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W&W

[Letterhead]

  May 23, 2005

  Philip T. Colton

  (612) 604-6729

  pcolton@winthrop.com

VIA EDGAR and FEDERAL EXPRESS

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC  20549

  RE:

  Digital Angel Corporation

  Form 10-K for the year
  ended December 31, 2004

  Filed March 8, 2005

  Form 10-Q for the
  quarterly period ended March 31, 2005

  File No. 1-15177

Ladies and Gentlemen:

On behalf of Digital Angel Corporation, a Delaware corporation, we are
responding to the comments presented in the letter from Mr. Larry Spirgel
dated May 4, 2005.  For the Staff’s
convenience, each of our Responses is preceded by the related Staff Comment.

Form 10-K for the Year Ending December 31,
2004

Critical Accounting Policies and Estimates, page 14

1.                                       Describe
for us why you believe that your goodwill was not impaired at December 31,
2004 and previous periods.  In this
regard, we note that you have incurred net losses and negative cash flows from
operations in the three most recent fiscal years and the three months ended March 31,
2005.  Provide us with a copy of your
evaluation of goodwill for the year ended December 31, 2004.  In addition, tell us why you believe that the
expected recovery period for goodwill is five years.

As disclosed in note 1 to the Company’s
consolidated financial statements included in its Form 10-K for the
year ended December 31, 2004, the Company adopted SFAS 142 on January 1,
2002.  There was no impairment of
goodwill upon the adoption of SFAS 142 on January 1, 2002.  However, based on the Company’s annual
reviews for impairment, the Company recorded impairment charges of $2.4 million
and $57.4 million in the fourth quarters of 2003 and 2002, respectively.  The impairment charge in 2003 related to the
goodwill associated with the Company’s discontinued Medical Systems reporting
unit.  The impairment charge in 2002
related to the goodwill at the GPS and Radio Communications and the
discontinued Medical Systems reporting units.
The Company believes, based on its analysis, that its operations will be
cash flow positive this year.  The
Company also notes that the disclosure of impairment charges in the current
10-K and prior periods was full and prominent.

The Company used an expected recovery period of 5
years as it believes this is a typical or commonly used recovery period for its
industry.  Projections beyond this
timeframe are highly subjective and unreliable as the terms go out further.  Therefore, the Company used a five year
projection with a terminal value at the end.  In addition, the Company believes this time
horizon is sufficient to gauge overall levels of growth and profitability as
well as the capital expenditures required to achieve future performance.

The Company engaged an independent third party to
perform a fair value measurement valuation of the Company’s separate reporting
units in accordance with SFAS 142, “Goodwill and Other Intangible Assets.”  The valuation was based upon a comparable
company analysis and discounted cash flow analysis. The valuation report indicated
that the fair market value of the goodwill of each of the reporting units was
not impaired as of December 31, 2004.
The

Company’s management reviewed the valuation report
and concluded that the goodwill of each of the reporting units was not impaired
as of December 31, 2004.  These
conclusions were also considered by the Company’s auditors in conjunction with
their audit of our consolidated financial statements.

As requested, we are providing a copy of the
valuation report supplementally under separate cover.  The Company requests that this information be
kept confidential under Rules 83 and 12b-4 and that this information
be returned in accordance with the Rule 12b-4.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure
Controls and Procedures

2.                                       Please
note that Item 308(c) of Regulation S-K requests disclosure of any changes (not just significant changes) in a company’s
internal control over financial reporting occurring during the last quarter
that may have materially affected or are reasonably likely to materially
affect, the company’s internal control over financial reporting.  Please revise your disclosure to confirm that
there were no changes in your internal controls over financial reporting that
occurred during your last fiscal quarter (the fourth fiscal quarter in the case
of an annual report) that materially affected, or were reasonably likely to
materially affect, the company’s internal control over financial
reporting.  Revise your 10-Q for
the quarter ended March 31, 2005 to comply with this comment too.

In regards to the Form 10-K for the year
ended December 31, 2004, the Company confirms that there was no change in
our internal control over financial reporting during the most recently
completed fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

In regards to our Form 10-Q for the
three months ended March 31, 2005, the Company confirms that during the
period covered by this Form 10-Q, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

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In light of the fact that (a) there were no
changes in the Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting and (b) the Company’s response
to your comments will be both publicly available and viewed in the context of
your inquiry, the Company does not believe that its Form 10-K or 10-Q
should be amended as it believes doing so would not add any additional
information that will not have already been disclosed to users of the financial
statements but could, instead, be more confusing.

Following review of Item 307 and 308 of Regulation
S-K, unless circumstances otherwise require, Digital Angel proposes to revise
its Control & Procedure disclosures in future filings as follows:

FORM 10-Q DISCLOSURE

Item 4.          Controls
and Procedures

As of the end of the period covered by this Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures.
Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.

During the period covered by this Form 10-Q,
there were no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

FORM 10-K DISCLOSURE

Item 9A.  Controls And Procedures

Evaluation of Disclosure Controls
and Procedures

Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.

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We have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of [add appropriate date].  Based on that evaluation, our chief executive
officer and the chief financial officer concluded that our disclosure controls
and procedures are effective to ensure that information required to be
disclosed in the reports filed by us under the Exchange Act are recorded,
processed , summarized and reported, within the time periods specified in the
Commission’s rules and forms and are also effective to ensure that
information required to be disclosed in the reports filed or submitted by us
under the Exchange Act are accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosure.

Change in Internal Control Over Financial Reporting

There was no
change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

Our management’s
assessment of the effectiveness of our internal control over financial
reporting as of [add appropriate date] has been audited by Eisner LLP,
the Company’s independent registered public accounting firm, as stated in their
report which is included herein.

Consolidated Balance Sheets, page 33

3.                                       Revise
to present goodwill separately from intangible assets in accordance with
paragraph 43 of SFAS 142.

The Company included, in its Form 10-K
for the year ended December 31, 2004, the breakout of goodwill and
intangible assets in note 6 to the consolidated financial statements.  In addition, the Company disclosed the amount
of goodwill in the Risk Factors section on page 23 of its Form 10-Q
for the three months ended March 31, 2005.

The following presents, in accordance with
paragraph 43 of SFAS 142, goodwill separately from intangible assets for the
applicable periods:

  (In thousands)

  March 31,

  2005

  December 31,

  2004

  December 31,

  2003

  Goodwill,
  net

  53,535

  48,997

  45,119

  Intangible
  Assets, net

  3,830

  4,011

  —

The Company will, in future filings, in accordance
with paragraph 43 of SFAS 142 “Goodwill and Other Intangible Assets,” present
goodwill separately from intangible assets.
However, the amount of goodwill is currently disclosed in the Company’s Form 10-K
for the year ended December 31, 2004 and Form 10-Q for the
three months ended March 31, 2005 and the amount of intangibles is
available within the above referenced documents.

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Consolidated Statements of Cash Flows, page 36

4.                                       Revise
to present the proceeds from the sale of the Applied Digital stock as a
component of cash provided by operating activities in accordance with paragraph
18 of SFAS 115, since you have classified this investment as trading security.

The Company acknowledges that, in accordance with
paragraph 18 of SFAS 115, “Accounting for Certain Investments in Debt and
Equity Securities,” the proceeds from the sale of the Applied Digital stock
should be classified as a component of cash provided by operating
activities.  The Company proposes to
include this information prospectively in future filings.

Note 1. The Company and Basis of Presentation, page 37

Revenue Recognition, page 39

5.                                       We
note your disclosure that warranties are offered on your products. Disclose the
information required by paragraph 14 of FIN 45.

In accordance with paragraph 14 of FIN 45,
following is the reconciliation of the Company’s product warranties for the
year ended December 31, 2004:

  Dollar Amount of

  Liability

  (In thousands)

  Balance
  as of December 31, 2003

  $

  139

  Accruals
  for warranties issued during the period

  —

  Accruals
  related to pre-existing warranties (including changes in estimates)

  (58

  )

  Settlements
  made (in cash or in kind) during the period

  (34

  )

  Balance
  as of December 31, 2004

  $

  47

It is the Company’s policy to record a liability
for product warranties at the time it is probable that a warranty liability has
been incurred and the amount of loss can be reasonably estimated.  The Company’s warranty liability as of December 31,
2004 and 2003 was $47,000 and $139,000, respectively.  The Company did not disclose the information
set forth in paragraph 14 of FIN 45 in its Form 10-K for the year
ended December 31, 2004 because the Company believes the amounts involved
are not material, representing approximately 0.1% of product revenues.  However, in response to your comment, the
Company will disclose in future filings its policy to

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record a liability for product warranties and the
tabular reconciliation of the Company’s product warranties for the period.

6.                                       Tell
us how you applied the guidance in EITF 00-21 in determining your revenue
recognition policy for services and products sold by OuterLink.

The Company applied the criteria in paragraph 9 of
EITF 00-21 “Revenue Arrangements with Multiple Deliverables.”  Paragraph 9 states that in an arrangement
with multiple deliverables, the delivered item(s) should be considered a
separate unit of accounting if all of the following criteria are met:

a.              The delivered
item(s) has value to the customer on a standalone basis.  The item(s) has value on a standalone basis
if it is sold separately by any vendor or the customer could resell the
delivered item(s) on a standalone basis.
In the context of a customer’s ability to resell the delivered item(s),
the Task Force observed that this criterion does not require the existence of
an observable market for that deliverable(s).

b.              There is objective
and reliable evidence of the fair value of the undelivered item(s).

c.               If the arrangement
includes a general right of return relative to the delivered item, delivery or
performance of the undelivered item(s) is considered probable and substantially
in the control of the vendor.

Because OuteLink’s hardware can only be used with
OuterLink’s service and the hardware is not sold in a separate transaction
(i.e. without the service), the Company
believes that the hardware has no standalone value to the customer and
should not be accounted for as a separate unit of accounting (i.e. does not
meet criteria (a) above).

In addition, the Company applied the guidance of
Staff Accounting Bulletin 104 “Revenue Recognition.”  Because the hardware is not sold in a
separate transaction (i.e. without the service) and has no value on a
standalone basis, the accounting was treated in a manner similar to
nonrefundable up-front fees.
Accordingly, as disclosed in the Company’s recent 10-K and 10-Q,
Outerlink Corporation’s product revenue is deferred upon shipment and
recognized ratably over the estimated customer service period, which
customarily is 30 months.

Note 2.
Acquisition, page 41

7.                                       We
note your discussion that the valuation of the stock issued in connection with
the OuterLink Corporation is based on historical trading history and stock
prices of the Company’s common stock.
Tell us why you believe a marketability discount of 30% was
appropriate.  In this regard, we note
that the preferred stock was contingently convertible at the date of
acquisition and was subsequently converted within the same year.

The Company engaged an independent third party to
value the 100,000 shares of Series A Preferred Stock issued in connection
with the acquisition of OuterLink Corporation.
A

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marketability discount was assessed to reflect the
inability to transfer the Preferred Shares until a historically high trading
price was obtained and the lack of a trading market for the Preferred
Shares.  This report utilized a 30%
d