VTEQ VeriTeQ Corporation (CE)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ___)

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Digital Angel Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Joseph J. Grillo
Chief Executive Officer and President

August 4, 2009

Dear Stockholder:

You are cordially invited to attend the annual meeting of stockholders of Digital Angel Corporation, which will be held on September 25, 2009, at 8:30 a.m., Central Standard Time, at the Capella Tower, 225 South Sixth Street, Minneapolis, Minnesota 55402.

The enclosed notice of meeting identifies each business proposal for your action. These proposals and the vote the board of directors recommends are:

		Recommended
Proposal		Vote
1. Election of one director to hold office until the 2012 annual meeting of stockholders and until his successor has been duly elected and qualified;		FOR
2. Approval of an amendment to our 2003 flexible stock plan to increase the number of authorized shares of common stock issuable under the plan from 875,000 to 2,875,000 shares;		FOR
3. Approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 50,000,000 shares;		FOR
4. Ratification of the appointment of Eisner LLP as our independent registered public accounting firm for the year ending December 31, 2009; and		FOR
5. To transact such other business as may properly come before the annual meeting or at any adjournment thereof.		FOR

A notice of annual meeting, form of proxy, a proxy statement containing information about the matters to be acted on at the annual meeting and the 2008 Annual Report to Stockholders follow this letter.

If you plan to attend the annual meeting, you will need an admission card to enter the annual meeting. If your shares are registered in your name, you are a stockholder of record. Your admission card is attached to your proxy card, and you will need to bring it with you to the annual meeting. If your shares are in the name of your broker or bank, your shares are held in street name. Ask your broker or bank for an admission card in the form of a legal proxy to bring with you to the annual meeting. If you do not receive the legal proxy in time, bring your brokerage statement with you to the annual meeting so that we can verify your ownership of our stock on the record date and admit you to the annual meeting. However, you will not be able to vote your shares at the annual meeting without a legal proxy.

Your vote is important regardless of the number of shares you own. We encourage you to vote by proxy so that your shares will be represented and voted at the annual meeting even if you cannot attend. All stockholders can vote by written proxy card. Many stockholders also can vote by proxy via a touch-tone telephone from the U.S. and Canada, using the toll-free number on your proxy card, or via the Internet using the instructions on your proxy card. In addition, stockholders may vote in person at the annual meeting as described above.

		Sincerely,
		/s/ JOSEPH J. GRILLO   JOSEPH J. GRILLO Chief Executive Officer and President

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO THE STOCKHOLDERS OF DIGITAL ANGEL CORPORATION:

Notice is hereby given that the 2009 annual meeting of stockholders of Digital Angel Corporation, a Delaware corporation, or the Company, whose headquarters are located in South Saint Paul, Minnesota, will be held at the Capella Tower, 225 South Sixth Street, Minneapolis, Minnesota 55402, on September 25, 2009, at 8:30 a.m., Central Standard Time, for the following purposes:

	1.		To elect one director to hold office until the 2012 annual meeting of stockholders and until his successor has been duly elected and qualified;
	2.		To approve an amendment to our 2003 flexible stock plan to increase the number of authorized shares of common stock issuable under the plan from 875,000 to 2,875,000 shares;
	3.		To approve an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 50,000,000 shares;
	4.		To ratify the appointment of Eisner LLP as our independent registered public accounting firm for the year ending December 31, 2009; and
	5.		To transact such other business as may properly come before the annual meeting or at any adjournment thereof.

The board of directors has fixed the close of business on August 3, 2009 as the record date for the determination of stockholders entitled to receive notice of the annual meeting and vote, or exercise voting rights through a voting trust, as the case may be, at the annual meeting and any adjournments or postponements of the annual meeting. We will make available a list of holders of record of our common stock as of the close of business on August 3, 2009 for inspection during normal business hours at our offices, 490 Villaume Avenue, South Saint Paul, Minnesota 55075, for ten business days prior to the annual meeting. This list will also be available at the annual meeting.

		By Order of the Board of Directors,
		/s/ JOSEPH J. GRILLO
		JOSEPH J. GRILLO Chief Executive Officer and President

South Saint Paul, Minnesota
August 4, 2009

EACH STOCKHOLDER IS URGED TO VOTE PROMPTLY BY USING THE TELEPHONE VOTING SYSTEM OR ACCESSING THE WORLD WIDE WEBSITE INDICATED ON THE PROXY CARD RECEIVED IN THE MAIL TO VOTE VIA THE INTERNET OR IF A PAPER COPY OF THE PROXY CARD IS RECEIVED, BY SIGNING, DATING AND RETURNING THE PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. IF A STOCKHOLDER DECIDES TO ATTEND THE ANNUAL MEETING, HE OR SHE MAY REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.

IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS FOR THE DIGITAL ANGEL CORPORATION ANNUAL MEETING OF STOCKHOLDERS:

This notice and the accompanying proxy statement, form of proxy and the Company’s 2008 Annual Report to Stockholders included in the Company’s Current Report on Form 8-K dated July 7, 2009, are available at the Company’s website at http://www.digitalangel.com . Additionally, and in accordance with the rules of the Securities and Exchange Commission, shareholders may access these materials at the cookies-free website indicated in the Important Notice Regarding the Availability of Proxy Materials that you receive in connection with this notice and the accompanying proxy statement, form of proxy and the Company’s 2008 Annual Report to Stockholders. References to our website are not intended to and do not incorporate information found on the website into this proxy statement.

Digital Angel Corporation
490 Villaume Avenue, South St. Paul
Minnesota 55075

PROXY STATEMENT
FOR THE 2009 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 25, 2009

The board of directors of Digital Angel Corporation, a Delaware corporation (the “Company,” “we,” “our,” or “us”), whose principal executive office is located at 490 Villaume Avenue, South Saint Paul, Minnesota, 55075, furnishes you with this proxy statement to solicit proxies on its behalf to be voted at the 2009 annual meeting of stockholders (“annual meeting”). The annual meeting will be held at the Capella Tower, 225 South Sixth Street, Minneapolis, Minnesota 55402, on September 25, 2009, at 8:30 a.m., Central Standard Time, subject to adjournment or postponement thereof. The proxies also may be voted at any adjournments or postponements of the annual meeting. This proxy statement and the accompanying form of proxy, together with our 2008 Annual Report to Stockholders are being made available to stockholders on the Internet or are first being mailed to our stockholders on or about August 14, 2009.

VOTING AND REVOCABILITY OF PROXIES

Record Date and Share Ownership

Owners of record of shares of our common stock at the close of business on August 3, 2009 will be entitled to vote at the annual meeting or adjournments or postponements thereof. Each owner of record of our common stock on August 3, 2009 is entitled to one vote for each share of common stock so held.

As of the close of business on August 3, 2009, there were 18,020,649 shares of common stock outstanding entitled to vote at the annual meeting (all such shares being referred to herein as the “shares” and all holders thereof being referred to as our “stockholders”). A majority of the shares must be present, in person or by proxy, to conduct business at the annual meeting.

For information regarding security ownership by management and by the beneficial owners of more than 5% of our common stock, see “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

All share numbers in this proxy statement do not take into account the effect of the proposed amendments to the Company’s Certificate of Incorporation, as amended, unless otherwise expressly indicated.

Notice of Internet Availability of Proxy Materials

The Company is making proxy materials for the annual meeting available over the Internet. Therefore, the Company is mailing to its shareholders a notice about the Internet availability of the proxy materials instead of a paper copy of the proxy materials. The notice is entitled “Important Notice Regarding the Availability of Proxy Materials.” All stockholders receiving the notice will have the ability to access the proxy materials over the Internet and request to receive a paper copy of the proxy materials by mail. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found on the notice. The Company’s proxy materials may also be accessed on the Company’s website at http://www.digitalangel.com by selecting “Investors” and then “Proxy Materials.”

All properly executed written proxies and all properly completed proxies voted by telephone or via the Internet and delivered pursuant to this solicitation (and not revoked later) will be voted at the annual meeting in accordance with the instructions of the stockholder. Below is a list of the different votes stockholders may cast at the annual meeting pursuant to this solicitation.

Voting Shares

In voting on the election of one director to serve until the 2012 annual meeting of stockholders, stockholders may vote in one of the following ways:

	1.		in favor of the nominee, or
	2.		withhold votes as to the nominee.

In voting on (i) approval of an amendment to our 2003 flexible stock plan to increase the number of authorized shares of common stock issuable under the plan from 875,000 to 2,875,000 shares; (ii) approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 50,000,000 shares; and (iv) the ratification of the appointment of Eisner LLP as our independent registered public accounting firm for the year ending December 31, 2009, stockholders may vote in one of the following ways:

	1.		in favor of the proposal,
	2.		against the proposal, or
	3.		abstain from voting on the proposal.

Stockholders should specify their choice for each matter on the proxy. Instead of submitting a signed proxy card, shareholders may submit their proxies by telephone or through the Internet using the control number and instructions on the proxy card. The telephone and Internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to vote their shares and to confirm that their instructions have been properly recorded. Specific instructions to be followed by stockholders interested in voting via the telephone or the Internet are set forth on the proxy card. Telephone and Internet proxies must be used in compliance with, and will be subject to, the information and terms contained on the proxy card. These procedures may not be available to shareholders who hold their shares through a broker, nominee, fiduciary or other custodian. If no specific instructions are given, proxies which are signed and returned will be voted FOR the election of the director as set forth herein, FOR the approval of an amendment to our 2003 flexible stock plan to increase the number of authorized shares of common stock issuable under the plan from 875,000 to 2,875,000 shares, FOR the approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 50,000,000 shares, and FOR the ratification of the appointment of Eisner LLP as our independent registered public accounting firm for the year ending December 31, 2009. In addition, if other matters come before the annual meeting, the persons named in the proxy will vote in accordance with their best judgment with respect to such matters.

Revocability

A stockholder submitting a proxy has the power to revoke it at any time prior to its exercise by voting in person at the annual meeting, by giving our proxy tabulator written notice bearing a later date than the proxy or by giving a later dated proxy. Any written notice revoking a proxy should be sent to our proxy tabulator: Broadridge Financial Solutions, 51 Mercedes Way, Edgewood, NY 11717.

Quorum

A quorum must be present at the annual meeting. According to our bylaws, the holders of a majority of the outstanding shares entitled to vote at the annual meeting, represented in person or by proxy, constitute a quorum. If you have returned valid proxy instructions or attend the annual meeting in person, your shares will be counted for the purpose of determining whether there is a quorum, even if you wish to abstain from voting on some or all matters introduced at the annual meeting. Abstentions and “broker non-votes” (shares held by a broker, bank or other nominee that does not have authority, either express or discretionary, to vote on a particular matter) are counted for determining whether there is a quorum. If a quorum is not present, the annual meeting may be adjourned from time to time until a quorum is present.

Required Vote

A plurality of the votes cast is required for the election of the Director to serve until the 2012 annual meeting of stockholders. This means that the Director nominee with the most votes for a particular slot is elected for that slot. Only votes “for” or “withheld” affect the outcome. Abstentions are not counted for purposes of the election of Directors.

Approval of an amendment to our 2003 flexible stock plan to increase the number of authorized shares of common stock issuable under the plan from 875,000 to 2,875,000 shares will require the affirmative vote of a majority of the votes cast at the annual meeting of stockholders. For this proposal, an abstention will have the effect of a vote against such proposal and broker non-votes will have no effect on the outcome of the vote for this proposal.

Approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 50,000,000 shares will require the affirmative vote of a majority of the outstanding shares of our common stock entitled to vote at the annual meeting of stockholders. For this proposal, abstentions and broker non-votes will have the effect of a vote against this proposal.

Approval of the ratification of the appointment of Eisner LLP as our independent registered public accounting firm for the year ending December 31, 2009 will require the affirmative vote of a majority of the shares of our common stock represented at the annual meeting, either in person or by proxy, assuming a quorum is present. For this proposal, abstentions and broker non-votes will not be counted as votes for or against this proposal.

The telephone and Internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to vote their shares and to confirm that their instructions have been properly recorded. Specific instructions to be followed by stockholders interested in voting via the telephone or the Internet are set forth on the proxy card.

Expenses of Solicitation

The expense of solicitation of proxies, estimated at $10,000 will be borne by us. We have not retained a proxy solicitor to solicit proxies; however, we may choose to do so prior to the annual meeting. Proxies may also be solicited by certain of our directors, officers and other employees, without additional compensation, personally or by written communication, telephone or other electronic means. We are required to request brokers and nominees who hold stock in their name to furnish our proxy material to beneficial owners of the stock and will reimburse such brokers and nominees for their reasonable out-of-pocket expenses in so doing.

STOCKHOLDER PROPOSALS FOR THE 2010 ANNUAL MEETING OF STOCKHOLDERS

Pursuant to the applicable rules under the Exchange Act, some stockholder proposals may be eligible for inclusion in our 2010 proxy statement. Proposals by stockholders intended to be included in our 2010 proxy statement must comply with all applicable requirements of Rule 14a-8 promulgated under the Exchange Act and must be submitted in writing to our Secretary no later than • , or a reasonable time before we begin to print and mail our proxy materials. Stockholders interested in submitting such a proposal are advised to contact knowledgeable counsel with regard to the detailed requirements of such securities rules. Stockholder proposals to be presented at our 2010 annual meeting (but not intended to be included in our 2010 proxy statement) must be submitted in writing to our Secretary no earlier than • , but no later than • , in accordance with our bylaws. Otherwise, the proxies named by our board of directors may exercise discretionary voting authority with respect to the stockholder proposal, without any discussion of the proposal in our proxy materials.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of our common stock by (i) each person known to us to beneficially own more than 5% of our common stock, (ii) each of our directors and, (iii) each of the named executive officers and (iv) all the directors and executive officers as a group. The calculation of the percentage of outstanding shares is based on 18,020,649 shares of our common stock outstanding on July 30, 2009, adjusted, where appropriate, for shares of stock beneficially owned but not yet issued. Except as otherwise indicated, each stockholder named has sole voting and investment power with respect to such stockholder’s shares.

		Aggregate
		Number of Shares				Percent of
		Beneficially				Outstanding
Name of Beneficial Owner		Owned (1)				Shares
Five Percent Stockholders:
Valens Capital Management, LLC (2)			943,959				5.2	%
Executive Officers and Directors (3) :
Joseph J. Grillo			280,135				1.6
Lorraine M. Breece			35,983				*
Parke H. Hess			46,907				*
John R. Block			130,625				*
Daniel E. Penni			116,249				*
Dennis G. Rawan			38,337				*
Constance K Weaver			85,675				*
Michael S. Zarriello			149,568				*
All current directors and executive officers as a group (8 persons)			883,479				4.8

The following table sets forth information regarding beneficial ownership of our subsidiary, Thermo Life Energy Corp. (“Thermo Life”) by (i) each of our directors, (ii) each of the named executive officers and (iii) all the directors and executive officers as a group. The calculation of the percentage of outstanding shares is based on 20,000,000 shares of Thermo Life’s common stock outstanding on July 30, 2009, adjusted, where appropriate, for shares of stock beneficially owned but not yet issued. Except as otherwise indicated, each stockholder named has sole voting and investment power with respect to such stockholder’s shares.

		Aggregate
		Number of Shares				Percent of
		Beneficially				Outstanding
Name of Beneficial Owner		Owned (1)				Shares
Joseph J. Grillo			—				*	%
Lorraine M. Breece			70,000				*
Parke H. Hess			—				*
John R. Block			—				*
Daniel E. Penni			200,000				1.1
Dennis G. Rawan			200,000				1.1
Constance K Weaver			200,000				1.1
Michael S. Zarriello			—				*
All current directors and executive officers as a group (8 persons)			670,000				3.7

FINANCIAL STATEMENTS

Our consolidated financial statements for the year ended December 31, 2008 are included in our 2008 annual report to stockholders. Copies of the annual report will be available on our website on or about August 14, 2009 and will be sent to our stockholders upon request. The annual report does not form any part of the material for the solicitation of proxies.

OTHER BUSINESS

At the date hereof, there are no other matters which our board of directors intends to present or has reason to believe others will present at the annual meeting. If other matters come before the annual meeting, the persons named in the accompanying form of proxy will vote in accordance with their best judgment with respect to such matters.

PROPOSAL 1

ELECTION OF DIRECTORS

Board of Directors

Our board of directors is divided into three classes. A class of directors is elected each year to serve for a three-year term and until the directors’ successors are duly elected and qualified, which has been our practice since 1998. The stockholders elect approximately one-third of the members of the board of directors annually. Directors may be removed only for cause. Any director appointed by our board of directors to fill a vacancy on the board serves the balance of the unexpired term of the class of directors in which the vacancy occurred.

The term of Constance K. Weaver and Michael S. Zarriello will expire at the 2009 annual meeting. Mr. Zarriello has indicated a willingness to serve if elected but Ms. Weaver has decided not to stand for re-election. Mr. Zarriello has been nominated to stand for reelection at the annual meeting to hold office until the 2012 annual meeting of stockholders and until his successor has been duly elected and qualified. Proxies may not be voted for a greater number of persons than the nominee identified below.

Cumulative voting does not apply in the election of directors. Unless otherwise indicated, the shares represented by this proxy will be voted for the nominee named below. Should the nominee become unable to serve for any reason, or for good cause will not serve, our board of directors may, unless the board of directors by resolution provides for a lesser number of directors, designate substitute nominees, in which event the persons named in the enclosed proxy will vote proxies that would otherwise be voted for all named nominees for the election of such substitute nominee or nominees.

Vote Required

In order to approve this proposal, the affirmative vote of a plurality of the shares of common stock represented at the annual meeting, in person or by proxy, assuming a quorum is present, must be received in favor of this proposal. Unless a contrary choice is specified, proxies solicited by our board of directors will be voted FOR approval of the election of the director nominee.

Recommendation of our Board of Directors

Our board of directors recommends a vote FOR Michael S. Zarriello to hold office until the 2012 annual meeting of stockholders and until his successor has been duly elected and qualified.

Current Directors		Age				Positions		Board Member Since
John R. Block			74			Independent Board Member, Nominating Committee (Chair) and Compensation Committee		December 2007 (Served on Destron Fearing’s Board of Directors from January 2004 through December 2007)
Joseph J. Grillo			51			Non-Independent Board Member		January 2008
Daniel E. Penni			61			Independent Board Member (Chair), Audit & Governance Committee and Nominating Committee		March 1995
Dennis G. Rawan			65			Independent Board Member, Audit & Governance Committee and Nominating Committee		December 2002
Constance K. Weaver			56			Independent Board Member, Compensation Committee (Chair)		July 1998
Michael S. Zarriello			59			Independent Board Member, Audit & Governance Committee (Chair) and Compensation Committee		December 2007 (Served on Destron Fearing’s Board of Directors from September 2003 through December 2007)

Biographical and other information concerning our directors and the nominee for election at the annual meeting is set forth below.

Nominee for Election to Term Expiring 2012

Michael S. Zarriello: Mr. Zarriello, age 59, joined our board of directors on December 28, 2007. Mr. Zarriello is an Executive Director of Capstone Advisory Group LLC, a national firm providing restructuring and turnaround services. He joined the firm in May 2008. Mr. Zarriello served as Senior Managing Director of MTS Health Partners L.P., a merchant bank providing advisory services and private equity investments to companies in the healthcare sector from January 2007 to April 2008. He served as Senior Vice President and Chief Financial Officer for Rural/Metro Corporation, a medical transportation company, in Scottsdale, Arizona, from July 2003 to December 2006. From 1998 to 2003, Mr. Zarriello was a Senior Managing Director of Jesup & Lamont Securities Corporation and President of Jesup & Lamont Merchant Partners LLC, both of which are investment banking firms. From 1989 to 1997, Mr. Zarriello was a Managing Director-Principal of Bear Stearns & Co., Inc., an investment bank, and from 1989 to 1991, he served as Chief Financial Officer of the Principal Activities Group that invested Bear Stearns’ capital in middle market companies. Mr. Zarriello previously served as a member of our board of directors from May 2003 until July 2006 and served as a member of our subsidiary’s, Destron Fearing Corporation (“Destron Fearing”), board of directors from September 2003 through December 2007.

Incumbent Directors — Term Expiring 2010

Joseph J. Grillo: Mr. Grillo, age 51, an RFID industry veteran, was selected to be our Chief Executive Officer, President and director effective January 2, 2008. From December 2003 until joining Digital Angel, Mr. Grillo served as the President and Chief Executive Officer of the Global Technologies Division of Assa Abloy, AB, a publicly held global manufacturer in the security and lock industry (“Assa Abloy”). From January of 2002 until December of 2003, Mr. Grillo served as the President and Chief Executive Officer of the Identification Technology Group Division of Assa Abloy, where he formed and was responsible for the sales growth of the Identification Technology business unit. He earned a Bachelor of Science in Finance from the University of Connecticut, School of Business.

John R. (Jack) Block: Mr. Block, age 74, joined our board of directors on December 28, 2007. Mr. Block has served as Senior Policy Advisor for Olsson Frank Weeda Terman Bode Matz P.C., a law firm, since January 2006. From January 2003 through December 2005, Mr. Block served as the Executive Vice President of the Food Marketing Institute, a trade association in Washington, D.C. From 1986 until December 2002, Mr. Block was President and Chief Executive Officer of Food Distributors International and the International Foodservice Distributors Association (NAWGA/IFDA). Mr. Block was appointed to President Reagan’s Cabinet in 1981 and served for five years as the Secretary of the U.S. Department of Agriculture. As a member of the Reagan Cabinet and a key member of the Economic Policy Council, he dealt with a wide range of complex domestic farm program and tax issues. Under his leadership, the Department of Agriculture’s Food for Peace Program was a primary resource in feeding the starving African continent. During his tenure as Secretary of Agriculture, Mr. Block visited more than 30 foreign countries, meeting with heads of state and agriculture ministers from all over the globe and negotiating sensitive agreements critical to U.S. farm interests. From 1977 to 1981, he served as director of Agriculture for the State of Illinois. Mr. Block currently has a syndicated weekly radio commentary broadcast carried by more than 600 stations in 30 states. Mr. Block has served on a number of corporate boards, including NYSE-listed Hormel Foods Corporation, John Deere (Deere & Company), Archer Daniels Midland Company and MetaMorphix, Inc. He is currently a member of the Board of Directors of AE Biofuels and Blast Energy Services Inc., as well as serving on the audit committee of Blast Energy Services, Inc. He is also on the board of directors of the U.S. Friends of the World Food Programme, a joint initiative of the United Nations and the Food and Agricultural Organization, Chairman of the Agribusiness Alliance of the Citizens Network for Foreign Affairs in Washington, and on the Advisory Board of the Illinois Global Partnership. Mr. Block also served on the Destron Fearing board of directors from January 2004 through December 2007.

Incumbent Directors — Term Expiring 2011

Daniel E. Penni: Mr. Penni, age 61, has served as a director since March 1995, and as chairman of our board since July 3, 2007. Presently, he is a principal with the Endowment for the 21st Century since 2001. From September 1988 until December 2005, Mr. Penni was employed by Arthur J. Gallagher & Co. (NYSE:AJG), an insurance brokerage and risk management services firm, where he served in several positions, including most recently as an Area Executive Vice President. He has worked in various sales and administrative roles in the insurance business since 1969. He also served on the board of trustees of the Massachusetts College of Pharmacy and Health Sciences in Boston from 1989 through June 2006 and served as the chair of finance, the treasurer and the chair of the audit committee at various times during his service period. Mr. Penni graduated with a Bachelor of Science degree in 1969 from the School of Management at Boston College. Mr. Penni was a member of the board of directors of VeriChip Corporation (“VeriChip” which is a former subsidiary of ours) from June 2004 until January 2008.

Dennis G. Rawan: Mr. Rawan, age 65, has served as a director since December 10, 2002. Mr. Rawan was Chief Financial Officer of Expo International, Inc. (“Expo”) from 1996 until his retirement in 2000. Expo provides information technology products and services to the event industry. For over 20 years prior to joining Expo, Mr. Rawan was a certified public accountant, or CPA, providing audit, review, tax and financial statement preparation services for a variety of clients. From 1970 to 1988, while working as a CPA, Mr. Rawan taught graduate level accounting courses at Babson College. Mr. Rawan earned a Bachelor of Science degree and a Master of Business Administration degree from Northeastern University.

CORPORATE GOVERNANCE, BOARD OF DIRECTORS AND COMMITTEES

Director Independence

Our board of directors has determined that five of our six current directors—Messrs. Block, Penni, Rawan and Zarriello and Ms. Weaver—are independent under the applicable standards of the Nasdaq Capital Market. For transactions, relationships or arrangements that were considered by our board of directors in determining whether each director was independent, please see the section “Certain Relationships and Related Transactions, and Director Independence — Director and Officer Roles and Relationships with Our Subsidiaries.”

Board Meetings and Committees

Our board of directors held fourteen meetings during 2008 and acted by unanimous written consent in lieu of a meeting seven times, as permitted by the applicable state law. During 2008, all directors attended 75% or more of the meetings of the board of directors and committees to which they were assigned. In order to control expenses, and in light of the fact that very few stockholders attend our annual or special meetings of stockholders in person, we do not require directors to attend. Our directors are invited, and frequently one or more of our directors is in attendance at the meeting. At the 2008 annual meeting of stockholders, all directors were present. At our special meeting of stockholders in October 2008, no directors were present.

We have a standing Audit and Governance Committee, Compensation Committee and Nominating Committee of our board of directors, each of which is more fully described below.

Audit and Governance Committee

Our board of directors established an audit and governance committee in accordance with Section 3(a)(58)(A) of the Exchange Act. Our audit and governance committee is comprised of three members of the board of directors: Messrs. Zarriello, Rawan and Penni. All of the committee members are independent as defined in Rule 5605(a)(2) of the Nasdaq Marketplace Rules and as defined by the Sarbanes-Oxley Act of 2002. Our board of directors has determined that we have two audit committee financial experts as defined in the applicable SEC rules: Mr. Zarriello, who serves as the chairman of the committee, and Mr. Rawan, who serves as a member of the committee. The committee (i) recommends for approval by our board of directors an independent registered public accounting firm to audit our consolidated financial statements for the fiscal year in which they are appointed, and (ii) monitors the effectiveness of the audit effort, the internal and financial accounting organization and controls and financial reporting. The duties of the committee are also to oversee and evaluate the independent registered public accounting firm, to meet with the independent registered public accounting firm to review the scope and results of the audit, to approve non-audit services provided to us by our independent certified public accountants, and to consider various accounting and auditing matters related to our system of internal controls, financial management practices and other matters. The audit and governance committee has been assigned the functions of monitoring the integrity of our financial statements, monitoring the independence, qualifications and performance of our independent auditors and overseeing our systems of internal controls. The committee complies with the provisions of the Sarbanes-Oxley Act of 2002. The committee held seven meetings during 2008. A copy of the audit and governance committee charter is available on our website at www.digitalangel.com .

Compensation Committee

Our compensation committee consists of Constance K. Weaver, Michael Zarriello and John R. Block. Ms. Weaver is chairman of the committee. The committee administers the 1996 Non-Qualified Stock Option Plan, the 1999 Flexible Stock Plan, the 2003 Flexible Stock Plan, the 1999 Employees Stock Purchase Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan, including the review and grant of stock options to officers and other employees under such plans, and recommends the adoption of new plans, including the plans of our subsidiary, Thermo Life. We own 100% of the outstanding stock of Thermo Life and Destron Fearing. The committee also reviews and approves various other compensation policies and matters and reviews and approves salaries, bonuses, the Incentive and Recognition Policy (“IRP”) and other matters relating to our senior officers. The committee reviews all senior corporate employees after the end of each fiscal year to determine compensation for the subsequent year. Particular attention is paid to each employee’s contributions to our current and future success, as well as their salary level, in comparison to the market value of personnel with similar skills and responsibilities. The committee also looks at accomplishments, which are above and beyond management’s normal expectations for their positions. The committee held five meeting during 2008 and acted by unanimous written consent five times during 2008. A copy of the compensation committee charter is available on our website at www.digitalangel.com .

Our compensation committee assists our board of directors in the discharge of its responsibilities relating to compensation of our executive officers. Specific responsibilities of our compensation committee include:

	•		reviewing and recommending to our board approval of the compensation, benefits, corporate goals and objectives of our chief executive officer and our other executive officers;
	•		evaluating the performance of our executive officers; and
	•		administering our employee benefit plans and making recommendations to our board of directors regarding these matters.

Our compensation committee has the authority to delegate any of its responsibilities to one or more subcommittees as the committee may from time to time deem appropriate and may ask members of management, employees, outside counsel, or others whose advice and counsel are relevant to the issues then being considered by the compensation committee to attend any meetings and to provide such pertinent information as the compensation committee may request. We expect that the compensation committee will continue to solicit input from our chief executive officer with respect to compensation decisions affecting other members of our senior management. Our compensation committee has not engaged compensation consultants to determine or recommend the amount or form of executive and director compensation. Our compensation committee has read consultant reports prepared for similar companies and has spoken with experts regarding compensation.

Nominating Committee

Our nominating committee considers and nominates candidates for election to our board of directors. The committee consists of John R. Block, who serves as its chairman, Daniel E. Penni, and Dennis G. Rawan, all of whom are independent members of our board of directors. The committee met one time during 2008. A copy of the nominating committee charter is available on our website at www.digitalangel.com .

Qualifications of Candidates for Election to the Board

Our board of directors takes a critical role in guiding our strategic direction, and it oversees the management of us. When candidates for our board of directors are considered, they are evaluated based upon various criteria. Director candidates for our board of directors are considered for vacant seats if they (i) are independent, in accordance with applicable law and stock exchange listing standards, (ii) demonstrate high ethical standards, professionalism, and integrity in their personal and professional dealings, (iii) are willing to commit themselves to their duties as members of our board of directors and its various committees and to their responsibilities to us, (iv) possess the appropriate knowledge and understanding of fundamental financial statements, (v) have substantial relevant business, technological or government experience, (vi) provide a diverse set of skills, backgrounds and experiences in order to provide varying perspectives, (vii) have no identified conflicts of interest with us, (viii) have not been convicted in a criminal proceeding other than traffic violations during the five years before the date of selection, and (ix) are willing to comply with our code of ethics. We retain the right to modify these minimum qualifications from time to time. Exceptional candidates who do not meet all of these criteria may still be considered.

Process for Identifying and Evaluating Candidates for Election to the Board

The role of the nominating committee of our board of directors is to review the qualifications and backgrounds of any candidates for our board of directors, its current members, as well as the overall composition of the board. Prior to the formation of the nominating committee, our entire board evaluated candidates based upon the qualifications outlined above. In the case of any director candidates, the questions of independence and financial expertise are important to determine what roles the candidate can perform, and the nominating committee will consider whether the candidate meets the applicable independence standards and the level of the candidate’s financial expertise. Any new candidates will be interviewed, and the nominating committee will approve the final nominations. Our chairman of the board, acting on behalf of the nominating committee, will extend the formal invitation to the selected candidate.

Stockholder Nominations

Stockholders may nominate director candidates for consideration by the nominating committee by writing to our Secretary, who will forward the nomination to the chairman of the nominating committee. The submission must provide the candidate’s name, biographical data and qualifications, including five-year employment history with employer names and a description of the employer’s business; whether such individual can read and understand fundamental financial statements; other board memberships (if any); and such other information as is reasonably available and sufficient to enable the nominating committee to evaluate the minimum qualifications stated above under the section of this proxy statement entitled “Qualifications of Candidates for Election to the Board.” The submission must be accompanied by a written consent of the individual to stand for election if nominated by the nominating committee and to serve if elected by the stockholders. If a stockholder nominee is eligible, and if the nomination is proper, the nominating committee then will deliberate and make a decision as to whether the candidate will be appointed and subsequently submitted to our stockholders for a vote. The nominating committee will not change the manner in which it evaluates candidates, including the applicable minimum criteria set forth above, on the basis of whether the candidate was recommended by a stockholder.

Executive Sessions of the Board

Our board of directors has adopted a formal policy of meeting in executive session, with only independent directors being present, on a regular basis and at least two times each year. The board of directors met in executive session four times during 2008.

Stockholder Communications

Our board of directors believes that it is important for us to have a process whereby our stockholders may send communications to our board. Accordingly, stockholders who wish to communicate with our board of directors or a particular director may do so by sending a letter to Patricia M. Petersen, General Counsel and Secretary, at 490 Villaume Avenue, South Saint Paul, Minnesota, 55075. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication” or “Stockholder-Director Communication.” All such letters must identify the author as a stockholder and clearly state whether the intended recipients are all members of our board of directors or only certain specified individual directors. Ms. Petersen copies all such letters and circulates them to the appropriate director or directors.

Code of Conduct and Corporate Ethics General Policy Statement

Our board of directors has approved, and we have adopted, a Code of Conduct and Corporate Ethics General Policy Statement, or the Code of Conduct, which applies to all of our directors, officers and employees. Our board of directors has also approved, and we have adopted, a Code of Ethics for Senior Financial Officers (the “Code for SFO”) which applies to our chief executive officer and chief financial officer. The Code of Conduct and the Code for SFO are available, without charge, upon written request to Digital Angel Corporation, Attention: Patricia Petersen, Secretary, 490 Villaume Avenue, South Saint Paul, Minnesota 55075. The audit and governance committee of our board of directors is responsible for overseeing the Code of Conduct and the Code for SFO. Our audit and governance committee must approve any waivers of the Code of Conduct, and our board of directors must approve any waivers of the Code for SFO.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our officers and directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission, or SEC, and to furnish copies of all such reports to us. We believe, based on our stock transfer records and written representations from certain reporting persons, that all reports required under Section 16(a) were timely filed during 2008 (with the exception of one Form 4 untimely filed by Joseph J. Grillo with the SEC on January 26, 2009 for one transaction reporting the acquisition of our common stock in 2008).

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 2008, Messrs. Penni and Zarriello and Ms. Weaver served as members of the compensation committee. None of the members of the compensation committee served as an officer or employee of ours or any of our subsidiaries during the fiscal year ended December 31, 2008. There were no material transactions between us and any of the members of the compensation committee during the fiscal year ended December 31, 2008. None of our executive officers served as a member of the board of directors or the compensation committee, or committee performing an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee.

2008 Director Compensation

																		Change in Pension
																		Value and
																		Nonqualified
														Non-Equity				Deferred
		Fees Earned or				Stock				Option				Incentive Plan				Compensation				All Other
Name		Paid in Cash				Awards (6)				Awards (7)(8)				Compensation				Earnings				Compensation				Total
John R. Block (1)		$	36,000			$	31,500			$	9,171			$	—			$	—			$	—			$	76,671
Daniel E. Penni (2)			86,000				31,500				19,808				—				—				2,356	(9)			137,308
Dennis G. Rawan (3)			40,000				31,500				9,171				—				—				—				80,671
Constance K. Weaver (4)			40,000				31,500				19,808				—				—				—				91,308
Michael S. Zarriello (5)			52,000				31,500				9,171				—				—				—				92,671

In 2008, the compensation committee of our board of directors determined that the annual compensation for outside directors was as follows: (i) $8,000 per quarter for board service, (ii) an additional $4,000 and $2,000 per quarter for service as the audit and governance committee chair or the compensation committee chair, respectively, (iii) an additional $2,000 and $1,000 per quarter for service as a member of the audit and governance committee or the compensation committee, respectively, and (iv) $19,500 per quarter for service as the chairman of our board of directors. Reasonable travel expenses are reimbursed when incurred. Directors who are not also executive officers are not eligible to participate in any of our other benefit plans.

At December 31, 2008, the following directors owned fully vested options exercisable for shares of Thermo Life common stock:

	•		Mr. Penni — 200,000 shares
	•		Mr. Rawan — 200,000 shares
	•		Ms. Weaver — 200,000 shares

These options are exercisable at $0.05 per share and expire on April 18, 2011.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Since the beginning of our fiscal year 2008, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed $120,000 and in which any related person, including any current director, executive officer, holder of more than 5% of our capital stock, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

Director and Officer Roles and Relationships with Our Subsidiaries

Several of our directors and our chief executive officer served as directors of VeriChip, which became a minority-owned investee in the first quarter of 2008 when our ownership fell below 50%. In November of 2008, we sold all of the shares of common stock of VeriChip that we owned. By virtue of the relationships described below, certain of our directors and our chief executive officer could have faced situations in which there were actual or apparent conflicts of interest that could have interfered, or appeared to have interfered, with their ability to act in a manner that was in our best business interests. Two of our six directors, Mr. Penni and Ms. Weaver, served on the board of directors of VeriChip through January 11, 2008 and our chief executive officer served on the board of VeriChip from July 18, 2008 to November 12, 2008. In their various positions with VeriChip and us, Messrs. Penni, Rawan, Block and Zarriello and Ms. Weaver and Ms. Breece were each granted stock option awards by VeriChip. As of December 31, 2008, all of these options were exercised except for 5,556, 25,000 and 69,444 options held by Mr. Block, Mr. Penni and Ms. Weaver, respectively.

Transactions with and between Subsidiaries

VeriChip

Supply and Development Agreement

VeriChip (our former subsidiary) and Destron Fearing (our current subsidiary) executed a supply and development agreement dated March 4, 2002, as amended and restated on December 27, 2005 and as amended on May 9, 2007 (“Supply Agreement”). Under this agreement, Destron Fearing was VeriChip’s sole supplier of human-implantable microchips. VeriChip’s purchases of product under the supply and development agreement were approximately $12 thousand, $0.1 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. Effective November 12, 2008, the supply and development agreement, as amended, was terminated.

Transition Services Agreement

On December 27, 2005, we entered into a transition services agreement with VeriChip under which we agreed to continue to provide VeriChip with certain administrative transition services, including payroll, legal, finance, accounting, information technology, tax services, and services related to VeriChip’s initial public offering. As compensation for these services, VeriChip agreed to pay us approximately $62,000 per month for fixed costs allocable to these services, among other reimbursable expenses. On December 21, 2006, we and VeriChip entered into an amended and restated transition services agreement which became effective on February 14, 2007, the date of completion of VeriChip’s initial public offering. The term of the amended and restated agreement was to continue until such time as VeriChip requested that we cease performing the transition services, provided that we were not obligated to continue to provide the transition services for more than twenty-four months following the effective date of the transition services agreement. The services that were provided by us under the amended and restated transition services agreement were the same as those provided under the initial agreement. In connection with the December 21, 2006 amendment, the estimated monthly charge for the fixed costs allocable to these services was increased to approximately $72,000 per month, primarily as the result of an increased allocation for office space. Effective April 1, 2007, the estimated monthly charge for the fixed costs allocable to these services was reduced to $40,000 per month, primarily as a result of a reduction in allocable accounting fees and accounting and legal services. Effective January 1, 2008, the monthly cost was reduced further and varied each month. The cost of these services to VeriChip was $0.1 million, $0.5 million and $0.8 million in the years ended December 31, 2008, 2007 and 2006, respectively. Effective November 12, 2008, the transition services agreement, as amended, was terminated.

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

Intercompany Loan Agreement with VeriChip

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

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

On December 20, 2007, we entered into a letter agreement with VeriChip, (the “December 2007 Letter Agreement”), which was amended on February 29, 2008, which is more fully discussed below, whereby VeriChip was required to pay $0.5 million to us by December 21, 2007. In addition, VeriChip could prepay the outstanding principal amount before October 30, 2008 by providing us with $10.0 million plus (i) any accrued and unpaid interest between October 1, 2007 and the date of such prepayment less (ii) the $0.5 million payment and any other principal payments made to reduce the outstanding principal amount between the date of the letter agreement and the date of such prepayment. VeriChip was also required to register for resale all shares of VeriChip common stock that we owned with the SEC and all applicable states within 120 days following the prepayment of the outstanding principal amount.

On February 29, 2008, VeriChip obtained financing in the form of an $8.0 million secured term note (the “VeriChip Note”), with Valens Offshore SPV II, Corp. (the “VeriChip Lender”). In connection with the VeriChip financing, we entered into a Subordination Agreement with the VeriChip Lender, dated February 29, 2008, under which security provided by VeriChip to us to secure the VeriChip Loan was subordinated in right of payment and priority to the payment in full due to the VeriChip Lender by VeriChip. In addition, Destron Fearing entered into a letter agreement with VeriChip, dated February 29, 2008, which provided that, in connection with the Supply Agreement, between Destron Fearing and VeriChip, the VeriChip Lender was entitled to the benefit of all of the rights of VeriChip under the Supply Agreement including, without limitation, the right to sell any of the Developed Products (as defined in the Supply Agreement) provided by Destron Fearing and the right to require Destron Fearing to manufacture the Developed Products and supply such Developed Products, provided however, that the VeriChip Lender could not exercise any rights under the Supply Agreement unless an event of default had occurred and was continuing, the VeriChip Lender commenced exercising its rights, and in exercising its rights the VeriChip Lender complied with the Supply Agreement and all applicable laws.

VeriChip used part of the proceeds of the financing with the VeriChip Lender to prepay $5.3 million of debt owed to us, which included VeriChip’s February 2008 installment payment of $0.3 million, pursuant to the VeriChip Loan. In connection with the VeriChip financing, VeriChip entered into a letter agreement with us, dated February 29, 2008, under which VeriChip agreed, among other things, (i) to prepay the $5.0 million to us, (ii) to amend the VeriChip Loan documents to reduce the grace period from thirty days to five business days, (iii) to include a cross-default provision under which an event of default under the VeriChip Note, if not cured within the greater of the applicable cure period or ten days after the occurrence thereof, would be an event of default under the VeriChip Loan, and (iv) to amend the December 2007 Letter Agreement. As a result of the $5.0 million payment, VeriChip was not required to make any further debt service payments to us until September 1, 2009.

As consideration for providing financing to VeriChip, which in turn enabled VeriChip to make the $5.0 million prepayment us, we issued to the VeriChip Lender 28,750 shares of our common stock.

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

VeriChip’s Stock Purchase Agreement

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

	•		A Voting Agreement (the “Voting Agreement”) in which we granted an irrevocable proxy in favor of the Transaction and against any alternative proposal. The Voting Agreement limited our ability to transfer shares of stock we held in 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).

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

On the same date, we entered into a Consent and Waiver Agreement (the “Consent and Waiver Agreement”) with Laurus, Kallina, Valens U.S. SPV I, LLC, Valens Offshore SPV I Ltd., Valens Offshore SPV II Corp and PSource Structured Debt Limited (collectively referred to as the “Lenders”), in which the Lenders gave their consent to our entrance into the Guarantee and the Voting Agreement. The Consent and Waiver Agreement sets forth changes to our term loan agreements with the Lenders and also provided that we could prepay a portion of our debt held by the Lenders from the proceeds of the Transaction.

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

On September 2, 2008, we received a special dividend of approximately $7.2 million in cash from VeriChip. Approximately $5.8 million of the cash received was applied to debt repayment.

Sale of VeriChip Shares

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

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

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

InfoTech

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

Purchase Agreement with Blue Moon

In July 2008, we entered into a purchase agreement with Blue Moon, whereby we sold all our shares of InfoTech. The partners of Blue Moon are Messrs Silverman and Caragol, who are current or former VeriChip executives (or directors) and current stockholders of the Company.

Review, Approval or Ratification of Transactions with Related Parties

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

EXECUTIVE OFFICERS

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

Name		Age		Position		Officer Since
Joseph J. Grillo		51		Chief Executive Officer and President		January, 2008
Lorraine M. Breece		56		Senior Vice President, Chief Financial Officer and Chief Accounting Officer		March, 2004
Parke H. Hess		51		Chief Operating Officer		March, 2008

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

Lorraine M. Breece: Ms. Breece was appointed as our chief financial officer in March 2008. From March 2007 until March 2008, she was our acting chief financial officer. She has served as our senior vice president since April 2006 and served as assistant secretary from November 2006 until January 2008, and as treasurer from March 2007 until January 2008. She was appointed vice president in March 2004. In March 2001, she was named director of accounting and SEC reporting. She joined in April 2000 as our controller and chief accounting officer, and she continues to serve as our chief accounting officer. Prior to joining the Company, from 1991 to 1999, Ms. Breece served as director of finance and chief accounting officer of Nabi BioPharmaceuticals (NASDAQ:NABI). From 1984 to 1990, she served as corporate controller for Levitt Corporation. Ms. Breece has over 20 years employment/consulting experience with public and private companies, including Trammell Crow Company (NYSE:TCC) and Office Depot (NYSE:OD). Ms. Breece began her career as an auditor with Coopers & Lybrand. She earned a Bachelor of Administration in accounting from Florida Atlantic University and was licensed as a CPA in Florida.

Parke H. Hess: Mr. Hess was appointed as our chief operating officer on March 22, 2008. Mr. Hess has been a consultant working with us since January of 2008 and has worked with investment banks and businesses involving investment opportunities and transaction negotiations, primarily within the Radio Frequency Identification technology segment. Mr. Hess was an independent business consultant from 2002 -2007. He was CFO of HID Corporation from 1998-2001, and an investor and officer in the management buy-outs of several companies during the 1990s. Mr. Hess graduated magna cum laude from the United States Air Force Academy, and earned an MBA from the Stanford University Graduate School of Business.

COMPENSATION COMMITTEE REPORT

The compensation committee has reviewed and discussed with management the contents of the Compensation Discussion and Analysis set forth below. Based on its review and discussion, the committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

THE COMPENSATION COMMITTEE
Constance K. Weaver (Chair)
Michael S. Zarriello
John R. Block

The compensation committee report above shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

COMPENSATION DISCUSSION AND ANALYSIS

General

We strongly believe that our ability to attract, retain and motivate a high caliber of executive talent in the marketplace is essential for us to execute our business plan and those of our subsidiaries. We place great importance on the consistency of our senior management in achieving results that we believe will enhance long-term stockholder value. We believe that using an effective and individualized executive compensation package will serve to attract, motivate and retain highly qualified executive officers and provide them with the opportunity to build a meaningful ownership stake in our Company. Our general compensation philosophy is that total cash compensation should vary with our performance in attaining financial and non-financial objectives and that any long-term incentive compensation should be closely aligned with the interests of stockholders. Total 2008 cash compensation for our executive officers included a base salary, non-equity incentive compensation based on the achievement of certain financial and non-financial goals and the profitability of our individual subsidiaries and long-term incentive compensation realized through the grants of stock options.

In setting the base salary, individual non-equity incentive and equity compensation packages for executives, the compensation committee reviews information relating to executive compensation of U.S. based companies that are of approximately the same size and in the same or similar industry as we are. While there is no specific formula that is used to set compensation in relation to this market data, executive officer base salary, individual non-equity incentive compensation and equity compensation packages are generally set around the median salaries for comparable jobs in the market place. Generally, the compensation committee has used a mix more heavily weighted to long-term equity based compensation than the market as a whole. We believe this emphasis closely aligns our named executive officers’ interest with those of our stockholders. We believe this approach is an effective incentive for our executives to be forward-looking and proactive in meeting challenges presented by the continual changes in our competitive environment. We also believe this approach has significant retention value.

When specific financial and non-financial goals are met, upon the approval of the compensation committee, additional compensation in the form of either cash compensation or long-term incentive compensation may be paid to our executive officers. Therefore, such additional compensation may not be comparable to compensation paid by companies of comparable size in the same or similar industry.

The foregoing information is intended to provide context for the discussion that follows regarding our existing compensation arrangements with those persons who served as our executive officers for all or part of 2008.

Principal Components of Compensation of Our Executive Officers

The principal components of the compensation we have historically paid to our executive officers have consisted of:

	•		base salary;
	•		cash incentive compensation (or bonuses) under the terms of individual incentive and recognition policies established for our executive officers; and
	•		equity compensation, generally in the form of grants of stock options.

Our chief executive officer has historically played a significant role in the determination of the amounts of base salary and other forms of cash and equity-based compensation to be paid other members of senior management. We expect that the compensation committee of our board of directors will continue to solicit input from our chief executive officer with respect to compensation decisions affecting other members of senior management.

Allocation of Compensation among Principal Components

The compensation committee of our board of directors has established policies with respect to the mix of base salary, bonus, cash incentive compensation and equity awards to be paid or awarded to our executive officers. In general, the compensation committee believes that a greater percentage of the compensation of the most senior members of our management should be performance-based. These policies serve to link pay with measurable performance, which, in turn, helps to align the interests of our executive officers with our stockholders.

Base Salary

Chief Executive Officer and President

On January 3, 2008, our board appointed Joseph J. Grillo as our chief executive officer, president and director. In connection with Mr. Grillo’s appointment, we entered into an employment agreement with Mr. Grillo (the “Grillo Employment Agreement”) effective as of January 1, 2008. The Grillo Employment Agreement provides for a base salary of $375,000 per annum. To exhibit his confidence in our future, as of March 13, 2008, Mr. Grillo agreed to accept the balance of his 2008 salary, after customary withholdings, but at a program-related premium, in unrestricted shares of our common stock. The board approved Mr. Grillo’s participation in the Equity Swap Program on the same terms and conditions as those applicable to all other participants.

As a result of agreeing to accept the entire balance of his 2008 salary in our common stock, Mr. Grillo received a 30% premium on the balance of his 2008 salary (remaining as of March 14, 2008) under the Equity Swap Program. In addition, since Mr. Grillo agreed not to sell this stock for twelve months from the date on which he received the shares, he received an additional premium of 12%, compounded on the gross amount issued to him under the Equity Swap Program. In total, Mr. Grillo received 49,688 shares of our common stock as calculated below:

Remaining 2008 base salary		$	288,462
Stock premium (30% of remaining 2008 base salary)			86,538
Hold premium (12 % of the combined remaining 2008 base salary and stock premium)			45,000
Total			420,000
Less: Tax and benefit withholdings			149,695
Amount paid in shares of our common stock		$	270,305
Divided by: Market price of our common stock at issuance		$	5.44
Total shares issued to Mr. Grillo			49,688

Senior Vice President, Chief Financial Officer, and Chief Accounting Officer

On March 11, 2008, our board of directors appointed Ms. Breece as our senior vice president, chief financial officer and chief accounting officer. We do not have an employment agreement with Ms. Breece. During 2008, Ms. Breece’s salary was $208,385.

Chief Operating Officer

On March 22, 2008, our board appointed Parke H. Hess, Jr. to be our chief operating officer. From January 2008 to the time of his appointment, Mr. Hess served us in the capacity of a consultant. In connection with his appointment, we and Mr. Hess entered into an employment agreement, effective as of March 24, 2008 (the “Hess Employment Agreement”). Pursuant to the terms of the Hess Employment Agreement, Mr. Hess’ salary and signing bonus (aggregating $192,500) were paid in the form of unrestricted shares of our common stock, for which Mr. Hess received a stock premium and hold premium under terms similarly provided under the Equity Swap Program.

As a result of agreeing to accept his 2008 salary and signing bonus in our common stock, Mr. Hess received a 30% premium on his 2008 salary and signing bonus under the Equity Swap Program. In addition, since Mr. Hess agreed not to sell this stock for twelve months from the date on which he received the shares, he received an additional premium of 12%, compounded on the gross amount issued to him under terms similarly provided under the Equity Swap Program. In total, Mr. Hess received 34,407 shares of our common stock as calculated below:

Remaining 2008 base salary and bonus		$	192,500
Stock premium (30% of remaining 2008 base salary)			57,750
Hold premium (12 % of the combined remaining 2008 base salary and stock premium)			30,030
Total			280,280
Less: tax and benefit withholdings			93,102
Amount paid in shares of our common stock		$	187,178
Divided by: Market price of our common stock at issuance		$	5.44
Total shares issued to Mr. Hess			34,407

Performance-Based Non-Equity Incentive Compensation

On March 30, 2009, our compensation committee approved bonuses for participants under the 2008 Digital Angel Corporation Annual Incentive Plan (the “Plan”) and established the Plan Annual Targets for the 2009 fiscal year. The Plan was previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed with the SEC on May 9, 2006 and was adopted by the compensation committee as our Plan. The targets for 2009 are based on the following metrics: Revenue, EBITDA, Cash Generation, and achievement of individual targets outlined in a Management By Objectives (“MBO”) record for each participant. Under the Plan, the compensation committee determines the participants entitled to participate in the Plan. The category of eligible participants remains the same as previous years, except that our CEO, Joseph Grillo, is not eligible to participate. Mr. Grillo’s incentive compensation is determined instead by the terms of the Grillo Employment Agreement. Each participant’s bonus amount is calculated based on an analysis of performance based on the established targets and individual performance objectives and is subject to the discretion of the CEO. The maximum award under the Plan varies based upon the participant’s level and performance. Target bonuses have been set for the various senior executives participating in the Plan at 60% of their base salary, and for executives participating in the Plan at 15% to 30% of their base salary. In no event can amounts awarded under the Plan exceed 200% of each executive’s target bonus. Under the Plan, determination of awards and actual performance is the responsibility of the compensation committee, which reserves the right, in its sole discretion, to increase or decrease awards to participants.

Our compensation committee has not considered whether it would adjust or attempt to recover incentive compensation paid to any or all of our executive officers if the relevant performance objectives upon which such compensation were based were to be restated or otherwise adjusted in a manner that would have the effect of reducing the amounts payable or paid. However, in accordance with Section 304 of the Sarbanes-Oxley Act of 2002, if we were required to restate our financial statements due to material noncompliance with any financial reporting requirement under the federal securities laws as a result of misconduct, our chief executive officer and chief financial officer are legally required to reimburse us for any bonus or other incentive-based or equity-based compensation he, she or they receive from us during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission of the financial document embodying such financial restatement, as well as any profits they realize from the sale of our securities during this 12-month period.

Non-Performance-Based Bonus Compensation

Subject to limited exceptions, we have not historically paid any automatic or guaranteed bonuses to our executive officers. One exception was the signing bonus paid and annual bonus to be paid to Mr. Hess under the Hess Employment Agreement. Bonuses awarded are usually in the form of compensation for the achievement of certain performance objectives, as discussed under “Compensation Discussion and Analysis — Performance-Based Bonus Compensation.”

Equity Compensation

Our board of directors’ historical practice has been to grant equity-based awards to attract, retain, motivate and reward our executive officers, and to encourage their ownership of an equity interest in us. Through April 9, 2009, such grants have consisted, with several exceptions, of non-qualified stock options which do not qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. During 2008, we granted options to acquire an aggregate of 264,870 shares of common stock to Messrs Grillo and Hess and Ms. Breece. In addition, we extended the term of certain stock options held by Ms. Breece as additional incentive.

All grants of options have been granted with exercise prices equal to or exceeding the fair value of the underlying shares of common stock on the grant date, as determined by our board of directors. All equity-based awards have been reflected in our consolidated financial statements, based upon the applicable accounting guidance. Previously, we accounted for equity compensation paid to our executive officers and directors using the intrinsic value method under APB No. 25 and FIN 44. Under the intrinsic value method, no stock-based compensation was recognized in our consolidated statements of operations for options granted to our directors, employees, consultants and others when the exercise price of such stock options equaled or exceeded the fair value of the underlying stock on the dates of grant. Changes in the exercise prices of previously issued stock options and other modifications were treated under variable accounting in accordance with APB No. 25 and FIN 44. Effective January 1, 2006, we adopted FAS 123R using the modified prospective transition method. Under this method, stock-based compensation expense is recognized using the fair-value based method for all awards granted on or after the date of adoption of FAS 123R. FAS 123R requires us to estimate and record an expense over the service period of the stock-based award. In 2006, our compensation committee, conscious of the less favorable accounting treatment for stock options resulting from adoption of FAS 123R, took a more conservative approach to the granting of awards of stock options.

We structure cash incentive compensation so that it is taxable to our executive officers at the time it becomes available to them. We currently intend that all cash compensation we pay will be tax deductible. However, with respect to equity-based awards, while any gain recognized by our executive officers and other employees from non-qualified stock options should be deductible, to the extent that in the future we grant incentive stock options, any gain recognized by the optionee related to such options will not be deductible by us if there is no disqualifying disposition by the optionee. In addition, our grant of shares of restricted stock or restricted stock units that are not subject to performance vesting provisions may not be fully deductible by us at the time the grant is otherwise taxable to the grantee. We desire that our non-cash compensation expense be tax deductible thus we do not actively grant incentive stock options, shares of restricted stock or restricted stock units to our executive officers.

We do not have any program, plan or practice that requires us to grant equity-based awards on specified dates, and we have not made grants of such awards that were timed to precede or follow the release or withholding of material non-public information. It is possible that we will establish programs or policies regarding the timing of equity-based awards in the future. Authority to make equity-based awards to executive officers rests with our compensation committee, which considers the recommendations of our chief executive officer and other executive officers. As a Nasdaq-listed company, we are subject to NASDAQ listing standards that, in general, require stockholder approval of equity-based plans.

Equity Swap Program

On March 11, 2008, our compensation committee approved an Equity Swap Program for 2008 (the “Equity Swap Program”), which allowed certain employees earning an annual base salary of over $100,000 to elect to receive their 2008 salary in shares of our common stock, less customary withholdings, payable in a lump sum at the current market value of the stock. The Equity Swap Program was intended to reduce the cash outlay related payroll but more importantly, to align the long-term commitment of our executives and senior staff to our stockholders. At the same time, the compensation committee granted certain employees the right to receive their 2007 bonuses in shares of our common stock under the same terms as the Equity Swap Program except that there is no maximum cap on the amount that could be exchanged. Employees who sold the stock within the first thirty days after issuance received 100% price protection. No additional shares were issued for price protection. Employees who elected to participate in the Equity Swap Program were required to sign a repayment agreement that contemplated any form of termination or resignation during 2008.

An election to exchange 10%, 20% or 30% (maximum) of base salary for shares of our common stock allowed the employee to receive a 20%, 25% or 30% premium, respectively, on the amount exchanged. In addition, if participating employees committed to holding stock received under the Equity Swap Program for a period of between six to twelve months, they received an additional premium of 1% for every month the stock is held (compounded on the gross amount to be issued under the Equity Swap Program). For example, if an employee had a base salary of $120,000, elected to take 30% of their salary in stock and committed to hold the stock for 10 months, the calculation would be as follows:

2008 Base salary		$	120,000
Election percentage			30	%
Salary to be paid in shares of common stock		$	36,000
Stock premium (30%)			130	%
		$	46,800
Hold premium (1% for 10 months)			110	%
Total amount to be received in shares of common stock		$	51,480

Severance and Change-in-Control Payments

Our board of directors believes that companies should provide reasonable severance benefits to employees, recognizing that it may be difficult for them to find comparable employment within a short period of time. Our board also believes it prudent that we should disentangle ourselves from employees whose employment terminates as soon as practicable. Our historical practice for U.S. employees has been to make the termination of an employee effective immediately upon the communication of the termination rather than at the expiration of any required advance notice period. In such situations, we have continued to pay, on a post-termination basis, base salary compensation to the terminated employee under his or her employment agreement, if any, for the specified advance notice period.

Other than Messrs Grillo and Hess whose severance and change of control payments are contractual, our named executive officers and certain other officers are also entitled to receive severance payments if we terminate such an employee without cause or if the employee resigns for good reason. The severance packages include providing such officers between six and twelve months of base salary, based on the salary in effect at the time of the termination, plus an additional amount equal to the percentage of yearly base salary representing the target bonus for the officers for the year of termination, depending upon such officer’s position. The issuance of any severance benefit is subject to the execution of a general release at the time of separation. Under this policy, Ms. Breece’s severance rights include one year of base salary plus 60% of her base salary in effect at the time. We reserved the right to pay the 60% of the base salary as a lump sum, or in shares of our common stock, which would be subject to price protection for three months following the issuance.

Other Benefits

Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. Ms. Breece was also provided with an individual term life insurance policy during 2008. We do not currently offer retirement benefits.

Perquisites

Our board of directors annually reviews the perquisites that members of senior management receive. The cost to us of such perquisites is minimal.

Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code generally does not allow a deduction for annual compensation in excess of $1,000,000 paid to our named executive officers. This limitation on deductibility does not apply to certain compensation, including compensation that is payable solely on account of the attainment of one or more performance goals. Our policy is generally to preserve the federal income tax deductibility of compensation, and we intend generally to qualify eligible compensation for the performance-based exception in order for compensation not to be subject to the limitation on deductibility imposed by Section 162(m) of the Internal Revenue Code. We may, however, approve compensation that may not be deductible if we determine that the compensation is in our best interests as well as the best interests of our stockholders.

Board Process

On at least an annual basis, the compensation committee of our board of directors approves all compensation and awards to our chief executive officer and president, our chief financial officer and chief operating officer. With respect to bonuses and equity compensation awarded to other employees, the compensation committee approves bonuses and grants stock options, generally based on the recommendation of our chief executive officer.

(1)		The amounts shown in this column were paid under the terms of incentive and recognition policies for fiscal year 2008, 2007 and 2006, which were entered into with each of our named executive officers for the achievement of specified performance objectives. For a description of the material terms of each of these policies, see the discussion under “Our 2008 Incentive and Recognition Policies” below.
(2)		Mr. Grillo became our chief executive officer and president effective January 3, 2008.
(3)		On March 1, 2007, we appointed Ms. Breece as our senior vice president, acting chief financial officer, chief accounting officer, and assistant secretary. On March 9, 2007, she was also appointed treasurer. In March of 2008, Ms. Breece was appointed chief financial officer and she is currently our senior vice president, chief financial officer and chief accounting officer.
(4)		On March 24 2008, we appointed Mr. Hess as our chief operating officer.

 

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(5)		Amount represents the contractual salary amount per the Grillo Employment Agreement. On March 13, 2008, Mr. Grillo elected to accept the balance of his 2008 base salary, after customary withholdings, in unrestricted shares of our common stock. As a result, Mr. Grillo received a 30% premium on the remaining balance of his 2008 salary. In addition, since Mr. Grillo agreed not to sell this stock for twelve months from the date on which he received the shares, he received an additional premium of 12%, compounded on the gross amount issued to him.
(6)		Amount represents the contractual salary amount per the Hess Employment Agreement. Mr. Hess elected to accept his 2008 base salary and signing bonus, after customary withholdings, in unrestricted shares of our common stock. As a result, Mr. Hess received a 30% premium on his 2008 salary and bonus. In addition, since Mr. Hess agreed not to sell this stock for twelve months from the date on which he received the shares, he received an additional premium of 12%, compounded on the gross amount issued to him.
(7)		Ms. Breece was awarded $6,800 as a bonus in connection with VeriChip’s initial public offering.
(8)		We issued the following options to purchase shares of our common stock to Mr. Grillo during 2008: 68,750 options with an exercise price of $5.36 were issued on January 3, 2008; 27,370 options with an exercise price of $5.04 were issued on January 30, 2008; 31,250 options with an exercise price of $2.64 were issued on September 29, 2008; and 50,000 options with an exercise price of $0.52 were issued on December 12, 2008. All of the options vest ratably over three years. The value of the option awards is the amount of the awards that we recognized for financial reporting purposes under SFAS No. 123(R). Refer to “Item 8. Financial Statements and Supplementary Data — Footnote 1, Organization and Summary of Significant Accounting Policies — Stock-Based Compensation” in our Annual Report on Form 10-K for the year ended December 31, 2008 for discussion of the assumptions used in calculating the expense under SFAS No. 123(R). See also “Outstanding Equity Awards as of December 31, 2008” table.
(9)		On December 12, 2008, we issued 25,000 options to purchase shares of our common stock to Ms. Breece. These options were issued with an exercise price of $0.52 and vest ratably over three years. SEC regulations require us to disclose the award of options measured in dollars and calculated in accordance with FAS 123(R). During 2008, we expensed $158 for these options in accordance with FAS 123(R). In addition, on June 20, 2008, we extended the exercise term of options to purchase 312 shares of our common stock to July 18, 2011 and extended the term of options to purchase 1,499 shares of our common stock to June 20, 2018. All of these options are fully vested The value of the option awards is the amount of the awards that we recognized for financial reporting purposes under SFAS No. 123(R). Refer to “Item 8. Financial Statements and Supplementary Data — Footnote 1, Organization and Summary of Significant Accounting Policies — Stock-Based Compensation” in our Annual Report on Form 10-K for the year ended December 31, 2008 for discussion of the assumptions used in the calculating the expense under SFAS No. 123(R). See also “Outstanding Equity Awards as of December 31, 2008” table.
(10)		This option to purchase 100,000 shares of Destron Fearing common stock at $1.55 per share was issued by Destron Fearing in connection with Ms. Breece’s appointment as Destron Fearing’s acting CFO. This option was cancelled and converted into an option to purchase 1.4 shares of our common stock for every share of Destron Fearing common stock, or 140,000 shares, at $1.55 per share divided by 1.4, or $1.11, pursuant to the merger agreement between us and Destron Fearing, which transaction was completed in December 2007. SEC regulations require us to disclose the award of options measured in dollars and calculated in accordance with FAS 123(R). In accordance with FAS 123(R), Destron Fearing expensed this option ratably over the vesting period. During 2007, Destron Fearing expensed $7,744 for this option. Then in December 2007, in connection with the merger with us, this option became fully vested and Destron Fearing recorded the remaining $95,508 of expense for this option. Subsequent to our reverse stock split on November 10, 2008, these were converted into 17,500 options with an exercise price of $8.88.
(11)		We issued the following options to purchase shares of our common stock to Mr. Hess during 2008: options to purchase 37,500 shares of our common stock with an exercise price of $5.44 were issued on March 24, 2008; and options to purchase 25,000 shares of our common stock with an exercise price of $0.52 were issued on December 12, 2008. All of the options vest ratably over three years. The value of the option awards is the amount of the awards that we recognized for financial reporting purposes under SFAS No. 123(R). Refer to “Item 8. Financial Statements and Supplementary Data — Footnote 1, Organization and Summary of Significant Accounting Policies — Stock-Based Compensation” in our Annual Report on Form 10-K for the year ended December 31, 2008 for discussion of the assumptions used in calculating the expense under SFAS No. 123(R). See also “Outstanding Equity Awards as of December 31, 2008” table.

 

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(12)		Amount represents $131,538 of the combined value of the stock and hold premiums Mr. Grillo received as a result of electing to take his 2008 base salary in shares of our common stock (see footnote 5), $9,200 of a 401(k) match and $5,617 for Mr. Grillo’s personal cellular telephone and internet services paid for during 2008.
(13)		Amount represents $21,889 realized upon exercise of options to purchase 22,222 shares of VeriChip common stock, $468 worth of life insurance premiums we paid on behalf of Ms. Breece, $4,729 of a 401(k) match and $5,226 of personal cellular telephone and internet services paid for during 2008.
(14)		Amount represents the cost of life insurance premiums we paid on behalf of Ms. Breece during 2007.
(15)		Amount represents the cost of life insurance premiums we paid on behalf of Ms. Breece during 2006.
(16)		Amount represents $87,780 of the combined value of the stock and hold premiums Mr. Hess received as a result of electing to take his 2008 base salary and signing bonus in shares of our common stock (see footnote 6), $74,000 of consulting fees paid to Mr. Hess prior to employment with the Company, $7,391 of a 401(k) match and $798 for Mr. Hess’s personal internet services paid for during 2008.

(1)		Our non-equity incentive plans, under which our named executive officers have been, or may have been, paid incentive compensation, in cash, with respect to fiscal year 2008, consist of incentive and recognition policies tailored for each of Mr. Grillo, Ms. Breece and Mr. Hess. The terms of the incentive and recognition policies with respect to 2008, to which each of Mr. Grillo, Ms. Breece and Mr. Hess are parties, provide for target/maximum amounts of incentive compensation based upon the achievement of specified performance objectives. The amounts listed in the “Target” column represent the amount of incentive compensation that could have been earned by our named executive officers under their respective incentive and recognition policies for 2008, based on their achievement of all specified performance objectives (as discussed below). The Hess Employment Agreement provides for a guaranteed minimum amount of incentive compensation; therefore, the amount is listed in the “Threshold” column.
(2)		We re-granted certain options that had expired to Ms. Breece as additional incentive during 2008. The options were granted at the same exercise price as the expired options.
(3)		On January 3, 2008, we granted Mr. Grillo 68,750 options to purchase shares of our common stock outside of our option plans as inducement for employment. The exercise price of the options is $5.36 per share and the fair value at the date of the grant was $198,261.

 

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(4)		On June 20, 2008, we extended the term of 312 options currently exercisable by Ms. Breece for $22.40 per share. The fair value of the option modification was $379.
(5)		On March 24, 2008, we granted Mr. Hess 37,500 options to purchase shares of our common stock outside of our option plans as inducement for employment. The exercise price of the options is $5.44 per share and the fair value at the date of the grant was $109,955.

(1)		Mr. Grillo did not achieve this objective.
(2)		Mr. Grillo earned $400,000 under his 2008 incentive and recognition policy based on the board of directors decision to provide Mr. Grillo a discretionary cash bonus for the achievement of certain individual goals. This amount has been reflected as the amount earned by Mr. Grillo as non-equity incentive plan compensation in the Summary Compensation Table above.

(3)		Ms. Breece did not achieve this objective.
(4)		Ms. Breece earned $70,000 under her 2008 incentive and recognition policy based on the board of directors decision to provide Ms. Breece a discretionary cash bonus for the achievement of certain individual goals. This amount has been reflected as the amount earned by Ms. Breece as non-equity incentive plan compensation in the Summary Compensation Table above.

 

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(1)		A narrative description of the material terms of our equity compensation plans is set forth on page 33 of our proxy statement and 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.

 

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(1)		Fees for services provided by Eisner LLP to Destron Fearing excluded above in 2007 were: Audit Fees — $135,668; Audit-Related Fees — $112,450; Tax Fees — $0; and All Other fees — $0.

 

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	/s/ JOSEPH J. GRILLO
	JOSEPH J. GRILLO
	Chief Executive Officer and President

 

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