How to tell advisor I'm declining a scholarship? I recently won a scholarship that could (in theory) pay for the remainder of my time in graduate school. However, it comes attached with strings that I'm not comfortable with, and so I've decided to decline the offer.

I was aware of the strings when I applied for it (basically, the public institution funding the scholarship pays x years and you work for them for x years). I thought I had done my research at the time and knew all that I needed to know about that -- it didn't seem like an issue then. Since then, however, I've learned more about the program that has me on edge (some very negative experiences that past winners have had, and a relatively-low salary compared to industry on graduation). Furthermore, the placement is not what I had in mind -- I was hoping for a position on the east coast of the U.S., and they placed me on the west coast.

I have one more year of funding available, so I can continue applying for more fellowships/scholarships; and my advisor had indicated to me in the past that he had other funding available for when my current fellowship ran out. However, I'm worried he'll get angry if I tell him I'm turning down free (for him, at least) funding.

So my question is: how should I inform him of my decision such that (hopefully) he's least likely to get infuriated? Or, put another way, how would faculty members on Academia S.E. want to be informed of such a decision?

(I have already planned to do this in-person; I'm looking for suggestions for what to actually say.)
Just honestly tell him your reasons. They are very understandable.

Making a commitment to work for years an institution that you aren't sure you want to work for, at a location thousands of miles away from where you want to be, is a very big deal for your life.  

Yes, it might be somewhat less convenient for your advisor, but so what?  This decision is about you and what is best for you, not about your advisor.  A reasonable person would not expect you to re-order years of your life, just so it is slightly easier to fund their lab.

I would just give your reasons and not worry about it.  It will probably be fine.  On the off chance that your advisor does get upset, just try to remember that it is not your fault.  And certainly don't change your plans in response.