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Exhibit 10.3    
    


 
 

SECURITY AGREEMENT    
    


	To:
	Laurus
Master Fund, Ltd.

c/o Onshore Corporate Services, Ltd.

P.O. Box 1234 G.T

Queensgate House

South Church Street

Grand Cayman, Cayman Islands 




Gentlemen: 


        1.     To
secure the payment of all Obligations (as hereafter defined), we hereby grant to you a continuing security interest in all of the following property now owned or at
any time hereafter acquired by us, or in which we now have or at any time in the future may acquire any right, title or interest (the "Collateral"): all accounts, inventory, equipment, goods,
documents, instruments (including, without limitation, promissory notes), contract rights, general intangibles (including, without limitation, payment intangibles), chattel paper, supporting
obligations, investment property, letter-of-credit rights, trademarks and tradestyles in which we now have or hereafter may acquire any right, title or interest, all proceeds
and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefor. 


        2.     The
term "Obligations" as used herein shall mean and include all debts, liabilities and obligations owing by us to you and all loans, advances, extensions of credit,
endorsements, guaranties, benefits and/or financial accommodations heretofore or hereafter made, granted or extended by you to us or which you have or will become obligated to make, grant or extend to
us or for our account and any and all interest, charges and/or expenses heretofore or hereafter owing by us to you and any and all renewals or extensions of any of the foregoing, no matter how or when
arising, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether under any present or future agreement or instruments between or among us, you or otherwise, including,
without limitation, all obligations owing by us to you under the Secured Convertible Note dated as of the date hereof made by us in favor of you in the original principal amount of $2,000,000 (as
amended, modified and supplemented from time to time, the "Note"). 


        3.     We
hereby represent, warrant and covenant to you that: (a) we are a company validly existing, in good standing and formed under the laws of the State of Delaware
with an organization identification number of 0927269 and we will provide you thirty days' prior written notice of any change in our state of formation; (b) our legal name is "Digital Angel
Corporation", as set forth in our Certificate of Incorporation as amended through the date hereof; (c) we are the lawful owner of the Collateral and have the sole right to grant a security
interest therein and will defend the Collateral against all claims and demands of all persons and entities; (d) we will keep the Collateral free and clear of all attachments, levies, taxes,
liens, security interests and encumbrances of every kind and nature, other than those liens and security interests set forth on Schedule 2.9 to the Securities Purchase Agreement dated as of the
date hereof between us and you; (e) we will at our own cost and expense keep the Collateral in good state of repair and will not waste or destroy the same or any part thereof; (f) we
will not without your prior written consent, sell, exchange, lease or otherwise dispose of the Collateral or any of our rights therein or permit any lien or security interest to attach to same, except
that created by this Agreement; (g) we will insure the Collateral in your name against loss or damage 








by
fire, theft, burglary, pilferage, loss in transit and such other hazards as you shall specify in amounts and under policies by insurers acceptable to you and all premiums thereon shall be paid by
us and the policies delivered to you. If we fail to do so, you may procure such insurance and the cost thereof shall constitute Obligations; (h) we will at all times allow you or your
representatives free access to and the right of inspection of the Collateral; and (i) we hereby indemnify and save you harmless from all loss, costs, damage, liability and/or expense, including
reasonable attorneys' fees, that you may sustain or incur to enforce payment, performance or fulfillment of any of the Obligations and/or in the enforcement of this Agreement or the Note or in the
prosecution or defense of any action or proceeding either against you or us concerning any matter growing out of or in connection with this Agreement, the Note and/or any of the Obligations and/or any
of the Collateral. 


        4.     We
shall be in default under this Agreement upon the happening of any of the following events or conditions, each such event or condition an "Event of Default":
(a) an Event of Default shall have occurred under and as defined in the Note, which shall not have been cured during any applicable cure or grace period, (b) the loss, theft, substantial
damage, destruction or sale of any Collateral having a value in the aggregate for all such occurrences of $250,000 or more, (c) the encumbrance of any of the Collateral, other than in favor of
Wells Fargo Business Credit, Inc., the lien priorities with respect to which are governed by the terms of a Subordination Agreement dated as of the date hereof or (d) a default shall
have occurred under the Registration Rights Agreement dated as of the date hereof between you and us, as the same may be amended, modified and supplemented from time to time, which shall not have been
cured during any applicable cure or grace period. 


        5.     Upon
the occurrence of any Event of Default and at any time thereafter, you may declare all Obligations immediately due and payable and you shall have the remedies of a
secured party provided in the Uniform Commercial Code as in effect in the State of New York, this Agreement and other applicable law. You will at all times have the right to take possession of the
Collateral and to maintain such possession on our premises or to remove the Collateral or any part thereof to such other premises as you may desire. Upon your request, we shall assemble the Collateral
and make it available to you at a place designated by you. If any notification of intended disposition of any Collateral is required by law, such notification, if mailed, shall be deemed properly and
reasonably given if mailed at least ten days before such disposition, postage prepaid, addressed to us either at our address shown herein or at any address appearing on your records for us. Any
proceeds of any disposition of any of the Collateral shall be applied by you to the payment of all expenses in connection with the sale of the Collateral, including reasonable attorneys' fees and
other legal expenses and disbursements and the reasonable expense of retaking, holding, preparing for sale, selling, and the like, and any balance of such proceeds may be applied by you toward the
payment of the Obligations in such order of application as you may elect, and we shall be liable for any deficiency. 


        6.     If
we default in the performance or fulfillment of any of the terms, conditions, promises, covenants, provisions or warranties on our part to be performed or fulfilled
under or pursuant to this Agreement which you deem material in the good faith exercise of your reasonable discretion, you may, at your option without waiving your right to enforce this Agreement
according to its terms, immediately or at any time thereafter and without notice to us, perform or fulfill the same or cause the performance or fulfillment of the same for our account and at our sole
cost and expense, and the cost and expense thereof (including reasonable attorneys' fees) shall be added to the Obligations and shall be payable on demand with interest thereon at the highest rate
permitted by law. 


        7.     We
appoint you, any of your officers, employees or any other person or entity whom you may designate as our attorney, with power to execute such documents in our behalf
and to supply any omitted information and correct patent errors in any documents executed by us or on our behalf; to file financing statements against us covering the Collateral; to sign our name on
public records; and to do all other things you deem necessary to carry out this Agreement. We hereby ratify and approve all acts of the attorney and neither you nor the attorney will be liable for any
acts of commission or omission, nor for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as any Obligations remains unpaid. 








        8.     No
delay or failure on your part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege, remedy or
option, and no waiver whatever shall be valid unless in writing, signed by you and then only to the extent therein set forth, and no waiver by you of any default shall operate as a waiver of any other
default or of the same default on a future occasion. Your books and records containing entries with respect to the Obligations shall be admissible in evidence in any action or proceeding, shall be
binding upon us for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. You shall have the right to enforce any one or more of the remedies
available to you, successively, alternately or concurrently. We agree to join with you in executing financing statements or other instruments to the extent required by the Uniform Commercial Code in
form satisfactory to you and in executing such other documents or instruments as may be required or deemed necessary by you for purposes of affecting or continuing your security interest in the
Collateral. 


        9.     This
Agreement shall be governed by and construed in accordance with the laws of the State of New York and cannot be terminated orally. All of the rights, remedies,
options, privileges and elections given to you hereunder shall inure to the benefit of your successors and assigns. The term "you" as herein used shall include your company, any parent of your
company, any of your subsidiaries and any co-subsidiaries of your parent, whether now existing or hereafter created or acquired, and all of the terms, conditions, promises, covenants,
provisions and warranties of this Agreement shall inure to the benefit of and shall bind the representatives, successors and assigns of each of us and them. You and we hereby (a) waive any and
all right to trial by jury in litigation relating to this Agreement and the transactions contemplated hereby and we agree not to assert any counterclaim in such litigation, (b) submit to the
nonexclusive jurisdiction of any New York State court sitting in the borough of Manhattan, the city of New York and (c) waive any objection you or we may have as to the bringing or maintaining
of such action with any such court. 


        10.   All
notices from you to us shall be sufficiently given if mailed or delivered to us at our address set forth below. 



	 	 	 	 	 	 	Very truly yours,
	

 	
 	

 	
 	

 	
 	

DIGITAL ANGEL CORPORATION
	

 	
 	

 	
 	

 	
 	

By:	
 	

 	
 	

 
	 	 	 	 	 	 	 	 	/s/  JAMES P. SANTELLI      

	 	 	 	 	 	 	 	 	Name:	 	James P. Santelli
	 	 	 	 	 	 	 	 	Title:	 	Vice President
	

 	
 	

 	
 	

 	
 	

Address:	
 	

490 Villaume Avenue

South St. Paul, MN 55075
	

 	
 	

 	
 	

 	
 	

Dated as of:	
 	

July 31, 2003
	

ACKNOWLEDGED:	
 	

 	
 	

 	
 	

 
	

LAURUS MASTER FUND, LTD.	
 	

 	
 	

 	
 	

 
	

By:	
 	

 	
 	

 	
 	

 	
 	

 	
 	

 
	 	 	/s/  DAVID GRIN      
	 	 	 	 	 	 
	 	 	Name:	 	David Grin	 	 	 	 	 	 
	 	 	Title:	 	 	 	 	 	 	 	 











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Exhibit 10.3


SECURITY AGREEMENT