**Exhibit10.3**

 

**THIS NOTE AND THE COMMON SHARESISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THESECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTEMAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCEOF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR ANOPINION OF COUNSEL REASONABLY SATISFACTORY TO DIGITAL ANGEL CORPORATION, THATSUCH REGISTRATION IS NOT REQUIRED.**

 

**SECUREDCONVERTIBLE NOTE**

 

FORVALUE RECEIVED, DIGITAL ANGEL CORPORATION, a Delaware corporation (hereinaftercalled the “Borrower”), hereby promises to pay to LAURUS MASTER FUND, LTD., c/oIronshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, SouthChurch Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the “Holder”)or its registered assigns, on order, without demand, the sum of Two MillionDollars ($2,000,000) (the “Principal Amount”), together with any accrued andunpaid interest, on July 31, 2005 (the “Maturity Date”).

 

Thefollowing terms shall apply to this Note:

 

# **ARTICLE I**

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**INTEREST**

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## 1.1   Interest Rate.  Interest payable on this Note shall accrueat the annual rate of Prime Rate plus 1.75%, provided, however, that in noevent shall the interest rate be less than 6% (the “**Interest Rate**”) and bepayable in arrears commencing one month from the date hereof and on the firstbusiness day of each consecutive calendar month thereafter, and on the MaturityDate, accelerated or otherwise, due and payable as described below.  Interest shall be computed on the basis ofactual days elapsed in a year of 360 days. “Prime Rate” means the “base rate” or “prime rate” published in the WallStreet Journal from time to time.  ThePrime Rate shall be increased or decreased as the case may be for each increaseor decrease in the Prime Rate in an amount equal to such increase or decreasein the Prime Rate, each such change to be effective as of the day of the changein such rate.

##  

## 1.2   Default Rate.  The Borrower shall have a three (3) businessday grace period to pay any monetary amounts due under this Note, after whichgrace period a default interest rate of 5% per annum above the Interest Rateshall apply to the amounts owed hereunder. This is the same period set forth in Section 4.1.

 

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# **ARTICLE II**

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# **PAYMENTS OF PRINCIPAL AND INTEREST**

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## 2.1   Monthly Payments.  Subject to the terms of this Article II, theBorrower shall repay one twenty-first (1/21st) of the PrincipalAmount (to the extent such amount has not been converted pursuant to ArticleIII below), together with interest accrued to date on such portion of thePrincipal Amount plus any and all other amounts owing under this Note but notpreviously paid (collectively the “**Monthly Amount**”), in accordance with Section2.2 below, on the first business day of each consecutive calendar month (each,a “**RepaymentDate**”), beginning on the first such day which occurs ninety daysfollowing the date hereof.

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## 2.2   Cash or Common Stock.  Subject to the terms of this Article II, theBorrower has the sole option to determine whether to satisfy payment of theMonthly Amount in full on each Repayment Date either in cash or in shares ofthe Borrower’s common stock, as currently constituted (the “**Common Stock**”),or any combination of both.  TheBorrower shall deliver to the Holder a written irrevocable notice in the formof Exhibit B attached hereto electing to pay such Monthly Amount in full onsuch Repayment Date in either cash or Common Stock, or any combination of both(“**RepaymentElection Notice**”).  SuchRepayment Election Notice shall be delivered at least twenty (20) days prior tothe applicable Repayment Date (the date of such notice being hereinafterreferred to as the “**Notice Date**”).  The Holder shall have the right to defer for any period of timethe payment of the Monthly Amount in shares of Common Stock in its solediscretion.  If such Repayment ElectionNotice is not delivered within twenty (20) days prior to the applicable RepaymentDate, then the repayment shall be made in either cash or shares of Common Stockon the same terms hereunder at the Holder’s sole option.  If the Borrower elects or is required torepay all or a portion of the Monthly Amount in cash on a Repayment Date, thenon such Repayment Date the Borrower shall pay to the Holder 105% of the MonthlyAmount in satisfaction of such obligation. If the Borrower elects or is required to repay any portion of theMonthly Amount in shares of Common Stock, the number of such shares to beissued for such Repayment Date shall be the number determined by dividing (x)the portion of the Monthly Amount to be paid in shares of Common Stock, by (y)the applicable Conversion Price as of such Repayment Date. Any shares of CommonStock comprising the Monthly Amount are referred to herein as “**RepaymentShares**.”

 

## 2.3   No Effective Registration.  Notwithstanding anything to the contraryherein, the Borrower shall be prohibited from exercising its right to repay theMonthly Amount in Repayment Shares (and must deliver cash in respect thereof)if at any time from the Notice Date until the day on which the Holder receivesuch Repayment Shares (i) there fails to exist an effective registrationstatement covering the resale of such Repayment Shares or (ii) an Event ofDefault (as defined in Article V) exists or occurs which is not waived inwriting by the Holder in whole or in part at the Holder’s option.

 

2.4   Share Price/IssuanceLimitations.  Notwithstandinganything to the contrary herein (a) the Borrower shall have no right to satisfypayment of the Monthly Amount by delivery of Repayment Shares unless theclosing price of the Common Stock as reported by Bloomberg, L.P. on thePrincipal Market for any of the eleven (11) trading days preceding a RepaymentDate is greater than 113% of the Fixed Conversion Price (as defined in Section3.1

 

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below) and (b) the Borrower shall not be entitled to issue anyRepayment Shares if such issuance would exceed the difference between thenumber of shares of Common Stock beneficially owned by the Holder or issuableupon exercise of warrants held by the Holder and 4.99% of the outstandingshares of Common Stock of the Borrower. For the purposes of the immediately preceding sentence, beneficial ownershipshall be determined in accordance with Section 13(d) of the Exchange Act andRegulation 13d-3 thereunder.  The Holdermay void the Repayment Share limitation described in this Section 2.4 upon 75days’ prior notice to the Borrower or without any notice requirement upon anEvent of Default.

 

## 2.4   Deemed Conversions.  Any repayment of the Monthly Amount inRepayment Shares pursuant to the terms hereof shall constitute and be deemed aconversion of such portion of the applicable Principal Amount and accruedinterest for all purposes under this Note (except as otherwise providedherein).

 

## 2.5   Prepayments.  In the event Borrower wishes to prepay allor a portion of the Principal Amount, Borrower shall deliver to the Holder awritten irrevocable notice indicating the amount intended to be so prepaid (the“Prepayment Amount”) and the date on which such prepayment shall be made (the“Prepayment Date”).  Such notice shallbe delivered to the Holder at least five (5) business days’ prior to thePrepayment Date.  On the PrepaymentDate, Borrower shall pay to the Holder (a) in the event the Prepayment Dateoccurs during the first six month period following the date hereof, 110% of thePrepayment Amount in satisfaction of the Prepayment Amount, (b) in the event thePrepayment Date occurs during the second six month period following the datehereof, 115% of the Prepayment Amount in satisfaction of the Prepayment Amountand (c) in the event the Prepayment Date occurs at any time after the secondsix month period following the date hereof, 125% of the Prepayment Amount insatisfaction of the Prepayment Amount.

 

# **ARTICLE III**

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# **CONVERSION RIGHTS**

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## 3.1   Optional Conversion.Subject to the terms of this Article III, the Holder shall have the right, butnot the obligation, at any time until the Maturity Date or thereafter during anEvent of Default (as defined in Article V), to convert all or any portion ofthe outstanding Principal Amount and/or accrued interest and fees due andpayable into fully paid and nonassessable shares of Common Stock at theconversion price set forth in Section 3.2 (the “**Conversion Price**”). Theshares of Common Stock to be issued upon such conversion are herein referred toas the “**ConversionShares**.”

##  

## 3.2   Conversion Price.Subject to adjustment as provided in Section 3.7 hereof, the Conversion Priceper share shall be $2.33 (the “**Fixed Conversion Price**”).  If an Event of Default has occurred andshall be continuing hereunder, then the Conversion Price shall be equal to thelower of (i) the Fixed Conversion Price; or (ii) eighty percent (80%) of theaverage of the three lowest closing prices for the Common Stock on theprincipal trading exchange or market for the Common Stock, (the “**PrincipalMarket**”), or on any securities exchange or other securities marketon which the Common Stock is then being listed or traded, for the thirty (30)trading days prior to but not including the Conversion Date.

 

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## 3.3   Conversion Limitation.Notwithstanding anything contained herein to the contrary, the Holder shall notbe entitled to convert pursuant to the terms of this Note an amount that wouldbe convertible into that number of Conversion Shares which would exceed thedifference between the number of shares of Common Stock beneficially owned bysuch holder or issuable upon exercise of warrants held by such holder and 4.99%of the outstanding shares of Common Stock of the Borrower.  For the purposes of the immediatelypreceding sentence, beneficial ownership shall be determined in accordance withSection 13(d) of the Exchange Act and Regulation 13d-3 thereunder.  The Holder may void the Conversion Sharelimitation described in this Section 3.3 upon 75 days’ prior notice to the Borroweror without any notice requirement upon an Event of Default.

 

## 3.4   Mechanics of Conversion.In the event that the Holder elects to convert this Note into Common Stock, theHolder shall give notice of such election by delivering an executed andcompleted notice of conversion (“**Notice of Conversion**”) to the Borrower andsuch Notice of Conversion shall provide a breakdown in reasonable detail of theamount of Principal Amount, accrued interest and fees that are beingconverted.  On each Conversion Date (ashereinafter defined) and in accordance with its Notice of Conversion, theHolder shall make the appropriate reduction to the Principal Amount, accruedinterest and fees as entered in its records and shall provide written noticethereof to the Borrower within two (2) business days after the ConversionDate.  Each date on which a Notice ofConversion is delivered or telecopied to the Borrower in accordance with theprovisions hereof shall be deemed a Conversion Date (the “**Conversion Date**”).  A form of Notice of Conversion that may beemployed by the Holder is annexed hereto as Exhibit A.  The Borrower will cause the transfer agentto transmit the certificates representing the Conversion Shares to the Holderby crediting the account of the Holder’s designated broker with the DepositoryTrust Corporation (“**DTC**”) through its Deposit Withdrawal AgentCommission (“DWAC”) system within three (3) business days after receipt by theBorrower of the Notice of Conversion (the “**Delivery Date**”).

 

In thecase of the exercise of the conversion rights set forth herein, the conversionprivilege shall be deemed to have been exercised and the Conversion Sharesissuable upon such conversion shall be deemed to have been issued upon the dateof receipt by the Borrower of the Notice of Conversion.  The Holder shall be treated for all purposesas the record holder of such Common Stock, unless the Holder provides theBorrower written instructions to the contrary.

 

## 3.5   Partial Conversions.In the event of any partial conversions of outstanding Principal Amountpursuant to this Article III, such conversions shall be deemed to constituteconversions of outstanding Principal Amount applying to Monthly Amounts for theRepayment Dates in chronological order. For example, if the Holder elects to convert $200,000 of the PrincipalAmount prior to the first Repayment Date, then (i) the Principal Amount of theMonthly Amount due on each of the first and second Repayment Dates would equal$0, (ii) the Principal Amount of the Monthly Amount due on the third RepaymentDate would equal $85,714 and (iii) the Principal Amount of the Monthly Amountdue on each of the remaining Repayment Dates would be $95,238.

 

## 3.6   Late Payments. TheBorrower understands that a delay in the delivery of the shares of Common Stockin the form required pursuant to this Article beyond the Delivery Date couldresult in economic loss to the Holder. As compensation to the Holder for such loss, the

 

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Borrower agrees to pay late payments to the Holder for late issuance ofthe such shares in the form required pursuant to this Article III uponconversion of the Note, in the amount equal to the greater of (i) $500 perbusiness day after the Delivery Date and (ii) the Borrower’s actual damagesfrom such delayed delivery.  TheBorrower shall pay any payments incurred under this Section in immediatelyavailable funds upon demand and, in the case of actual damages, accompanied byreasonable documentation of the amount of such damages.

 

## 3.7   Adjustment Provisions.The Fixed Conversion Price and number and kind of shares or other securities tobe issued upon conversion determined pursuant to Sections 3.1 and 3.2 shall besubject to adjustment from time to time upon the happening of certain eventswhile this conversion right remains outstanding, as follows:

 

#### A.                                                                                   Reclassification,etc.  If the Borrower at any timeshall, by reclassification or otherwise, change the Common Stock into the sameor a different number of securities of any class or classes, this Note, as tothe unpaid Principal Amount and accrued interest thereon, shall thereafter bedeemed to evidence the right to purchase an adjusted number of such securitiesand kind of securities as would have been issuable as the result of such changewith respect to the Common Stock immediately prior to such reclassification orother change.

 

#### B.                                                                                     StockSplits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greateror smaller number of shares of Common Stock, or if a dividend is paid on theCommon Stock in shares of Common Stock, the Fixed Conversion Price shall beproportionately reduced in case of subdivision of shares or stock dividend orproportionately increased in the case of combination of shares, in each suchcase by the ratio which the total number of shares of Common Stock outstandingimmediately after such event bears to the total number of shares of CommonStock outstanding immediately prior to such event.

 

#### C.                                                                                     ShareIssuances.  Subject to theprovisions of this Section 3.7, if the Borrower shall at any time prior to theconversion or repayment in full of the Principal Amount issue any shares ofCommon Stock to a person other than the Holder (otherwise than (i) pursuant toSubsections A or B above; (ii) pursuant to options, warrants, or otherobligations to issue shares outstanding on the date hereof as set forth in theSchedules to the Purchase Agreement dated as of the date hereof between theBorrower and the Holder, which agreement is incorporated herein by thisreference (the “Purchase Agreement”); or (iii) pursuant to options that may beissued under any employee incentive stock option and/or any qualified stockoption plan adopted by the Borrower), for a consideration per share (the “OfferPrice”) less than the Fixed Conversion Price in effect at the time of suchissuance, then the Fixed Conversion Price shall be immediately reset to suchlower Offer Price. For purposes hereof, the issuance of any security of theBorrower convertible into or exercisable or exchangeable for Common Stock shallresult in an adjustment to the Conversion Price only upon the conversion,exercise or exchange of such securities.

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#### D.                                                                                    Computationof Consideration. For purposes of any computation respecting considerationreceived pursuant to Subsection C above, the following shall apply:

 

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#### (a)                                  inthe case of the issuance of shares of Common Stock for cash, the considerationshall be the amount of such cash, provided that in no case shall any deductionbe made for any commissions, discounts or other expenses incurred by theCompany for any underwriting of the issue or otherwise in connection therewith;

 

#### (b)                                 inthe case of the issuance of shares of Common Stock for a consideration in wholeor in part other than cash, the consideration other than cash shall be deemedto be the fair market value thereof as determined in good faith by the Board ofDirectors of the Company (irrespective of the accounting treatment thereof);and

 

#### (c)                                  inthe case of the issuance of securities convertible into or exchangeable forshares of Common Stock, the aggregate consideration received therefor shall bedeemed to be the consideration received by the Company for the issuance of suchsecurities plus the additional minimum consideration, if any, to be received bythe Company upon the conversion or exchange thereof (the consideration in eachcase to be determined in the same manner as provided in clauses (a) and (b) ofthis Subsection (D)).

 

## 3.8   Reservation of Shares.During the period the conversion right exists, the Borrower will reserve fromits authorized and unissued Common Stock a sufficient number of shares toprovide for the issuance of Common Stock upon the full conversion of thisNote.  The Borrower represents that uponissuance, such shares will be duly and validly issued, fully paid andnon-assessable.  The Borrower agreesthat its issuance of this Note shall constitute full authority to its officers,agents, and transfer agents who are charged with the duty of executing andissuing stock certificates to execute and issue the necessary certificates forshares of Common Stock upon the conversion of this Note.

 

## 3.9   Registration Rights.  The Holder has been granted registrationrights with respect to the shares of Common Stock issuable upon conversion ofthis Note as more fully set forth in a Registration Rights Agreement dated thedate hereof.

 

# **ARTICLE IV**

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# **EVENT OF DEFAULT**

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Theoccurrence of any of the following events is an Event of Default (“**Event ofDefault**”):

 

## 4.1   Failure to Pay Principal,Interest or other Fees.  Subject tothe grace period set forth in Section 1.2 hereof, the Borrower fails to pay anyinstallment of principal, interest or other fees hereon or in respect of anyother promissory note issued pursuant to the Purchase Agreement when due.

 

## 4.2   Breach of Covenant.  The Borrower breaches any covenant or otherterm or condition of this Note or the Purchase Agreement (as hereafter defined)in any material respect and such breach, if subject to cure, continues for aperiod of five (5) days after the occurrence thereof.

 

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## 4.3   Breach of Representationsand Warranties.  Any materialrepresentation or warranty of the Borrower made herein, in the PurchaseAgreement, or in any agreement, statement or certificate given in writingpursuant hereto or in connection therewith shall be false or misleading.

 

## 4.4 Receiver orTrustee.  The Borrower shall make anassignment for the benefit of creditors, or apply for or consent to theappointment of a receiver or trustee for it or for a substantial part of itsproperty or business; or such a receiver or trustee shall otherwise beappointed.

 

## 4.5   Judgments.  Any money judgment, writ or similar finalprocess shall be entered or filed against the Borrower or any of its propertyor other assets for more than $250,000, and shall remain unvacated, unbonded orunstayed for a period of ninety (90) days.

 

## 4.6   Bankruptcy.  Bankruptcy, insolvency, reorganization orliquidation proceedings or other proceedings or relief under any bankruptcy lawor any law for the relief of debtors shall be instituted by or against theBorrower.

 

## 4.7   Stop Trade.  An SEC stop trade order or Principal Markettrading suspension of the Common Stock for 5 consecutive trading days or 5trading days during a period of 10 consecutive trading days, excluding in allcases a suspension of all trading on a Principal Market.

 

## 4.8   Cross Default.  A default shall have occurred under anydocument, instrument or agreement by and between the Company and Wells FargoBusiness Credit, Inc., which has not been cured within any applicable cure orgrace period, other than those financial covenant defaults specified onSchedule 2.6(b) to the Purchase Agreement.

 

## 4.9   Default Under RelatedAgreement.  An Event of Defaultoccurs under and as defined in the Security Agreement.

 

# **ARTICLE V**

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# **DEFAULT PAYMENT**

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## 5.1   Default Payment.  If an Event of Default occurs, the Holder,at its option, may elect to require the Borrower to make a Default Payment (“**DefaultPayment**”).  The DefaultPayment shall be 130% of the outstanding principal amount of the Note, plusaccrued but unpaid interest, all other fees then remaining unpaid, and allother amounts payable hereunder. Additionally, at the direction of Laurus, the Borrower shall enter intoan additional convertible debt transaction with Laurus, the proceeds of whichshall be used by the Borrower to payoff in full all obligations and liabilitiesthen owing by the Borrower to Wells Fargo Business Credit, Inc.  In connection therewith, the Borrower shalldeliver to Laurus an additional secured convertible note, registration rightsagreement, securities purchase agreement and common stock purchase warrant on termsidentical to those set forth in such documents, instruments and agreementsentered into by the Borrower in connection with the transactions contemplatedhereby.

 

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## 5.2   Default Payment Date andDefault Notice Period.  The DefaultPayment shall be due and payable on the fifth business day after the datewritten notice is sent from the Holder to the Borrower of an Event of Defaultas defined in Article IV (“**Default Payment Date**”).  The period between the date of the writtennotice from the Holder to the Borrower of an Event of Default and the DefaultPayment Date shall be the “**Default Notice Period**.”  If during the Default Notice Period, theBorrower cures the Event of Default, the Event of Default will no longer existand any rights the Holder had pertaining to the Event of Default will no longerexist.  If the Event of Default is notcured during the Default Notice Period, all amounts payable hereunder shall bedue and payable on the Default Payment Date, all without further demand,presentment or notice, or grace period, all of which hereby are expresslywaived.

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## 5.3   Cumulative Remedies.  The remedies under this Note shall becumulative.

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# **ARTICLE VI**

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# **MISCELLANEOUS**

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## 6.1   Failure or Indulgence NotWaiver.  No failure or delay on thepart of the Holder hereof in the exercise of any power, right or privilegehereunder shall operate as a waiver thereof, nor shall any single or partialexercise of any such power, right or privilege preclude other or furtherexercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunderare cumulative to, and not exclusive of, any rights or remedies otherwiseavailable.

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## 6.2   Notices.  Any notice herein required or permitted tobe given shall be in writing and shall be deemed effectively given:  (a) upon personal delivery to the partynotified, (b) when sent by confirmed telex or facsimile if sent during normalbusiness hours of the recipient but, if not, then on the next business day, (c)five days after having been sent by registered or certified mail, returnreceipt requested, postage prepaid, or (d) one day after deposit with anationally recognized overnight courier, specifying next day delivery, withwritten verification of receipt.  Allcommunications shall be sent to the Borrower at the address as set forth on thesignature page to the Purchase Agreement executed in connection herewith and tothe Holder at the address set forth on the signature page to the PurchaseAgreement for such Holder, with a copy to John Tucker, Esq., 152 West 57thStreet, 4th Floor, New York, New York 10019, facsimile number (212) 541-4434,or at such other address as the Borrower or the Holder may designate by tendays’ advance written notice to the other parties hereto.  A Notice of Conversion shall be deemed givenwhen made to the Borrower pursuant to the Purchase Agreement.

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## 6.3   Amendment Provision.  The term “Note” and all references thereto,as used throughout this instrument, shall mean this instrument as originallyexecuted, or if later amended or supplemented, then as so amended orsupplemented.

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## 6.4   Assignability.  This Note shall be binding upon the Borrowerand its successors and assigns, and shall inure to the benefit of the Holderand its successors and assigns, and may be assigned by the Holder.

 

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## 6.5   Costs of Collection.  If default is made in the payment of thisNote, the Borrower shall pay the Holder hereof reasonable costs of collection,including reasonable attorneys’ fees.

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## 6.6   Governing Law.  This Note shall be governed by and construedin accordance with the laws of the State of New York, without regard toprinciples of conflicts of laws.  Anyaction brought by either party against the other concerning the transactions contemplatedby this Agreement shall be brought only in the state courts of New York or inthe federal courts located in the state of New York.  Both parties and the individual signing this Note on behalf ofthe Borrower agree to submit to the jurisdiction of such courts.  The prevailing party shall be entitled torecover from the other party its reasonable attorneys’ fees and costs.  In the event that any provision of this Noteis invalid or unenforceable under any applicable statute or rule of law, then suchprovision shall be deemed inoperative to the extent that it may conflicttherewith and shall be deemed modified to conform with such statute or rule oflaw.  Any such provision which may proveinvalid or unenforceable under any law shall not affect the validity orunenforceability of any other provision of this Note.

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## 6.7   Maximum Payments.  Nothing contained herein shall be deemed toestablish or require the payment of a rate of interest or other charges inexcess of the maximum permitted by applicable law.  In the event that the rate of interest required to be paid orother charges hereunder exceed the maximum permitted by such law, any paymentsin excess of such maximum shall be credited against amounts owed by theBorrower to the Holder and thus refunded to the Borrower.

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## 6.8   Security Interest.  The Holder of this Note has been granted asecurity interest in certain assets of the Borrower as more fully described inthe Security Agreement dated as of the date hereof between the Borrower and theHolder, as the same may be amended, modified and supplemented from time to time(the “Security Agreement”).

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## 6.9   Construction.  Each party acknowledges that its legalcounsel participated in the preparation of this Note and, therefore, stipulatesthat the rule of construction that ambiguities are to be resolved against thedrafting party shall not be applied in the interpretation of this Note to favorany party against the other.

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## 6.10   Management Fee.  Simultaneously with the execution of thisNote, the Borrower shall pay to Laurus Capital Management, LLC a management feein an amount equal to four percent (4%) of the Principal Amount, which suchamount at the Holder’s option may be deducted from funds made available by theHolder to the Borrower hereunder.

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## 6.11   Subordination Agreement.  This Note is subject to the SubordinationAgreement dated as of the date hereof among the Borrower, the Holder and WellsFargo Business Credit, Inc. under which this Note and the Borrower’sobligations hereunder are subordinated in the manner set forth therein.

 

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**IN WITNESS WHEREOF**,the Borrower has caused this Note to be signed in its name effective as of this        day of July, 2003.

 
|     | DIGITAL  ANGEL CORPORATION |
|----------|----------------------------|
|     |                       |
|     |                       |   |   |
|     |                       | By: |   |   |
|     |                       | Name: |
|     |                       | Title: |   |
|     |                       |   |   |
| WITNESS: |                       |   |   |
|     |                       |   |   |
|     |                       |   |   |
|     |                       |   |   |
|          |                            |  |  |  |  |

 

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**NOTICE OFCONVERSION**

 

(To be executed by theHolder in order to convert the Note)

 

Theundersigned hereby elects to convert$                of the principal and$                of the interest due on the Note issued by DIGITAL ANGEL CORPORATION (the“Company”) on                 ,2003 into Shares of Common Stock of the Company according to the conditions setforth in such Note, as of the date written below.

 
| Date of  Conversion:     |   |
|--------------------------|--------|
|                     |   |   |
| Conversion  Price:       |   |
|                     |   |   |
| Shares To Be  Delivered: |   |
|                     |   |   |
| Signature:               |   |
|                     |   |   |
| Print Name:              |   |
|                     |   |   |
| Address:                 |   |
|                     |   |   |
|                     |   |

 

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**EXHIBIT B**

** **

**FORM OF REPAYMENTELECTION NOTICE**

** **

To:                              [HOLDERAT HOLDER’S ADDRESS]

 

Pursuant to Section 2.2 the Note of Digital AngelCorporation (the “Company”) issued on             ,2003 we hereby notify you that we are irrevocably electing to repay theoutstanding Monthly Amount (as defined in the Note) due on the Repayment Date(as defined in the Note) which occurs on             ,20     (CHECK ONE):

 

o   Infull in cash on such Repayment Date.

 

o   Infull in shares of the Company’s Common Stock within three (3) trading daysfollowing such Repayment Date.

 
|   | Digital  Angel Corporation |
|--------|----------------------------|
|   |                       |
|   |                       |   |
|   | By:                        |   |
|   | Name:                      |   |
|   | Title:                     |   |
|        |                            |  |  |  |

 

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