##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 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
  Delaware
    
    43-1641533(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 490 Villaume Avenue
South Saint Paul, Minnesota 55075
 
 (Title of each class)
    
    (Name of each exchange on which registered)Common Stock, $0.01 par value
    
    NASDAQ Capital Market
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o (Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   Class
    

Outstanding
at March 16, 2009Common Stock, $.01 par value per share
    
    17,505,718 shares




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##### 



DIGITAL ANGEL CORPORATION
 TABLE OF CONTENTS
 Item
    
    Description
    
    PagePART I1.
    
    Business
    
    
    31A.
    
    Risk Factors
    
    
    111B.
    
    Unresolved Staff Comments
    
    
    172.
    
    Properties
    
    
    173.
    
    Legal Proceedings
    
    
    174.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    186.
    
    Selected Financial Data
    
    
    217.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    237A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    378.
    
    Financial Statements and Supplementary Data
    
    
    389.
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    389A.
    
    Controls and Procedures
    
    
    389B.
    
    Other Information
    
    
    39PART III10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    3911.
    
    Executive Compensation
    
    
    3912.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    3913.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    3914.
    
    Principal Accountant Fees and Services
    
    
    39PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    
    39Signatures
    
    
    40Exhibit 3.7Exhibit 10.101 Letter AgreementExhibit 10.102 Form of Stock Option AgreementExhibit 21.1 List of SubsidiariesExhibit 23.1 Consent of Independent Registered Public Accounting FirmExhibit 31.1 302 Certificate of Chief Executive OfficerExhibit 31.2 302 Certificate of Chief Financial OfficerExhibit 32.1 906 CertificateExhibit 32.2
   2




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PART 1
 
 ITEM 1. BUSINESS
 Unless the context otherwise provides, when we refer to the Company, we, Digital Angel, or
us, we are referring to Digital Angel Corporation and its subsidiaries (either wholly- or
majority-owned). Formerly, we were known as Applied Digital Solutions, Inc.
 Overview
   
    
    Our Animal Identification segment focuses on developing, manufacturing
and marketing of visual and electronic identification tags and
implantable radio frequency identification (RFID) microchips,
primarily for identification, tracking and location of companion pets,
horses, livestock (e.g., cattle and hogs), fish and wildlife
worldwide, and, more recently, for animal bio-sensing applications,
such as temperature reading for companion pet, equine and livestock
applications; and
    
    Our Emergency Identification segment focuses on developing and
marketing global position systems (GPS) and GPS-enabled products
used for location tracking and message monitoring of pilots, aircraft,
maritime vehicles and outdoor adventurers in remote locations.
 Merger With Destron Fearing
  Geissler Technologies Corporation Acquisition
  Discontinued Operations
  Internet Website
 www.digitalangel.com www.destronfearing.com www.signatureindustries.com Form 10-Q,
  3




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Recent and Other Events
 Reverse Stock Split
  Industry Overview
     
    
    a tag, containing a microchip-equipped transponder, an antenna and a
capacitor, attached to the item to be identified, located or tracked,
which wirelessly transmits stored information to a receiver;
    
    one or more receivers, also referred to as readers or scanners,
which are devices that read the tag by sending out an RF signal to
which a tag, in the range of the signal, responds; and
    
    the equipment, cabling, computer network and software applications to
use the processed data for one or more applications.
  Pet Identification and Safeguarding
 New York Times
 Livestock/Fish Identification and Tracking and Food Safety and Traceability
   4




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Emergency Identification
    
    
    navigation, ranging from personal hand-held devices for trekking, to devices fitted to cars, trucks, ships and aircraft;
    
    synchronization;
    
    location-based services such as enhanced 911;
    
    surveying;
    
    entering data into a geographic information system;
    
    search and rescue;
    
    geophysical sciences; and
    
    tracking devices used in wildlife management.
  Operating Segments
 Financial Information About Our Segments
  For the Years EndedDecember 31,2008
    
    
    2007
    
    
    2006(in thousands)Animal Identification
    
    $
    38,501
    
    
    $
    43,825
    
    
    $
    38,058Emergency Identification
    
    
    39,671
    
    
    
    34,045
    
    
    
    16,351Corporate/ Eliminations
    
    
    
    
    
    
    (76
    )
    
    
    (356
    )Total
    
    $
    78,172
    
    
    $
    77,794
    
    
    $
    54,053
   5




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##### Table of Contents



Animal Identification Segment
 Principal Products and Services
  
    
    visual and electronic ear tags for livestock; and
    
    implantable microchips and RFID scanners for the companion pet, horse, livestock, fish and wildlife industries.
  TM ®
    Growth Strategy
  
    
    focus on animal identification products in the growing livestock, fish and wildlife industries;
    
    become a major player in the food source traceability and safety tracking systems arena; and
    
    increase our market share in the pet identification and equine markets with enhanced products
such as our temperature-sensing Bio-Thermo® product.
   6




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® ®
 New
Products
 ®
 ®
 Sales, Marketing and Distribution
 ® ® ® ®
 ® ® ®
    7




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Competition
   Manufacturing; Supply Arrangements
   Emergency Identification Segment
 Principal Products and Services
  
    
    GPS enabled search and rescue equipment and intelligent communications
products and services for mobile data and radio communications
applications, including our SARBETM and McMurdo brands,
which serve commercial and military markets; and
    
    alarm sounders for industrial use and other electronic components.
 GPS Enabled Search and Rescue Equipment and Intelligent Communications Products
 TM
 
  8




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FAST TM
  Alarm Sounders
  Growth Strategy
    FAST TM FAST
 Sales and Distribution
   Competition
   9




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Manufacturing; Supply Arrangements
  Government Regulation
 Animal Identification Laws and Regulations
  U.S. Federal Communications Commission Regulations
  Industry Canada Regulations
   Emergency Identification Laws and Regulations
  Intellectual Property
       10




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Seasonality
  Employees
  Backlog
  Geographic Areas
    United
    
    
    
    
    
    
    SouthStates
    
    
    Europe
    
    
    America
    
    
    Total2008Net revenue
    
    $
    29,275
    
    
    $
    47,839
    
    
    $
    1,058
    
    
    $
    78,172Property and equipment, net
    
    
    5,764
    
    
    
    2,829
    
    
    
    241
    
    
    
    8,8342007Net revenue
    
    $
    37,059
    
    
    $
    39,591
    
    
    $
    1,144
    
    
    $
    77,794Property and equipment, net
    
    
    6,792
    
    
    
    4,818
    
    
    
    404
    
    
    
    12,0142006Net revenue
    
    $
    32,566
    
    
    $
    20,791
    
    
    $
    696
    
    
    $
    54,053Property and equipment, net
    
    
    5,877
    
    
    
    4,242
    
    
    
    220
    
    
    
    10,339
   
 ITEM 1A. RISK FACTORS
 We have a history of operating losses and negative cash flows 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.
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Historical
losses and negative cash flows from operations raise concerns about
our ability to continue operations at the current level.
  The current volatility in economic conditions and the financial markets may adversely affect our
industry, business and financial performance.
   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.
  If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our stock could
be delisted by the Nasdaq Capital Market. If delisting occurs, it would adversely affect the market
liquidity of our common stock and harm our businesses.
  
    
    a $1.00 minimum closing bid price;
    
    shareholders equity of $2.5 million, market value of publicly-held shares of
$35 million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
    
    500,000 shares of publicly-held common stock with a market value of at least $1 million;
    
    300 round-lot stockholders; and
    
    compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
   12




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We have substantial debt and debt service.
    
    
    our ability to obtain additional financing in the future for
operations, capital expenditures, potential acquisitions, and other
purposes may be limited, or financing may not be available on terms
favorable to us or at all;
    
    a substantial portion of our cash flows from operations must be used
to pay our interest expense and repay our debt, which reduces the
funds that would otherwise be available to us for our operations and
future business opportunities; and
    
    our ability to continue operations at the current level could be negatively
affected if we cannot refinance our obligations before their due date.
  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,
as a result, the value of our common stock may be further diluted.
  We rely heavily on revenues derived from sales to various governmental agencies, and the loss of,
or a significant reduction in, orders from government agencies could result in significant losses
and deficits in cash flows from operations.
  Our Animal Identification segment relies heavily on revenue from a principal distributor and two
customers and the loss of the principal distributor and customers could negatively affect our
revenue, cash flows and results of operations.
   13




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We depend on a small team of senior management and key employees, and we may have difficulty
attracting and retaining additional personnel.
   Over the past few years, we have made significant changes in the nature and scope of our businesses
and we have expanded into different product lines, including new, unproven technologies.
  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.
  We may be subject to costly product liability claims from the use of our systems, which could
damage our reputation, impair the marketability of our systems and force us to pay costs and
damages that may not be covered by adequate insurance.
  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.
  
    
    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.
   14




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We obtain the implantable microchip used in our Animal Identification segments products from a
single supplier, making us vulnerable to supply disruptions that could constrain our sales of such
systems and/or increase the per-unit cost of production of the microchip.
  The expiration or invalidation of patents covering products and technologies in our Animal
Identification segment could expose us to potential competition that may have a material adverse
effect on our sales and results of operations.
  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 compete with other companies in the visual and electronic identification and locator markets,
and the products sold by our competitors could become more popular than our products or render our
products obsolete.
   Infringement by third parties on our intellectual property or development of substantially
equivalent proprietary technology by our competitors could negatively affect our businesses.
  
    
    maintain patent and trade secret protection;
    
    obtain future patents and licenses; and
    
    operate without infringing on the proprietary rights of third parties.
   15




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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.
  Domestic and foreign government regulation and other factors could impair our ability to develop
and sell our products in certain markets.
   Our foreign operations pose additional risks .
  Our results of operations may be adversely affected if we write-off additional goodwill and other
intangible assets.
  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.
  Currency exchange rate fluctuations could have an adverse effect on our sales and financial
results.
    16




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We
have issued and outstanding a significant number of derivative
securities representing potential common shares (e.g., options and
warrants) and the conversion or exercise of such securities may adversely affect the market price
of our common stock.
  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.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   Factory /Office
    
    
    Warehouse
    
    
    TotalOwned
    
    
    Leased
    
    
    Owned
    
    
    Leased
    
    
    Owned
    
    
    LeasedAnimal Identification
    
    
    31,892
    
    
    
    5,913
    
    
    
    47,800
    
    
    
    8,005
    
    
    
    79,692
    
    
    
    13,918Emergency Identification
    
    
    
    
    
    
    30,538
    
    
    
    
    
    
    
    78,730
    
    
    
    
    
    
    
    109,268Corporate (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    31,892
    
    
    
    36,451
    
    
    
    47,800
    
    
    
    86,735
    
    
    
    79,692
    
    
    
    123,186
 (1)
    
    In 2008, our headquarters moved to South Saint Paul, Minnesota and we subsequently subleased our previous Corporate office facility.  Factory /Office
    
    
    Warehouse
    
    
    TotalOwned
    
    
    Leased
    
    
    Owned
    
    
    Leased
    
    
    Owned
    
    
    LeasedEurope
    
    
    
    
    
    
    4,416
    
    
    
    
    
    
    
    8,005
    
    
    
    
    
    
    
    12,421Minnesota
    
    
    31,892
    
    
    
    
    
    
    
    47,800
    
    
    
    
    
    
    
    79,692
    
    
    
    South America
    
    
    
    
    
    
    1,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,497Texas
    
    
    
    
    
    
    4,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,966United Kingdom
    
    
    
    
    
    
    25,572
    
    
    
    
    
    
    
    78,730
    
    
    
    
    
    
    
    104,302Total
    
    
    31,892
    
    
    
    36,451
    
    
    
    47,800
    
    
    
    86,735
    
    
    
    79,692
    
    
    
    123,186
 
 ITEM 3. LEGAL PROCEEDINGS
   17




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    Approve an amendment to our Certificate of Incorporation, as amended, to effect a
one-for-eight reverse stock split of our common stock by proportionately decreasing the
authorized number of shares of common stock without changing the par value of our common
stock. The proposal received 86,355,625 votes for, 17,271,569 votes against and 924,412
votes abstaining.2.
    
    Approve an amendment to our Certificate of Incorporation, as amended, to increase the
number of authorized shares of common stock from 23,750,000 to 35,000,000. The proposal
received 82,276,009 votes for, 21,548,900 votes against and 726,697 votes abstaining
 
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
   High
    
    
    Low2008First Quarter
    
    $
    7.36
    
    
    $
    4.16Second Quarter
    
    
    6.88
    
    
    
    4.88Third Quarter
    
    
    6.16
    
    
    
    2.64Fourth Quarter
    
    
    2.88
    
    
    
    0.362007First Quarter
    
    $
    18.00
    
    
    $
    11.68Second Quarter
    
    
    12.80
    
    
    
    9.52Third Quarter
    
    
    11.12
    
    
    
    6.96Fourth Quarter
    
    
    8.40
    
    
    
    3.36
  th
 Holders
  Dividends
   18




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Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information(c)(a)
    
    
    (b)
    
    
    Number of securitiesNumber of
    
    
    Weighted-average
    
    
    remaining available forsecurities to be
    
    
    exercise price per
    
    
    future issuance underissued upon exercise
    
    
    share of outstanding
    
    
    equity compensation plansof outstanding options
    
    
    options, warrants
    
    
    (excluding securitiesPlan Category (1)
    
    warrants and rights
    
    
    and rights
    
    
    reflected in column (a))Equity compensation plans approved by security holders
    
    
    3,036,309
    
    
    $
    19.32
    
    
    
    20,732
    (2)Equity compensation plans not approved by security holders
(3)
    
    
    303,870
    
    
    
    11.08
    
    
    
    Total
    
    
    3,340,179
    
    
    
    18.58
    
    
    
    20,732
 (1)
    
    A narrative description of the material terms of our equity compensation plans is set forth in Note 12 to our consolidated financial statements.(2)
    
    Includes 119 shares available for future issuance under our 1999 Employees Stock Purchase Plan.(3)
    
    We have made grants outside of our equity plans and have outstanding options exercisable for shares of our common stock. These options were granted as an
inducement for employment or for the rendering of consulting services. Recent Sales of Unregistered Securities / Recent Purchases of Securities
   19




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Notwithstanding anything to the contrary set forth in any of our previous filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might
incorporate future filings, including this Annual Report in whole or in part, the following
Performance Graph shall not be incorporated by reference into any such filings.
 PERFORMANCE GRAPH
 ®
 Cumulative Total Return
Based on Investment of $100
December 31, 2003  December 31, 2008
 
  20




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ITEM 6. SELECTED FINANCIAL DATA
  For the Fiscal Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands)Statement of Operations Data:Revenue
    
    $
    78,172
    
    
    $
    77,794
    
    
    $
    54,053
    
    
    $
    53,853
    
    
    $
    44,460Cost of sales
    
    
    51,850
    
    
    
    48,963
    
    
    
    31,779
    
    
    
    29,663
    
    
    
    24,782Gross profit
    
    
    26,322
    
    
    
    28,831
    
    
    
    22,274
    
    
    
    24,190
    
    
    
    19,678Selling, general and administrative expense
    
    
    34,295
    
    
    
    44,338
    
    
    
    34,487
    
    
    
    28,065
    
    
    
    24,673Research and development
    
    
    3,146
    
    
    
    4,702
    
    
    
    3,442
    
    
    
    3,534
    
    
    
    2,712Restructuring, severance and separation expenses
    
    
    3,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill and asset impairments
    
    
    35,467
    
    
    
    4,632
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (50,264
    )
    
    
    (24,841
    )
    
    
    (15,655
    )
    
    
    (7,409
    )
    
    
    (7,707
    )Gain on sale of assets
    
    
    
    
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    Interest and other income (expense), net
    
    
    2,722
    
    
    
    444
    
    
    
    1,734
    
    
    
    2,056
    
    
    
    1,874Interest (expense) recovery
    
    
    (10,892
    )
    
    
    (6,720
    )
    
    
    (3,076
    )
    
    
    2,327
    
    
    
    (2,728
    )Loss from continuing operations before benefit
(provision) for taxes, minority interest and gains (losses)
attributable to capital transactions of subsidiary
    
    
    (58,434
    )
    
    
    (30,426
    )
    
    
    (16,997
    )
    
    
    (3,026
    )
    
    
    (8,561
    )Benefit (provision) for income taxes
    
    
    165
    
    
    
    (160
    )
    
    
    198
    
    
    
    656
    
    
    
    (1
    )Loss from continuing operations before minority interest and
gains (losses) attributable to capital transactions of
subsidiary
    
    
    (58,269
    )
    
    
    (30,586
    )
    
    
    (16,799
    )
    
    
    (2,370
    )
    
    
    (8,562
    )Minority interest
    
    
    (122
    )
    
    
    8,011
    
    
    
    2,368
    
    
    
    (73
    )
    
    
    (415
    )Net (loss) gain on capital transactions of subsidiary
    
    
    
    
    
    
    (629
    )
    
    
    322
    
    
    
    411
    
    
    
    11,090(Loss) gain attributable to changes in minority interest as
a result of capital transactions of subsidiary
    
    
    
    
    
    
    (3,632
    )
    
    
    135
    
    
    
    598
    
    
    
    (20,203
    )Loss from continuing operations
    
    
    (58,391
    )
    
    
    (26,836
    )
    
    
    (13,974
    )
    
    
    (1,434
    )
    
    
    (18,090
    )Income
(loss) from discontinued operations, net of income taxes of
$0, $1,043, $260, $209 and $76
    
    
    258
    
    
    
    (5,184
    )
    
    
    (13,235
    )
    
    
    (8,731
    )
    
    
    791Net loss
    
    
    (58,133
    )
    
    
    (32,020
    )
    
    
    (27,209
    )
    
    
    (10,165
    )
    
    
    (17,299
    )Preferred stock dividends and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,573
    )
    
    
    Accretion of beneficial conversion feature of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (58,133
    )
    
    $
    (32,020
    )
    
    $
    (27,209
    )
    
    $
    (12,212
    )
    
    $
    (17,299
    )
  21




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##### Table of Contents



(Loss) Earnings Per Share Adjusted For the Reverse Stock Splits
  For the Fiscal Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands)Net (loss) income per common share  basic and diluted:Continuing operations
    
    $
    (3.85
    )
    
    $
    (3.11
    )
    
    $
    (1.66
    )
    
    $
    (0.44
    )
    
    $
    (2.82
    )Discontinued operations
    
    
    0.02
    
    
    
    (0.60
    )
    
    
    (1.57
    )
    
    
    (1.11
    )
    
    
    0.12Net loss attributable to common shares  basic and diluted
    
    $
    (3.83
    )
    
    $
    (3.71
    )
    
    $
    (3.23
    )
    
    $
    (1.55
    )
    
    $
    (2.70
    )Average common shares outstanding (in thousands):Basic and diluted
    
    
    15,156
    
    
    
    8,640
    
    
    
    8,417
    
    
    
    7,862
    
    
    
    6,411
 As of December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    1,807
    
    
    $
    2,222
    
    
    $
    6,071
    
    
    $
    20,561
    
    
    $
    30,053Restricted cash
    
    
    
    
    
    
    90
    
    
    
    81
    
    
    
    310
    
    
    
    327Current assets from discontinued operations
    
    
    5
    
    
    
    23,503
    
    
    
    20,847
    
    
    
    23,248
    
    
    
    12,768Property and equipment
    
    
    8,834
    
    
    
    12,014
    
    
    
    10,339
    
    
    
    9,497
    
    
    
    7,063Goodwill and intangibles, net
    
    
    30,214
    
    
    
    57,367
    
    
    
    56,410
    
    
    
    52,850
    
    
    
    47,632Other assets from discontinued operations
    
    
    32
    
    
    
    35,729
    
    
    
    53,464
    
    
    
    58,109
    
    
    
    25,907Total assets
    
    
    64,206
    
    
    
    167,636
    
    
    
    172,225
    
    
    
    185,958
    
    
    
    140,188Current liabilities of discontinued operations
    
    
    10
    
    
    
    13,866
    
    
    
    30,434
    
    
    
    28,276
    
    
    
    18,768Long-term debt
    
    
    6,942
    
    
    
    17,217
    
    
    
    14,192
    
    
    
    15,657
    
    
    
    2,288Total debt
    
    
    15,524
    
    
    
    31,448
    
    
    
    20,585
    
    
    
    18,367
    
    
    
    2,485Other liabilities of discontinued operations
    
    
    
    
    
    
    6,439
    
    
    
    7,683
    
    
    
    5,666
    
    
    
    745Minority interest
    
    
    45
    
    
    
    208
    
    
    
    46,140
    
    
    
    48,325
    
    
    
    52,644Minority interest, discontinued operations
    
    
    
    
    
    
    13,157
    
    
    
    2,934
    
    
    
    1,437
    
    
    
    1,669Stockholders equity
    
    
    22,660
    
    
    
    70,995
    
    
    
    43,864
    
    
    
    66,546
    
    
    
    40,844
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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
    
    our growth strategies including, without limitation, our ability to deploy our products and services including Bio-Thermo;
    
    anticipated trends in our business and demographics;
    
    the ability to hire and retain skilled personnel;
    
    relationships with and dependence on technological partners;
    
    our reliance on government contractors;
    
    uncertainties relating to customer plans and commitments;
    
    our ability to successfully integrate the business operations of acquired companies;
    
    our future profitability and liquidity;
    
    our ability to maintain compliance with covenants under our credit facilities, including our ability to make principal and
interest payments when due;
    
    our ability to obtain patents, enforce those patents, preserve trade secrets and operate without infringing on the
proprietary rights of third parties;
    
    governmental export and import policies, global trade policies, worldwide political stability and economic growth;
    
    expectations about the outcome of litigation and asserted claims;
    
    regulatory, competitive or other economic influences;
    
    our ability to successfully mitigate the risks associated with foreign operations;
    
    our ability to successfully implement our business strategy;
    
    our expectation that we can achieve profitability in the future;
    
    our ability to fund our operations;
    
    borrowings under DSD Holdings existing bank and credit facilities as well as Signatures invoice discounting facility are
payable on demand and/or the facilities could be terminated at any time without notice;
    
    our reliance on third-party dealers to successfully market and sell our products;
    
    our reliance on a single source of supply for our implantable microchip;
    
    we may become subject to costly product liability claims and claims that our products infringe the intellectual property
rights of others;
  23




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##### Table of Contents




    
    our ability to comply with current and future regulations relating to our businesses;
    
    the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the
implantable microchip technology and that we are violating another partys intellectual property rights. If such a claim
is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable
microchip and be required to pay substantial damages;
    
    our ability to comply with the obligations in our various registration rights agreements;
    
    the impact of new accounting pronouncements;
    
    our ability to establish and maintain proper and effective internal accounting and financial controls;
    
    our ability to continue operations at their current level; and
    
    our actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk
factors described under the heading Risk Factors beginning on page 13 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.
   Overview
  
    
    developing, manufacturing and marketing of visual and electronic
identification tags and implantable RFID microchips primarily for
identification, tracking and location of companion pets, horses,
livestock (e.g., cattle and hogs), fish and wildlife worldwide, and,
more recently, for animal bio-sensing applications such as temperature
reading for companion pet and livestock applications; and
    
    developing and marketing global position systems (GPS) enabled
products used for location tracking and message monitoring of pilots,
aircraft and maritime vehicles in remote locations.
  Recent Events and other Significant Factors Affecting Our Results of Operations and Financial
Condition
  
    
    On October 30, 2008, our stockholders approved a one-for-eight reverse
stock split of our common stock by proportionately decreasing the
authorized number of shares of common stock without changing the par
value of our common stock. Our shareholders also approved an increase
in the number of shares of our authorized capital stock after taking
into account the reverse stock split, from 28,750,000 shares, of which
23,750,000 shares were common stock, to 40 million shares, of which
35 million shares are common stock. The reverse stock split was
effective on November 10, 2008.
    
    On November 12, 2008, we sold all of the shares we owned in VeriChip
to R&R Consulting Partners, LLC, a company controlled by Scott
Silverman, and Scott Silverman, a past executive officer and director
of the Company and VeriChip Corporation and the current Chairman of
the Board of VeriChip. As a result, our equity investment in VeriChip
in 2008 and VeriChips financial information for all other periods
presented are included in discontinued operations;
    
    On November 12, 2008, Destron Fearing entered into an Asset Purchase
Agreement with VeriChip whereby VeriChip acquired certain assets used
or useful in the operation of the business of human-implantable
passive radio-frequency products (Human RFID Business) in exchange
for approximately $0.5 million in cash and on November 14, 2008, we
entered into a purchase order with VeriChip whereby VeriChip acquired
certain inventory related to the Human RFID Business for approximately
$0.2 million in cash;
  24




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##### Table of Contents




    
    On November 26, 2008, we amended the Secured Term Note dated as of
August 31, 2007 in the original principal amount of $7,000,000 from us
originally in the favor of Kallina Corporation (Kallina) (2007
Note) and the Secured Term Note dated as of August 24, 2006 in the
original principal amount of $13,500,000 from us originally in the
favor of Laurus Master Fund, Ltd. (Laurus) (2006 Note). The
amendment reduced our monthly principal payments due under the 2006
Note and 2007 Note to approximately $0.1 million per month in the
aggregate during the period commencing on December 1, 2008 through
April 1, 2009 and approximately $0.2 million per month in the
aggregate during the period commencing on May 1, 2009 through
January 1, 2010. In exchange for the amendment, we agreed to pay the
lenders an aggregate fee of $0.8 million upon the earlier of the full
repayment or maturity date of the notes. The notes mature on February
1, 2010.
 Impact of Recently Issued Accounting Standards
  Business Segment Overview
      Sources of Revenue:
    
    2008
    
    
    2007
    
    
    2006Visual and electronic
identification tags and
implantable microchips
for companion pets,
horses, livestock, fish
and wildlife markets
from our Animal
Identification segment
    
    
    49.3
    %
    
    
    56.2
    %
    
    
    69.8
    %GPS enabled products
used for location
tracking and message
monitoring of vehicles,
pilots and aircraft in
remote locations from
our Emergency
Identification segment
    
    
    50.7
    
    
    
    43.8
    
    
    
    30.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Sources of Gross Profit:
    
    2008
    
    
    2007
    
    
    2006Visual and electronic
identification tags and
implantable microchips
for companion pets,
horses, livestock, fish
and wildlife markets
from our Animal
Identification segment
    
    
    31.0
    %
    
    
    45.6
    %
    
    
    62.7
    %GPS enabled products
used for location
tracking and message
monitoring of vehicles,
pilots and aircraft in
remote locations from
our Emergency
Identification segment
    
    
    69.0
    
    
    
    54.4
    
    
    
    37.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  25




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    66.3
    
    
    
    62.9
    
    
    
    58.8Gross profit
    
    
    33.7
    
    
    
    37.1
    
    
    
    41.2Selling, general and administrative expenses
    
    
    43.9
    
    
    
    57.0
    
    
    
    63.8Research and development expenses
    
    
    4.0
    
    
    
    6.0
    
    
    
    6.4Restructuring, severance and separation expenses
    
    
    4.7
    
    
    
    
    
    
    
    Goodwill and asset impairment charges
    
    
    45.4
    
    
    
    6.0
    
    
    
    Total operating costs and expenses
    
    
    98.0
    
    
    
    69.0
    
    
    
    70.2Operating loss
    
    
    (64.3
    )
    
    
    (31.9
    )
    
    
    (29.0
    )Gain on sale of asset
    
    
    
    
    
    
    0.9
    
    
    
    Interest and other income (expense), net
    
    
    3.4
    
    
    
    0.5
    
    
    
    3.2Interest expense
    
    
    (13.9
    )
    
    
    (8.6
    )
    
    
    (5.6
    )Loss from continuing operations before provision for income
taxes, minority interest and gain (loss) attributable to
capital transactions of subsidiary
    
    
    (74.8
    )
    
    
    (39.1
    )
    
    
    (31.4
    )Benefit (provision) for income taxes
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    0.3Loss from continuing operations before minority interest, and
gain (loss) attributable to capital transactions of subsidiary
    
    
    (74.6
    )
    
    
    (39.3
    )
    
    
    (31.1
    )Minority interest
    
    
    (0.1
    )
    
    
    10.3
    
    
    
    4.4Net (loss) gain on capital transactions of subsidiary
    
    
    
    
    
    
    (0.8
    )
    
    
    0.6(Loss) gain attributable to changes in minority interest as a
result of capital transactions of subsidiary
    
    
    
    
    
    
    (4.7
    )
    
    
    0.3Loss from continuing operations
    
    
    (74.7
    )
    
    
    (34.5
    )
    
    
    (25.8
    )Income (loss) from discontinued operations, net of income taxes
    
    
    0.3
    
    
    
    (6.7
    )
    
    
    (24.5
    )Net loss attributable to common stockholders
    
    
    (74.4
    )%
    
    
    (41.2
    )%
    
    
    (50.3
    )%
   
    
    To streamline our segments operations and improve our supply chain management;
    
    To streamline and consolidate our corporate structure, which was exemplified by the
DA Merger, which eliminated redundant overhead costs;
    
    To divest of non-core assets and businesses;
    
    To attempt to produce additional cash flow and revenue from our technology products;
  26




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##### Table of Contents




    
    To transition some of our in-house manufacturing to lower-cost countries;
    
    To instill a pay for performance culture; and
    
    To continue to grow through strategic acquisitions or partnerships.
  Critical Accounting Policies and Estimates
  Revenue Recognition
  Goodwill and Other Intangible Assets
  Capital Transactions of Subsidiaries
 Net Gain/Loss on Capital Transactions of Subsidiaries
  Gain/Loss Attributable to Changes in Minority Interest as a Result of Capital Transactions of
Subsidiaries
   27




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Principles of Consolidation
  Stock-Based Compensation
    Inventory Obsolescence
  Accounting for Income Taxes
     28




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Results of Operations from Continuing Operations
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(in thousands)Animal Identification
    
    $
    (43,949
    )
    
    $
    (18,124
    )
    
    $
    (4,048
    )Emergency Identification
    
    
    (44
    )
    
    
    86
    
    
    
    (1,230
    )Corporate/Eliminations (1)
    
    
    (14,441
    )
    
    
    (12,388
    )
    
    
    (11,719
    )Total
    
    $
    (58,434
    )
    
    $
    (30,426
    )
    
    $
    (16,997
    )
 (1)
    
    The Corporate/Eliminations category includes all amounts given effect to in the consolidation of our
subsidiaries, such as the elimination of inter-segment revenues, expenses, assets and liabilities.
Corporate/Eliminations also includes certain selling, general and administrative expense (reductions) and
other income (expenses) associated with companies sold or closed in 2001 and 2002, and interest expense and
other expenses associated with corporate activities and functions.  Year Ended December 31,2008
    
    
    2007
    
    
    2006(in thousands)Animal Identification
    
    $
    38,501
    
    
    $
    43,825
    
    
    $
    38,058Emergency Identification
    
    
    39,671
    
    
    
    34,045
    
    
    
    16,351Corporate/Eliminations
    
    
    
    
    
    
    (76
    )
    
    
    (356
    )Total
    
    $
    78,172
    
    
    $
    77,794
    
    
    $
    54,053
 Animal Identification Segment
 Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 % of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue  external customers
    
    $
    38,501
    
    
    
    100.0
    %
    
    $
    43,749
    
    
    
    99.8
    %
    
    $
    (5,248
    )
    
    
    (12.0
    )%Revenue  intercompany
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    0.2
    
    
    
    (76
    )
    
    
    (100.0
    )Total revenue
    
    
    38,501
    
    
    
    100.0
    
    
    
    43,825
    
    
    
    100.0
    
    
    
    (5,324
    )
    
    
    (12.1
    )Gross profit  external customers
    
    
    8,355
    
    
    
    21.7
    
    
    
    13,133
    
    
    
    30.0
    
    
    
    (4,778
    )
    
    
    (36.4
    )Gross profit  intercompany
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    0.1
    
    
    
    (42
    )
    
    
    (100.0
    )Total gross profit
    
    
    8,355
    
    
    
    21.7
    
    
    
    13,175
    
    
    
    30.1
    
    
    
    (5,088
    )
    
    
    (38.6
    )Selling, general and administrative expenses
    
    
    11,550
    
    
    
    30.0
    
    
    
    23,275
    
    
    
    53.1
    
    
    
    (11,725
    )
    
    
    (50.4
    )Research and development expenses
    
    
    1,993
    
    
    
    5.2
    
    
    
    2,560
    
    
    
    5.9
    
    
    
    (567
    )
    
    
    (22.1
    )Restructuring, severance and separation
expenses
    
    
    2,357
    
    
    
    6.1
    
    
    
    
    
    
    
    
    
    
    
    2,357
    
    
    NM
    (1)Goodwill and asset impairment charges
    
    
    34,171
    
    
    
    87.2
    
    
    
    3,086
    
    
    
    7.0
    
    
    
    30,489
    
    
    NMOperating loss
    
    $
    (41,716
    )
    
    NM
    %
    
    $
    (15,746
    )
    
    
    (35.9
    )%
    
    $
    (25,970
    )
    
    NM
 (1)
    
    NM = Not meaningful Revenue

 Gross Profit and Gross Profit Margin 
  29




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##### Table of Contents



Selling, General and Administrative Expenses 
 Research and Development Expenses 
 Restructuring, Severance and Separation Expenses
 Goodwill and Asset Impairment Charges 
 Outlook and Trends
  ®
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % of
    
    
    
    
    
    
    % of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue  external customers
    
    $
    43,749
    
    
    
    99.8
    %
    
    $
    37,702
    
    
    
    99.0
    %
    
    $
    6,047
    
    
    
    16.0
    %Revenue  intercompany
    
    
    76
    
    
    
    0.2
    
    
    
    356
    
    
    
    1.0
    
    
    
    (280
    )
    
    
    (78.6
    )Total revenue
    
    
    43,825
    
    
    
    100.0
    
    
    
    38,058
    
    
    
    100.0
    
    
    
    5,767
    
    
    
    15.2Gross profit  external customers
    
    
    13,133
    
    
    
    30.0
    
    
    
    13,967
    
    
    
    36.7
    
    
    
    (834
    )
    
    
    (6.0
    )Gross profit  intercompany
    
    
    42
    
    
    
    0.1
    
    
    
    216
    
    
    
    0.6
    
    
    
    (174
    )
    
    
    (80.5
    )Total gross profit
    
    
    13,175
    
    
    
    30.1
    
    
    
    14,183
    
    
    
    37.3
    
    
    
    (1,008
    )
    
    
    (7.1
    )Selling, general and administrative
expenses
    
    
    23,275
    
    
    
    53.1
    
    
    
    15,522
    
    
    
    40.8
    
    
    
    7,753
    
    
    
    50.0Research and development expenses
    
    
    2,560
    
    
    
    5.9
    
    
    
    2,668
    
    
    
    7.0
    
    
    
    (108
    )
    
    
    (4.1
    )Goodwill and asset impairment charges
    
    
    3,086
    
    
    
    7.0
    
    
    
    
    
    
    
    
    
    
    
    3,086
    
    
    NM
    (1)Operating loss
    
    $
    (15,746
    )
    
    
    (35.9
    )%
    
    $
    (4,007
    )
    
    
    (10.5
    )%
    
    $
    (11,739
    )
    
    NM
 (1)
    
    NM = Not meaningful Revenue 
 Gross Profit and Gross Profit Margin 
  30




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##### Table of Contents



Selling, General and Administrative Expenses 
 Research and Development Expenses 
 Merger Expense 
 Goodwill and Asset Impairment Charges 
 Emergency Identification Segment
 Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 % of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    39,671
    
    
    
    100.0
    %
    
    $
    34,045
    
    
    
    100.0
    %
    
    $
    5,626
    
    
    
    16.5
    %Gross profit
    
    
    17,967
    
    
    
    45.3
    
    
    
    15,698
    
    
    
    46.1
    
    
    
    2,269
    
    
    
    14.5Selling, general and
administrative expenses
    
    
    16,104
    
    
    
    40.6
    
    
    
    13,304
    
    
    
    39.1
    
    
    
    2,800
    
    
    
    21.0Research and development expenses
    
    
    1,153
    
    
    
    2.9
    
    
    
    2,142
    
    
    
    6.3
    
    
    
    (989
    )
    
    
    (46.2
    )Restructuring, severance and
separation expenses
    
    
    596
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    596
    
    
    NM
    (1)Operating income
    
    $
    114
    
    
    
    0.2
    %
    
    $
    252
    
    
    
    0.7
    %
    
    $
    (138
    )
    
    
    (54.8
    )
 (1)
    
    NM = Not meaningful Revenue 
 Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expenses 
  31




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Research and Development Expenses 
 Restructuring, Severance and Separation Expenses
 Outlook and Trends
   Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 % of
    
    
    
    
    
    
    % of
    
    
    Change2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Increase (Decrease)(dollar amounts in thousands)Revenue
    
    $
    34,045
    
    
    
    100.0
    %
    
    $
    16,351
    
    
    
    100.0
    %
    
    $
    17,694
    
    
    NM
    (1)%Gross profit
    
    
    15,698
    
    
    
    46.1
    
    
    
    8,307
    
    
    
    50.8
    
    
    
    7,391
    
    
    
    89.0Selling, general and
administrative expenses
    
    
    13,304
    
    
    
    39.1
    
    
    
    8,707
    
    
    
    53.2
    
    
    
    4,597
    
    
    
    52.8Research and development expenses
    
    
    2,142
    
    
    
    6.3
    
    
    
    774
    
    
    
    4.7
    
    
    
    1,368
    
    
    NMOperating income (loss)
    
    $
    252
    
    
    
    0.7
    %
    
    $
    (1,174
    )
    
    
    (7.2
    )%
    
    $
    1,426
    
    
    NM
 (1)
    
    NM = Not meaningful Revenue 
 Gross Profit and Gross Profit Margin 
 Selling, General and Administrative Expenses 
 Research and Development Expenses 
  32




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##### Table of Contents



Corporate/Eliminations Segment
 Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 Change2008
    
    
    2007
    
    
    Increase (Decrease)(dollar amounts in thousands)Elimination of intercompany revenue
    
    $
    
    
    
    $
    (76
    )
    
    $
    76
    
    
    
    100.0
    %Elimination of intercompany product gross profit
    
    
    
    
    
    
    (42
    )
    
    
    42
    
    
    
    100.0Selling, general and administrative expenses
    
    
    6,641
    
    
    
    7,759
    
    
    
    (1,118
    )
    
    
    (14.4
    )Restructuring expenses
    
    
    725
    
    
    
    
    
    
    
    725
    
    
    NM
    (1)Goodwill and asset impairment charges
    
    
    1,296
    
    
    
    1,546
    
    
    
    (250
    )
    
    
    (16.2
    )Operating loss
    
    $
    (8,662
    )
    
    $
    (9,233
    )
    
    $
    (571
    )
    
    
    (6.2
    )
 (1)
    
    NM = Not meaningful Selling, General and Administrative Expenses 
 Restructuring Expenses
 Goodwill and Asset Impairment Charges 
 Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 Change2007
    
    
    2006
    
    
    Increase (Decrease)(dollar amounts in thousands)Elimination of intercompany revenue
    
    $
    (76
    )
    
    $
    (356
    )
    
    $
    280
    
    
    
    (78.6
    )%Elimination of intercompany product gross profit
    
    
    (42
    )
    
    
    (216
    )
    
    
    174
    
    
    
    (80.5
    )Selling, general and administrative expenses
    
    
    7,759
    
    
    
    10,258
    
    
    
    (2,499
    )
    
    
    (24.4
    )Goodwill and asset impairment charges
    
    
    1,546
    
    
    
    
    
    
    
    1,546
    
    
    NM
    (1)Operating loss
    
    $
    (9,233
    )
    
    $
    (10,474
    )
    
    $
    1,241
    
    
    
    (11.8
    )
 (1)
    
    NM = Not meaningful Selling, General and Administrative Expenses 
 Goodwill and Asset Impairment Charges 
  33




---



##### Table of Contents



Consolidated
 Interest and Other Income, net
   Interest Expense
    Income Taxes
  Net Loss from Continuing Operations
   LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS
    34




---



##### Table of Contents




    
    Accounts and unbilled receivables, net of allowance for doubtful
accounts were $10.9 million and $16.1 million at December 31, 2008 and
2007, respectively. The decrease is primarily due to decreased sales
at Destron Fearing in the current period as sales in December 2008
were approximately $2.0 million below the same period in 2007,
decreased sales during the period at Destron Fearing A/S, as well as
unfavorable exchange rates for Signatures operations.  We
anticipate our accounts receivable to increase in 2009 as a result of
our sales levels.
    
    Inventories decreased to $8.9 million at December 31, 2008, compared
to $14.2 million at December 31, 2007. The change was due primarily to
an inventory write-off of obsolete inventory and inventory identified
as part of the restructuring efforts, the implementation of inventory
reduction procedures and just-in-time inventory methods as well as the
unfavorable exchange rates for Signatures operations.  We
expect our inventory levels to increase mid-year as we manufacture
products for the PELs contract, but end the year at a level
relatively consistent with 2008.
    
    Accounts payable decreased $4.2 million, or 30.2%, to $9.7 million at
December 31, 2008, from $13.9 million at December 31, 2007. The
decrease was primarily a result of an overall decrease in expenditures
due to budget cuts and inventory reduction efforts, unfavorable
exchange rates for Signatures operations as well as the general
timing of billings and payments of purchases.  We anticipate our
accounts payable levels to increase mid-year, along with the
inventory levels, but then decrease to a level consistent with
2008.
    
    Accrued expenses decreased $0.7 million, or 7.2%, to $9.1 million at
December 31, 2008, from $9.8 million at December 31, 2007. The
decrease was primarily due to decreased accrued purchases at Destron
Fearing slightly offset by increased accruals for legal and bonus
expenses at our Corporate segment. We expect our accrued expenses to stay
relatively constant in 2009.
   Financial Condition
 Financing Agreements and Debt Obligations
  Destron Fearings Revolving Facility
  Signatures Invoice Discounting Agreement
   35




---



##### Table of Contents



Destron Fearing A/Ss Line of Credit
  Nordisk Factoring Agreement
  Liquidity
     36




---



##### Table of Contents



Contractual Obligations
  Payments Due By PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(amounts in thousands)Notes payable, long-term
debt and other long-term
obligations
    
    $
    15,524
    
    
    $
    8,582
    
    
    $
    6,878
    
    
    $
    64
    
    
    $
    Operating lease obligations
    
    
    16,664
    
    
    
    1,634
    
    
    
    2,226
    
    
    
    836
    
    
    
    11,968Total
    
    $
    32,188
    
    
    $
    10,216
    
    
    $
    9,104
    
    
    $
    900
    
    
    $
    11,968
  Outlook
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    For the Year EndedDecember 31, 2008(in millions)Exchange Rate Sensitivity:Net foreign currency gains recorded in our consolidated statements of operations
    
    $
    303Foreign currency translation adjustments included in other comprehensive loss
    
    $
    2,736
     37




---



##### Table of Contents



Carrying Value atDecember 31, 2008(in millions)Total notes payable, long-term debt and advances from factors, including current portion
    
    $
    16,998Notes payable bearing interest at fixed interest rates
    
    $
    9,473Weighted-average interest rate during 2008
    
    
    18.6
    %
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Report of Management on Internal Control Over Financial Reporting. Internal Controls  Integrated Framework
  (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.
   38




---



##### Table of Contents



Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial
Reporting
  Changes in Internal Control over Financial Reporting.
  
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)(1)
    
    The financial statements and financial statement schedule listed below are included in this reportReport of Independent Registered Public Accounting FirmFinancial StatementsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsFinancial Statement ScheduleSchedule of Valuation and Qualifying Accounts(a)(2)
    
    Financial statement schedules have been included in Item 15(a)(1) above.(a)(3)
    
    ExhibitsSee the Exhibit Index filed as part of this Annual Report on Form 10-K.
  39




---



##### Table of Contents



DIGITAL ANGEL CORPORATIONBy:
    /s/ Joseph J. GrilloDate: March 31, 2009
    
    Joseph J. GrilloPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Joseph J. Grillo
    
    President, Chief Executive
Officer and Director
    
    March 31, 2009(Joseph J. Grillo)
    
    (Principal
Executive Officer)/s/ Lorraine M. Breece
    
    Senior Vice President and Chief
Financial Officer
    
    March 31, 2009(Lorraine M. Breece)
    
    (Principal Accounting Officer)/s/ Daniel E. Penni
    
    Chairman of the Board of Directors
    
    March 31, 2009(Daniel E. Penni)/s/ John R. Block
    
    Director
    
    March 31, 2009(John R. Block)/s/ Dennis G. Rawan
    
    Director
    
    March 31, 2009(Dennis G. Rawan)/s/ Constance K. Weaver
    
    Director
    
    March 31, 2009(Constance K. Weaver)/s/ Michael S. Zarriello
    
    Director
    
    March 31, 2009(Michael S. Zarriello)
  40




---



##### Table of Contents



DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 CONTENTS
 PageReports of Independent Registered Public Accounting Firm
    
    
    2Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    
    4Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2008
    
    
    5Consolidated Statements of Stockholders Equity for each of the years in the three-year period ended December 31, 2008
    
    
    6Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008
    
    
    9Notes to Consolidated Financial Statements
    
    
    10Schedule
of Valuation and Qualifying Accounts
    
    
    45
  1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Accounting for Uncertainty in Income
Taxes  an interpretation of FASB No. 109,
  
  2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
    Internal Control
 Integrated Framework
 Accounting for Uncertainty
in Income Taxes  an interpretation of FASB No. 109
 
  3




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (in thousands, except par value)
 December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,807
    
    
    $
    2,222Restricted cash
    
    
    
    
    
    
    90Accounts receivable, net of allowance for doubtful accounts of $503 in 2008 and $280 in 2007
    
    
    10,945
    
    
    
    16,143Note receivable
    
    
    450
    
    
    
    Inventories
    
    
    8,922
    
    
    
    14,193Deferred taxes
    
    
    130
    
    
    
    180Other
current assets
    
    
    1,530
    
    
    
    2,235Current assets of discontinued operations
    
    
    5
    
    
    
    23,503Total current assets
    
    
    23,789
    
    
    
    58,566Property and equipment, net
    
    
    8,834
    
    
    
    12,014Goodwill, net
    
    
    8,386
    
    
    
    35,194Intangibles, net
    
    
    21,828
    
    
    
    22,173Note receivable
    
    
    1,015
    
    
    
    Other assets, net
    
    
    322
    
    
    
    3,960Other assets of discontinued operations
    
    
    32
    
    
    
    35,729Total assets
    
    $
    64,206
    
    
    $
    167,636LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable and current maturities of long-term debt
    
    $
    8,581
    
    
    $
    14,231Accounts payable
    
    
    9,704
    
    
    
    13,907Advances from factors
    
    
    1,474
    
    
    
    1,992Accrued expenses
    
    
    9,133
    
    
    
    9,839Deferred revenue
    
    
    840
    
    
    
    804Current liabilities of discontinued operations
    
    
    10
    
    
    
    13,866Total current liabilities
    
    
    29,742
    
    
    
    54,639Long-term debt and notes payable
    
    
    6,943
    
    
    
    17,217Deferred taxes
    
    
    2,593
    
    
    
    2,229Other liabilities
    
    
    2,223
    
    
    
    2,752Other liabilities of discontinued operations
    
    
    
    
    
    
    6,439Total liabilities
    
    
    41,501
    
    
    
    83,276Minority interest
    
    
    45
    
    
    
    208Minority interest, discontinued operations
    
    
    
    
    
    
    13,157Total minority interest
    
    
    45
    
    
    
    13,365Commitments and contingencies:Stockholders equity:Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil)
    
    
    
    
    
    
    Common shares ($.01 par value; shares authorized 35,000; shares issued, 16,080 and 13,135;
shares outstanding, 15,950 and 13,066)
    
    
    161
    
    
    
    131Additional paid-in-capital
    
    
    584,466
    
    
    
    573,565Accumulated deficit
    
    
    (558,839
    )
    
    
    (500,706
    )Accumulated other comprehensive (loss) income  foreign currency translation
    
    
    (2,308
    )
    
    
    428Subtotal
    
    
    23,480
    
    
    
    73,418Treasury stock (carried at cost, 130 and 69 shares)
    
    
    (820
    )
    
    
    (2,423
    )Total stockholders equity
    
    
    22,660
    
    
    
    70,995Total liabilities and stockholders equity
    
    $
    64,206
    
    
    $
    167,636
 See the accompanying notes to consolidated financial statements.
  4




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
 
 Consolidated Statements of Operations
 (in thousands, except per share data)
 For the years ended December 31,2008
    
    
    2007
    
    
    2006Revenue
    
    $
    78,172
    
    
    $
    77,794
    
    
    $
    54,053Cost of sales
    
    
    51,850
    
    
    
    48,963
    
    
    
    31,779Gross profit
    
    
    26,322
    
    
    
    28,831
    
    
    
    22,274Selling, general and administrative expenses
    
    
    34,295
    
    
    
    44,338
    
    
    
    34,487Research and development expenses
    
    
    3,146
    
    
    
    4,702
    
    
    
    3,442Restructuring, severance and separation expenses
    
    
    3,678
    
    
    
    
    
    
    
    Goodwill and asset impairments
    
    
    35,467
    
    
    
    4,632
    
    
    
    Operating loss
    
    
    (50,264
    )
    
    
    (24,841
    )
    
    
    (15,655
    )Gain on sale of assets
    
    
    
    
    
    
    691
    
    
    
    Interest and other income (expense), net
    
    
    2,722
    
    
    
    444
    
    
    
    1,734Interest expense
    
    
    (10,892
    )
    
    
    (6,720
    )
    
    
    (3,076
    )Loss from continuing operations before taxes, minority interest and gains (losses)
attributable to capital transactions of subsidiary
    
    
    (58,434
    )
    
    
    (30,426
    )
    
    
    (16,997
    )Benefit (provision) for income taxes
    
    
    165
    
    
    
    (160
    )
    
    
    198Loss from continuing operations before minority interest and gains (losses)
attributable to capital transactions of subsidiary
    
    
    (58,269
    )
    
    
    (30,586
    )
    
    
    (16,799
    )Minority interest
    
    
    (122
    )
    
    
    8,011
    
    
    
    2,368Net (loss) gain on capital transactions of subsidiary
    
    
    
    
    
    
    (629
    )
    
    
    322(Loss) gain attributable to changes in minority interest as a result of capital
transactions of subsidiary
    
    
    
    
    
    
    (3,632
    )
    
    
    135Loss from continuing operations
    
    
    (58,391
    )
    
    
    (26,836
    )
    
    
    (13,974
    )Income
(loss) from discontinued operations, net of income taxes of $0,
$1,043 and $260
    
    
    258
    
    
    
    (5,184
    )
    
    
    (13,235
    )Net loss
    
    $
    (58,133
    )
    
    $
    (32,020
    )
    
    $
    (27,209
    )(Loss) income per common share  basic and diluted:Loss from continuing operations
    
    $
    (3.85
    )
    
    $
    (3.11
    )
    
    $
    (1.66
    )Income (loss) from discontinued operations
    
    
    0.02
    
    
    
    (0.60
    )
    
    
    (1.57
    )Net loss
    
    $
    (3.83
    )
    
    $
    (3.71
    )
    
    $
    (3.23
    )Weighted average number of common shares outstanding  basic and diluted
    
    
    15,156
    
    
    
    8,640
    
    
    
    8,417
 See the accompanying notes to consolidated financial statements.
  5




---



##### Table of Contents



Digital Angel Corporation and Subsidiaries
 
 Consolidated Statements of Stockholders Equity
 For the Years Ended December 31, 2008, 2007 and 2006
 (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Notes
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    Received for
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    Shares Issued
    
    
    EquityBalance  December 31,
2005
    
    
    8,392
    
    
    $
    84
    
    
    $
    510,348
    
    
    $
    (441,387
    )
    
    $
    (122
    )
    
    $
    (1,777
    )
    
    $
    (600
    )
    
    $
    66,546Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )Comprehensive income 
Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    446Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    (26,763
    )Adjustment to allowance
for uncollectible
portion of notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    412Warrant anti-dilution
charge
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Stock option extensions
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145Issuance of common
stock warrants
    
    
    
    
    
    
    
    
    
    
    1,525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,525Issuance of common
shares for purchase of
Signature Industries
Limited minority
interest
    
    
    44
    
    
    
    
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Issuance of common
shares
    
    
    12
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194Issuance of common
shares under share
exchange agreement
    
    
    57
    
    
    
    1
    
    
    
    970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    971Restricted stock issued
under incentive plan
    
    
    6
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )VeriChip options issued
for services
    
    
    
    
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Adjustment for notes
received for shares
issued
    
    
    (18
    )
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    Retirement of common
shares
    
    
    (107
    )
    
    
    (1
    )
    
    
    (260
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261
    )Balance  December 31,
2006
    
    
    8,386
    
    
    $
    84
    
    
    $
    513,829
    
    
    $
    (468,596
    )
    
    $
    324
    
    
    $
    (1,777
    )
    
    $
    
    
    
    $
    43,864
  6




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity (continued)
For the Years Ended December 31, 2008, 2007 and 2006  (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    EquityBalance  December 31, 2006
(brought forward)
    
    
    8,386
    
    
    $
    84
    
    
    $
    513,829
    
    
    $
    (468,596
    )
    
    $
    324
    
    
    $
    (1,777
    )
    
    $
    43,864Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,020
    )
    
    
    
    
    
    
    
    
    
    
    (32,020
    )Comprehensive income 
Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    104Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,020
    )
    
    
    104
    
    
    
    
    
    
    
    (31,916
    )Effect of adopting FASB
Interpretation No. 48
Accounting for
Uncertainties in Income
Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    (90
    )Issuance of common shares
for settlement to Silverman
    
    
    299
    
    
    
    3
    
    
    
    3,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,034Issuance of common shares
for settlement to Krawitz
    
    
    439
    
    
    
    4
    
    
    
    1,726
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,730Reclassification of warrant
payable
    
    
    
    
    
    
    
    
    
    
    1,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,240Issuance of restricted
stock and options for
services
    
    
    6
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Issuance of common stock
for options exercise
    
    
    1
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Issuance of common stock
for legal settlement
    
    
    184
    
    
    
    2
    
    
    
    1,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300Net issuances of common
stock to InfoTech for
payment of note payable
    
    
    88
    
    
    
    1
    
    
    
    976
    
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    331Acquisition of Destron
Fearing minority interest
    
    
    3,732
    
    
    
    37
    
    
    
    40,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,873Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )Repricing of common stock
warrants for financing
transaction
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185VeriChip options and
restricted stock issued for
services
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Exercise of VeriChip warrant
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Destron Fearing issuance of
common stock warrants
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,044Destron Fearing options and
restricted stock issued for
services
    
    
    
    
    
    
    
    
    
    
    4,893
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,893Purchase of treasury stock
by VeriChip
    
    
    
    
    
    
    
    
    
    
    (761
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (761
    )Issuance of warrants for
financing transaction
    
    
    
    
    
    
    
    
    
    
    1,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711InfoTech options and
restricted stock issued for
services
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Balance  December 31, 2007
    
    
    13,135
    
    
    $
    131
    
    
    $
    573,565
    
    
    $
    (500,706
    )
    
    $
    428
    
    
    $
    (2,423
    )
    
    $
    70,995
 See the accompanying notes to consolidated financial statements.
  7




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity (continued)
For the Years Ended December 31, 2008, 2007 and 2006  (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPaid-in-
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersCommon Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss) Income
    
    
    Stock
    
    
    EquityBalance  December 31,
2007 (brought forward)
    
    
    13,135
    
    
    $
    131
    
    
    $
    573,565
    
    
    $
    (500,706
    )
    
    $
    428
    
    
    $
    (2,423
    )
    
    $
    70,995Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,133
    )
    
    
    
    
    
    
    
    
    
    
    (58,133
    )Comprehensive income
(loss)  Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,736
    )
    
    
    
    
    
    
    (2,736
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,133
    )
    
    
    (2,736
    )
    
    
    
    
    
    
    (60,869
    )Acquisition of Geissler
Technologies Corporation
    
    
    1,488
    
    
    
    15
    
    
    
    6,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,879Issuance of common stock
for services
    
    
    262
    
    
    
    3
    
    
    
    1,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,446Issuance of common stock
for financing
    
    
    216
    
    
    
    2
    
    
    
    742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744Issuance of restricted
stock and stock options
for services
    
    
    31
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441Issuance of shares in
connection with warrants
exercised
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
for legal settlement
    
    
    162
    
    
    
    2
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Re-pricing of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    1,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,112Exercise of common stock
warrants
    
    
    778
    
    
    
    8
    
    
    
    2,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,315Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )Treasury shares issued to
affiliate
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    
    
    
    
    
    
    
    
    646
    
    
    
    Retirement
of treasury shares
    
    
    
    
    
    
    
    
    
    
    (1,777
    )
    
    
    
    
    
    
    
    
    
    
    1,777
    
    
    
    Treasury shares acquired
under severance agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (820
    )
    
    
    (820
    )Partial
share repurchase
    
    
    (14
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Balance  December 31, 2008
    
    
    16,080
    
    
    $
    161
    
    
    $
    584,466
    
    
    $
    (558,839
    )
    
    $
    (2,308
    )
    
    $
    (820
    )
    
    $
    22,660
 See the accompanying notes to consolidated financial statements.
  8




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (in
thousands)
 For the Years ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (58,133
    )
    
    $
    (32,020
    )
    
    $
    (27,209
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:(Income) loss from discontinued operations
    
    
    (258
    )
    
    
    5,184
    
    
    
    13,235Equity compensation and administrative expenses
    
    
    1,875
    
    
    
    5,031
    
    
    
    1,172Depreciation and amortization
    
    
    4,415
    
    
    
    2,606
    
    
    
    1,996Amortization of debt discount and financing costs
    
    
    8,049
    
    
    
    3,501
    
    
    
    435Allowance for doubtful accounts
    
    
    361
    
    
    
    194
    
    
    
    (145
    )Allowance for inventory excess and obsolescence
    
    
    2,300
    
    
    
    846
    
    
    
    Loss on settlement of debt
    
    
    2,512
    
    
    
    
    
    
    
    Impairment of goodwill and assets
    
    
    35,467
    
    
    
    4,632
    
    
    
    Reduction in derivative warrant liability
    
    
    
    
    
    
    (589
    )
    
    
    Net (gain) loss on capital transactions of subsidiaries
    
    
    
    
    
    
    (629
    )
    
    
    322(Loss) gain attributable to changes in minority interest as a result of capital transactions of subsidiaries
    
    
    
    
    
    
    (3,632
    )
    
    
    135Minority interest in net income (loss) of subsidiaries
    
    
    122
    
    
    
    (8,011
    )
    
    
    (2,368
    )Loss (gain) on sale of equipment and assets
    
    
    
    
    
    
    (691
    )
    
    
    Issuance of stock for services to former employee
    
    
    
    
    
    
    1,730
    
    
    
    Other
    
    
    221
    
    
    
    
    
    
    
    (142
    )Decrease (increase) in restricted cash
    
    
    90
    
    
    
    (9
    )
    
    
    251Net change in operating assets and liabilities
    
    
    4,467
    
    
    
    5,134
    
    
    
    998Net cash (used in) provided by discontinued operations
    
    
    (93
    )
    
    
    (1,792
    )
    
    
    3,874Net cash provided by (used in) operating activities
    
    
    1,395
    
    
    
    (18,515
    )
    
    

    (7,446
    )Cash flows from investing activities:(Increase) decrease in notes receivable
    
    
    (1,452
    )
    
    
    108
    
    
    
    239Proceeds from note receivable with VeriChip
    
    
    9,500
    
    
    
    
    
    
    
    Payment for investment in subsidiary
    
    
    (241
    )
    
    
    
    
    
    
    Proceeds from special dividend received
    
    
    7,230
    
    
    
    
    
    
    
    Payments for property and equipment
    
    
    (2,194
    )
    
    
    (1,512
    )
    
    
    (2,884
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    794Payment for costs of business acquisition
    
    
    (261
    )
    
    
    (7,338
    )
    
    
    (1,000
    )Increase in other assets
    
    
    (416
    )
    
    
    (375
    )
    
    
    (262
    )Net cash provided by (used in) discontinued operations
    
    
    1,165
    
    
    
    (275
    )
    
    
    (3,368
    )Net cash provided by (used in) investing activities
    
    
    13,331
    
    
    
    (9,392
    )
    
    
    (6,481
    )Cash flows from financing activities:Net amounts (paid) borrowed on notes payable
    
    
    (1,366
    )
    
    
    5,930
    
    
    
    969Net (payments) proceeds of long-term debt
    
    
    (15,001
    )
    
    
    3,775
    
    
    
    952Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    (190
    )Proceeds from warrant exercise
    
    
    2,315
    
    
    
    
    
    
    
    Treasury stock acquired from Rabbi Trust
    
    
    (820
    )
    
    
    
    
    
    
    Other financing costs
    
    
    
    
    
    
    (1,205
    )
    
    
    Issuance of common shares and warrants
    
    
    
    
    
    
    
    
    
    
    89Payments of dividends to subsidiarys minority shareholder
    
    
    (34
    )
    
    
    (108
    )
    
    
    Net proceeds from subsidiarys issuance of common stock
    
    
    
    
    
    
    
    
    
    
    574Stock issuance costs
    
    
    (83
    )
    
    
    (78
    )
    
    
    (79
    )Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    15,716
    
    
    
    (2,926
    )Net cash (used in) provided by financing activities
    
    
    (14,989
    )
    
    
    24,030
    
    
    
    (611
    )Net decrease in cash and cash equivalents
    
    
    (263
    )
    
    
    (3,877
    )
    
    
    (14,538
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (152
    )
    
    
    28
    
    
    
    48Cash and cash equivalents  Beginning of year
    
    
    2,222
    
    
    
    6,071
    
    
    
    20,561Cash and cash equivalents  End of year
    
    $
    1,807
    
    
    $
    2,222
    
    
    $
    6,071Supplemental disclosure of cash flow information:Income taxes paid, net of refunds received
    
    $
    113
    
    
    $
    84
    
    
    $
    103Interest paid
    
    
    2,070
    
    
    
    3,317
    
    
    
    2,659
 See the accompanying notes to consolidated financial statements.
  9




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##### Table of Contents



Digital Angel Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements
  1. Organization and Summary of Significant Accounting Policies
    Business Segments
  Animal Identification Segment
  
    
    visual and electronic ear tags for livestock; and
    
    implantable microchips and RFID scanners for the companion pet, horse, livestock, fish and wildlife industries.
 Emergency Identification Segment
  
    
    GPS enabled search and rescue equipment and intelligent communications
products and services for telemetry, mobile data and radio
communications applications, including our SARBETM and
McMurdo brands, which serve military and commercial markets;
    
    alarm sounders for industrial use and other electronic components.
 Corporate/Eliminations Segment
  Discontinued Operations
   10




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##### Table of Contents



Summary of Significant Accounting Policies
 Liquidity
    Principles of Consolidation
  Use of Estimates
  Foreign Currencies
   Cash and Cash Equivalents
   11




---



##### Table of Contents



Accounts Receivable
  Concentration of Credit Risk
   Inventories
  Property and Equipment
  Goodwill and Intangible Assets
 Goodwill and Intangible Assets
  Accounting for the Impairment or Disposal of Long-Lived Assets
   12




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##### Table of Contents



Advertising Costs
  Revenue Recognition
   Stock-Based Compensation
   Research and Development
  Warrants Treated as a Liability
  Restructuring, Severance and Separation Expenses
 Accounting for Costs Associated with Exit or Disposal Activities Employers Accounting for
Post-employment Benefits
  13




---



##### Table of Contents



Income Taxes
  Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Gains/Losses Attributable to Capital Transactions of Majority-Owned Subsidiary
   (Loss) Income Per Common Share and Common Share Equivalent
  Comprehensive Income (Loss)
  Impact of Recently Issued Accounting Standards
 Fair Value Measurements Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13 Effective Date
of FASB Statement No. 157 Accounting for Leases 157-2
  14




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##### Table of Contents



Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans
 The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement 115
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities
 Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
 Business Combinations Business Combinations
 Determining Whether an Instrument (or an Embedded
Feature) Is Indexed to an Entitys Own Stock
 Uncertain Nasdaq Listing
   15




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##### Table of Contents



2. Accounts Receivable
 December 31,
    
    
    December 31,2008
    
    
    2007(in thousands)Receivables assigned to factors
    
    $
    1,474
    
    
    $
    2,490Unfactored accounts receivable
    
    
    9,974
    
    
    
    13,933Allowance for doubtful accounts
    
    
    (503
    )
    
    
    (280
    )$
    10,945
    
    
    $
    16,143
 RBS Invoice Discounting Agreement
  Nordisk Factoring Agreement
  3. Acquisitions
 Goodwilland
    
    
    Other NetOther
    
    
    AssetsDate
    
    
    Acquisition
    
    
    Intangibles
    
    
    AndCompany Acquired
    
    Acquired
    
    
    Price
    
    
    Acquired
    
    
    Liabilities
    
    
    Business Description(in thousands)McMurdo Limited
    
    
    4/05/07
    
    
    $
    7,302
    
    
    $
    4,456
    
    
    $
    2,846
    
    
    Develops and manufactures emergency location GPS beacons and NAVTEX technologyGeissler Technologies Corporation
    
    
    1/14/08
    
    
    
    7,147
    
    
    
    7,430
    
    
    
    (283
    )
    
    Develops e.tag technology for customer interface and herd management
  McMurdo Limited
   16




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##### Table of Contents



Geissler Technologies Corporation
   Merger with Destron Fearing
    ($ in thousands, except per share amounts)Number of Destron Fearing shares outstanding at the effective time of the merger
    
    
    21,330Exchange ratio per the terms of the DA Merger Agreement
    
    
    1.4Number of shares of our common stock issued
    
    
    29,862Reverse stock split factor
    
    
    8Number of shares issued post-split
    
    
    3,732Value of our common stock issued (1)
    
    $
    9.218Value of the shares exchanged
    
    $
    34,401Value of the 1.7 million Destron Fearing options assumed (2)
    
    
    5,430Value of the 0.3 million Destron Fearing warrants assumed (3)
    
    
    1,041Transaction costs
    
    
    1,691Total purchase price
    
    $
    42,563
 (1)
    
    The fair value of our common stock was determined using an
average of the closing prices of our common stock for the period
beginning two trading days before and ending two trading days
after August 9, 2007, the date on which the acquisition was
publicly announced.(2)
    
    Based on the Black Scholes valuation model using the following
weighted average assumptions: expected volatility of 60.0%,
dividend yield of 0%, risk-free interest rate of 3.52% and a
weighted average life of 5.0 years.(3)
    
    Based on the Black Scholes valuation model using the following
weighted average assumptions: expected volatility of 60.0%,
dividend yield of 0%, risk-free interest rate of 3.62% and a
weighted average life of 4.9 years.  17




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##### Table of Contents



Minority OwnersInterest inGTC
    
    
    McMurdo
    
    
    Destron Fearing(in thousands)Current assets
    
    $
    317
    
    
    $
    2,210
    
    
    $
    14,029Equipment
    
    
    
    
    
    
    636
    
    
    
    5,569Other assets
    
    
    
    
    
    
    
    
    
    
    412Intangibles:Patented and non-patented proprietary technology
    
    
    2,000
    
    
    
    20
    
    
    
    5,274Trademarks and tradenames
    
    
    390
    
    
    
    2,860
    
    
    
    4,978Software
    
    
    500Customer relationships and non-compete
    
    
    375
    
    
    
    840
    
    
    
    9,069Goodwill
    
    
    4,165
    
    
    
    1,350
    
    
    
    22,720Current liabilities
    
    
    (600
    )
    
    
    
    
    
    
    (8,127
    )Long-term debt and other liabilities
    
    
    
    
    
    
    
    
    
    
    (8,800
    )Deferred tax liability
    
    
    
    
    
    
    (614
    )
    
    
    (2,561
    )Total
    
    $
    7,147
    
    
    $
    7,302
    
    
    $
    42,563
    Pro Forma Results of Operations (Unaudited)
  Year Ended December 31,2008
    
    
    2007
    
    
    2006(in thousands)Net operating revenue
    
    $
    78,200
    
    
    $
    82,409
    
    
    $
    66,383Net loss from continuing operations attributable to common
shareholders  basic and diluted
    
    
    (58,392
    )
    
    
    (29,248
    )
    
    
    (19,268
    )Net loss from continuing operations per common share  basic and diluted
    
    
    (3.84
    )
    
    
    (2.09
    )
    
    
    (1.59
    )
 Capital Transactions of Subsidiary
   18




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##### Table of Contents



For the Year Ended December 31,2007
    
    
    2006Issuances of common stock
    
    
    173
    
    
    
    48Issuance of common stock under the share exchange agreement
    
    
    115
    
    
    
    35Total issuances of common stock
    
    
    288
    
    
    
    83Proceeds from stock issuances
    
    $
    
    
    
    $
    1,561Average price per share
    
    $
    
    
    
    $
    2.34Beginning ownership percentage of Destron Fearing
    
    
    55.2
    %
    
    
    55.4
    %Ending ownership percentage of Destron Fearing before merger(2)
    
    
    54.4
    %
    
    
    55.2
    %Change in ownership percentage
    
    
    (0.8
    )%
    
    
    (0.2
    )%Net (loss) gain on capital transactions of Destron Fearing (1)
    
    $
    (629
    )
    
    $
    322(Loss) gain attributable to changes in minority interest as a result of capital
transactions of Destron Fearing (1)
    
    $
    (3,632
    )
    
    $
    135
 (1)
    
    We have not provided a tax benefit for the net gain (loss) on capital transactions of subsidiaries and gain (loss) attributable to changes in minority interest as a result of capital
transactions of subsidiaries due to our current tax status and available operating loss carry forwards.(2)
    
    Effective December 28, 2007 we acquired the minority owners interest in Destron Fearing and owned 100% of Destron Fearing at December 31, 2007.  Dispositions
  4. Inventories
  December 31,2008
    
    
    2007(in thousands)Raw materials
    
    $
    8,584
    
    
    $
    11,408Work in process
    
    
    622
    
    
    
    1,128Finished goods
    
    
    1,240
    
    
    
    2,88210,446
    
    
    
    15,418Less: Allowance for excess and obsolescence
    
    
    (1,524
    )
    
    
    (1,225
    )Total inventories
    
    $
    8,922
    
    
    $
    14,193
 5. Property and Equipment
  December 31,2008
    
    

2007(in thousands)Land
    
    $
    278
    
    
    $
    278Building and leasehold improvements
    
    
    6,676
    
    
    
    6,661Equipment
    
    
    16,828
    
    
    
    16,61923,782
    
    
    
    23,558Less: Accumulated depreciation
    
    
    (14,948
    )
    
    
    (11,544
    )Total property and equipment
    
    $
    8,834
    
    
    $
    12,014
  19




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##### Table of Contents



Note 23.
 6. Goodwill
 Business Combinations
 December 31,2008
    
    
    2007(in thousands)Beginning balance
    
    $
    35,194
    
    
    $
    54,777Acquisition
    
    
    4,165
    
    
    
    27,336Adjustment to purchase price allocation
    
    
    473
    
    
    
    (26,459
    )Adjustment to change in percentage ownership
    
    
    
    
    
    
    (15,925
    )Impairment
    
    
    (31,006
    )
    
    
    (4,632
    )Foreign currency and other adjustments
    
    
    (440
    )
    
    
    97Ending balance
    
    $
    8,386
    
    
    $
    35,194
 Method of Accounting for Goodwill
          20




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##### Table of Contents



7. Intangibles, net
  WeightedAverage Lives(in years) atDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008Trademarks
    
    $
    4,668
    
    
    $
    4,668
    
    
    Indefinite
    (1)Trademarks, net of accumulated amortization of $266 and $22
    
    
    1,463
    
    
    
    2,154
    
    
    
    7.1Patents and non-patented proprietary technology, net of accumulated
amortization of $615 and $149
    
    
    6,667
    
    
    
    5,716
    
    
    
    11.3Customer relationships, net of accumulated amortization of $1,095 and $33
    
    
    8,518
    
    
    
    9,499
    
    
    
    9.6Tradenames and non compete, net of accumulated amortization of $23 and $82
    
    
    90
    
    
    
    136
    
    
    
    2.0Software, net of accumulated amortization of $78 and nil
    
    
    422
    
    
    
    
    
    
    
    5.0$
    21,828
    
    
    $
    22,173
 (1)
    
    During 2008, management reviewed the nature of our intangible assets with indefinite lives and has determined to change the lives to 20
years. Effective January 1, 2009, we will begin to amortize these intangibles.  2009
    
    $
    2,5382010
    
    
    2,4192011
    
    
    2,2482012
    
    
    2,2442013
    
    
    2,077Thereafter
    
    
    10,302$
    21,828
      21




---



##### Table of Contents



8. Accrued Expenses
  December 31,2008
    
    
    2007(in thousands)Accrued salary, wages and payroll expenses
    
    $
    1,766
    
    
    $
    1,003Accrued bonuses
    
    
    1,261
    
    
    
    1,061Accrued compensation to former CEOs
    
    
    
    
    
    
    246Accrued purchases
    
    
    106
    
    
    
    196Accrued litigation reserves
    
    
    318
    
    
    
    853Accrued professional fees
    
    
    449
    
    
    
    874Accrued warranty
    
    
    908
    
    
    
    865Other accrued expenses
    
    
    4,325
    
    
    
    4,741$
    9,133
    
    
    $
    9,839
 9. Notes Payable and Other Financings
  December 31,2008
    
    
    2007(in thousands)Revolving facility, bears interest at prime plus 2.0% but not less than 10.0% (10.0% at
December 31, 2008), net of discount of $580 and $927
    
    $
    2,024
    
    
    $
    4,747Senior secured, non-convertible term note, bears interest at 12.0%
    
    
    1,103
    
    
    
    7,000Senior secured, non-convertible term note, net of discount of nil and $781, bears interest at 12.0%
    
    
    3,067
    
    
    
    10,819Senior secured, non-convertible term note, bears interest at 12%
    
    
    2,000
    
    
    
    Mortgage notes payable, collateralized by Destron Fearings land and building, payable in monthly
installments of principal and interest totaling $20 thousand, bearing interest at 8.2%, due
through November 2010
    
    
    2,103
    
    
    
    2,167Line of credit, bears interest at the international rates Danske Bank can establish on a loan in
DKK in the international market plus 2.0% (8.35% at December 31, 2008) and is determined
quarterly. The agreement shall remain effective until further notice
    
    
    3,417
    
    
    
    3,651Equipment loan, collateralized by DSD Holdings production equipment, payable in quarterly
installments of principal and interest totaling $65 thousand, bearing interest at variable rates,
bearing interest at 6.0% at December 31, 2008, due through January 2010
    
    
    497
    
    
    
    821Note payable, payable in quarterly installments of principal and interest totaling $59 thousand,
bearing interest at the international rates Danske Bank can establish on a loan in DKK in the
international market plus 2.0% (8.35% at December 31, 2008), due through December 2008.
    
    
    
    
    
    
    238Notes payable  other and capital lease obligations
    
    
    1,313
    
    
    
    2,005Total debt
    
    
    15,524
    
    
    
    31,448Less: current maturities
    
    
    8,581
    
    
    
    14,231Total long term notes payable and debt
    
    $
    6,943
    
    
    $
    17,217
  December 31,2008(in thousands)Year:2009
    
    $
    9,1622010
    
    
    6,6462011
    
    
    2322012
    
    
    642013
    
    
    Total payments
    
    
    16,104Debt discount, net
    
    
    (580
    )Total debt outstanding
    
    $
    15,524
   22




---



##### Table of Contents



$6.0 Million Revolving Asset-Based Facility with Kallina
   $13.5 Million Secured Non-Convertible Term Note
    $7.0 Million Secured Non-Convertible Term Note
    23




---



##### Table of Contents



$2.0 Million Senior Secured, Non-Convertible Term Note
   Debtors Accounting for a
Modification or Exchange of Debt Instruments
  Omnibus Amendment and Waiver
    24




---



##### Table of Contents



Amendments of Warrants and Conditional Consent to Asset Sales
     Destron Fearing A/Ss Line of Credit
  Destron Fearings 10.25% Senior Secured Debenture and Securities Purchase Agreement
  10. Warrants Classified as a Liability
    25




---



##### Table of Contents



11. Fair Value of Financial Instruments
 Cash and Cash Equivalents
  Notes Payable and Long-Term Debt
  Accounts Payable and Accrued Expenses
  12. Stockholders Equity
  Warrants Classified as Equity
  BalanceExercised/
    
    
    December 31,
    
    
    Exercise
    
    
    Date of
    
    
    ExercisableClass of Warrants
    
    Authorized
    
    
    Issued
    
    
    Forfeited
    
    
    2008
    
    
    Price
    
    
    Issue
    
    
    PeriodSeries B
    
    
    83
    
    
    
    83
    
    
    
    
    
    
    
    83
    
    
    $
    24.504
    
    
    April 2004
    
    6 yearsSeries D
    
    
    83
    
    
    
    83
    
    
    
    
    
    
    
    83
    
    
    $
    37.040
    
    
    October 2004
    
    7 yearsSeries E
    
    
    122
    
    
    
    122
    
    
    
    
    
    
    
    122
    
    
    $
    30.160
    
    
    June 2005
    
    5 yearsSeries E
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    $
    27.728
    
    
    June 2005
    
    5 yearsClass A
    
    
    215
    
    
    
    215
    
    
    
    215
    
    
    
    
    
    
    $
    3.200
    
    
    August 2006
    
    7 yearsClass C
    
    
    371
    
    
    
    371
    
    
    
    371
    
    
    
    
    
    
    $
    3.200
    
    
    October 2007
    
    7 yearsDestron Fearing Warrants  Class A
    
    
    13
    
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    $
    3.200
    
    
    July 2003
    
    5 yearsDestron Fearing Warrants  Class B
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    $
    3.200
    
    
    July 2003
    
    5 yearsDestron Fearing Warrants  Class C
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    $
    3.200
    
    
    July 2003
    
    5 yearsDestron Fearing Warrants  Class D
    
    
    71
    
    
    
    71
    
    
    
    
    
    
    
    71
    
    
    $
    15.086
    
    
    February 2004
    
    5 yearsDestron Fearing Warrants  Class E
    
    
    169
    
    
    
    169
    
    
    
    169
    
    
    
    
    
    
    $
    3.200
    
    
    August 2007
    
    7 years1,161
    
    
    
    1,161
    
    
    
    777
    
    
    
    384
     26




---



##### Table of Contents



Dividend
    
    
    
    
    
    
    Expected
    
    
    Risk-Free
    
    
    Date of theClass of Warrant
    
    Yield
    
    
    Volatility
    
    
    Lives (Yrs.)
    
    
    Rate
    
    
    AssumptionsSeries B
    
    
    0.00
    %
    
    
    69.00
    %
    
    
    6.00
    
    
    
    3.38
    %
    
    April 5, 2004Series C
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    0.42
    
    
    
    2.00
    %
    
    October 21, 2004Series D
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    6.00
    
    
    
    3.31
    %
    
    October 21, 2004Series E
    
    
    0.00
    %
    
    
    50.00
    %
    
    
    5.00
    
    
    
    3.75
    %
    
    June 10, 2005Class A
    
    
    0.00
    %
    
    
    60.00
    %
    
    
    7.00
    
    
    
    4.85
    %
    
    August 24, 2006Class C
    
    
    0.00
    %
    
    
    60.00
    %
    
    
    7.00
    
    
    
    4.18
    %
    
    October 31, 2007
  Stock Option Plans
       27




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    Exerciseof Options
    
    
    Price
    
    
    of Options
    
    
    Price
    
    
    of Options
    
    
    PriceOutstanding on January 1
    
    
    2,405
    
    
    $
    22.44
    
    
    
    770
    
    
    $
    26.16
    
    
    
    811
    
    
    $
    34.72Destron Fearing options converted into our
options(1)
    
    
    
    
    
    
    
    
    
    
    1,665
    
    
    
    21.28
    
    
    
    
    
    
    
    Granted
    
    
    629
    
    
    
    2.59
    
    
    
    13
    
    
    
    11.04
    
    
    
    
    
    
    
    Exercised(2)
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    12.00
    
    
    
    (3
    )
    
    
    10.64Forfeited
    
    
    (171
    )
    
    
    23.46
    
    
    
    (42
    )
    
    
    42.56
    
    
    
    (38
    )
    
    
    236.08Outstanding at December 31
    
    
    2,863
    
    
    
    18.02
    
    
    
    2,405
    
    
    
    22.44
    
    
    
    770
    
    
    
    26.16Exercisable at December 31(3)
    
    
    2,245
    
    
    
    22.33
    
    
    
    2,391
    
    
    
    22.48
    
    
    
    770
    
    
    
    26.16Vested or expected to vest at December 31
    
    
    2,833
    
    
    
    16.59
    
    
    
    2,405
    
    
    
    22.27
    
    
    
    770
    
    
    
    26.16Shares available on December 31 for options
that may be granted
    
    
    21
    
    
    
    
    
    
    
    285
    
    
    
    
    
    
    
    100
 (1)
    
    Includes 1.7 million options assumed in connections with
the DA Merger. Theses options had a weighted average exercise price of $21.28 per share as of December 31, 2007.(2)
    
    The intrinsic value of the stock options exercised in 2006, was approximately $23,000.(3)
    
    The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The fair value of our common stock was $0.50 at
December 31, 2008 based upon the closing price on the Nasdaq Capital Market. As of December 31, 2008, the aggregate intrinsic value was $11 thousand.  Exercisable StockOutstanding Options
    
    
    OptionsWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life in Years
    
    
    Price
    
    
    Shares
    
    
    PriceDigital Angel Stock Plan$0.0000 to $2.0000
    
    
    421
    
    
    
    8.8
    
    
    $
    0.49
    
    
    
    61
    
    
    $
    0.32$2.0001 to $4.0000
    
    
    40
    
    
    
    8.2
    
    
    
    2.91
    
    
    
    9
    
    
    
    3.84$4.0001 to $6.0000
    
    
    227
    
    
    
    9.2
    
    
    
    5.23
    
    
    
    
    
    
    
    $6.0001 to $8.0000
    
    
    18
    
    
    
    8.6
    
    
    
    7.44
    
    
    
    18
    
    
    
    7.44$8.0001 to $10.0000
    
    
    22
    
    
    
    8.6
    
    
    
    8.97
    
    
    
    22
    
    
    
    8.97$10.0001 and over
    
    
    2,135
    
    
    
    5.0
    
    
    
    23.30
    
    
    
    2,135
    
    
    
    23.30Total stock options
    
    
    2,863
    
    
    
    5.9
    
    
    
    18.02
    
    
    
    2,245
    
    
    
    22.33
  28




---



##### Table of Contents



Year Ended December 31,2008
    
    2007Estimated option life
    
    5 years
    
    5 yearsRisk free interest rate
    
    1.55  3.57%
    
    
    4.97  5.00%Expected volatility
    
    60.00  91.51%
    
    
    60.00%Expected dividend yield
    
    %
    
    
    %
 Restricted Stock Grants
    13. Agreement With Our Former Chief Executive Officer
    14. Asset Impairment Testing
     29




---



##### Table of Contents




    
    Earnings before interest, taxes, depreciation and amortization were used as the measure of cash flow;
    
    Cash flows were projected for five years and added to the present value of the terminal value; and
    
    Discount rates ranging from 13% to 26% were used. The rates were determined based on the level of
risk associated with a reporting units operations and the related degree of certainty of generating
future cash flows.
 Residual or Terminal Enterprise Value Calculation
    15. Income Taxes
  2008
    
    
    2007
    
    
    2006Current:United States
    
    $
    (78
    )
    
    $
    (95
    )
    
    $
    (184
    )International
    
    
    (40
    )
    
    
    (70
    )
    
    
    (104
    )Current income tax (provision) benefit
    
    
    (118
    )
    
    
    (165
    )
    
    
    (288
    )Deferred:United States
    
    
    
    
    
    
    
    
    
    
    International
    
    
    283
    
    
    
    5
    
    
    
    486Deferred income taxes benefit
    
    
    283
    
    
    
    5
    
    
    
    486$
    165
    
    
    $
    (160
    )
    
    $
    198
   30




---



##### Table of Contents



2008
    
    
    2007Deferred tax assets:Liabilities and reserves
    
    $
    1,667
    
    
    $
    1,510Stock-based compensation
    
    
    3,672
    
    
    
    3,232Property and equipment
    
    
    825
    
    
    
    590Net operating loss carryforwards
    
    
    107,555
    
    
    
    97,139Gross deferred tax assets
    
    
    113,719
    
    
    
    102,471Valuation allowance
    
    
    (113,559
    )
    
    
    (102,223
    )160
    
    
    
    248Deferred tax liabilities:Property and equipment
    
    
    30
    
    
    
    68Intangible assets
    
    
    2,593
    
    
    
    2,2292,623
    
    
    
    2,297Net Deferred Tax Liabilities
    
    $
    (2,463
    )
    
    $
    (2,049
    )
  December 31
    
    
    December 312008
    
    
    2007(in thousands)Current deferred tax assets
    
    $
    130
    
    
    $
    180Long-term deferred tax liability
    
    
    (2,593
    )
    
    
    (2,229
    )Net Deferred Tax Liabilities
    
    $
    (2,463
    )
    
    $
    (2,049
    )
   2008
    
    
    2007
    
    
    2006Domestic
    
    $
    (50,682
    )
    
    $
    (26,139
    )
    
    $
    (14,957
    )International
    
    
    (7,752
    )
    
    
    (4,287
    )
    
    
    (2,040
    )$
    (58,434
    )
    
    $
    (30,426
    )
    
    $
    (16,997
    )
      31




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006%
    
    
    %
    
    
    %Statutory tax/(benefit) rate (1)
    
    
    (35
    )
    
    
    (35
    )
    
    
    (34
    )Nondeductible intangibles amortization/impairment
    
    
    20
    
    
    
    19
    
    
    
    13State income taxes, net of federal benefits
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Non-deductable merger expenses
    
    
    
    
    
    
    7
    
    
    
    Foreign tax differences
    
    
    
    
    
    
    1
    
    
    
    1Change in deferred tax asset valuation allowance (2)
    
    
    16
    
    
    
    10
    
    
    
    21Impact of prior year adjustments (3)
    
    
    
    
    
    
    
    
    
    
    (1
    )Other
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    1
    
    
    
    (2
    )
 (1)
    
    Statutory rate increased to 35%, consistent with Destron
Fearings reporting.(2)
    
    Substantially attributed to net operating losses.(3)
    
    Related to the reversal of prior year estimated tax liabilities, which were no longer required. Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 
    
    Income tax benefits should be recognized when, based on the technical
merits of a tax position, the company believes that if a dispute arose
with the taxing authority and were taken to a court of last resort, it
is more likely than not (i.e., a probability of greater than
50 percent) that the tax position would be sustained as filed; and
    
    If a position is determined to be more likely than not of being
sustained, the reporting company should recognize the largest amount
of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority.
   2008(in thousands)Gross unrecognized tax benefits at January 1, 2008
    
    $
    193Increases in tax positions for current year
    
    
    74Lapse in statute of limitations
    
    
    (66
    )Gross unrecognized tax benefits at December 31, 2008
    
    $
    201
   16. Discontinued Operations
   32




---



##### Table of Contents



Sale of FDC
  Sale of Computer Equity
     Sale of 49.94% ownership in InfoTech
  Sale of 45.6% ownership in VeriChip
    33




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006(in thousands)Revenue
    
    $
    8,948
    
    
    $
    67,316
    
    
    $
    68,635Cost of sales
    
    
    5,447
    
    
    
    36,587
    
    
    
    39,809Gross profit
    
    
    3,501
    
    
    
    30,729
    
    
    
    28,826Selling, general and administrative expenses
    
    
    2,870
    
    
    
    32,393
    
    
    
    28,568Research and development expenses
    
    
    144
    
    
    
    5,053
    
    
    
    5,505Operating income (loss)
    
    
    487
    
    
    
    (6,717
    )
    
    
    (5,247
    )Gain on sale of asset
    
    
    3,174
    
    
    
    1,559
    
    
    
    Asset impairment
    
    
    
    
    
    
    (9,538
    )
    
    
    (6,629
    )Interest and other income (expense), net
    
    
    4
    
    
    
    6,359
    
    
    
    (404
    )Interest expense
    
    
    (144
    )
    
    
    (402
    )
    
    
    (378
    )Equity in loss of affiliates
    
    
    (3,263
    )
    
    
    
    
    
    
    Income (loss) before income taxes, minority interest and gain (loss) on
capital transactions of subsidiaries
    
    
    258
    
    
    
    (8,739
    )
    
    
    (12,658
    )Income taxes
    
    
    
    
    
    
    1,043
    
    
    
    (260
    )Minority interest
    
    
    
    
    
    
    4,311
    
    
    
    1,331Gain (loss) on capital transactions of subsidiaries
    
    
    
    
    
    
    3,766
    
    
    
    (1,949
    )(Loss) gain attributable to changes in minority interest as a result of
capital transactions of subsidiaries
    
    
    
    
    
    
    (5,565
    )
    
    
    301Income (loss) from discontinued operations
    
    $
    258
    
    
    $
    (5,184
    )
    
    $
    (13,235
    )Income (loss) from discontinued operations per common share  basic and diluted
    
    $
    0.02
    
    
    $
    (0.60
    )
    
    $
    (1.57
    )Weighted average number of common shares outstanding  basic and diluted
    
    
    15,189
    
    
    
    8,640
    
    
    
    8,417
    Gain/Loss Attributable to Changes in Minority Interest as a Result of Capital Transactions of
Subsidiaries
   2007
    
    
    2006Issuances of common stock for restricted stock, stock options and warrants
    
    
    1,169
    
    
    
    500Issuances of common stock in IPO
    
    
    3,100
    
    
    
    Repurchase of common stock
    
    
    (181
    )
    
    
    Total issuances of common stock
    
    
    4,088
    
    
    
    500Proceeds from stock issuances
    
    $
    12,494
    
    
    $
    Average price per share
    
    $
    2.95
    
    
    $
    Beginning ownership percentage of VeriChip
    
    
    91.7
    %
    
    
    100.0
    %Ending ownership percentage of VeriChip
    
    
    52.8
    
    
    
    91.7Change in ownership percentage
    
    
    (38.9
    )%
    
    
    (8.3
    )%Gain (loss) on capital transactions of VeriChip
    
    $
    3,787
    
    
    $
    (1,954
    )(Loss) gain attributable to changes in minority interest as a result of
    
    $
    (5,809
    )
    
    $
    368capital transactions of VeriChip
  34




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##### Table of Contents



December 31,2008
    
    
    2007(in thousands)Current assets:Cash
    
    $
    
    
    
    $
    8,061Accounts receivable
    
    
    
    
    
    
    10,681Inventory
    
    
    
    
    
    
    2,242Other current assets
    
    
    5
    
    
    
    2,519Total current assets
    
    
    5
    
    
    
    23,503Property and equipment, net
    
    
    32
    
    
    
    1,279Goodwill and intangibles, net
    
    
    
    
    
    
    34,403Deferred offering costs
    
    
    
    
    
    
    Other assets, net
    
    
    
    
    
    
    47Total assets
    
    $
    37
    
    
    $
    59,232Current liabilities:Notes payable
    
    $
    
    
    
    $
    2,530Accounts payable
    
    
    
    
    
    
    3,619Accrued expenses and other current liabilities
    
    
    10
    
    
    
    5,476Deferred revenue
    
    
    
    
    
    
    2,241Total current liabilities
    
    
    10
    
    
    
    13,866Notes payable
    
    
    
    
    
    
    2,406Deferred revenue
    
    
    
    
    
    
    225Deferred taxes
    
    
    
    
    
    
    3,808Other long-term liabilities
    
    
    
    
    
    
    Total liabilities
    
    
    10
    
    
    
    20,305Minority interest
    
    
    
    
    
    
    13,157Net assets of discontinued operations
    
    $
    27
    
    
    $
    25,770
  17. Loss Per Share
  2008
    
    
    2007
    
    
    2006Numerator for basic and diluted loss per share:Loss from continuing operations
    
    $
    (58,391
    )
    
    $
    (26,836
    )
    
    $
    (13,974
    )Income (loss) from discontinued operations
    
    
    258
    
    
    
    (5,184
    )
    
    
    (13,235
    )Net loss attributable to common stockholders
    
    $
    (58,133
    )
    
    $
    (32,020
    )
    
    $
    (27,209
    )Denominator for basic and diluted loss per share:Basic and diluted weighted-average shares outstanding (1)
    
    
    15,156
    
    
    
    8,640
    
    
    
    8,417Loss per share  basic and dilutedContinuing operations
    
    $
    (3.85
    )
    
    $
    (3.11
    )
    
    $
    (1.66
    )Discontinued operations
    
    
    0.02
    
    
    
    (0.60
    )
    
    
    (1.57
    )Total  basic and diluted
    
    $
    (3.83
    )
    
    $
    (3.71
    )
    
    $
    (3.23
    )
 (1)
    
    The following stock options and warrants outstanding as of December 31, 2008, 2007
and 2006 were not included in the computation of dilutive loss per share because the net
effect would have been anti-dilutive: 2008
    
    
    2007
    
    
    2006(in thousands)Stock options
    
    
    2,863
    
    
    
    2,405
    
    
    
    770Warrants
    
    
    384
    
    
    
    1,162
    
    
    
    582Restricted stock
    
    
    31
    
    
    
    3
    
    
    
    63,278
    
    
    
    3,570
    
    
    
    1,358
  35




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##### Table of Contents



18. Commitments and Contingencies
   MinimumRentalPaymentsYear:2009
    
    $
    1,6342010
    
    
    1,3122011
    
    
    9142012
    
    
    4212013
    
    
    415Thereafter
    
    
    11,968$
    16,664
 Krawitz Employment Agreement
   Joseph Grillo Employment Agreement
     36




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##### Table of Contents



Incentive and Recognition Policy
    Amendment to Schering-Plough Supply and Distribution Agreement
 ®
 Destron Fearings RME Supply Agreement
  19. Profit Sharing Plan
   20. Legal Proceedings
   37




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##### Table of Contents



Vasa Suit
    Chemring Suit
  Artigliere Suit
  21. Segment Information
    38




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##### Table of Contents



2008 (in thousands)Total fromAnimal
    
    
    Emergency
    
    
    Corporate/
    
    
    ContinuingIdentification
    
    
    Identification
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    38,501
    
    
    $
    39,671
    
    
    $
    
    
    
    $
    78,172Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    $
    38,501
    
    
    $
    39,671
    
    
    $
    
    
    
    $
    78,172Depreciation and amortization(1)
    
    $
    3,129
    
    
    $
    1,259
    
    
    $
    26
    
    
    $
    4,414Interest and other income (expense)
    
    
    1,015
    
    
    
    
    
    
    
    1,707
    
    
    
    2,722Interest expense
    
    
    (3,248
    )
    
    
    (157
    )
    
    
    (7,487
    )
    
    
    (10,892
    )Operating (loss) income
    
    
    (41,716
    )
    
    
    114
    
    
    
    (8,662
    )
    
    
    (50,264
    )Loss from continuing operations
before provision for income taxes, minority
interest and gain (loss) attributable to
capital transactions of subsidiary
    
    
    (43,949
    )
    
    
    (44
    )
    
    
    (14,441
    )
    
    
    (58,434
    )Goodwill, net
    
    
    3,310
    
    
    
    5,076
    
    
    
    
    
    
    
    8,386Segment assets from continuing operations
    
    
    28,809
    
    
    
    27,459
    
    
    
    7,901
    
    
    
    64,169Expenditures for property and equipment
    
    
    579
    
    
    
    1,615
    
    
    
    
    
    
    
    2,194
 2007 (in thousands)Total fromAnimal
    
    
    Emergency
    
    
    Corporate/
    
    
    ContinuingIdentification
    
    
    Identification
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    43,749
    
    
    $
    34,045
    
    
    $
    
    
    
    $
    77,794Intersegment revenues
    
    
    76
    
    
    
    
    
    
    
    (76
    )
    
    
    Total revenue
    
    $
    43,825
    
    
    $
    34,045
    
    
    $
    (76
    )
    
    $
    77,794Depreciation and amortization(1)
    
    $
    1,601
    
    
    $
    904
    
    
    $
    101
    
    
    $
    2,606Interest and other income (expense)
    
    
    1,608
    
    
    
    
    
    
    
    (1,164
    )
    
    
    444Interest expense
    
    
    (3,986
    )
    
    
    (166
    )
    
    
    (2,568
    )
    
    
    (6,720
    )Operating (loss) income
    
    
    (15,746
    )
    
    
    252
    
    
    
    (9,347
    )
    
    
    (24,841
    )(Loss) income from continuing operations
before provision for income taxes, minority
interest and gain (loss) attributable to
capital transactions of subsidiary
    
    
    (18,124
    )
    
    
    86
    
    
    
    (12,388
    )
    
    
    (30,426
    )Goodwill, net
    
    
    30,573
    
    
    
    4,621
    
    
    
    
    
    
    
    35,194Segment assets from continuing operations
    
    
    70,863
    
    
    
    30,721
    
    
    
    6,820
    
    
    
    108,404Expenditures for property and equipment
    
    
    783
    
    
    
    725
    
    
    
    4
    
    
    
    1,512
 2006 (in thousands)Total fromAnimal
    
    
    Emergency
    
    
    Corporate/
    
    
    ContinuingIdentification
    
    
    Identification
    
    
    Eliminations
    
    
    OperationsRevenue from external customers
    
    $
    37,702
    
    
    $
    16,351
    
    
    $
    
    
    
    $
    54,053Intersegment revenues
    
    
    356
    
    
    
    
    
    
    
    (356
    )
    
    
    Total revenue
    
    $
    38,058
    
    
    $
    16,351
    
    
    $
    (356
    )
    
    $
    54,053Depreciation and amortization(1)
    
    $
    1,403
    
    
    $
    480
    
    
    $
    113
    
    
    $
    1,996Interest and other income
    
    
    364
    
    
    
    4
    
    
    
    1,366
    
    
    
    1,734Interest expense
    
    
    (405
    )
    
    
    (60
    )
    
    
    (2,611
    )
    
    
    (3,076
    )Operating loss
    
    
    (4,007
    )
    
    
    (1,174
    )
    
    
    (10,474
    )
    
    
    (15,655
    )Loss from continuing operations before
provision for income taxes, minority
interest and gain (loss) attributable to
capital transactions of subsidiary
    
    
    (4,048
    )
    
    
    (1,230
    )
    
    
    (11,719
    )
    
    
    (16,997
    )Goodwill, net
    
    
    52,639
    
    
    
    2,138
    
    
    
    
    
    
    
    54,777Segment assets from continuing operations
    
    
    81,358
    
    
    
    10,159
    
    
    
    6,397
    
    
    
    97,914Expenditures for property and equipment
    
    
    1,789
    
    
    
    1,091
    
    
    
    4
    
    
    
    2,884
 (1)
    
    Depreciation and amortization includes $2.1 million, $1.5 million and $1.1 million included
in cost of sales in 2008, 2007 and 2006, respectively.   39




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##### Table of Contents



Animal
    
    
    EmergencyIdentification
    
    
    Identification
    
    

Corporate
    
    
    TotalBalance  December 31, 2006
    
    $
    50,077
    
    
    $
    3,154
    
    
    $
    1,546


    $
    54,777Acquisitions
    
    
    20,125
    
    
    
    7,211
    
    




    
    27,336Adjustment to carrying value of minority interest
    
    
    (12,049
    )
    
    
    (3,876
    )
    




    
    (15,925
    )Adjustment to purchase price allocation
    
    
    (25,154
    )
    
    
    (1,305
    )
    




    
    (26,459
    )Impairment
    
    
    (3,086
    )
    
    
    
    
    

(1,546
)

    
    (4,632
    )Other adjustments
    
    
    97
    
    
    
    
    
    




    
    97Balance  December 31, 2007
    
    
    30,010
    
    
    
    5,184
    
    




    
    35,194Acquisitions
    
    
    4,165
    
    
    
    
    
    




    
    4,165Adjustment to purchase price allocation
    
    
    (141
    )
    
    
    614
    
    




    
    473Impairment
    
    
    (31,006
    )
    
    
    
    
    




    
    (31,006
    )Foreign currency and other adjustments
    
    
    282
    
    
    
    (722
    )
    




    
    (440
    )Balance  December 31, 2008
    
    $
    3,310
    
    
    $
    5,076
    
    
    $



    $
    8,386
  United
    
    
    
    
    
    
    SouthStates
    
    
    Europe
    
    
    America
    
    
    Total2008Net revenue
    
    $
    29,275
    
    
    $
    47,839
    
    
    $
    1,058
    
    
    $
    78,172Property and equipment, net
    
    
    5,764
    
    
    
    2,829
    
    
    
    241
    
    
    
    8,8342007Net revenue
    
    $
    37,059
    
    
    $
    39,591
    
    
    $
    1,144
    
    
    $
    77,794Property and equipment, net
    
    
    6,792
    
    
    
    4,818
    
    
    
    404
    
    
    
    12,0142006Net revenue
    
    $
    32,566
    
    
    $
    20,791
    
    
    $
    696
    
    
    $
    54,053Property and equipment, net
    
    
    5,877
    
    
    
    4,242
    
    
    
    220
    
    
    
    10,339
 22. Related Party Transactions
  Agreement between VeriChip and Destron Fearing
  Intercompany Loan Agreement with VeriChip
   40




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##### Table of Contents



VeriChips Stock Purchase Agreement
  
    
    A Voting Agreement (the Voting Agreement) in which we granted an irrevocable proxy in favor of the Transaction and
against any alternative proposal. The Voting Agreement limited our ability to transfer shares of stock we held in VeriChip
or vote for any alternative deal during the period prior to the consummation of the Transaction.
    
    A Guarantee (the Guarantee) in favor of Stanley holding Stanley harmless from certain liabilities under the VeriChip SPA.
    
    A Non-Competition Agreement (the Non-Competition Agreement) in which we agreed that we would not compete with Xmark for
3 years following the consummation of the Transaction. We do not operate in any of these businesses today. The
Non-Competition Agreement terminates upon a Change in Control Effective Date (as defined in the Non-Competition
Agreement).
    41




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##### Table of Contents



Transition Services Agreement
    42




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##### Table of Contents



Satisfaction of Loan Agreement With InfoTech
   Sale of VeriChip Shares
     Purchase Agreement with Blue Moon
  Private Placement Sale with Certain Directors
  Share Exchange with the Former Shareholders of Destron Fearing A/S
   23. Restructuring, Severance and Separation Expenses
   Animal
    
    

    EmergencyIdentification
    
    

    Identification
    
    
    Corporate
    
    
    TotalRestructuring and workforce reduction charges:Severance
    
    $
    1,903
    
    
    $
    597
    
    
    $
    371
    
    
    $
    2,871Contract termination
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    354Facility closing
    
    
    453
    

    
    
    
    
    
    
    
    
    
    
    453$
    2,356
    
    
    $
    597
    
    
    $
    725
    
    
    $
    3,678Asset impairment:Fixed assets
    
    $
    1,888
    
    
    $
    
    
    
    $
    146
    
    
    $
    2,034Other assets
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    244$
    2,132
    
    
    $
    
    
    
    $
    146
    
    
    $
    2,278
     43




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##### Table of Contents



24. Notes Received for Stock Issuances
  25. Supplemental Cash Flow Information
  For the Years Ended December 31,2008
    
    
    2007
    
    
    2006Decrease (increase) in accounts receivable and unbilled receivables
    
    $
    114
    
    
    $
    (2,386
    )
    
    $
    (1,189
    )Decrease (increase) in inventories
    
    
    1,076
    
    
    
    (4,290
    )
    
    
    (1,429
    )Decrease (increase) in other current assets
    
    
    620
    
    
    
    612
    
    
    
    (1,214
    )Increase (decrease) in accounts payable, accrued expenses and other liabilities
    
    
    2,657
    
    
    
    6,426
    
    
    
    2,452$
    4,467
    
    
    $
    5,134
    
    
    $
    998
  2008
    
    
    2007
    
    
    2006Issuance of shares, warrants, and options for business acquisition
    
    $
    6,879
    
    
    $
    40,574
    
    
    $
    Issuance of shares for legal settlement
    
    
    500
    
    
    
    
    
    
    
    Issuance of warrants in connection with financings
    
    
    744
    
    
    
    1,711
    
    
    
    Issuance of Destron Fearing warrants in connection with financings
    
    
    
    
    
    
    2,297
    
    
    
    1,525Issuance of shares for purchase of Signatures minority interest
    
    
    
    
    
    
    
    
    
    
    907Issuance of shares under a share exchange agreement
    
    
    
    
    
    
    
    
    
    
    973Reclassification of deferred financing costs to acquisition costs
    
    
    
    
    
    
    494
    
    
    
    Assets acquired for long-term debt and capital leases
    
    
    330
    
    
    
    927
    
    
    
    606
 26. Summarized Quarterly Data (Unaudited) (in thousands, except per share amounts)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year2008Total revenue
    
    $
    22,426
    
    
    $
    20,703
    
    
    $
    18,856
    
    
    $
    16,187
    
    
    $
    78,172Gross profit
    
    
    8,299
    
    
    
    6,624
    
    
    
    7,075
    
    
    
    4,324
    
    
    
    26,322Net loss from continuing
operations attributable to
common
stockholders(1)
    
    
    (4,358
    )
    
    
    (8,145
    )
    
    
    (32,578
    )
    
    
    (13,310
    )
    
    
    (58,391
    )Net (loss) income from
discontinued operations
    
    
    (418
    )
    
    
    (1,332
    )
    
    
    2,143
    
    
    
    (135
    )
    
    
    258Basic and diluted net loss
per share from continuing
operations(3)
    
    $
    (0.31
    )
    
    $
    (0.56
    )
    
    $
    (2.13
    )
    
    $
    (0.83
    )
    
    $
    (3.85
    )Basic and diluted (loss)
income per share from
discontinued
operations(3)
    
    
    (0.03
    )
    
    
    (0.09
    )
    
    
    0.14
    
    
    
    (0.01
    )
    
    
    0.02
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year2007Total revenue
    
    $
    19,039
    
    
    $
    15,792
    
    
    $
    20,337
    
    
    $
    22,626
    
    
    $
    77,794Gross profit
    
    
    6,493
    
    
    
    6,828
    
    
    
    8,242
    
    
    
    7,268
    
    
    
    28,831Net loss from continuing
operations attributable to
common stockholders(2)
    
    
    (2,866
    )
    
    
    (4,063
    )
    
    
    (5,637
    )
    
    
    (14,270
    )
    
    
    (26,836
    )Net (loss) income from
discontinued operations
    
    
    (2,283
    )
    
    
    1,341
    
    
    
    (5,662
    )
    
    
    1,420
    
    
    
    (5,184
    )Basic and diluted net loss per
share from continuing
operations(3)
    
    $
    (0.35
    )
    
    $
    (0.49
    )
    
    $
    (0.65
    )
    
    $
    (1.60
    )
    
    $
    (3.11
    )Basic and diluted net
(loss) income per share from
discontinued
operations(3)
    
    
    (0.27
    )
    
    
    0.16
    
    
    
    (0.65
    )
    
    
    0.16
    
    
    
    (0.60
    )
 (1)
    
    The increase in the 2008 third quarter loss relates primarily to $25.0 million of goodwill impairment charges which primarily related to the recent declines in our equity market capitalization, which fell below our stockholders equity.(2)
    
    The increase in the 2007 fourth quarter loss relates primarily to $4.8 million in merger expenses and $1.7 million in severance expense to our former CEO.(3)
    
    Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share will not necessarily equal the total for the year.  44




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##### Table of Contents



FINANCIAL STATEMENT SCHEDULE
 Valuation and Qualifying Accounts (in thousands)
 AdditionsBalance at
    
    
    Charged tobeginning of
    
    
    cost and
    
    
    
    
    
    
    Balance at endDescription
    
    period
    
    
    expenses
    
    
    Deductions
    
    
    of periodValuation reserve deducted in the balance
sheet from the asset to which it applies:Accounts receivable:2008 Allowance for doubtful accounts
    
    $
    280
    
    
    
    361
    
    
    
    138
    
    
    $
    5032007 Allowance for doubtful accounts
    
    
    206
    
    
    
    194
    
    
    
    120
    
    
    
    2802006 Allowance for doubtful accounts
    
    
    669
    
    
    
    (145
    )
    
    
    318
    
    
    
    206Inventory:2008 Allowance for excess and obsolescence
    
    $
    1,225
    
    
    
    2,300
    
    
    
    2,001
    
    
    $
    1,5242007 Allowance for excess and obsolescence
    
    
    1,011
    
    
    
    846
    
    
    
    632
    
    
    
    1,2252006 Allowance for excess and obsolescence
    
    
    1,999
    
    
    
    
    
    
    
    988
    
    
    
    1,011Notes receivable:2008 Allowance for doubtful accounts
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    2007 Allowance for doubtful accounts
    
    
    3,663
    
    
    
    
    
    
    
    3,663
    
    
    
    2006 Allowance for doubtful accounts
    
    
    3,663
    
    
    
    
    
    
    
    
    
    
    
    3,663Deferred Taxes:2008 Valuation reserve
    
    $
    105,011
    
    
    
    8,548
    
    
    
    
    
    
    $
    113,5592007 Valuation reserve
    
    
    100,380
    
    
    
    4,631
    
    
    
    
    
    
    
    105,0112006 Valuation reserve
    
    
    93,732
    
    
    
    6,648
    
    
    
    
    
    
    
    100,380
  45




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Reorganization dated as of August 8, 2007 among Digital Angel Corporation, Applied Digital
Solutions, Inc., and Digital Angel Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the
registrants Current Report on Form 8-K filed with the Commission on August 9, 2007)2.2
    
    Amendment No. 1 to Agreement and Plan of Reorganization dated as of December 4, 2007 among Digital Angel
Corporation, Applied Digital Solutions, Inc., and Digital Angel Acquisition Corp. (incorporated by reference to
Exhibit 2.1 to the registrants Current Report on Form 8-K filed with the Commission on December 4, 2007)2.3
    
    Agreement and Plan of Merger dated January 14, 2008 among Applied Digital Solutions, Inc., GT Acquisition Sub,
Inc., Geissler Technologies Corporation and the individuals named therein (incorporated by reference to
Exhibit 2.1 to the registrants Current Report on Form 8-K filed with the Commission on January 17, 2008)2.4
    
    Asset Purchase Agreement among Applied Digital Solutions, Inc., Pacific Decision Sciences Corporation and
Customer Service Delivery Platform Corporation dated June 2, 2008 (incorporated by reference to Exhibit 2.1 to
the registrants Current Report on Form 8-K filed with the Commission on June 6, 2008)2.5
    
    Stock Purchase Agreement between Digital Angel Corporation and Blue Moon Energy Partners LLC dated August 1, 2008
(incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form 8-K filed with the
Commission on August 4, 2008)3.1
    
    Certificate of Incorporation of Applied Digital Solutions, Inc. filed with the Secretary of State of Delaware on
March 7, 2007 (incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K filed with
the Commission on April 25, 2007)3.2
    
    Certificate of Elimination to Certificate of Designations filed with the Secretary of State of Missouri on
April 5, 2007 (incorporated by reference to Exhibit 3.4 to the registrants Annual Report on Form 10-K/A filed
with the Commission on April 6, 2007)3.3
    
    Amended and Restated Bylaws of Applied Digital Solutions, Inc. (incorporated by reference to Exhibit 3.3 to the
registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2007)3.4
    
    Certificate of Amendment of Certificate of Incorporation of Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 3.2 to the registrants Quarterly Report on Form 10-Q filed with the Commission on May 12,
2008)3.5
    
    Certificate of Amendment of Certificate of Incorporation of Applied Digital Solutions, Inc. (incorporated by
reference to Annex A to the registrants Definitive Proxy Statement on Schedule 14(a) filed with the Commission
on April 28, 2008)3.6
    
    Certificate of Amendment of Certificate of Incorporation of Digital Angel Corporation dated October 31, 2008
(incorporated by reference to Exhibit 3.1 to the registrants Quarterly Report on Form 10-Q filed with the
Commission on August 11, 2008)3.7**
    
    Certificate of Amendment of Certificate of Incorporation of Digital Angel Corporation dated November 10, 200810.1
    
    Voting Agreement by and between Applied Digital Solutions, Inc. and The Stanley Works dated as of May 15, 2008
(incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the
Commission on May 16, 2008)10.2*
    
    1996 Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc., as amended through June 13, 1998
(incorporated herein by reference to Exhibit 4.1 to the registrants Registration Statement on Form S-8 (File
No. 333-11294) filed with the Commission on December 2, 1999)10.3*
    
    Applied Digital Solutions, Inc. 1999 Flexible Stock Plan, as amended (incorporated herein by reference to
Exhibit 4.2 to the registrants Registration Statement on Form S-8 (File No. 333-118776) filed with the
Commission on September 3, 2004)10.4*
    
    Amended and Restated Digital Angel Corporation Transition Stock Option Plan, as amended (incorporated herein by
reference to Exhibit 4.1 to the registrants Registration Statement on Form S-8 (file No. 333-148958) filed with
the Commission on January 31, 2008)10.5*
    
    Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to
Exhibit 4.2 to the registrants Registration Statement on Form S-8 (File No. 333-126229) filed with the
Commission on June 29, 2005)10.6*
    
    Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan
(incorporated by reference to Exhibit 10.110 to the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)
  46




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##### Table of Contents



ExhibitNumber
    
    Description10.7*
    
    Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to
Exhibit 4.2 to the registrants Registration Statement on Form S-8 (File No. 333-126229) filed with the
Commission on June 29, 2005)10.8*
    
    Form of Stock Award Agreement in connection with the Applied Digital Solutions, Inc. 1999/2003 Flexible Stock Plan
(incorporated by reference to Exhibit 10.110 to the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)10.9*
    
    Letter Agreement dated March 14, 2007 between Applied Digital Solutions, Inc. and Scott R. Silverman
(incorporated by reference to Exhibit 10.111 to the registrants Annual Report on Form 10-K filed with the
Commission on March 15, 2007)10.10*
    
    Incentive and Recognition Policy dated April 2, 2007 (incorporated by reference to Exhibit 10.112 to the
registrants Annual Report on Form 10-K/A filed with the Commission on April 6, 2007)10.11*
    
    Letter Agreement dated August 6, 2007 between Digital Angel Corporation and Kevin N. McGrath (incorporated by
reference to Exhibit 10.8 to the registrants Quarterly Report on Form 10-Q filed with the Commission on
August 9, 2007)10.12*
    
    Employment Agreement effective as of January 1, 2008 between Applied Digital Solutions, Inc. and Joseph J. Grillo
(incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the
Commission on January 4, 2008)10.13*
    
    Employment Letter Agreement dated January 15, 2008 between Digital Angel Corporation and Randolph K. Geissler
(incorporated by reference to Exhibit 10.3 to the registrants Current Report on Form 8-K filed with the
Commission on January 17, 2008)10.14*
    
    Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 4.2 to the registrants
Registration Statement on Form S-8 (file No. 333-148958) filed with the Commission on January 31, 2008)10.15
    
    Form of Series B Warrant to Purchase Common Stock of Applied Digital Solutions, Inc. (incorporated herein by
reference to Exhibit 10.3 to the registrants Current Report on Form 8-K filed with the Commission on April 15,
2004)10.16
    
    Form of Series D Warrant to Purchase Common Stock of Applied Digital Solutions, Inc., in favor of Satellite
Strategic Finance Associates, LLC dated October 21, 2004 (incorporated herein by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K filed with the Commission on October 22, 2004)10.17
    
    Form of Series E Warrant to Purchase Common Stock of Applied Digital Solutions, Inc. dated as of June 10, 2005
(incorporated by reference to Exhibit 10.8 to the registrants Current Report on Form 8-K/A filed with the
Commission on June 13, 2005)10.18
    
    Supply Agreement between Digital Angel Corporation and Raytheon Microelectronics España, S.A. dated April 26,
2006 (incorporated by reference to Exhibit 10.1 to the registrants Quarterly Report on Form 10-Q filed with the
Commission on May 9, 2006)10.19
    
    Amended Credit Facility between Danske Bank and Daploma International A/S dated June 1, 2006 (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the Commission on June 5,
2006)10.20
    
    Letter of Support Issued to Danske Bank A/SM (incorporated by reference to Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with the Commission on June 5, 2006)10.21
    
    Letter Agreement regarding Amendment of $13,500,000 Note dated as of February 29, 2008 among Applied Digital
Solutions, Inc., Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd. and PSource
Structured Debt Limited (incorporated by reference to Exhibit 10.10 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)10.22
    
    Master Security Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated August 24,
2006 (incorporated by reference to Exhibit 10.3 to the registrants Current Report on Form 8-K filed with the
Commission on August 25, 2006)10.23
    
    Stock Pledge Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated August 24,
2006 (incorporated by reference to Exhibit 10.4 to the registrants Current Report on Form 8-K filed with the
Commission on August 25, 2006)10.24
    
    Common Stock Purchase Warrant between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated
August 24, 2006 (incorporated by reference to Exhibit 10.5 to the registrants Current Report on Form 8-K filed
with the Commission on August 25, 2006)10.25
    
    Registration Rights Agreement between Applied Digital Solutions, Inc. and Laurus Master Fund, Ltd., dated
August 24, 2006 (incorporated by reference to Exhibit 10.6 to the registrants Current Report on Form 8-K filed
with the Commission on August 25, 2006)10.26
    
    Funds Escrow Agreement among Applied Digital Solutions, Inc., Laurus Master Fund, Ltd. and Loeb & Loeb LLP, dated
August 24, 2006 (incorporated by reference to Exhibit 10.7 to the registrants Current Report on Form 8-K filed
with the Commission on August 25, 2006)
  47




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##### Table of Contents



ExhibitNumber
    
    Description10.27
    
    Securities Purchase Agreement between
Digital Angel Corporation and
Imperium Master Fund, Ltd. dated
February 6, 2007 (incorporated by
reference to Exhibit 10.1 to the
registrants Current Report on
Form 8-K filed with the Commission on
February 12, 2007)10.28
    
    Amendment No. 4 to Securities
Purchase Agreement dated May 7, 2007
between Digital Angel Corporation and
Imperium Master Fund, Ltd.
(incorporated by reference to
Exhibit 10.18 to the registrants
Quarterly Report on Form 10-Q filed
with the Commission on May 10, 2007)10.29
    
    Amendment No. 5 to Securities
Purchase Agreement dated as of June
28, 2007 among Digital Angel
Corporation, Imperium Master Fund,
Ltd. and Gemini Master Fund, Ltd.
(incorporated by reference to
Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with
the Commission on July 5, 2007)10.30
    
    Amendment No. 6 to Securities
Purchase Agreement dated as of
August 24, 2007 between Digital Angel
Corporation and Imperium Master Fund,
Ltd. (incorporated by reference to
Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with
the Commission on August 30, 2007)10.31
    
    10.25% Senior Secured Debenture
payable to Imperium Master Fund, Ltd.
dated February 6, 2007 (incorporated
by reference to Exhibit 10.2 to the
registrants Current Report on
Form 8-K filed with the Commission on
February 12, 2007)10.32
    
    Warrant to Purchase Common Stock
issued to Imperium Master Fund, Ltd.
dated February 6, 2007 (incorporated
by reference to Exhibit 10.3 to the
registrants Current Report on
Form 8-K filed with the Commission on
February 12, 2007)10.33
    
    Form of Warrant to Purchase Common
Stock of Digital Angel Corporation
(incorporated by reference to
Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with
the Commission on July 5, 2007)10.34
    
    Security Agreement between Digital
Angel Corporation, Digital Angel
Technology Corporation, OuterLink
Corporation, DSD Holding A/S,
Signature Industries Limited, Digital
Angel International, Inc., Digital
Angel Holdings, LLC, Imperium
Advisers, LLC and Imperium Master
Fund, Ltd. dated February 6, 2007
(incorporated by reference to
Exhibit 10.4 to the registrants
Current Report on Form 8-K filed with
the Commission on February 12, 2007)10.35
    
    Subsidiary Guarantee between Digital
Angel Technology Corporation,
OuterLink Corporation, DSD Holding
A/S, Signature Industries Limited,
Digital Angel International, Inc.,
Digital Angel Holdings, LLC and
Imperium Advisers, LLC dated
February 6, 2007 (incorporated by
reference to Exhibit 10.5 to the
registrants Current Report on
Form 8-K filed with the Commission on
February 12, 2007)10.36
    
    Registration Rights Agreement between
Digital Angel Corporation and
Imperium Master Fund, Ltd. dated
February 6, 2007 (incorporated by
reference to Exhibit 10.6 to the
registrants Current Report on
Form 8-K filed with the Commission on
February 12, 2007)10.37
    
    Amendment No. 2 to Registration
Rights Agreement dated as of June 28,
2007 between Digital Angel
Corporation and Imperium Master Fund,
Ltd. (incorporated by reference to
Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with
the Commission on July 5, 2007)10.38
    
    Stock Purchase Agreement dated May 7,
2007 between Digital Angel
Corporation and Newcomb
Communications, Inc. (incorporated by
reference to Exhibit 10.17 to the
registrants Quarterly Report on
Form 10-Q filed with the Commission
on May 10, 2007)10.39
    
    Satisfaction of Loan Agreement dated
May 15, 2007 between Applied Digital
Solutions, Inc. and InfoTech USA,
Inc. (incorporated by reference to
Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with
the Commission on May 21, 2007)10.40
    
    Omnibus Amendment and Waiver dated as
of October 31, 2007 among Applied
Digital Solutions, Inc., VeriChip
Corporation, Laurus Master Fund,
Ltd., Kallina Corporation, Valens
U.S. SPV I, LLC, Valens Offshore SPV
II, Corp. and PSource Structured Debt
Limited (incorporated by reference to
Exhibit 10.1 to the registrants
Current Report on Form 8-K filed with
the Commission on November 6, 2007)10.41
    
    Omnibus Amendment Agreement dated
February 29, 2008 among Applied
Digital Solutions, Inc., Laurus
Master Fund, Ltd., Kallina
Corporation, Valens U.S. SPV I, LLC,
Valens Offshore SPV II, Corp., Valens
Offshore SPV I, Ltd. and PSource
Structured Debt Limited (incorporated
by reference to Exhibit 10.141 to the
registrants Annual Report on Form
10-K filed with the Commission on
March 17, 2008)10.42
    
    Common Stock Purchase Warrant in
favor of PSource Structured Debt
Limited dated October 31, 2007
(incorporated by reference to
Exhibit 10.2 to the registrants
Current Report on Form 8-K filed with
the Commission on November 6, 2007)
  48




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##### Table of Contents



ExhibitNumber
    
    Description10.43
    
    Common Stock Purchase Warrant in favor of Valens
Offshore SPV I, Ltd. dated October 31, 2007
(incorporated by reference to Exhibit 10.3 to the
registrants Current Report on Form 8-K filed with
the Commission on November 6, 2007)10.44
    
    Amendment to Common Stock Purchase Warrant between
Applied Digital Solutions, Inc. and Valens Offshore
SPV I, Ltd. dated February 29, 2008 (incorporated by
reference to Exhibit 10.141 to the registrants
Annual Report on Form 10-K filed with the Commission
on March 17, 2008)10.45
    
    Common Stock Purchase Warrant in favor of Valens U.S.
SPV I, LLC dated October 31, 2007 (incorporated by
reference to Exhibit 10.4 to the registrants Current
Report on Form 8-K filed with the Commission on
November 6, 2007)10.46
    
    Securities Purchase Agreement dated August 31, 2007
between Applied Digital Solutions, Inc. and Kallina
Corporation (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.47
    
    Secured Term Note dated August 31, 2007 between
Applied Digital Solutions, Inc. and Kallina
Corporation (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.48
    
    Letter Agreement regarding Amendment of $7,000,000
Note dated as of February 29, 2008 among Applied
Digital Solutions, Inc., Kallina Corporation, Valens
U.S. SPV I, LLC, Valens Offshore SPV I, Ltd. and
Valens Offshore SPV II, Corp. (incorporated by
reference to Exhibit 10.9 to the registrants Current
Report on Form 8-K filed with the Commission on
March 5, 2008)10.49
    
    Subordination Agreement dated as of February 29, 2008
among Applied Digital Solutions, Inc., VeriChip
Corporation and LV Administrative Services, Inc.
(incorporated by reference to Exhibit 10.11 to the
registrants Current Report on Form 8-K filed with
the Commission on March 5, 2008)10.50
    
    Amendment of Warrants and Conditional Consent to
Asset Sales dated as of February 29, 2008 among
Applied Digital Solutions, Inc., Laurus Master Fund,
Ltd., Kallina Corporation, Valens U.S. SPV I, LLC,
Valens Offshore SPV I, Ltd., Valens Offshore SPV II,
Corp. and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.12 to the
registrants Current Report on Form 8-K filed with
the Commission on March 5, 2008)10.51
    
    Master Security Agreement dated August 31, 2007
between Applied Digital Solutions, Inc. and Kallina
Corporation (incorporated by reference to
Exhibit 10.3 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.52
    
    Stock Pledge Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Computer Equity Corporation, Digital Angel
Corporation and Digital Angel Technology Corporation
(incorporated by reference to Exhibit 10.4 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)10.53
    
    Intellectual Property Security Agreement dated
August 31, 2007 between Applied Digital Solutions,
Inc. and Kallina Corporation (incorporated by
reference to Exhibit 10.5 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.54
    
    Intercreditor Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Laurus Master Fund, Ltd., Valens U.S. SPV I, LLC and
Valens Offshore SPV II, Corp. (incorporated by
reference to Exhibit 10.6 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.55
    
    Guaranty by Applied Digital Solutions, Inc. in favor
of Kallina Corporation dated August 31, 2007
(incorporated by reference to Exhibit 10.7 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)10.56
    
    Amendment and Partial Assignment of Loans, Liens and
Documents dated August 31, 2007 among Kallina
Corporation, Valens U.S. SPV I, LLC, and certain
other parties named therein (incorporated by
reference to Exhibit 10.8 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.57
    
    Amendment and Partial Assignment of Loans, Liens and
Documents dated August 31, 2007 among Kallina
Corporation, Valens Offshore SPV II, Corp., and
certain other parties named therein (incorporated by
reference to Exhibit 10.9 to the registrants Current
Report on Form 8-K/A filed with the Commission on
November 7, 2007)10.58
    
    Amendment to Warrant dated August 31, 2007 among
Applied Digital Solutions, Inc., Laurus Master Fund,
Ltd., Valens Offshore SPV II, Corp. and Valens U.S.
SPV I, LLC (incorporated by reference to
Exhibit 10.10 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.59
    
    Second Amendment to Common Stock Purchase Warrant
dated as of February 29, 2008 among Applied Digital
Solutions, Inc., Laurus Master Fund, Ltd., Valens
U.S. SPV I, LLC and PSource Structured Debt Limited
(incorporated by reference to Exhibit 10.141 to the
registrants Annual Report on Form 10-K filed with
the Commission on March 17, 2008)
  49




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##### Table of Contents



ExhibitNumber
    
    Description10.60
    
    Intellectual Property Security Agreement dated
August 31, 2007 between Applied Digital Solutions,
Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.11 to the registrants
Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.61
    
    Registration Rights Agreement dated August 31, 2007
between Kallina Corporation and VeriChip Corporation
(incorporated by reference to Exhibit 10.12 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)10.62
    
    Secured Term Note dated August 31, 2007 among Digital
Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc. and
Digital Angel International in favor of Applied
Digital Solutions, Inc. (incorporated by reference to
Exhibit 10.13 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.63
    
    Digital Angel Corporation Security Agreement dated
August 31, 2007 among Applied Digital Solutions,
Inc., Digital Angel Corporation, Digital Angel
Technology Corporation, Fearing Manufacturing Co.,
Inc. and Digital Angel International (incorporated by
reference to Exhibit 10.14 to the registrants
Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.64
    
    Subordination Agreement dated August 31, 2007 among
Applied Digital Solutions, Inc., Kallina Corporation,
Valens Offshore SPV II, Corp. and Valens U.S. SPV I,
LLC (incorporated by reference to Exhibit 10.15 to
the registrants Current Report on Form 8-K/A filed
with the Commission on November 7, 2007)10.65
    
    Secured Revolving Note dated August 31, 2007 among
Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., and
Digital Angel International in favor of Kallina
Corporation (incorporated by reference to Exhibit
10.16 to the registrants Current Report on
Form 8-K/A filed with the Commission on November 7,
2007)10.66
    
    Security Agreement dated August 31, 2007 among
Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., Digital
Angel International, and Kallina Corporation
(incorporated by reference to Exhibit 10.17 to the
registrants Current Report on Form 8-K/A filed with
the Commission on November 7, 2007)10.67
    
    Stock Pledge Agreement dated August 31, 2007 among
Digital Angel Corporation, Digital Angel Technology
Corporation and Kallina Corporation (incorporated by
reference to Exhibit 10.18 to the registrants
Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.68
    
    Intellectual Property Security Agreement dated August 31, 2007
among Digital Angel Corporation, Digital Angel Technology
Corporation, Fearing Manufacturing Co., Inc., and Kallina
Corporation (incorporated by reference to Exhibit 10.19 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.69
    
    Registration Rights Agreement dated August 31, 2007 between
Destron Fearing Corporation (formerly Digital Angel Corporation)
and Kallina Corporation (incorporated by reference to
Exhibit 10.20 to the registrants Current Report on Form 8-K/A
filed with the Commission on November 7, 2007)10.70
    
    Common Stock Purchase Warrant in favor of Kallina Corporation
dated August 31, 2007 (incorporated by reference to Exhibit 10.21
to the registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.71
    
    Subsidiary Guaranty by Digital Angel Corporation, Digital Angel
Technology Corporation, Fearing Manufacturing Co., Inc., and
Digital Angel International in favor of Kallina Corporation dated
August 31, 2007 (incorporated by reference to Exhibit 10.22 to the
registrants Current Report on Form 8-K/A filed with the
Commission on November 7, 2007)10.72
    
    Settlement Agreement and General Release dated September 28, 2007
among Hark M. Vasa, H&K Vasa 1999 Family Limited Partnership, H&K
Vasa 2000 Family Limited Partnership, Applied Digital Solutions,
Inc. and Pacific Decision Sciences Corporation (f/k/a PDS
Acquisition Corporation) (incorporated by reference to Exhibit
10.1 to the registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2007)10.73
    
    Confidential Settlement Agreement and Release dated December 19,
2007 among Verizon Federal Inc., Government Telecommunications,
Inc. and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on December 21, 2007)10.74
    
    Guaranty by Applied Digital Solutions, Inc. in favor of Verizon
Federal Inc. dated December 19, 2007 (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed
with the Commission on December 21, 2007)10.75
    
    Subordination Agreement dated December 19, 2007 among Verizon
Federal Inc., Laurus Master Fund, Ltd., Kallina Corporation,
Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens
Offshore SPV II, Corp., PSource Structured Debt Limited and LV
Administrative Services, Inc. (incorporated by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed
with the Commission on December 21, 2007)
  50




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##### Table of Contents



ExhibitNumber
    
    Description10.76
    
    Letter Agreement dated December 20, 2007 between VeriChip
Corporation and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.4 to the registrants Current Report on
Form 8-K filed with the Commission on December 21, 2007)10.77
    
    Joinder Agreement dated January 14, 2008 between GT Acquisition
Sub, Inc. and Kallina Corporation (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on January 17, 2008)10.78
    
    Joinder Agreement dated January 14, 2008 among GT Acquisition Sub,
Inc., Kallina Corporation, Valens Offshore SPV I, Ltd., Valens
Offshore SPV II, Corp., Valens U.S. SPV I, LLC and PSource
Structured Debt Limited (incorporated by reference to Exhibit 10.2
to the registrants Current Report on Form 8-K filed with the
Commission on January 17, 2008)10.79
    
    Letter Agreement dated as of February 29, 2008 between VeriChip
Corporation and Applied Digital Solutions, Inc. (incorporated by
reference to Exhibit 10.6 to the registrants Current Report on
Form 8-K filed with the Commission on March 5, 2008)10.80
    
    Amendment to Replacement Common Stock Purchase Warrant dated as of
February 29, 2008 between Applied Digital Solutions, Inc. and
Kallina Corporation (incorporated by reference to Exhibit 10.141
to the registrants Annual Report on Form 10-K filed with the
Commission on March 17, 2008)10.81
    
    Amendment No. 1, dated January 5, 2008, to the Product Supply and
Distribution Agreement dated February 13, 2007 between Digital
Angel Corporation and Schering-Plough Home Again LLC (incorporated
by reference to Exhibit 10.1 to the registrants Quarterly Report
on Form 10-Q filed with the Commission on May 12, 2008)10.81*
    
    Employment Agreement, dated March 24, 2008, by and between the
registrant and Parke H. Hess (incorporated by reference to Exhibit
10.1 to the registrants Amendment No. 1 to the Quarterly Report
on Form 10-Q/A filed with the Commission on July 9, 2008)10.83*
    
    Applied Digital Solutions, Inc. 2003 Flexible Stock Plan, as
Amended and Restated through June 20, 2008 (incorporated by
reference to Exhibit 10.1 to the registrants Quarterly Report on
Form 10-Q filed with the Commission on August 11, 2008)10.84
    
    Guarantee by Applied Digital Solutions, Inc. in favor of The
Stanley Works dated as of May 15, 2008 (incorporated by reference
to Exhibit 10.2 to the registrants Current Report on Form 8-K
filed with the Commission on May 16, 2008)10.85
    
    Non-Competition Agreement by and between Applied Digital
Solutions, Inc. and The Stanley Works dated as of May 15, 2008
(incorporated by reference to Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with the Commission on May 16,
2008)10.86
    
    Intercompany Letter Agreement by and between Applied Digital
Solutions, Inc. and VeriChip Corporation dated as of May 15, 2008
(incorporated by reference to Exhibit 10.4 to the registrants
Current Report on Form 8-K filed with the Commission on May 16,
2008)10.87
    
    Consent and Waiver Agreement by and among Laurus Master Fund,
Ltd., Kallina Corporation, Valens U.S. SPV I, LLC, Valens Offshore
SPV I, Ltd., Valens Offshore SPV II, Corp., PSource Structured
Debt Limited, and Applied Digital Solutions, Inc. dated as of
May 15, 2008 (incorporated by reference to Exhibit 10.5 to the
registrants Current Report on Form 8-K filed with the Commission
on May 16, 2008)10.88
    
    Secured Promissory Note from Customer Service Delivery Platform
Corporation dated June 2, 2008 (incorporated by reference to
Exhibit 2.2 to the registrants Current Report on Form 8-K filed
with the Commission on June 6, 2008)10.89
    
    Security Agreement between Customer Service Delivery Platform
Corporation and Applied Digital Solutions, Inc. dated June 2, 2008
(incorporated by reference to Exhibit 2.3 to the registrants
Current Report on Form 8-K filed with the Commission on June 6,
2008)10.90
    
    Stock Purchase Agreement between Digital Angel Corporation and
Sterling Hallmark, Inc. dated July 10, 2008 (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on
Form 8-K filed with the Commission on July 16, 2008)10.91
    
    Amendment to Confidential Settlement Agreement and Release between
Verizon Federal Inc., Government Telecommunications, Inc. and
Digital Angel Corporation dated July 10, 2008 (incorporated by
reference to Exhibit 10.2 to the registrants Current Report on
Form 8-K filed with the Commission on July 16, 2008)10.92
    
    Noncompetition and Confidentiality Agreement between Digital Angel
Corporation and Sterling Hallmark, Inc. dated July 10, 2008
(incorporated by reference to Exhibit 10.3 to the registrants
Current Report on Form 8-K filed with the Commission on July 16,
2008)10.93
    
    Omnibus Amendment between Digital Angel Corporation, Laurus Master
Fund, Ltd., Kallina Corporation, Valens Offshore SPV I, Ltd.,
Valens Offshore SPV II Corp, Valens US SPV I, LLC, Psource
Structured Debt Limited and LV Administrative Services, Inc. dated
July 21, 2008 (incorporated by reference to Exhibit 10.1 to the
registrants Current Report on Form 8-K filed with the Commission
on July 24, 2008)
  51




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##### Table of Contents



ExhibitNumber
    
    Description10.94
    
    Common Stock Purchase Warrant dated July 21, 2008 issued to Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.2
to the registrants Current Report on Form 8-K filed with the Commission on July 24, 2008)10.95*
    
    Form of Amendment to the Option Agreements issued to Joseph Grillo and Parke Hess (incorporated by reference to Exhibit 10.1 to
the registrants Current Report on Form 8-K filed with the Commission on September 24, 2008)10.96
    
    Letter Agreement dated September 30, 2008 between Digital Angel Corporation, Laurus Master Fund, LTD, Kallina Corporation,
Valens U.S. SPV I, LLC, Valens Offshore SPV I Ltd., Valens Offshore SPV II Corp. and Psource Structured Debt Limited and
consented to by Destron Fearing Corporation, Digital Angel Technology Corporation, Digital Angel International, Inc. and
Fearing Manufacturing Co. Inc. (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed
with the Commission on October 3, 2008)10.97
    
    Secured Term Note dated September 30, 2008 payable by Digital Angel Corporation to Valens Offshore SPV II Corp. (incorporated
by reference to Exhibit 10.2 to the registrants Current Report on Form 8-K filed with the Commission on October 3, 2008)10.98
    
    Agreement dated September 30, 2008 between Digital Angel Corporation and Valens Offshore SPV II Corp. (incorporated by
reference to Exhibit 10.3 to the registrants Current Report on Form 8-K filed with the Commission on October 3, 2008)10.99
    
    Stock Purchase Agreement dated November 12, 2008 between Digital Angel Corporation, Scott Silverman and R&R Consulting
Partners, LLC (incorporated by reference to Exhibit 10.2 to the registrants Current Report on Form 8-K filed with the
Commission on November 18, 2008)10.100
    
    Asset Purchase Agreement dated November 12, 2008 between Digital Angel Corporation and VeriChip Corporation (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on Form 8-K filed with the Commission on November 18, 2008)10.101**
    
    Letter Agreement dated November 26, 2008 between Digital Angel Corporation, Destron Fearing Corporation, Digital Angel
Technology Corporation, Digital Angel International, Inc., Laurus Master Fund, Ltd, Kallina Corporation, Valens Offshore SPV I,
Ltd., Valens Offshore SPV II Corp, Valens US SPV I, LLC, Psource Structured Debt Limited and LV Administrative Services, Inc.10.102**
    
    Form of Stock Option Agreement under the 2003 Flexible Stock Plan21.1**
    
    List of Subsidiaries of Digital Angel Corporation23.1**
    
    Consent of Eisner LLP31.1**
    
    Certification by Joseph J. Grillo, Chief Executive Officer and President, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)31.2**
    
    Certification by Lorraine M. Breece, Senior Vice President and Chief Financial Officer, pursuant to Exchange Act
Rules 13A-14(a) and 15d-14(a)32.1**
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 *
    
    - Management contract or compensatory plan.**
    
    - Filed herewith.  52