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  September 14, 2005

  [W & W Letterhead]

  Philip T. Colton

  Direct Dial: (612) 604-6729

  Direct Fax: (612) 604-6929

  pcolton@winthrop.com

VIA
EDGAR/COURTESY COPY FEDERAL EXPRESS

Ms. Kathleen Kerrigan

Securities and Exchange Commission

100 F Street N.E.

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

Dear Ms. Kerrigan:

On behalf of Digital Angel Corporation, a Delaware corporation, we are
responding to the comments and requests made by you and Ms. Hauber during our
conference call on Wednesday, August 31, 2005 and our subsequent conversation
later that afternoon.  We have responded
to each of the comments/requests and have preceded each response with the
related Staff Comment/Request.

1.             Please
advise the applicability of SOP 97-2 and if the Company believes that this
literature is not applicable, please explain why.

Response:              A typical OuterLink system consists of data terminal
hardware, communication services and software tools that enable clients to
visually track and display real-time and historical information about the
assets under their control.  The data
terminal hardware includes a CPU.  The
data terminal hardware transmits and receives over specific OuterLink dedicated
frequencies to OuterLink’s network operations center and when used in
connection with OuterLink’s software enables the communication of position and
location reports, fleet status information as well two way messaging.  A more complete description of OuterLink’s
business and product is attached as Exhibit A hereto.

Paragraph 2 of SOP 97-2 states in
part “…It does not apply, however, to revenue earned on products or services
containing software that is incidental to the products or services as a
whole.”  Footnote 2 to this paragraph
states in part “Indicators of whether software is incidental to a product as a
whole include (but are not limited to) (a) whether the software is a
significant

focus of the marketing effort or is
sold separately, (b) whether the vendor is providing post contract customer
support, and (c) whether the vendor incurs significant costs that are within
the scope of FASB Statement No. 86…”

OuterLink’s proprietary software is
licensed only to customers that purchase the OuterLink transceiver (the CP2)
and sign a service agreement.  The
software license automatically terminates upon the termination of the service
agreement.  Additionally, the license
cannot be transferred or assigned to anyone else.  The customers are not purchasing from
OuterLink a license to use software in their day to day business, they are
purchasing the ongoing ability to track in real-time the location of their
fleet of aircraft and to send and receive messages directly to/from one or more
aircraft.  As such, the software is
incidental to the service and not subject to SOP 97-2.

OuterLink, in its marketing material
briefly discusses its software but such discussion is limited to stating that
it may be installed on a standalone system or network, its ability to interface
with other software and the data which is provided.  Additionally, except as additional
installations for existing customers, the software is not sold separately from
the transceiver and the service agreement.
There is limited post contract support for one year which provides for
maintenance but not software upgrades, if any.
Lastly, OuterLink currently incurs only nominal costs associated with
the delivery of the software to customers.
The Company infrequently upgrades the software and the outsourced costs
associated with such upgrades are nominal.

Additionally, only one license is
required in order for the customer to track multiple aircraft.  In general, the relative cost is $5,000 for
the software license, $12,000 for one transceiver - the CP-2 (each aircraft
must have its own transceiver) and $100 per month per transceiver for the
tracking service.

Based upon the criteria set forth in
SOP 97-2, the Company considers the software an incidental component of the
service being provided and therefore it is appropriate that the licensing fee
be amortized over the estimated number of months of service the Company
provides on the hardware units it sells.

2.             Please
provide a copy of Outerlink’s sales documentation.

Response:              Attached to this response, as Exhibit B and Exhibit C, respectively, is
a copy of Outerlink’s standard terms and conditions and form of Communications
Services Agreement.

3.             Advise
how the Company determined that a 30 month period was an appropriate period
over which to recognize Outerlink’s product revenue and expenses.

Response:             The Company initially determined the deferral period
by estimating the timeframe over which the Company’s product (transceiver
hardware, software and service) would be utilized by a customer.  The Company took into consideration the
estimated life of the hardware unit, the relatively short period of time the
product had been available, the estimated release date of new versions and the Company’s
estimated experience at that time.

The Company intends to monitor the
average service period annually to determine if a longer or shorter period of
time should be utilized over which to recognize OuterLink product revenue and
associated product costs.

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4.             Advise
as to whether the resale of Outerlink product by Outerlink customers occurred
since the Company acquired Outerlink in January 2004 or whether these resales
occurred since the inception of Outerlink.

Response: In April 2005 OuterLink became indirectly involved
in facilitating the transfer of four transceiver hardware units owned by a
former customer to an existing customer. The transfer resulted in the Company
earning additional consideration (about $2,000) for conducting an inspection
and recertification of the transceiver hardware.  To the best of the Company’s knowledge, no
other resale of Outerlink product has occurred over the approximate 5 years
that its product has been available.

5.             Please
explain why the Company believes that revenues and expenses associated with
Outerlink hardware and software sales should be deferred over a period of time
as opposed to being immediately recognized; addressing in particular EITF
00-21’s mention that product that should be considered a separate unit of
accounting if the product can be resold.

Response:             EITF 00-21 paragraph 9, states that in the case of an
arrangement containing multiple deliverables, the delivered item(s) should be
considered separate if all conditions are met.
The focus of this response, as requested by the staff, is condition “a”.

Condition “a” provides that “the
delivered item has to have value to the customer on a standalone basis.  That 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.”

The software component of the
Outerlink deliverables has no separate functionality, and accordingly, does not
fall under SOP 97-2 accounting.  It is
not separable from the transceiver

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hardware (the CP-2 unit) delivered for revenue recognition
purposes.  The software and transceiver
hardware represent a singe deliverable for such purposes.  Further, combined or separately, they have no
utility without the separate “tracking” service provided by OuterLink.  Customers using the Company’s proprietary
products cannot obtain the “tracking” service from any other provider.

If a CP-2 unit were to be sold by a
pre-existing customer,
the buyer does NOT acquire an item that has standalone
value.  Such a buyer cannot acquire BOTH
the transceiver hardware and the software from the resale marketplace.  As previously discussed, the resale of the
software to 3rd parties is both contractually prohibited by
OuterLink and the use of said software by anyone requires that a license fee be
paid to OuterLink.  Therefore,  a CP-2 unit has no
resale marketplace.  Even if the hardware
is capable of being resold (the above analysis notwithstanding) the sale is not
on a standalone basis because the hardware is not functional with any other
software but OuterLink’s, nor can the transceiver hardware be
modified/retrofitted to make the proprietary spectrum frequency, used in
conjunction with the Company’s leased satellite capacity, compatible with a
competitor’s service.  The CP-2 unit
could be resold (absent the Company’s involvement) only for scrap as it would
be nonfunctional. Without Outerlink’s tracking services, a 3rd party
buyer does not have any viable alternatives to render the acquired transceiver
hardware useable and capable of function.
The 3rd party transceiver hardware buyer needs to go to the
Company, acquire the software, pay a license fee to OuterLink and enter into
the agreements for the license and service that are only offered by the Company
in order to have anything of value at all.

We do not believe the resale
standalone criteria have been met merely by an ability of an owner of a
tangible item being able to resell the item without regard to its subsequent
utility.  If that were the case, then
virtually all tangible items not legally restrictable would so qualify.

In point of fact, Outerlink in its
nearly 5 year history (including its prior operations independent of Digital
Angel Corporation) has, to the best knowledge of the Company, had only one case
of such a resale transfer of transceiver hardware take place.  Specifically, the Company became indirectly
involved in facilitating the transfer of transceiver hardware owned by a former
customer who was unfortunately unhappy with its service to an already existing
customer, who was.  That unusual and
isolated case, involving 4 transceiver hardware units (out of approximately
1,700 units sold to date) resulted in the Company earning additional
consideration (about $2,000) for conducting an inspection and recertification
of the transceiver hardware - since the customer was not new, there was no
software or license involved.
Notwithstanding the limited and unusual nature of the facts involved in
this transfer, the Company agreed to provide service to the resold units (and
charged a reactivation fee to do so etc. and earns a monthly fee for tracking
them) because it perceived that action and the resale from an unhappy to a
happy customer to be in its best business interests at that time.  The Company reserves the right to make the
determination of when, as and if used product can be used after a resale with a
presumption that such an action is not permissible.  Accordingly,  it is not reasonably certain that the
Company “would”  agree to provide service
to any  3rd party transferees
(unlike the EITF example #1 involving the cell phone).  A completely different

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analysis by the Company is involved where a new customer
becomes the 3rd party transferee.
In any case, it would a decision solely within the discretion of the
Company.

Furthermore, the question as to
whether the Company “would” provide the service does not appear to us to be
germane to the resale analysis.  In
Example 6 of EITF 00-21 (Bio-tech/Pharma Co.) it was determined that the
technology license granted by Bio-tech to Pharma Co. had no standalone value
because were Pharma Co. to sublicense the technology to 3rd Party
Co., the new sublicense (3rd Party Co.) would in turn still be
required to utilize Bio-tech Co. to do the research and development on the drug
because of the existing contractual arrangements.  In other words, the analysis in this example
by the EITF concluded simply and strictly on the basis of the contractual
arrangements between the parties that the technology license between Bio-tech
Co. and Pharma Co. had no standalone value.
The EITF analysis did not include any discussion as to whether Biotech
Co. “would” agree to perform the research and development for 3rd
Party Co., since such consideration was deemed irrelevant to the analysis of
standalone value.  We believe that the
fact pattern and conclusion in Example 6 fits Outerlink’s fact pattern and
conclusion.

Therefore, we believe it is correct
to conclude that the item(s) delivered by OuterLink never have standalone value, neither individually nor in tandem (transceiver
hardware plus software) nor do they ever have standalone value to 3rd
parties absent a service agreement.  The
service provided by OuterLink of monitoring/messaging is what the customer is
buying from OuterLink and neither item works without the service agreement.  The Company’s accounting for the license, the
activation charge and the gross profit applicable to the transceiver hardware
delivered are combined and recognized as revenue over the estimated number of
months of service the Company provides on the hardware units it sells .  In this case,
30 months is used since that bears proper and reasonable relationship to the
utility and value of what OuterLink provides from the perspective of its
customer, which is the treatment required by GAAP.

6.       Below
is draft language discussing in more depth the goodwill analysis, which would
be included in future filings.

Response:             Critical
Accounting Policies and Estimates

Goodwill,
Intangibles and Other Long-Lived Assets

On
January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible
Assets.”  SFAS No. 142 requires that
goodwill and certain intangibles no longer be amortized but instead be tested
for impairment at least annually by applying a fair value based test. There was
no impairment of goodwill upon the adoption of SFAS 142 on January 1,
2002.  In addition, there was no
impairment of goodwill as a result of our 2004 annual impairment review.  However based upon an annual review for
impairment in 2003 and 2002, we recorded impairment charges of $3.0 million and
$57.4 million in the fourth quarters of 2003 and 2002, respectively (of which
$3.0 million and $25.9 million in 2003 and 2002, respectively, related to our
Medical Systems segment and is included in discontinued operations).  The impairment charge in 2002

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related to the goodwill at the GPS and Radio Communications reporting unit.

In
accordance with FAS 142, we are required to allocate goodwill to the various
reporting units.  As of December 31,
2004 the reporting units consisted of the following (the reporting units listed
below are those businesses, which have goodwill and for which discrete
financial information is available and upon which management makes operating
decisions):

•              Animal
Applications (goodwill of $44.0 million)

•              Signature
Industries, Ltd. (goodwill of $1.2 million)

•              OuterLink
Corporation (goodwill of $3.8 million)

We
engaged an independent valuation firm to review and evaluate the goodwill as
reflected on our books as of December 31, 2004, 2003 and 2002.
Independently, the valuation firm reviewed the goodwill of the various
reporting units. The Company’s management compiled the cash flow forecasts,
growth rates, gross margin, fixed and variable cost structure, depreciation and
amortization expenses, corporate overhead, tax rates, and capital expenditures,
among other data and assumptions related to the financial projections upon
which the valuation reports were based.
The valuation firm’s methodology including residual or terminal enterprise
values were based on the following factors: risk free rate of 10 years; current
leverage (E/V); leveraged beta – Bloomberg; unleveraged beta; risk premium;
cost of equity; after-tax cost of debt; and weighted average cost of
capital.  These variables generated a
discount rate calculation.

The
assumptions used in the determination of fair value using discounted cash flows
were as follows:

•