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, 2011

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

For the transition period from to

Commission file number: 000-26020

DIGITAL ANGEL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	43-1641533
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

300 State Street, Suite 214,

New London, Connecticut 06320

(Address of principal executive offices, including zip code)

(651) 900-0776

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	OTC Bulletin Board

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 þ Noo

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	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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, 2011, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $6.0 million, computed by reference to the price at which the stock was last sold on that date of $0.21 per share as reported on the OTC Bulletin Board.

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 20, 2012
Common Stock, $.01 par value per share	29,874,685 shares

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DIGITAL ANGEL CORPORATION

TABLE OF CONTENTS

Item	Description	Page
	PART I
1.	Business		3
1A.	Risk Factors		5
2.	Properties		10
3.	Legal Proceedings		10
4.	Mine Safety Disclosures		10
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		10
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
8.	Financial Statements		18
9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		18
9A	Controls and Procedures		18
	PART III
10	Directors, Executive Officers and Corporate Governance		19
11	Executive Compensation		21
12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		25
13	Certain Relationships and Related Transactions, and Director Independence		26
14	Principal Accountant Fees and Services		26
	PART IV
15.	Exhibits and Financial Statements		28
	Signatures		29

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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 majority-owned subsidiaries.

Overview

As of December 31, 2011, our business operations consisted primarily of our 98.5% owned subsidiary, Signature Industries Limited (“Signature”). Currently we operate in one business segment, which we refer to as Signature Communications, or SigComm.  SigComm is a distributor of two-way communications equipment in the U.K.  Products offered range from conventional radio systems used by the majority of SigComm’s customers, for example, for safety and security uses and construction and manufacturing site monitoring, to trunked radio systems for large scale users, such as local authorities and public utilities.

Previously, we operated in two business segments: Animal Identification and Emergency Identification.  The Animal Identification segment was comprised of the operations of Destron Fearing Corporation (“Destron”), which we sold on July 22, 2011.  Our SARBE and SigComm businesses comprised divisions of Signature which constituted the Emergency Identification segment.  On June 15, 2011, we sold the assets of our SARBE business, with the exclusion of one contract.  The sale of these businesses is more fully discussed below under the heading Discontinued Operations.

Discontinued Operations

During the years ended December 31, 2011 and 2010, we sold several businesses. On July 22, 2011, all of the outstanding capital stock of our then wholly-owned subsidiary, Destron, was sold to Allflex USA, Inc., a Delaware corporation (“Allflex”). This sale represented the sale of a major portion of our assets.  On June 15, 2011, we sold certain assets of our SARBE business, excluding one contract, which is for the sale of Signature’s personal emergency location beacons (“PELS”) with the U.K. Ministry of Defence, or MOD.  During the first half of 2010, we sold our Clifford and Snell business unit (“Clifford & Snell”) and our Control Products business unit (“Control Products Group”), both of which were divisions of Signature.  In addition, in January 2010, we sold our wholly-owned subsidiary, Thermo Life Energy Corp. (“Thermo Life”).Our decision to sell the Destron business was made as a result of the need for cash to remain in business as we had existing indebtedness and other outstanding obligations that were due or becoming due.  The decisions to sell the SARBE business and the businesses that were sold in 2010 were made as part of management’s strategy to streamline operations. Accordingly, operations of these sold businesses, as well as the PELS contract, through the earlier of their dates of sale or December 31, 2011 are presented in discontinued operations for all periods presented in this Annual Report. Discontinued operations are more fully discussed in Note 8 to our consolidated financial statements.

PELS contract

We have obligations under the terms of Signature’s PELS contract with the MOD to supply radio beacons.  We have determined that we will incur a loss on the completion of the contract and this estimate is subject to change, and any increases or decreases will be reflected in the results of our discontinued operations in future periods.  The PELS contract has been delayed several times in the past, and may be further delayed as more fully discussed under Item 1A., “Risk Factors.”  We expect to begin delivery of the units in the third quarter of 2012.

Internet Website

Our internet website address is www.digitalangel.com. Our segment’s internet website address is: 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”).

Effective April 20, 2007, we became a Delaware corporation. We initially incorporated in the state of Missouri on May 11, 1993. Our principal executive offices are located at 300 State Street, Suite 214, New London, Connecticut (651-900-0776).

Industry Overview

Our principal operations provide a comprehensive range of two-way radio communication solutions to organizations throughout the U.K., and we believe that we are one of the largest distributors of two-way communication equipment in the U.K. Our product range includes conventional radio for uses such as safety, security, construction and manufacturing to trunked radio systems for large scale users, such as local authorities and public utilities.

Business radio (“BR”) communications are used across a variety of industries and applications.  In simple terms, they consist of two-way radios that employees carry with them, enabling them to easily and quickly communicate with colleagues.  In 2011, the worldwide BR market is forecast to reach $16 billion by the year 2017.  Mobile radios provide a critical communications capability for many industries, governmental organizations and the military.  In these organizations, BR communications are the primary and most desirable method used to communicate effectively and economically.

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Key market drivers for the BR market include:

●   Technological progress (digital convergence): Innovations such as the transition from analogue to digital radios have revitalized the industry and offer future potential for increasing revenues;

●   Health and safety regulations: Radios enable employers to avoid and control the risks of working in a hazardous environment, and therefore meet their obligations relating to health, safety and welfare regulations;

●   Security: The increasing demand for tailor made security solutions in all segments from retail to oil rigs means that radio is ideally placed to offer effective and secure communication solutions;

●   Mission critical communications and disaster recovery: During disaster recovery, radio is essential to locate workers, coordinate disaster handling and manage operations to their normal levels;

●   Recession: The recent recession in the U.K. has increased the demand for the rental and hire of tailored solutions as businesses seek to reduce capital expenditures and seek cost effective solutions; and

●   Concerts/Public events: High profile public events raise awareness as to the communications systems that are available and therefore lead to further inquiries.

Principal Products and Services

The key products and services provided by SigComm are:

●   Conventional and Trunked Business Radio Systems:  Conventional systems are usually used by small businesses to provide reliable communication and compliance with health and safety legislation.  Trunked systems are upgrades to a conventional system and allow for private conversations and a larger number of users or greater geographical area coverage;

●   Intrinsically Safe Radio Equipment: This special equipment is required by the petrochemical and pharmaceutical industries and other hazardous environments;

●   License Free Radio Equipment: This is used by smaller organizations with less stringent requirements;

●   Project Management and System Design: This involves site surveys, designing systems and project managing the installation of systems;

●   Hire of Business Radios: This includes rental of business radios of all kinds, for use in small and large, temporary and permanent systems; and

●   Other Services: These include technical support, repairs, troubleshooting and system design and reconfiguration.

Growth Strategy

With the migration of the market from analog radios to the use of digital radios, we believe we are ideally placed to capitalize on this market trend as we are approved suppliers of digital radios and with on-site engineers. Our approved suppliers are discussed below under the section "Manufacturing; Supply Arrangements." We can deliver a digital solution to clients, whether in the sale or rental market.  We currently operate our business in Scotland, which presents a significant opportunity for growth as we can leverage our preferred supplier agreements and reputation to develop the business in England and Wales.  Additionally, we can offer a number of complimentary products and services.

Management anticipates that the current economic environment will have a variable impact on the market for BR equipment.  It is expected that some market segments will have to cut back purchases of new and replacement equipment.  However, many of the needs for communication are independent of economic activity.  Customers facing cash constraints that would have purchased BRs may well have to rent radios instead and we are well positioned to service and expand in this segment.  The oil, gas and petrochemical industries have needs for communication with operational and safety staff that are driven by infrastructure in place rather than by current volumes, so there is an expectation that this market will remain relatively consistent during the recession.

These factors combined with growing government legislation on providing duty of care relating to the health and safety of all employees, particularly the lone worker, which is increasing due to the economic climate, we believe increases the potential requirement for radio communications.  The recession, and the potential increase in crime which often follows, highlights the need for organizations to protect their personnel and improve security.  Also, digital convergence should continue to offer replacement and interoperability opportunities for BR.

Sales and Distribution

We believe that our SigComm business is one of the largest distributors of two-way communication equipment in the U.K.  The sales department offers a comprehensive range of products to meet requirements and we act as an authorized partner, dealer and distributor for all major two-way communication manufacturers.

We specialize in digital solutions and have our own team of digital engineers that provides tailored solutions to clients.  We also offer a range of additional contracts for customers who require a more comprehensive service arrangement.  Our service department has fully trained and accredited engineers with many years of experience in the communications and electronics industries.  In addition to the sale and rental of products and solutions, we provide after sales service and support through our technical team that has project management expertise.

Competition

The business radio market in Scotland and elsewhere is extremely fragmented, with a large number of very small resellers active in the market.  The majority of SigComm’s competitors are small private companies, many of which are owned by a single individual.  All of our main competitors present somewhat different profiles with regard to specialization in particular market segments and the products and services offered.  However, most resellers have limited technical skills and limited training staff.  SigComm, as a Motorola Ltd. partner and systems solution provider, is differentiated from most competitors in this regard.

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Manufacturing; Supply Arrangements

The BR equipment sold and used by us is supplied by a number of leading radio providers, including Motorola Ltd., and is programmed at SigComm’s premises by skilled engineers.  We have preferred supplier arrangements with four of the key communication suppliers in the global market: Motorola, Kenwood, Tait Communications and Hytera. 3M U.K. and Talking Headsets are also key suppliers.  We have a written supply agreement with Motorola and verbal agreements with our other suppliers.  There are no termination provisions or minimum purchase requirements in our agreements, although under certain agreements we can obtain a discount if we purchase above certain specified quantities.  SigComm is not affected by raw material availability as its inventory consists of finished goods.

Government Regulation

The manufacture and distribution of our BR products are subject to compliance with applicable regulatory requirements in both the country of manufacture and in those countries where these products are sold, including compliance with the U.K.-based OfCom.  We must comply with local, 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.  Maintaining compliance relies on us purchasing an annual license to supply and hire radio equipment onto the U.K. spectrum. The spectrum is policed by OfCom engineers; therefore, all equipment supplied and installed by SigComm must meet the license terms and conditions laid down by OfCom.  Failure to do so could result in a revocation of our license to supply and hire equipment or worse we could be prosecuted. We believe that we are in substantial compliance with all OfCom and other governmental requirements applicable to our BR products and systems.

Intellectual Property

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.

Seasonality

No significant portion of our business is considered to be seasonal.

Employees

At March 20, 2012, we employed approximately 36 employees, of which 33 are full-time. We believe we have positive relationships with our employees.

Geographic Areas

Our primary operations and sales are in the U.K.

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

Dependence on One or a Few Major Customers

No single customer represented 10% or more of our consolidated revenue from continuing operations for 2011.

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 $8.6 million and $7.7 million for the years ended December 31, 2011 and 2010, respectively. Our consolidated operating activities used cash of $10.7 million during the year ended December 31, 2011. As of December 31, 2011, we had an accumulated deficit of approximately $587 million. There is no assurance that our operating activities will be able to fund our cash requirements in the future, which could ultimately result in our inability to continue operations as a going concern.

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 sale of businesses, and proceeds from the issuance of debt, among others. 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.

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Prior to closing the Destron Transaction,  we had a working capital deficiency, which was partially due to continuing losses from operations and a number of our debt obligations becoming due or potentially due within the next twelve months. Certain of our credit facilities were due on demand and/or required us to make significant monthly or quarterly principal payments. Our factoring lines could be amended or terminated at any time by the lenders, and  we had a mortgage loan on Destron’s South St. Paul facility of approximately $1.9 million that was due on November 1, 2011, although we had the option to extend the loan an additional six months. These conditions indicated that without the proceeds from the sale of Destron substantial doubt existed about our ability to operate as a going concern, as we may not have been able to generate the funds necessary to pay our obligations in the ordinary course of business.  With the sale of Destron and the receipt of the net proceeds, we satisfied the majority of our notes payable and at December 31, 2011, our notes payable and advances from factors totaled approximately $0.1 million.  Although we anticipate incurring losses in 2012, we believe that we have sufficient funds to operate our business and meet our commitments and obligations over the next twelve months ending December 31, 2012. However, if circumstances were to change and projected cash flows were not realized, it could affect our ability to operate as a going concern.

Continuing delays in the completion of the PELS contract, which sales have been delayed significantly pending resolution of certain technological problems along with extended testing and customer certification requirements, would have a negative impact on our projected cash flows and funds available for any dividend distribution.

During the last half of 2011, we made a decision to outsource the manufacture of the PELS beacons.  In July 2011, we entered into a “Master Manufacturing Agreement” with a U.K.-based manufacturing firm and in November and December, we agreed upon the pricing term under that agreement.  The manufacturer has completed a pilot batch of beacons and is now completing a pilot batch of antennas. The MOD has visited the factory and verbally expressed satisfaction with the manufacturing line. Certain formalities remain before the MOD will formally qualify and approve the third-party manufacturing firm.  We believe that they will be accepted by the MOD.  To date, we have successfully completed the PELS field trials and the next milestone is Production Readiness Review, or PRR, during which we expect the MOD to approve the production system at our manufacturing subcontractor. The definitive PRR will take place at the subcontractor's facility when all final pilot batches have been completed and the manufacturing system is ready for full production.  PRR is a prerequisite for the final project milestone, which is the Final Design Review, or FDR, at which the MOD will sign off on the complete package of design, test and manufacturing documentation. Following this, the product can be released for field service and shipments to the MOD can commence.  We have to supply extensive documentation on the design and testing of the product for FDR and this is currently in process. Our subcontractor is expected to be ready for PRR in April, 2012 and we are anticipating that FDR will take place in May 2012. We had to redesign part of the beacon’s antenna system, due to a defect discovered in the original design.  This design change has been completed and tested positively internally, but has yet to be approved by the MOD and there is a risk this process will delay the anticipated PRR and FDR dates.  We have also been working through issues related to satellite connections, which again, we believe we have resolved satisfactorily but the MOD is still in process of review.  The PRR and FDR could be delayed further, as they have been several times in the past, if either the MOD or the Signature team needs additional time to complete all of the required documentation and testing that are prerequisites to the process.  See risk factor below concerning the MOD’s right to cancel the contract.

Changes to the estimated loss on the PELS contract with the MOD could harm our financial condition and could negatively affect our cash flows and the cash available for any cash dividend distribution.

We have determined that we will incur a loss of approximately $3.7 million on the completion of the PELS contract with the MOD to supply radio beacons, which we have included in the results of discontinued operations for the year ended December 31, 2011.  This estimate is subject to future events and circumstances and change and any increases or decreases will be reflected in our results of discontinued operations in future periods.  Increases in the loss would have a negative impact on our financial condition, results of operations and cash flows.

The MOD has the right to cancel the contract for the delivery of the PELS beacons, which if cancelled would harm our financial condition, results of discontinued operations and cash flows and may result in our inability to continue operations as a going concern.

We have experienced several delays under the terms of the contract with the MOD for the delivery of our PELS beacons due primarily to design and technological issues, and the MOD has responded to these delays with notices that we are in technical default of the contract’s delivery terms.  Under its terms and as a result of the delays, the MOD has the right to cancel the contract at any time.  Should the MOD cancel the contract, it would result in negative changes to projected cash flows and could subject us to potentially significant contract termination penalties, which would harm our financial condition, results of discontinued operations and cash flow.  Any of these results could result in our inability to continue operations as a going concern.

Our foreign operations pose additional risks.

We operate our businesses and market our products internationally in the U.K. During the years ended December 31, 2011 and 2010, all of our sales were to U.K.-based companies. 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.

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

During both the years ended December 31, 2011 and 2010, all of our revenue from continuing operations and a portion of our expenses were transacted in British pounds. During both the years ended December 31, 2011 and 2010, we incurred approximately $0.1 million of other comprehensive (loss) income due to fluctuations in foreign currency exchange rates.  In addition, our intercompany loans to Signature are denominated in British pounds, which resulted in foreign currency translation  losses during the year ended December 31, 2011 of approximately $0.2 million and an accumulated foreign currency adjustment loss of approximately $1.4 million.  Going forward fluctuations between the British pound and the United States (“U.S.”) dollar could have an adverse effect on our financial results.

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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.

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/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.

Each of these transactions would result in further dilution.

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 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. and certain other foreign governments have 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. or foreign economies, 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, 2010 to March 20, 2012, the price per share of our common stock has ranged from a high of $0.76 to a low of $0.11. 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 have and could continue to affect our access to capital, and may, if they continue, 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 are unable to compete with Destron’s business for three years ended July 21, 2014.

We have agreed that, for a period of three years after the closing of the Destron Transaction, which occurred on July 22, 2011, we will not:

• engage in the business, or own any person that engages in the business, directly or indirectly, of developing, manufacturing or selling of radio frequency identification, or RFID, and visual identification tags, readers and related software for animals;

• provide services related to the restricted business to any competitor;

• become associated with any Destron competitor;

• solicit, divert or take away any business related to the restricted business from a person who was during the last two years a customer or supplier of Destron Fearing; or

• attempt to hire any person who served as an officer, employee, consultant or advisor of Destron during the year prior to the closing and who received compensation in excess of $50,000.

Our ability to realize the funds held in escrows or recognize the related gain from the sales of Destron and SARBE is uncertain.

By letter dated October 31, 2011, Allflex advised the Company that it intended to assert a claim for recovery of certain alleged losses under the escrow established under the stock purchase agreement dated May 8, 2011 relating to Allflex’s purchase of Destron on July 22, 2011.  On February 3, 2012, we received formal notice of claim from Allflex. The claim alleges that certain chip implants supplied to an overseas customer were defective.  The formal notice states that the loss estimate and claim against the funds held in escrow from the sale of Destron is $1.2 million and that there may be additional alleged losses.  Given the preliminary nature of this matter and the fact that we have been provided with very limited information regarding the underlying matter and how the situation has been handled or who is responsible for the allegedly defective products, no further assessment or information can be provided at this time.  We have disputed this claim and notified Allflex that we intend to further investigate this matter, vigorously defend any claim of impropriety and aggressively pursue responsible parties. Historically, we have never experienced the type of defect claimed.  Additionally, we expect that insurance coverage for the product involved may cover some or all of any alleged loss and that the escrow of $2.5 million which exists for claims under the stock purchase agreement would cover any shortfall in insurance coverage.  This $2.5 million escrow is included in long-term assets as a deferred gain at December 31, 2011, and income will be recognized only upon receipt, if any, of the escrow funds.

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In addition, there is an escrow of £0.2 million (or approximately $0.3 million which is included in other current assets as of December 31, 2011) outstanding from the sale of our SARBE business to cover indemnifications.  The escrow period ends in June 2012.  We expect claims and negotiations to take place as to the ultimate disposition of these escrow funds within the framework contemplated by the purchase agreement and, therefore, the ultimate receipts of these funds and recognition of the gain is uncertain.

Our estimated loss on a lease termination is subject to change and any increase could negatively affect our financial condition, future results from discontinued operations and cash flows.

On or about December 24, 2011, Signature vacated its U.K. facility in Thamesmead.  Keyswitch Varley, a wholly-owned subsidiary of Signature, is obligated on the lease.  Neither Signature nor the Company guaranteed the lease.  We have accrued an estimate of the liability associated with the lease termination in the results of discontinued operations for the year ended December 31, 2011.  The estimated loss is subject to change.  Any increase in the loss could negatively impact our financial condition, future results from discontinued operations and cash flows.

Uncertainty exists as to the timing and amount of any initial, special cash dividend(s).

We used a portion of the net proceeds from the sale of Destron to satisfy certain of our outstanding accounts payable and accrued expenses and other outstanding severance related liabilities, to fund working capital and to fund obligations under the PELS contract.  In addition, we may be required to use a portion to fund our estimated obligation under the Thamesmead lease.  Additional amounts are also necessary during the first half of 2012 to fund costs associated with the PELS contract. We still hope to use a portion of the net proceeds to fund an initial, special cash dividend to our stockholders.  However, at this time, we are unable to determine the amount and timing of any such dividend distribution due to continuing uncertainties regarding the timing and completion of the PELS contract and other working capital requirements over the next several months.  It is possible that funds will not be available to pay any dividend.

During the next twelve to fifteen months, we anticipate completing the PELS contract with the MOD.  During this process, our board of directors will continue to evaluate strategic alternatives for the Signature business and for us as a whole. One alternative is to sell the remaining assets of our Signature business.  Based on current information, we presently expect these efforts, including the proceeds from the sale of our Signature business, along with receipt of some or all of the $2.5 million holdback from the sale of Destron Fearing, to net additional cash to us, which we currently hope will allow us to make distributions to our stockholders in dividends after all outstanding liabilities and wind down costs are paid. The amount and timing of any such distributions is highly uncertain and subject to future events and uncertainties due to: (i) the timing and cost to complete the PELS contract; (ii) , the uncertainty regarding product liability claims made by Allflex; (iii) uncertainty regarding the amount of proceeds, if any, from a sale of our Signature Communications business; (iv) uncertainties as to the ultimate amount of claims, liabilities and operational expenses associated with the winding down our business; (v) Delaware corporate law requirements; and (vi) the potential pursuit of other strategic alternatives that may be presented to us.

We may be unable to pay the initial, special cash dividend due to Delaware Law restrictions.

We may not be permitted to declare and pay any special cash dividend if we lack sufficient surplus or net profits for such fiscal year from which dividends may be declared and paid in compliance with Delaware General Corporation Law. It is possible that legal restrictions and our financial condition may prevent the payment of any special cash dividend.

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

Our future success will depend in large part upon the continued services and performance of key senior management and other key personnel and consultants. If we lose the services of any key member, 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 and consultants when and if the need arises. Any failure to attract and retain the necessary technical, managerial, marketing, purchasing and customer service and other key personnel and consultants could have a material adverse effect on our financial condition and results of operations.

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

Management continues to review strategic alternatives to increase stockholder 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 our remaining Signature assets. If we are successful in further streamlining our business to focus our attention on a new business entity or industry, it could, 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 radio communications industry 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.

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We may be subject to costly product liability claims from the use of our products, 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 products entail a risk of product liability. We could be subject to product liability claims in the event our products 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 products. 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;

• 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.

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.  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.

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 products and their 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 products, which would likely reduce our sales in these countries. Furthermore, some of our patent rights may be limited in enforceability to the U.S., U.K., 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.

We are also subject to regulations by various governmental entities in the U.K. 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 certain 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 business.

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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, 2011, the book value of our inventory was $3.2 million, including approximately $3.1 million of discontinued operations inventory related to the PELS contract. 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.

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, and entail substantial costs in order to modify our existing accounting systems, which 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, 2011, we were obligated under operating leases for approximately 8,248 square feet of office facilities, of which 8,068 square feet relate to our U.K. facilities, and 180 square feet is for our corporate office. On December 24, 2011, we vacated the leased U.K. manufacturing facility in Thamesmead as more fully discussed in Note 8 to our consolidated financial statements.

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings from time to time. We have accrued, to the extent practicable based on current facts and circumstances, 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 12 to our consolidated financial statements for a description of certain legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Our common stock is currently traded on the OTC Bulletin Board under the symbol “DIGA.OB.” The following table lists the high and low price for our common stock as quoted, in U.S. dollars, on the internet tracking services during each quarter within the last two fiscal years: 

	High		Low
2011
First Quarter	$	0.52	$	0.35
Second Quarter		0.49		0.17
Third Quarter		0.25		0.16
Fourth Quarter		0.22		0.11
2010
First Quarter	$	0.75	$	0.40
Second Quarter		0.76		0.46
Third Quarter		0.61		0.33
Fourth Quarter		0.50		0.31

The quotations set forth above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 20, 2012, the closing sale price of our common stock on the OTC Bulletin Board was $0.12 per share.

On October 5, 2010, our common stock began to trade under the symbol "DIGA.OB" on the OTC Bulletin Board. Previously, our common stock traded on The NASDAQ Capital Market.

Holders

According to the records of our transfer agent, as of March 20, 2012, there were approximately 1,417 holders of record of our common stock.

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Dividends

We have never paid cash dividends on our common stock. As more fully discussed under Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Liquidity and Capital Resources,  we hope to use a portion of the net proceeds from the sale of Destron to fund a special cash dividend to our stockholders.  However, due to uncertainties surrounding the timing and cost to complete the PELS contract, the uncertainty regarding product liability claims made by Allflex in connection with the funds held in escrow from the sale of Destron, uncertainties regarding the amount of proceeds, if any, from the sale of our Signature Communications business, uncertainties as to the ultimate amount of claims, liabilities and operational expenses associated with the winding down of our business, and the potential pursuit of other strategic alternatives that may be presented to us, the actual amount and timing of the special cash dividend has not yet been determined and none has been declared.

Securities Authorized for Issuance Under Equity Compensation Plans

During 2011, we did not grant any shares of restricted common stock or stock options for executive compensation.  As of December 31, 2011, the following shares of our common stock were authorized for issuance under our equity compensation plans:

	Equity Compensation Plan Information
Plan Category (1)	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted-average exercise price per share of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		2,336,411	$	14.51		1,472,894	(2)
Equity compensation plans not approved by security holders (3)		134,374		9.35		--
Total		2,470,785		14.23		1,472,894

(1)	A narrative description of the material terms of our equity compensation plans is set forth in Note 6 to our consolidated financial statements.
(2)	Includes 36,455 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

We did not repurchase any shares of our common stock during the year ended December 31, 2011.

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 ability to pay dividends, 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 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 ability to fund our operations;

• anticipated trends in our business and demographics;

• the ability to hire and retain skilled personnel and consultants;

• relationships with and dependence on technological partners;

• our future profitability and liquidity;

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

• worldwide political stability and economic growth;

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• expectations about the outcome of adverse developments, and outcomes and expenses in legal proceedings, litigation and asserted claims;

• regulatory, competitive or other economic influences;

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

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

• our expectation that we will not suffer costly or material 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;

• uncertainty in the time and amount of any initial, special cash dividend with a portion of the proceeds from the sale of Destron and the timing and amount and likelihood of the payment of additional special cash dividends;

• our ability to complete the PELS contract, which sales have been delayed significantly pending resolution of certain technological problems along with extended testing and customer certification requirements;

• our expectation of the cash flows we will generate from the PELS contract and our current estimate of the losses we will incur;

• our estimate of the liability associated with the termination of the Thamesmead U.K. facility lease;

• our ability to realize the funds held in escrow from the sales of Destron and SARBE;

• our ability to successfully sell our remaining Signature business if we decide to do so and such opportunities are present;

• the impact of foreign currency exchange rate fluctuations and additional risks of foreign operations;

• the impact of new accounting pronouncements;

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

• the potential of further dilution to our common stock based on transactions effected involving issuance of shares;

• the impact of our inability to compete with Destron’s business for three years;

• volatility in our stock price, including a significant decrease over the past few years; 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 5 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 operate in one business segment, which we refer to as Signature Communications, or SigComm.  SigComm is a distributor of two-way communications equipment in the U.K.  Products offered range from conventional radio systems used by the majority of SigComm’s customers, for example, for safety and security uses and construction and manufacturing site monitoring, to trunked radio systems for large scale users, such as local authorities and public utilities.

Discontinued Operations

During the years ended December 31, 2011 and 2010, we sold several businesses. On July 22, 2011, all of the outstanding capital stock of our then wholly-owned subsidiary, Destron Fearing Corporation, (“Destron”), was sold to Allflex USA, Inc., a Delaware corporation (“Allflex”). This sale represented the sale of a major portion of our assets.  On June 15, 2011, we sold certain assets of our SARBE business, excluding one contract, which is for the sale of Signature’s personal emergency location beacons (“PELS”) with the U.K. Ministry of Defence, or MOD.  During the first half of 2010, we sold our Clifford and Snell business unit (“Clifford & Snell”) and our Control Products business unit (“Control Products Group”), both of which were divisions of Signature.  In addition, in January 2010, we sold our wholly-owned subsidiary, Thermo Life Energy Corp. (“Thermo Life”).Our decision to sell the Destron business was made as a result of the need for cash to remain in business as we had existing indebtedness and other outstanding obligations that were due or becoming due.  The decisions to sell the SARBE business and the businesses that were sold in 2010 were made as part of management’s strategy to streamline operations. Accordingly, operations of these sold businesses, as well as the PELS contract, through the earlier of their dates of sale or December 31, 2011 are presented in discontinued operations for all periods presented in this Annual Report. Discontinued operations are more fully discussed in Note 8 to our consolidated financial statements.

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.

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Business Overview

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:

	2011			2010
Revenue		100.0	%		100.0	%
Cost of sales		58.4			55.4
Gross profit		41.6			44.6
Selling, general and administrative expenses		182.7			271.6
Severance and separation expenses		27.7			39.2
Total operating expenses		210.4			310.8
Operating loss		(168.8	)		(266.2	)
Interest and other income (expense), net		25.0			(1.4	)
Interest expense		(93.8	)		(5.9	)
Loss from continuing operations before income tax benefit		(237.6	)		(273.5	)
Benefit from income taxes		3.0			21.6
Loss from continuing operations		(234.6	)		(251.9	)
(Loss) income from discontinued operations, net of income taxes		(47.5	)		61.4
Net loss		(282.1	)		(190.5	)
Loss attributable to the noncontrolling interest, continuing operations		0.3			1.4
Loss (income) attributable to the noncontrolling interest, discontinued operations		1.8			(0.6	)
Net loss attributable to Digital Angel Corporation		(280.0	)%		(189.7	)%

Our consolidated operating activities used cash of $10.7 million and provided cash of $0.2 million during the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, our cash and cash equivalents totaled $6.3 million compared to $0.3 million as of December 31, 2010.  As of December 31, 2011, our stockholders’ equity was $4.0 million, as compared to $12.5 million as of December 31, 2010, and as of December 31, 2011, we had an accumulated deficit of $587.3 million. Our consolidated operating loss was approximately $8.6 million and $7.7 million for the years ending December 31, 2011 and 2010, respectively.

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 complete existing contracts, 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  operations and improve our supply chain management;

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

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

• 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.

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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.

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 our sole subsidiary. 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 investment under the equity method. All significant intercompany transactions and balances between or among us and our subsidiaries have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the 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 and bad-debt reserves, assumptions used in Black-Scholes valuation models, and the determination of the cost to complete the PELS contract, among others.

Stock-Based Compensation

In accordance with the Compensation – Stock Compensation Topic of the FASB Accounting Standards Codification (“ASC” or “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.

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 writedowns for obsolete or slow-moving inventory. The estimated market value of our inventory, including the inventory for the PELS contract reflected in discontinued operations, is based upon assumptions about future demand, usability and market conditions. If actual market conditions and or use of the inventory are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on our financial condition and results of operations.

Foreign Currencies & Foreign Currency Adjustment of Intercompany Loans

We operate a foreign subsidiary in the U.K., which uses its local currency as the 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.

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 resulting from those transactions are included in equity in the accumulated other comprehensive income (loss). However, when intercompany transactions are deemed to be of a short-term nature, such gains and losses are required to affect consolidated earnings. As a result of the current estimate of projected cash flows from the PELS contract as well as the potential sale of SigComm, which would result in the winding down of the Signature business, we have determined that it is likely that a large portion of the loans will be repaid within the next twelve to fifteen months and, accordingly, we have reclassified approximately $1.4 million of  foreign currency translation adjustment losses related to the intercompany loans between Signature and us from other comprehensive loss to other income (expense) in the statement of operations for the year ended December 31, 2011.  In addition, during 2011, we have expensed approximately $0.2 million of foreign currency translation adjustments on intercompany transactions between us and Signature.

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, 2011 and 2010, we had recorded a full valuation allowance against our U.S.  net deferred tax assets and as of December 31, 2011, we had recorded a full valuation against our U.K. net deferred tax assets due to uncertainties related to our ability to utilize these deferred tax assets, primarily consisting of net operating losses carried forwards. The valuation allowances are 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.

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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, 2011, we had an aggregate valuation allowance against our U.S. and U.K. net deferred tax assets of approximately $80.6 million and $2.3 million, respectively.

The amount of any benefit from our U.S. and U.K. 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 our U.S. net operating losses to offset any future taxable U.S. income we may generate. Such limitations, in conjunction with the net operating loss expiration provisions, effectively eliminate our ability to use a substantial portion of our net operating loss carryforwards to offset future taxable income. Based on our current cumulative three-year change in ownership, we exceeded the fifty percent threshold during the year ended December 31, 2009. As a result, approximately $189.9 million of the U.S. net operating loss carryforwards at December 31, 2011 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 (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 7 for further information concerning our income taxes.

Results of Operations from Continuing Operations

Outlook and Trends

Going forward, we intend to focus on completing the PELS contract and operating our remaining SigComm business.  During this process, our board of directors is continuing to evaluate strategic alternatives for our remaining Signature business, including a possible sale, and for us as a whole.  Investment bankers have been hired to help evaluate potential buyers for SigComm.  New revenue opportunities that could benefit shareholder value continue to be explored.  The investment firm that assisted in the strategic process resulting in the sale of Destron has been working with us to evaluate and to identify companies that might be interested in merging with us to capitalize on our public listing and existing stockholder base.

We expect 2012 sales and gross profits to be comparable with the 2011 results and we expect selling, general and administrative expenses to decrease in 2012.  We presently operate with one U.S.-based corporate employee, three outsourced, part-time consultants, one outsourced, full-time consultant and three board members (previously we had five board members) in a “virtual” office environment, in order to minimize costs and conserve cash.  We expect to continue to execute all required filings, tax returns, and maintain insurance and perform other required activities to maintain our standing as an Over-the-Counter Bulletin Board, or OTC Bulletin Board, publicly-traded company.  Also see the discussion below under the heading Liquidity and Capital Resources, which discusses our expectations regarding liquidity and the payment of common stock dividends.

Revenue

Our revenue was approximately $3.7 million and $3.1 million for the years ended December 31, 2011 and 2010, respectively.  The increase of approximately $0.6 million was primarily the result of an increase in revenue from our sales of hand held radios.  We expect revenue to remain fairly consistent in 2012.

Gross Profit and Gross Profit Margin

Our gross profit was approximately $1.5 million and $1.4 million for the years ended December 31, 2011 and 2010, respectively.  The increase was due to the increase in sales. Gross profit margin decreased to 41.6% for 2011 compared to 44.6% for 2010 due primarily to lower margins on higher sales of hand held radios.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6.7 million and $8.3 million for years ended December 31, 2011 and 2010, respectively, and were 183% and 272% of revenue for the same respective periods.  The $1.6 million decrease in selling, general and administrative expenses was due primarily to the reduction of personnel costs as we eliminated positions at both our corporate headquarters and at Signature during 2011 and 2010.  The reductions at Signature were due to eliminating various accounting and administrative positions as a result of the sale of several business units during 2011 and 2010. The reductions at corporate were due primarily to a restructuring we initiated during the first half of 2010 and a further reduction in headcount and board seats during 2011. Selling, general and administrative expenses decreased as a percentage of revenue primarily as a result of both the increase in sales during the year ended December 31, 2011 and the lower headcount.  Selling, general and administrative expenses consisted of $4.2 million and $5.0 million of expenses associated with Signature’s U.K. operations and $2.5 million and $3.3 million of corporate related expenses for the years ended December 31, 2011 and 2010, respectively.

Severance and Separation Expenses

We incurred approximately $1.0 million and $1.2 million of severance and separation expenses during the years ended December 31, 2011 and 2010, respectively. During 2011, the severance expense related primarily to severance expense associated with a change of control provision in our former CEO’s employment agreement, which was triggered by the sale of Destron. During 2010, the severance expense related to the accrual of costs associated with corporate headcount reductions.

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Other Income (Expense), Net

Other income (expense) was approximately $0.9 million in the year ended December 31, 2011 compared to ($43) thousand in the year ended December 31, 2010.  The $0.9 million increase in other income in 2011, as compared to 2010, is primarily a result of the revaluation of warrants to fair value, which resulted in income of approximately $2.1 million in 2011, and approximately $0.2 million of income associated with the reversal of liabilities for which the statute of limitations had expired and for which we no longer had a legal obligation to pay. Partially offsetting these amounts in 2011 were accumulated foreign currency losses of approximately $1.4 million.

Interest Expense

Interest expense was $3.4 million and $0.2 million for the years ended December 31, 2011 and 2010, respectively. The increase was primarily due to interest expense associated with debentures that we issued in February 2011 and redeemed on July 22, 2011. Approximately $2.5 million of the interest expense in 2011 related to the value of the Series A and B warrants that we issued in connection with the debentures, $0.5 million was due to the prepayment of the debentures and approximately $0.2 million resulted from debt issue costs for the debentures.  We redeemed the debentures and repurchased the Series A and B warrants with a portion of the proceeds from the sale of Destron.

Income Taxes

We had an income tax benefit of $0.1 million for 2011 related to the changes in the estimate for uncertain tax positions, compared to a benefit of $0.7 million for 2010, which resulted from the carryback of net operating losses generated by our U.K. operations.  Differences in the effective income tax rates from the statutory federal income tax rate arise from the increase or reduction of valuation allowances related to net operating loss carry forwards and other deferred tax assets. As of December 31, 2011, we have provided a valuation allowance to fully reserve our net operating loss carryforwards and our other existing net deferred tax assets, primarily as a result of our recurring losses and our current projections of future taxable loss.

Loss from Continuing Operations

During the years ended December 31, 2011 and 2010, we reported a loss from continuing operations of approximately $8.6 million and $7.7 million, respectively. The increase in the loss for 2011 compared to 2010 relates primarily to the increase in interest expense of $3.2 million in 2011, accumulated foreign currency losses of $1.4 million related to the translation of the intercompany balance with Signature, and a reduced tax benefit of $0.6 million.  These increases were partially offset by a $1.6 million decrease in selling, general and administrative expense in 2011 as discussed above, and approximately $2.1 million of income from the revaluation of outstanding warrants to fair value included in other income (expense) in 2011.

Changing Prices for Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2011 and 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2011, cash totaled $6.3 million, an increase of $6 million, from $0.3 million at December 31, 2010.

Net cash used in operating activities totaled $10.7 million in 2011 and provided cash from operating activities of $0.2 million in 2010.  In 2011, cash was used primarily by the net loss, payments of accounts payable and accrued obligations and discontinued operations.  In 2010, cash provided by operating activities was primarily from discontinued operations offset partially by the net loss.

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 $0.4 million and $0.4 million, at December 31, 2011 and 2010, respectively.  We anticipate accounts receivable to remain at a similar level going forward.

• Inventories decreased to $0.1 million at December 31, 2011, compared to $0.2 million at December 31, 2010. We expect our inventory levels to increase somewhat as we replenish and upgrade our stock of radios for hire.

• Accounts payable decreased to $0.8 million at December 31, 2011 from $1.9 million at December 31, 2010, as we used a portion of the proceeds from the sale of Destron to pay outstanding accounts payable. We anticipate accounts payable to remain at a similar level to the December 31, 2011 balance going forward.

• Accrued expenses decreased to $2.7 million at December 31, 2011, from $4.3 million at December 31, 2010,due to payments for accrued bonuses, severance, director’s fees and other accrued liabilities made with a portion of the proceeds from the sale of Destron and the reversal of approximately $0.2 million of liabilities related to sold companies for which we no longer had a legal obligation to pay. The decrease was partially offset by approximately $1.4 million of accrued expenses associated with change in control payments related to the sale of Destron. We paid $1.0 million of the change of control payment in February 2012.  As a result of this payment and other severance related payments, we expect our accrued expenses to decrease going forward.

We anticipate an additional outlay of up to approximately $1.5 million in the first half of 2012 for costs associated with the PELS contract.  Overall, we expect to realize positive cash flow from the contract during 2012 based on our current estimate that shipments will commence in the third quarter of 2012.

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Investing activities provided cash of $22.2 million and $2.6 million in 2011 and 2010, respectively. In 2011 and 2010, cash was primarily provided by discontinued operations.  The cash provided by discontinued operations in 2011 was primarily from the sales of Destron and SARBE.  The cash provided by discontinued operations in 2010 was primarily from the sale of Clifford and Snell.

Financing activities used cash of $5.4 million and $3.1 million during 2011 and 2010, respectively.  In 2011, cash was used primarily by discontinued operations and to repurchase warrants. In 2010, cash was primarily used by discontinued operations and payment of debt, partially offset by the issuance of stock.

Financing Agreements

As of December 31, 2011, our notes payable was $40 thousand, primarily related to the financing of insurance premiums.  As of March 20, 2012, we had fully repaid our notes payable.  In addition, at December 31, 2011 and currently, Signature had an invoice discounting factoring agreement which is described below.

Signature’s Invoice Discounting Factoring Agreement

In 2009, Signature entered into an invoice discounting factoring agreement (the “Bibby Invoice Discounting Agreement”) with Bibby Financial Services (“Bibby”), which replaced a similar arrangement with the Royal Bank of Scotland. 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 lends 80% of the receivables from the U.K. and 70% of receivables from the rest of the world, not to exceed a balance of £0.5 million (approximately $0.8 million at December 31, 2011). 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 and 0.3% for each receivable from the rest of the world. If the total of the yearly fee is less than £30,000, 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% (5% at December 31, 2011). Discounting charges of approximately $20 thousand and $41 thousand are included in interest expense for the years ended December 31, 2011 and 2010, respectively. 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. As of December 31, 2011, we had approximately £25 thousand outstanding (approximately $39 thousand) and approximately £51 thousand available (approximately $79 thousand) for borrowing under the Bibby Invoice Discounting Agreement.

Liquidity

As of December 31, 2011, we had working capital of approximately $4 million.  In addition, included in current liabilities are approximately $0.7 million of liabilities associated with subsidiaries we closed in 2001 and 2002 that were not guaranteed by us and that we believe we will not be required to pay.  On July 22, 2011, the closing date of the Destron Transaction, we received $13.5 million in cash from Allflex as follows:

	(in millions)
Purchase Price	$	25.0
Less:
Repayment or assumption of debt		(4.8	)
Repayment of debentures & Series A/B warrants		(3.0	)
Indemnification escrow		(2.5	)(a)
Working capital adjustment escrow		(1.2	)(b)
Cash receipts at closing date	$	13.5

The final net proceeds that we expect to realize from the Destron Transaction after all related payments are made and if the estimated escrow funds are released is approximately $13.3 million:

	(in millions)
Cash receipts at closing date	$	13.5
Less:
Payment of transaction costs		(1.2	)
Change of control payments		(1.3	)
Redemption of Iroquois/Alpha warrants		(0.2	)
Expected indemnification escrow proceeds		2.5	(a)
Expected net proceeds	$	13.3

(a) This amount was placed in escrow for eighteen months to cover certain indemnifications.  See the discussion below regarding the claim made by Allflex against the $2.5 million held in escrow.

(b) Under the terms of the Destron Transaction, at closing, $1.2 million was placed in escrow to cover a purchase price working capital adjustment provision in the stock purchase agreement. Both parties completed their analysis in January 2012, and agreed that Allflex was entitled to receive the $1.2 million (plus accrued interest) held in escrow in complete and full satisfaction of the post-closing adjustments. This amount was distributed to Allflex in January 2012.

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By letter dated October 31, 2011, Allflex advised the Company that it intended to assert a claim for recovery of certain alleged losses under the escrow established under the stock purchase agreement dated May 8, 2011 relating to Allflex’s purchase of Destron on July 22, 2011.  On February 3, 2012, we received formal notice of claim from Allflex. The claim alleges that certain chip implants supplied to an overseas customer were defective.  The formal notice states that the loss estimate and claim against the funds held in escrow from the sale of Destron is $1.2 million and that there may be additional alleged losses.  Given the preliminary nature of this matter and the fact that we have been provided with very limited information regarding the underlying matter and how the situation has been handled or who is responsible for the allegedly defective products, no further assessment or information can be provided at this time.  We have disputed this claim and notified Allflex that we intend to further investigate this matter, vigorously defend any claim of impropriety and aggressively pursue responsible parties. Historically, we have never experienced the type of defect claimed.  Additionally, we expect that insurance coverage for the product involved may cover some or all, of any alleged loss and that the escrow of $2.5 million which exists for claims under the stock purchase agreement would cover any shortfall in insurance coverage.  This $2.5 million escrow is included in long-term assets as a deferred gain at December 31, 2011, and will be recognized upon receipt, if any, of the escrow funds.

We used a portion of the net proceeds from the Destron Transaction to satisfy certain of our outstanding accounts payable and accrued expenses and other outstanding severance related liabilities, to fund working capital and to fund obligations under the PELS contract.  In addition, we may be required to use a portion to fund our estimated obligation under a lease related to Signature’s former U.K. manufacturing facility in Thamesmead.  Additional amounts are also necessary during the first half of 2012 to fund costs associated with the PELS contract.  We still hope to use a portion of the net proceeds to fund an initial, special cash dividend to our stockholders.  However, at this time, we are unable to determine the amount and timing of any such dividend distribution due to continuing uncertainties regarding the timing and completion of the PELS contract and other working capital requirements over the next several months.  It is possible that funds will not be available to pay any dividend.

During the next twelve to fifteen months, we anticipate completing the PELS contract with the MOD.  During this process, our board of directors will continue to evaluate strategic alternatives for the Signature business and for us as a whole. One alternative is to sell the remaining assets of our Signature business.  Based on current information, we presently expect these efforts, including the proceeds from the sale of our Signature business, along with receipt of some or all of the $2.5 million holdback from the sale of Destron Fearing, to net additional cash to us, which we currently hope will allow us to make distributions to our stockholders in dividends after all outstanding liabilities and wind down costs are paid. The amount and timing of any such ditributions is highly uncertain and subject to future events and uncertainties due to: (i) the timing of and cost to complete the PELS contract; (ii) the uncertainty regarding product liability claims made by Allflex; (iii) uncertainty regarding the amount of proceeds, if any, from a sale of our Signature Communications business; (iv) uncertainties as to the ultimate amount of claims, liabilities and operational expenses associated with the winding down our business; (v) Delaware corporate law requirements; and (vi) the potential pursuit of other strategic alternatives that may be presented to us.

Prior to closing the Destron Transaction,  we had a working capital deficiency, which was partially due to continuing losses from operations and a number of our debt obligations becoming due or potentially due within the next twelve months. Certain of our credit facilities were due on demand and/or required us to make significant monthly or quarterly principal payments. Our factoring lines could be amended or terminated at any time by the lenders, and  we had a mortgage loan on Destron’s South St. Paul facility of approximately $1.9 million that was due on November 1, 2011, although we had the option to extend the loan an additional six months. These conditions indicated that without the proceeds from the sale of Destron substantial doubt existed about our ability to operate as a going concern, as we may not have been able to generate the funds necessary to pay our obligations in the ordinary course of business.  With the sale of Destron and the receipt of the net proceeds, we repaid a significant portion of our notes payable and we believe that we have sufficient funds to operate the business and meet our commitments and obligations over the next twelve months ending December 31, 2012.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements for the year ended December 31, 2011.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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. 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.

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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;
(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, 2011. 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.

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, 2011 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

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

BOARD OF DIRECTORS

Our board of directors currently consists of three directors, two of whom (Mr. Penni and Mr. Rawan) were elected in 2008 and will serve until the next meeting of stockholders.  Our board of directors was structured to be divided into three classes, and a class is generally elected to serve for a three-year term or until the directors' successors are duly elected and qualified.  Thus, it has been our historical practice (since 1998) to elect approximately one-third of the members of the board of directors annually.  However, with the recent downsizing of our board of directors, we have only three sitting members at the present time and they are not divided equally into three classes. Directors may be removed only for cause. Any director appointed by our board of directors to fill a vacancy on the board serves the balance of the unexpired term of the class of directors in which the vacancy occurred.

Our current board members are as follows:

Current Directors	Age		Positions	Board Member Since
Joseph J. Grillo		54	Non-Independent Board Member	January 2008
Daniel E. Penni		64	Non-Independent Board Member (Chair), Audit & Governance Committee, Compensation Committee (Chair) and Nominating Committee, President and Interim Chief Executive Officer	March 1995
Dennis G. Rawan		68	Independent Board Member, Audit & Governance Committee (Chair) and Nominating Committee	December 2002

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Daniel E. Penni and Dennis G. Rawan were most recently elected as directors in 2008 and Mr. Grillo was most recently elected in 2010.  Each director was elected to serve for a term of 3 years or until such time as his successor is elected and qualified. Biographical and other information concerning our directors is set forth below.

Joseph J. Grillo: Mr. Grillo, age 54, an RFID industry veteran, served as our chief executive officer, president and director from January 2, 2008 to January 31. 2012.  Mr. Grillo currently serves as a member of our board of directors and as an advisor to our board. From December 2003 until joining us, Mr. Grillo served as the president and chief executive officer of the Global Technologies Division of Assa Abloy, AB, a publicly-held global manufacturer in the security and lock industry (“Assa Abloy”). From January of 2002 until December of 2003, Mr. Grillo served as the president and chief executive officer of the Identification Technology Group Division of Assa Abloy, where he formed and was responsible for the sales growth of the Identification Technology business unit. He earned a bachelor of science in finance from the University of Connecticut, School of Business. Mr. Grillo was selected to serve as a director on our board because of his general business experience, his experience and knowledge gained from acting as our chief executive officer, his proven expertise in the radio frequency identification industry and his experience with company turnarounds.

Daniel E. Penni: Mr. Penni, age 64, was elected to be our president and interim chief executive officer effective January 31, 2012.  He has served as a director since March 1995 and as chairman of our board since July 3, 2007. From September 1988 until December 2005, Mr. Penni was employed by Arthur J. Gallagher & Co. (NYSE:AJG), an insurance brokerage and risk management services firm, where he served in several positions, including his final position as area executive vice president. He has worked in various sales and administrative roles in the insurance business since 1969. He also served on the board of trustees of the Massachusetts College of Pharmacy and Health Sciences in Boston from 1989 through June 2006 and served as the chair of finance, the corporate treasurer and the chair of the audit committee at various times during his service period. Mr. Penni graduated with a bachelor of science degree in 1969 from the School of Management at Boston College. Mr. Penni was a member of the board of directors of VeriChip Corporation, n/k/a Positive ID Corporation (which was a former subsidiary of ours) from June 2004 until January 2008. Mr. Penni was selected to serve as a director on our board because of his specific experience and proven expertise in our industry, his past and continuing contributions to the Company, and his general expertise and perspective on our business.

Dennis G. Rawan: Mr. Rawan, age 68, has served as a director since December 10, 2002. Mr. Rawan was chief financial officer of Expo International, Inc. (“Expo”) from 1996 until his retirement in 2001. Expo provides information technology products and services to the event industry. For over 20 years prior to joining Expo, Mr. Rawan was a certified public accountant, or CPA, providing audit, review, tax and financial statement preparation services for a variety of clients. From 1970 to 1988, while working as a CPA, Mr. Rawan taught graduate level accounting courses at Babson College. Prior to starting his CPA practice, Mr. Rawan spent several years in public accounting with the then Touche Ross and Company and subsequently in the building materials industry with Evans Products’ Retail Group.  Mr. Rawan earned a bachelor of science degree and a master of business administration degree from Northeastern University. Mr. Rawan was selected to serve as a director on our board because of his past experience as an executive officer, his financial expertise as a CPA, his past and continuing contributions to the Company, and his general expertise and perspective on our business.

EXECUTIVE OFFICERS

As of the date of this report, each of the persons below currently serves as one of our executive officers:

Name	Age	Position
Daniel E. Penni	64	President and Interim Chief Executive Officer
Lorraine M. Breece	59	Chief Financial Officer

To our knowledge, there are no family relationships between any of our directors and executive officers.

The following is a summary of the background and business experience of our executive officer other than Mr. Penni (whose background and business experience is described in connection with his status as a director):

Lorraine M. Breece:Ms. Breece was appointed our chief financial officer on August 1, 2011. Ms. Breece had worked as a consultant from July 2010 until July 2011, including performing consulting services for the Company. Prior to that time, she served as the Company’s Chief Financial Officer from March 2008 to June 2010, as acting Chief Financial Officer since March 2007, and in various finance related roles with the Company, including Chief Accounting Officer, since April 2000. Prior to joining the Company, from 1991 to 1999, Ms. Breece served as director of finance and chief accounting officer of Nabi BioPharmaceuticals (NASDAQ:NABI). From 1984 to 1990, she served as corporate controller for Levitt Corporation. Ms. Breece began her career as an auditor with PricewaterhouseCoopers LLP. She earned a bachelor of business administration in Accounting from Florida Atlantic University and is a licensed CPA (inactive) in Florida.

CORPORATE GOVERNANCE

We have a standing Audit and Governance Committee, Compensation Committee and Nominating Committee of our board of directors.  Each have a written charter approved by our Board.

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Audit and Governance Committee

Our board of directors established an audit and governance committee in accordance with Section 3(a)(58)(A) of the Exchange Act. Our audit and governance committee is comprised of two members of the board of directors: Messrs. Rawan and Penni. Mr. Rawan is independent as defined in Exchange Act Rule 10A-3. Although Mr. Penni does not receive compensation for his role as president and interim CEO, we have determined that he is no longer independent under these standards.  Our board of directors has determined that we have one audit committee financial expert as defined in the applicable SEC rules: Mr. Rawan, who serves as the chairman of the committee. The committee (i) recommends for approval by our board of directors an independent registered public accounting firm to audit our consolidated financial statements for the fiscal year in which they are appointed, and (ii) monitors the effectiveness of the audit effort, the internal and financial accounting organization and controls and financial reporting. The duties of the committee are also to oversee and evaluate the independent registered public accounting firm, to meet with the independent registered public accounting firm to review the scope and results of the audit, to approve non-audit services provided to us by our independent certified public accountants, and to consider various accounting and auditing matters related to our system of internal controls, financial management practices and other matters. The audit and governance committee has been assigned the functions of monitoring the integrity of our financial statements, monitoring the independence, qualifications and performance of our independent auditors and overseeing our systems of internal controls.

Code of Conduct and Corporate Ethics General Policy Statement

Our board of directors has approved, and we have adopted, a Code of Conduct and Corporate Ethics General Policy Statement, or the Code of Conduct, which applies to all of our directors, officers and employees. Our board of directors has also approved, and we have adopted, a Code of Ethics for Senior Financial Officers (the “Code for SFO”) which applies to our president and chief executive officer, chief financial officer and other senior officers as deemed appropriate. The Code of Conduct and the Code for SFO are available, without charge, upon written request to Digital Angel Corporation, Attention: Patricia Petersen, Secretary, 300 State Street, Suite 214, New London, CT 06320. The audit and governance committee of our board of directors is responsible for overseeing the Code of Conduct and the Code for SFO. Our audit and governance committee must approve any waivers of the Code of Conduct, and our board of directors must approve any waivers of the Code for SFO.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our officers and directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission, or SEC, and to furnish copies of all such reports to us. We believe, based on our stock transfer records and written representations from certain reporting persons, that all reports required under Section 16(a) were timely filed during 2011.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation earned in or with respect to our fiscal years 2010 and 2011 by:

●   each person who served as our chief executive officer in 2011;

●   each person who served as our chief financial officer in 2011; and

●   each person who served as our chief operating officer in 2011.

 We had no other executive officers in 2011.  We refer to these officers collectively as our named executive officers.

Summary Compensation Table

Name and Principal Position	Year	Salary		Bonus			Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation(1)		All Other Compensation			Total
Joseph J. Grillo(2)	2011	$	337,500	$	—		$	—	$	—	$	—	$	51,346	(6)	$	388,846
Former Chief Executive Officer	2010	337,500		200,000		(12)			—		97,891		9,896		(7)	645,287
and President
Jason G. Prescott(3)	2011	$	80,769	$	25,000	(13)	$	—	$	—	$	—	$	—		$	105,769
Former Chief Financial Officer	2010	140,000		—							82,497		—			222,497
Lorraine M. Breece(4)	2011	$	56,538	$	—		$	—	$	—	$	—	$	1,284	(8)	$	57,822
Chief Financial Officer	2010	94,500		—			—		—		—		326,597		(9)	421,097
Parke H. Hess(5)	2011	$	77,538	$	25,000	(14)	$	—	$	—	$	—	$	15,230	(10)	$	117,768
Former Chief Operating Officer	2010		180,000		100,000	(15)		—		—		21,600		327,528	(11)		629,128

(1)   The amounts shown in this column were paid under the terms of incentive and recognition policies for fiscal years 2010, which were entered into with each of our named executive officers for the achievement of specified performance objectives. We did not have an incentive and recognition plan for 2011.

(2)   As a result of Mr. Grillo’s resignation on January 31, 2012 related to the change of control provisions in his employment agreement, which were triggered by the sale of Destron on July 22, 2011, we have accrued approximately $1.4 million of severance/change of control payments due to Mr. Grillo under the terms of his employment agreement, as amended, which included compensation relating to vesting of unvested restricted stock and stock options, payroll taxes and group medical expenses. See further discussion under section titled “Executive Employment Arrangements with Former Named Executive Officers.”

(3)   On June 30, 2010, we appointed Mr. Prescott as our chief financial officer.  Mr. Prescott served as our chief financial officer until July 31, 2011.

(4)   Ms. Breece was hired in April 2000 and served as our chief financial officer during the six months ended June 30, 2010.  She was rehired as our chief financial officer on August 1, 2011.

21

(5)   Mr. Hess was appointed as our chief operating officer in March 2008 and served as our chief operating officer until May 31, 2011.

(6)   Amount represents $9,074 for Mr. Grillo’s cellular telephone and internet services paid for during 2011, $1,214 for Mr. Grillo’s club dues during 2011 and $41,058 for accrued vacation hours paid to Mr. Grillo in 2011.

(7)   Amount represents $8,792for Mr. Grillo’s cellular telephone and internet services paid for during 2010, as well as $1,104 for Mr. Grillo’s club dues during 2010.

(8)   Amount represents $1,284 for Ms. Breece’s cellular telephone and internet services paid for during 2011.  We also paid Ms. Breece $13,370 for consulting services during 2011, which are not reflected in the compensation table above as she was paid for those services as an independent contractor.

(9)   Amount represents $2,389 for Ms. Breece’s cellular telephone and internet services paid for during 2010, $21,808 for accrued vacation hours paid in 2010 and $302,400 for amounts accrued in 2010 due to Ms. Breece under the terms of her severance agreement. See Note (4) above.

(10)   Amount represents $4,992 for Mr. Hess’s cellular telephone and internet services paid for during 2011, as well as $10,238 for accrued vacation hours paid to Mr. Hess in 2011.

(11)   Amount represents $8,374 for Mr. Hess’s cellular telephone and internet services paid for during 2010, $31,154 for vacation hours paid to Mr. Hess in 2010 and $288,000 for amounts accrued in 2010 due to Mr. Hess under the terms of his severance provisions of his employment agreement.  During 2010, Mr. Hess was notified that his services would be terminated effective December 31, 2010.  Subsequently, the Company extended Mr. Hess’s employment through May 31, 2011. The Company began making the severance payments to Mr. Hess on June 1, 2011.

(12)   Amount represents a discretionary bonus award to Mr. Grillo in 2010 to recognize Mr. Grillo for the additional duties and responsibilities he has assumed.

(13)   Amount represents a discretionary bonus award to Mr. Prescott in 2010 to recognize Mr. Preston for additional duties and responsibilities he assumed in connection with the sale of Destron.

(14)   Amount represents a discretionary bonus award to Mr. Hess in 2011 to recognize Mr. Hess for additional duties and responsibilities he assumed in the completion of divestiture and investment transactions.

(15)   Amount represents a discretionary bonus award to Mr. Hess in 2010 to recognize Mr. Hess for the additional duties and responsibilities he assumed related to critical divestiture and investment transactions.

Our 2011 Incentive and Recognition Policies

We did not establish an incentive and recognition plan for our named executive officers for 2011.

Outstanding Equity Awards as of December 31, 2011

The following table provides information as of December 31, 2011 regarding unexercised stock options and restricted stock awards granted to each of our named executive officers by us.

	Option Awards						Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unearned Options	Option Exercise Price		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares of Units of Stock That Have Not Vested		Equity Incentive Plan Awards: Number of Unearned Units or Other Rights That Have Not Vested	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
Joseph J. Grillo
	68,750	—	—	$	5.36	01/03/2018	—	—		—	—
	27,370	—	—	$	5.04	01/30/2018	—	—		—	—
	31,250	—	—	$	2.64	09/29/2018	—	—		—	—
	50,000	—	—	$	0.52	12/12/2018	—	—		—	—
	87,171	43,585 (1)	—	$	1.08	10/01/2019	—	—		—	—
	—	—	—		—	—	39,062 (2)	$	5,078	—	—
Jason G. Prescott	5,250	—	—	$	21.68	03/16/2014	—	—		—	—
	5,250	—	—	$	29.04	02/25/2015	—	—		—	—
	4,375	—	—	$	18.64	06/14/2016	—	—		—	—
	4,666	—	—	$	0.52	12/12/2018	—	—		—	—
	14,463		—	$	1.08	10/01/2019	—	—		—	—
Lorraine M. Breece
	1,128	—	—	$	3.84	01/01/2012	—	—		—	—
	6,104	—	—	$	20.24	07/29/2012	—	—		—	—
	6,250	—	—	$	25.84	07/06/2013	—	—		—	—
	17,500	—	—	$	8.88	08/15/2017	—	—		—	—
	437	—	—	$	12.00	06/20/2018	—	—		—	—
	437	—	—	$	25.60	06/20/2018	—	—		—	—
	625	—	—	$	12.00	06/20/2018	—	—		—	—
	8,334	—	—	$	0.52	12/12/2018	—	—		—	—
Parke H. Hess
	37,500	—	—	$	5.44	03/23/2018	—	—		—	—
	25,000	—	—	$	0.52	12/12/2018	—	—		—	—
	46,491		—	$	1.08	10/01/2019	—	—		—	—

22

(1) 43,585 options vested on January 31, 2012 (As a result of Mr. Grillo’s resignation on January 31, 2012 related to the change of control provisions in his employment agreement, which were triggered by the sale of Destron on July 22, 2011, the vesting of these options was accelerated and they became fully vested on January 31, 2012).

(2) 39,062 restricted shares of our common stock vested on January 31, 2012. (As a result of Mr. Grillo’s resignation on January 31, 2012 related to the change of control provisions in his employment agreement, which were triggered by the sale of Destron on July 22, 2011, the vesting of these shares of restricted stock was accelerated and they became fully vested on January 31, 2012).

2011 Option Exercises and Stock Vested

None of our named executive officers exercised options during the year ended December 31, 2011.  On October 1, 2011, 39,062 shares of restricted stock vested for Mr. Grillo and 8,641 shares of restricted stock vested for Mr. Prescott as a result of the termination of his employment on that date.  On May 31, 2011, 27,777 shares of restricted stock vested for Mr. Hess as a result of the termination of his employment on that date.

Pension Benefits

None of our named executive officers are covered by a pension plan or other similar benefit plan that provides for payments or other benefits at, following, or in connection with retirement.

Nonqualified Deferred Compensation

None of our named executive officers are covered by a defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.

Potential Payments Upon Termination or Change in Control

We have entered into employment agreements with certain of our former named executive officers that required us to make payments upon termination or a change in control of the Company. These arrangements are discussed below in the section “Executive Employment Arrangements with Former Named Executive Officers.”   By letter agreement, we are required to give Ms. Breece a ninety-day termination notice.

Executive Employment Arrangements with Current Named Executive Officers

We have not entered into any employment agreements, termination or change in control arrangements with our current named executive officers except as discussed above in the section “Potential Payments Upon Termination or Change in Control.”

Executive Employment Arrangements with Former Named Executive Officers

A discussion of formal employment agreements with two of our former named executive officers, Mr. Grillo and Mr. Hess, follows:

Joseph J. Grillo

In connection with Mr. Grillo’s appointment, we entered into an employment agreement with Mr. Grillo, (the “Grillo Employment Agreement”), effective as of January 1, 2008, which provided that Mr. Grillo receive a base salary of $375,000, (which was to be reviewed annually), and he was eligible to receive an annual bonus, subject to approval of our board of directors, ranging from 0% to 200% of base salary. Mr. Grillo’s bonus was to be determined based upon his performance in the following areas with related metrics and goals to be approved by our board of directors at the beginning of each performance year: company and divisional revenues, net income, cash generation, board discretion, investment analyst coverage, price per share, strategic deals/partnerships that enhance stockholder value and such other metrics and goals that our board of directors could establish. A non-equity incentive compensation plan was not provided to Mr. Grillo for fiscal year 2011. In 2009, Mr. Grillo elected to reduce his base salary by 10% to $337,500 which remained in effect for 2010 and 2011.

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The Grillo Employment Agreement was not for a fixed period of time but provided that, if we terminated Mr. Grillo’s employment without cause or Mr. Grillo terminated his employment for good reason or Mr. Grillo terminated his employment within six months of a change in control, Mr. Grillo would receive a payment equal to the sum of one and a half times his base salary plus one and a half times his target bonus, or approximately $1.0 million. If Mr. Grillo’s termination was the result of a change of control, Mr. Grillo was required to provide us a four-month notice of such resignation.

A change of control was defined as any bona fide, third-party change of control as follows:

(a) any person or entity (or persons or entities acting as a group) other than one of its Affiliates acquires stock of the Company that, together with stock then held by such person, entity or group, results in such person, entity or group holding more than fifty percent (50%) of the total combined voting power of all classes of the then issued and outstanding securities of the Company; or

(b) the sale of all or substantially all of the properties and assets of the Company to any person or entity which is not a subsidiary, parent or affiliate of the Company.  

The Grillo Employment Agreement also contained non-compete and confidentiality provisions that are effective from the date of employment through 18 months from the date the Grillo Employment Agreement is terminated.

The Destron Transaction represented a change of control as defined in the agreement. In addition, due to Allflex’s requirement that Mr. Grillo sign a three year non-competition agreement with Allflex in connection with the sale of Destron, we agreed to amend Mr. Grillo’s employment agreement to include an additional payment of one year base salary, or $0.3 million, and make other changes to the terms of payment. The additional one year base salary is payable on the earlier of the second anniversary of the closing date of the Destron Transaction or our winding down if, and only if, Mr. Grillo has not found employment by that time. In addition, if Mr. Grillo secures alternative employment during the third year after the closing of the Destron Transaction, he will be obligated to repay the amount earned during the third year up to the amount he received from us.

 On September 30, 2011, Mr. Grillo notified us of his intention to resign and on January 31, 2012 Mr. Grillo resigned.  We have accrued $1.4 million of severance/change of control payments due to Mr. Grillo under the terms of his employment agreement, as amended, which included compensation related to vesting of unvested restricted stock and stock option, payroll taxes and group medical expenses. This deferred expense was amortized over the four months ending January 31, 2012 and accordingly, we recorded $1.0 million of this expense during 2011.  In February 2012, the initial change of control payment of $1.0 million was placed in the Grillo Rabbi Trust and the funds will to be distributed to Mr. Grillo in August 2012.

Parke H. Hess

In connection with Mr. Hess’s appointment, we entered into an employment agreement with Mr. Hess, (the “Hess Employment Agreement”), effective as of March 24, 2008, which provided that Mr. Hess receive a base salary of $200,000, which was to be reviewed annually, less customary withholdings, and on the first date of his employment, a signing bonus in the amount of $50,000.  Under the Hess Employment Agreement, Mr. Hess was eligible to receive annual non-equity incentive compensation, subject to the approval of our board of directors, ranging from 0% to 120% of his base salary. A non-equity incentive compensation plan was not provided to Mr. Hess for fiscal year 2011. He received a discretionary bonus of $25,000 in 2011 for completing a critical divestiture and investment transaction for us.  In 2009, Mr. Hess elected to reduce his base salary by 10% to $180,000, which remained in effect through his termination date.

In June 2010, we notified Mr. Hess that his employment would be terminated effective December 31, 2010.  Accordingly, during 2010, we accrued $288,000 in severance payments due to Mr. Hess under the terms of his employment agreement.  Subsequently, the Company extended Mr. Hess’s employment through May 31, 2011. The Company began making the accrued severance payments to Mr. Hess on June 1, 2011.

2011 Director Compensation

Name	Fees Earned or Paid in Cash	Stock Awards	Option Awards	Non-Equity Incentive Plan Compensation	Nonqualified Deferred Compensation Earnings	All Other Compensation	Total
Daniel E. Penni(1)	$78,300	$—	$—	$—	$825(5)	—	$79,125
Dennis G. Rawan(2)	38,700	—	—	—	—	—	38,700
John R. Block(3)	24,300	—	—	—	—	—	24,300
Michael S. Zarriello(4)	35,100	—	—	—	—	—	35,100

(1)   As of December 31, 2011, Mr. Penni held options to purchase 82,112 shares of our common stock.

(2)   As of December 31, 2011, Mr. Rawan held options to purchase 53,437 shares of our common stock.

(3)   As of December 31, 2011, Mr. Block held options to purchase 146,875 shares of our common stock. Mr. Block was a director until September 30, 2011.

(4)   As of December 31, 2011, Mr. Zarriello held options to purchase 178,437 shares of our common stock.  Mr. Zarriello was a director until September 30, 2011.

(5)   Amount represents payments for personal cellular telephone usage during 2011.

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In 2011, the compensation committee of our board of directors determined that the annual compensation for outside directors was as follows: (i) $7,200 per quarter for board service, (ii) an additional $3,600 and $1,800 per quarter for service as the audit and governance committee chair and the compensation committee chair, respectively, (iii) an additional $900 and $900 per quarter for service as a member of the audit and governance committee and the compensation committee, respectively, and (iv) $17,550 per quarter for service as the chairman of our board of directors. Reasonable out of pocket travel expenses are reimbursed when incurred. Directors who are not also executive officers are not eligible to participate in any of our other benefit plans. Mr. Penni who is currently acting as our interim president and chief executive officer is not participating in any of our other benefit plans, nor is he being compensated for serving as our president and interim chief executive officer.

None of our directors exercised options during the year ended December 31, 2011.  On January 25, 2011, 1,250 shares of restricted stock vested for Messrs. Penni, Rawan, Block and Zarriello respectively.  On October 1, 2011, 4,166, and 4,166 shares of restricted stock vested for Messrs. Penni and Rawan, respectively.  On October 1, 2011, and partially as result of the termination of board service, 10,833 and 10,833 shares of restricted stock vested for Messrs. Block and Zarriello, respectively.

Stock Option and Other Compensation Plans

Stock Options and Other Awards Granted under the 1996 Non-Qualified Stock Option Plan, the 1999 Flexible Stock Plan, the 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan.

The 1996 Non-Qualified Stock Option Plan, the 1999 Flexible Stock Plan, the 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan (“Digital Angel Plan”) are long-term plans designed to link rewards with stockholder value over time. Stock options are granted to aid in the retention of employees and to align the interests of employees with stockholders. The value of the stock options to an employee increases as the price of our stock increases above the fair market value on the grant date, and the employee must remain in our employ for the period required for the stock option to be exercisable, thus providing an incentive to remain in our employ.

The 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan are also designed to encourage ownership of our common stock by employees, directors and other individuals, and to promote and further our best interests by granting options and other stock awards. Under these plans, we may grant awards of our common stock in lieu of payments of cash compensation pursuant to the mutual agreement of the participant and us.

Stock Options Granted under the 1999 Employees Stock Purchase Plan.

The 1999 Employees Stock Purchase Plan, which is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code (“Code”), provides eligible employees with an opportunity to accumulate, through payroll deductions, funds to be used toward the purchase of our stock pursuant to options granted under the plan. Options granted in connection with an offering under the plan permit the option holder to purchase our stock at a price per share equal to 85% of the fair market value of the stock on (i) the date on which the option was granted (i.e., the first business day of the offering) and (ii) the date on which the option was exercised (i.e., the last business day of the offering), whichever is less. Section 423 of the Code also provides certain favorable tax consequences to the option holder, provided that the stock acquired under the plan is held for a specified minimum period of time. Under FAS 123R, which became effective for us on January 1, 2006, options granted under the plan may be compensatory. During 2010 and 2011, we did not grant any options under the plan.  See Note 6 to our consolidated financial statements for the outstanding stock option details.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of March 20, 2012 by:

(i)     each person known to us to beneficially own more than 5% of our common stock,

(ii)    each of the named executive officers (as disclosed in the summary compensation table),

(iii)   each of our directors, and

(iv)   all of the current executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting and investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 20, 2012 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown opposite such person’s name. The calculation of the percentage of outstanding shares is based on 29,874,685 shares of our common stock outstanding on March 20, 2012, adjusted, where appropriate, for shares of stock beneficially owned but not yet issued.

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	Aggregate
	Number of Shares		Percent of
	Beneficially		Outstanding
Name of Beneficial Owner	Owned(1)		Shares
Five Percent Stockholders:
None		—		—	%
Executive Officers and Directors:
Joseph J. Grillo (2)		1,173,608		3.9	%
Lorraine M. Breece(2)		40,081		*
Jason G. Prescott(3)		34,004		*
Parke H. Hess (2) (4)		167,598		*
Daniel E. Penni(2)		214,990		*
Dennis G. Rawan(2)		81,045		*
All current directors and executive officers as a group (4 persons)		1,509,724		5.0	%

*	Represents less than 1% of the issued and outstanding shares of common stock of the Company.
(1)	This table includes presently exercisable stock options and options that are exercisable within sixty days of March 20, 2012, in accordance with Rule 13d-3(d) under the Exchange Act. The following directors and executive officers hold the number of exercisable options set forth following their respective names: Joseph J. Grillo — 308,126; Lorraine M. Breece— 39,687 shares; Jason G. Prescott — 34,004; Parke H. Hess — 108,991; Daniel E. Penni — 77,945; Dennis G. Rawan — 49,270; and all current directors and officers as a group — 475,028
(2)	All of these individuals share the same business address: 300 State Street, Suite 214, New London, CT 06320.
(3)	Mr. Prescott’s employment with the Company was terminated on August 1, 2011. His business address is 490 Villaume Avenue, South St. Paul, MN 55075
(4)	Mr. Hess’s employment with the Company was terminated on May 31, 2011.

Securities Authorized for Issuance Under Equity Compensation Plans

During 2011, we did not grant any shares of restricted common stock or options for executive compensation. Shares of our common stock that were authorized for issuance under our equity compensation plans is presented on page 11 of this Annual Report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Since the beginning of our fiscal year 2011, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at years ended 2010 and 2011, and in which any related person, including any current director, executive officer, holder of more than 5% of our capital stock, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

Consulting Agreement with Joseph Grillo

Effective February 1, 2012, we entered into a twelve month consulting agreement with our director, Joseph Grillo.  Per the terms, Mr. Grillo receives $25,000 per month in consulting fees, reimbursement for his monthly COBRA premiums and reimbursement up to $25,000 in executive outplacement fees for Mr. Grillo. The consulting agreement may be (a) terminated by either party upon 90 days prior written notice, and (b) extended beyond the initial 12 month term upon written agreement.

Review, Approval or Ratification of Transactions with Related Parties

Our audit and governance committee’s charter requires review of any proposed related party transaction, conflicts of interest and any other transaction for which independent review is necessary or desirable to achieve the highest standards of corporate governance. It is also our unwritten policy, which policy is not otherwise evidenced, for any related party transaction that involves more than a de minimis obligation, expense or payment, to obtain approval by our board of directors prior to our entering into any such transaction. In conformity with our various policies on related party transactions, the above transaction discussed in this “Certain Relationships and Related Transactions” section had been reviewed and approved by our board of directors.

Director Independence

Our board of directors and board committees are made up of directors that are both non-independent and independent.  The board of directors has determined that Mr. Rawan is independent under all applicable standards set forth by the SEC, including Exchange Act Rule 10A-3.  Additionally, with regard to his membership on the company’s audit committee, Mr. Rawan is the audit committee financial expert..  The board of directors has determined that Mr. Penni is non-independent, due to his recent appointment as president and interim chief executive officer of the company, notwithstanding the fact that Mr. Penni is not receiving any compensation for this role.  Mr. Grillo remains a non-independent director.

26

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Non-Audit Fees

For the fiscal years ended December 31, 2011 and 2010, fees for services provided by our principal accountant were as follows:

	2011		2010
Audit Fees	$	280,000	$	341,000
Audit-Related Fees (review of registration statements and other SEC filings)		18,000		13,000
Tax Fees		--		--
All Other Fees		--		--
Total Fees	$	298,000	$	354,000

None of the services described above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulation S-X promulgated by the SEC.

Compatibility of Fees

The audit and governance committee of the board of directors has considered whether the provision of the services listed above is compatible with maintaining the independent registered public accounting firm’s independence and has concluded that the services did not interfere with the independent registered public accounting firm’s independence.

Pre-Approval Policies and Procedures

The audit and governance committee has a policy for the pre-approval of audit services, requiring its prior approval for all audit and non-audit services provided by our independent registered public accounting firm. Our independent registered public accounting firm may not provide certain prohibited services. The audit and governance committee’s prior approval must be obtained before the scope or cost of pre-approved services is increased.

Consistent with these policies and procedures, the audit and governance committee approved all of the services rendered by EisnerAmper LLP during fiscal years 2011 and 2010, as described above.

27

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.

28

 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
	By:	/s/ Daniel E. Penni
Date: March 29, 2012		Daniel E. Penni
		President and Interim 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/ Daniel R. Penni	President, Interim Chief Executive Officer and	March 29, 2012
(Daniel E. Penni)	Chairman of the Board of Directors (Principal Executive Officer)
/s/ Lorraine M. Breece	Chief Financial Officer	March 29, 2012
(Lorraine M. Breece)
/s/ Joseph J. Grillo	Director	March 29, 2012
(Joseph J. Grillo)
/s/ Dennis G. Rawan	Director	March 29, 2012
(Dennis G. Rawan)

29

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, 2011 and 2010	F-3
Consolidated Statements of Operations for each of the years in the two-year period ended December 31, 2011	F-4
Consolidated Statements of Stockholders’ Equity for each of the years in the two-year period ended December 31, 2011	F-5
Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31, 2011	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, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years then ended. The 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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included 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, 2011 and 2010, 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/ EisnerAmper LLP

New York, New York

March 29, 2012

F-2

Digital Angel Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value)

	December 31,
	2011			2010
ASSETS
Current assets:
Cash	$	6,302		$	268
Accounts receivable assigned to factor, net of allowance for doubtful accounts of $56 in 2011 and $71 in 2010		434			358
Inventories		130			196
Other current assets		980			1,096
Current assets of discontinued operations		4,514			15,003
Total current assets		12,360			16,921
Property and equipment, net		195			100
Funds held in escrow from sale of business		2,500			—
Other assets, net		203			460
Other assets of discontinued operations, net		179			18,448
Total assets	$	15,437		$	35,929
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable	$	40		$	192
Accounts payable		844			1,924
Advances from factors		39			121
Accrued expenses		2,723			4,281
Deferred gain on sale		439			584
Current liabilities of discontinued operations		4,422			13,794
Total current liabilities		8,507			20,896
Commitments and contingencies (Note 10)
Warrant liabilities		—			362
Deferred gain on sale		2,500			—
Other liabilities		419			258
Other liabilities of discontinued operations		—			1,905
Total liabilities		11,426			23,421
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 and outstanding, 29,875 and 29,273, respectively)		299			293
Additional paid-in-capital		591,287			590,945
Accumulated deficit		(587,275	)		(577,021	)
Accumulated other comprehensive loss - foreign currency translation		(183	)		(1,674	)
Total Digital Angel Corporation stockholders’ equity		4,128			12,543
Non-controlling interest		(117	)		(35	)
Total stockholders’ equity		4,011			12,508
Total liabilities and stockholders’ equity	$	15,437		$	35,929

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,
	2011			2010
Revenue (including short-term equipment rentals of $1,109 and $1,095)	$	3,663		$	3,068
Cost of sales		2,139			1,701
Gross profit		1,524			1,367
Severance expense		1,016			1,201
Selling, general and administrative expenses		6,693			8,334
Total operating expenses	7,709			9,535
Operating loss		(6,185	)		(8,168	)
Other income (expense), net		917			(43	)
Interest expense		(3,435	)		(181	)
Loss from continuing operations before income tax benefit		(8,703	)		(8,392	)
Benefit from income taxes		110			664
Loss from continuing operations		(8,593	)		(7,728	)
(Loss) income from discontinued operations, net of income taxes of $32 and $197		(1,741	)		1,884
Net loss		(10,334	)		(5,844	)
Loss attributable to the noncontrolling interest, continuing operations		11			44
Loss (income) attributable to the noncontrolling interest, discontinued operations		69			(18	)
Net loss attributable to Digital Angel Corporation	$	(10,254	)	$	(5,818	)
Loss per common share attributable to Digital Angel Corporation common stockholders – basic and diluted:
Loss from continuing operations, net of noncontrolling interest	$	(0.29	)	$	(0.28	)
Loss (income) from discontinued operations, net of noncontrolling interest		(0.05	)		0.07
Net loss	$	(0.34	)	$	(0.21	)
Weighted average number of common shares outstanding — basic and diluted		29,872			27,794

See the accompanying notes to consolidated financial statements.

F-4

Digital Angel Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the Year Ended December 31, 2010

(in thousands)

	Common Stock				Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Stockholders’
	Number		Amount		Capital			Deficit			Income (Loss)			Interest			Equity
Balance, December 31, 2009		23,479	$	235	$	588,652		$	(571,203	)	$	(1,737	)	$	(4	)	$	15,943
Net loss		—		—		—			(5,818	)		—			(26	)		(5,844	)
Comprehensive loss:
Foreign currency translation		—		—		—			—			63			(5	)		58
Total comprehensive loss									(5,818	)		63			(31	)		(5,786	)
Issuance of common stock in settlement for payables and for services		786		8		351			—			—			—			359
Issuance of common stock and cash for price protection under the terms of a legal settlement		1,114		11		304			—			—			—			315
Sale of common stock and warrants		3,385		34		1,659			—			—			—			1,693
Fair value of warrant liability upon issuance		—		—		(526	)		—			—			—			(526	)
Sale of common stock under the Standby Equity Distribution Agreement		94		1		60			—			—			—			61
Common stock offering costs		—		—		(165	)		—			—			—			(165	)
Share-based compensation		415		4		706			—			—			—			710
Stock issuance costs		—		—		(96	)		—			—			—			(96	)
Balance, December 31, 2010		29,273	$	293	$	590,945		$	(577,021	)	$	(1,674	)	$	(35	)	$	12,508

See the accompanying notes to consolidated financial statements.

F-5

Digital Angel Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity (continued)

For the Year Ended December 31, 2011

(in thousands)

	Common Stock						Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Noncontrolling			Total Stockholders’
	Number			Amount			Capital			Deficit			Income (Loss)			Interest			Equity
Balance, December 31, 2010 (brought forward)		29,273		$	293		$	590,945		$	(577,021	)	$	(1,674	)	$	(35	)	$	12,508
Net loss		—			—			—			(10,254	)		—			(80	)		(10,334	)
Comprehensive loss:
Foreign currency translation adjustment reclassified to earnings		—			—			—			—			1,361						1,361
Other foreign currency translation adjustments														130			(2	)		128
Total comprehensive loss											(10,254	)		1,491			(82	)		(8,845	)
Issuance of common stock and cash for price protection under the terms of a legal settlement		197			2			(25	)		—			—			—			(23	)
Share-based compensation		512			5			381			—			—			—			386
Shares retired from treasury		(107	)		(1	)		1			—			—			—			—
Stock issuance costs		—			—			(15	)		—			—			—			(15	)