to include the noncontrolling interest in equity, our consolidated statements of stockholders’ equity for the year ended December 31, 2008 to include the noncontrolling interest in equity and the applicable notes to the consolidated financial statements.

A summary of the changes to our financial statements to reflect the retrospective application of the modified requirements of the Business Combination Topic of the Codification is presented below.

	Year Ended
	December 31, 2008
	(in thousands)
Statement of Operations Data as Restated to Reflect the Adoption of the Modified Requirements of the Business Combination Topic of the Codification:
Loss from continuing operations, as previously reported on form 10-K	$	(58,391	)
Reclassify McMurdo results to discontinued operations		(1,371	)
Remove minority interest (to present below as noncontrolling interest)		122
Loss from continuing operations, restated		(59,640	)
Income from discontinued operations, net of income taxes of $0		1,629
Net loss, restated		(58,011	)
Income attributable to noncontrolling interest, continuing and discontinued operations		(122	)
Net loss attributable to common stockholders of Digital Angel Corporation	$	(58,133	)

F-9

	December 31,
	2008
	(in thousands)
Balance Sheet Data Restated to Reflect the Adoption of the Modified Requirements of the Business Combination Topic of the Codification:
Stockholders’ equity attributable to Digital Angel Corporation, as previously reported	$	22,660
Stockholders’ equity attributable to noncontrolling interest		45
Stockholders’ equity, restated	$	22,705

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) 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 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, lives of intangible assets, assumptions used in Black-Scholes valuation models, estimates of the fair value of acquired assets and assumed liabilities, and the determination of whether any impairment is to be recognized on goodwill or intangibles, among others.

Foreign Currencies

We operate foreign subsidiaries in Europe and South America. Our subsidiaries domiciled in Europe and South America use their local currencies as their functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in the statement of stockholders’ equity.

Other transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than a subsidiaries’ functional currency are included in our results of operations as incurred. These amounts are not material to the consolidated financial statements.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollected amounts through a charge to earnings and a credit to a valuation account based on its assessment of the current status of individual accounts.

Concentration of Credit Risk

We maintained our domestic cash in one financial institution during the years ended December 31, 2009 and 2008. Balances were insured up to Federal Deposit Insurance Corporation limits of $250,000 per institution. Cash may from time to time exceed the federally insured limits.

Our trade receivables are potentially subject to credit risk. We extend credit to our customers based upon an evaluation of the customers’ financial condition and credit history and generally do not require collateral.

Inventories

Inventories consist of raw materials, work in process and finished goods. The majority of the components are plastic ear tags, electronic microchips, electronic readers and components and GPS search and rescue equipment. Inventory is valued at the lower of cost (determined by the first-in, first-out method) or market. We monitor and analyze inventory for potential obsolescence and slow-moving items based upon the aging of the inventory and the inventory turns by product. Inventory items designated as obsolete or slow moving are reduced to net realizable value.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization computed using the straight-line method. Building and leasehold improvements are depreciated and amortized over their estimated useful lives ranging from 10 to 40 years and equipment is depreciated over their estimated useful lives ranging from 3 to 10 years. Repairs and maintenance, which do not extend the useful life of the asset, are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the consolidated statements of operations.

F-10

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. Our reporting units are those businesses for which financial information is available and upon which segment management makes operating decisions. We account for goodwill and intangible assets in accordance with the Intangibles — Goodwill and Other Topic of the Codification. Intangible assets deemed to have an indefinite life, such as goodwill, are reviewed at least annually for impairment. Intangible assets with finite lives are amortized over their estimated useful lives. Other than goodwill, we do not have any intangible assets with indefinite lives. Annually, we test our goodwill and intangible assets for impairment as a part of our annual business planning cycle. Goodwill and intangible assets are also tested between testing dates if an impairment condition or event is determined to have occurred.

During the fourth quarter of 2009, we recorded approximately $3.8 million of goodwill impairment related to our Emergency Identification reporting unit. In 2008, as a result of the declines in our equity market capitalization, which fell below our stockholders’ equity, we performed an interim goodwill assessment in the third quarter of 2008 which resulted in a $25.0 million goodwill impairment charge. In performing our assessment, we placed emphasis on current trading values, including those of our competitors, as well as higher market-risk discount rates. We also recorded approximately $1.9 million of goodwill impairment related to restructuring efforts at our Destron Fearing European business unit in 2008. During the fourth quarter of 2008, we performed our annual impairment testing which resulted in an additional $4.1 million goodwill impairment which related to Geissler Technologies Corporation (“GTC”), one of Destron Fearing’s subsidiaries.

Future events, such as market conditions or operational performance of our acquired businesses, could cause us to conclude that additional impairment exists, which could have a material impact on our financial condition and results of operations. See Notes 6, 7 and 12 for more information.

We have other intangible assets consisting of trademarks, tradenames, patented and non-patented technologies and customer relationships. These intangible assets are amortized over their expected economic lives ranging from 2 to 20 years. The lives were determined based upon the expected use of the asset, the ability to extend or renew patents, trademarks and other contractual provisions associated with the asset, the estimated average life of the replacement parts of the reporting units products, the stability of the industry, expected changes in and replacement value of distribution networks and other factors deemed appropriate. We continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-lived intangible assets warrant revision or that the remaining balance of such assets may not be recoverable. We use an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. In the fourth quarter of 2009, we recorded an impairment charge of approximately $3.3 million (net of approximately $(1.4) million of deferred tax liability impairment) related to intangible assets at our Emergency Identification reporting unit. In conjunction with our restructuring efforts at our Destron Fearing European business unit during 2008, we recorded approximately $0.8 million of impairments related to certain trademarks and tradenames. In addition, during our annual review in the fourth quarter of 2008, we recorded an impairment of approximately $0.3 million of our South American intangible assets.

The total impairments of goodwill and intangible assets recorded in the fourth quarter of 2009 were approximately $7.1 million. These impairments are more fully discussed in Notes 6, 7 and 12.

Advertising Costs

We expense production costs of print advertisements on the first date the advertisements take place. Other advertising costs are expensed when incurred. Advertising expense included in selling, general and administrative expense was $0.4 million and $0.6 million in 2009 and 2008, respectively.

Revenue Recognition

We follow the revenue recognition guidance in the Revenue Recognition Topic of the Codification. Our Animal Identification and Emergency Identification segments recognize product revenue at the time product is shipped and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties regarding customer acceptance exist, revenue is recognized when such uncertainties are resolved. There are no significant post-contract support obligations at the time of revenue recognition. Our accounting policy regarding vendor and post contract support obligations is based on the terms of the customers’ contracts and is billable upon occurrence of the post-sale support. Costs of products sold and services provided are recorded as the related revenue is recognized. For non-fixed and fixed fee jobs, service revenue is recognized based on the actual direct labor hours in the job multiplied by the standard billing rate and adjusted to net realizable value, if necessary. Other revenue is recognized at the time services or goods are provided. It is our policy to record contract losses in their entirety in the period in which such losses are foreseeable. We enter into bill and hold arrangements with certain customers at our Emergency Identification segment. Revenue for these arrangements is recognized when the following criteria are met; (i) the arrangement is requested by the buyer who has a substantial business purpose for ordering the goods, (ii) risks of ownership have passed to the buyer, (iii) there is a fixed, written commitment to purchase these goods, (iv) there is a fixed schedule (consistent with the buyer’s business purpose) for delivery of the goods, (v) we do not retain any specific performance obligations, (vi) the ordered goods are kept segregated from our other inventory and are not subject to being used to fill other orders and (vii) the equipment is complete and ready for shipment.

We offer a warranty on our Animal Identification and Emergency Identification segment’s products and record a liability for product warranties at the time it is probable that a warranty liability has been incurred and the amount of loss can reasonably be estimated. The warranty expense incurred during the years ended December 31, 2009 and 2008 was $0.2 million and $43 thousand, respectively.

It is our policy to approve all customer returns before issuing credit to the customer. We incurred returns of approximately $0.1 million and $0.5 million in 2009 and 2008, respectively.

F-11

Stock-Based Compensation

At December 31, 2009, we had seven stock-based employee compensation plans (four of which have been terminated with respect to any new stock option grants) and Destron Fearing had two stock-based employee compensation plans (one of which has been terminated with respect to any new stock option grants), which are described more fully in Note 11. In addition, Thermo Life has two employee compensation plans, which are described in Note 14.

In accordance with the Compensation — Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. See Note 11 for further information concerning our stock option plans.

Research and Development

Research and development expense consists of personnel costs, supplies, payments to consultants, other direct costs and indirect overhead costs of developing new products and technologies and is charged to expense as incurred.

Restructuring, Severance and Separation Expenses

During 2008, we initiated a comprehensive review of our businesses to develop a strategic long-range plan focusing on restoring growth and profitability. In connection with this review, we recorded estimated expenses for severance, lease payments and other restructuring costs. In accordance with the Exit or Disposal Cost Obligations Topic of the Codification, generally costs associated with restructuring activities are recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. In addition, post-employment benefits accrued for workforce reductions related to restructuring activities are accounted for under the Compensation — Nonretirement Postemployment Benefits Topic of the Codification. A liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated. We continually evaluate the adequacy of the liabilities under our restructuring efforts. During the years ended December 31, 2009 and 2008, we incurred approximately $0.7 million and $3.7 million of restructuring, severance and separation expenses, respectively, and as of December 31, 2009, we had an accrued liability for restructuring, severance and separation expenses of $0.5 million.

Foreign Currency Adjustment of Intercompany Loans

In accordance with the Foreign Currency Matters Topic of the Codification, when intercompany foreign currency transactions between entities included in the consolidated financial statements are of a long-term investment nature (i.e., those for which settlement is not planned or anticipated in the foreseeable future) foreign currency transaction adjustments should not produce gains or losses that affect consolidated earnings. Gains and losses on such transactions are included in equity in the accumulated other comprehensive income (loss) — foreign currency translation account in consolidation. However, when intercompany transactions are deemed to be of a short-term nature, such gain and losses are required to affect consolidated earnings. Until July 6, 2009, management concluded that the intercompany loan from Destron Fearing to Signature was of a long-term nature. This was appropriate because management had no plans to require repayment of the intercompany loan. The funds were provided to Signature for new product development and the acquisition of McMurdo. Management of both entities verbally agreed that the intention was that the loan was not anticipated to be repaid in the foreseeable future and no loan agreement was documented. The historical and projected cash flows of Signature did not support repayment of the loan and Signature’s invoice discount facility did not permit repayment of the loan. Accordingly, included in accumulated other comprehensive loss as of December 31, 2008 is approximately $1.7 million of losses associated with the intercompany loan between Destron Fearing and Signature. On July 7, 2009, upon entering into the Bibby Invoice Discounting Agreement, which is more fully discussed in Note 2, Destron Fearing and Signature entered into a loan agreement, which requires Signature to make quarterly principal payments. Management determined at this time that it was appropriate to treat the intercompany loan as short-term in nature because of several factors: (i) the Bibby Invoice Discount Agreement provided Signature additional working capital; (ii) the terms of the Bibby Invoice Discount Agreement allowed for the repayment of the loan per the terms of the intercompany loan agreement; and (iii) the planned sale of McMurdo would provide the funds necessary for Signature to repay the loan. Therefore, we determined that effective July 7, 2009, it was appropriate to begin recording transaction adjustments as gains/losses in the statement of operations and, accordingly, we recorded approximately $8 thousand of foreign currency transaction losses during the year ended December 31, 2009. Going forward, changes in the foreign currency exchange rates between the U.S. dollar and the English pound will result in additional gains or losses in our consolidated earnings.

Income Taxes

We account for income taxes under the asset and liability approach for the financial accounting and reporting for income taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred tax assets where we determine realization is not currently judged to be more likely than not. Income taxes include U.S. and international taxes. We and our U.S. subsidiaries file a consolidated federal income tax return. Income taxes are more fully discussed in Note 13.

We recognize and measure uncertain tax positions through a two step process in accordance with the Income Taxes Topic of the Codification. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken in a tax return and recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.

F-12

Compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of our legal entities that are located in several countries. Our determinations include many decisions based on our knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third-parties. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We are periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures. Such estimates are subject to change.

(Loss) Income Per Common Share and Common Share Equivalent

Basic and diluted (loss) income per common share is computed by dividing the (loss) income by the weighted average number of common shares outstanding for the period and has been retroactively adjusted for the reverse stock split effected on November 10, 2008. Since we have incurred losses attributable to common stockholders during each of the two years ended December 31, 2009 and 2008, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares consist of restricted stock and incremental shares issuable upon exercise of stock options and warrants to the extent that the average fair value of our common stock for each period is greater than the exercise price of the derivative securities. See note 15.

Comprehensive Income (Loss)

Our comprehensive accumulated other income (loss) consists of foreign currency translation adjustments and is reported in the consolidated statements of stockholders’ equity.

Impact of Recently Issued Accounting Standards

In June 2009, FASB released the Codification which became the source of authoritative GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. For all financial statements issued after September 15, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification does not change how we account for our transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, we are required to refer to topics in the Codification rather than the superseded standards. The adoption of the Codification did not impact our consolidated financial position, results of operations, cash flows or financial statement disclosures.

In April 2009, FASB established general standards of accounting for, and the disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, the Subsequent Event Topic of the Codification sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted this standard as of June 30, 2009, which did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2008, FASB established that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarified the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. The standard was effective as of January 1, 2009. We adopted the Contracts in Entity’s Own Equity Subtopic of the Derivatives and Hedging Topic of the Codification on January 1, 2009 and as a result we have a liability associated with outstanding warrants of approximately $4 thousand at December 31, 2009 and have recorded other income of approximately $53 thousand during the year ended December 31, 2009 due to the change in values.

In March 2008, FASB required enhanced disclosures about an entity’s derivative and hedging activities. Entities are required to provide enhanced disclosures about: (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This standard was effective for financial statements issued as of January 1, 2009. Comparative disclosures for earlier periods at initial adoption was encouraged but not required. We adopted the applicable requirements of the Derivative and Hedging Topic of the Codification on January 1, 2009, which did not have a material impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures.

In December 2007, FASB modified certain requirements of the Business Combination Topic of the Codification. The changes provided new guidance that defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. It also requires that an acquirer recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In addition, the guidance requires that the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. The guidance of modified sections is applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. An entity may not apply the standard before that date. We adopted these requirements effective January 1, 2009, which did not have any impact on our consolidated financial position, results of operations, cash flows or financial statement disclosures as we have not had any acquisitions since adopting the standard.

F-13

In December 2007, FASB established new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarified that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. In addition, the modified Consolidation Topic of the Codification changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. This also established a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The modified sections are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. Noncontrolling interests should be accounted for and presented as equity if material, rather than as a liability or mezzanine equity and significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. We adopted these requirements on January 1, 2009 and as such, we have presented our statement of operations for the year ended December 31, 2008 to include the income attributable to the noncontrolling interest in consolidated net income and our balance sheet at December 31, 2008 to include the noncontrolling interest in stockholders’ equity. The effect of the adoption of these requirements on our financial statements for the year ended December 31, 2008 is presented above under the heading “Principles of Consolidation.”

Uncertain Nasdaq Listing

On December 10, 2009, we received a letter from the Nasdaq Stock Market (the “Nasdaq”) indicating that we are not in compliance with Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310I(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, we have been provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

2. Accounts Receivable

	December 31,			December 31,
	2009			2008
	(in thousands)
Receivables assigned to factors	$	1,241		$	1,494
Unfactored accounts receivable		7,061			7,857
Allowance for doubtful accounts		(906	)		(476	)
	$	7,396		$	8,875

Factoring Agreements

Descriptions of our borrowing agreements, which are reflected on our consolidated balance sheet as “advances from factors,” are as follows:

RBS Invoice Discounting Agreement

Signature had an Invoice Discounting Agreement, (as amended, the “RBS Invoice Discounting Agreement”) with The Royal Bank of Scotland Commercial Services Limited (“RBS”). The RBS Invoice Discounting Agreement provided for Signature to sell with full title guarantee most of its receivables, as defined in the RBS Invoice Discounting Agreement. Under the RBS Invoice Discounting Agreement, as amended in December 2008, RBS prepaid up to 70% of the receivables sold in the United Kingdom (“U.K.”) and up to 70% of the receivables sold in the rest of the world, not to exceed an outstanding balance of £1.5 million at any given time, subject to restrictions on the use of proceeds. RBS paid Signature the remainder of the receivable upon collection. Receivables which remained outstanding 90 days from the end of the invoice month became ineligible and RBS could require Signature to repurchase the receivable. The discounting charge accrued at an annual rate of 1.5% above the base rate as defined in the RBS Invoice Discounting Agreement. Signature paid a commission charge to RBS of 0.16% of each receivable balance sold. The RBS Invoice Discounting Agreement required a minimum commission charge of £833 per month. Discounting charges of $35 thousand and $0.1 million are included in interest expense for the years ended December 31, 2009 and 2008, respectively. In July 2009, we terminated the RBS Invoice Discounting Agreement and replaced it with the Bibby Invoice Discounting Agreement as discussed below.

Bibby Invoice Discounting Factoring Agreement

In July 2009, Signature entered into an invoice discounting factoring agreement (the “Bibby Invoice Discounting Agreement”) with Bibby Financial Services (“Bibby”), which replaced the RBS Invoice Discounting Agreement as discussed above. The Bibby Invoice Discounting Agreement provides for Signature to sell, with full title guarantee, certain of its receivables as defined in the Bibby Invoice Discounting Agreement. Bibby prepays 80% of the receivables sold in the U.K. and 70% of receivables sold in the rest of the world, not to exceed a balance of £2.5 million (approximately $4.0 million at December 31, 2009). Subsequent to continued satisfactory operation of the invoice discounting facility and Signature’s financial progress, Bibby will increase funding in two further tranches of £500 thousand each (approximately $0.8 million at December 31, 2009), up to a total balance of £3.5 million (approximately $5.6 million at December 31, 2009), based upon the cash needs of the business and ability to generate the required level of receivable funding. Bibby repays Signature the remainder of the receivable upon collection.

F-14

Receivables which remain outstanding 90 days from the invoice date become ineligible and Signature is required to repurchase the receivable. The Bibby Invoice Discounting Agreement requires a fee of 0.25% for each U.K. receivable sold and 0.3% for each receivable sold in the rest of the world. If the total of the yearly fee is less than £60,000, Signature is required to pay Bibby the amount of such deficit. Signature is also required to pay a discounting charge of 2.0% above the higher of Barclays Bank Plc base rate or 3 month LIBOR subject to a minimum of 3.5% (3.5% at December 31, 2009). Discounting charges of approximately $0.1 million are included in interest expense for the year ended December 31, 2009. Either Signature or Bibby can terminate the Bibby Invoice Discounting Agreement by providing written notice to the other party six months prior to the intended termination date but neither party can terminate for eighteen months following the commencement date. As of December 31, 2009, we had approximately £0.4 million outstanding (approximately $0.6 million) and approximately £0.3 million available (approximately $0.5 million) for borrowing under the Bibby Invoice Discounting Agreement.

Nordisk Factoring Agreement

In March 2008, our wholly-owned European subsidiary, Destron Fearing A/S, entered into a factoring agreement (the “Nordisk Factoring Agreement”) with Nordisk Factoring A/S (“Nordisk”). Under the Nordisk Factoring Agreement, Nordisk advances 80% of Destron Fearing A/S’s eligible receivables, not to exceed a balance of DKK 6.0 million (approximately $1.2 million at December 31, 2009) at any given time. As security, Destron Fearing A/S assigns all invoice balances to Nordisk, regardless of whether advances were made on them, and warrants payments by its customers. Destron Fearing A/S pays a factoring commission charge to Nordisk of 0.15% of the gross volume of receivables factored. The Nordisk Factoring Agreement requires a minimum commission charge of DKK 36,000 (approximately $7 thousand) per year. Discounting charges of approximately $34 thousand and $31 thousand are included in interest expense for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, Destron Fearing A/S had assigned approximately DKK 3.5 million receivables (approximately $0.7 million) to Nordisk and had no additional availability under the agreement.

3. Acquisitions

					Goodwill
					and		Other Net
					Other		Assets
	Date		Acquisition		Intangibles		And
Company Acquired	Acquired		Price		Acquired		Liabilities			Business Description
(in thousands)
Geissler Technologies Corporation		1/14/08	$	7,147	$	7,430	$	(283	)	Develops e.tag technology for customer interface and herd management

Geissler Technologies Corporation

On January 14, 2008, we entered into an Agreement and Plan of Merger (“the GTC Merger Agreement”) with GT Acquisition Sub, Inc. (our wholly-owned subsidiary), GTC and the four shareholders of GTC (the “Holders”), pursuant to which GTC merged with and into GT Acquisition Sub, Inc. with GT Acquisition Sub, Inc. continuing as our wholly-owned subsidiary (the “GTC Merger”). Upon the closing of the GTC Merger, we assigned the ownership of GT Acquisition Sub, Inc. to Destron Fearing, such that GT Acquisition Sub, Inc. became a wholly-owned subsidiary of Destron Fearing.

Upon the closing of the GTC Merger, we paid approximately 1.3 million shares of our common stock, valued at approximately $6.2 million to the Holders on January 14, 2008. In addition, upon the satisfaction of criteria contained in an earn-out provision of the GTC Merger Agreement, as of December 31, 2009, we have paid the Holders approximately 0.5 million shares of our common stock valued at approximately $1.1 million. The number of shares issued was based on a weighted average stock price for the ten days prior to the date the earn-out amounts were achieved. As of December 31, 2009, we may be required to pay the Holders up to an additional $2.7 million of potential earn-out payments if certain gross profit levels on sales of GTC-related products are achieved through January 2011. Any additional payout may be made in either cash or in shares of our common stock or a combination of both at our option. Earn-out amounts are recorded as additional goodwill.

The total purchase price of GTC was allocated as follows (in thousands):

Current assets	$	317
Intangibles:
Patented and non-patented proprietary technology		2,000
Trademarks and tradenames		390
Software		500
Customer relationships and non-compete		375
Goodwill		4,165
Current liabilities		(600	)
Total	$	7,147

The estimated fair value of the acquired intangible assets of GTC was determined on the basis of customer relationships, patents and other proprietary rights for technologies and contract lives and revenue and using discounted cash flow methodology. Under this method, we estimated the cash flows that each of these intangible assets are expected to generate over the course of their expected economic lives. Actual cash flows may differ significantly from these estimates. The expected economic lives of these intangible assets were determined based upon the expected use of the asset, the ability to extend or renew patents and other contractual provisions associated with the asset, the estimated average life of the associated products, the stability of the industry and other factors deemed appropriate.

During the fourth quarter of 2008, we impaired $4.1 million of the goodwill acquired in the GTC acquisition as more fully discussed in Note 12.

F-15

In determining the purchase price for GTC, we considered various factors including: (i) historical and projected revenue streams and operating cash flows of the company; (ii) the complementary nature of each of our product offerings as an extension of the offerings of our existing businesses; and (iii) the opportunity for expanded research and development of the combined product offerings and the potential for new product offerings. Based on our assessments, we determined that it was appropriate to offer a purchase price for the business that resulted in the recognition of goodwill.

The results of GTC have been included in the consolidated statements of operations since the date of acquisition. Unaudited pro forma results of operations for the year ended December 31, 2008 are included below. Such pro forma information assumes that the above acquisitions had occurred as of January 1, 2008, and revenue is presented in accordance with our accounting policies. This summary is not necessarily indicative of what our result of operations would have been had these been consolidated entities during such periods, nor does it purport to represent results of operations for any future periods.

	For the year ended
	December 31,
	2008
	(in thousands)
Net operating revenue	$	62,288
Net loss from continuing operations attributable to common shareholders — basic and diluted		(59,641	)
Net loss from continuing operations per common share — basic and diluted		(3.93	)

Dispositions

For a discussion regarding our discontinued operations, see Note 14.

4. Inventories

Inventories consist of the following:

	December 31,
	2009		2008
	(in thousands)
Raw materials	$	8,088	$	5,581
Work in process		762		614
Finished goods		986		948
	$	9,836	$	7,143

5. Property and Equipment

Property and equipment consist of the following:

	December 31,
	2009			2008
	(in thousands)
Land	$	278		$	278
Building and leasehold improvements		6,768			6,676
Equipment		15,152			14,223
		22,198			21,177
Less: Accumulated depreciation		(14,835	)		(12,628	)
Total property and equipment	$	7,363		$	8,549

Included above are vehicles and equipment acquired under capital lease obligations in the amount of $1.7 million and $2.1 million at December 31, 2009 and 2008, respectively. Related accumulated depreciation amounted to $0.7 million and $0.4 million as of December 31, 2009 and 2008, respectively.

Depreciation expense charged against income amounted to $1.8 million and $2.1 million for the years ended December 31, 2009 and 2008, respectively. Accumulated depreciation related to disposals of property and equipment amounted to $0.1 million and $0.1 million in 2009 and 2008, respectively.

During the year ended December 31, 2009, we impaired approximately $0.2 million of our fixed assets at our Animal Identification segment. During the year ended December 31, 2008, we recognized an impairment charge of approximately $2.1 million of our fixed assets as a result of our restructuring efforts at our Animal Identification and Corporate segments as more fully discussed in Note 21.

F-16

6. Goodwill

Goodwill consists of the excess of cost over fair value of net tangible and identifiable intangible assets of companies purchased. We apply the principles of the Intangibles — Goodwill and Other Topic of the Codification and use the purchase method of accounting for acquisitions of wholly-owned and majority-owned subsidiaries.

	December 31,
	2009			2008
	(in thousands)
Beginning balance	$	6,848		$	33,947	(1)
Acquisition		—			4,165
Adjustment to purchase price allocation		—			(141	)
Earn-out payment		300			—
Impairment		(3,816	)		(31,006	)
Foreign currency and other adjustments		11			(117	)
Ending balance	$	3,343		$	6,848

⁽¹⁾ Balance represents the beginning balance as previously reported on Form 10-K of approximately $35.2 million less $1.3 million reclassified to discontinued operations in 2009.

Method of Accounting for Goodwill

In accordance with the principles of the Intangibles — Goodwill and Other Topic of the Codification, we do not amortize goodwill. Instead, we are required to test goodwill for impairment annually as part of our annual business planning cycle during the fourth quarter of each year or earlier depending on specific changes in conditions surrounding our business units.

We allocate goodwill to our reporting business units. At December 31, 2009 and 2008, our reporting units were Animal Identification segment and Emergency Identification segment. Our reporting units are those businesses for which discrete financial information is available and upon which segment management makes operating decisions. The business operations of our current reporting units are described in Note 1. We tested the goodwill for each of our reporting units during the fourth quarters of 2009 and 2008. In addition, we tested goodwill in the third quarter of 2008 as a result of the declines in our equity market capitalization, which fell below our stockholders’ equity. If the fair value of a reporting unit exceeded its carrying value, then no further testing was required. However, if the carrying value of a reporting unit exceeded its fair value, then an impairment charge was recorded. The assumptions used in the comparable company and discounted cash flow analyses are described in Note 12. Based upon our goodwill testing, we recorded impairment charges related to our Emergency Identification reporting unit of approximately $3.8 million during the fourth quarter of 2009, and approximately $25.0 million and $4.1 million related to our Animal Identification reporting unit during the third quarter and fourth quarters of 2008, respectively.

As a result of our decision on June 30, 2008 to restructure our European operations, we recorded an impairment charge of $1.9 million in 2008 associated with goodwill assigned to our Destron Fearing A/S business. The restructuring is more fully described in Note 21.

Refer to Note 19 for our goodwill by reporting unit.

7. Intangibles, net

Intangibles and other assets consist of the following (dollars in thousands):

					Weighted
					Average Lives
					(in years) at
	December 31,				December 31,
	2009		2008		2009
Trademark, net of accumulated amortization of $113 and nil(1)	$	—	$	2,306		N/A
Trademarks, net of accumulated amortization of $222 and $189		980		1,281		7.3
Patents and non-patented proprietary technology, net of accumulated amortization of $771 and $613		4,219		6,654		10.5
Customer relationships, net of accumulated amortization of $987 and $941		5,916		7,755		9.9
Tradenames and non compete, net of accumulated amortization of $41 and $23		28		90		2.0
Software, net of accumulated amortization of $118 and $78		304		422		5.0
	$	11,447	$	18,508

⁽¹⁾ During 2008, management reviewed the nature of our intangible assets with indefinite lives and decided to change the lives to 20 years. Effective January 1, 2009, we began to amortize these intangibles. As of December 31, 2009, these trademarks were fully impaired.

F-17

The following is a rollforward of our intangible assets for the years ending December 31, 2009 and 2008.

	December 31,
	2009			2008
	(in thousands)
Beginning balance	$	18,508		$	17,737	(1)
Acquisition		—			3,348
Amortization		(2,253	)		(1,610	)
Impairment		(4,692	)		(1,070	)
Foreign currency and other adjustments		(116	)		103
Ending balance	$	11,447		$	18,508

⁽¹⁾ Balance represents the beginning balance as previously reported on Form 10-K of approximately $22.2 million less $4.5 million reclassified to discontinued operations in 2009.

Estimated amortization expense of the definite-lived assets for the years ending December 31, is as follows (in thousands):

2010	$	1,759
2011		1,612
2012		1,606
2013		1,466
2014		1,461
Thereafter		3,543
	$	11,447

Amortization of intangibles charged against income amounted to $2.3 million and $1.9 million for the years ended December 31, 2009 and 2008, respectively.

During our annual impairment review in the fourth quarter of 2009, we recorded an impairment charge of approximately $3.3 million (net of a deferred tax liability of approximately $(1.4) million) associated with trademarks, patents and customer relationships at our Emergency Identification reporting unit. During our annual impairment review in the fourth quarter of 2008, we recorded an impairment charge of approximately $0.2 million associated with trademarks and customer relationships to Destron Fearing’s South American business. As a result of our decision on June 30, 2008 to restructure our European operations, we recorded an impairment charge of approximately $0.3 million associated with trademarks and $0.5 million associated with tradenames assigned to our Destron Fearing A/S business during 2008. The restructuring is more fully described in Note 21.

8. Accrued Expenses and Other Liabilities

Accrued expenses consist of the following:

	December 31,
	2009		2008
	(in thousands)
Accrued salary, wages and payroll expenses	$	1,741	$	1,697
Accrued bonuses		929		1,261
Accrued liabilities of companies whose assets were sold		849		—
Accrued litigation reserve and legal settlement		637		318
Accrued professional fees		850		374
Other accrued expenses		1,574		4,087
	$	6,580	$	7,737

Other liabilities consist of the following:

	December 31,
	2009		2008
	(in thousands)
Accrued bonuses (long-term)	$	950		—
Accrued legal settlement		118		625
Accrued tax obligations		243		244
Accrued financing fee		—		800
Other		134		554
	$	1,445	$	2,223

The accrued bonuses (long-term) reflect amounts due to certain members of senior management, including our chief executive officer and chief operating officer, that are not due and payable until April 1, 2011. We have the right to pay some or all of such bonuses prior to April 1, 2011 at our sole discretion and contingent upon cash availability. No interest is due on the bonuses unless required by law and, if so required, will be accrued at the minimum legally required rate.

F-18

9. Notes Payable and Other Financings

Notes payable and long-term debt consists of the following:

	December 31,
	2009		2008
	(in thousands)
Revolving facility, bears interest at prime plus 2.0% but not less than 10.0% (10.0% at December 31, 2009), net of discount of $232 and $580	$	1,994	$	2,024
Senior secured, non-convertible term note, bears interest at 12.0%		79		1,103
Senior secured, non-convertible term note, bears interest at 12.0%		1,164		3,067
Senior secured, non-convertible term note, bears interest at 12.0%		134		2,000
Mortgage notes payable, collateralized by Destron Fearing’s land and building, payable in monthly installments of principal and interest totaling $20 thousand, bearing interest at 8.2%, due through November 2010.		2,034		2,103
Line of credit, bears interest at the international rates Danske Bank can establish on a loan in DKK in the international market plus 2.0% (6.6% at December 31, 2009) and is determined quarterly. The agreement shall remain effective until further notice.		2,925		3,417
Equipment loan, collateralized by Destron Fearing A/S’s production equipment, payable in quarterly installments of principal and interest totaling $64 thousand, bearing interest at variable rates (6.6% at December 31, 2009, due through July 2010).		274		497
Notes payable — other and capital lease obligations		1,085		1,312
Total debt		9,689		15,523
Less: current maturities		9,297		8,581
Total long term notes payable and debt	$	392	$	6,942

The scheduled payments due based on maturities of current and long-term debt as of December 31, 2009 are presented in the following table (in thousands):

Year:
2010	$	9,529
2011		304
2012		88
Total payments		9,921
Debt discount, net		(232	)
Total debt outstanding	$	9,689

Interest expense on the long and short-term notes amounted to $2.2 million and $10.9 million for the years ended December 31, 2009 and 2008, respectively. The weighted average interest rate was 13.7% and 14.1% for the years ended December 31, 2009 and 2008, respectively. The weighted average interest rates exclude interest expense related to certain amortization and accretion of debt discount and issue costs, share issuances and legal expenses related to financing activities, revaluation of certain warrants and obligation to Laurus Master Fund, Ltd (“Laurus”). In addition to the debt discount of $232 thousand reflected in the table above, as of December 31, 2009, we had approximately $0.1 million of unamortized debt issuance costs.

$6.0 Million Revolving Asset-Based Facility with Kallina

On August 31, 2007, Destron Fearing and certain of its wholly-owned subsidiaries, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International, (collectively, the “Eligible Subsidiaries”) entered into a $6.0 million revolving asset-based financing transaction with Kallina Corporation (“Kallina”) pursuant to the terms of a Security Agreement. Under the terms of the Security Agreement, Destron Fearing may borrow, from time to time, an amount equal to the lesser of the amount of availability under the borrowing base and $6.0 million, subject to certain reserves that the lender is authorized to take in its reasonable commercial judgment (the “Revolving Facility”). The borrowing base is calculated as a percentage of the total amount of eligible accounts and inventory owned by Destron Fearing and its Eligible Subsidiaries. Amounts outstanding under the Revolving Facility accrue interest at a rate equal to the prime rate plus 2.0%, but not less than 10.0% at any time. At December 31, 2009, approximately $2.2 million was outstanding under the Revolving Facility, there was $0.3 million available for borrowing and the interest rate was 10.0%.

The Revolving Facility matures on August 31, 2010. Destron Fearing and its Eligible Subsidiaries have pledged all of their respective assets, excluding the stock of all foreign subsidiaries other than Signature, in support of the obligations under the Revolving Facility. In connection with the Revolving Facility, Destron Fearing issued to Kallina seven-year warrants, which, as a result of our acquisition of the minority owners’ interest in Destron Fearing in 2007, were converted into warrants to purchase shares of our common stock. The value of the warrants of approximately $1.0 million was recorded as a discount to the Revolving Facility and is being amortized to interest expense over the life of the Revolving Facility. Destron Fearing paid Kallina an upfront fee equal to 3.5% of the $6.0 million Revolving Facility, which is also being amortized over the life of the Revolving Facility as interest expense.

F-19

Senior Secured Non-Convertible Term Notes

In August 2006, we entered into a convertible term note (“2006 Note”) with 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. Concurrent with the closing of the Revolving Facility discussed above, we entered into a $7.0 million non-convertible term note (“2007 Note”) with 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 Valens 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 “Existing Debt Obligations”) allowed for optional redemption without a prepayment penalty.

In connection with the 2006 Note, we issued Laurus a warrant for the purchase of approximately 0.2 million shares of our common stock. In connection with the 2007 Note, we issued Laurus 200,000 shares of the PSID common stock that we owned valued at approximately $1.2 million on August 31, 2007 and repriced approximately 0.2 million warrants that we had previously issued to Laurus in August 2006. The value of the PSID common stock and the repricing of the warrants, which totaled approximately $1.3 million, were recorded as debt issue costs and were being amortized over the life of the 2007 Note as additional interest expense. In addition, we paid Kallina an upfront fee equal to 3.5% of the 2007 Note, which was also being amortized over the life of the 2007 Note as interest expense. In connection with the 2008 Note, we issued Valens approximately 0.2 million shares of our common stock.

In connection with a 2007 amendment of the 2006 Note and 2007 Note, we issued warrants to the Lenders to purchase a total of 0.4 million shares of our common stock. The value of the warrants of approximately $1.7 million was recorded as debt discount and was being amortized to interest expense over the life of the Notes. In connection with a 2008 amendment of the 2006 Note and the 2007 Note, we issued Valens Offshore SPV II, Corp., an affiliate of Laurus and Kallina, approximately 29 thousand shares of our common stock valued at approximately $0.2 million. The value of the common stock was recorded as interest expense in 2008.

In February 2008, we entered into an Amendment of Warrants and Conditional Consent to Asset Sales with the Lenders which, among other things, reduced the exercise price of three warrant tranches (collectively exercisable for a total of approximately 0.5 million shares of our common stock) previously issued to the Lenders from exercise prices ranging from $8.00 to $10.80 per share to an exercise price of $5.60 per share. As a result of the repricing, we recorded additional interest expense of approximately $0.5 million in 2008. In July 2008, we entered into an Omnibus Amendment with the Lenders and LV Administrative Services, Inc., the administrative and collateral agent for the Lenders. Under the Omnibus Amendment, we reduced the exercise price of previously issued and outstanding warrants (collectively exercisable for a total of approximately 0.8 million shares of our common stock at a weighted average exercise price of $6.56 per share) to an exercise price of $3.20 per share on condition that the Lenders exercise such warrants in full in cash. Accordingly, the Lenders exercised all of their outstanding warrants to purchase shares of our common stock for approximately $2.3 million in net cash.

During 2008, we prepaid approximately $7.9 million of the 2006 Note and approximately $5.8 million on the 2007 Note. As a result of the prepayments, we amortized approximately $1.4 million and $0.4 million of debt issue costs and original debt issue discount associated with the 2006 Note and 2007 Note, respectively, during the year ended December 31, 2008, which was recorded as interest expense.

In connection with a November 2008 amendment of certain terms of our 2006 Note and 2007 Note, we agreed to pay the Laurus, Kallina and the Lenders a combined deferred fee of $0.8 million either on the maturity date of the notes or when the notes were prepaid in full or accelerated upon default. The fee was payable either in cash, shares of our common stock or a combination of both at our option. If the fee was paid with shares of common stock, the fee was based on a 20% discount to the then-current market price of the common stock. The changes effected by the November 2008 amendment were considered substantial modifications in accordance with Debt — Modifications and Extinguishments Topic of the Codification. Therefore, all remaining fees, debt discounts and debt issuance costs were required to be expensed during the fourth quarter of 2008. The total unamortized amount was approximately $0.7 million and was reflected in interest expense in 2008.

In December 2009, we prepaid $3.0 million on the Existing Debt Obligations and we issued approximately 1.4 million shares of our common stock in payment of the deferred fee. On February 1, 2010, the maturity date, we paid the final balance of approximately $1.4 million on the Existing Debt Obligations.

Destron Fearing A/S’s Line of Credit

Destron Fearing A/S is party to a credit agreement with Danske Bank (the “Credit Facility”). On June 1, 2006, Destron Fearing A/S amended the borrowing availability from DKK 12.0 million to DKK 18.0 million. In connection with the amendment, Destron Fearing executed a Letter of Support which confirms that it will maintain its holding of 100% of the share capital of Destron Fearing A/S, and will neither sell, nor pledge, nor in any way dispose of any part of Destron Fearing A/S or otherwise reduce Destron Fearing’s influence on Destron Fearing A/S without the prior consent of Danske Bank. Interest is determined quarterly and is based on the international rates Danske Bank can establish on a loan in the same currency on the international market plus 2.0%. At December 31, 2009, the annual interest rate on the Credit Facility was 6.6%. Borrowing availability under the Credit Facility considers guarantees outstanding. The Credit Facility will remain effective until further notice. Destron Fearing A/S can terminate the Credit Facility and pay the outstanding balance, or Danske Bank may demand the credit line be settled immediately at any given time, without prior notice. Beginning in July 2009, Destron Fearing A/S and Danske Bank agreed to reduce the borrowing availability on the Credit Facility each month by DKK 500 thousand (approximately $0.1 million). As of December 31, 2009, total availability had been reduced from DKK 18.0 million (approximately $3.5 million) to DKK 15.0 million (approximately $2.9 million). DKK 15.2 million (approximately $2.9 million) was outstanding at December 31, 2009 and there was no availability under the credit line.

F-20

10. Fair Value of Financial Instruments

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short maturity of those instruments.

Notes Payable and Long-Term Debt

The carrying amount approximates fair value because of the short-term nature of the debt, its underlying collateral and certain interest rates which are reset periodically to reflect current market conditions.

Accounts Payable and Accrued Expenses

The carrying amount approximates fair value.

11. Stockholders’ Equity

On October 30, 2008, our stockholders approved a one-for-eight reverse stock split of our common stock by proportionately decreasing the authorized number of shares of common stock without changing the par value of our common stock. The reverse stock split was effective on November 10, 2008 and all shares and options amounts have been adjusted accordingly for all periods.

Warrants

We have issued warrants convertible into shares of common stock for consideration, as follows (in thousands, except exercise price):

							Balance
					Exercised/		December 31,		Exercise		Date of	Date of
Class of Warrants	Authorized		Issued		Forfeited		2009		Price		Issue	Expiration
Series B		83		83		—		83	$	16.910	April 2004	April 2010
Series D		83		83		—		83	$	25.443	October 2004	October 2010
Series E		122		122		—		122	$	20.759	June 2005	June 2010
Series E		25		25		—		25	$	19.104	June 2005	June 2010
Destron Fearing Warrants — Class D		71		71		71		—	$	15.086	February 2004	February 2009
		384		384		—		313

The Series B warrant was issued in connection with a securities purchase agreement effective April 16, 2004. The Series B warrant is exercisable for approximately 83 thousand shares of our common stock. The exercise price of the Series B warrant, which was originally $26.40 per share, was reduced to $16.91 per share as a result of our issuances of common stock for financings and severance payments, which triggered the anti-dilution provisions in the Series B warrant agreement. The Series B warrant vested on April 16, 2005 and expires on April 16, 2010. The Series B warrant agreement provides for anti-dilution provisions that require that the exercise price be adjusted if we issue certain securities at a price below the exercise price then in effect and the number of warrants and the exercise price is required to be adjusted upon the declaration or payment of a dividend or other distribution of our common stock. The total number of shares that can be issued under such provisions is subject to a ceiling.

The Series D warrants were issued in connection with a securities purchase agreement effective October 21, 2004. The Series D warrant is exercisable into approximately 83 thousand shares of our common stock. The exercise price of the Series D warrant, which was originally $40.40 per share, was reduced to $25.443 per share as a result of our issuances of common stock for financings and severance payments, which triggered the anti-dilution provisions in the warrant agreement. The Series D warrant vested on October 21, 2005 and expires on October 21, 2010. The Series D warrant agreement provides for anti-dilution provisions similar to those outlined above for the Series B warrant and the total number of shares that can be issued under such provisions is also subject to a ceiling.

The Series E warrants were issued in connection with a financing completed on June 10, 2005. Warrants to acquire approximately 92 thousand and 55 thousand shares of our common stock were issued to two investors, respectively. The warrants are exercisable at any time at exercise prices ranging from $29.632 to $32.28 per share. The exercise prices of the warrants were reduced to prices ranging from $19.104 to $20.759 per share as a result of our issuances of common stock for financings and severance payments, which triggered the anti-dilution provisions in the warrant agreements. The warrants vested on June 10, 2005 and expire on June 10, 2010. The Series E warrant agreement provides for anti-dilution provisions similar to those outlined above for the Series B warrant and the total number of shares that can be issued under such provisions is also subject to a ceiling.

The Destron Fearing warrants were converted into warrants to acquire shares of our common stock in connection with our acquisition of the minority owners’ interest in Destron Fearing in December 2007 and expired in February 2009.

The valuation of warrants utilized the following assumptions in the Black-Scholes valuation model:

	Dividend						Expected		Risk-Free			Date of the
Class of Warrant	Yield			Volatility			Lives (Yrs.)		Rate			Assumptions
Series B		0.00	%		69.00	%		6.00		3.38	%	April 5, 2004
Series D		0.00	%		50.00	%		6.00		3.31	%	October 21, 2004
Series E		0.00	%		50.00	%		5.00		3.75	%	June 10, 2005

F-21

In addition to the warrants described above, in February 2010, we issued warrants to acquire approximately 1.7 million shares of our common stock to certain investors. The warrants are exercisable at any time at an exercise price of $0.50 per share and expire in February 2017. See Note 23 for further discussion.

Stock Option Plans

In accordance with the Compensation — Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. We currently use the Black-Scholes option pricing model to calculate the compensation cost to be recognized. During the year ended December 31, 2009, we recorded approximately $0.4 million in compensation expense related to stock options granted to our and our subsidiary employees, directors and consultants.

A summary of the status of our and our subsidiary’s stock options as of December 31, 2009, and changes during the two years then ended, is presented below.

During 1996, we adopted a nonqualified stock option plan (“1996 Option Plan”). During 2000, we adopted the 1999 Flexible Stock Plan. With the 2000 acquisition of Destron Fearing Corporation, we acquired one additional stock option plan referred to as the 1999 Employees’ Stock Purchase Plan. During 2003, we adopted the 2003 Flexible Stock Plan. With the acquisition of the minority owners’ interest in Destron Fearing in December 2007, we acquired two additional stock option plans, referred to as the Destron Fearing MAS Plan and the Destron Fearing Stock Option Plan. Upon consummation of the merger between Destron Fearing and us, all outstanding Destron Fearing stock options became fully vested and each of Destron Fearing’s stock options existing on the effective date were converted into options to acquire shares of our common stock at the effective exchange rate of 1.4.

The Destron Fearing MAS Plan, was terminated on February 23, 2006. No new options can be granted under the terminated plan. However, all outstanding options will remain in effect until they are exercised, forfeited or expired. As of December 31, 2009, awards consisting of options to purchase approximately 82 thousand shares were outstanding under the Destron Fearing MAS Plan.

As of December 31, 2009, the Destron Fearing Stock Option Plan had approximately 1.9 million shares of common stock reserved for issuance, of which approximately 1.9 million shares have been issued and approximately 5 thousand remain available for issuance, subject to certain restrictions regarding eligible participants. As of December 31, 2009, awards consisting of options to purchase approximately 1.5 million shares were outstanding under the Destron Fearing Stock Option Plan. Option awards are generally granted with exercise prices between market price and 110% of the market price of our stock at the date of grant, generally vest over three to nine years and have ten-year contractual terms.

Under the 1996 Option Plan, options for approximately 0.1 million common shares were authorized for issuance to certain of our officers, directors and employees. As of December 31, 2009, approximately 0.1 million options have been issued, net of forfeitures, and approximately 2 thousand are outstanding under the 1996 Option Plan. The options vest as determined by our board of directors and are exercisable over a period of five years. The 1996 Option Plan has been discontinued with respect to any future grant of options.

Under the 1999 Flexible Plan, the number of shares which may be issued or sold, or for which options, Stock Appreciation Rights (“SARs”), or Performance Shares may be granted to our officers, directors and employees is approximately 0.5 million. As of December 31, 2009, 0.4 million options have been granted, net of forfeitures and 65 thousand are outstanding. The options vest as determined by our board of directors and are exercisable over a period of five years.

Under the 2003 Flexible Plan, the number of shares which may be issued or sold, or for which options, SARs, or performance shares may be granted to our officers, directors and employees is approximately 2.9 million. As of December 31, 2009, 1.7 million options have been granted and 1.2 million are outstanding and 1.2 million shares are available for future issuances. The options vest as determined by our board of directors and are exercisable over a period of three to ten years.

The 1999 Employees’ Stock Purchase Plan authorizes the grant of options to employees who purchase shares of common stock. As of December 31, 2009, approximately 0.2 million options have been granted, 0.1 million are outstanding and a de minimus amount of shares are available for grant.

We have three additional plans that we acquired in connection with previous acquisitions. As of December 31, 2009, there was approximately 1 thousand options outstanding under the plans. These plans have been discontinued with respect to future grants.

In addition, as of December 31, 2009, we have granted approximately 0.3 million options, net of forfeitures, and have outstanding approximately 0.3 million options which were granted outside of the above plans as an inducement to employment.

F-22

A summary of the stock option activity for our stock options plans for 2009 and 2008 is as follows (in thousands, except per share price data):

	2009					2008
				Weighted-					Weighted-
				Average					Average
	Number			Exercise		Number			Exercise
	of Options			Price		of Options			Price
Outstanding on January 1		2,863		$	18.02		2,405		$	22.44
Granted		499			0.97		629			2.59
Exercised		—			—		—			—
Forfeited		(173	)		23.60		(171	)		23.46
Outstanding at December 31		3,189			15.05		2,863			18.02
Exercisable at December 31(1)		2,300			20.25		2,245			22.33
Vested or expected to vest at December 31		3,024			14.27		2,833			16.59
Shares available on December 31 for options that may be granted		1,199					21

⁽¹⁾ The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The fair value of our common stock was $0.75 at December 31, 2009 based upon the closing price on the Nasdaq Capital Market. As of December 31, 2009 and 2008, the aggregate intrinsic value of options outstanding, exercisable and vested or expected to vest was $0.1 million and $0.1 million, respectively.

As of December 31, 2009, there was approximately $0.6 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 1.9 years.

The following table summarizes information about our stock options at December 31, 2009 (in thousands, except per share price data):

	Outstanding Options						Exercisable Stock
			Weighted-				Options
			Average		Weighted-				Weighted-
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range of Exercise Prices	Shares		Life in Years		Price		Shares		Price
$0.0000 to $2.0000		913		8.9	$	0.75		196	$	0.46
$2.0001 to $4.0000		40		7.2		2.91		19		3.20
$4.0001 to $6.0000		227		8.2		5.23		76		5.23
$6.0001 to $8.0000		18		7.6		7.44		18		7.44
$8.0001 to $10.0000		22		7.6		8.97		22		8.97
$10.0001 and over		1,969		4.1		23.20		1,969		23.20
Total stock options		3,189		5.8		15.05		2,300		20.25

The weighted average per share fair values of grants made in 2009 and 2008 under our incentive plans was $0.97 and $1.33, respectively. The weighted average per share fair value of options granted or modified by us was estimated on the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions.

	Year Ended December 31,
	2009	2008
Estimated option life	6 years	5 years
Risk free interest rate	2.34%	1.55 – 3.57%
Expected volatility	130.00%	60.00 – 91.51%
Expected dividend yield	—%	—%

Restricted Stock Grants

The stock-based compensation charges associated with restricted stock are included in the consolidated statements of operations in selling, general and administrative expense.

In June 2009, we issued approximately 14 thousand shares of our restricted stock to a consultant. We determined the value of the stock to be approximately $16 thousand based on the closing price of our stock on the date of the grant. The value of the restricted stock, which was fixed as a result of price protection provisions, was amortized as consulting expense over the vesting period of six months.

F-23

In August 2009, we issued approximately 0.1 million shares of our restricted stock to a consultant. We determined the value of the stock to be approximately $0.1 million based on the closing price of our stock on the date of the grant. The value of the restricted stock, which was fixed as a result of price protection provisions, is being amortized as consulting expense over the vesting period of six months.

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 $0.1 million in 2009 and 2008, respectively, associated with such restricted stock grants.

In August 2008, we issued approximately 40 thousand shares of our restricted common stock to a consultant which fully vested on December 31, 2008. We recorded compensation expense of approximately $0.2 million in 2008 associated with the restricted stock.

12. Asset Impairment Testing

As of December 31, 2009, the net carrying value of our goodwill was $3.3 million. We test our goodwill and intangible assets for impairment as a part of our annual business planning cycle. Goodwill and intangible assets are also tested between testing dates if an impairment condition or event is determined to have occurred. Based upon our annual testing, we recorded a goodwill impairment charge of approximately $3.8 million in the fourth quarter of 2009 at our Emergency Identification reporting unit. We recorded approximately $26.9 million in the second and third quarters of 2008; $25.0 million impairment of goodwill at our Animal Identification reporting unit, which was a result of declines in our equity market capitalization; and $1.9 million impairment of goodwill at Destron Fearing’s European business unit as a result of our restructuring efforts. In the fourth quarter of 2008, we recorded approximately $4.1 million of goodwill impairment which related to GTC.

During the fourth quarters of 2009 and 2008 and the third quarter of 2008, we determined the fair value of our reporting units using discounted cash flow analyses and a company comparable analysis. If the fair value of a reporting unit exceeded its carrying value, then no further testing was required. However, if the carrying value of a reporting unit exceeded its fair value, then an impairment charge was recorded. Management compiled the revenue forecasts, growth rates, gross margin, corporate overhead and tax rates, among other data and assumptions related to the financial projections upon which the valuations were based. The methodology used to determine the residual or terminal enterprise values included the following factors: current leverage, risk premium, cost of equity, after-tax cost of debt, and weighted average cost of capital, which were used in the discount rate calculations. The assumptions used in the determination of fair value using discounted cash flows were as follows:

• Earnings before interest, taxes, depreciation and amortization were used as the measure of cash flow;

• Cash flows were projected for five years and added to the present value of the terminal value; and

• Discount rate used was 20%. The rate was determined based on the level of risk associated with a reporting units’ operations and the related degree of certainty of generating future cash flows.

The company comparable analysis was performed utilizing financial and market information on publicly traded companies that are considered to be generally comparable to our reporting units. Each analysis provided a benchmark to compare to the values of each business unit.

Future goodwill impairment reviews may result in write-downs. Such determination involves the use of estimates and assumptions, which may be difficult to accurately measure or value.

During the year ended December 31, 2009, we recorded approximately $7.3 million of goodwill and asset impairments; $3.8 million impairment of goodwill and $3.3 million impairment (net of a deferred tax liability of approximately $1.4 million) of intangible assets at our Emergency Identification reporting unit as well as approximately $0.2 million related to the impairment of fixed assets at our Animal Identification segment. During the year ended December 31, 2008, we recorded approximately $31.1 million in goodwill and asset impairments. Of this amount, $26.9 million was related to goodwill, as discussed above, $0.8 million related to intangible assets at our Destron Fearing European business unit, $1.9 million related to the impairment of fixed assets throughout our Animal Identification segment, $0.3 million impairment of other assets in our South American business and $1.2 million related to the impairment of our investment in PSID. See Notes 5, 6 and 7 for further discussion.

13. Income Taxes

The benefit (provision) for income taxes consists of:

	2009			2008
Current:
United States	$	4		$	(78	)
International		(54	)		(40	)
Current income tax provision		(50	)		(118	)
Deferred:
United States		—			—
International		74			283
Deferred income taxes benefit		74			283
Total income tax benefit	$	24		$	165

In addition to the income tax benefit above, which related primarily to the amortization of deferred tax liabilities arising from acquisitions, we recorded income tax expense in 2009 associated with our discontinued operations. See Note 14.

F-24

Destron Fearing has operations in Europe and South America. We consider earnings from our foreign entities to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings, we may be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign jurisdiction.

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:

	2009			2008
Deferred tax assets:
Liabilities and reserves	$	1,381		$	1,584
Stock-based compensation		4,300			3,672
Property and equipment		382			825
Net operating loss carryforwards		110,341			107,555
Gross deferred tax assets		116,404			113,636
Valuation allowance		(116,404	)		(113,476	)
		—			160
Deferred tax liabilities:
Property and equipment		—			30
Intangible assets		—			1,227
		—			1,257
Net Deferred Tax Liabilities	$	—		$	(1,097	)

The deferred tax assets and liabilities are included in the following balance sheet captions:

	December 31,		December 31,
	2009		2008
	(in thousands)
Current deferred tax assets	$	—	$	130
Long-term deferred tax liability		—		(1,227	)
Net Deferred Tax Liabilities	$	—	$	(1,097	)

The valuation allowance for deferred tax asset increased by $2.8 million and $8.6 million in 2009 and 2008, respectively, due primarily to the generation of net operating losses. The valuation allowance was provided for net deferred tax assets that exceeded the level of existing deferred tax liabilities and our projected pre-tax income. Our goodwill is not deductible for tax purposes.

Approximate domestic and international (loss) income from continuing operations before provision for income taxes consists of (in thousands):

	2009			2008
Domestic	$	(6,326	)	$	(51,794	)
International		(9,121	)		(8,011	)
	$	(15,447	)	$	(59,805	)

At December 31, 2009, we had aggregate net operating loss carryforwards of approximately $278.6 million for income tax purposes that expire in various amounts from 2014 through 2029. Of the aggregate U.S. net operating loss carryforwards of $268.7 million, $69.2 million relate to Destron Fearing.

Based upon the change of ownership rules under IRC section 382, approximately $197.9 million of our separate U.S. net operating loss carryforwards experienced a more than 50% ownership change during the year and therefore are significantly limited as to the amount of use in any particular year. The ownership change was due to the issuance of sufficient common stock which resulted in our ownership change exceeding the 50% limitation threshold imposed by that section. The $69.2  million of operating loss carryforwards related to Destron Fearing were not impacted by this ownership change and are not currently subject to limitation under IRC section 382.

Of the total aggregate net operating loss carryforwards, foreign loss carryforwards are approximately $9.9 million. These net operating loss carryforwards are available to only offset future taxable income earned in the home country of the foreign entity and do not expire.

F-25

The reconciliation of the effective tax rate with the statutory federal income tax (benefit) rate is as follows:

	2009			2008
	%			%
Statutory tax/(benefit) rate		(35	)		(35	)
Nondeductible intangibles amortization/impairment		11			20
State income taxes, net of federal benefits		(2	)		(2	)
Foreign tax differences		4			—
Shares issued for services		(4	)		—
Change in deferred tax asset valuation allowance (1)		18			15
Impact of discontinued operations		8			2
		—			—

⁽¹⁾ Substantially attributed to net operating losses.

Liabilities for Uncertain Tax Positions

A reconciliation of the beginning and ending balances of gross unrecognized tax benefits for 2009 and 2008 is as follows (in thousands):

	2009			2008
Gross unrecognized tax benefits at January 1	$	201		$	193
Increases in tax positions for current year		17			74
Lapse in statute of limitations		(11	)		(66	)
Gross unrecognized tax benefits at December 31	$	207		$	201

Included in the balance of unrecognized tax benefits at December 31, 2009 and 2008 are $0.2 and $0.2 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of January 1 and December 31, 2009, we had accrued $7 thousand and $24 thousand of interest related to uncertain tax positions, respectively and have accrued no penalties. Our unrecognized tax benefits are largely related to certain state filing positions and are included in other long-term liabilities. We, in combination with our consolidated 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 2005. During 2008, we completed an Internal Revenue Service examination of 2005. The results of the examination were not material to the financial statements and did not cause a material change to any unrecognized tax position. We do not currently have any examinations ongoing.

14. Discontinued Operations

During the three-months ended March 31, 2008, our board of directors agreed to sell two of our wholly-owned subsidiaries: Florida Decision Corporation (“FDC”, formerly known as Pacific Decision Sciences Corporation) and Thermo Life. During the three-months ended December 31, 2008, our board of directors decided to sell our ownership of PSID. During the three-months ended December 31, 2009, our board of directors decided to sell our ownership of McMurdo. Prior to 2008, we had discontinued the operations of Computer Equity Corporation (“Computer Equity”), Perimeter Acquisition Corp. (“Perimeter”) and IFTH Acquisition Corp. (“IFTH”). IFTH provided computer hardware and IT services; Computer Equity provided voice, data and video telecommunications products and services; Perimeter sold call center software and related services; FDC provided service relationship management software; Thermo Life was a development company with patented rights to a thin-film thermoelectric generator; PSID developed and marketed RFID systems used to identify, locate and protect people and their assets; and McMurdo was a manufacturer of emergency locator beacons. 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. With the exception of Thermo Life (which was sold on January 21, 2010 as more fully discussed in Note 20), each of these businesses had been sold as of December 31, 2009.

Sale of FDC

Effective June 2, 2008, we sold all of the assets of FDC pursuant to an Asset Purchase Agreement among us, FDC and Customer Service Delivery Platform Corporation (the “Buyer”). The purchase price for the assets was $2.0 million, of which $1.8 million is payable in 48 equal monthly installments pursuant to the terms of a non-interest bearing promissory note, and $0.2 million was related to amounts owed to the buyer and, therefore, credited against the purchase price. The promissory note is secured by all of the assets of the Buyer, including the FDC assets acquired in the transaction. On February 24, 2010, we entered into a letter agreement with the Buyer whereby the Buyer agreed to pay the remaining balance of the promissory note of approximately $0.7 million on March 8, 2010, as more fully discussed in Note 23.

Sale of Computer Equity

On July 10, 2008, we entered into a Stock Purchase Agreement with Sterling Hallmark, Inc., a California corporation (“Sterling”), whereby we sold all the issued and outstanding stock of Computer Equity, which had previously been classified as a discontinued operation, to Sterling (the “Sale”). As a result of the Sale, Sterling also indirectly acquired Computer Equity’s wholly-owned subsidiary, Government Telecommunications, Inc. (“GTI”).

F-26

Under the terms of the agreement, Sterling paid us $0.6 million — $0.4 million in cash and a secured promissory note in the principal amount of $0.2 million. The secured promissory note was collected in full on August 1, 2008. Intercompany loans between Computer Equity, GTI and us were forgiven by the parties.

In addition, in connection with the Sale, GTI, the Company and Verizon Federal Inc. entered into an amendment (“Amendment”) to the Confidential Settlement Agreement and Release entered into by the same parties on December 19, 2007 (“Settlement Agreement”). The Amendment, among other things, released us from our guaranty of GTI’s obligations under the Settlement Agreement. Therefore, as a result of the Sale and the Amendment, we are no longer liable for GTI’s obligations under the Settlement Agreement, as amended. In addition, we and Sterling entered into a Noncompetition and Confidentiality Agreement, whereby we are prohibited, among other things, from engaging in certain competing business activities and soliciting Sterling’s customers and employees for a period of two years.

Sale of 49.94% ownership in IFTH

On July 31, 2008, pursuant to a Stock Purchase Agreement between us and Blue Moon Energy Partners LLC, we sold 2,570,000 shares of IFTH which constitutes all of the shares of IFTH owned by us, to Blue Moon. The consideration paid by Blue Moon to us under the Agreement was $0.4 million. Blue Moon is managed by Scott R. Silverman and William J. Caragol, former and current executive officers and director of PSID and, therefore, this was a related party transaction.

Sale of 45.6% ownership in PSID (f/k/a VeriChip Corporation)

On November 12, 2008, we entered into a Stock Purchase Agreement with R&R Consulting Partners, LLC (a company controlled by Scott Silverman) and Scott Silverman (a past executive officer and director of us and the current chairman of the board of PSID) (collectively, the “Stock Buyers”), whereby we sold all 5,355,556 shares of PSID we owned to the Stock Buyers for approximately $0.8 million in cash.

Sale of McMurdo

On November 2, 2009, we, together with our subsidiaries 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 up to 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.

The financial condition, results of operations and cash flows of the businesses discussed above have been reported as discontinued operations in our financial statements, and prior period information has been reclassified accordingly. We no longer owned a majority of the outstanding stock of IFTH and PSID beginning in the first quarter of 2008. Therefore, IFTH and PSID’s summarized operating data and changes in assets and liabilities are presented below under the equity method of accounting during 2008.

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Results of discontinued operations for each of the years ended December 31, 2009 and 2008 are presented below.

	Years Ended December 31,
	2009			2008
	(in thousands)
Revenue	$	14,534		$	24,860
Cost of sales		8,634			14,955
Gross profit		5,900			9,905
Selling, general and administrative expenses		3,852			6,750
Research and development expenses		710			1,297
Operating income		1,338			8,047
Gain on sale		1,769			3,174
Interest and other income (expense), net		585			4
Interest expense		(91	)		(144	)
Equity in loss of affiliates		—			(3,263	)
Income from discontinued operations before income taxes		3,601			1,629
Provision for income taxes		(608	)		—
Income from discontinued operations		2,993			1,629
Income attributable to the non-controlling interest		(44	)		(20	)
Income from discontinued operations attributable to Digital Angel Corporation	$	2,949		$	1,609
Income from discontinued operations per common share — basic and diluted	$	0.16		$	0.11
Weighted average number of common shares outstanding — basic and diluted		18,768			15,156

The results above do not include any allocated or common overhead expenses. In 2009, we recorded a gain on the sale of McMurdo of approximately $2.1 million, net of UK income taxes of $0.5 million. In 2008, we recorded a gain on the sale of Computer Equity of approximately $3.4 million, which was partially offset by a write off of investment of approximately $0.2 million. The gain on the sale of Computer Equity did not result in a provision for income taxes due to federal and state net operating losses and carry forwards.

In January 2010, we sold Thermo Life with the sale having a de minimus effect on our results of operations for the first quarter of 2010. 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.

The net assets of discontinued operations as of December 31, 2009 and 2008 were comprised of the following:

	December 31,
	2009			2008
	(in thousands)
Current assets:
Cash	$	66		$	394
Accounts receivable		1,787			2,070
Inventory		—			1,779
Other current assets		—			102
Total current assets		1,853			4,345
Property and equipment, net		—			318
Goodwill and intangibles, net		—			4,857
Total assets	$	1,853		$	9,520
Current liabilities:
Accounts payable	$	259		$	1,319
Advances from factors		—			(20	)
Accrued expenses and other current liabilities		2,255			1,406
Total current liabilities		2,514			2,705
Deferred taxes		—			1,367
Total liabilities	$	2,514		$	4,072
Net (liabilities) assets of discontinued operations	$	(661	)	$	5,448

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In addition, Thermo Life has granted options under its two plans which have been discontinued with respect to future grants. As of December 31, 2009, 9 thousand options have been granted net of forfeitures and all are outstanding. These stock options have no intrinsic value as of December 31, 2009.

15. 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:

	2009			2008
Numerator for basic and diluted loss per share:
Loss from continuing operations	$	(15,313	)	$	(59,742	)
Income from discontinued operations		2,949			1,609
Net loss attributable to common stockholders	$	(12,364	)	$	(58,133	)
Denominator for basic and diluted loss per share:
Basic and diluted weighted-average shares outstanding (1)		18,768			15,156
(Loss) Income per share — basic and diluted
Continuing operations	$	(0.82	)	$	(3.94	)
Discontinued operations		0.16			0.11
Total — basic and diluted	$	(0.66	)	$	(3.83	)

⁽¹⁾ The following stock options and warrants outstanding as of December 31, 2009 and 2008 were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:

	2009		2008
	(in thousands)
Stock options		3,189		2,863
Warrants		313		384
Restricted stock		461		31
		3,963		3,278

16. Commitments and Contingencies

Rentals of space, vehicles, and office equipment under operating leases amounted to approximately $0.8 million and $1.6 million for the years ended December 31, 2009 and 2008, respectively. The approximate minimum payments required under operating leases that have initial or remaining terms in excess of one year at December 31, 2009, are as follows (in thousands):

	Minimum
	Rental
	Payments
Year:
2010	$	853
2011		576
2012		510
2013		484
2014		463
Thereafter		12,712
	$	15,598

We have written employment arrangements with several of our officers, some of which provide for bonus, severance and change of control payments. Salaries under the agreements amounted to $1.2 million for 2009. All of our employment agreements are for “at will” employment.

Annual Incentive Plan

The Compensation Committee of our board establishes the Annual Targets for fiscal years for our Annual Incentive Plan (the “Plan”). The targets are based on the following metrics: revenue, operating income, cash generation and achievement of individual targets outlined in a Management By Objectives record for each participant. Under the Plan, the Compensation Committee determines the participants entitled to participate in the Plan. The category of eligible participants remains the same as previous years, except the CEO, Joseph Grillo, is not eligible to participate, his incentive compensation determined instead by reference to his contract terms. Each participant’s bonus amount is calculated based on an analysis of performance based on the established targets and individual performance objectives and is subject to the discretion of the CEO. The maximum award under the Plan varies based upon the participant’s level and performance. Target bonuses have been set for the various senior executives participating in the Plan at 60% of their base salary, and executives participating in the Plan at 15% to 30% of their base salary. In no event can amounts awarded under the Plan exceed 200% of each executive’s target bonus. Under the Plan, determination of awards and actual performance is the responsibility of the Compensation Committee, which reserves the right, in its sole discretion, to increase or decrease awards to participants. We have not yet finalized the incentive compensation to be paid under the Plan for 2009; however, the bonus accrual was estimated based on the achievement of the various targets. In addition, we have not yet determined the parameters of our 2010 Annual Incentive Plan.

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Amendment to Schering-Plough Supply and Distribution Agreement

On January 5, 2008, Destron Fearing entered into Amendment No. 1 to the Product Supply and Distribution Agreement dated February 13, 2007 (the “Amended Agreement”), by and between Destron Fearing and Schering-Plough Home Again LLC (“Schering-Plough”). The Amended Agreement governs the terms pursuant to which Destron Fearing has agreed to provide Schering-Plough electronic identification microchips and scanners as part of the Home Again^® Proactive Pet Recovery Network. During the term of the Amended Agreement, Destron Fearing will exclusively manufacture, supply and sell to Schering-Plough and Schering-Plough will exclusively purchase from Destron Fearing certain Products (as defined in the Amended Agreement). The Amended Agreement contains, among other things, minimum purchase requirements by Schering-Plough. The Amended Agreement prohibits Destron Fearing from manufacturing, supplying or selling the Products to any other person, governmental authority or entity in the Territory (as defined in the Amended Agreement). The initial term began February 13, 2007 for a period of 24 months with an option for Schering-Plough to extend the term for an additional 12 months. The Amended Agreement also grants to Schering-Plough exclusive distribution, marketing and sale rights to Destron Fearing’s RFID products in the Companion Animal market in the Territory and non-exclusive distribution, marketing and sale rights to Destron Fearing’s RFID Biothermo Product in certain markets subject to a maximum amount of units. In March 2009, the Amended Agreement was extended to June 30, 2009 and in January 2010, the Amended Agreement was extended until June 2010. There were no material modifications in the extensions.

Destron Fearing’s RME Supply Agreement

Destron Fearing relies on a sole source production agreement with RME, a subsidiary of Raytheon Company for the manufacture of certain of its microchip products. The subsidiary utilizes both Destron Fearing’s and its own equipment in the production of the microchips. On April 28, 2006, Destron Fearing entered into a new production agreement with RME related to the manufacture and distribution of certain of its glass-encapsulated syringe-implantable transponders. This agreement expires on June 30, 2010.

17. Profit Sharing Plan

We have a retirement savings plan under section 401(k) of the Internal Revenue Code for the benefit of eligible United States employees. Our employees are eligible to participate in this plan and may elect to contribute a percentage of their salaries. In 2008, we began providing matching contributions to the 401(k) Plan of up to 4% of our employees’ contributions for a total of approximately $0.2 million during the year ended December 31, 2008. Destron Fearing provided a discretionary employer match up to 4% of its employees’ contributions. Destron Fearing’s expense related to the plan was approximately $0.1 million for the year ended December 31, 2008. In 2009, we and Destron Fearing discontinued the employer match but have the option of reinstating it when deemed appropriate.

Signature has a defined contribution pension plan. The expense relating to the plan was approximately nil and $0.2 million for the years ended December 31, 2009 and 2008, respectively.

18. Legal Proceedings

For pending legal matters, we have accrued our estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. We do not believe the outcome of these proceedings will have a material adverse effect on our consolidated financial position.

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, which we believe are frivolous and without merit.

Chemring Suit

In July 2008, our subsidiary Signature filed a claim (number 2008 FOLIO 687 in the London Mercantile Court, Royal Courts of Justice) against Chemring, the seller of the McMurdo business, which was acquired by Signature in April 2007. The claim falls into three parts: an indemnity claim in relation to the costs of repairing faulty McMurdo products sold under Chemring’s ownership, claims for breach of warranty, and a claim that had Chemring disclosed concerns being raised by a major customer for the particular McMurdo product, Signature would not have agreed to waive a minimum purchase obligation on the requirement. We then did not pay the final deferred purchase price payment of approximately £0.5 million on the McMurdo acquisition pending resolution on these warranty claims. Chemring counterclaimed against both Signature and us (as the parent of Signature) (number 2008 FOLIO 718 in the Commercial Court, Royal Courts of Justice), for the deferred purchase price, plus costs and interest, claiming that there is no right to set off warranty claims against the deferred purchase price. In June 2009, the parties agreed upon a mutually satisfactory settlement of this dispute, and a definitive settlement agreement was finalized. As a result of the resolution, the warranty claims were offset against the deferred purchase price and we recorded approximately $0.5 million of other income included in our results from discontinued operations during the year ended December 31, 2009.

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Additionally, we are a 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. Segment Information

We currently operate in two business segments: Animal Identification and Emergency Identification. For further information on our segments and their principal products and services, refer to Note 1.

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

	2009 (in thousands)
										Total from
	Animal			Emergency						Continuing
	Identification			Identification			Corporate			Operations
Revenues	$	30,774		$	18,689		$	—		$	49,463
Depreciation and amortization (1)	$	3,011		$	1,058		$	—		$	4,069
Interest and other income		202			—			117			319
Interest expense		(1,246	)		(177	)		(753	)		(2,176	)
Operating loss		(757	)		(7,672	)		(5,161	)		(13,590	)
Loss from continuing operations before provision for income taxes		(2,766	)		(7,850	)		(4,831	)		(15,447	)
Goodwill, net		3,343			—			—			3,343
Segment assets from continuing operations		23,954			13,635			7,602			45,191
Expenditures for property and equipment		55			365			—			420

	2008 (in thousands)
										Total from
	Animal			Emergency						Continuing
	Identification			Identification			Corporate			Operations
Revenues	$	38,501		$	23,759		$	—		$	62,260
Depreciation and amortization(1)	$	3,129		$	855		$	26		$	4,010
Interest and other income (expense)		1,015			—			1,707			2,722
Interest expense		(3,248	)		(157	)		(7,487	)		(10,892	)
Operating loss		(41,716	)		(1,257	)		(8,662	)		(51,635	)
Loss from continuing operations before provision for income taxes		(43,949	)		(1,415	)		(14,441	)		(59,805	)
Goodwill, net		3,310			3,538			—			6,848
Segment assets from continuing operations		28,809			17,976			7,901			54,686
Expenditures for property and equipment		580			1,533			—			2,113

(1) Depreciation and amortization includes $1.7 million and $1.9 million included in cost of sales in 2009 and 2008, respectively.

For the years ended December 31, 2009 and 2008, Destron Fearing had one customer, Schering Plough Animal Health, Inc., which accounted for approximately 8% and 19% of its revenues, respectively.

Goodwill by segment for the years ended December 31, 2009 and 2008 was as follows (in thousands):

	Animal			Emergency
	Identification			Identification			Total
Balance — December 31, 2007	$	30,010		$	3,937		$	33,947
Acquisitions		4,165			—			4,165
Adjustment to purchase price allocation		(141	)		—			(141	)
Impairment		(31,006	)		—			(31,006	)
Foreign currency and other adjustments		282			(399	)		(117	)
Balance — December 31, 2008		3,310			3,538			6,848
GTC earn-out payment		300			—			300
Impairment		—			(3,816	)		(3,816	)
Foreign currency and other adjustments		(267	)		278			11
Balance — December 31, 2009	$	3,343		$	—		$	3,343

F-31

Revenues are attributed to geographic areas based on the location of the assets producing the revenue. Information concerning principal geographic areas as of and for the years ended December 31, was as follows (in thousands):

	United				South
	States		Europe		America		Total
2009
Net revenue	$	21,694	$	27,074	$	695	$	49,463
Property and equipment, net		4,854		2,390		119		7,363
2008
Net revenue	$	29,275	$	31,927	$	1,058	$	62,260
Property and equipment, net		5,764		2,544		241		8,549

20. Related Party Transactions

The following related party transactions are eliminated in consolidation of ours and our subsidiaries results of operations.

Intercompany Loan Agreement with PSID

PSID financed a significant portion of its operations and investing activities primarily through funds that we provided. On December 27, 2005, we and PSID entered into the PSID Loan to memorialize the terms of existing advances to PSID and provide the terms under which we would lend additional funds to PSID. Through October 5, 2006, our loan to PSID bore interest at the prevailing prime rate of interest. On October 6, 2006, we entered into an amendment to the loan agreement which increased the principal amount available thereunder to $13.0 million and PSID borrowed an additional $2.0 million under the agreement to make the second purchase price payment with respect to its acquisition of a company called Instantel. In connection with that amendment, the interest rate was also changed to a fixed rate of 12% per annum and further provided that the loan matured on July 1, 2008, but could be extended at our sole option through December 27, 2010.

On January 19, 2007, February 8, 2007 and February 13, 2007, we entered into further amendments to the PSID documents, which increased the maximum principal amount of indebtedness that PSID could incur to $14.5 million. On February 9, 2007, the effective date of PSID’s initial public offering, the loan ceased to be a revolving line of credit, and PSID had no ability to incur additional indebtedness under the loan documents. The interest continued to accrue on the outstanding indebtedness at a rate of 12% per annum. Under the terms of the loan agreement, as amended, PSID was required to repay us $3.5 million of principal and accrued interest upon the consummation of their initial public offering. Accordingly, PSID paid us $3.5 million on February 14, 2007. PSID was not obligated to repay any additional amount of the indebtedness until January 1, 2008. Effective with the payment of the $3.5 million, all interest which had accrued on the loan as of the last day of each month, commencing with the month in which such payment was made, was added to the principal amount. A final balloon payment equal to the outstanding principal amount then due under the loan plus all accrued and unpaid interest was due and payable on February 1, 2010.

On December 20, 2007, we entered into a letter agreement with PSID, (the “December 2007 Letter Agreement”), which was amended on February 29, 2008, which is more fully discussed below, whereby PSID was required to pay $0.5 million to us by December 21, 2007. In addition, PSID could prepay the outstanding principal amount before October 30, 2008 by providing us with $10.0 million plus (i) any accrued and unpaid interest between October 1, 2007 and the date of such prepayment less (ii) the $0.5 million payment and any other principal payments made to reduce the outstanding principal amount between the date of the letter agreement and the date of such prepayment.

On February 29, 2008, PSID obtained financing in the form of an $8.0 million secured term note (the “PSID Note”), with Laurus. In connection with the PSID financing, we entered into a Subordination Agreement with Laurus, dated February 29, 2008, under which security provided by PSID to us to secure the PSID Loan was subordinated in right of payment and priority to the payment in full due to Laurus by PSID. PSID used part of the proceeds of the financing with Laurus to prepay $5.3 million of debt owed to us, which included PSID’s February 2008 installment payment of $0.3 million, pursuant to the PSID Loan. In connection with the PSID financing, PSID entered into a letter agreement with us, dated February 29, 2008, under which PSID agreed, among other things, (i) to prepay the $5.0 million to us, (ii) to amend the PSID Loan documents to reduce the grace period from thirty days to five business days, (iii) to include a cross-default provision under which an event of default under the PSID Note, if not cured within the greater of the applicable cure period or ten days after the occurrence thereof, is an event of default under the PSID Loan, and (iv) to amend the December 2007 Letter Agreement. As a result of the $5.0 million payment, PSID was not required to make any further debt service payments to us until September 1, 2009.

As consideration for providing financing to PSID, which in turn enabled PSID to make the $5.0 million prepayment us, we issued to Laurus 28,750 shares of our common stock. We used $3.0 million of the $5.0 million prepayment to repay a portion of the 2006 Note and the 2007 Note due to Laurus and certain of its affiliates in 2008, as more fully discussed in Note 9.

On July 18, 2008, in connection with the sale of PSID’s Xmark Corporation (“Xmark”) business, PSID repaid in full its obligations to us under the loan, pursuant to the terms of the December 2007 Letter Agreement, as amended on February 29, 2008.

PSID’s Stock Purchase Agreement

On May 15, 2008, PSID entered into a stock purchase agreement (the “PSID SPA”) to sell its wholly-owned subsidiary Xmark to The Stanley Works (“Stanley”) for $45 million in cash (the “Transaction”). In connection with the Transaction, we entered into the three following agreements with Stanley:

• A Voting Agreement (the “Voting Agreement”) in which we granted an irrevocable proxy in favor of the Transaction and against any alternative proposal. The Voting Agreement limited our ability to transfer shares of stock we held in PSID or vote for any alternative deal during the period prior to the consummation of the Transaction.

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• A Guarantee (the “Guarantee”) in favor of Stanley holding Stanley harmless from certain liabilities under the PSID SPA.

• A Non-Competition Agreement (the “Non-Competition Agreement”) in which we agreed that we would not compete with Xmark for 3 years following the consummation of the Transaction. We do not operate in any of these businesses today. The Non-Competition Agreement terminates upon a Change in Control Effective Date (as defined in the Non-Competition Agreement).

On May 15, 2008, we also entered into a letter agreement (the “Intercompany Letter Agreement”) with PSID, in which we and PSID agreed, among other things, that (i) we were permitted to name up to three designees to the board of directors of PSID after the closing of the Transaction, all of which were required to be independent with the exception of Joseph J. Grillo, our president and chief executive officer; (ii) PSID agreed to pay up to $250,000 of our expenses related to the Transaction and to pay us a Guarantee Fee of $250,000; (iii) PSID limited all bonus payments to those scheduled, with any changes or new payments to be pre-approved by us; (iv) Scott Silverman, the chairman of the board and chief executive officer of PSID, entered into a separation agreement; and (v) we were to have access to PSID’s financial information. The Intercompany Letter Agreement provided that the PSID SPA and the transactions contemplated thereby did not constitute an event of default under the (i) Commercial Loan Agreement dated December 27, 2005, as amended, between us and PSID, (ii) Security Agreement dated December 27, 2005, as amended, between us and PSID, and (iii) Third Amended and Restated Revolving Line of Credit Note dated as of February 8, 2007, as amended, from PSID in favor of us.

On the same date, we entered into a Consent and Waiver Agreement (the “Consent and Waiver Agreement”) with Laurus, Kallina and certain of their affiliates, in which they gave their consent to our entrance into the Guarantee and the Voting Agreement. The Consent and Waiver Agreement set forth changes to our term loan agreements with the lenders and also provided that we prepay a portion of our debt held by the lenders from the proceeds of the Transaction.

On July 18, 2008, PSID completed the transactions contemplated by the PSID SPA and sold Xmark for $47.9 million in cash including the $2.9 million of excess working capital. From the proceeds of the sale, PSID paid us approximately $5.3 million on July 18, 2008, $4.8 million of which was to prepay all of PSID’s outstanding obligations to us under the PSID Loan, as amended, and $0.5 million was the reimbursement of transaction expenses and the guarantee fee per the terms of the Intercompany Letter Agreement. The $4.8 million debt repayment reflects the prepayment discount as discussed above. As a result of the prepayment discount granted by us, we recorded a loss on settlement of debt of approximately $2.5 million. In addition, pursuant to the Intercompany Letter Agreement, our chief executive officer, Joseph Grillo was appointed chairman of the board of directors of PSID effective July 18, 2008, replacing Scott R. Silverman, a position he held until December 2008. We repaid $3.2 million of our debt with Laurus with the funds received.

On September 2, 2008, we received a special dividend of approximately $7.2 million in cash from PSID. Approximately $5.8 million of the cash received was applied to debt repayment. See Note 9 for further discussion.

Transition Services Agreement

On December 27, 2005, we entered into a transition services agreement, as amended from time to time, with PSID under which we agreed to continue to provide PSID with certain administrative transition services, including payroll, legal, finance, accounting, information technology, tax services, and services related to PSID’s initial public offering. The term of the amended and restated agreement was to continue until such time as VeriChip requested that we cease performing the transition services, provided that we were not obligated to continue to provide the transition services for more than twenty-four months following the initial effective date. The cost of these services to PSID was $0.1 million in the year ended December 31, 2008. Effective November 12, 2008, the transition services agreement, as amended, was terminated.

The terms of the transition services agreement and the amendment and restatement of the agreement were negotiated between certain of PSID’s executive officers and certain executive officers of ours. These executive officers were independent of one another and the terms of the agreement were based upon historical amounts incurred by us for payment of such services to third parties. However, these costs may not necessarily be indicative of the costs which would have been incurred by PSID as an independent stand alone entity.

The following related party transactions are not eliminated in the consolidation of ours and our subsidiaries results of operations:

Sale of PSID Shares

On November 12, 2008, we entered into a Stock Purchase Agreement (“Stock Purchase Agreement”) with R&R Consulting Partners, LLC (a company controlled by Scott Silverman) and Scott Silverman (a past executive officer and director of the Company and the current chairman of the board of PSID) (collectively, the “Stock Buyers”), whereby we sold all 5,355,556 shares of PSID we owned to the Stock Buyers for approximately $0.8 million in cash. The stock sold represented approximately 45.6% of PSID’s issued and outstanding shares of common stock. The proceeds from the sale, less expenses, were used for debt repayment.

In addition, we entered into an Asset Purchase Agreement with PSID (“Asset Purchase Agreement”), whereby PSID acquired certain assets used or useful in the operation of the business of human-implantable passive radio-frequency products (“Human RFID Business”) in exchange for $0.5 million in cash. Under this agreement, among other things, PSID was assigned certain patents, obtained the right not to be sued by us for use of certain other patents held by us, was granted a license to use certain trade secrets and business know-how related to the Human RFID Business and was assigned our rights in the Glucose Sensor Development Agreement dated January 1, 2008 between us, PSID and Receptors, LLC. The proceeds from the sale, less expenses, were used for debt repayment.

F-33

Pursuant to the terms of the Asset Purchase Agreement, Joseph J. Grillo, our Chief Executive Officer and President, resigned as the chairman of the board of directors of PSID. In addition, several agreements were terminated including the 2006 Tax Allocation Agreement dated as of December 21, 2006 between us and PSID, the Letter Agreements dated May 15, 2008 and December 17, 2007 between us and PSID and an Amended and Restated Supply, License and Development Agreement dated as of December 27, 2005, as amended, between Destron Fearing and PSID.

In connection with these transactions, we entered into a sublease with IFTH and a former affiliate of ours, whereby IFTH subleased from us our former headquarters located in Delray Beach, FL and purchased lease prepayments made by us for approximately $0.2 million in cash. Blue Moon Energy Partners, LLC, which is managed by Scott Silverman and William J. Caragol, a current executive officer of PSID, was a majority owner of IFTH. On November 14, 2008, we also entered into a purchase order with PSID whereby they acquired certain inventory related to the Human RFID Business for approximately $0.2 million in cash. The proceeds from these two transactions were used for working capital.

Purchase Agreement with Blue Moon

In July 2008, we entered into a purchase agreement with Blue Moon, whereby we sold all our shares of IFTH. The partners of Blue Moon are current or former PSID executives or directors. See Note 16 for a further discussion.

Private Placement Sale with Certain Directors

On January 19, 2009, several of our directors agreed to purchase an aggregate of approximately 0.3 million shares of our common stock in exchange for an aggregate of approximately $0.1 million in cash in accordance with the terms of a Private Placement. The purchase price of the shares was $0.50 per share, based on the closing price of our common stock on the prior business day, which was January 16, 2009. The sales were closed on January 20, 2009.

Destron Fearing A/S’s Leased Facility

Destron Fearing A/S leased a 13,600 square foot building located in Hvidovre, Denmark. The building was occupied by Destron Fearing A/S’s administrative and production operations. Destron Fearing A/S leased the building from LANO Holding Aps. LANO Holding Aps is 100% owned by Lasse Nordfjeld, Destron Fearing A/S’s former CEO. The rent expense was $0.2 million for the year ended December 31, 2008. The lease agreement had no expiration but included a three month termination notice that was utilized by Destron Fearing A/S in October, 2008.

Sale of Thermo Life

On January 21, 2010, we entered into a purchase agreement and licensing agreement with Mr. 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 UK entity controlled by Gary Lawrence, the manager of the Control Products division for the past several years. The purchase price of £400,000 was represented, in part, by a secured promissory note in the original principal amount of £374,000 issued from the buyer to Signature, which calls for monthly cash payments for approximately 5 years. Gain recognition may be deferred based on applicable accounting guidance.

21. Restructuring, Severance and Separation Expenses

During 2008, we initiated restructuring efforts to develop a strategic long-range plan focusing on restoring growth and profitability. With our restructuring, we seek 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 headcount reductions. Our purpose in taking these actions is to increase profitability at the gross margin level, which management believes is necessary to competitively price products and achieve positive earnings. Restructuring activities were recorded in accordance with the Exit or Disposal Cost Obligation Topic and the Compensation — Nonretirement Postemployment Benefit Topic of the Codification.

Restructuring charges and asset impairments were (in thousands):

	Animal		Emergency
	Identification		Identification		Corporate		Total
Year Ended December 31, 2009:
Restructuring and workforce reduction charges:
Severance	$	347	$	181	$	—	$	528
Contract termination		150		—		—		150
	$	497	$	181	$	—	$	678
Year Ended December 31, 2008:
Restructuring and workforce reduction charges:
Severance	$	1,903	$	597	$	371	$	2,871
Contract termination		—		—		354		354
Facility closing		453		—		—		453
	$	2,356	$	597	$	725	$	3,678
Asset impairment:
Fixed assets	$	1,971	$	—	$	146	$	2,117
Other assets		244		—		—		244
	$	2,215	$	—	$	146	$	2,361

In addition to the charges listed above, included in cost of goods sold for the year ended December 31, 2008 was approximately $1.5 million of inventory write-offs associated with the restructuring.

F-34

As of December 31, 2009, our restructuring accrual was as follows:

				Contract
				Termination
				and Facility
	Severance			Closing Costs			Total
Balance — January 1, 2009	$	1,066		$	478		$	1,544
Additional expense		528			150			678
Cash payments		(1,291	)		(396	)		(1,687	)
Balance — December 31, 2009	$	303		$	232		$	535

22. Supplemental Cash Flow Information

The changes in operating assets and liabilities are as follows (in thousands):

	For the years ended
	December 31,
	2009			2008
Decrease in accounts receivable and unbilled receivables	$	1,304		$	385
(Increase) decrease in inventories		(2,166	)		730
Decrease in other current assets		392			666
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(2,047	)		2,867
	$	(2,517	)	$	4,648

We had the following non-cash investing and financing activities (in thousands):

	For the years ended
	December 31,
	2009		2008
Issuance of common stock, warrants, and options for business acquisition	$	—	$	6,879
Issuance of common stock for purchase of equipment		186		—
Issuance of common stock for legal settlement		400		500
Issuance of common stock for SEDA commitment fee		125		—
Issuance of common stock for deferred financing fee		800
Issuance of warrants in connection with financings		—		744
Assets acquired for long-term debt and capital leases		—		330

23. Subsequent Events

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 existing term debt obligations as discussed above.

F-35

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 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 will be reflected in our consolidated balance sheet beginning in February 2010 as a liability and the warrants will be required to be revalued at each reporting period. Going forward, changes in the value of the warrants will result in 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 payable 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 VWAP for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. In connection with the registered direct offering discussed above, we terminated the SEDA effective February 4, 2010.

Sale of Thermo Life

On January 21, 2010, we sold the assets of Thermo Life to Ingo Stark, an employee and scientist at Thermo Life, as more fully discussed in Note 20.

Sale of Control Products Group

On January 25, 2010, we sold our Control Products Group division to Gary Lawrence, the manager of the Control Products division for the past several years. This sale is more fully discussed in Note 20.

Settlement of Note Receivable

On February 24, 2010, we entered into a letter amendment to the Secured Promissory Note (the “Note”) between Customer Service Delivery Platform Corporation (“CSDP”) and Florida Decision Corporation (“FDC,” formerly known as Pacific Decision Sciences Corporation) dated as of June 2, 2008. In accordance with the amendment, CSDP made a payment of approximately $0.7 million on March 8, 2010 which represented payment in full of all remaining amounts due on the Note. The discounted book value of the note on the payment date was approximately $0.9 million. As a result, we will record a loss on the settlement during the first quarter of 2010 of approximately $0.2 million. Upon final payment, FDC delivered a security interest release to CSDP which confirmed the release of all security interests granted by CSDP to FDC pursuant to the terms of the Note.

We have evaluated subsequent events through the date the Form 10-K was filed.

F-36

Exhibit Index

Exhibit
Number			Description
	2.1		Agreement and Plan of Merger dated January 14, 2008 among the Company, GT Acquisition Sub, Inc., Geissler Technologies Corporation and the individuals named therein (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the Commission on January 17, 2008)
	2.2		Asset Purchase Agreement among the Company, Pacific Decision Sciences Corporation and Customer Service Delivery Platform Corporation dated June 2, 2008 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the Commission on June 6, 2008)
	2.3		Stock Purchase Agreement between the Company and Blue Moon Energy Partners LLC dated August 1, 2008 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the Commission on August 4, 2008)
	3.1		Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 7, 2007 (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the Commission on April 25, 2007)
	3.2		Certificate of Elimination to Certificate of Designations filed with the Secretary of State of Missouri on April 5, 2007 (incorporated by reference to Exhibit 3.4 to the registrant’s Annual Report on Form 10-K/A filed with the Commission on April 6, 2007)
	3.3		Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2008)
	3.4		Certificate of Amendment of Certificate of Incorporation of the Company dated December 21, 2007 (incorporated by reference to Annex A to the registrant’s Definitive Proxy Statement on Schedule 14(a) filed with the Commission on April 28, 2008)
	3.5		Certificate of Amendment of Certificate of Incorporation of the Company dated October 31, 2008 (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 11, 2008)
	3.6		Certificate of Amendment of Certificate of Incorporation of the Company dated November 10, 2008 (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 12, 2008)
	3.7		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 9, 2007)
	3.8		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on September 28, 2009)
	10.1		Voting Agreement by and between Applied Digital Solutions, Inc. and The Stanley Works dated as of May 15, 2008 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on May 16, 2008)
	10.2	*	1996 Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc., as amended through June 13, 1998 (incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (File No. 333-11294) filed with the Commission on December 2, 1999)
	10.3	*	Applied Digital Solutions, Inc. 1999 Flexible Stock Plan, as amended (incorporated herein by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-8 (File No. 333-118776) filed with the Commission on September 3, 2004)
	10.4	*	Amended and Restated Digital Angel Corporation Transition Stock Option Plan, as amended (incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (file No. 333-148958) filed with the Commission on January 31, 2008)
	10.5	*	Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-8 (File No. 333-126229) filed with the Commission on June 29, 2005)
	10.6	*	Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan (incorporated by reference to Exhibit 10.110 to the registrant’s Annual Report on Form 10-K filed with the Commission on March 15, 2007)
	10.7	*	Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-8 (File No. 333-126229) filed with the Commission on June 29, 2005)
	10.8	*	Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan (incorporated by reference to Exhibit 10.110 to the registrant’s Annual Report on Form 10-K filed with the Commission on March 15, 2007)

35

Exhibit
Number			Description
	10.9	*	Incentive and Recognition Policy dated April 2, 2007 (incorporated by reference to Exhibit 10.112 to the registrant’s Annual Report on Form 10-K/A filed with the Commission on April 6, 2007)
	10.10	*	Employment Agreement effective as of January 1, 2008 between Applied Digital Solutions, Inc. and Joseph J. Grillo (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on January 4, 2008)
	10.11	*	Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-8 (file No. 333-148958) filed with the Commission on January 31, 2008)
	10.12	*	Employment Agreement, dated March 24, 2008, by and between the registrant and Parke H. Hess (incorporated by reference to Exhibit 10.1 to the registrant’s Amendment No. 1 to the Quarterly Report on Form 10-Q/A filed with the Commission on July 9, 2008)
	10.13	*	Applied Digital Solutions, Inc. 2003 Flexible Stock Plan, as Amended and Restated through June 20, 2008 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 11, 2008)
	10.14	*	Form of Amendment to the Option Agreements issued to Joseph Grillo and Parke Hess (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on September 24, 2008)
	10.15	*	Form of Stock Option Agreement under the 2003 Flexible Stock Plan (incorporated by reference to Exhibit 10.102 to the registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2009)
	10.16	*	Digital Angel Corporation 2003 Flexible Stock Plan, as Amended (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement Under The Securities Act of 1933 on Form S-8 filed with the Commission on October 16, 2009)
	10.17		Form of Series B Warrant to Purchase Common Stock of Applied Digital Solutions, Inc. (incorporated herein by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on April 15, 2004)
	10.18		Form of Series D Warrant to Purchase Common Stock of Applied Digital Solutions, Inc., in favor of Satellite Strategic Finance Associates, LLC dated October 21, 2004 (incorporated herein by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on October 22, 2004)
	10.19		Form of Series E Warrant to Purchase Common Stock of Applied Digital Solutions, Inc. dated as of June 10, 2005 (incorporated by reference to Exhibit 10.8 to the registrant’s Current Report on Form 8-K/A filed with the Commission on June 13, 2005)
	10.20		Supply Agreement between Digital Angel Corporation and Raytheon Microelectronics España, S.A. dated April 26, 2006 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2006)
	10.21		Amended Credit Facility between Danske Bank and Daploma International A/S dated June 1, 2006 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on June 5, 2006)
	10.22		Letter of Support Issued to Danske Bank A/SM (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on June 5, 2006)
	10.23		Letter Agreement regarding Amendment of $13,500,000 Note dated as of February 29, 2008 among Applied Digital Solutions, Inc., Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd. and PSource Structured Debt Limited (incorporated by reference to Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2008)
	10.24		Master Security Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2006)
	10.25		Stock Pledge Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2006)
	10.26		Registration Rights Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated August 24, 2006 (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2006)
	10.27		Omnibus Amendment and Waiver dated as of October 31, 2007 among Applied Digital Solutions, Inc., VeriChip Corporation, Laurus Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV II, Corp. and PSource Structured Debt Limited (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on November 6, 2007)

36

Exhibit
Number		Description
	10.28	Omnibus Amendment Agreement dated February 29, 2008 among Applied Digital Solutions, Inc., Laurus Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV II, Corp., Valens Offshore SPV I, Ltd. and PSource Structured Debt Limited (incorporated by reference to Exhibit 10.141 to the registrant’s Annual Report on Form 10-K filed with the Commission on March 17, 2008)
	10.29	Securities Purchase Agreement dated August 31, 2007 between Applied Digital Solutions, Inc. and Kallina Corporation (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.30	Secured Term Note dated August 31, 2007 between Applied Digital Solutions, Inc. and Kallina Corporation (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.31	Letter Agreement regarding Amendment of $7,000,000 Note dated as of February 29, 2008 among Applied Digital Solutions, Inc., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd. and Valens Offshore SPV II, Corp. (incorporated by reference to Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2008)
	10.32	Subordination Agreement dated as of February 29, 2008 among Applied Digital Solutions, Inc., VeriChip Corporation and LV Administrative Services, Inc. (incorporated by reference to Exhibit 10.11 to the registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2008)
	10.33	Amendment of Warrants and Conditional Consent to Asset Sales dated as of February 29, 2008 among Applied Digital Solutions, Inc., Laurus Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp. and PSource Structured Debt Limited (incorporated by reference to Exhibit 10.12 to the registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2008)
	10.34	Master Security Agreement dated August 31, 2007 between Applied Digital Solutions, Inc. and Kallina Corporation (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.35	Stock Pledge Agreement dated August 31, 2007 among Applied Digital Solutions, Inc., Kallina Corporation, Computer Equity Corporation, Digital Angel Corporation and Digital Angel Technology Corporation (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.36	Intellectual Property Security Agreement dated August 31, 2007 between Applied Digital Solutions, Inc. and Kallina Corporation (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.37	Intercreditor Agreement dated August 31, 2007 among Applied Digital Solutions, Inc., Kallina Corporation, Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC and Valens Offshore SPV II, Corp. (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.38	Guaranty by Applied Digital Solutions, Inc. in favor of Kallina Corporation dated August 31, 2007 (incorporated by reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.39	Amendment and Partial Assignment of Loans, Liens and Documents dated August 31, 2007 among Kallina Corporation, Valens U.S. SPV I, LLC, and certain other parties named therein (incorporated by reference to Exhibit 10.8 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.40	Amendment and Partial Assignment of Loans, Liens and Documents dated August 31, 2007 among Kallina Corporation, Valens Offshore SPV II, Corp., and certain other parties named therein (incorporated by reference to Exhibit 10.9 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.41	Intellectual Property Security Agreement dated August 31, 2007 between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.11 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.42	Secured Term Note dated August 31, 2007 among Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International in favor of Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 10.13 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)

37

Exhibit
Number		Description
	10.43	Digital Angel Corporation Security Agreement dated August 31, 2007 among Applied Digital Solutions, Inc., Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International (incorporated by reference to Exhibit 10.14 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.44	Subordination Agreement dated August 31, 2007 among Applied Digital Solutions, Inc., Kallina Corporation, Valens Offshore SPV II, Corp. and Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.15 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.45	Secured Revolving Note dated August 31, 2007 among Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc., and Digital Angel International in favor of Kallina Corporation (incorporated by reference to Exhibit 10.16 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.46	Security Agreement dated August 31, 2007 among Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc., Digital Angel International, and Kallina Corporation (incorporated by reference to Exhibit 10.17 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.47	Stock Pledge Agreement dated August 31, 2007 among Digital Angel Corporation, Digital Angel Technology Corporation and Kallina Corporation (incorporated by reference to Exhibit 10.18 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.48	Intellectual Property Security Agreement dated August 31, 2007 among Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc., and Kallina Corporation (incorporated by reference to Exhibit 10.19 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.49	Registration Rights Agreement dated August 31, 2007 between Destron Fearing Corporation (formerly Digital Angel Corporation) and Kallina Corporation (incorporated by reference to Exhibit 10.20 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.50	Subsidiary Guaranty by Digital Angel Corporation, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc., and Digital Angel International in favor of Kallina Corporation dated August 31, 2007 (incorporated by reference to Exhibit 10.22 to the registrant’s Current Report on Form 8-K/A filed with the Commission on November 7, 2007)
	10.51	Settlement Agreement and General Release dated September 28, 2007 among Hark M. Vasa, H&K Vasa 1999 Family Limited Partnership, H&K Vasa 2000 Family Limited Partnership, Applied Digital Solutions, Inc. and Pacific Decision Sciences Corporation (f/k/a PDS Acquisition Corporation) (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2007)
	10.52	Letter Agreement dated December 20, 2007 between PositiveID Corporation and Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the Commission on December 21, 2007)
	10.53	Joinder Agreement dated January 14, 2008 between GT Acquisition Sub, Inc. and Kallina Corporation (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on January 17, 2008)
	10.54	Joinder Agreement dated January 14, 2008 among GT Acquisition Sub, Inc., Kallina Corporation, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC and PSource Structured Debt Limited (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on January 17, 2008)
	10.55	Letter Agreement dated as of February 29, 2008 between PositiveID Corporation and Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed with the Commission on March 5, 2008)
	10.56	Amendment No. 1, dated January 5, 2008, to the Product Supply and Distribution Agreement dated February 13, 2007 between Digital Angel Corporation and Schering-Plough Home Again LLC (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 12, 2008)
	10.57	Guarantee by Applied Digital Solutions, Inc. in favor of The Stanley Works dated as of May 15, 2008 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on May 16, 2008)
	10.58	Non-Competition Agreement by and between Applied Digital Solutions, Inc. and The Stanley Works dated as of May 15, 2008 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on May 16, 2008)

38

Exhibit
Number		Description
	10.59	Intercompany Letter Agreement by and between Applied Digital Solutions, Inc. and PositiveID Corporation dated as of May 15, 2008 (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the Commission on May 16, 2008)
	10.60	Consent and Waiver Agreement by and among Laurus Master Fund, Ltd., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., PSource Structured Debt Limited, and Applied Digital Solutions, Inc. dated as of May 15, 2008 (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed with the Commission on May 16, 2008)
	10.61	Secured Promissory Note from Customer Service Delivery Platform Corporation dated June 2, 2008 (incorporated by reference to Exhibit 2.2 to the registrant’s Current Report on Form 8-K filed with the Commission on June 6, 2008)
	10.62	Security Agreement between Customer Service Delivery Platform Corporation and Applied Digital Solutions, Inc. dated June 2, 2008 (incorporated by reference to Exhibit 2.3 to the registrant’s Current Report on Form 8-K filed with the Commission on June 6, 2008)
	10.63	Stock Purchase Agreement between Digital Angel Corporation and Sterling Hallmark, Inc. dated July 10, 2008 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on July 16, 2008)
	10.64	Noncompetition and Confidentiality Agreement between Digital Angel Corporation and Sterling Hallmark, Inc. dated July 10, 2008 (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on July 16, 2008)
	10.65	Omnibus Amendment between Digital Angel Corporation, Laurus Master Fund, Ltd., Kallina Corporation, Valens Offshore SPV I, Ltd., Valens Offshore SPV II Corp, Valens US SPV I, LLC, Psource Structured Debt Limited and LV Administrative Services, Inc. dated July 21, 2008 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on July 24, 2008)
	10.66	Letter Agreement dated September 30, 2008 between Digital Angel Corporation, Laurus Master Fund, LTD, Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I Ltd., Valens Offshore SPV II Corp. and Psource Structured Debt Limited and consented to by Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc. and Fearing Manufacturing Co. Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on October 3, 2008)
	10.67	Secured Term Note dated September 30, 2008 payable by Digital Angel Corporation to Valens Offshore SPV II Corp. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on October 3, 2008)
	10.68	Agreement dated September 30, 2008 between Digital Angel Corporation and Valens Offshore SPV II Corp. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the Commission on October 3, 2008)
	10.69	Stock Purchase Agreement dated November 12, 2008 between Digital Angel Corporation, Scott Silverman and R&R Consulting Partners, LLC (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on November 18, 2008)
	10.70	Asset Purchase Agreement dated November 12, 2008 between Digital Angel Corporation and Positive ID Corporation (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on November 18, 2008)
	10.71	Letter Agreement dated November 26, 2008 between Digital Angel Corporation, Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc., Laurus Master Fund, Ltd, Kallina Corporation, Valens Offshore SPV I, Ltd., Valens Offshore SPV II Corp, Valens US SPV I, LLC, Psource Structured Debt Limited and LV Administrative Services, Inc. (incorporated by reference to Exhibit 10.101 to the registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2009
	10.72	Recourse Invoice Discounting Agreement between Bibby Financial Services and Signature Industries Limited on July 7, 2009 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2009)
	10.73	Standard Conditions for the Purchase of Debts (Edition A/2004) Incorporated into the Confidential Invoice Discounting Agreement Made between Bibby Financial Services and Signature Industries Limited on July 7, 2009 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2009)
	10.74	Standby Equity Distribution Agreement dated as of July 10, 2009 by and between YA Global Master SPV Ltd. and Digital Angel Corporation (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed with the Commission on July 14, 2009
	10.75	Amendment No. 1 to the Standby Equity Distribution Agreement (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2009)

39

Exhibit
Number			Description
	10.76		Form of Letter Agreement dated November 5, 2009 between Digital Angel Corporation, Laurus Master Fund, Ltd, Kallina Corporation, Valens U.S. SPV I LLC, Valens Offshore SPV I Ltd, Valens Offshore SPV II Corp. and PSource Structured Debt Limited and consented to by Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc. and Fearing Manufacturing Co. Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on November 12, 2009)
	10.77		Amendment to Letter Agreement dated December 14, 2009 between Digital Angel Corporation, Laurus Master Fund, LTD, Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Psource Structured Debt Limited, LV Administrative Services, Inc., Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc., Fearing Manufacturing Co. Inc. and Florida Decision Corporation (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on December 15, 2009)
	10.78		Securities Purchase Agreement by and among Digital Angel Corporation and Iroquois Master Fund Ltd. and Alpha Capital Anstalt dated February 4, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Commission on February 4, 2010)
	10.79		Digital Angel Corporation’s Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Commission on February 4, 2010)
	10.80		Placement Agency Agreement with Chardan Capital Markets, LLC dated February 3, 2010 (incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Commission on February 4, 2010)
	10.81	**	Asset Sale and Purchase Agreement Relating to Certain Assets of Signature Industries Limited’s marine business “McMurdo” between Signature Industries Limited, McMurdo Limited, Digital Angel Corporation and Orolia SA dated November 20, 2009
	21.1	**	List of Subsidiaries of Digital Angel Corporation
	23.1	**	Consent of Eisner LLP
	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 Lorraine M. Breece, Senior Vice President and Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
	32.1	**	Certification by Joseph J. Grillo Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	**	Certification by Lorraine M. Breece Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	- Management contract or compensatory plan.
**	- Filed herewith.

40

EX-10.81

Exhibit 10.81

Date      November 20, 2009

Signature Industries Limited (1)

McMurdo Limited (2)

Digital Angel Corporation (3)

Orolia SA (4)

Asset Sale and Purchase Agreement

relating to

certain assets of

Signature Industries Limited’s marine business
“McMurdo”

Power House, Harrison Close, Knowlhill
Milton Keynes MK5 8PA

Tel: (01908) 668555
Fax: (01908) 685085
www.kimbells.com

Ref: DIG4-5

CONTENTS

Clause	Page
1 Definitions and interpretation		3
2 Agreement to Sell and Purchase		13
3 Consideration		14
4 Adjustment to the Initial Stock Value		15
5 Conditions Precedent		15
6 Break-up fee		16
7 Exchange		17
8 Completion		18
9 Conduct of Business prior to Completion		20
10 Warranties		21
11 Buyer’s remedies		22
12 Property		22
13 Employees		23
14 Business Contracts		25
15 Mutual covenants and apportionments		26
16 Book Debts and Creditors		28
17 Obligations of the Seller and Buyer after Completion		28
18 Restrictive Covenants		29
19 Confidentiality		30
20 Value Added Tax		31
21 OROLIA Guarantee		31
22 DC Guarantee		33
23 Announcements and publicity		36
24 Notices		36
25 Successors, assigns and third parties		37
26 Variation		37
27 Waiver		37
28 Costs		37
29 Severance		37
30 Further assurance		38
31 Entire Agreement		38
32 Counterparts		38
33 Miscellaneous		38
34 Applicable law and jurisdiction and remedy and agents for services		39
35 Post-completion effect		39
Schedule 1		40
Apportionment of the Consideration		40
Schedule 2		41
Warranties		41
Schedule 3		56
Seller Protection Provisions		56
Schedule 4		60
The Employees		60
Schedule 5		63
The Customer Contracts		63
Schedule 6		64
The Supplier Contracts		64
Schedule 7		65
Products		65
Schedule 8		66
Registered Intellectual Property		66
Schedule 9		67
Schedule 10		75
The Plant		75
Schedule 11		76
Leasing/Hire Agreements		76
Schedule 12		77
Schedule 13		81
Schedule 14		82

2

This Agreement is dated            2009

Parties

(1)	SIGNATURE INDUSTRIES Limited, a company registered in England (registered number 2800561) whose registered office is at Tom Cribb Road, Thamesmead, London SE28 0BH (the “Seller”);
(2)	MCMURDO LIMITED, a company registered in England (registered number 6952856 whose registered office is at Silver Point, Airport Service Road, Portsmouth PO3 5PB (the “Buyer” or “McMurdo Limited”);
(3)	Digital Angel Corporation, a company incorporated under the laws of the state of Delaware, whose registered office is 490 Villaume Avenue, South St, Paul MN 55075 -2433 USA (“DC”).
(4)	OROLIA SA, a company incorporated under the laws of France, whose registered office is at 3 Avenue Du Canada, 91 974 Les Ulis cedex, France (“OROLIA”).

Agreed terms:

1 Definitions and interpretation

1.1 In this Agreement, unless the context otherwise requires, the following words will have the following meanings:

Accounting Date	31 December 2008;
Accounts	the audited financial statements of the Seller for the accounting reference period ended on the Accounting Date comprising a balance sheet, profit and loss account, notes, the directors’ and auditors’ reports;
Actual Stock Value	the aggregate value of the Stock as shown in the Completion Statement as agreed or determined in accordance with Schedule 12;
Aged Creditors List	the aged creditors list relating to the Due Creditors and the Creditors’ Sums dated and issued by the Seller to OROLIA immediately before Completion and showing the sums due to those Creditors in decreasing order of value, initialled and agreed between the Seller, the Buyer and OROLIA;
Anniversary Date	the first anniversary of the Transfer Date;
Assets	the assets of the Business agreed to be sold and purchased pursuant to this Agreement as described in clause 2.1;
Book Debts	all trade and other debts owing to the Seller on the Transfer Date in relation to the Business;
Brands	the names or code references by which products are known and which may or may not include a Logo and/or Trademark in their description;
Business	the business of the design, manufacture and sale of marine personal location beacons and complimentary maritime safety products including the Products carried on by the Seller at the Transfer Date, from the Property (other than the Retained Business);
Business Contracts	the Customer Contracts, Suppliers Contracts, IP Licences, Leasing/Hire Agreements, and all other contracts, arrangements, licences and other commitments whether conditional or unconditional and whether by deed, under hand, oral or otherwise relating to the Business entered into on or before the Transfer Date, and which remain to be performed in whole or in part at the Transfer Date, which have been entered into by or for the benefit of the Seller, or the benefit of which is held in trust for or has been assigned or subcontracted to the Seller, but excluding the Liabilities;

3

Business Day	any day which is not a Saturday, a Sunday or a bank or public holiday in England and Wales;
Business Information	all information, documentation, papers, books, records, know-how and techniques (whether or not confidential and in whatever form held) (if any) which exclusively relates to:
	(a)  all or any part of the Business and Assets (including all books, accounts, credit reports, price lists, cost records, warranty records, work tickets, catalogues, certificates of title (including all correspondence with the patent and trade mark agents relating to any registered Business Intellectual Property and all registration certificates therefor));
	(b)  any products manufactured or sold or services rendered by the Business (including formulae, designs, processes, specifications, drawings, data, manuals or instructions, plans, product descriptions, user or test reports, type approval papers or certificates, instructional and promotional material and other technical material together with any plates, blocks, negatives and similar material relating thereto);
	(c)  any products or processes which are or were the subject of any research or development undertaken exclusively by the Business (whether or not completed or abandoned);
	(d)  the operations, management, administration, or financial affairs of the Business (including all employee records and interview records); and
	(e)  the sale or marketing of any of the products manufactured and/or sold or services rendered by the Business including, without limitation, all Customers and suppliers names and lists limited to the Customers and suppliers of the Business since the period of the Seller’s ownership of the Business, sales advertising and marketing information (including without limitation, targets, sales and market share statistics, market surveys and reports on research commissioned by the Seller and terms and conditions of sale or supply;
Business Intellectual Property	all Intellectual Property owned or lawfully used by the Seller exclusively in connection with the Business as carried on by the Seller as at the Transfer Date including:
	(a)  those items of registered Intellectual Property (and applications therefor) described in Schedule 8;
	(b)  the Business Information;
	(c)  the Business Names;
	(d)  the know-how and trade secrets;
	(e)  the Brands, design rights, Logos, patents, Trade Marks, copyright, Domain Names, the website, and email addresses; and
	(f)  any other confidential and proprietary knowledge and information;
	(g)  all the Intellectual Property Rights to the plastics, mechanics, electronics and software making up the Nav 7 Product (save for the demodulation library source code);
	whether registered or not, and the right to apply for the same, and to renew or extend such rights, anywhere in the world;

4

Business Names	‘McMurdo’ and ‘McMurdo a division of Signature Industries’;
Buyer’s Group	the Buyer, OROLIA and all companies and undertakings which now or in the future become subsidiaries or subsidiary undertakings of the Buyer, OROLIA or of any such holding company;
CAA	the Capital Allowances Act 2001;
Chemring Stock	the items of stock-in-trade disclosed in M1.002 of the Disclosure Bundle;
Completion	completion of the sale and purchase of the Business and the Assets in accordance with clause 8;
Completion Date	(subject to clause 5) the date which is the earlier of:
	(a)  5 Business Days after notice has been given in accordance with clause 5 by the relevant Party that the last unsatisfied Condition has been satisfied;
	(b)  5 Business Days after OROLIA has waived the last unsatisfied Condition or Conditions in accordance with clause 5.4; or
	(c)  or such other date as OROLIA and the Seller may agree in writing;
Completion Statement	the completion statement prepared in accordance with the clause 4.1 and Schedule 12;
Computer System	all computer hardware and associated peripheral equipment, software, networks and technical and other documentation related thereto owned or used by the Business including all arrangements relating to the provision of maintenance and support, security, disaster recovery, facilities management, bureau and on-line services to the Business;
Conditions	the conditions precedent set out in clause 5.1;
Consideration	the total purchase price payable by the Buyer to the Seller in accordance with clause 3.1;
Creditors	all trade and other debts, accrued charges and all other amounts owing by the Seller in connection with the Business on the Transfer Date;
Creditors’ Fund	the amount representing the Creditors’ Sums;
Creditors’ Sums	the sums set out in the Aged Creditors List due by the Seller to the Creditors other than the sums owed to the Due Creditors to be paid by the Buyer after Completion out of the Creditors’ Fund to certain Creditors other than the Due Creditors;
Customers	the persons, firms or companies who or which were at or before the Transfer Date a customer or prospective customer of the Business;

5

Customer Contracts	those contracts, engagements or orders entered into on or prior to the Transfer Date by or on behalf of the Seller with Customers in connection with and in the ordinary course of the Business which at the Transfer Date remain to be performed in whole or in part by the Seller including those contracts listed in Schedule 5 and subject to clause 9 (Conduct of the Business prior to Completion) any further such contracts entered into after or on today’s date. For the avoidance of doubt this excludes the Kelvin Hughes Contract, the RNLI Contract and any customer and/or distribution agreement, purchase order or arrangement relating to the product sold or supplied by the Seller under the Dive Canister Contract;
Disclosure Bundle	has the meaning given in the Disclosure Letter;
Disclosure Letter	a letter dated the same date as this Agreement from the Seller to the Buyer and OROLIA;
Dive Canister Contract	the trade agreement dated 27 February 2009 between the Seller (1) and Dive Containers New Zealand Ltd (2) , a copy of which is document D21.008 of the Disclosure Bundle;
Domain Names	the domain names required for the carrying on of the Business details of which are given in Schedule 8;
Due Amount	the amount (if any) due to the Buyer being settled as defined in paragraph 2.4 of Schedule 9;
Due Creditors	any overdue insurance premium, any overdue rent and service charges relating to the Property, and the first 20 trade Creditors in value as at the Completion Date based on the Aged Creditors List;
Employees	the persons whose names are set out in Schedule 4 and subject to clause 9 (Conduct of the Business prior to Completion) any further persons who are employed by the Seller as employees in the Business on or after today’s date up to and including the Transfer Date;
Escrow Account	an interest bearing bank account in the joint names of the Seller’s Solicitors and OROLIA’s Solicitors and designated as required by the Instruction Letter;
Escrow Agents	the Seller’s Solicitors and OROLIA’s Solicitors;
Escrow Agreement	the agreement, in the agreed form, to be signed by the parties instructing and authorising the Escrow Agents to establish and operate the Escrow Account in the form set out in Schedule 9;

6

Excluded Assets	the following assets which are excluded from the sale to the Buyer under this Agreement: (i) the Retained Business; (ii) the Book Debts and all records relating to the same; (iii) the statutory books and books relating to the Retained Business and all of the records of the Seller relating to the Retained Business; (iv) cash in hand or at the bank and all cheques and other securities representing the same; (v) any right to use or continue to use after Completion any trade or service name or mark of the Seller or any member of the Seller’s Group other than the Business Names; (vi) the Property; (vii) the intellectual property associated with Sarbe ‘stubby’ antenna McMurdo Pt No. 83-200A; (viii) the intellectual property associated with the Sarbe PELS remote antenna Pt No. 33806-1-6; ; (ix) all assets, property rights and other interests of the Seller other than the Assets; (x) all corporation tax repayments, withholding tax refunds, VAT refunds due from HM Revenue & Customs; (xi) the VAT Records; (xii) the Creditors; (xiii) the RNLI Contract; (xiv) the Kelvin Hughes Contract; (xv) the Dive Canister Contract; (xvi) all properties, any leases or subleases of Properties or rights in any real properties of the Seller; (xvii) all shares or securities held in by the Seller in the capital of any company or undertaking including Keyswitch Varley Limited, Sarbe Limited, and McMurdo Limited; (xviii) the Seller’s Scheme and (xix) all Leasing/Hire agreements other than the Vehicle Leases and (xx) all employees’ benefits of the Retained Business and which are not capable of being transferred under this Agreement and (xxi) all assets relating to NAV5, NAV5+, NAV6, NAV DUAL, NAV6 plus, NAV6A plus and NAV6 Repeater products and (xxii) the Nav 7 demodulation library source code;
General Retention	the sum of US$1,000,000 further referred to in Clause 3.2.2;
Goodwill	the goodwill custom interest and connection of the Seller in and concerning the Business together with the exclusive right for the Buyer and its successors and assigns to carry on the Business under the Business Names (and all other names associated with the Business) and respectively to represent themselves as carrying on the Business in succession to the Seller;
Guaranteed Agreements	has the meaning given in clause 21.1;
Initial Consideration	has the meaning ascribed to it in clause 3.2.1;
Initial Stock Value	the net book value of the Stock agreed between the Seller and OROLIA as being £1,300,000 ;
Insolvency Event	(a) the passing of a resolution for the liquidation of the party other than a solvent liquidation for the purpose of the reconstruction or amalgamation of all or part of the Seller’s Group or the Buyer’s Group (the structure of which has been previously approved by the other party in writing) in which a new company assumes (and is capable of assuming) all the obligations of the party; or
	(b) the presentation at court by any competent person of a petition for the winding up of the Seller or the Buyer and which has not been withdrawn or dismissed within fourteen days of such presentation; or
	(d) the issue at court by any competent person of a notice of intention to appoint an administrator to the Seller or the Buyer, a notice of appointment of an administrator to the Seller or the Buyer or an application for an administration order in respect of the Seller or the Buyer; or
	(e) any step is taken by any person to appoint a receiver, administrative receiver or manager in respect of the whole or a substantial part of the assets or undertaking of the Seller or the Buyer; or
	(f) a non frivolous statutory demand outstanding against the Seller or the Seller or the Buyer being unable to pay its debts as they fall due for the purposes of section 123 of the Insolvency Act 1986

7

Instruction Letter	the letter from the Seller and the Buyer to the Seller’s Solicitors and OROLIA’s Solicitors relating to the Retention in the form agreed as set out in Part 2 of Schedule 9;
Intellectual Property	patents, right to invention, know-how, goodwill, registered and unregistered trademarks and service marks, domain names, registered designs, design rights, utility models, copyright (including all such rights in computer software, information and any databases), Logos, Brands, database rights, moral rights and topography rights, trade secret and other similar confidential information, rights in the nature of unfair competition rights and right to sue for passing off and any other similar intellectual proprietary knowledge or information or commercial right (in each case whether or not registered or registrable for the full period thereof and all extensions and renewals thereof), applications for any of the foregoing and the right to apply for any of the foregoing in any part of the world and any similar rights situated in any country;
IP Licences	any licences, authorisations and permissions in any form whatsoever whether express or implied, written or unwritten (a) pertaining to the use, enjoyment and exploitation by the Seller of any Business Intellectual Property in connection with the Business as carried on at the Transfer Date;
Kelvin Hughes Contract	the development and supply agreement dated 30 December 2005 between the Seller (1) and Kelvin Hughes (2) , a copy of which is document D21.004 of the Disclosure Bundle;
Lease	a lease of the Property dated 25 February 2008 made between Chemring Group plc and Signature Industries Limited together with any documents ancillary or supplemental to it.
Leasing/Hire Agreements	those leasing and hire agreements entered into on or prior to the Transfer Date by or on behalf of the Seller for the lease or hire of equipment exclusively in connection with and in the ordinary course of the Business which at the Transfer Date remain to be performed in whole or in part being those contracts listed in Part 2 of Schedule 11;
Legal Opinion	the legal opinion in agreed form given in relation to DC or OROLIA (as appropriate) entering into this Agreement;
Liabilities	all liabilities relating directly or indirectly to the Retained Business and the Excluded Assets, the Seller’s Schemes and all other liabilities or obligations relating to the Business or Assets and outstanding on, or accrued or referable to the period up to and including, the Transfer Date or arising by virtue of the sale and purchase recorded by this Agreement, including any and all liabilities in respect of Taxation attributable to the Seller in respect of the Business or the Assets relating to the period ending on the Transfer Date and all bank and other overdrafts and loans owing by the Seller other than those specified to be transferred in this Agreement or any of the Transaction Documents;
Licence to Occupy	the licence to occupy the Property between the Seller and the Buyer in the agreed form as set out in Schedule 13 to be entered into between the Seller (1) and the Buyer (2) on Completion;
Logos	the logos used in connection with the Business excluding all and any owned or used by the Seller in connection with the Retained Business;

8

Long Stop Date	18 December 2009 (or such other date the Seller and OROLIA may agree in writing);
Management Accounts	unaudited profit and loss account and balance sheet for the Business as at and for the period to August 2009, a copy of which is in the Disclosure Bundle;
Mandate Letters	the letters of instruction from the Seller’s Solicitors and OROLIA’s Solicitors in the agreed form;
McMurdo Limited or the “Buyer”	a dormant company being a wholly owned subsidiary of the Seller, incorporated on 6 July 2009 under Company Number 6952856 by the Seller for the purpose of selling that company to OROLIA immediately prior to the Completion Date of this Agreement, in accordance with the terms of McMurdo Ltd Sale and Purchase Agreement referred to in Schedule 14;
McMurdo Ltd Sale and Purchase Agreement	the agreement to be entered into by the Parties as set forth in Schedule 14 for the acquisition by OROLIA of the entire issued share capital of McMurdo Limited;
Nav 5 Stock	all stock relating to NAV5 and NAV5+ products
Nav 6 Stock	all stock relating to NAV6+, NAV Dual, NAV6 plus, NAV6A plus and NAV6 Repeater products
OROLIA’s Confidential Information	has the meaning as ascribed to it in clause 19.1;
OROLIA’s Solicitors	Pritchard Englefield Solicitors, 14 New Street, London EC2M 4HE;
Parties	the parties to this Agreement (and Party means any of them depending on the context);
Patent Assignment	the patent assignment in the agreed form to be entered into between the Seller (1) and the Buyer (2);
Plant	fixed or moveable fixtures and fittings, plant, equipment, hardware items of office equipment and Computer System used at the Property , machinery wherever situate, including tools (including to the extent owned by the Seller the tools relating to MOB Guardian products sold under the RNLI Contract disclosed in the Disclosure Letter) and jigs in the possession of suppliers, belonging to the Seller and used exclusively in connection with the Business including those listed in Schedule 10 and the offsite tooling disclosed in the Disclosure Letter, and subject to Clause 9 (Conduct of Business Prior to Completion) together with any other such items acquired by the Seller after today’s date but before Completion for use exclusively in connection with the Business and less any items on such list which are disposed of by the Seller after today’s date but before Completion;
Post Exchange Breach	has the meaning given in clause 10.6;
Products	the products listed at Schedule 7;
Property	the property known as Silver Point, Airport Service Road, Portsmouth PO3 5PB and any part or parts thereof as further demised and described in the Lease;

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Relevant Claim	any claim by the Buyer for breach of or liability under any of the representations, undertakings, agreements, covenants, warranties (including the Warranties) and indemnities made against the Seller or DC under or pursuant to this Agreement and any Transaction Documents save for the Seller’s obligations to pay for the services set out in Transitional Service Agreement unless any such monies remain outstanding from the Seller to the Buyer under the Transitional Services Agreement immediately before the Anniversary Date;
Request Letter	the letter from the Escrow Agent to the relevant bank relating to the Retention in the form agreed as set out in Part 2 of Schedule 9;
Retained Business	any businesses including without limitation all the assets, contracts and any other property and rights in connection with such businesses (other than the Business and Assets) carried on or previously carried on by the Seller including any arrangements of the Seller between the Business and the Seller’s other businesses and including the business relating to the Nav 5 and 6 series products;
Retention	the General Retention in accordance with clause 3.2.2;
RNLI Contract	the manufacturing and marketing licensing agreement for the MOB Guardian dated 16 November 2007 between the Seller (1) and RNLI (2) , corresponding to document J3.000 of the Disclosure Bundle;
Schedule of Apportionments	the schedule of apportionments pursuant to clause 15.12;
Seller’s Solicitors	Kimbells LLP, Power House, Harrison Close, Knowlhill, Milton Keynes MK5 8PA;
Seller’s Solicitors Account	National Westminster Bank plc Solicitors Corporate Service Team, PO Box 333, Silbury House ,300 Silbury Boulevard, Milton Keynes MK9 2ZF Sort Code: 60-14-55 Client Account: 60546085;
Security Interest	any encumbrance, mortgage, charge (fixed or floating), assignment for the purpose of security, pledge, lien, right of set-off, security interest (including any created by law), retention of title or hypothecation for the purpose, or which has the effect, of granting security interest of any kind whatsoever and any agreement or arrangement, whether conditional or otherwise, to create any of the foregoing (including any right to acquire, option or right of pre-emption);
Seller’s Confidential Information	has the meaning ascribed to it in clause 19.1;
Seller’s Group	the Seller, its holding company and all companies and undertakings which now or in the future become subsidiaries or subsidiary undertakings of the Seller or of any such holding company;

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Seller’s Scheme(s)	all agreements or arrangements (whether legally enforceable or not) for the payment of any pensions, allowances, lump sums or other like benefits on retirement for the benefit of any Employee or Other Employee (as defined in Clause 13.2.1) of the Seller or for the benefit of the dependants of such any person including the Prudential Money Purchase Master Plan and the Prudential Stakeholder Plan;
Solicitors	OROLIA’s Solicitors and the Seller’s Solicitors;
Special Provisions Order	the VAT (Special Provisions) Order 1995 SI 1995/1268;
Stock	the stock-in-trade exclusively relating to the Business at the Transfer Date including (without limitation) raw materials, goods and other assets purchased for resale, stores, component parts, work in progress, together with finished products, packaging and promotional material owed by the Seller, all exclusively relating to the Business but for the avoidance of doubt, excluding , the Chemring Stock, the Nav 5 Stock and the Nav 6 Stock and stock relating to the C1 SVDR Capsule product;
Supplier Contracts	those contracts, engagements or orders entered into on or prior to the Transfer Date by or on behalf of the Seller for the supply or sale of goods or services to the Seller exclusively in connection with and in the ordinary course of the Business which at the Transfer Date remain to be performed in whole or in part including those contracts listed in Schedule 7 but excluding any liabilities thereunder (other than the Creditors’ Sums) and excluding any supplier contracts relating to the Excluded Assets and the Retained Business;
Tax or Taxation	all taxes, levies, duties, imposts, charges, contributions and withholdings of any nature whatsoever or wheresoever imposed and all penalties, fines, charges, surcharges and interest relating thereto;
Trade Mark	the registered or unregistered trade marks used in connection with the Business including those listed in Schedule 8 together with all trade or service mark applications or registered trade or service marks, registered protected designations of origin, registered protected geographic origins, refilings, renewals or reissue thereof, unregistered trade or service marks, get up and company names in each case with any and all associated goodwill and all rights or forms of protection of a similar or analogous nature including rights which protect goodwill whether arising or granted under the law of England or of any other jurisdiction;
Trade Mark Assignment	the “McMurdo” trade mark assignment in the agreed form to be entered into between the Seller (1) and the Buyer (2) on Completion;
Transaction Documents	Disclosure Letter, Transitional Services Agreement, McMurdo Ltd Share Purchase Agreement, Trade Mark Assignment, Licence to Occupy, Patent Assignment, Escrow Agreement and any other documents ancillary to this Agreement;
Transfer Date	the close of business on the Completion Date;
Transitional Services Agreement	an agreement in respect of certain transitional services between the Seller and the Buyer to be entered into on Completion;
TULRA	the Trade Union and Labour Relations (Consolidation) Act 1992;

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TUPE	the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (and, where the context so requires, the Transfer of Undertakings (Protection of Employment) Regulations 1981;
VAT	Value Added Tax or any equivalent tax outside of the United Kingdom;
VATA	Valued Added Tax Act 1994;
Vehicle Leases	the vehicle leases listed in Part 1 of Schedule 11;
Warranties	the warranties set out in clause 10.1 and Schedule 2;
Warranty Claim	a claim for a breach of Warranty.

1.2 In this Agreement, unless the context requires otherwise:

1.2.1	save as otherwise provided in the Agreement, words and expressions used in this Agreement that are defined in the provisions of the Companies Act 2006 or the Insolvency Act 1986 in force at the date of this Agreement shall be read as having those meanings;
1.2.2	a document in the agreed form is a document which has been agreed by the parties before today’s date and which has been initialled by them or on their behalf for identification;
1.2.3	references to a Clause or Schedule are to a clause of or a schedule to this Agreement; references to this Agreement include its schedules; and references in a Schedule to a paragraph are to a paragraph of that Schedule;
1.2.4	all words and terms defined in a Schedule have the same meaning when used elsewhere in this Agreement;
1.2.5	references to this Agreement or any other document are to this Agreement or that document as amended from time to time;
1.2.6	the singular includes the plural and vice versa; references to any gender include every gender, and references to persons include corporations, partnerships and other unincorporated associations or bodies of persons;
1.2.7	all headings and subheadings are for convenience, have no legal effect and should be ignored in the interpretation of this Agreement;
1.2.8	the words other, otherwise, including and in particular or any similar expression do not limit the generality of any preceding words;
1.2.9	any obligation not to do anything is deemed to include an obligation not to suffer, permit or cause that thing to be done if it is within the power of the relevant person to prevent that thing being done;
1.2.10	agreements includes any agreement, arrangement, contract, commitment, scheme or understanding (whether or not made in writing) whether legally binding or not and references to being party to an agreement will be construed accordingly;
1.2.11	enactment means any statute or statutory provision (of the United Kingdom or elsewhere) and any subordinate legislation made under any statute or statutory provision;
1.2.12	a reference to any enactment includes a reference to:

(a)	any enactment which that enactment has directly or indirectly replaced (with or without modification); and
(b)	that enactment as re-enacted, replaced or modified at any time except to the extent that the liability of any party would be increased or extended as a result.

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1.2.13	subsidiary and holding company have the meanings given to them by section 1159 Companies Act 2006 and subsidiary undertaking and parent undertaking will have the meanings given to them by section 1162 Companies Act 2006; and
1.2.14	any reference to “persons” shall include references to natural persons, firms corporations or unincorporated associations or, governments, governmental agencies and departments, statutory bodies or other entities, in each case whether or not having a separate legal personality, and shall include such person’s successor;
1.2.15	a reference to a “company” shall include any company, corporation or other body corporate, wherever and however incorporated or established and a “body corporate” shall be construed so as to include any company, corporation or other body corporate and limited liability partnership wherever and howsoever incorporated or established;
1.2.16	any reference to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official, person or any other legal concept shall, in respect of any other jurisdiction, be treated as including that which in its nature and effect most nearly approximates in that jurisdiction to the English legal term;
1.2.17	any amount expressed in US Dollars (US$) or pounds sterling (£) shall, to the extent that it requires in whole or in part to be expressed in any other currency in order to give due effect to this Agreement, be deemed for that purpose to have been converted into the relevant currency immediately before the close of business on Completion (or, if that is not a Business Day, the Business Day immediately preceding such day). Subject to any applicable legal requirements governing conversions into that currency, the rate of exchange shall be National Westminster Bank plc’s mid-point spot rate for the purchase of that currency with dollars or sterling (as applicable) at the time of the deemed conversion; and
1.2.18	where it is necessary to determine whether a monetary limit or threshold set out in paragraph 4 of Schedule 3 (or any other threshold or limit in this Agreement and/or any Transaction Documents (if any)) has been reached or exceeded and the value of the Relevant Claim is expressed in a currency other than pound sterling (£), the value of that Relevant Claim shall be translated into pound sterling at the closing mid-point spot rate applicable to that amount of that non-sterling currency at close of business in London on the date of receipt by the Seller of written notification from the Purchaser (in accordance with the relevant provisions of this Agreement) of the existence of such claim (or, if such day is not a Business Day, on the Business Day immediately preceding such day) and subject to any applicable legal requirements governing conversions into that currency, the rate of exchange shall be National Westminster Bank plc’s mid-point spot rate for the purchase of that currency with sterling on the next following day.
1.2.19	Any reference to an indemnity shall be construed as an undertaking by one party to the other to fully indemnify and keep fully indemnified the relevant party against all losses, liabilities (including liabilities to Tax), damages, costs, actions, awards, penalties, fines, proceedings, claims, demands and reasonable and proper legal and professional fees and expenses arising directly out of the breach and the word indemnify shall be construed accordingly.

2 Agreement to Sell and Purchase

2.1 Subject to clause 5, with effect from the Transfer Date the Seller will sell and the Buyer relying on the Warranties and clause 22, will purchase the Business as a going concern together with the following assets:

2.1.1	the Goodwill;
2.1.2	the Plant;
2.1.3	the Stock;
2.1.4	the benefit (subject to the burden) of the Business Contracts;

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2.1.5	the Business Intellectual Property (excluding the Business Information (see below));
2.1.6	the Business Information; and
2.1.7	all the Seller’s rights against third parties including all rights under any of the warranties, conditions, guarantees or indemnities or under the Sale of Goods Act 1979 exclusively relating to any of the Assets and the benefit of all sums to which the Seller is entitled from third parties or insurers in respect of damage to those Assets listed in clauses 2.1.1 to 2.1.6 (inclusive);

	but for the avoidance of doubt, excluding the Excluded Assets.
2.2	The Seller will sell the Business and the Assets to the Buyer with full title guarantee free from all Security Interests.
2.3	Title to and beneficial ownership of each of the Assets will pass to the Buyer on Completion.
2.4	Nothing in this Agreement shall pass to OROLIA or the Buyer, or shall be construed as acceptance by OROLIA or the Buyer, of any liability, debt or other obligation of the Seller, other than as expressly set out in this Agreement.
2.5	The Seller shall indemnify OROLIA and the Buyer in relation to:-

2.5.1	the Liabilities which are attributable to the period up to and including the Transfer Date;
2.5.2	all outstanding charges and other security interests relating to any Assets and subsisting at Completion;
2.5.3	all supplier accounts relating to any of the Assets acquired by or any service supplied to the Business, whether such accounts are rendered before or after Completion.

3 Consideration

3.1	The consideration (“the Consideration”) for the sale and purchase of the Business Assets shall be USD 10,000,000 (ten million US dollars) as adjusted in accordance with clause 3.4, clause 4 and Schedules 9 and 12.
3.2	The Consideration will be paid by the Buyer as follows:

3.2.1	USD 9,000,000 (“Initial Consideration”) will be paid in cash on Completion to the Seller in accordance with clause 8.1.5(h); and
3.2.2	USD 1, 000,000 (“General Retention”) will be paid in cash on Completion into the Escrow Account in accordance with clause 8.1.5(i).

3.3	The provisions of Schedule 9 apply to the Retention once it has been deposited in the Escrow Account. The Buyer and the Seller shall instruct the Escrow Agents to open the Escrow Account using the Escrow Agreement in the agreed form as set forth in Schedule 9.
3.4	On Completion, the Buyer shall retain the Creditors’ Sums and USD250,000 as a contribution towards the cost of developing new intellectual property and the Initial Consideration shall be adjusted accordingly.
3.5	The Consideration shall (subject as aforesaid, to clauses 3.4 and 4 and Schedules 9 and 12) be apportioned between the Assets in the manner set out in Schedule 1.
3.6	The apportionment of Consideration referred to in Schedule 1 is given for the sake of convenience only and the Seller agrees that OROLIA and/or the Buyer’s remedies shall not in any way be limited or affected by the amount apportioned to any particular Business Asset or category of Assets.
3.7	All sums payable by the Buyer are stated exclusive of VAT which shall (if applicable) be payable in addition to such sums on the presentation by the Seller of the relevant VAT invoices.

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4 Adjustment to the Initial Stock Value

4.1	OROLIA, the Buyer and the Seller will ensure that the Completion Statement is prepared in accordance with Schedule 12.
4.2	If the Actual Stock Value:

4.2.1	is equal to the Initial Stock Value there shall be no adjustment of the Initial Consideration;
4.2.2	is less than the Initial Stock Value the Initial Consideration will be reduced by an amount equal to the deficiency, provided always that the Seller shall not be required pursuant to this clause to repay an amount which is more than Initial Stock Value; or
4.2.3	is more than the Initial Stock Value the Buyer will pay to the Seller an additional amount of consideration, such amount being equal to the excess.

4.3 Any payment required to be made under clause 4.2 will be made in cleared funds by electronic funds transfer on Completion or on determination if later in accordance with Schedule 12.

5 Conditions Precedent

5.1 Subject to clause 5, completion of the sale and purchase of the Business under this Agreement is subject to the Seller satisfying each of the following Conditions:

5.1.1	the Buyer receiving to its satisfaction, evidence of the release of all charges over the Business and Assets in accordance with clause 8.1.4(g);
5.1.2	the Buyer receiving the Trade Mark Assignment duly executed by the Seller;
5.1.3	the Buyer receiving the Patent Assignment duly executed by the Seller;
5.1.4	the Schedule of Condition as set out in the Licence to Occupy, duly agreed between the Seller and OROLIA;
5.1.5	the Buyer receiving the Transitional Services Agreement duly executed by the Seller;
5.1.6	the Buyer receiving the ISO 9001:2008 certificate pursuant to the quality audit performed in July 2009 in relation to the Business conditional on Completion taking place);
5.1.7	the Buyer receiving (conditional on Completion taking place) the Qinetiq ‘Module B’ certificate (in the form shown at document R1.013-R1.025 of the Disclosure Bundle);
5.1.8	the Buyer receiving (conditional on Completion taking place) the Qinetiq ‘Module D’ certificate (in the form shown at document R1.087 of the Disclosure Bundle);
5.1.9	the Buyer receiving the (conditional on Completion taking place) the COSPAS SARSAT type approval certificates (in the form shown at R1.064-R1.068 of the Disclosure Bundle);
5.1.10	the Buyer receiving the consent of Davis Instruments Corp to the assignment (conditional on Completion taking place) of the Distribution Agreement dated 12 December 2002 between the Seller (1) and Davis Instruments Corp (2) (document D.11.001 of the Disclosure Bundle) in accordance with the terms of such agreement or in such other manner or form as the Seller, OROLIA and the Buyer may agree;
5.1.11	the Buyer receiving the consent of Simrad Limited (under its current identity) to the assignment (conditional on Completion taking place) of the Commercial Agreement dated 10 July 2006 between McMurdo Ltd and Simrad Limited (document D7.002 of the Disclosure Bundle) novated to the Seller pursuant to the Deed of Novation dated 28 March 2007 (Document D7.002.2 of the Disclosure Bundle) in accordance with the terms of such agreement or in such other manner or form as the Seller, OROLIA and the Buyer may agree;

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5.1.12	the Buyer receiving the consent of Simrad Limited (under its current identity) to the assignment (conditional on Completion taking place) of the Commercial Agreement dated 7 February 2003 between McMurdo Ltd and Simrad Limited (document D21.001.1 of the Disclosure Bundle) novated to the Seller pursuant to the Deed of Novation dated 28 March 2007 (Document D21.001.2 of the Disclosure Bundle) in accordance with the terms of such agreement or in such other manner or form as the Seller, OROLIA and the Buyer may agree;
5.1.13	the Buyer receiving satisfactory evidence of ownership for the recordal by the Seller of the US FastFind trademark;
5.1.14	the Buyer receiving satisfactory evidence from the Seller that the Seller has removed all Chemring Stock from the Property; and
5.1.15	the Buyer receiving confirmation in writing by the Seller and Jeremy Harrison that the Seller and Jeremy Harrison have reached an agreement that the Seller will after Completion pay to Jeremy Harrison any bonus, commission or any sum due under any incentive scheme agreed for Jeremy Harrison for fiscal year 2009 and that he will have no stock option rights in DC.

5.2	The Seller and the Buyer shall respectively use all reasonable endeavours to ensure the satisfaction of all the Conditions as soon as possible so far as lies within their respective power so to do and OROLIA shall use all reasonable endeavours to co-operate and assist the Seller and the Buyer to ensure the satisfaction of all of the Conditions. Each Party shall give notice in writing to the other Parties of the satisfaction of the relevant Conditions within two Business Days of becoming aware of the same.
5.3	All costs and expenses relating to obtaining the consents or approvals or other matters referred to in clauses 5.1 will be borne by the Seller and the Seller shall indemnify each of the Buyer and OROLIA against any such costs and expenses.
5.4	OROLIA may waive in writing all or any of the Conditions set out in clause 5.1.
5.5	Without prejudice to clauses 5.2 and 6.2 (in so far as it relates to clause 5.2), if all the Conditions are not satisfied to the reasonable satisfaction of OROLIA or waived in accordance with clause 5.4 on or before 4 December 2009 or such other date as the Seller and OROLIA in their absolute discretion may agree in writing that this Agreement (save for clauses 19 (Confidentiality) 23 (Announcements and Publicity), 24 (Notices), clause 33.3 and clause 34 which shall remain in force) shall become null and void and no party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of such clauses.
5.6	The Buyer shall not be entitled to waive or vary any conditions or terms of this Agreement (including those set out in clause 8.1) without the prior written consent of OROLIA.

6 Break-up fee

6.1

If all the Conditions are satisfied in accordance with Clause 5.1 and OROLIA fails to complete the purchase of the Business and the Assets under clause 8 on the Completion Date or rescinds or terminates this Agreement (other than where it properly rescinds or terminates this Agreement in accordance with its terms or the Seller is subject to an Insolvency Event) then OROLIA shall pay promptly and in any event within 30 Business Days of a notice in writing issued by the Seller to OROLIA, to the Seller a break-up fee of USD 500,000.00 and this Agreement (save for clause 5.5, this clause 6, clause 19 (Confidentiality), clause 22 (DC Guarantee), clause 33.3 and clause 34 which shall remain in force) shall become null and void and no Party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of clauses 5.5, 6, 19, 22 (DC Guarantee).

6.2

If all the Conditions are not satisfied or waived in accordance with clause 5.4 on or before 4 December 2009 or such other date as the Seller and OROLIA in their absolute discretion may agree in writing or OROLIA terminates the Agreement pursuant to clause 11.1.2, neither the Seller nor OROLIA shall be entitled to any break-up fee. However if under clause 5.2 the Seller and the Buyer fail respectively to use all reasonable endeavours to ensure the satisfaction of all the Conditions in accordance with that clause, then the Seller or DC shall promptly and in any event within 30 Business Days of a notice in writing issued by OROLIA to the Seller, pay to OROLIA a break-up fee of USD 500,000.00 and this Agreement (save for clause 5.5, this clause 6, clause 19 (Confidentiality) and clause 22 (DC Guarantee), clause 33.3 and clause 34 which shall remain in force) shall become null and void and no Party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of clause 5.5, 6, 19, 22 (DC Guarantee).

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6.3 If all the Conditions are satisfied and the Seller or the Buyer (provided that the Buyer is still wholly under the Seller’s control) fails to complete the sale of the Business and the Assets under clause 8 on the Completion Date or rescinds or terminates this Agreement (other than where they properly rescind or terminate this Agreement in accordance with this Agreement) then the Seller or DC shall promptly and in any event within 30 Business Days of a notice in writing issued by OROLIA to the Seller, pay to OROLIA a break-up fee of USD 500,000.00 and this Agreement (save for clause 5.5, this clause 6, clause 11,clause 23, clause 33.3 and clause 34 which shall remain in force) shall become null and void and no Party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of clause 5.5, 6, 19 and 22.

7 Exchange

7.1 Exchange will take place at the offices of the Seller’s Solicitors on today’s date (or such other place as the parties may agree), when the following will take place:

7.1.1 the Seller will deliver, or procure delivery, to OROLIA of:

(a)	the Seller obtaining and providing to the Buyer all licences, consents and approvals required from Laurus;
(b)	the Disclosure Letter;
(c)	a certified copy of an extract from the minutes of a meeting of the directors of the Seller and DC in the agreed form authorising the execution by such party of this Agreement and of any other documentation that may be necessary or desirable arising out of or in connection with this Agreement and appointing the relevant signatory or signatories to sign the same;
(d)	a certified copy of the minutes of a meeting of the directors of the Buyer in the agreed form authorising the execution by the Buyer of this Agreement and of any other documentation that may be necessary or desirable arising out of or in connection with this Agreement and appointing the relevant signatory or signatories to sign the same; and
(e)	the Legal Opinion in relation to DC duly given by the relevant lawyers;

7.1.2 against compliance by the Seller with its obligations under clause 7.1.1 OROLIA will deliver, or procure delivery, to the Seller of:

(a)	a certified copy of the minutes of a meeting of the directors of OROLIA in the agreed form authorising the execution by OROLIA of this Agreement and of any other documentation that may be necessary or desirable arising out of or in connection with this Agreement and appointing the relevant signatory or signatories to sign the same;
(b)	a duly countersigned copy of the Disclosure Letter by OROLIA and the Buyer;
(c)	the Legal Opinion in relation to OROLIA duly given by the relevant lawyers; and
(d)	written evidence to the reasonable satisfaction of the Seller that the Buyer will be able to fund the payments this Agreement requires it is to make on Completion.

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7.1.3 The parties will deliver, or procure delivery to each other of all other documents required to be in agreed form pursuant to this Agreement. For the avoidance of doubt, these are as follows:-

(a)	the Licence to Occupy;
(b)	the Escrow Agreement;
(c)	the McMurdo Ltd Sale and Purchase Agreement;
(d)	the Trade Mark Assignment; and
(e)	the Patent Assignment.

8 Completion

8.1 Subject to clause 5, Completion will take place at the offices of the Seller’s Solicitors on the Completion Date (or such other place as the parties may agree), when the following will take place:

8.1.1	the Seller will sell and OROLIA will acquire the entire issued share capital of McMurdo Limited (relying on the Warranties and the warranties set out in the McMurdo Ltd Sale and Purchase Agreement) for a consideration of £1 according to the McMurdo Ltd Share Purchase Agreement as attached to Schedule 14. The Seller hereby procures that the board of directors of the Buyer will consent to the transfer of the entire issued share capital of the Buyer to OROLIA;
8.1.2	the Seller will deliver, or procure delivery to OROLIA of duly executed share transfers, written resignations and releases of the relevant officers of the Buyer, share certificates, statutory books, or other documents of title and all other documents effecting or ancillary to the transfer of the entire issued share capital of the Buyer to OROLIA as further set out in and pursuant to the terms of the McMurdo Ltd Share Purchase Agreement;
8.1.3	the Seller shall instruct the Seller’s solicitors to pay the Due Creditors in accordance with clause 16.5;
8.1.4	the Seller will deliver, or procure delivery, (in the case of items (a) to (f) below at the Property) to the Buyer of:

(a)	all the Assets capable of passing by delivery (and title to those assets will pass by delivery);
(b)	all documents of title and certificates it may hold exclusively relating to the lawful operation and use of, and all service documents pertaining to the Plant, and the Stock;
(c)	all documents, information and requirements set out in Clause 5.1;
(d)	the Aged Creditors List duly initialled by the Seller;
(e)	all documents of title, certificates, deeds, licences, agreements and other documents it may hold exclusively relating to the Business Intellectual Property (including any correspondence with the patent and trade mark agents relating to any registered Business Intellectual Property and all registration certificates therefor) and all manuals, drawings, plans, documents and other materials and media it may hold on which the Business Information is exclusively recorded;
(f)	the Business Contracts to the extent they are written;
(g)	the duly executed discharge for all outstanding mortgages, charges, pledges, securities and guarantees affecting the Business and Assets (including MG04 forms duly sworn with reference to the partial releases of the same and the following consents, authorisations, letters of non crystallisation or similar clearances being granted in terms satisfactory to OROLIA acting reasonably;
(h)	the McMurdo Ltd Sale and Purchase Agreement duly executed by the Seller;
(i)	the Licence to Occupy duly executed by the Seller;

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(j)	the Trade Mark Assignment duly executed by the Seller;
(k)	the Transitional Services Agreement duly signed by the Seller;
(l)	the Patent Assignment duly executed by the Seller; and
(m)	the Escrow Agreement duly executed by the Seller.

8.1.5 against compliance by the Seller with its obligations under clauses 8.1.1 to 8.1.4 the Buyer will deliver, or procure delivery, to the Seller of:

(a)	the Aged Creditors List duly signed by the Buyer and OROLIA;
(b)	the McMurdo Ltd Sale and Purchase Agreement duly executed by the OROLIA;
(c)	the Licence to Occupy duly executed by the Buyer;
(d)	the Trade Mark Assignment duly executed by the Buyer;
(e)	the Transitional Services Agreement duly signed by the Buyer;
(f)	Patent Assignment duly executed by the Buyer;
(g)	the Escrow Agreement executed by the Buyer;
(h)	pay the Initial Consideration by electronic transfer to the Seller’s Solicitors’ Account and the Seller’s Solicitors are hereby authorised to receive the same and whose receipt will be an absolute discharge of the Buyer;
(i)	pay the Retention by electronic transfer to the Escrow Account; and
(j)	written confirmation from OROLIA pursuant to clause 8.2.

8.2	The Buyer shall not be entitled to complete this Agreement without the consent of OROLIA provided always OROLIA shall not withhold or delay in giving such consent where the provisions of clauses 8.1.1 to 8.1.4 have been satisfied.
8.3	Neither OROLIA nor the Buyer will be obliged to complete the purchase of any of the Assets unless the purchase of all the Assets is completed in accordance with this Agreement. Neither OROLIA nor the Buyer will be obliged to complete if the Seller or DC has suffered an Insolvency Event which is continuing.
8.4	At Completion the Seller and the Buyer shall sign the Escrow Agreement and the Instruction Letters and procure that the Escrow Agents sign the Request Letter.
8.5	OROLIA may, acting reasonably, waive any requirement contained in clauses 8.1.1 to 8.1.4. The Seller may, acting reasonably, waive any requirement contained in clause 8.1.5.
8.6	If any of the provisions or obligations set out in clause 8.1 are not fully complied with on the Completion Date by OROLIA or the Seller (as the case may be) (the “Party in Default”) the Party to whom the relevant obligation is owed may, on one or more occasions, by written notice to the Party in Default:

8.6.1	defer Completion to a date not more than 10 Business Days following the intended Completion Date or the next following intended Completion Date if Completion has already been deferred under this Clause (and the provisions of clause 8 apart from this clause 8.6 will apply to the deferred Completion) provided always it shall not be deferred past the Long Stop Date; or
8.6.2	proceed to Completion so far as practicable (without prejudice to its rights under this Agreement); or
8.6.3	rescind this Agreement.

8.7 If this Agreement is rescinded pursuant to clause 8.6, it shall become null and void (save for clauses 19 (Confidentiality) 22 (DC Guarantee), 23 (Announcement and Publicity), 24 (Notices) and 34 (Applicable law and Jurisdiction etc...) which shall remain in force) and no Party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of such clauses.

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9 Conduct of Business prior to Completion

9.1	Pending the Transfer Date, ownership of the Assets shall be retained by and risk in the Assets shall remain with the Seller.
9.2	Subject to the provisions of clause 9.3, the Seller shall continue to carry on the Business for its own benefit and at its own risk up to the Transfer Date.
9.3	Save in circumstances where in the Seller’s reasonable opinion a failure to take or make the relevant act or omission may prejudice the interests of any company in the Seller’s group, the Seller undertakes to OROLIA that pending the Completion Date unless it has obtained the prior written consent of OROLIA to the contrary (such consent not to be unreasonably withheld or delayed):

9.3.1	the Buyer will not enter into any commitment whatsoever or commence trading;
9.3.2	the Business will in all material respects continue to be carried on in the same manner as it is presently carried on as regards the nature, scope and manner of conducting it and so as to maintain it as a going concern;
9.3.3	the Seller will not enter into a long term contract (being a contract which cannot be terminated by the Seller on less than 3 months notice) or a contract with an aggregate contract value of more than £50,000 in relation to the Business or any onerous or unusual agreements or obligations;
9.3.4	the Seller will not engage any person as an employee of the Business other than the Employees;
9.3.5	the Seller will not create, issue or grant or agree to create, issue or grant any Security Interest over any of the Assets unless, the Assets will be released from such Security Interest on or prior to the Completion;
9.3.6	there shall be no merger or amalgamation of the Business with any other company or business;
9.3.7	the Seller shall not (and shall procure that no member of the Seller’s Group) directly or indirectly acquire any business which is competitive with any business carried on by the Business;
9.3.8	no scheme of arrangement will be entered into in relation to the Seller or the Buyer;
9.3.9	there shall be no change to the corporate and/or trading names currently used by the Seller or the Buyer;
9.3.10	no resolution for the cessation of business or the winding-up of the Seller or the Buyer shall be proposed, made or take place except in the event of the insolvency of the Seller;
9.3.11	the Seller will not directly request or procure the appointment of a receiver or an administrative receiver of the whole or any part of the Assets;
9.3.12	the Seller will not commence any legal or arbitration proceedings (other than routine debt collection) in relation to the Business;
9.3.13	neither the Seller nor the Buyer will sell or dispose of any part of the Business or the Assets or other assets or property of the Business to any third party other than any such assets or goods intended to be sold in the ordinary course of business; and
9.3.14	in relation to the Property, the Seller will not to terminate, or give notice to terminate, a lease, Licence to Occupy or licence which would have the effect of preventing the right granted by the Seller to the Buyer to occupy the Property under the Licence to Occupy.

9.4	Pending Completion or earlier termination of the Agreement pursuant to this Agreement, OROLIA, the Buyer and the Seller will use reasonable endeavours to resolve constructively any issues that arise in relation to the Business so as to achieve an orderly transfer under this Agreement.
9.5	Pending Completion the Seller will, on OROLIA’s reasonable request, give to OROLIA or its professional advisers such facilities and information and assistance (including access to Employees and premises) regarding the Business and Assets.

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9.6	Pending Completion the Seller will have Jean-Yves Courtois telephone Jeremy Harrison together with Parke Hess on a weekly basis to give him a business update in relation to the Business.
9.7	Pending Completion the Seller will provide OROLIA with monthly management accounts (in a form consistent with the Management Accounts) relating to the Business.
9.8	The Seller shall carry out at its own costs before Completion all necessary repairs to the roof of the Property relating to the leak referred to in the Disclosure Letter. The costs of such repairs shall not be comprised in the Creditor’s Sums or transferred to the Buyer post Completion.
9.9	Pending Completion the Seller will immediately notify OROLIA and the Buyer in writing of all adverse events or circumstances arising in connection with or relating to any Business Contracts of which the Seller becomes aware.

10 Warranties

10.1	The Seller warrants to the Buyer in the terms set out in Schedule 2 and acknowledges that OROLIA and the Buyer are entering into this Agreement in reliance on the Warranties.
10.2	The Warranties are given subject only to matters accurately and fairly disclosed in the Disclosure Letter and for this purpose fairly disclosed means disclosed in a manner and with sufficient detail to enable a reasonable buyer to make a reasonably informed assessment of the matter concerned.
10.3	Where any Warranty is qualified by “to the best of the Seller’s knowledge and belief” or “so far as the Seller is aware” or other similar qualification, such warranty will be deemed to mean that it has been made after reasonable enquiry of Jeremy Harrison, Dave Jones, Steve Foster, Alison Delaney, Mike Cook and Parke Hess of the Seller (with the Seller having taken professional advice where appropriate) and the Seller will be deemed to have knowledge only of that information revealed by such enquiries.
10.4	Each of the Warranties is separate and independent of other Warranties and are not limited or restricted by any other Warranty or by other terms of this Agreement or the Transaction Documents.
10.5	The Parties agree that any claims under the Warranties and indemnities set out in this Agreement or the Transaction Documents will be limited in accordance with Schedule 3.
10.6	The Seller undertakes that pending Completion it will as soon as reasonably practicable notify OROLIA in writing of any fact, matter or circumstance arising after today’s date of which it becomes aware (such awareness being deemed to be the actual knowledge of Jeremy Harrison, Dave Jones, Steve Foster, Alison Delaney, Mike Cook and Parke Hess) which causes (a) any of the Warranties, whether given at today’s date and repeated immediately before Completion and/or (b) the terms of clauses 9.3.1, 9.3.5, 9.3.6, 9.3.8 to 9.3.14, to be breached or (c) an Insolvency Event (Post Exchange Breach).
10.7	DC warrants to Orolia and the Buyer as at the date of this Agreement and at Completion that it has the right, power and authority, and has taken all actions necessary, to execute, deliver and exercise its rights and perform its obligations under this Agreement and each of the Transaction Documents to which it is expressed to be a party and this Agreement and each of the Transaction Documents creates legally binding obligations fully enforceable against DC in accordance with their terms and do not conflict with, violate or result in a breach of the terms, provisions or conditions of any arrangements entered into by DC or any law, undertaking to or judgments, order, injunction or decree of any court.
10.8	OROLIA warrants to the Seller at the date of this Agreement it is not actually aware of any matter other than the matters disclosed in the Disclosure Letter which would enable it or the Buyer to make a Warranty Claim and this Warranty shall be repeated on Completion.

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11 Buyer’s remedies

11.1 If, on or before Completion the Seller notifies OROLIA that there has been one or more Post Exchange Breach in respect of which the aggregate quantum of damages is agreed or determined to be more than US$150,000, OROLIA may within 10 Business Days (and in any event before the Long Stop Date) of receipt of such notice, either:

11.1.1

elect to proceed to Completion and make a Relevant Claim; or

11.1.2

elect to terminate this Agreement (save for clause 5.5, clause 6.2, clause 19, clause 22 (DC Guarantee) clause 23, clause 33.3 and clause 34 which shall remain in force) by serving written notice on the Seller and following such termination the Agreement shall become null and void and no Party shall be entitled to make a claim against any other party in connection with this Agreement save for any claim which arises in respect of clause 5.5, clause 6.2, clause 19, clause 22 (DC Guarantee) clause 23, clause 33.3 and clause 34.

11.2	If on or before Completion the Seller notifies OROLIA of one or more Post Exchange Breach in respect of which the aggregate quantum of damages is agreed or determined to be not more than US$150,000 OROLIA (“Minor Breach”), OROLIA and the Buyer shall be obliged to proceed to Completion and the Buyer shall be entitled to make a Relevant Claim. Nothing in this clause shall prejudice or affect adversely the rights of the Buyer and OROLIA to pursue after Completion any remedy for and make recovery in respect of the disclosure so made pursuant to this Clause and the Seller hereby indemnify OROLIA, the Buyer and any member of the OROLIA’s Group in respect of a disclosure pursuant to this clause in the event that such disclosure fails to be a “Minor Breach” within 18 months from Completion, through no fault of the Buyer.
11.3	If there is a dispute as to whether the relevant such breach is a Minor Breach, OROLIA and the Seller shall acting reasonably attempt to agree the level of such quantum. The Parties hereby agree that Post Exchange Breach shall be assessed at the date of the notice and within one year of such notice so as to take into account the nature of the Business and the likely adverse effect on the Business of the said Post Exchange Breach.
11.4	If they have not agreed it within 5 Business Days, either of them may refer the matter for determination by an independent chartered accountant or other suitable expert (the “Expert”) agreed on by them (or appointed by the President for the time being of the Institute of Chartered Accountants of England and Wales on the request of either of them). The Expert shall act as an expert (not an arbitrator) and his determination shall (in the absence of manifest error) be conclusive. The Expert’s fees shall be paid as he determines equitable.
11.5	If the Expert’s determination is sought and he determines that it is a Minor Breach, the 10 Business Day period specified in clause 11.1 shall be deemed to end 10 Business Days after the Expert issues his determination.
11.6	If the Expert’s determination is sought and he determines that it is not a Minor Breach then clause 11.1 applies.
11.7	If the Completion Date has already passed:

11.7.1	before the expiration of the notice period at clause 11.1;
11.7.2	when an agreement is reached by OROLIA and the Seller; or
11.7.3	when the Expert has made his determination

	then Completion shall take place 10 Business Days after the date of each of the above.
12	Property

12.1	The Seller shall grant and the Buyer shall accept the Licence to Occupy to occupy the Property in accordance with the terms of the Licence to Occupy from the Transfer Date.
12.2	For the avoidance of doubt, neither OROLIA nor the Buyer are under any obligation to enter into any direct covenant with any of the relevant landlords or superior landlords relating to the repair, condition, decoration of the Property other than in respect of the period of occupation stated in the Licence to Occupy.

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13 Employees

13.1

The parties acknowledge and agree that irrespective of any determination by a court of competent jurisdiction to the contrary that the sale and purchase pursuant to this Agreement will constitute a relevant transfer for the purposes of TUPE and accordingly that it will not operate so as to terminate any of the contracts of employment of the Employees and such contracts will be transferred to the Buyer pursuant to TUPE with effect from the Transfer Date which will be the time of transfer under TUPE.

13.2

The Seller undertakes to the Buyer and OROLIA to indemnify the Buyer from:-

13.2.1	any claim or other legal recourse by all or any of the Employees or any person who is not an Employee but deemed to be an employee of the Business at the Transfer Date (the “Other Employees”)in respect of any fact or matter concerning or arising from employment with the Seller prior to the Transfer Date including those claims or legal recourses or threat of claims or legal recourses set out in the Disclosure Letter and in particular in connection with David Richold, Ron Peckham, Sasha Smart (including any eventual costs of reinstatement), Paul Slee and Dave Jones;
13.2.2	any claim or other legal recourse by any trade union or staff association or employee representatives in respect of all or any of the Employees or any of the Other Employees arising from or connected with the failure by the Seller to comply with its legal obligations to such trade union or staff association or employee representatives; and
13.2.3	any act or omission done or omitted to be done by the Seller in relation to the Employees or any other employee of the Seller which by virtue of TUPE is deemed to be an act or omission of the Buyer; and
13.2.4	any failure by the Seller to comply with its obligations under this clause 13.

13.3 If any contract of employment or collective agreement not disclosed to the Buyer and OROLIA will have effect as if originally made between the Buyer and any of the Employees or any of the Other Employees or a trade union as a result of the provisions of TUPE:

13.3.1	the Buyer may, within 28 days of the Transfer Date, terminate such contract or agreement provided that the Buyer gives the Seller prior written notification of its intention to do so; and
13.3.2	the Seller undertakes to indemnify the Buyer and OROLIA from such termination or arising from such contracts of employment or collective agreement before and after the Transfer Date provided that the Buyer acts reasonably when terminating such contracts or agreements and in accordance with the terms of the relevant contract or agreement and in accordance with the law.

13.4	Without prejudice to the other provisions of this clause, the Seller will, at its own expense, give the Buyer such assistance as the Buyer or OROLIA may reasonably require to contest any claim by any person employed in the Business at or prior to Completion resulting from or in connection with this Agreement.
13.5	The Buyer will perform and observe all the employer’s obligations, whether under the contract of employment or otherwise, arising out of or in connection with any employee’s employment including, without limitation, payment for wages or salaries, accrued holiday pay, sick pay, maternity pay, liability to Tax, accrued bonuses or commissions and other periodic payment for any period after the Transfer Date and indemnify the Seller against any breach of this clause.
13.6	The Buyer confirms and acknowledges that it has supplied the Seller in writing with all relevant information for the purposes of Regulation 13 of TUPE on a timely basis in connection with the sale and purchase of the Business.

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13.7 The Seller undertakes to the Buyer and OROLIA unless otherwise agreed by the OROLIA:-

13.7.1	that it has complied with, and shall up to and including the Transfer Date, comply with all of its obligations and those of any of its predecessors (whether or not legally binding or in respect of which it would be expected to comply by any regulatory or other body to which it is subject) due to or in connection with the Employees, the Other Employees and former employees or any body representing them (or any of the said obligations the Seller would have had under or in connection with such contracts of employment but for TUPE);
13.7.2	that it has paid and shall pay all sums due to or in relation to the Employees, the Other Employees and former employees up to and including the Transfer Date (whether arising under common law, statute, equity or otherwise) including all salaries, wages, holiday pay, sick pay, bonus or commission, expenses, National Insurance and pension contributions, liability to Taxation and other sums payable in respect of any period up to the Transfer Date;
13.7.3	that it shall be solely responsible for and will promptly discharge all its obligations to make redundancy payments (whether statutory or contractual) and all other payments howsoever arising in relation to any employee of the Seller (including the Other Employees) who leave his or her employment or receive notice of termination of his or her employment before the Transfer Date for whatever reason;
13.7.4	that there are no sums owing to or from any Employee, Other Employee or former employee other than reimbursement of expenses for the current month, wages for the current salary period and holiday pay for the current holiday year; and
13.7.5	that it has complied and shall comply in all respects with its obligations under regulations 11 and 13 of TUPE and Part IV of TULRCA, and that, in connection with regulation 13 of TUPE the Seller has provided and shall provide to the Buyer such information as the Buyer may request in writing in order to verify such compliance.

13.8 The Buyer undertakes to the Seller to indemnify the Seller from:

13.8.1	any act or omission of the Buyer in relation to an Employee occurring after the Transfer Date;
13.8.2	any claim or allegation by an Employee that as a direct result of the sale of the Business to the Buyer where there has been or will be a detrimental change in that Employee’s working conditions;
13.8.3	any claim or action by an Employee or by any representative (as defined by TUPE) by virtue of Regulation 13 of TUPE to the extent that it arises solely out of the failure of the Buyer to comply with its obligations under Regulation 13 of TUPE; or
13.8.4	any act or omission of OROLIA or its officers or employees in respect of the Employees which directly results in an Employee not transferring by virtue of this Agreement.

13.9	If the Seller employs any person in connection with the Business between today’s date and Completion then, if the OROLIA’s written consent to this employment has been obtained (but not otherwise) that person is deemed to be an Employee. This shall be without prejudice to the indemnity given by the Seller to the Buyer provided pursuant to this clause 13.
13.10	If any person employed in connection with the Business is dismissed or his employment otherwise terminates for any reason between today’s date and Completion then that person is deemed not to be an Employee but this shall be without prejudice to the indemnity given by the Seller to the Buyer provided pursuant to this clause 13.
13.11	All wages and salaries and other emoluments including overtime pay, holiday pay, sick pay, maternity pay and commission payments or bonuses, pension contributions and sums relating to other benefits enjoyed by the Employees (or Other Employees if applicable), liability to Tax and other period payments that have become due and payable at or refer to the period up to and including the Transfer Date relating to Employees and the Other Employees, shall be borne by the Seller up to and including the Transfer Date and all necessary apportionments shall be made accordingly.

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13.12 The Seller will indemnify Buyer against all claims in connection with the Seller’s failure to pay wages or salaries, accrued holiday pay, sick pay, maternity pay, liability to Tax, accrued bonuses or commissions and other periodic payments in connection with any of the Employees and any of the Other Employees or former employees in respect of the period up to and including the Transfer Date.

14 Business Contracts

14.1 With effect from the Transfer Date the Buyer will:

14.1.1	become entitled to the benefit of the Seller under the Business Contracts; and
14.1.2	carry out and perform and complete all the obligations and liabilities created by or arising under the Business Contracts (except to the extent that any obligations or liabilities which are attributable to a breach on the part of the Seller or its employees, agents or sub-contractors prior to the Transfer Date).

14.2	With effect from the Transfer Date the Seller hereby assigns to the Buyer all the Business Contracts which are capable of assignment without the consent of other parties.
14.3	If any of the Business Contracts cannot be assigned to the Buyer without the agreement of or novation by or consent to the assignment from another party this Agreement will not constitute an assignment or attempted assignment if the same would constitute a breach of such Business Contracts. In the event that consent or novation is required to such assignment:

14.3.1

at the Buyer’s request the Seller will use all reasonable endeavours with the co-operation of the Buyer to procure such novation or assignment on terms reasonably satisfactory to the Buyer; and

14.3.2

unless and until any such Business Contract will be novated or assigned the Seller will continue its corporate existence and will hold such Business Contract on trust for the Buyer and its successors in title absolutely and the Buyer will perform all the obligations of the Seller under such Business Contract as the Seller’s sub-contractor (if such sub-contracting is permissible and lawful under the Business Contract in question) or as the Seller’s distributor (if such distributorship is permissible and lawful under the Business Contract in question).

14.4	If the Seller receives any payment in respect of the Business Contracts on or after the Transfer Date the Seller will hold the same as trustee, record such payment separately in its books and will account to the Buyer for the same within 5 Business Days of receipt.
14.5	The Buyer will indemnify the Seller in respect of the non-performance or defective or negligent performance by the Buyer of the Business Contracts after the Transfer Date.
14.6	Save as otherwise herein expressly provided, the Seller will indemnify the Buyer in respect of the non-performance or defective or negligent performance by the Seller of the Business Contracts or in connection with customer complaints disclosed in the Disclosure Letter or products manufactured or sold by the Seller prior to the Transfer Date or products manufactured by the Seller before the Transfer Date and sold by the Buyer after the Transfer Date including in relation to those Business Contracts or products referred to in the Disclosure Letter and any third party claims relating thereto.
14.7	The trade agreement with Dive Containers New Zealand Limited in relation to dive canisters (document D21.008 of the Disclosure Bundle) shall not be a Business Contract for the purposes of this Agreement and all and any liability (including any liability to any third party claims) in relation to it or the products sold by the Seller to third parties will remain with the Seller. The Seller confirms that any claims arising from the Dive Canister 50 (Part No. 91-061A, part of the FastFind 200 Series) that could not be shipped back as described in document D21.006 of the Disclosure Bundle are the sole liability of the Seller and the Seller shall indemnify the Buyer from any liabilities under the relevant customer contracts.

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14.8

The supply contract with Kelvin Hughes in relation to S-VDR Capsule recorders (document D21.004 and documents D21.004.1 to D21.004.7 of the Disclosure Bundle) shall not be a Business Contract for the purposes of this Agreement and the liability in relation to it will remain with the Seller. The Seller confirms that any claims arising in relation to the S-VDR Capsule products are the sole liability of the Seller and the Seller shall indemnify the Buyer from any liabilities under the relevant contracts.

14.9

The Seller shall indemnify the Buyer from any liabilities that the Buyer may suffer:

14.9.1	as a result of the Seller not owning the intellectual property rights in the beacon circuit board and the antenna receiver for the SEPIRB provided that the Buyer shall be under a duty to mitigate its loss in relation to any such claims; or
14.9.2	relating to any infringement or alleged infringement of intellectual property rights of Spot LLC connected with the disclosure no. 10.6.1 of the Disclosure Letter.

15 Mutual covenants and apportionments

15.1	Save as otherwise herein expressly provided the Seller covenants with OROLIA that the Seller will pay, satisfy, discharge and fulfil all costs, claims, expenses, liabilities, obligations and undertakings whatsoever relating to the Business arising in respect of or by reference to any period up to and including the Transfer Date and will indemnify the Buyer in respect of the same.
15.2	Save as otherwise herein expressly provided the Buyer covenants with the Seller that it will pay, satisfy, discharge and fulfil all costs, claims and expenses, liabilities, obligations and undertakings whatsoever relating to the Business in respect of any period commencing immediately after the Transfer Date and will indemnify the Seller in respect of the same.
15.3	Subject to the remainder of this clause 15, all costs, claims, expenses, liabilities, obligations and undertakings whatsoever (“Remedial Costs”) resulting from any defects in, or alleged defects in, goods or parts of goods sold or supplied or services provided in the course of the Business prior to the Transfer Date shall be the responsibility of the Seller and not the Buyer.
15.4	Notwithstanding the foregoing, the Parties agree that to protect the Goodwill, certain services will be performed by the Seller and the Buyer under the Transitional Services Agreement.
15.5	If the Buyer receives notice from a customer (past or present) of the Business of any defect or alleged defect of the type referred to in clause 15.3, the Buyer shall be entitled to or at the request of the Seller be obliged to carry out repair or replacement work on behalf of the Seller in relation to such defect or alleged defect provided always that the cost of such repair or replacement does not exceed £250 (excluding VAT). In calculating the cost of such work parts and stock will be charged at cost price and labour shall be charged at the rates the Buyer is entitled to charge under the Transitional Services Agreement for the relevant work. For the avoidance of doubt the Buyer requires the consent of the Seller before it initiates a product recall.
15.6	If following Completion the Buyer receives notice of claims relating to defects or alleged defects of the kind referred to in clause 15.3, it shall promptly give notice of such claims to the Seller. Save where the relevant costs fall within clause 15.5, the Buyer shall not take any preventative action in order to avoid claims relating to defects or alleged defects of the kind referred to in clause 15.3 or carry out any maintenance and/or repair work and/or replace any items in connection with such claims without the prior written approval of the Seller (such approval not to be unreasonably withheld or delayed). The Buyer shall be under no obligation to carry out repair or replacement of obsolete or quarantine stocks.

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15.7	To the extent the Buyer carries out work in accordance with clause 15.5 and clause 15.6 and the Transitional Services Agreement, it shall be entitled to recover the costs from the Seller by submitting a monthly invoice at the end of each month together with papers reasonably supporting such invoice and a statement of work carried out in the period to which the invoice relates. The Seller shall pay such invoice within 30 days of receipt.
15.8	The Buyer shall indemnify the Seller against any increase in its liability arising under claims relating to defects or alleged defects of the kind referred to in clause 15.3 where such increased liability arises as a result of work carried out by the Buyer pursuant to this clause 15.
15.9	All rates, gas, water, electricity and telephone charges and other outgoings relating to or payable in respect of the Business in its ordinary and normal course up to and including the Transfer Date and all wages, salaries, other emoluments including overtime pay, holiday pay, sick pay and maternity pay, commission payments or bonuses, pension contributions and sums relating to other benefits enjoyed by the Employees (or Other Employees if applicable), liability to Tax and other period payments and outgoings related to the Employees or any Other Employees (as defined in clause 13.2.1) up to and including the Transfer Date shall be borne by the Seller and as from the Transfer Date shall be borne by the Buyer and all insurance premiums, royalties and other periodical payments receivable in respect of the Business up to and including the Transfer Date shall belong to and be payable to the Seller and as from the Transfer Date shall belong to and be payable to the Buyer. Such outgoings and payments receivable shall if necessary be apportioned accordingly.
15.10	Purchase orders and Business Contracts shall be executed according to the contractual delivery dates as requested by the customers. All amounts payable for deliveries made by the Seller before the contractual delivery dates and before the Transfer Date shall be payable by the Seller to the Buyer if such deliveries to a customer exceed £25,000.
15.11	Prepayments and payments in advance made to the Seller on or before the Transfer Date in respect of goods or services to be supplied by the Buyer after Completion shall be payable by the Seller to the Buyer and prepayments and payments in advance made by the Seller in respect of goods ordered but not delivered and services contracted for but not rendered to the Seller in connection with the Business prior to Completion shall be refundable by the Buyer to the Seller. All necessary apportionments shall be made by the Seller and the Buyer.
15.12	Immediately after Completion the Seller shall prepare the Schedule of Apportionments in accordance with clauses 15.13 to 15.15.
15.13	The Schedule of Apportionments will be delivered to the Buyer and OROLIA by the Seller as soon as practicable after Completion and, in any event, not later than 30 Business Days after Completion. Before delivery, the Seller and the Buyer will so far as practicable consult with each other with a view to reducing the potential areas of future disagreement.
15.14	If the Buyer or OROLIA does not within 30 Business Days of receiving the Schedule of Apportionments give written notice to the Buyer that it disagrees with the Schedule of Apportionments or any item in them, this notice stating the reasons for the disagreement in reasonable detail, (Apportionments Objection Notice), the Schedule of Apportionments will be final and binding on the Parties. If OROLIA or the Buyer gives an Apportionments Objection Notice within the 30 Business Day period, OROLIA, the Buyer and the Seller will attempt in good faith to reach agreement in respect of it and, if they are unable to do so within 30 Business Days of the notification, either such Party may refer the matter to an independent accountant to be agreed by such Parties or, failing agreement within 5 Business Days, to be appointed by the President of the Institute of Chartered Accountants in England and Wales (Independent Accountants) at the instance of whichever such Party first applies to it.
15.15	The balancing payment so agreed or determined shall be paid by OROLIA (or on behalf of OROLIA) to the Seller or vice versa (as appropriate) within 10 Business Days of agreement or determination of the Schedule of Apportionments.

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15.16	The Seller and the Buyer agree that the “US Battery for life” promotion agreement with Revere dated 26 November 2007 (document D23.009 of the Disclosure Bundle) shall not pass on to the Buyer, and that the Buyer is entitled to charge under the Transitional Services Agreement for the relevant work that will be required to assume the liabilities under this promotion agreement.
15.17	The Seller and the Buyer agree that the sales rebate scheme dated 3 February 2009 granted to Revere (document D23.005 of the Disclosure Bundle) shall fully pass on to the Buyer, which shall issue a credit note for the full rebate amount that may be due to Revere per that rebate.

16 Book Debts and Creditors

16.1	The Seller is entitled, for its own account, to collect the Book Debts. The Buyer is under no obligation to collect the Book Debts.
16.2	The Buyer will hold on trust for the Seller any payment which it may receive after the Transfer Date in respect of the Book Debts and will account to the Seller for the same at the end of the week following Completion and thereafter at weekly intervals.
16.3	Any sum received by the Buyer in respect of the Business which is not specifically appropriated by the debtor to a particular transaction will be appropriated first to the oldest debt outstanding (whether due to the Buyer or a Book Debt).
16.4	The Seller will collect the Book Debts in an orderly manner and in a manner which is consistent with the way in which the Seller has collected trade and other debts in the course of carrying on the Business prior to the Transfer Date.
16.5	The Seller shall procure that an amount equal to the aggregate of the invoices of the Due Creditors is paid into the Seller’s Solicitors Account and shall be exclusively used as soon as reasonably practicable (and in any event within 2 Business Days from the receipt of the Initial Consideration) to pay and discharge the Due Creditors provided always such Due Creditors shall be paid in accordance with their payment terms and indemnify the Buyer against any failure to do so. For the avoidance of doubt, the General Retention shall not be released at the Anniversary Date if there remains unpaid Due Creditors by the Seller.
16.6	The Seller shall notify in writing immediately OROLIA and the Buyer of the existence of a genuine dispute in respect of any Creditor’s invoices setting out precisely particulars of the nature of the dispute and amount claimed and proposals to resolve it.
16.7	Following Completion the Buyer shall pay and discharge the certain Creditors (other than the Due Creditors) to whom the Creditors’ Sums relates in accordance with their contractual payment terms and indemnify the Seller against any failure to do so save that the Buyer shall not be obliged to pay a Creditors’ Sum in the event of the existence of a genuine dispute in respect of that Creditor’s invoices in which case, the Buyer shall notify in writing immediately the Seller of the existence of such dispute setting out precisely particulars of the nature of the dispute and amount claimed and proposals to resolve it. For the avoidance of doubt, the Buyer shall not pay any Creditors which are not described as being within the definition of Creditors’ Sums in the Aged List of Creditors and the Seller shall indemnify the Buyer accordingly.

17 Obligations of the Seller and Buyer after Completion

17.1 For the 12 months following Completion, the Seller:

17.1.1 will promptly refer to the Buyer all enquiries (including any payment, notice, correspondence and information) relating to the Business and assign to the Buyer all orders relating to the Business, including enquiries relating to orders for any stocks, spares, parts, accessories and other equipment manufactured or sold, or any services provided in connection with the Business, which the Seller may receive after Completion;

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17.1.2	will retain for the period required by law, the books, accounts, records (including VAT records), returns of the Seller relating exclusively to or exclusively in connection with the Business and the type approvals, licences and national authorisations in respect of the Products (“Product Consents”) held by the Seller and will give to the Buyer reasonable access to such books, accounts, records, returns, and Product Consents as the Buyer may reasonably require (including the right to take copies and extracts on reasonable advance notice at the Buyer’s expense, subject to prior written notice and during normal business hours) and will keep them in good order to the extent required by the Buyer for the continuation of the Business.
17.1.3	without prejudice to clause 5, co-operate with the Buyer at the reasonable costs of the Seller for a period of one year following the Transfer Date in applying to arrange for the issue to the Buyer of all relevant consents required by it to carry on the Business after the Transfer Date and all or any other consents, authorisations, permits and licences required to transfer the Business in compliance with any and all laws, regulations and other legal obligations; and
17.1.4	procure the transfer (free of charge) of the Domain Names to the Buyer.

17.2 The Buyer:

17.2.1

will promptly refer to the Seller all enquiries relating to the Retained Business and assign to the Seller all orders relating to the Retained Business, including enquiries relating to orders for any stocks, spares, parts, accessories and other equipment manufactured or sold, or any services provided in connection with the Retained Business, which the Buyer may receive after Completion;

17.2.2

will retain, for the period required by law, the books, accounts, records and returns of the Buyer relating exclusively to or exclusively in connection with the Business (in so far as they related to the pre-transfer Business) and will give to the Seller reasonable access to such books, accounts, records and returns (insofar as they relate to the pre-transfer Business) as the Seller may reasonably require (including the right to take copies and extracts on reasonable advance notice at the Seller’s expenses during normal business hours) and will keep them in good order.

17.3 The Buyer will allow the Seller to use the name and trade mark “McMurdo” alone or in combination with other words and marks solely for the purposes of:

17.3.1	selling or otherwise supplying any products carrying the McMurdo mark according to the Transitional Services Agreement but the Seller shall not enter into any new arrangements with third parties in relation to its supply of the products;
17.3.2	collecting any Book Debts or paying any Creditor relating to the Business.

18 Restrictive Covenants

18.1 Subject always to clause 18.2, the Seller covenants with the Buyer that it will not and will procure that any other member of the Seller’s Group will not either on its or their own account or through or in conjunction, association or by arrangement with or on behalf of any person or persons whether for its own benefit or that of others and whether directly or indirectly for the period of five years from Completion:

18.1.1 in competition with the Business as carried on at Completion supply products or provide services to any person, firm or company who or which was either at Completion or during the period of 24 months prior to Completion a client or customer of the Business where such goods or services are the same as or similar to or compete with products sold or services provided by the Business to that person, firm or company at or during the period of 24 months prior to Completion (for the avoidance of doubt these goods include any Man-Over-Board (MOB) product such as the ones currently supplied by the Seller under the RNLI Contract or similar products thereof);

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18.1.2	in competition with the Business as carried on at Completion solicit or endeavour to solicit the custom of or canvas or approach any person, firm or company who or which was either at Completion or during the period of 24 months prior to Completion had been a client or customer of the Business, for the supply of products or the provision of services which are the same as or similar to or compete with those products sold or services provided by the Business to that person, firm or company at or during the period of 24 months prior to Completion (for the avoidance of doubt these goods include any Man-Over-Board (MOB) product such as the ones currently supplied by the Seller under the RNLI Contract or similar products thereof);
18.1.3	other than by way of general advertisement solicit or entice away or endeavour to solicit or entice away from the Buyer any officer, manager, or other senior employee who was either at Completion or during the period of 12 months prior to Completion engaged in the Business whether or not such person would commit a breach of his contract of employment by reason of leaving service;
18.1.4	carry on or be engaged, concerned or interested in any business which competes with the Business as the same was carried on at Completion (other than as a holder of securities listed on a recognised investment exchange or provided that such holding will not exceed five per cent of the class of securities of which the said holding forms part); or
18.1.5	employ or conclude any contract for services with any director, senior manager, or senior employee (being an employee with an annual salary of more than £50,000) who worked in the Business at Completion.

18.2	Each restriction in clause 18.1 constitutes an entirely independent restriction on the Seller.
18.3	If any restriction in clause 18.1 is determined to be unenforceable in whole or in part, its unenforceability will not affect the enforceability of the remaining restrictions or (in the case of restrictions enforceable in part) the remainder of that restriction.
18.4	Nothing in this clause 18 prevents the Seller from carrying on the Retained Businesses, dealing with any retained liabilities in accordance with this Agreement, Excluded Assets or complying with the provisions of the Transitional Services Agreement but this clause 18.4 shall be without prejudice to the restrictions set out in this clause 18 in so far as they relate to any Man-Over-Board (MOB) product such as the ones currently supplied by the Seller under the RNLI Contract or any other similar or competing products.

19 Confidentiality

19.1

Subject to clause 23 (Announcements and Publicity), the Seller undertakes and will procure that all member of the Seller’s Group will undertake to keep confidential and not at any time to disclose or make known to anyone whatsoever or use for their own or any other person’s benefit all Business Information or any information regarding OROLIA and OROLIA’s Group (OROLIA’s Confidential Information) and the Buyer and OROLIA undertakes and will procure that any member of the OROLIA’s Group will undertake to keep confidential and not at any time to disclose or make known to anyone whatsoever or use for their own or any other person’s benefit all any information (excluding the Business Information) regarding the Seller’s Group (Seller’s Confidential Information).

19.2

The Seller and DC shall not, except with the prior written consent of the Buyer and OROLIA, publish or otherwise disclose to any person any OROLIA Confidential Information and the Buyer and OROLIA shall not except with the prior written consent of the Seller and DC to publish or otherwise disclose to any person any Seller’s Confidential Information, except to the extent required by order of a court or regulatory body or in law (and only to that extent).

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19.3 The obligations imposed by the provisions of clauses 19.1 and 19.2 will not apply to the extent that the Business Information in question:

19.3.1	is or comes into the public domain without fault on the part of the party to whom the same was disclosed, or to whose attention the same has come;
19.3.2	has been lawfully disclosed to the relevant party by a third party;
19.3.3	is required to be disclosed by law provided that any such disclosure shall not be made without the prior consultation of the relevant Parties; or
19.3.4	is required to be disclosed by a contractual obligation existing at the date of this Agreement provided that any such disclosure shall not be made without prior notice and consultation with the relevant Parties.

20 Value Added Tax

20.1	All amounts expressed in this Agreement as being payable by the Buyer are expressed exclusive of any VAT which may be chargeable and the Buyer will pay to the Seller in addition to such amounts an amount equal to any VAT (to include any interest and penalties) for which the Seller is liable to account to HM Revenue and Customs in respect of any supply made by it to the Buyer under or in connection with this Agreement.
20.2	The parties intend that section 49 VATA and paragraph 5 of the Special Provisions Order will apply to the transfer of the Business and the Seller and the Buyer will each use its reasonable endeavours to secure that pursuant to the provisions referred to above the sale of the Business is treated as neither a supply of goods nor a supply of services for the purposes of VAT but as the transfer of a business as a going concern.
20.3	If HM Revenue and Customs do not agree that the sale of the Business pursuant to this Agreement falls within section 49 VATA and paragraph 5 of the Special Provisions Order the Seller will issue to the Buyer a valid VAT invoice in respect of the sale of the Business. The Buyer will forthwith on receipt of such invoice pay to the Seller the VAT (to include any interest and penalties) charged on the sale of the Business in addition to the Consideration.
20.4	The Seller warrants that McMurdo Limited is registered for VAT purposes in the United Kingdom or that McMurdo Limited will be registered conditional on Completion taking place pursuant to a proper submission for VAT registration to the relevant authorities.
20.5	OROLIA warrants that McMurdo Limited will use the Assets to be transferred under this Agreement with the intention of continuing the Business without a break in trade immediately after Completion.
20.6	The Seller warrants that it is duly registered for VAT purposes in the United Kingdom.
20.7	The Seller will retain and preserve all records relating to the Business which are required to be preserved by paragraph 6(1) of Schedule 11 VATA and any regulations made under that section.

21 OROLIA Guarantee

21.1 Subject to and in consideration of OROLIA entering into the McMurdo Limited Share Purchase Agreement and acquiring the entire issued share capital in McMurdo Limited and from the date of such acquisition (but subject to the Seller exercising its right pursuant to clause 4.6 of McMurdo Limited Share Purchase Agreement in which case this Guarantee shall be limited to the obligation of the Buyer to sell back the entire issued share capital of McMurdo Limited in accordance with the terms of the McMurdo Limited Share Purchase Agreement and no party shall be entitled to make any claim whatsoever under it for anything else), OROLIA unconditionally and irrevocably guarantees to the Seller and its successors, transferees and assigns:

21.1.1 the due and punctual performance and observance by the Buyer of all the Buyer’s obligations; and

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21.1.2 the punctual discharge by the Buyer of all the Buyer’s liabilities to the Seller;

contained in or arising under this Agreement, McMurdo Limited Share Purchase Agreement, the Escrow Agreement, the Transitional Services Agreement, the Licence to Occupy, the Trade Mark Assignment and the Patent Assignment arising on or after Completion of this Agreement (the Guaranteed Agreements).

21.2	If the Buyer defaults in the payment when due of any amount payable to the Seller under the Guaranteed Agreements OROLIA will immediately on demand by the Seller pay to the Seller the amount payable by the Buyer and perform and discharge all obligations of the Buyer in the manner prescribed in the relevant Guaranteed Agreement and as if OROLIA were the principal obligor in respect of that amount.
21.3	As an independent and primary obligation and without prejudice to clauses 21.1 and 21.2 OROLIA will unconditionally and irrevocably indemnify the Seller against any failure of the Buyer to comply with any of its obligations or discharge any of its obligations under the Guaranteed Agreements.
21.4	The guarantee and indemnity contained in this clause 21 (OROLIA Guarantee Obligations):

21.4.1

is a continuing guarantee and indemnity and will continue in full force and effect until all liabilities or purported liabilities of the Buyer arising under, and all monies owing or payable or purported to be owing or payable by the Buyer under the Guaranteed Agreements have been paid, discharged or satisfied in full and notwithstanding any insolvency of the Buyer or any change in name or status of the Buyer; and

21.4.2

is in addition to and is not in any way prejudiced by any other security now or subsequently held by the Seller.

21.5 The OROLIA Guarantee Obligations occurring after Completion (subject always to clause 21.1) will not be discharged, diminished or in any way adversely affected as a result of any of the following:

21.5.1	any time, consent or waiver given to, or composition made with, the Buyer or any other person;
21.5.2	any amendment to, or replacement of, any Guaranteed Agreement (however fundamental) or any other agreement or security entered into by the Buyer;
21.5.3	the taking, variation, compromise, exchange, renewal, release or refusal or neglect to take, perfect or enforce any rights or remedies against or security over the assets of the Buyer or any other person or any non-observance of any formality or other requirement under any Guaranteed Agreement or any failure to realise the full value of any security;
21.5.4	the release of the Buyer, any other guarantor or other person under the terms of any composition or arrangement, including any corporate or individual voluntary arrangement;
21.5.5	any incapacity, lack of power, authority or legal personality of or dissolution or change in the members or status of the Buyer or any other person;
21.5.6	any unenforceability, illegality or invalidity of any obligation of any person under any Guaranteed Agreement or any other document or security;
21.5.7	any insolvency or similar proceedings; and
21.5.8	any other act, omission, circumstance, matter or thing which, but for this clause 21.5, might operate to release, reduce or otherwise exonerate OROLIA but which would not have discharged a person primarily liable in respect thereof.

21.6 OROLIA may not determine its liabilities under the guarantees and indemnities given in this clause 21.

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21.7	The Seller will not be obliged to enforce any other rights, security or claims it may have against the Buyer or any other person before claiming under the guarantees and indemnities given by this clause 21.
21.8	Until all amounts which may be or become payable by the Buyer under or in connection with the Guaranteed Agreements have been irrevocably paid in full OROLIA agrees that it will not exercise any rights which it may have:

21.8.1	to be subrogated to or otherwise to share in any security or monies held, received or receivable by the Seller or, to claim any right of contribution in relation to any payment made by OROLIA under this Agreement;
21.8.2	to enforce any of its right of subrogation, indemnity, or to make any application for quia timet relief against or in respect of the Buyer or OROLIA;
21.8.3	following a claim made on OROLIA under the OROLIA Guarantee Obligations, to demand or accept repayment of any monies due from the Buyer or to claim any set off or counter claim against the Buyer; or
21.8.4	to claim or prove in any liquidation or other insolvency proceeding of or affecting the Buyer or any co-surety in competition with the Seller.

21.9	Following the making of a demand on OROLIA under the OROLIA Guarantee Obligations, OROLIA will (at its own cost) promptly take such steps or action as are referred to in clauses 21.1 and 21.8 above as the Seller may from time to time stipulate.
21.10	For the avoidance of doubt, in no event shall OROLIA Guarantee Obligations impose any greater obligation or liability on OROLIA than if OROLIA were jointly and severally liable with the Buyer of Guaranteed Agreements.
21.11	All amounts payable in respect of the OROLIA Guarantee Obligations will be paid by OROLIA without set off, deduction or counterclaim of any kind being made.
21.12	OROLIA warrants to the Seller as follows:

21.12.1	OROLIA is duly incorporated under the laws of France and has full power and authority and has taken all necessary corporate action to enable it to enter into, complete and perform this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
21.12.2	OROLIA does not require the consent, approval or authority of any other person to enter into or perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
21.12.3	is not engaged in any litigation or arbitration proceedings which might have an effect upon its capacity or ability to perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
21.12.4	OROLIA’s entry into and performance of this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement will not constitute any breach of or default under any contractual, governmental or public obligation binding upon it.
21.12.5	OROLIA is solvent and able to pay its debts as they fall due.
21.12.6	OROLIA’s obligations under this Agreement, the Guaranteed Agreements and all ancillary documents to be entered into pursuant to this Agreement are and will be valid, binding and enforceable.

22 DC Guarantee

22.1 In consideration of OROLIA and the Buyer entering into this Agreement DC unconditionally and irrevocably guarantees to the Buyer and OROLIA and their respective successors, transferees and assigns:

22.1.1 the due and punctual performance and observance by the Seller of all the Seller’s obligations; and

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22.1.2 the punctual discharge by the Seller of all the Seller’s liabilities to the Buyer and/or OROLIA;

	contained in or arising under the Guaranteed Agreements.
22.2	If the Seller defaults in the payment when due of any amount payable to the Buyer and/or OROLIA under the Guaranteed Agreements DC will immediately on demand by the Buyer or OROLIA pay to the Buyer or OROLIA (as OROLIA may direct from time to time) the amount payable by the Seller and perform and discharge all obligations of the Seller in the manner prescribed in the relevant Guaranteed Agreement and as if DC were the principal obligor in respect of that amount.
22.3	As an independent and primary obligation and without prejudice to clauses 22.1 and 22.2, DC will unconditionally and irrevocably indemnify the Buyer and OROLIA against any failure of the Seller to comply with any of its obligations or discharge any of its obligations under the Guaranteed Agreements.
22.4	The guarantee and indemnity contained in this clause 22 (DC Guarantee Obligations):

22.4.1

is a continuing guarantee and indemnity and will continue in full force and effect until all liabilities or purported liabilities of the Seller arising under, and all monies owing or payable or purported to be owing or payable by the Seller under the Guaranteed Agreements have been paid, discharged or satisfied in full and notwithstanding any insolvency of the Seller or any change in name or status of the Seller; and

22.4.2

is in addition to and is not in any way prejudiced by any other security now or subsequently held by the Buyer and/or OROLIA.

22.5 The DC Guarantee Obligations will not be discharged, diminished or in any way adversely affected as a result of any of the following:

22.5.1	any time, consent or waiver given to, or composition made with, the Seller or any other person;
22.5.2	any amendment to, or replacement of, any Guaranteed Agreement (however fundamental) or any other agreement or security entered into by the Seller;
22.5.3	the taking, variation, compromise, exchange, renewal, release or refusal or neglect to take, perfect or enforce any rights or remedies against or security over the assets of the Seller or any other person or any non-observance of any formality or other requirement under any Guaranteed Agreement or any failure to realise the full value of any security;
22.5.4	the release of the Seller, any other guarantor or other person under the terms of any composition or arrangement, including any corporate or individual voluntary arrangement;
22.5.5	any incapacity, lack of power, authority or legal personality of or dissolution or change in the members or status of the Seller or any other person;
22.5.6	any unenforceability, illegality or invalidity of any obligation of any person under any Guaranteed Agreement or any other document or security;
22.5.7	any insolvency or similar proceedings including the winding up, liquidation or dissolution of the Seller, the making of an administration order in relation to the Seller or the appointment of a receiver or administrator in respect of some or all of the assets of the Seller; and
22.5.8	any other act, omission, circumstance, matter or thing which, but for this clause 22.5 might operate to release, reduce or otherwise exonerate DC but which would not have discharged a person primarily liable in respect thereof.

22.6 DC may not determine its liabilities under the guarantees and indemnities given in this clause 22.

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22.7	The Buyer and/or OROLIA will not be obliged to enforce any other rights, security or claims they may have against the Seller or any other person before claiming under the guarantees and indemnities given by this clause 22.
22.8	Until all amounts which may be or become payable by the Seller under or in connection with the Guaranteed Agreements have been irrevocably paid in full DC agrees that it will not exercise any rights which it may have:

22.8.1	to be subrogated to or otherwise to share in any security or monies held, received or receivable by the Buyer and/or OROLIA or, to claim any right of contribution in relation to any payment made by DC under this Agreement;
22.8.2	to enforce any of its right of subrogation, indemnity, or to make any application for quia timet relief against or in respect of the Seller or DC;
22.8.3	following a claim made on DC under the DC Guarantee Obligations, to demand or accept repayment of any monies due from the Seller or to claim any set off or counter claim against the Seller; or
22.8.4	to claim or prove in any liquidation or other insolvency proceeding of or affecting the Seller or any co-surety in competition with the Buyer and/or OROLIA.

22.9	Following the making of a demand on DC under the DC Guarantee Obligations, DC will (at its own cost) promptly take such steps or action as are referred to in clauses 22.2 and 22.8 above as the Buyer and/or OROLIA may from time to time stipulate.
22.10	For the avoidance of doubt, in no event shall the DC Guarantee Obligations impose any greater obligation or liability on DC than if DC were jointly and severally liable with the Seller of Guaranteed Agreements.
22.11	All amounts payable in respect of the DC Guarantee Obligations will be paid by DC without set off, deduction or counterclaim of any kind being made.
22.12	DC warrants to the Buyer and/OROLIA as follows:

22.12.1	DC is duly incorporated under the laws of Delaware and has full power and authority and has taken all necessary corporate action to enable it to enter into, complete and perform this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
22.12.2	DC does not require the consent, approval or authority of any other person to enter into or perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
22.12.3	is not engaged in any litigation or arbitration proceedings which might have an effect upon its capacity or ability to perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement.
22.12.4	DC’s entry into and performance of this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement will not constitute any breach of or default under any contractual, governmental or public obligation binding upon it.
22.12.5	DC is solvent and able to pay its debts as they fall due.
22.12.6	DC’s obligations under this Agreement, the Guaranteed Agreements and all ancillary documents to be entered into pursuant to this Agreement are and will be valid, binding and enforceable.

22.13 Notwithstanding the foregoing, all obligations of DC as Guarantor as set forth and evidenced in this clause 22 shall be subordinated in right of payment and priority to the payment in full of DC’s obligations to its senior lender, Laurus Master Fund, Ltd. and its affiliates (including Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Psource Structure Debt Limited, Kallina Corporation, and Valens U.S. SPV I, LLC), pursuant to that certain (a) Secured Term Note dated August 24, 2006 from Digital Angel Corporation (as amended or modified) and the related Securities Purchase Agreement and ancillary documents of same date; (b) Secured Term Note dated August 31, 2007 from Digital Angel Corporation (as amended or modified) and the related Securities Purchase Agreement and ancillary documents of same date, and (c) Revolving Facility and Security Agreement dated August 31, 2007 from Digital Angel Corporation’s subsidiary Destron Fearing Corporation and certain of its subsidiaries (as amended or modified) and related agreements.

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23 Announcements and publicity

23.1 No announcement or circular or other publicity in connection with the subject matter of this Agreement (other than as permitted by this Agreement) will be made by or on behalf of the Seller and OROLIA without the approval of the other as to its content, form and manner of publication (such approval not to be unreasonably withheld or delayed) save that any announcement, circular or other publicity required to be made or issued by any of the parties pursuant to any legal or regulatory authority may be made or issued without such approval.

24 Notices

24.1 Any notice or other communication required to be given under this Agreement or in connection with the matters contemplated by it shall, except where otherwise specifically provided, be in writing in the English language and shall be addressed as provided in clause 24.2 and may be:

24.1.1	personally delivered, in which case it shall be deemed to have been given upon delivery at the relevant address; or
24.1.2	if within the United Kingdom, sent by first class pre-paid post, in which case it shall be deemed to have been given two Business Days after the date of posting; or
24.1.3	if from or to any place outside the United Kingdom, sent by pre-paid priority airmail, in which case it shall be deemed to have been given seven Business Days after the date of posting; or
24.1.4	sent by fax, in which case it shall be deemed to have been given when despatched, subject to confirmation of uninterrupted transmission by a transmission report provided that any notice despatched by fax after 5 pm (at the place where such fax is to be received) on any day shall be deemed to have been received at 8am on the next Business Day.

24.2 The addresses and other details of the parties referred to in clause 24.1 are, subject to clause 24.3:

24.2.1	Name: Signature Industries Limited
	For the attention of: Mr Mike Cook
	Address: Tom Cribb Road, Thamesmead, London SE28 0BH England
	Fax number: +44 (0) 1256 322 695
	with a copy to Kimbells LLP, Jonathan Hambleton, ref: DIG4-5; Fax: 01908 685054
24.2.2	Name: McMurdo Limited
	For the attention of: Christophe François
	Address: 291 rue Albert Caquot, 06560 Sophia Antipolis, France
	Fax number: + 33 (0) 4 92 38 09 75
	with a copy to Pritchard Englefield, 14 New Street, London EC2M 4HE ref: GF/AHH/123722.6, Fax: +44 (0)20 7972 9721.
24.2.3	Name: Digital Angel Corporation
	For the attention of: Patricia Petersen
	Address: 490 Villaume Avenue, South St, Paul MN 55075 -2433 USA
	Fax number: +00 (1) 561-431-8562

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24.2.4	Name: OROLIA SA
	For the attention of: Christophe François
	Address: 291 rue Albert Caquot, 06560 Sophia Antipolis, France
	Fax number: + 33 (0) 4 92 38 09 75

24.3 Any party to this Agreement may notify the other parties of any change to its address or other details specified in clause 24.3, provided that such notification shall be effective only on the date specified in such notice or five Business Days after the notice is given, whichever is later.

25 Successors, assigns and third parties

25.1

This Agreement will be binding upon and ensure for the benefit of each party’s successors. No party to this Agreement can assign or establish a trust of the benefit to this Agreement save that (i) provided that the Seller’s liability under this Agreement (including the Warranties) shall not be increased as a result of such assignment, the Buyer may freely assign the benefit of this Agreement (including the Warranties) to another company in the Buyer’s Group provided that such assignee is of the equivalent or of a better financial standing than the Buyer and if any such assignee shall leave the Buyer’s Group, prior to leaving it shall re-assign to the Buyer any rights assigned under this clause and (ii) provided that OROLIA’s and the Buyer’s rights under this Agreement (including the Warranties) shall not be adversely affected, the Seller may assign its rights under this Agreement to another company in the Seller’s Group provided such assignee is in a better financial standing than the Seller.

25.2

The Parties agree that (save where may be expressly stated otherwise in this Agreement) for the purposes of the Contracts (Rights of Third Parties) Act 1999 they do not intend any person other than a party to this Agreement to be able to enforce any term of this Agreement.

26 Variation

26.1 No variation or amendments of this Agreement will be valid unless made in writing and signed by or on behalf of each of the parties and the Buyer shall not grant any waiver, time or indulgence to the Seller or DC without prior written OROLIA’s consent.

27 Waiver

27.1	Any waiver of any provision of this Agreement must be in writing and signed by or on behalf of each of the parties. No failure or delay by any party in exercising any right, power or privilege under this Agreement will operate as a waiver thereof nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
27.2	Any waiver by any party of a breach of any provision of this Agreement will not be a waiver of any subsequent breach of the same or any other provision.
27.3	All the Parties’ respective rights and remedies under this Agreement or by law are cumulative so a reference to or the exercise of one remedy does not affect any of the others and any failure to exercise or delay in exercising any rights or remedies, will not operate as a waiver or prevent any further exercise of them.

28 Costs

28.1 The Parties will pay their own costs and expenses in relation to the negotiation, preparation, execution and implementation of this Agreement.

29 Severance

29.1 If any provision of this Agreement will be found by any court or administrative body of competent jurisdiction to be invalid or unenforceable such invalidity or unenforceability will not affect the other provisions of this Agreement which will remain in full force and effect.

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30 Further assurance

30.1

The Seller will (at the Seller’s expense) do, execute and perform and will procure to be done, executed and performed all such further acts, deeds, documents and things as OROLIA and/or the Buyer may reasonably require from time to time in order to carry out, evidence and confirm their rights and the intended purpose of this Agreement in order to vest the Assets in the Buyer on the terms of this Agreement and otherwise to give to OROLIA and/or the Buyer the full benefit of this Agreement.

30.2

Save as otherwise provided in this Agreement, the Buyer and OROLIA will (at the Buyer or OROLIA’s expense) do, execute and perform and will procure to be done, executed and performed all such further acts, deeds, documents and things as the Seller may reasonably require from time to time in order to carry out, evidence and confirm the Seller’s rights and the intended purpose of this Agreement and to give to the Seller the full benefit of this Agreement.

31 Entire Agreement

31.1 This Agreement and the Transaction Documents entered, or to be entered into, pursuant to the terms of this Agreement or entered into between the Seller and the Buyer in writing and expressly referring to this Agreement:

31.1.1

together constitute the entire agreement and understanding between the parties with respect to the subject matter of this Agreement; and

31.1.2

(in relation to such subject matter) supersede all prior discussions, understandings and agreements between the parties and their agents (or any of them) and all prior representations and expressions of opinion by any party (or its agent) to any other party (or its agent) including any heads of terms and confidentiality agreements entered into by any of the parties in connection with the purpose of this Agreement.

31.2

The Parties also agree and acknowledge between each other that the letter of intent (as amended) entered into on 19 June 2009 and any confidentiality agreement or arrangement which may have been entered into between the Parties and/or any member of the Seller’s Group or the Orolia’s Group are hereby terminated and each of the Parties waives or procures the waiver of all or any claims (known or unknown) arising on or prior to the date of this Agreement that it may have against the other parties in respect of any breach of any obligations set out therein. Each Party confirms to the others that it has no knowledge of any breach by any party of the provisions of the letter of intent or any confidentiality agreement or arrangement which may have occurred on or prior to the date of this Agreement.

31.3

Each of the Parties acknowledges that it is not relying on any statements, warranties or representations given or made by any of them in relation to the subject matter hereof, save those expressly set out in this Agreement, and other documents referred to in clause 31.1, and that it will have no rights or remedies with respect to such subject matter otherwise than under this Agreement (and the documents executed at the same time as it or on Completion or referred to in it) save to the extent that they arise out of the fraud, fraudulent misrepresentation or fraudulent concealment of any party.

32 Counterparts

32.1 This Agreement may be entered into in any number of counterparts, each of which when executed and delivered will be an original, but all the counterparts will together constitute one and the same agreement.

33 Miscellaneous

33.1 No failure to exercise nor any delay in exercising any right, power, privilege or remedy under this Agreement shall in any way impair or affect the exercise thereof or operate as a waiver thereof in whole or in part. No single or partial exercise of any right, power, privilege or remedy under this Agreement shall prevent any further or other exercise thereof or the exercise of any other right, power, privilege or remedy.

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33.2

If any provision of this Agreement shall be held to be illegal, void, invalid or unenforceable under the laws of any jurisdiction, the legality, validity and enforceability of the remainder of this Agreement in that jurisdiction shall not be affected, and the legality, validity and enforceability of the whole of this Agreement in any other jurisdiction shall not be affected.

33.3

If any dispute arises in connection with this Agreement the Parties will first attempt to settle it by mediation in accordance with the Centre for Effective Dispute Resolution (CEDER) Model Mediation Procedure. Unless otherwise agreed by the Parties the mediator will be nominated by CEDR. For the avoidance of doubt, this will not preclude a party to issue proceedings in accordance with lause 34, such proceedings being, when appropriate, stayed pending determination of the mediator under this clause 33.3.

34 Applicable law and jurisdiction and remedy and agents for services

34.1	English law governs this Agreement. Each party irrevocably agrees to submit to the exclusive jurisdiction of the courts of England over any claim or matter arising out of or in connection with this Agreement and waives any objection to proceedings in such courts on the grounds of venue or on the grounds that the proceedings have been brought in an inconvenient forum.
34.2	Save as otherwise provided in this Agreement, the only remedy available to a party for breach of any of the provisions of this Agreement is for breach of contract under the terms of this Agreement.
34.3	Nothing in clauses 31, 34.2 or Schedule 3 will operate to limit or exclude any liability for fraud.
34.4	DC irrevocably appoints the Seller’s Solicitors as its agent to receive on its behalf in England or Wales service of any proceedings arising out of or in connection with this Agreement and such other documents entered into pursuant to this Agreement.
34.5	OROLIA irrevocably appoints Pritchard Englefield Solicitors as its agent to receive on its behalf in England or Wales service of any proceedings arising out of or in connection with this Agreement and such other documents entered into pursuant to this Agreement.

35 Post-completion effect

35.1 This Agreement will remain in full force and effect after and notwithstanding Completion in respect of all obligations, agreements, covenants, undertakings or conditions contained in or implied by this Agreement which have not been done, observed or performed at or prior to Completion and all warranties and indemnities contained in or implied by this Agreement (including the Warranties) will continue in full force and effect after and notwithstanding Completion and the parties may take action for any breach of non-fulfilment of any of them after Completion.

In witness whereof this Agreement has been executed as a Deed on the date stated at the beginning of this Agreement.

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SCHEDULE 1

Apportionment of the Consideration

1 The Price will be apportioned as follows:-

Item	US$
Goodwill		7,519,583
Plant		342,303
Stock (Initial Stock Value — GBP1,300,000)		2,138,110
Business Contracts		1
Business Intellectual Property		1
Business Information		1
Rights against third parties referred to in clause 2.1.7		1
Total		10,000,000

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SCHEDULE 2

Warranties

1	Disclosure Bundle
1.1	The information in the Schedules to this Agreement is complete, true, accurate and not misleading. The information in the Disclosure Letter is complete, true, accurate and not misleading and the documents in the Disclosure Bundle are true and complete copies of the originals.
	Capacity and Authority
1.2	The Seller:

1.2.1	is a limited company duly incorporated under English law;
1.2.2	have full power and authority and have taken all necessary corporate action to enable them to enter into, complete and perform this Agreement and all agreements to be entered into pursuant to this Agreement;
1.2.3	does not require the consent, approval or authority of any other person to enter into or perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement; and
1.2.4	is not engaged in any litigation or arbitration proceedings which might have an effect upon its capacity or ability to perform its obligations under this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement and no such legal or arbitration proceedings have been threatened against it.

1.3	The Seller’s entry into and performance of this Agreement and all agreements to which it is a party and entered into pursuant to this Agreement will not constitute any breach of or default under any contractual, governmental or public obligation binding upon it.
1.4	The Seller’s obligations under this Agreement and each agreement to be entered into pursuant to this Agreement will be valid, binding and enforceable.
	The Business
1.5	The Business is not carried on by or for the benefit of any person, firm or corporation other than the Seller.
1.6	The Seller does not conduct and has not conducted any part of the Business through a branch, agency or permanent establishment anywhere in the world other than at the Property.
1.7	The Seller has at all times carried on the Business in all respects in accordance with its memorandum and articles of association for the time being in force and any other documents relating to the Business to which it is or has been a party.
1.8	The Seller in connection with the Business is not a party to and is not liable (including contingently liable) under a guarantee, indemnity or other obligation to secure or incur a financial or other obligation with respect to another person’s obligation.
	Connected persons
1.9	Neither the Seller nor any persons connected (as that expression is defined in section 839 Income and Corporation Taxes Act 1998) with the Seller has any direct or indirect interest in any business which has a close trading relationship with the Business or which is, or is likely to become, competitive with the Business.
2	Records and Accounts
	Records
2.1	All books, accounts and records of a material nature required by law to be maintained in connection with the Business:

2.1.1 are in possession of the Seller; and

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2.1.2	during the period of the Seller’s ownership have at all times been properly maintained written up to date and will be so kept up to Completion; do not contain any material inaccuracies or discrepancies. During the period prior to the Seller’s ownership, they have been maintained to a reasonable standard.
2.1.3	are kept on computer, the Seller is the owner of all hardware and all software licences necessary to enable it to use any of those books, accounts and records in the manner in which they have been used prior to the date of this Agreement, and the Seller does not share any such hardware or software with any other person.

2.2	No notice has been received or allegation made to the Seller that any of the records are incorrect or should be rectified.
	Accounts
2.3	The Accounts:

2.3.1	were prepared on a proper and consistent basis with that used for the preparation of the Seller’s accounts for the preceding three financial years and comply with the requirements of the Companies Act 2006 and other relevant statutes and generally accepted accounting principles and standards in the United Kingdom;
2.3.2	give a true and fair view of and properly reflect the financial position of the Business as at the Accounting Date;
2.3.3	have been audited by an auditor or firm or accountants qualified to act as auditors in the UK and the auditors’ report required to be annexed to the accounts is unqualified;
2.3.4	contain proper and adequate provisions or reserves for bad and doubtful debts, old, depreciated, obsolete, unsaleable or slow-moving stock, for depreciation on fixed assets as at the Accounts Date;
2.3.5	are not affected by any unusual or non-recurring items;
2.3.6	provide for all known actual or known contingent liabilities of the Business (whether or not unquantified or disputed), including but not limited to, finance lease commitments, pension liabilities, contingent liabilities to customers at the Accounts Date; and
2.3.7	reflect all the fixed and loose plant, machinery, equipment, furniture, fittings and vehicles owned by the Business at the Accounts Date.

2.4	With respect to valuation of Stock, the accounting policies and bases, and the method of valuing Stock used in the preparation of the Accounts, were the same as those adopted in the accounts of the Business for the three financial periods immediately preceding the Accounts Date.
	Management Accounts
2.5	The Management Accounts have been properly and diligently prepared in a manner consistent with the bases and policies adopted in preparing the management accounts for the previous management accounting period August 2009 and, except as expressly disclosed in them, there were no unusual, exceptional, non-recurring or extraordinary items which materially affected such accounts. The Management Accounts contain accurate details of sales, stocks, margin and mark drawings and accurately, clearly and fairly state the assets, liabilities and position of the Business at the date of the Management Accounts and their results for the period ended on that date.
3	Trading
	Change since the Accounting Date
3.1	Since the Accounting Date:

3.1.1 the Business has been carried on in the ordinary and usual course both as regards the nature, scope and manner of conducting the same and so as to maintain the same as a going concern;

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3.1.2	the Business has paid its creditors within the times agreed with such creditors and there are no debts outstanding which have been due for more than twelve weeks;
3.1.3	there has been no unusual change in the stock levels , current assets or liabilities of the Business;
3.1.4	there has been no material reduction in the value of the Plant, to the extent that they are still owned by the Seller;
3.1.5	none of the Plant have been lost, damaged or destroyed;
3.1.6	none of the Stock reflected in the Accounts has realised an amount less than the value that was placed on it in the Accounts;
3.1.7	the Seller has not acquired or disposed of, or agreed to acquire or dispose of, any asset other than trading stock in the ordinary and usual course of business, or assumed or incurred, or agreed to assume or incur, any capital commitment or liability (actual or contingent);
3.1.8	no unusual or abnormal contracts differing from the ordinary contracts necessitated by the nature of the Business have been entered into by the Seller;
3.1.9	no contract has been entered into by the Seller involving expenditure by it on capital account;
3.1.10	[LEFT INTENTIONALLY BLANK]
3.1.11	the Business has not been adversely affected by:

(a)	the loss of or material reduction in regular orders from any customer;
(b)	the loss of or material reduction in any regular source of supply;
(c)	any abnormal factor not affecting similar businesses to a like extent.

3.1.12	there has been no material adverse change in the financial position of the Business; and
3.1.13	the Seller has not knowingly done or omitted to do anything to prejudicially affect the Goodwill in a material way.

	Agents
3.2	There are no agents or distributors of the Business and there are no persons, firms or companies whether in the United Kingdom or elsewhere with whom formal or informal arrangements exist or have existed concerning the manufacture, sale, distribution, hire, lease or promotion or licensing of any goods or services connected with the Business and no such agent or distributor has any right to any indemnity or compensation whatsoever upon termination of any arrangement in connection with the Business.
3.3	There are no existing joint venture agreements, partnership agreements, market sharing agreements relating to the Business. Any such agreements or arrangements have been terminated with no liability on either party to them.
	Terms of Trade
3.4	So far as it is aware the Seller has not:

3.4.1	given any guarantee or warranty (other than any implied by law) or made any representation in respect of any products or services sold or supplied by the Business;
3.4.2	accepted any liability to service, maintain, repair or otherwise do or refrain from doing anything in relation to such goods or services after they have been sold or supplied by it;

except for those contained in its standard conditions of trading, complete and accurate copies of which are contained in the Disclosure Letter.

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4	The Assets
	Title to the Assets
4.1	The Assets (excluding the Excluded Assets) comprise all assets now used in the Business and which are necessary or reasonably required for the continuation of the Business as carried on by the Seller.
4.2	The Assets:

4.2.1	the absolute property of the Seller and are in the Seller’s possession and control;
4.2.2	are free from any Security Interest, agreement of hire or hire purchase or for payment on deferred terms, bill of sale or any obligation to pay any outstanding sums in respect of them;

4.3	No person other than the Seller has or claims any rights in relation to the Assets or any of them or the proceeds of any sale of the Assets or any of them and the Assets are not subject to or potentially subject to any floating charge or guarantee given by the Seller or by any person or company connected with the Seller.
4.4	The Business does not depend on the use of assets owned by, or facilities provided by, the Seller which are not being acquired under this Agreement.
4.5	The Seller has not agreed to dispose of or granted or agreed to grant any security, charges, liens or other encumbrance in respect of any of the Assets and none of the Assets is subject to, and there is no agreement or commitment to give or create, any option, lien or encumbrances on or over the Business Assets.
4.6	There has been no exercise or purported exercise of any charge, lien, encumbrance or equity over any of the Assets and no claim has been made by any person to be entitled to any of the foregoing and there is no dispute directly or indirectly relating to any of the Assets.
	Plant
4.7	So far as the Seller is aware the Plant:

4.7.1	is in good repair, condition and working order having regard to its age and level of use;
4.7.2	has been properly maintained;
4.7.3	includes no items with a value of more than £5,000 which are surplus to the requirements of the Business;
4.7.4	has been written down correctly;
4.7.5	is used exclusively in connection with the Business; and does not contravene any material legal requirement or restriction.

	The Stock and Products
4.8	The Products referred to in Schedule 7 are all the material products sold or supplied by the Business.
4.9	The Stock:

4.9.1	is sufficient for the normal requirements of the Business as carried on at the date of this Agreement and at Completion and relates exclusively to the Business;
4.9.2	is in good condition or, if not, its value has been appropriately written down; and
4.9.3	(including work-in-progress) is not excessive in quantity and is capable of being used in the ordinary course of business and the work-in-progress of the Business and the amounts ordered for stock is at its normal level having regard to current orders and to orders reasonably anticipated from customers of the business None of the Stock is old, obsolete, slow moving, unsaleable, unusable or unmarketable. All work in progress hereby agreed to be transferred (if any) is wholly re-chargeable to clients.

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4.9.4	(in the case of completed goods) is capable of being sold in the ordinary and usual course of business in accordance with current price lists and without discount, rebate or allowance to a buyer.
4.9.5	complies fully, and will on sale in the ordinary and usual course of the Business comply fully, with all applicable laws, regulations, standards (including British and European Union Standards) and specifications agreed with Customers.

5	Contracts
	Business Contracts
5.1	The Seller had and has the legal power and authority to enter into and perform the Business Contracts.
5.2	So far as the Seller is aware all the Business Contracts are in full force and effect and the Seller has complied with them in all material respects.
5.3	All the material terms of each of the material Business Contracts have been disclosed to the Buyer and none of the Business Contracts and no contract, agreement or arrangement (whether oral or documented) in relation to the Business or the Assets (whether or not disclosed):

5.3.1	was entered into otherwise than in the ordinary and usual course of business of the Business;
5.3.2	is not on an arm’s length basis.

5.4	None of the Business Contracts is the subject of any material claim, dispute or proceeding, whether actual, pending or threatened and of which the Seller has received written notice.
	Customer Contracts
5.5	The Customer Contracts are the only contracts entered into prior to today’s date by or on behalf of the Seller with customers for the sale or hire of goods or equipment or provision of services by the Seller in connection with the Business which at today’s date remain to be performed in whole or in part by the Seller.
5.6	No more than 25% of the aggregate amount of all sales of the Business in the preceding 12 months were made to the same customer.
	Leasing/Hire Agreements
5.7	The Leasing/Hire Agreements are the only leasing or hire agreements relating to the Business existing at today’s date.
	Supplier Contracts
5.8	The Supplier Contracts are the only contracts, engagements and orders entered into prior to today’s date by or on behalf of the Seller for the supply or sale of goods or services in connection with the Business which at today’s date remain to be performed in whole or in part by the Seller.
5.9	No more than 25% of the aggregate amount of all purchases of the Business in the preceding 12 months were obtained from the same supplier.
	Breach of Business Contracts and other arrangements
5.10	The Seller has not waived any rights or privileges under the Business Contracts.
5.11	The Seller is not in breach of any material obligation or restriction, agreement or arrangement (including without limitation the Business Contracts) which it has entered into for the purpose of, or which is used in the operation of, the Business and the Assets. So far as the Seller is aware no matter exists which might give rise to such breach.
5.12	So far as the Seller is aware no event has occurred, is subsisting which, with the giving of notice and/or lapse of time will, constitute or result in a default or the acceleration of any obligation of the Seller under any agreement or arrangement which it has entered into for the purpose of, or which is used in the operation of, the Business and Assets.

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5.13	No threat or claim of default under any of the Business Contracts or any other agreement, instrument or arrangements to which the Seller is a party relating to the Business or the Assets has been made and is outstanding against the Seller and there is no circumstances whereby any of the Business Contracts or any such other agreement, instrument or arrangement may be terminated or rescinded by any other party or whereby the terms may be worsened as against the Seller or the Buyer or whereby the Business or the Assets may be prejudiced as a result of anything done or omitted or permitted to be done by the Seller.
6	Compliance
	General
6.1	So far as the Seller is aware neither the Seller nor any of its officers, agents or employees (in the course of their employment with the Seller and where the Seller is liable for the relevant act or omission) has done or omitted to do any act or thing which is in contravention or breach of or the subject of enquiry, investigation or proceedings under the provisions of any Act, Order, Regulation or the like whether made in or pertaining to the United Kingdom giving rise to any material fine, penalty, default, proceedings or other such material liability in relation to the Business or any of the Assets.
6.2	So far as the Seller is aware (having received no notice of the same) all legislation and all orders, provisions, directions and conditions relating to the Assets or the conduct of the Business (including VAT) have been duly complied with in all material respects.
6.3	So far as the Seller is aware all necessary material licences, consents, permits, agreements, arrangements, norms and authorities (public and private) necessary to enable the Seller to carry on the Business effectively in the manner in which it is now carried on:

6.3.1	have been obtained;
6.3.2	are valid and subsisting; and
6.3.3	are detailed in the Disclosure Letter;

	and the Seller is not in material breach of any of them.
6.4	In particular, the Seller warrants that the contract and licenses as provided or listed in Documents K2.002-K2.014, K2.016-K2.023 are fully valid and in force at the Completion Date.
	Data Protection
6.5	For the purpose of this paragraph 6 the terms data subject, personal data, processing and data protection principles will have the same meanings as in the Data Protection Act 1998 (DPA 1998).
6.6	The Seller has complied in all material respects with the DPA 1998 in relation to the Business and in particular but without limitation:

6.6.1	the Seller has complied in all material respects with all the data protection principles;
6.6.2	the Seller has made a notification in respect of the Business in accordance with the DPA 1998, and the details given in such notification have been kept accurate and up to date, and the notification has not expired.

6.7 So far as it is aware, the Seller has not at any time in the 12 months immediately preceding the date of this Agreement received in writing:

6.7.1	any complaint from any data subject;
6.7.2	any compensation claim from any data subject in relation to its processing of personal data in relation to the Business;
6.7.3	any notice from the Office of the Information Commissioner (or any similar supervisory authority) in relation to the Business including but not limited to any information, special information, enforcement, deregistration or transfer prohibition notices.

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Competition and Trade Regulation

6.7.4	So far as the Seller is aware the Seller, in relation to the Business, is not and has not been a party to or concerned in any agreement, practice or arrangement and has not engaged in any course of conduct or practice which in whole or in part:
6.7.5	contravened any of the provisions of the Restrictive Trade Practices Acts 1976 and 1977 or was or should have been registered under those or either of those Acts,
6.7.6	contravened any of the provisions of the Resale Prices Act 1976,
6.7.7	contravenes or has contravened the Trade Descriptions Acts 1968 and 1972,
6.7.8	contravenes or has contravened any of the provisions of the Competition Act 1998 or the Enterprise Act 2002;
6.7.9	it has not received any written notice informing it is the subject of any enquiry or investigation under the Fair Trading Act 1973, the Competition Act 1980, the Competition Act 1998, the Enterprise Act 2002 or under any competition or anti trust law anywhere in the world;
6.7.10	it has not received any written notice informing the Seller the Business infringes or has infringed any of the provisions of the European Communities Act 1972 or Articles 81 and/or 82 of the EC Treaty (or any regulations or directives made pursuant to the Treaty) or Articles 53 and/or 54 of the EEA Agreement;
6.7.11	infringes or has infringed any competition, anti-trust, anti-cartel or restrictive trade practices law, rule, regulation, order or the like anywhere in the world;
6.7.12	is or has been the subject of any measure, including any undertaking on the part of the Seller to, or any requirement or order of, the Restrictive Practices Court, the Director General of Fair Trading, the Office of Fair Trading, the Secretary of State for Trade and Industry, the European Commission, the Court of Justice of the European Communities or the Competition Appeal Tribunal or to any other competition or regulatory authority, tribunal or court anywhere in the world; or
6.7.13	is unenforceable or void (whether in whole or in part) or renders the Seller liable to civil, criminal or administrative proceedings by virtue of any competition or anti-trust legislation anywhere in the world.

6.8 The Seller, in relation to the Business:

6.8.1	has not given any undertaking or assurance (whether or not legally binding) to; and
6.8.2	has not received any request for information from

any regulatory authority under any competition, anti trust, or restrictive trade practice legislation, law, rule or regulation anywhere in the world.

6.9 The Seller, in relation to the Business is not and has not been a party to or concerned in any agreement or arrangement in respect of which:

6.9.1	an application under Article 81 and/or Article 82 of the EC Treaty for negative clearance or exemption has been made to the European Commission; and/or
6.9.2	an application under sections 13, 14, 21 or 22 of the Competition Act 1998 has been made to the Office of Fair Trading or any sectoral regulator.

6.10 So far as the Seller is aware no investigations, enquiries, reports or orders by or by reference to any regulatory authority under any competition, anti trust, or restrictive trade practice legislation, law, rule or regulation anywhere in the world have been made are pending or in existence:

6.10.1 in respect of the Seller, the Business or any of the Assets or in which the Business may be involved ; or

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6.10.2 in respect of activities or behaviour in which the Business or the Seller (in respect of the Business) is or has been or is alleged to be or have been involved.

6.11	The Business is not and has not been in receipt of any aid which could be construed as falling within Article 87(1) of the EC treaty other than aid or any alteration to existing aid falling within Article 87(3) which has been duly notified to the European commission pursuant to Article 88(3), and the Seller is not aware of any investigation, complaint, action or negative decision in relation to the receipt or alleged receipt by the Business of any aid or alleged aid or any threatened such investigation , complaint, action or negative decision.
	Restrictions on Business
6.12	The Seller, in relation to the Business, is not and has not been a party to any agreement, arrangement, understanding or practice restricting its freedom to:

6.12.1	supply and receive goods and services to and from such persons by such means and into or from such places as it may from time to time think fit; or
6.12.2	carry on the whole or any part of the Business or to use or exploit any of the Assets in any part of the world in such manner as it from time to time thinks fit.

7	Litigation and Insolvency
	Defective Products and Services
7.1	So far as the Seller is aware there are no outstanding claims or circumstances that could give rise to a claim against the Seller in respect of defects in quality or delays in delivery or completion of contracts or deficiencies of design or performance of equipment, non compliance with specifications or otherwise relating to liability for goods or services supplied or to be supplied by the Seller in relation to the Business and so far as the Seller is aware no such claims are threatened or anticipated. A list showing any such claims (or series of claims arising from the same fact, matter or circumstances) having a value of more than £2,000 which have been made against the Seller in the period from the preceding 12 months is attached to the Disclosure Letter.
7.2	During the period of the Seller’s ownership of the Business the Seller has not:-

7.2.1 instigated any product recall programme in respect of any of the Products; or

7.2.2 save as disclosed in the Disclosure Letter, accepted any liability or obligation to service, repair, maintain, take back or otherwise do or not do anything in respect of any goods or products or services that would apply to after the goods or products have been delivered by it or services provided.

7.3	The Seller has not received a prohibition notice, a notice to warn or a suspension notice under the Consumer Protection Act 1987 in relation to the Business.
	Litigation
7.4	Details of all material customer claims, complaints or returns relating to the Business that have occurred during the 12 months preceding today’s date are set out in the Disclosure Letter.
7.5	Neither the Seller nor so far as the Seller is aware any person for whose acts or omissions it may be vicariously liable is engaged (whether as a claimant, defendant or otherwise) in or subject to any civil, administrative, criminal or arbitration proceedings in relation to the Business or the Assets or any of them and has not received notice informing the Seller it or any person for whose acts or omissions it may be vicariously liable is the subject of any investigation, inquiry or enforcement proceedings by any governmental, administrative or regulatory body in relation to the Business or the Assets, and:

7.5.1	so far as the Seller is aware there are no such proceedings pending or threatened by or against the Seller or against any such person;
7.5.2	so far as the Seller is aware there are no facts or circumstances likely to give rise to any such proceedings;

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7.5.3	there are no judgements and/or awards outstanding against the Seller which affect or might affect any of the Assets; or
7.5.4	there is no undertaking or assurance given to any court or governmental agency or injunction relating to the Business which is still in force.

	Insolvency
7.6	No application has been made or notice given or other step taken by the Seller or its directors or any other person to appoint an administrator in respect of the Seller.
7.7	No request has been made by the Seller or its directors to any person for the appointment of an administrator, administrative receiver or receiver in respect of the Seller or the whole or any part of the Business or Assets.
7.8	No administrator, administrative receiver or receiver has been appointed in respect of the Seller or the Business or the Assets or any of them and no mortgagee has taken possession of the whole or any part of the Business or the Assets.
7.9	No order has been made or petition presented or application made or meeting convened or resolution passed for the winding up or bankruptcy or striking off or dissolution of the Seller or for any related interim order.
7.10	No composition in satisfaction of the debts of the Seller or scheme of arrangement of its affairs or compromise or arrangement between it and either or both of its creditors or members or any class of either or both of its creditors or members has been proposed, sanctioned or approved and no proceedings have been commenced in respect of the Seller under any law, regulation or procedure relating to the reconstruction or readjustment of debt.
7.11	No distress, charging order, third party debt order, execution or other process has been levied or applied for in respect of the whole or any part of the Business or the Assets and no action has been taken to repossess any of the Assets.
7.12	No event has occurred causing (and there are no circumstances likely to cause , or which upon intervention or notice by any third party may cause) any floating charge created by the Seller to crystallise over the Business or the Assets or any of them or any charge created by it to become enforceable over the Business or the Assets or any of them nor has any such crystallisation occurred nor is such enforcement in process.
7.13	The Seller is not insolvent, is not unable or deemed unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 or the insolvency legislation applicable to the Seller and the Seller has not stopped or threatened to stop paying its debts as they fall due.
7.14	No judgement is outstanding against the Seller and no demand has been served on the Seller under section 123(1)(a) of the Insolvency Act 1986.
7.15	No event has occurred or proceedings taken in respect of the Seller in any jurisdiction to which it is subject which has an effect equivalent or analogous to any of the events mentioned in paragraphs 7.6 to 7.14 (inclusive) above.
8	Employees
8.1	No person is employed or engaged in the Business (whether temporarily or permanently and whether under a contract of service or contract for services) other than the Employees and the Employees are all employed directly by the Seller and each of the Employees is employed wholly and mainly in the Business.
8.2	There are no employees employed or engaged in the Retained Business at the Property.
8.3	The Disclosure Letter contains copies of all service contracts and contracts for services and full particulars of the current terms of employment or engagement of all Employees and agents of the Business (including all information required by law to be included in particulars of terms of employment and all information relating to any collective agreements) and all of such particulars are true and accurate and complete in all respects.

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8.4	The Seller has not offered any contract of employment or contract for services to any person (except to any of the Employees) and there is not now outstanding any contract of service or for services with any of the Employees or agents of the Business which is not determinable by the Seller at any time on one month’s notice or less without compensation (other than under the Employment Rights Act 1996) or any liability (other than for salary, wages, commission or pension) on the part of the Business to or for the benefit of any person who is an Employee or agent of the Business.
8.5	The Seller has not offered, promised or agreed for the future any variation in any contract of employment or any contract for services in respect of the Employees or any other person employed by the Seller in respect of whom liability may be deemed by TUPE to pass to the Buyer.
8.6	There are no enquiries or investigations existing, pending or threatened into the Seller or the Business by the Equal Opportunities Commission or the Commission for Racial Equality or the Disability Rights Commission other similar authorities.
8.7	There is no person other than an Employee who now has or may in the future have a right to return to work (whether for reasons connected with maternity leave or absence by reason of illness or incapacity or otherwise) or a right to be reinstated or re-engaged in the Business or to any other compensation.
8.8	There are not in existence and the Seller has not proposed or is not proposing to introduce any bonus, profit sharing scheme, share option scheme, share incentive scheme or any other scheme or arrangement under which the Employees or any of them are or is or would be entitled to participate in the profits of the Business.
8.9	The Seller is not engaged or involved in any dispute, claim or legal proceedings (whether arising under contract, common law, statute or in equity) with any of the Employees nor with any other person employed by the Seller in respect of whom liability is deemed to pass to the Buyer by virtue of TUPE, and so far as the Seller is aware there is no likelihood of any such dispute, claim or proceedings arising at any time.
8.10	There is no industrial action or dispute threatened or existing or anticipated in respect of or concerning any of the Employees.
8.11	The Seller has not recognised any trade union, works/staff councils or association of trade unions or any other organisation of employees in respect of the Employees or any of them.
8.12	There is no collective agreement or other agreement or arrangement (whether in writing, or by custom and practice) with any trade union, staff association, staff works council or other organisation of employees in relation to the Business and the Seller is not involved or likely to be involved in connection with the Business in any industrial or trade dispute or negotiation with any trade union or other organisation of employees nor any application for recognition pending before the Central Arbitration Committee under the Employment Relations Act 1999 nor any prior notice of such.
8.13	Within the period of one year ending on the date of this Agreement and in relation to the Employees, the Seller has not:

8.13.1	given notice of any redundancies to the relevant Secretary of State or started consultations with any trade union under Part IV TULRA or under TUPE nor has Seller failed to comply with any of its obligations under Part IV of that Act; or
8.13.2	been a party to any relevant transfer as defined in TUPE nor has the Seller failed to comply with any duty to inform and consult any trade union under TUPE and will not before Completion do any of such things.

9	Pensions
9.1	There are no agreements or arrangements for the payment to any person of or the contribution to any scheme for benefits on the retirement or death of any Employee or any dependant of any such person and no proposal to establish any such scheme or arrangement has been announced to the Employees other than the Seller’s Scheme.

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9.2	As regards the Seller’s Scheme there are annexed to the Disclosure Letter a copy of the current Member’s Handbook and of any announcements to Members which have not yet been incorporated into the Handbook.
9.3	The names of the Employees who are members of the Seller’s Scheme are listed in the Disclosure Letter and no other Employees are members of the Seller’s Scheme.
9.4	The Seller’s Scheme is a registered scheme under section 153 Finance Act 2004.
9.5	The Seller’s Scheme is a contracted out scheme within the meaning of the Pension Schemes Act 1993.
9.6	So far as the Seller is aware there are no actions, proceedings or claims (other than routine claims for benefits) outstanding, by the Employees or any of them in respect of the Seller’s Scheme relating to any act, event, omission or other matter arising out of or in connection with the Seller’s Scheme.
9.7	No Employee has been excluded or prevented from membership of the Seller’s Scheme on the grounds of part-time employment, marital status or otherwise where such exclusion, prevention or restriction constitutes (or could reasonably constitute) discrimination in breach of Article 141 of the EU Treaty or any European directive.
10	Intellectual Property
10.1	Details of all registered Business Intellectual Property (including applications for such rights) are set out in Schedule 8 which are accurate in all material respects. All such Business Intellectual Property are used, enjoyed and exploited exclusively in connection with the Business.
10.2	The Business Intellectual Property constitutes all Intellectual Property required in order to carry out the Business as carried on at the Transfer Date. The Seller does not own or use in connection with the Business any Business Intellectual Property which has not been disclosed.
10.3	Save in respect of any Business Intellectual Property which is the subject of an IP Licence, or the subject of any licence, authorisation or permission (in any form whatsoever, whether express or implied, written or unwritten) from a member of the Seller’s Group or incorporated into any Customer Contract or Supplier Contract, the Seller is the sole legal and beneficial owner of all Business Intellectual Property and free from all Security Interests, licences and adverse rights of any description.
10.4	None of the Business Intellectual Property so disclosed is jointly owned by the Seller and any third party.
10.5	None of the Business Intellectual Property so disclosed is jointly used by the various businesses of the Seller.
10.6	The Business Intellectual Property owned by the Seller is valid and enforceable, in full force and effect and nothing has been done or not been done as a result of which any of them has ceased or might cease to be valid, subsisting or enforceable. The Seller has not received written notice that it is:

10.6.1	subject to any claim, challenge disputes or proceedings, pending or threatened, in relation to the ownership, validity or use of such rights by a third party or competent authority; or
10.6.2	subject to an application for cancellation, revocation, amendment or licence of right or compulsory licence; or
10.6.3	being claimed or opposed by any other person.

10.7	So far as the Seller is aware there has been no infringement by any third party of any Business Intellectual Property, nor any third party breach of confidence, passing off or actionable act of unfair competition in relation to the Business and no such infringement, breach of confidence, passing off or actionable act of unfair competition is current or anticipated.
10.8	All application, renewal and other official statutory and regulatory fees and all professional advisers fees payable in connection with any Business Intellectual Property owned by the Seller have been paid and reasonable steps have been taken to ensure the maintenance and protection of all such Business Intellectual Property.

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10.9	Particulars of all material IP Licences are set out in the Disclosure Letter. So far as the Seller is aware the Seller is not in breach of any IP Licence. So far as the Seller is aware all such IP Licences are valid and enforceable, in full force and effect and will not terminate or be capable of termination by reason of the execution and performance of this Agreement.
10.10	So far as the Seller is aware none of the activities involved in the conduct of the Business, (save in relation to the Excluded Assets) infringe or have infringed any Intellectual Property or constitute or have constituted breach of confidence, passing off or actionable unfair competition in any jurisdiction. So far as the Seller is aware no such activities give or have given rise to any obligation to pay any royalty, fee, compensation or any other sum whatsoever.
10.11	The Seller is not, and has not within the year preceding the date of this Agreement, been party to or threatened with any legal proceedings relating to any Intellectual Property and the Seller is not aware of (and has not acquiesced in) any infringement of the Business Intellectual Property or any breach of confidence, passing off or actionable unfair competition in any jurisdiction in relation to the Business, (save in relation to the Excluded Assets).
10.12	The Seller has in its possession or control all Business Information (to the extent the same is confidential) used, enjoyed or exploited in the Business (or held with a view to such use, enjoyment or exploitation). Except insofar as it is in the public domain through no fault of the Seller or any member of the Seller’s Group, none of the same is known or accessible to any person except the Seller, or members of the Seller’s Group, the Seller’s employees and advisers, other than persons who have given the Seller confidentiality undertakings in respect thereof details of which are set out in the Disclosure Letter. The Seller is not aware without making any specific enquiries of any breach of such confidentiality obligations by any third party.
10.13	Save in the ordinary course of business or with its employees, the Seller has not entered into any confidentiality or other agreement, nor is subject to any duty, which restricts the free use or disclosure of such information as is referred to in paragraph 10.12 above.
10.14	There are no outstanding written claims against the Seller under any contract or under section 40, Patents Act 1977 for employee compensation in respect of any Business Intellectual Property owner by the Seller.
10.15	The Seller has not in the year prior to today’s date carried on the Business under any name other than its corporate name or Business Name.
11	Tax
11.1	The Seller has complied in all material respects with all statutory provisions, rules, regulations, orders and directions in relation to the Business concerning VAT, PAYE and National Insurance contributions including the making on time of accurate returns and payments and the proper maintenance and preservation of records, and the Seller has not been given any penalty, notice or warning regarding the same.
11.2	The Seller is not involved in any dispute with HM Revenue and Customs, the [Contributions Agency] or other appropriate fiscal authority whether in the United Kingdom or elsewhere concerning any matter affecting or likely to affect either the Business or any of the Assets to be transferred under this Agreement.
11.3	No circumstances exist whereby any power within section 212, Inheritance Tax Act 1984 could be exercised in relation to any of the Assets.
11.4	There is no HM Revenue & Customs charge over any of the Assets outstanding for unpaid inheritance tax as provided by sections 237 and 238, Inheritance Tax Act 1984.
11.5	In respect of the Business all returns and payments for the purposes of VAT referable to supplies made have been made.
11.6	None of the Assets is subject to the Value Added Tax Capital Goods Scheme provided for in Part XV of the Value Added Tax Regulations 1995 (SI 1995/2518).
11.7	All VAT payable on the importation of goods, and all excise duties payable to HM Revenue & Customs payable in respect of the Business Assets including the Stock, have been paid in full, and none of the Business Assets is liable to confiscation, forfeiture or distress.

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11.8	None of the Assets is chargeable assets of a business which, if transferred to a body corporate treated as a member of a group under section 43, VATA as a going concern, would give rise to a liability on that body corporate or the representative member of the group of which that body corporate is a member under section 44, VATA.
11.9	In respect of any Assets which are plant and machinery for the purposes of Part II of the CAA and which are fixtures (as defined in section 173(1), CAA) at today’s date either:

11.9.1	no person has been or will have become entitled to allowances in respect of any expenditure incurred on the provision of the fixture or,
11.9.2	if any person has become so entitled that person has been, is or will be required to bring the disposal receipts in respect of the fixture into account under section 55, CAA; or
11.9.3	the Consideration will be apportioned for the purposes of CAA so as to attribute a sum equal to the Seller’s ‘notional written down value’ as described in section 197(2) CAA to the fixtures.

11.10	HM Revenue and Customs has not agreed to operate any special arrangement (being an arrangement which is not based on a strict application of the relevant legislation) in relation to the Business whether in respect of benefits provided to its officers or employees, the valuation of its stock, the depreciation of its assets or any administrative or other matter whatsoever.
11.11	All documents in the possession or under the control of the Seller which establish or are necessary to establish the title of the Seller to the Assets that need a stamp duty have been duly stamped and any applicable stamp duties or charges in respect of such documents have been duly accounted for and paid, and no such documents which are outside the United Kingdom would attract stamp duty if they were brought in to the United Kingdom.
12	Health and Safety
	Interpretation
12.1	In this paragraph 12:

Health and Safety Laws all applicable primary and subordinate Legislation, Directives, Approved Codes of Practices including but without limitation the Fire Precautions Act 1971, The Health and Safety at Work etc Act 1974 and Regulations made pursuant to section 15 of the Health and Safety at Work Etc Act 1974 concerning the health and safety of those who work for the Business, whether as employees or otherwise, visit the Property or are in anyway affected by the activities of the Business or by persons working for the Business.

12.2	So far as the Seller is aware the Business complies with all material conditions, limitations, obligations, prohibitions and requirements contained in any Health and Safety Laws and so far as the Seller is aware there are no facts or circumstances which may lead to any breach of any Health and Safety Laws.
12.3	The Seller has not received any written prohibition or improvement notices from any enforcement body, including but without limitation the Health and Safety Executive and the relevant local authority, with regard to breaches of Health and Safety Laws or otherwise in respect of the Business.
12.4	In the last 12 months there have been no written claims (which remain outstanding), investigations, proceedings against or threatened against the Seller or any of its directors, officers or employees in respect of accidents, injuries, illness, disease or any other harm to the health and safety of employees, contractors or any other persons caused by breaches of Health and Safety Laws by the Seller in carrying on the Business and so far as the Seller is aware there are no facts or circumstances which may lead to any such claims, investigations or proceedings.

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13	Property
13.1	In relation to the Property, the rents have been paid and in all material respects all covenants, restrictions, stipulations, obligations and undertakings have been performed and the last demand (or receipt for rent if issued) were unqualified and the Lease is valid and in full force and no notice of any breach has been received by either the Seller.
13.2	The Property is free from:

13.2.1	any mortgage, debenture, charge (whether legal or equitable and whether fixed or floating), rent, charge, lien or other right in the nature of security; and
13.2.2	any agreement for sale, estate contract, option, right of pre-emption or right of first refusal,

	and there is no agreement or commitment to give or create any of them.
13.3	The Property is not subject to the payment of any outgoings other than non-domestic local business rates and water and sewerage charges, and all outgoings have been paid when due and none are disputed.
13.4	The Seller has complied with all applicable statutory and bye-law requirements, and all regulations, rules and delegated legislation, relating to the Property and its current use, including without limitation all requirements under the Public Health Acts, the Occupiers Liability Act 1957, the Offices, Shops and Railway Premises Act 1963, the Occupiers Liability Act 1984, the Construction (Design and Management) Regulations 1994, the Disability Discrimination Act 1995, the Construction (Design and Management) Regulations 2007, and all regulations, rules and delegated legislation and the Vendor has maintained all necessary fire certificates and certificates in relation to electricity and gas.
14	The Property is in a condition that is fit for its current use.
15	There are no development works, redevelopment works or fitting-out works outstanding in respect of the Property.
16	The Property has not suffered from any:

16.1.1	flooding; or
16.1.2	subsidence; or
16.1.3	heave; or
16.1.4	landslip; or
16.1.5	mining activities; or
16.1.6	structural defects; or
16.1.7	defects in the drains and services from time to time serving the Property; or
16.1.8	dry rot, wet rot, rising damp or any infestation.

17	The Seller has not received any adverse report from any engineer, surveyor or other professional relating to the Property and is not aware of any predecessor in title having done so.
18	No notices, complaints or requirements have been issued or made (whether formally or informally) by any competent authority or undertaking exercising statutory or delegated powers in relation to the Property, the current use of the Property or any machinery, plant or equipment in it, and the Seller is not aware of any matter which could lead to any such notice, complaint or requirement being issued or made.
19	There exists no dispute between the Seller and the owner or occupier of any other premises adjacent to or neighbouring the Property and the Seller does not expect, and is not aware of any circumstances that may give rise to, any such dispute after the date of this Agreement.

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20	McMurdo Limited
20.1	The warranties set out in the McMurdo Ltd Sale and Purchase Agreement are hereby repeated.
21	Legal Opinion
21.1	The Legal Opinion of DC is true and accurate.

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SCHEDULE 3

Seller Protection Provisions

1	Definitions
1.1	In this Schedule:

Claim	means any claim for breach of any of the Warranties;
Event	means any event, act, transaction, arrangement, default or omission including, without limitation, the receipt or accrual of any income or gains or of any distribution, failure to distribute, acquisition, disposal, transfer, payment, loan or advance including, without prejudice to the generality of the foregoing, the sale and purchase of the Business and the Assets pursuant to this Agreement;
Taxation Warranties	means the warranties contained in paragraph 11 of Schedule 2.

2	Remedies
2.1	Subject to clause 11.1.2 of this Agreement a breach of any of the Warranties will give rise only to an action by the Buyer for damages and will not entitle the Buyer to terminate, rescind or repudiate this Agreement.
2.2	Where the matter or default giving rise to a Claim is capable of remedy, that Claim will only entitle the Buyer to damages or other compensation to the extent that the relevant matter or default is not remedied to the reasonable satisfaction of the Buyer within 30 days after the date on which notice is served pursuant to paragraph 3 below.
3	Time
3.1	The Seller will have no liability for any Claim unless notice in writing of the Claim (giving reasonable particulars of the nature of the Claim and amount claimed together with an estimate of the liability) has been given to the Seller:

3.1.1	on or before the expiry of the seventh anniversary of Completion Date in respect of any Claim under the Taxation Warranties; or
3.1.2	on or before the expiry of the period of 18 months from the Completion Date in respect of any other Claim.

3.2 The Seller or the Buyer or OROLIA (if applicable) will have no liability for any indemnity claim pursuant to this Agreement or any of the Transaction Documents unless notice in writing of the indemnity claim (giving reasonable particulars of the nature of the indemnity claim and the amount claimed together with an estimate of the liability) has been given to the Seller (in respect of a claim by the Buyer or OROLIA) or the Buyer (in respect of a claim by the Seller):

3.2.1	on or before the expiry of the seventh anniversary of Completion in respect Date of any indemnity claim relating to Tax; or
3.2.2	on or before the expiry of third anniversary of Completion Date in respect of any other indemnity claim.

3.3	Any Claim of which notice has been given in accordance with paragraph 3.1 of this Schedule is deemed to have been withdrawn and fully barred and unenforceable on the expiry of six months commencing on the date on which the relevant notice of the Claim was given to the Seller, unless proceedings in respect of the Claim have already been issued and served on the Seller.
4	Amount
4.1	The Seller will have no liability whatsoever in respect of any individual Claim unless the amount that would otherwise be recoverable from the Seller in respect of that Claim (or series of Claims arising from the same fact, matter or circumstances) exceeds US$15,000 (excluding costs and interest).

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4.2 The Seller will have no liability in respect of any individual Claim unless and until the amount that would otherwise be recoverable from the Seller in respect of that Claim, when aggregated with any other amounts so recoverable in respect of other Claims (excluding any amounts in respect of a Claim for which the Seller has no liability by virtue of paragraph 4.1) exceeds US$ 250,000 and in the event that the aggregate amount exceeds US$ 250,000 the Seller will be liable for the entire amount not only the excess over US$ 250,000.

4.3	The aggregate liability of the Seller for Claims and indemnity claims made against the Seller pursuant to this Agreement or any of the Transaction Documents shall under no circumstances exceed an amount equal to the Initial Consideration.
5	Reduction of Consideration
5.1	Any payment made by the Seller in respect of any Claim will be deemed to be a reduction in the Consideration.
6	Disclosure
6.1	The Seller will have no liability in respect of any Claim to the extent that the Event, fact or circumstance which might result in a Claim or a possible Claim is disclosed fairly and accurately in the Disclosure Letter or in this Agreement or in any agreement or arrangement otherwise entered into between the Seller and the Buyer.
7	Changes in the law
7.1	The Seller will have no liability whatsoever in respect of any Claim to the extent that the Claim would not have arisen but for the passing of or any change in after the date of this Agreement, any law, rule, regulation, interpretation of the law or administrative practice of any government, governmental department, agency or regulatory body or any increase in the rates of Taxation or any imposition of new Taxation in any such case not in force at the Completion Date.
8	Exclusion of certain Claims
8.1	The Buyer may not make any Claim against the Seller and the Seller will have no liability to the Buyer under this Agreement:

8.1.1 to the extent that the Claim arises or is increased out of:

(a)	any changes in accounting policy or practice of the Buyer introduced or having effect after Completion; or
(b)	any voluntary act or omission of the Buyer after Completion done or suffered outside the ordinary course of business and other than pursuant to a legally binding obligation entered into by the Seller before Completion or in order to comply with any legal requirement binding on the Buyer; or
(c)	any act, omission or transaction done, made or carried out by or on behalf of the Seller at the request; or

8.1.2 to the extent that the Claim arises because of:

(a)	any legislation not in force at today’s date or any change of law, judgment delivered or administrative practice having retrospective effect that comes into force after today’s date; or
(b)	that Claim relates to any liability which is contingent only until it becomes an actual liability, but this paragraph 8.1.2 will not operate to avoid a Claim made in respect of a contingent liability in accordance with paragraph 3 above.

9	Satisfaction by other persons/means
9.1	The Seller will have no liability for any Claim to the extent that any loss occasioned to the Buyer or to the Business is covered by a right to make recovery or claim indemnity or by a policy of insurance in force and payment is made under such indemnity or policy.

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9.2 If at any time the Buyer becomes entitled to recover from some other person any sum in respect of any Claim then the Buyer will subject to a full indemnity from the Seller:-

9.2.1	undertake all reasonable steps necessary to enforce such recovery; and
9.2.2	promptly supply all information which relates to such recovery to the Seller including details of any steps taken to enforce such recovery and copies of all correspondence and documents relating to the same.

9.3 If the Buyer recovers from a third party an amount which is referable to an Event giving rise to the Claim then:

9.3.1	the sum recovered will be set-off against the Seller’s liability for that Claim
9.3.2	if amounts previously paid by the Seller in respect of the Claim is more than the sum recovered, the Buyer will immediately pay the Seller the sum recovered; and
9.3.3	if amounts previously paid by the Seller in respect of the Claim is less than or equal to the sum recovered the Buyer will immediately pay the Seller an amount equal to the amount paid by the Seller.

	For the purposes of this paragraph 9.3 the “sum recovered” means an amount equal to the amount recovered from the third party plus any repayment supplement in respect of the amount recovered from the third party under section 825 ICTA plus any interest in respect of the amount recovered from the third party less all reasonable costs and expenses incurred by the Buyer in recovering the amount from the third party and any tax payable by the Buyer on any sum so recovered.
10	Procedure for claims
10.1	If the Buyer becomes aware of any matter which might give rise to a Claim, the following provisions will apply:-

10.1.1	the Buyer will as soon as reasonably practical give notice to the Seller of the Event and will consult with the Seller in respect of the Event;
10.1.2	the Buyer will provide to the Seller and to the Seller’s professional advisers reasonable access to premises and personnel and to any relevant assets, documents and records within their power, possession or control for the purpose of investigating the event and enabling the Seller to take such action as is referred to in paragraph 10.1.4;
10.1.3	the Seller (at its own expense) will be entitled to take copies of any documents or records and photograph any premises or assets as referred to in paragraph 10.1.2;
10.1.4	the Buyer will:-

(a)	take such action and institute such proceedings and give such information and assistance as the Seller may request to dispute, resist, appeal, compromise, defend, remedy or mitigate the Event or enforce against any person any rights of the Buyer in relation to the matter; and
(b)	in connection with any proceedings related to the Event use professional advisers nominated by the Seller and, if the Seller so requests, allow the Seller the exclusive conduct of the proceedings provided that such action will not in the Buyer’s reasonable opinion, be detrimental to the Business or its reputation

and in each case on the basis that the Seller will indemnify the Buyer for all reasonable costs and expenses incurred as a result of any request or nomination by the Seller.

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10.1.5 If the Seller and the Buyer agree on the amount to be paid in respect of the Claim, they will jointly instruct the Escrow Agent to pay to the Buyer the agreed amount.

10.1.6 If the Seller and the Buyer disagree on the amount to be paid in respect of the Claim, the matter will be settled according to clause 34 of this Agreement. The decision of the Court will be forwarded by either the Seller or the Buyer to the Escrow Agent and the Escrow Agent will take the appropriate measures.

11	Fraud, etc
11.1	The provisions of this Schedule 3 will not apply in the case of any fraud, wilful non-disclosure or misconduct by or on behalf of the Seller.
12	Mitigation
12.1	Nothing in this Agreement affects the duty at law of the Buyer to mitigate its loss.

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SCHEDULE 4

The Employees

Attached

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SCHEDULE 5

The Customer Contracts

Attached

63

SCHEDULE 6

The Supplier Contracts

Attached

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SCHEDULE 7

Products

1	C1 SVDR Capsule
2	Smartfind E5 EPIRB Auto
3	Smartfind E5 EPIRB Manual
4	Smartfind G5 EPIRB Auto
5	Smartfind G5 EPIRB Manual
6	FastFind
7	FastFind Plus
8	FastFind Max
9	FastFind Max G
10	FastFind 200/201
11	FastFind 210/211
12	S4 SART
13	Programming pen
14	MOB Guardian (excluding IP associated with the RNLI Contract)
15	G4 EPIRB GPS Auto
16	G4 EPIRB GPS Manual
17	Precision EPIRB GPS Auto
18	Precision EPIRB GPS Manual
19	E3 EPIRB Auto
20	E3 EPIRB Manual
21	SOS EPIRB Auto
22	SOS EPIRB Manual
23	HRU Kit
24	A5 SmartFind EPIRB Manual
25	Smartfind S5AIS SART
26	R1
27	R2
28	SART Batteries
29	EPIRB Batteries
30	NAV 7
31	NAV Accessories
32	Davis
33	SEPIRB
34	PLB Batteries
35	AMS 639 Buoy

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SCHEDULE 8

Registered Intellectual Property

Registered trade marks

		Application /
		Registration
Trade Mark	Jurisdiction	Number	Classes
FASTFIND	US	2934775	Class 9
SMARTFIND	US	3345623	Class 9
SMARTFIND	European Community	E4739256	Classes 9 & 41
McMURDO	European Community	E3250347	Classes 9, 13 & 41

Registered Patent

Patent number GB2334486
Full title: Release unit
Proprietor: Signature Industries Limited

Registered Domain Names

406mhz.co.uk
davisweather.co.uk
fastfindpersonallocatorbeacon.com
fastfindplb.com
mcmurdo.biz
mcmurdo.co.uk
mcmurdomarine.com

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SCHEDULE 9

Part 1

Escrow Agreement

This Agreement is dated 2009

Parties

(2) SIGNATURE INDUSTRIES Limited, a company registered in England (registered number 2800561) whose registered office is at Tom Cribb Road, Thamesmead, London SE28 0BH (the “Seller”);

(3) MCMURDO LIMITED, a company registered in England (registered number 6952856 whose registered office is at Silver Point, Airport Service Road, Portsmouth PO3 5PB (the “Buyer” or “McMurdo Limited”);

(4) Digital Angel Corporation, a company incorporated under the laws of the state of Delaware, whose registered office is 490 Villaume Avenue, South St, Paul MN 55075 -2433 USA (“DC”); and

(5) OROLIA SA, a company incorporated under the laws of France, whose registered office is at 3 Avenue Du Canada, 91974 Les Ulis cedex, France (“OROLIA”).

Whereas

(A) This agreement is supplemental to an Agreement dated 2 November 2009 made between the Seller, McMurdo Limited, OROLIA SA and Digital Angel Corporation (the Business Sale Agreement) whereby the Buyer agreed to purchase certain of the assets of the Seller.

(B) Clause 3.2.2 and clause 8.1.5(i) of the Business Sale Agreement provides that on Completion the Seller and the Buyer shall establish an Escrow Agreement in respect of the Retention.

(C) The Parties hereto wish to set out the terms and conditions of the establishment, maintenance and operation of the Escrow Agreement.

It is agreed as follows

1. In this Agreement, save as otherwise defined or as the context may require, words and expressions in the Business Sale Agreement shall have the same meaning in this Agreement.

1 Retention Account

1.1 On Completion:

(a)	OROLIA shall transfer the Retention into the Escrow Account pursuant to clause 8.1. 5(i) of the Business Sale Agreement by electronic means;
(b)	the Seller and the Buyer shall jointly sign and deliver the Instruction Letter to the Solicitors.

1.2 Each of the Buyer and the Seller undertake to each other to hold the Retention on trust for each other in accordance with the terms of this Schedule 9.

1.3 The following provisions shall apply in respect of the Escrow Account:

(a) all interest earned in respect of the Retention shall be credited to the Escrow Account;

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(b)	no other credit shall be made to the Escrow Account without the written consent of the Solicitors;
(c)	no withdrawal shall be made from the Escrow Account except in accordance with the Instruction Letter or as may otherwise be ordered by a court of competent jurisdiction;
(d)	neither the Buyer nor the Seller shall have any entitlement to interest until payment of the principal to which it relates.

2 Relevant Claims

2.1 After the Transfer Date, the Buyer shall notify the Seller monthly in writing all the Relevant Claims having arisen during the prior month. If there is a Due Amount in respect of a Relevant Claim, the Seller and the Buyer shall, unless such Due Amount in respect of a Relevant Claim has been paid to the Buyer for the Relevant Claim(s) in full, instruct the Escrow Agents to pay the Buyer the Due Amount in respect of the Relevant Claim(s) out of the Escrow Account together with interest (less tax if deduction of tax is required) earned on that sum in the Escrow Account from the Transfer Date to the date of actual payment in accordance with this clause and for the avoidance of doubt and without prejudice to clause 2.5 the Due Amount in respect of the Relevant Claim(s) to be paid out of the Escrow Account shall not in any circumstance exceed the General Retention.

2.2 If any Relevant Claim has been notified in writing by the Buyer to the Seller on or before the Anniversary Date but is not settled as defined at clause 2.6 (“Settled”) on or prior to the Anniversary Date, the Buyer shall be entitled to retain from the Retention such amount as is equal to the amount of the estimated liability of the Relevant Claim(s) (as determined by the Buyer acting in good faith).

2.3 In the event of a dispute as to the amount of the estimated liability of the Relevant Claim(s) under clause 2.2, the Seller shall notify the Buyer in writing of such dispute (giving reasonable particulars and supporting evidence of its valuation) and the Buyer and the Seller shall acting reasonably attempt to resolve their dispute within 10 Business Days of the receipt of such notice. If the dispute cannot be resolved amicably through ordinary negotiations by appropriate representatives of the Seller and the Buyer, the matter will be referred in writing by either the Seller or the Buyer to the Chief Executive Officers (or their equivalent) of OROLIA and DC. The Chief Executive Officers will meet in order to attempt to resolve the matter by negotiation, within 10 Business Days of them being notified in writing. The Chief Executive Officers will notify in writing both the Buyer and the Seller of the result of their negotiations (Chief Officers’ Notice).

2.4 If the Chief Officers’ Notice sets out that the meeting referred to in clause 2.3 failed to resolve the issue, either the Seller or the Buyer, on giving written notice to the other, may declare that they are in dispute in which case the provisions of clause 2.6 will apply. If the Chief Officers’ Notice set outs that the meeting successfully resolved the issue, then the Seller or the Buyer shall comply with the terms of the arrangements set out in the Chief Officers’ Notice and proceed to clause 2.5.

2.5 Without prejudice to clause 2.8, and subject to as otherwise provided by this clause 2.5:

(a)	if no Relevant Claim has been notified in writing by the Buyer to the Seller under this Agreement by the Anniversary Date; or
(b)	a settlement of all outstanding Relevant Claims notified in accordance with clauses 2.1 to 2.4 has been made; or
(c)	a retention in respect of any outstanding Relevant Claim in accordance with clause 2.2 above has been made;

the Seller and the Buyer shall, promptly (but in any event by no later than 5 Business Days following the Anniversary Date, the resolution of the dispute pursuant to clauses 2.3 and 2.4 or settlement of all outstanding Relevant Claims pursuant to clause 2.6 (as appropriate)) instruct the Escrow Agents to pay the balance standing to the credit of the Escrow Account (together with any interest which has accrued on the amount so paid less any applicable bank charges) to the Seller.

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2.6 For the purposes of this clause 2 a Relevant Claim shall be deemed Settled if:-

(a)	the Seller and the Buyer so agree in writing having followed if required the procedure set out in clauses 2.3 and 2.4 ; or
(b)	failing such resolution of their dispute pursuant to clauses 2.3 and 2.4, the Relevant Claim has been determined by a court or tribunal of competent jurisdiction from which there is no right of appeal or from whose judgment the Buyer or the Seller (as the case may be) is debarred by passage of time or otherwise from making an appeal.

2.7 The General Retention shall not be regarded as imposing any limit on the amount of any Relevant Claims under this Agreement or under any other Transaction Documents. If any part of the Relevant Claim is not satisfied in full out of the Retention, the balance shall remain fully enforceable against the Seller.

2.8 The General Retention shall not be released at the Anniversary Date if there are still any unpaid but due sums for services rendered by the Buyer or OROLIA SA under the Business Sale Agreement or the Transitional Services Agreement or if pursuant to clause 16.5 of the Business Sale Agreement, the Due Creditors remain unpaid. In such circumstances and without prejudice to the Buyer’s rights and remedies under the Business Sale Agreement or at law, the Buyer shall on notice to the Escrow Agents be entitled to set off such unpaid sums against the General Retention.

3 Insolvency

3.1 On the occurrence of an Insolvency Event in respect of either the Buyer or the Seller the Buyer or the Seller (as the case may be) shall be deemed to have assigned all of its rights under this Schedule 9 to OROLIA or DC (as appropriate) and (as appropriate)

3.1.1	DC shall perform and discharge all obligations of the Seller in the manner prescribed in this Agreement and the Business Sale Agreement;
3.1.2	OROLIA shall perform and discharge all obligations of the Buyer in the manner prescribed in this Agreement and the Business Sale Agreement.

3.2 On the occurrence of an Insolvency Event in respect of either the Buyer or the Seller, the Buyer or the Seller shall notify all the parties to this Agreement and the Escrow Agents.

3.3 Nothing in this Agreement shall prejudice the Buyer’s remedies under this Agreement, the Business Sale Agreement or any Transaction Document or at law. If any part of the Relevant Claim (subject always to clause 3.8) is not satisfied in full out of the Retention, the balance shall remain fully enforceable against the Seller; and nothing in this Escrow Agreement shall prejudice, limit or otherwise affect any right, including the right to make any claim, or remedy which the Buyer may have from time to time against the Seller or DC either under this Agreement or under any other Transaction Document.

69

In witness whereof this Agreement has been executed as a Deed on the date stated at the beginning of this Agreement.

Executed by as a Deed by Signature Industries Limited acting by or if by one	/s/ Parke Hess Director
director in the presence of:
Witness	Director/Secretary
Name — Geraldine Fabre
Address — 14 New Street, London
EC2M 4HE
Executed by as a Deed by McMurdo Limited acting by or if by one director	/s/ Jean Yves Courtois Director
in the presence of: Witness	/s/ Christophe Francois Deputy CEO
Name
Address
Executed by as a Deed by Digital Angel Corporation acting by or if by one	/s/ Parke Hess Authorised Signatory
director in the presence of:
Witness	Authorised Signatory
Name — Geraldine Fabre
Address — 14 New Street, London
EC2M 4HE
Executed by as a Deed by OROLIA SA acting by	/s/ Jean Yves Courtois Director
	/s/ Christophe Francois Deputy CEO

70

Part 2

Instruction Letter

Pritchard Englefield Solicitors
New Street
London
EC2M 4EH

Kimbells LLP
Power House
Harrison Close
Milton Keynes
MK5 8PA

2009

Dear Sirs

1 Purpose

This is the Escrow Letter referred to in the Escrow Agreement and sets out the terms on which you have agreed to act as our Escrow Agents in relation to the Escrow Account.

2	Interpretation
	The terms defined in the Escrow Agreement shall have the same meaning when used in this letter.

3	Deposit
	We jointly and irrevocably instruct you to:

3.1.1	open immediately a separately designated interest-bearing instant access deposit account with the Escrow Bank in your joint names on the terms and conditions of the Bank’s Mandate Letters or using the Request Letter attached to this letter; and
3.1.2	subject to receipt by the Escrow Bank from the Buyer of the Retention in accordance with the Business Sale Agreement, to invest the Retention in the Escrow Account unless we jointly instruct you otherwise in writing
3.1.3	hold the Retention to the credit of the Escrow Account to our joint order (less any amount debited by the Escrow Bank in respect of its fees and charges).

4	Interest
	All interest that accrues from time to time in respect of the Retention shall be added to the Retention and shall be deemed to form part of it for the purposes of this letter.

5	Operation Of The Escrow Account
5.1	You agree to hold the Retention as escrow agents on our behalf and to accept payments in, make payments from, and otherwise operate the Escrow Account in accordance with our joint written instructions given in accordance with this letter until the Anniversary Date or until settlement of all Relevant Claims in accordance with Schedule 9 (as the case may be).

71

5.2 The Retention (or any amount left of the Retention following a Relevant Claim) shall be retained by you in the Escrow Account until you receive instructions given by us pursuant to this letter, whether for the purpose of making payments from the Escrow Account or otherwise, shall be given jointly by us to both of you in writing and signed by us, or on our behalf, by the signatories whose names and specimen signatures are set out in the Schedule.

5.3 In making any payment out of the Escrow Account, you may withhold or deduct any sum which you are obliged by law to so withhold or deduct (whether in respect of liability to taxation or otherwise). We hereby authorise you to pay all bank charges, taxation and other liabilities referable to the operation of the Escrow Account. We undertake to indemnify each of you, and to keep you fully and effectively indemnified against all such charges, taxation and liabilities referable to the operation of the Escrow Account.

5.4 Any payment from the Escrow Account shall be made by you as soon as is reasonably practicable, and in any event no later than 10 Business Days, after receiving the relevant instructions.

5.5 You may (without checking the authority of such signatory) rely on and shall be protected in acting or refraining from acting in accordance with any written notice, instruction or request furnished to by the Buyer and the Seller.

5.6 Any instructions from us may consist of separate documents in the same form, each signed by or on behalf of the Seller and the Purchaser or following any assignment as envisaged by clause 4 of the Escrow Agreement their Guarantors where appropriate.

6 Liability Of The Escrow Agents

6.1 Each of you undertakes to perform only such duties as are specifically set out in this letter. In connection with such duties, neither of you shall be liable for any loss, damages, charge, costs or expenses occurring as a result of any mistake of fact, error of judgment or act, mistake or omission by you of any kind in connection with the operation or failure or delay in the operation of the Escrow Agreement unless caused by wilful misconduct or gross negligence, and you shall both be entitled to rely on any written notice, instrument or signature believed by you to be genuine and believed to have been signed or presented by the proper party or parties duly authorised to do so.

6.2 Your obligations and duties as joint holders of the Escrow Account are several and will be fully discharged by giving the Escrow Bank instructions in accordance with this letter.

6.3 We jointly and severally agree to indemnify each of you and hold you both harmless against any and all actions, proceedings, claims, demands liabilities (including, without limitation, the Escrow Bank’s charges incurred in operating the Escrow Account), costs and expenses which either of you may suffer or incur in connection with the performance of your obligations under this letter, except for liabilities incurred by either of you resulting from your wilful misconduct or gross negligence.

72

7 Miscellaneous

7.1 This letter is binding on, shall continue for the benefit of and be enforceable by, your and our respective successors and assigns. The provisions of this letter shall apply to and ensure for the benefit of the partners for the time being of each of the firms respectively to whom it is addressed and to the partners of any firm resulting from any reconstitution of either firm and reference to “partners” or “firms” shall include reference to such partners or firms.

7.2 No amendment to this letter shall be effective unless made in writing and signed by, or on behalf of, you and us (or the relevant Guarantor of either the Seller or the Buyer).

7.3 This letter may be executed in several counterparts, each of which when executed shall be deemed an original but all of which together shall constitute one and the same instrument.

7.4 We declare that the instructions given in this letter are irrevocable.

7.5 This letter and any disputes or claims arising out of or in connection with its subject matter or formation (including non-contractual disputes and claims) are governed by and construed in accordance with the law of England.

7.6 The courts of England have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims).

Please confirm that you agree to accept our instructions and to act as our escrow agents on the terms set out in this letter by signing and returning the duplicate copies of this letter enclosed.

Yours faithfully

On behalf of the Buyer

Yours faithfully

On behalf of the Seller

73

REQUEST LETTER

To: [ESCROW BANK]

Date

We, the undersigned, have this day request you to open a separately designated interest-bearing instant access deposit account such account to be designated [     ] subject to the following conditions:-

1. Interest is to be credited to the account gross.

2. Withdrawals at any time or times from that deposit account are to be made in accordance with written instructions addressed to you, provided that they are signed on behalf of each of us by one of the authorized signatories listed below.

3. You are entitled to deduct your reasonable and proper charges from the amount for the time being standing to the credit of the deposit account.

4. This authority shall remain in force until revoked notwithstanding any change in the constitution or name of the Firms and shall apply notwithstanding any change in the membership of the Firms by death, bankruptcy, retirement or otherwise, or the admission of new partner or partners.

5. Statement shall be supplied monthly to each of Pritchard Englefield Solicitors and Kimbells LLP (for the attention of Geraldine Fabre and Anthony Harris at Pritchard Englefield Solicitors and Jonathan Hambleton at Kimbells LLP.

List of Authorised Signatories

NAME	OFFICE HELD	SIGNATURE
Anthony Harris	Partner
David Glass	Partner
Bryan Bletso	Partner
Geraldine Fabre	Partner
For Pritchard Englefield Solicitors
Jonathan Hambleton	Partner
For Kimbells LLP

74

SCHEDULE 10

The Plant

75

SCHEDULE 11

Leasing/Hire Agreements

Part 1: Vehicle Leases

1 Automotive Leasing Agreements

(a)	Automotive Leasing — Car Registration AP06 PZL dated 1 August 2006
(b)	Fleethire Contract — Car Registration MT57 CMU dated 8 January 2008
(c)	Honda Finance — Car Registration EX57 VCP confirmation dated 3 August 2007
(d)	Arval Contract — Car Registration FY57 GVX dated 12 August 2007
(e)	Audi Finance — Car Registration GK08 UNE undated
(f)	Godfrey Davis Contract — Car Registration SL08 ENP undated
(g)	RCI Finance — Car Registration YE58 JCZ dated 4 December 2008
(h)	Fleethire Contract — Car Registration BN08 JYT start date 12 March 2008

Part 2: Other Leases

2 Hire Agreement between Canotec Ltd and McMurdo Ltd regarding Canon copiers dated 9 November 2004

3 Hire Agreement for franking machine between Vendor and Pitney Bowes dated 26 December 2007

76

SCHEDULE 12

Part (1)

Completion Statement

	Instructions
1	Immediately prior to (and in any event 7 days before Completion) the Seller will prepare the Completion Statement.

	Content
2	Paragraphs 3 to 7 of this Part of this Schedule apply to the content of the Completion Statement.

3 The Completion Statement will consist of the statement of the Initial Stock Value and the Actual Stock Value.

4 Subject to paragraph 5 of Part 1 of this Schedule which will take priority over the general requirements of this paragraph 4 the Buyer will prepare the Completion Statement on the following basis:

4.1	so far as relevant in ascertaining the matters which are to be stated in it, under the historical cost convention, in accordance with accounting principles and practices generally accepted in the UK in accordance with Companies Act 2006 as it applies to statutory accounts and all applicable statements of standard accounting practices;
4.2	in accordance with the accounting policies and practices used in the preparation of the Accounts.

	Accounting policies
5	In preparing the Completion Statement:

5.1 Stock will be determined in accordance with paragraph 6 of this Part of this Schedule.

	Stock valuation
6	For the purposes of the preparation of the Completion Statement, the value of Stock will be ascertained as follows:

6.1	the Seller, OROLIA and the Buyer will cause a stocktaking of all the Stock to be made seven days before the Completion Date;
6.2	unless otherwise agreed by the Seller and the Buyer, this stocktaking will consist of a reconciliation of the relevant books and records (including stock adjustments for obsolete and quarantine, reworked and to be reworked, stock, stock provisions, and any other adjustments and/or provisions) with a physical check of the amount, quality and condition of all Stock situated at the Property at the Completion Date and an inspection of the relevant books and records and contractual documentation of the Business for all Stock not so situated;
6.3	the stocktaking will also consist of a verification of the values attributed to the top 50 items of Stock by value included in relevant books and records (including stock adjustments for obsolete and quarantine, reworked and to be reworked stock, stock provisions, and any other adjustments and/or provisions);
6.4	any items of damaged, obsolete, slow moving, unsaleable, unusable, reworked, to be reworked, in quarantine or unmarketable Stock or work in progress shall have no value and Stock more than 12 months old shall be regarded as obsolete and have no value;
6.5	for the avoidance of doubt Chemring Stock shall be disregarded as shall any Stock or work in progress relating to the MOB Guardian contract;

77

6.6	any Stock which comprises of finished products or parts in relation to the support of obsolete products previously supplied to any customer shall be disregarded;
6.7	when this stocktaking has been completed and valued in accordance with paragraph 6 of this Schedule and such value shall be included in the Completion Statement provided always that if the verification referred to in paragraph 6.3 above reveals factual errors, such errors shall be corrected in the valuation of Stock for the purposes of the Actual Stock Value;
6.8	the value of the Stock shall be determined in pounds sterling (£) and then converted into US Dollars (US$) and the amount shall be paid in US dollars (US$).

	Format
7	The Completion Statement and shall be set out in the form of the pro forma Completion Statement which is at Part 2 of this Schedule.
	Preparation

8 The Completion Statement will be delivered to OROLIA by the Seller prior to Completion and, in any event, not later than 30 Business Days after Completion. Before delivery, OROLIA and the Seller will so far as practicable consult with each other with a view to reducing the potential areas of future disagreement.

9 In order to enable OROLIA and the Seller to review the Completion Statement, the Buyer and the Seller will keep up to date and make available to the other, its books and records relating to the Business and the stock take during normal office hours and co-operate with them with regard to the preparation and review of the Completion Statement.

10 If OROLIA does not within 5 Business days of receiving the Completion Statement give written notice to the Seller that it disagrees with the Completion Statement or any item in them, this notice stating the reasons for the disagreement in reasonable detail, (Objection Notice), the Completion Statement will be final and binding on the Parties. If OROLIA gives a valid Objection Notice within the 5 Business Day period, OROLIA and the Seller will attempt in good faith to reach agreement in respect of it and, if they are unable to do so before the Long Stop Date the parties shall proceed to Completion and an adjustment of the Purchase Price shall only made when the Completion Statement is agreed or determined in accordance with the provisions below.

11 In the event OROLIA and the Seller are unable to agree the Completion Statement, either such Party may refer the matter to an independent accountant to be agreed by such Parties or, failing agreement within 5 Business Days, to be appointed by the President of the Institute of Chartered Accountants in England and Wales (Independent Accountants) at the instance of whichever such Party first applies to him.

12 The Independent Accountants will act as experts and not as an arbitrators and will determine which, if any, adjustments proposed in the Objection Notice (or what lesser adjustments in respect of the matter giving rise to the adjustments proposed in the Objection Notice) should be made to the Completion Statement so that they comply with this Schedule. Any determination made by the Independent Accountants will be final and binding on the Parties (in the absence of manifest error).

13 The costs of the Independent Accountants will be borne as the Independent Accountants determine and if the Independent Accountants do not make a determination, then equally.

14 The adjustments agreed by OROLIA and Seller or determined by the Independent Accountants (as appropriate) will be deemed to form part of the Completion Statement.

15 OROLIA and Seller will co-operate with the Independent Accountants and comply with their reasonable requests made in connection with the carrying out of their duties under this Agreement.

78

16 Nothing in paragraph 17 will entitle OROLIA or the Seller or the Independent Accountants access to any information or a document which is protected by legal professional privilege, or which has been prepared by the other Party or its accountants and other professional advisers with a view to assessing the merits of any claim or argument.

17 Subject to paragraph 16, the Parties are not entitled to refuse to supply that part or parts of any document which contain only the facts on which the relevant claim or argument is based.

18 Each Party and the Independent Accountants will, and will ensure that its Accountants and other advisers will, keep all information and documents provided to them under paragraphs 8 to 17 confidential and will not use the same for any purpose, except for disclosure or use in connection with the preparation of the Completion Statement.

79

Part (2)

Pro Forma Completion Statement

Initial Stock Value	£	1,300,000
Actual Stock Value	£
Difference between the Initial Stock Value and the Actual Stock Value due to the Seller or OROLIA (as the case may be)	£

80

SCHEDULE 13

Licence to Occupy

81

SCHEDULE 14

McMurdo Ltd Sale and Purchase Agreement

82

Executed by as a Deed by
Signature Industries Limited acting by or if by one	Director
director in the presence of:
Witness	Director/Secretary
Name
Address
Executed by as a Deed by
McMurdo Limited acting by or if by one director in the	Director
presence of:
Witness	Director/Secretary
Name
Address
Executed by as a Deed by
Digital Angel Corporation acting by	Authorised Signatory
	Authorised Signatory
Executed by as a Deed by
OROLIA SA acting by	Jean-Yves COURTOIS, Chairman and CEO
	Authorised Signatory
	Christophe Francois, Deputy CEO

83

EX-21.1

EXHIBIT 21.1

DIGITAL ANGEL CORPORATION
List of Subsidiaries

	Country or State
Company Name	of Incorporation/Formation
Destron Fearing Corporation A/S f/k/a Daploma International A/S	Denmark
Daploma Polska, Sp. z.o.o.	Poland
Digital Angel Chile, S.A.	Chile
Destron Fearing Corporation f/k/a Digital Angel Corporation, f/k/a Medical Advisory Systems, Inc.	Delaware
Digital Angel de Brazil Produtos de Information LTDA.	Brazil
Digital Angel Holdings, LLC	Minnesota
Digital Angel International, Inc.	Minnesota
Digital Angel Paraguay S.A.	Paraguay
Digital Angel Uruguay S.A.	Uruguay
Digital Angel S.A.	Argentina
Digital Angel Technology Corporation f/k/a Digital Angel Corporation f/k/a Digital Angel.net Inc.	Delaware
DSD Holdings A/S	Denmark
GT Acquisition Sub., Inc.	Minnesota
Signature Industries Limited	United Kingdom
Thermo Life Energy Corp. f/k/a Advanced Power Solutions, Inc.	Delaware

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-48364, 333-38420, 333-31696, 333-93117, 333-92327, 333-11294, 333-88421, 333-39553, 333-106742, 333-118776, 333-121123, 333-123738, 333-126229, 333-148958 and 333-162535) and the Registration Statements on Form S-3 (No. 333-115059, 333-120456, 333-123567, 333-124822, 333-126347, 333-126931, 333-133403, 333-137165, 333-143385, 333-144663, 333-148974, 333-156001, 333-159880 and 333-164053) of our report dated March 31, 2010 relating to our audits of the consolidated financial statements of Digital Angel Corporation and subsidiaries, which report is included in the Annual Report on Form 10-K for the year ended December 31, 2009. We also consent to the reference to our firm as Experts in the Registration Statements on Form S-3.

/s/ Eisner LLP
New York, New York
March 31, 2010

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Joseph J. Grillo, certify that:

1.	I have reviewed this Annual Report on Form 10-K 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: April 1, 2010

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Lorraine M. Breece, certify that:

1.	I have reviewed this Annual Report on Form 10-K 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/ Lorraine M. Breece  

Lorraine M. Breece 

Senior Vice President and Chief Financial Officer 

Dated: April 1, 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 Annual Report on Form 10-K of Digital Angel Corporation and subsidiaries (the “Company”) for the year ended December 31, 2009 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, 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: April 1, 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.

EX-32.2

EXHIBIT 32.2

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 Annual Report on Form 10-K of Digital Angel Corporation and subsidiaries (the “Company”) for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lorraine M. Breece, Senior Vice President and 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/ Lorraine M. Breece  

Lorraine M. Breece 

Senior Vice President and Chief Financial Officer 

Dated: April 1, 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.