---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)

[X] Annual Report Pursuant To Section 13 Or 15(D) Of The
Securities Exchange Act Of 1934

For the fiscal year ended August 31, 2010

[   ] Transition Report Under Section 13 Or 15(D) Of
The Securities Exchange Act Of 1934

For the transition period from _____to _____

COMMISSION FILE NUMBER 000-28259

DESTINY MEDIA TECHNOLOGIES
INC.(Name of small business issuer in its charter)

|COLORADO                                                             | 84-1516745                          
|-------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or
      organization) | (I.R.S. Employer Identification No.)
|                                                                     |                                     
|650 West Georgia Street, Suite 750                                   |                                     
|Vancouver, British Columbia, Canada                                  | V6B 4N7                             
|(Address of principal executive offices)                             | (Zip
      Code)                    
|                                                                     |                                     
|604-609-7736                                                         |                                     
|Issuer's telephone number                                            |                                     
|                                                                     |                                     
|Securities registered under Section 12(b) of the Exchange
      Act: | NOT APPLICABLE                      
|                                                                     |                                     
|Securities registered under Section 12(g) of the Exchange
      Act: | COMMON STOCK, PAR VALUE             
|                                                                     | $0.001 PER SHARE                    

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [   ]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer [   ]
    
    Accelerated
      filer                  
      [   ]Non-accelerated filer   [   ]
    (Do not check if a smaller reporting
    Smaller reporting company [X]company)


Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ 
 ]    No [X]

State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrants most recently
completed second fiscal quarter.

40,334,692 common shares @ $0.44(1)= $17,747,264(1) Closing price as quoted on the OTC Bulletin Board on
February 26, 2010.

---

Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest practicable date.

50,628,347 Shares of $0.001 par value common stock
outstanding as of November 24, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

None

---

DESTINY MEDIA TECHNOLOGIES INC.FORM 10-K

INDEX

|               |                                                                                                                          | PAGE
|-------------- | ------------------------------------------------------------------------------------------------------------------------ | ----
|               |                                                                                                                          |     
|PART
      I   |                                                                                                                          |     
|               |                                                                                                                          |     
|Item
      1.  | Business                                                                                                                 | 5   
|               |                                                                                                                          |     
|Item 1A.       | Risk Factors                                                                                                             | 14  
|               |                                                                                                                          |     
|Item 1B.       | Unresolved Staff Comments                                                                                                | 16  
|               |                                                                                                                          |     
|Item
      2.  | Properties.                                                                                                              | 16  
|               |                                                                                                                          |     
|Item
      3.  | Legal
      Proceedings.                                                                                                 | 17  
|               |                                                                                                                          |     
|Item
      4.  | Removed
      and Reserved.                                                                                              | 18  
|               |                                                                                                                          |     
|PART
      II  |                                                                                                                          |     
|               |                                                                                                                          |     
|Item
      5.  | Market
      For Registrants Common Equity, Related Stockholder Matters and Issuer
      Purchases Of Equity Securities | 19  
|               |                                                                                                                          |     
|Item
      6.  | Selected
      Financial Data                                                                                            | 21  
|               |                                                                                                                          |     
|Item
      7.  | Management's
      Discussion And Analysis Of Financial Condition and Results Of Operations.                             | 21  
|               |                                                                                                                          |     
|Item 7A.       | Quantitative And Qualitative Disclosures About Market Risk                                                               | 29  
|               |                                                                                                                          |     
|Item
      8.  | Financial
      Statements And Supplementary Data                                                                        | 29  
|               |                                                                                                                          |     
|Item
      9.  | Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure.                        | 30  
|               |                                                                                                                          |     
|Item
      9A  | Controls
      and Procedures                                                                                            | 31  
|               |                                                                                                                          |     
|Item
      9B  | Other
      Information                                                                                                  | 31  
|               |                                                                                                                          |     
|PART
      III |                                                                                                                          |     
|               |                                                                                                                          |     
|Item
      10. | Directors,
      Executive Officers And Corporate Governance                                                             | 32  
|               |                                                                                                                          |     
|Item
      11. | Executive
      Compensation.                                                                                            | 34  
|               |                                                                                                                          |     
|Item
      12. | Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters.              | 35  
|               |                                                                                                                          |     
|Item
      13. | Certain
      Relationships And Related Transactions, And Director Independence                                          | 38  
|               |                                                                                                                          |     
|Item
      14. | Principal
      Accountant Fees and Services                                                                             | 38  
|               |                                                                                                                          |     
|PART
      IV  |                                                                                                                          |     
|               |                                                                                                                          |     
|Item
      15. | Exhibits,
      Financial Statement Schedules                                                                            | 39  
|               |                                                                                                                          |     
|Signatures     |                                                                                                                          | 41  

---

PART I

FORWARD LOOKING STATEMENTS

The information in this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including statements regarding Destiny Media's capital needs, business strategy
and expectations. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expect", "plan", "intend", "anticipate", "believe",
"estimate", "predict", "potential" or "continue", the negative of such terms or
other comparable terminology. Actual events or results may differ materially. In
evaluating these statements, you should consider various factors, including the
risks outlined below, and, from time to time, in other reports Destiny Media
files with the SEC. These factors may cause Destiny Media's actual results to
differ materially from any forward-looking statements. Destiny Media disclaims
any obligation to publicly update these statements, or disclose any difference
between its actual results and those reflected in these statements. The
information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.

CURRENCY

All dollar amounts in this Annual Report on Form 10-K are
presented in United States dollars unless otherwise indicated.

4

---

**ITEM 1.**         
  **BUSINESS**

OVERVIEW AND CORPORATE BACKGROUND

Destiny Media Technologies, Inc. was incorporated in August
1998 under the laws of the State of Colorado. We carry out our business
operations through our wholly owned subsidiary, Destiny Software Productions
Inc., a British Columbia company that was incorporated in 1992, and MPE
Distribution, Inc. a Nevada company that was incorporated in 2007. The
Company, Destiny or we refers to the consolidated activities of all three
companies.

Our principal executive office is located at #750-650 West
Georgia Street, Vancouver, British Columbia V6B 4N7. Our telephone number is
(604) 609-7736 and our facsimile number is (604) 609-0611.

In October 2010, the Company received approval for its shares
to trade on the TSX Venture Exchange in Canada under the symbol DSY. The
Companys shares will continue to trade on the OTC Bulletin board under the
symbol DSNY, and on various German exchanges (Frankfurt, Berlin, Stuttgart and
Xetra) under the symbol DME 935 410.

Our corporate website is located at http://www.dsny.com.

OUR PRODUCTS AND SERVICES

Destiny develops and markets services that enable the secure
distribution of digital media content over the internet. Destiny services are
based around proprietary security, watermarking and playerless streaming media
technologies.

The current offerings include the Play MPE® secure distribution
network, which the recording industry uses to distribute new pre-release music,
and the Clipstream® instant play streaming media solutions.

Currently, more than 90% of the Companys revenues come from
the Play MPE® digital distribution service. The remaining revenue is derived
from recurring revenues for secure Clipstream® powered market research video
questionnaires and legacy Clipstream® licenses.

Play MPE®

Play MPE® is a digital delivery service for securely moving
broadcast quality audio, video, images, promotional information and other
digital content securely through the internet. The system is currently marketed
to the recording industry, for transferring pre-release broadcast quality music,
radio shows, and music videos to trusted recipients such as radio stations,
media reviewers, VIPs, DJs, film and TV personnel, sports stadiums and
retailers. The system replaces the physical distribution (mail, courier or hand
delivery) of CDs. As with traditional physical delivery, our fees are based on
the size of the content and number of recipients.

More than 1,000 record labels, including all four major labels
(Universal Music Group, Warner Music Group, EMI and Sony), are regularly using
Play MPE® to deliver their content to radio.

Each distribution is initiated by our customers, which encode
the content and enter the appropriate data. Our software has a tiered
permissions based access allowing our clients to assign varying rights,
capabilities and responsibilities to different members of their staff. For
example, some customer staff may manage assets (album cover imagery, music
videos, the raw music, promotional information and other meta data), while
others manage hierarchical permission based lists of recipients. Larger labels
are normally structured into label groups, each with their own labels with
varying access (permissions) to various subsets of the master recipient
lists.

The release dates for music can be dependent on the territory
and, where administrative settings permit, local promotions staff will generate
a localized distribution of the song with modified marketing information in the local language. Local staff will select
pre-existing assets from the system and combine them together with local
recipient lists to form a send. Our customers also choose the level of access
for the recipients assigned to the release by designating whether the release
can be streamed, downloaded, exported into an unlocked digital format or burned
to a CD.

5

---

While many clients are set up to manage and upload recipient
lists, most rely on the proprietary Play MPE® network, which is quickly becoming
a valuable asset to the industry. Due to our recipient side integration (Clear
Channel, the BBC, Mediabase, RCS Sound Software, etc.) and the manner in which
our system operates, Play MPE® staff will be able to provide unparalleled access
to current global recipients. The Play MPE® system provides Play MPE® staff with
the feedback and resources necessary to manage and maintain this network of
recipients which is not available with physical distribution or smaller
competitors.

Staff who encode each release choose the access rights,
whether the system should automatically generate a template driven marketing
email alert, whether the song should be locked to the recipient computer and
which partner sites should have access to the content.

On the impact date, the send appears in the available
tracks section of the users account. Recipients can access through proprietary
iPhone, Mac and Windows based players, through a Direct to Web browser interface
supporting playerless streaming and download or through partner sites, including
integration into reporting systems such as Mediabase, radio automation systems
such as Nexgen or Selector or through custom direct integration into the backend
server systems at the radio chains such as Prophet. Destiny's proprietary
applications offer popular features, such as the ability to drag and drop to
build and burn playlists to CD's for music meetings, the ability to convert and
export into a wide variety of formats from the iTunes AAC format to the popular
MP3 format and to export meta data automatically into third party applications.

The system generates a Clipstream® format playerless streaming
audio clip for previewing and two broadcast quality versions of the downloadable
audio. The recipient can choose to receive a lossless compressed exact copy of
the original file at up to four times regular download speed or a variable
bitrate compressed version, indistinguishable to the human ear, at up to fifteen
times regular download speed. Recipients receive a custom library of available
tracks and are able to repeat the download if music is lost.

All exported songs are marked in real time with Destinys
patent pending watermark technology. Songs on the internet are scanned through
Destinys integration into the International Federation of the Phonographic
Industrys (IFPI) internet web crawler. Headquartered in London, UK, the IFPI
is the organization that represents the interests of the recording industry
worldwide and one of its missions is to safeguard the rights of record
producers. IFPI web crawlers visit torrents, peer to peer networks and websites
searching for unauthorized content. When problem files are identified, the IFPI
software looks for Destinys watermark in the content to identify the
originating source. If a mark is found, Destiny's server and the originating
label are automatically contacted so that recipient can be disabled from the
system and appropriate action can be taken against the individual to hold that
recipient accountable for the unauthorized distribution.

After the content is released, all activity by the recipient is
logged in real time, providing record labels and promotions staff real time
detail on which songs are accessed, streamed, downloaded and exported. This
contrast directly with physical distribution where they are unsure whether the
courier package went to the correct individual or whether it was opened. This
information provides invaluable feedback in real time to marketing and
promotions staff who can cater their programs appropriately.

Finally, details of the transaction are fed to the billing
servers for generation of automated monthly billing summaries for invoicing.

Real time usage statistics for Play MPE® are available at:
http://tinyurl.com/2dyb7ao

Clipstream®

The Clipstream® software suite enables audio or video content
to be streamed so that the media plays instantly and automatically when the user initiates playback.

6

---

According to Nielsen, 136.2 million Americans viewed 10.2
billion video streams in June 2010; an average of 74.9 streams per viewer. The
average US internet user spent 194.6 minutes watching online video during the
month. Most of these streams are served by only four competitive technologies to
Clipstream® and none of them can offer as high a playrate, secure streams and
instant play. Because they are player based, competing solutions require users
to maintain the installed playback software, which exposes their computer to
viruses, high resource use and instability. Clipstream® relies on features found
in most browsers on most operating systems to provide the easiest user
experience and the highest cross platform, secure playback rate.

A quality comparison between Clipstream® and the most common
alternate video formats is available at http://tinyurl.com/2fqacwc with Clipstream® in the
bottom right. An empty panel in the comparison reflects that the corresponding
player is not installed on the viewing computer. This common situation is one
reason Clipstream® content has a much higher play rate than other solutions.

The return on investment for selling direct licensing is low as
the competing streaming solutions are inexpensive and there is a long pre-sale
and post-sale support cycle. For that reason, the Company has focused on
marketing into niche opportunities such as the market research industry where
the higher playrate and security are required, while investing into research and
development for new high margin recurring revenue service based offerings built
around the Clipstream® feature set.

Clipstream® Powered Survey Clip

Market research professionals often use videos and imagery to
describe a product or to preview a potential movie trailer or advertisement that
may or may not air. Often, the content of the video is sensitive or
confidential. Destiny offers a solution that secures the content so that it will
only play from an authorized domain, blocks screenscraper programs (programs
which are able copy screen displays) and watermarks the content to protect it
from being recorded by video camera or other means. Destinys clips are
incorporated into online surveys where the high penetration and playrate ensure
the minimum number of high value survey participants drop out.

The Clipstream® survey solution (http://www.surveyclip.com/ )
is well suited to the market research vertical. Market research companies have
embraced the technology for internet based video surveys and Destiny has become
a long time member and sponsor of CASRO (http://www.casro.org/).

There is a high acquisition cost to survey participants who are
often paid to participate. It is important that everyone gets the exact same
viewing experience so that results are not skewed and that play rates are
reliable, so participants do not drop out because they do not have the correct
codec or the latest video player installed correctly.

Clipstream® Licensing

The Company continues to sell self serve internet radio
(http://www.pirateradio.com), streaming audio (http://www.clipstreamaudio.com)
and live video (http://live.clipstream.com) through an automated credit card
system. It also continues to license other Clipstream® technologies through
direct sales efforts through http://www.clipstream.com and other sites. These
sales are "word of mouth" as the company has not invested significantly in
marketing these offerings in the last fiscal year.

New Clipstream® Products

IPTV

The Company has developed ground breaking technology
(http://tv.clipstream.com) that enables users to remotely access their own video
or TV signal through any web browser without installing player software. The
Company is not offering this product directly to consumers and will pursue
direct OEM licensing opportunities where the broadcast software can be
pre-installed on internet enabled TV's, IP security cameras and computers.

7

---

HD Internet Radio

Destiny has developed a new internet radio service, which
enables radio stations to embed their own on air signal into their corporate
website without hiring new media consultants and installing high speed
connections and streaming servers into their own offices. Instead our software
forwards a single stream to our servers where it is replicated. Users who click
on the play button on the stations website receive the stream from Destinys
servers in the playerless Clipstream® format. We expect that higher play rates
will mean lower user support requirements for staff at the station.

This application can extend to derivative business
opportunities where the stations signal can be logged to meet regulatory and
advertiser requirements and where the stream can be analyzed to automate
reporting of which songs were played on air by that station.

Cloud Offering

Under development for over three years, this new asset
management system is being built out in direct response to customer requests for
a hosting system that allows users to easily organize and reuse content. Members
will be able to upload a wide variety of assets (video, documents, software,
audio, pictures, etc.), which they can lock down to be accessed by certain
users. Reporting on access is available on an asset by asset basis. Streamed
versions of audio and video content are created automatically by a farm of
stream encoding servers. Users can create audio content by dialing in through a
traditional telephone, so meetings and other audio content can easily be
automatically converted into streaming media. Users can choose templates to
organize assets into web pages or emails or they can simply embed assets to
appear to be served from their own corporate websites even though the content is
originating on Destiny's servers. The system has a wide variety of features
including sophisticated email list management for staying in contact with
customers.

BUSINESS DEVELOPMENT

In 2010, Business in Vancouver recognized Destiny in its Top
100 Fastest Growing Companies and Profit Magazine identified the company in its
Profit 100 Ranking of Canada's Fastest Growing Companies. In October 2010, the
Company received approval for its shares to trade on the TSX Venture Exchange in
Canada under the symbol DSY.

MPE®

Although 2010 was a year where the Company's focus was on
expanding the network and increasing the value proposition to lay the
foundations for new business for fiscal 2011, annual revenues still increased
55%.

Play MPE® is marketed to the recording industry as an
alternative to the much higher cost of physical delivery (mail or courier) of CD
copies. When entering a new market, the initial challenge is that radio is
reluctant to invest in change until there is adequate content in the system and
labels are unwilling to pay until there is an installed base with radio. The
Play MPE® service initially launched in the United States in 2003, but
appreciable commercialization did not begin until January 2008. A large focus in
fiscal 2010 has been to invest in strategies to speed up adoption by radio
recipients to build the foundation for future revenue growth. During the year,
Play MPE® staff worked closely with parent record labels on training tours with
sub-labels and radio, invested in local list management, integrated our solution
with third party systems and re-engineered the solution to better meet the needs
of international customers.

The Company is conducting trials across the globe. During the
year, songs were delivered in 44 countries representing every continent but
Antarctica. The software supports 24 languages and the Company continues to work
with our Major label clients to continue the global expansion to new countries.
The Company continues to sign agreements with new clients in North America (33
agreements in 2010) and internationally (20 in 2010). During the year, two Major
label agreements were each extended for two years.

8

---

Two majors have signed global agreements and, during the year, each agreement was renewed and extended for two years.   Parent label staff are working with Destiny to build out the network in new territories, however this rollout is not automatic and must accommodate needs in each territory.  Beginning in early 2010, Play MPE® staff traveled extensively, working closely with the labels, focusing on major markets including Canada, France, Japan, Norway, Spain, Portugal and the United Kingdom. The Company is pursuing partnerships and marketing opportunities in these markets and modifying the system to meet local needs, such as local regulations and local trade association rules. Play MPE® support toured over fifty major market radio stations in every major city in Canada and in September 2010, the Company sponsored a music meeting and party for the Canadian Country Music Association's Country Music Week with Sony Canada which was attended by program directors and station managers from across Canada.

The radio industry observes a high degree of staff turnover and
changes in job description. As a result, it is challenging to maintain accurate
recipient lists which result in the greatest chance of on air broadcast. The
Company has two outside consultants, two full time and one part-time staff who
are dedicated to maintaining current recipient lists through interpreting
feedback obtained automatically from the Play MPE® system, reviewing industry
publications and maintaining radio industry relationships. The Company also has
two full time label and radio relations representatives who visit radio stations
and labels directly. Further, the Company has partnered with the world's leading
developer of radio automation software (see below). Thus, while many labels
manage their own recipient lists, most rely on Play MPE® recipient network.

In December 2009, RCS http://www.rcsworks.com/en/default.aspx,
the world's largest broadcast software company, announced an agreement with
Destiny to deliver new music to radio stations on five continents. With over
9,000 customers across its product lines, RCS is the leading supplier of radio
automation and scheduling software, marketed under the brands Selector,
GSelector and NexGen Digital. Through the Play MPE® system, our record label
clients will have an instant distribution channel to radio station clients of
RCS. Labels can choose an RCS product and territory and those stations will be
able to instantly pull that music directly into the software that puts the music
on air.

The Company is also working to integrate directly with the
server infrastructure of large radio chains. In July 2010, the Company announced
the integration of Play MPE® into the British Broadcasting Corporations (BBC)
radio division. The BBC is the largest broadcasting organization in the world
and this represents another milestone in global expansion. As the first and,
currently, only pre-release distribution service to be digitally connected to
the BBC, Play MPE® adds another dimension in simplifying pre-release
distribution to our clients.

Dozens of new features were added to the Play MPE® Encoder at
customer request, with the main enhancements involving the List Manager, Asset
Manager, and Staff Manager to better support global usage. Activity in the
system is steady and continues to grow which creates demand for development
through user requests. The ability for labels to share completed releases with
sister labels has proven to be very popular as a labor saving efficiency and as
a means of quality control across all of a label's territories.

During 2010, the Company integrated its proprietary patent
pending watermark into the International Federation of the Phonographic
Industrys (IFPI) internet web crawler. With this integration, the source of
any content made available on the internet and detected by the IFPIs search
engine can be identified and appropriate action can be taken. Where security is
important, this integration represents an enormous advantage over all other
forms of distribution of audio content.

Labels can send Play MPE® content in either a locked or
unlocked format, depending on the reasonable need for the recipients to make
copies and the level of trust. Occasionally, recipients breach this trust and
leak the pre-release music to torrent and pirate sites and this has been a long
ongoing problem with physical distribution where the content is never locked.
Since Destiny's integration with the IFPI, leaks are now caught nearly
instantaneously and recipients automatically disabled from the system in as
little as one half hour from the illegal upload and the label is able to hold
the violator accountable. This is an extremely popular feature, not available
physically or by any other digital distribution system.

During the year, the Company released several high profile
releases which set record bandwidth usage numbers. Based on the volumes seen in
these releases, the Company built out its server software and infrastructure to
support volume spikes of up to fifty times average usage rates. A UK server
facility was added in September 2009 and a third North American facility was
added in August 2010. The Company currently has three physical locations in North America and one
in Europe which support a combined simultaneous bitrate of 2200 Mbps. Servers in
one location are configured to monitor servers in other locations for up time
and the system automatically fails over from one location to the next to ensure
continuous service.

9

---

The integration with these systems and expanded infrastructure
provides the foundation for global expansion.

Some highlights for the year include:

| | September 10-12, 2009: | Christian Music Broadcasters Momentum
      Conference in Orlando, Fla. 
| | ---------------------- | ------------------------------------------------------------------------
| |                        |                                                                         
| | October 29-30, 2009:   | Billboard Film and TV Music Conference in Los
      Angeles, California.
| |                        |                                                                         
| | March 10-14, 2010:     | Canadian Music Week in Toronto, Ontario.                                
| |                        |                                                                         
| | March 17-20, 2010:     | South by Southwest Music and Media Conference
      in Austin, Texas.   
| |                        |                                                                         
| | May 16-June 11, 2010:  | Canadian Radio Tours.                                                   

Clipstream®

The sales focus for Clipstream® was to manage legacy license
sales, but to focus on expanding usage in the market research niche where the
product has become a standard for secure video questionnaires. Because of the
cost of acquisition of a survey participant and the sensitivity of the content,
the high play rate and security of the Clipstream® solution is critical.

The company continues to invest only minimally into sales and
marketing until the new high margin Clipstream® services are ready for launch.

Some highlights for the year include:

| | October 14-16, 2009: | Council of American Survey Research Organizations Annual
      Conference in Colorado Springs, Colorado.
| | -------------------- | --------------------------------------------------------------------------------------------------------
| | June 9-11, 2010:     | Marketing Research Association Annual Conference in
      Boston, Massachusetts.                        

Significant Customers

During the year ended August 31, 2010, revenue earned from
three customers represented 61% of our gross revenue. During the year ended
August 31, 2009, revenue earned from two customers represented 44% of our gross
revenue.

OUR BUSINESS OPERATIONS

We lease approximately 5,792 square feet of office space, with
the lease expiring in October of 2013, and we currently have twenty-two full
time employees and one part time employee. Our employees include our President
and Chief Executive Officer, Chief Financial Officer, eleven sales and technical
support personnel, and seven software developers. We also employ contractors as
needed.

We manage our own server infrastructure and use the services of
an external hosting facility. We have racks of server and storage hardware at
four physical locations (three in Vancouver, Canada and one in London, England).
Servers are highly redundant with RAIDs, custom switches, redundant power
supplies and multiple connections to the internet backbone. Access to the
network is load balanced across the server locations, providing total bandwidth
of 2.2 gigabits per second and continued access to users if a facility ever
failed.

10

---

Research and Development

Total research and development expenditures for the year ended
August 31, 2010 were $1,193,618 (2009: $893,715).

COMPETITION

MPE®

The nature of the pre-release digital distribution of
promotional music ultimately lends itself to one dominant system where labels
and recipients participate. Play MPE® has the largest market share of a
relatively new market and a network effect entrenches the system as it is
difficult for any one user to switch to an alternative without the entire
industry switching.

Play MPE® has several advantages over physical distribution
(mail, courier or hand delivery) of manufactured CDs. Digital distribution
through Play MPE® is faster, less expensive, more reliable, more secure,
provides additional real time and more accurate reporting of usage, provides a
great deal of added functionality and provides the error free and automatic
transmission of meta data. Meta data includes International Standard Recording
Codes (ISRC)  which is a standard code for uniquely identifying sound
recordings and music video recordings - song and artist names, beats per minute,
release and impact dates, etc. The automatic transmission of this meta data
reduces the time required for manual data entry into radio automation software
on the receiving side and eliminates inaccuracies in royalty reporting.

Play MPE® provides extensive functionality, security and audio
quality and while significant savings are realized over physical delivery, lower
cost digital options exist. No digital delivery competitors have as extensive a
recipient network or global presence as Play MPE®. The Company expects that
competition will be strongest where audio quality, security, recipient network,
and reporting are not as important as cost.

The Company has entered into a large number of strategic
alliances to ensure that Play MPE® is an integrated part of the music industry.
These include:

- Allaccess.com, the US industry news site,
- Milkman-unlimited.com, the Canadian music industry job site
- Shooting Star pictures, our exclusive distributor in Australia and New
  Zealand, and,
- RCS (http://www.rcsworks.com) is launching a Play MPE® powered site
  branded as Musicpoint, which will provide instant access to over 9,000
  customers across its product lines, RCS is the leading supplier of radio
  automation and scheduling software, marketed under the brands Selector,
  GSelector and NexGen Digital.

Play MPE® integrates with Wide Orbit Automation for Radio,
various product offerings from OMT and supports Broadcast Electronics Audio
Vault.

The Company exports directly into a wide variety of back end
systems such as Clear Channel's Prophet system, the BBC's internal distribution
system and Sirius XM's servers. Mediabase, the dominant supplier of reporting
information to the recording industry exclusively links download links where
ever a new song appears and these links direct their users to register into our
system to access this content.

A tabular comparison is set out below which outlines some of
the more significant competitive advantages relative to competing digital
solutions or to physical delivery. Competing digital solutions generally show a
low investment in technology resulting in less secure and lower quality sound
distributions. Direct competitors are often regional, with little global
presence.

11

---

|                                 | Play
      MPE®                                                                                                                                                                                                                                                              | Competing
      alternatives                                                                | Physical
      Distribution                                                                                                      
|-------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------
|Speed                            | Proprietary
      lossless compression at 4 times download speed or 15 times download speed
      with inaudible compression loss.                                                                                                                                           | Trade
      off between slower download speeds or lower quality file.                       | Dependent
      on mail courier.                                                                                                 
|Security                         | User
      and machine authentication. Digital locking and Watermark available                                                                                                                                                                                               | Watermarking,
      password and other access control methods.                              | Typically
      no security.                                                                                                     
|Watermarking                     |                                                                                                                                                                                                                                                                             | Patent
      pending proprietary watermark "Methods for Watermarking Media Data"            |                                                                                                                                 
|                                | Embeds
      in real time                                                                                                                                                                                                                                                    |                                                                                            | Range available offers trade off between audio quality and reliability                                                           
|                                | Uniquely identifies the recipient account,                                                                                                                                                                                                                                  
|                                | Survives on air broadcast and compression,                                                                                                                                                                                                                                   |                                                                                            | Longer
      implementation required                                                                                             
|                                | Inaudible                                                                                                                                                                                                                                                                    |                                                                                            | Does not survive on air broadcast, conversion to new formats,
      compression or filtering                                     
|                                | Integrated with the IFPI                                                                                                                                                                                                                                                    
|                                 |                                                                                                                                                                                                                                                                              |                                                                                            | None known to be integrated with the IFPI                                                                                        
|Cost                             | Estimated
      to be approximately 80% savings over physical                                                                                                                                                                                                                | Unknown
      range                                                                         |                                                                                                                                  
|                                | mail or
      courier charges                                                                                                                                                                                                                                               
|                                | manufacture of CD                                                                                                                                                                                                                                                           
|                                | address
      label, packaging,                                                                                                                                                                                                                                             
|                                | list maintenance                                                                                                                                                                                                                                                            
|Streaming                        | Instant,
      Clipstream® powered                                                                                                                                                                                                                                           | 3rd
      party players and codecs.                                                         | Not
      applicable                                                                                                             
|Reporting                        | Real
      time                                                                                                                                                                                                                                                              | None
      to real time                                                                     | None                                                                                                                             
|Player Versions and capabilities |                                                                                                                                                                                                                                                                             | PC                                                                                          | Required
      3rd party players which require correct version and association information.                                      
|                                | Mac and,                                                                                                                                                                                                                                                                    
|                                | iPhone
      player versions including the following proprietary software features:                                                                                                                                                                                         
|                                | encrypted audio playback,                                                                                                                                                                                                                                                   
|                                | drag and
      drop play lists,                                                                                                                                                                                                                                             
|                                | integrated CD burning,                                                                                                                                                                                                                                                      
|                                | export to other formats                                                                                                                                                                                                                                                     
|Portability                      | No
      Player required Play MPE Direct to Web supports playerless streaming
      and download from any web browser                                                                                                                                                      | Websites
      require installation of a third party media player and authentication agents | Portable.                                                                                                                        
|Meta Data                        | Fingerprinting,
      photos, video, PDFs, Data (ISRC codes, intro times, beats per minute,
      etc.) exported into radio automation system/software. Exclusive integration
      with RCS Sound Software  the worlds leading radio scheduling
      software provider. | Artist
      name, title, label, compatible with only one automation system.                | Radio
      must manually input meta data requiring more labor and leading
      to errors causing errors in royalty reporting.
|Formats                          | CD,
      WAV, MP2, MP3, AAC, WMA                                                                                                                                                                                                                                            | MP3,
      WMA, WAV                                                                         | CD                                                                                                                               

12

---

Clipstream®

Our principal competitor for Clipstream® is Adobe Flash and to
a lesser extent, the player solutions provided by Apple, Real Networks and
Microsoft. Flash is recognized as the dominant player in the space, with a near
monopoly over instant play streaming video. Clipstream® has a number of economic
and usability advantages that make it extremely compelling in certain
circumstances, but the margins on streaming licenses are low. The corporate
strategy is to license Clipstream® to niches where its cost, security and
performance advantages are extremely beneficial, while creating new service
offerings that embrace competing technologies while extending them with the
benefits of Clipstream®.

Clipstream® Advantages

- A Clipstream® powered website does not require that its visitors download
  and install player software. Clipstream® just plays. Other solutions require
  intrusive codecs and new versions of their player in the background.
- As Clipstream® is playerless, management estimates that at least 10% more
  visitors see the rich media content
- Clipstream® playback takes minimal CPU and memory resources, so the
  viewer's computer is free for other tasks. This means that many Clipstream®
  objects can appear on the same page. Other solutions often restrict to one
  piece of content per page.
- The Clipstream® solution is less intrusive and, as a result, safer for
  users. Alternative solutions control a users device and can be used by
  malicious sites to install malware. Because it is restricted to the safe Java
  sandbox, Clipstream® content will never crash or compromise your machine.
- Clipstream® content is uploaded to any brand of web server and just works.
  Alternative solutions require that you purchase, install and configure
  streaming server systems, running on dedicated hardware.
- Clipstream® plays on any Java enabled device, so playback is not restricted
  to computers. This cross platform approach means the same object will work for
  any browser on any brand of computer or device at any bitrate. (An autodetect
  procedure automatically delivers the highest possible stream quality).
- Because there is no player, Clipstream® encoded media never becomes
  obsolete and never has to be re-encoded. Content encoded in Clipstream® ten
  years ago still plays today. Other solutions launch new player software
  without backwards compatibility.
- Clipstream® media will automatically cache because it is an ordinary web
  component, just like a graphic or a block of text. This means that Clipstream
  will save up to 90% on bandwidth cost (over 90% for ads), while providing much
  more reliable playback This standards based approach means that there is no
  limit to simultaneous streams.
- Clipstream® components can be uploaded to the cloud for third party
  hosting. Player solutions require complicated server farms to handle more than
  a few thousand simultaneous visitors.
- Clipstream® objects can be embedded into databases for long terms storage
  and easy context sensitive retrieval. Every aspect of the Clipstream® engine
  can be accessed by web authoring tools to create a customized look and feel
- Dozens of parameters provide functionality not available from any other
  streaming solution. For example, Clipstream® provides the only technology
  available to link every pixel or group of pixels in a banner to a different
  audio stream. This technology can be used for audio navigation of a website or
  to provide ads that do not require the visitor to leave the host site to
  listen to an ad.

GOVERNMENT REGULATION

We are not currently subject to direct regulation by any
governmental agency other than laws and regulations generally applicable to
businesses. It is possible that a number of laws and regulations may be adopted
in both the United States and Canada with particular applicability to the
Internet. Governments have and may continue to enact legislation applicable to
us in areas such as content distribution, performance and copying, other
copyright issues, network security, encryption, the use of key escrow data,
privacy protection, caching of content by server products, electronic
authentication or digital signatures, illegal or obscene content, access
charges and retransmission activities. The applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is also uncertain. Export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase our costs of doing business or increase its
legal exposure.

13

---

ITEM 1A.        RISK FACTORS

We face risks in executing our business plan and achieving
revenues. The following risks are material risks that we face. We also face the
risks identified elsewhere in this Annual Report, including those risks
identified under Item 1 Description of Business, including Competition and
Government Regulation, and Item 6  Management Discussion and Analysis or Plan
of Operations. If any of these risks occur, our business and our operating
results and financial condition could be seriously harmed.

If revenues decline, then our financial condition and
results of operations will be adversely affected.

Over 90% of our revenue is generated from our Play MPE®
distribution service. Competitors may arise and/or customers may not renew
distribution contracts. This factor could cause our revenue to decrease with the
result that our financial condition and operating results would be adversely
affected. Competitors have been small, regionally based, have limited resources,
and have yet to capture a material share of the market. If a competitor were to
develop a comparable or superior product, our market share could be reduced.

If we are not able to control our operating expenses, then
our financial condition may be adversely affected.

Operating expenses increased to $3,082,320 for the year ended
August 31, 2010 from $2,515,666 for the year ended August 31, 2009 while our
revenue increased to $3,771,382 for the year ended August 31, 2010 from
$2,560,447 for the year ended August 31, 2009. Our ability to maintain
profitability is conditional upon our ability to control our operating expenses.
While we have been successful in containing our operating expenses, there is a
risk that we will have to increase our operating expenses in the future. Factors
that could cause our operating expenses to increase include our determination to
spend more on sales and marketing in order to increase product sales or our
determination that more research and development expenditures are required in
order to keep our current software products competitive or in order to develop
new products for the market. To the extent that our operating expenses increase
without a corresponding increase in revenue, our financial condition would be
adversely impacted.

If we are not successful in legal proceedings against us,
then our business and financial condition could be adversely affected.

We are currently party to two counterclaims and one claim
against the Company, as described in Item 3 of Part I under the heading Legal
Proceedings. If we are not successful in these legal proceedings and are forced
to make payments of damages to the plaintiffs, then our business and our
financial condition would be adversely affected.

Our success is dependent, to a large degree, upon the
efforts of Mr. Steve Vestergaard, our current executive officer.

Mr. Vestergaard was the founder of Destiny Software and has
been involved in our business operations since our inception. The loss or
unavailability of Mr. Vestergaard could have an adverse effect on our business
operations and financial condition. We do not maintain key man life insurance
policies for Mr. Vestergaard or for any of our other employees. In addition, our
continued success is dependent upon our ability to attract and retain qualified
personnel in all areas of our business, especially management positions. In the
event that we are unable to attract and retain qualified personnel, our business
would be adversely affected.

Our financial results may be adversely impacted by currency
fluctuations.

Our revenues are primarily in United States dollars and Euros
while our operating expenses are primarily in Canadian dollars. An increase in
the value of the Canadian dollar in relation to the United States dollar and/or
Euro could have the effect of increasing our loss from operations. We do not
currently hedge our foreign currency exposures.

14

---

If our products are defective or contain errors, we may
become subject to product liability claims.

As a result of their complexity, our software products may
contain undetected errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing we undertake and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of such
errors could result in loss of or delay in market acceptance of our products,
which could have a material adverse effect on our business, financial condition
and results of operations. Our products also may be vulnerable to break-ins and
similar disruptive problems caused by Internet or other users.

Such computer break-ins and other disruptions would jeopardize
the security of information stored in and transmitted through the computer
systems of our customers, which may result in significant liability to us and
deter potential customers. The sale and support of our products may entail the
risk of liability claims. A product liability claim brought against us could
have a material adverse effect on our business, financial condition and results
of operations.

Our ability to manage growth.

Should we be successful in the sales and marketing efforts of
our software products, we will experience significant growth in operations. If
this occurs, management anticipates that additional expansion will be required
in order to continue our product development. Any expansion of our business
would place further demands on our management, operational capacity and
financial resources. We anticipate that we will need to recruit qualified
personnel in all areas of its operations, including management, sales,
marketing, delivery, and software development. There can be no assurance that we
will be effective in attracting and retaining additional qualified personnel,
expanding its operational capacity or otherwise managing growth. In addition,
there can be no assurance that our current systems, procedures or controls will
be adequate to support any expansion of our operations. The failure to manage
growth effectively could have a material adverse effect on our business,
financial condition and results of operations.

Risk of system failure and/or security risks.

Despite the implementation of security measures, our network
infrastructure could be vulnerable to unforeseen computer problems. Although we
believe we have taken steps to mitigate much of the risk, we may in the future
experience interruptions in service as a result of the accidental or intentional
actions of Internet users, current and former employees or others. Unknown
security risks may result in liability to us and also may deter new customers
from purchasing our software and services, and individuals from utilizing it.
Although we intend to continue to implement and establish security measures,
there can be no assurance that measures implemented by us will not be
circumvented in the future, which could have a material adverse effect on our
business, financial condition or results of operations.

Lack of established market for products and services;
dependence on internet and intranets as mediums of commerce and communications.

The market for our streaming media products and services is new
and evolving rapidly. It depends on increased use of the Internet and intranets.
If the Internet and intranets are not adopted as methods for commerce and
communications, or if the adoption rate slows, the market for our products and
services may not grow, or may develop more slowly than expected.

The electronic commerce market is relatively new and evolving.
Sales of our products depend in large part on the development of the Internet as
a viable commercial marketplace. There are now substantially more users and much
more traffic over the Internet than ever before, use of the Internet is
growing faster than anticipated, and the technological infrastructure of the
Internet may be unable to support the demands placed on it by continued growth.
Delays in development or adoption of new technological standards and protocols,
or increased government regulation, could also affect Internet use. In addition,
issues related to use of the Internet and intranets, such as security,
reliability, cost, ease of use and quality of service, remain unresolved and may
affect the amount of business that is conducted over the Internet and intranets.

Product delays and errors.

We have experienced development delays and cost overruns
associated with its product development. We may encounter such problems in the
future. Delays and cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive developments or
customer requirements. Our products also may contain undetected errors that
could cause adverse publicity, reduced market acceptance of the products, or
lawsuits by customers.

15

---

Online commerce security risks.

Online commerce and communications depend on the ability to
transmit confidential information securely over public networks. Any compromise
of our ability to transmit confidential information securely, and costs
associated with the prevention or elimination of such problems, could have a
material adverse effect on our business.

International operations.

We market and sell our products in the United States, Canada,
Europe, Asia, South America, Africa and Australia. As such, we are subject to
the normal risks of doing business abroad. Risks include unexpected changes in
regulatory requirements, export and import restrictions, tariffs and trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, potential adverse
tax consequences, exchange rate fluctuations, increased risks of piracy, limits
on the our ability to enforce our intellectual property rights, discontinuity of
our infrastructures, limitations on fund transfers and other legal and political
risks. Such limitations and interruptions could have a material adverse effect
on our business.

ITEM 1B.       
UNRESOLVED STAFF COMMENTS

None

ITEM
2.           PROPERTIES

Our head office is located in leased premises at Suite 750, 650
Georgia Street, Vancouver, British Columbia, Canada V6B 4N7. Our principal
business operations are carried out from head office. Our leased premises
consist of approximately 5,792 square feet. We pay rent of approximately $19,000
Canadian (equal to approximately $18,000 US) per month. The lease expires
October 30, 2013. We consider our leased premises adequate for our current
business purposes.

The Company owns proprietary algorithms, source code, web
domain addresses, patents, trademarks and other intellectual property.

Patents

1. Digital Locking "Digital Media
Distribution Method and System" (Granted US 20020146122)

This patent provides a method of
locking digital content which prevents play back on unauthorized machines and
devices. Claims include separating security from the content, so that content
files can be shared securely over peer to peer networks. This is one of the
earliest patents for securing peer to peer distributed content.

http://www.dsny.com/v7/pdfs/Digital_media_distribution_method_and_sy.pdf

One of the more important claims in
this patent is the ability to uniquely recognize a particular computer. Uniquely
identifying a persons computer is a common issue which is usually approached by
saving cookies or beacons to the users computer or by tracking IP addresses.
These are not reliable solutions as cookies are easily deleted and IP addresses
easily changed. Destinys propriety hash code process creates a serial number
that can be used to recognize the user on subsequent visits without ever saving
anything to that users computer.

2. Watermarking "Methods for
Watermarking Media Data" (US 20080098022) (pending Japan, Europe, Canada, USA)

Destiny has a developed a watermarking
technology which can uniquely identify the individual who originally accessed a
particular song. Our watermark is unique as it can be embedded and identified
rapidly, it is inaudible, it survives on air broadcast, compression and
conversion to other formats and is virtually impossible to remove. Patents are
pending in the US, Canada, Europe, Japan and China.

Our watermarking technology is used in
the Play MPE® distribution system when songs are exported or when streaming a
track.

16

---

Other watermarking technologies are
slow and provide a trade off between a destruction of audio quality and the ease
that they can be filtered out.

http://www.dsny.com/v7/pdfs/METHODS_FOR_WATERMARKING_MEDIA_DATA.pdf

Registered Trademarks

Clipstream® Granted: USA, Canada, Japan, Israel, European
CommunityPending: China

Play MPE® Granted: Japan, USA, Canada, European
Community, Japan Pending: China

MPE® Granted: Japan, USA, Canada, European Community
Pending: China

Sonox Digital® Granted: Japan, European Union Pending:
Canada, USA, China

Domain Names

Destiny owns a large number of domain names, including many
valuable four letter (dice.net, dsny.com) and URLs featuring common words
(radio-play.com, streamingaudio.com, pirateradio.com and many others.)

Trade Secrets

As an innovative software development Company, the Company has
a wide range of proprietary algorithms and software libraries which form the
core of its offerings.

ITEM
3.LEGAL
PROCEEDINGS

The Company is involved in three actions with a competitor in
Canada (Yangaroo Inc. Yangaroo, formerly Musicrypt Inc.) regarding various
patent claims as described below:

a) ****On March
7, 2006, the Company filed a statement of claim in the Federal Court of Canada
against Yangaroo (the Defendant) to assert that the Companys technology does
not infringe on the stated patent owned by the Defendant and to further declare
that Defendants patent is invalid. On June 7, 2006, the Companys counsel
received a statement of defense and counterclaim from the Defendant, requesting
specified damages or audited profits from the Play MPE® system sourced to
Canada.

b) ****On May 3,
2007, the Company filed a claim in Ontario Superior Court against the Defendant
(Yangaroo Inc.), and executives of the Defendant, Chief Executive Officer of the
Defendant and Chief Financial Officer of the Defendant (collectively the
Defendants) in the amount of $25,000,000 caused by the Defendants making
statements constituting defamation and injurious falsehood, making false or
misleading statements tending to discredit the business, making false or
misleading representations contrary to the Competition Act of Canada, and
unlawful interference with the Companys economic relations. On June 7, 2007,
the Defendant filed a statement of defense and counterclaim against the Company
for the same amount and for the same causes. The company has filed a motion to
dismiss the counterclaim as frivolous.

c)**** On May 12,
2009, the Company was served with a complaint in the United States District
Court for the Eastern District of Wisconsin by the
Defendant (the Claimant) in the Canadian litigation above, alleging that the
Company infringes on its recently issued one method claim in United States
Patent No. 7,529,712. On September 18, 2009 the Company filed an Answer, which
included a statement of its defenses. On June 7, 2010, based solely on the
Companys first of five defenses, the District Court ruled in Destiny's favor to
dismiss the claim in its entirety. This ruling is currently being appealed..

17

---

The amount of damages awarded to the Company or the
Defendants/Claimant, if any, cannot be reasonably estimated and no amount has
been recognized in the financial statements. Management believes it is unlikely
that the outcome of this matter will have an adverse impact on its result of
operations and financial condition.

On August 12, 2009 the Company received a statement of claim in
the Supreme Court of British Columbia from a former employee for wrongful
dismissal and breach of contract after that employee relocated to Mexico and
maintained he should keep his position. The claim is for approximately $170,000
($180,000 CDN) plus an award of stock options and unspecified damages. The
Company believes the claim is completely without merit and will defend its
position. Management believes it is unlikely that the outcome of this matter
will have an adverse impact on its result of operations and financial
condition.

ITEM
4.           (REMOVED AND
RESERVED)

18

---

PART II

|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES.
|------- | -------------------------------------------------------------------------------------------------------------------------

Market Information

Our shares are currently trading on the OTC Bulletin Board
under the stock symbol DSNY. The first day on which the Companys shares were
traded under the stock symbol DSNY was June 26, 2000. The high and the low
trading prices for our shares for each quarter of the last two fiscal years
were:

QUARTER
    HIGH ($)
    LOW ($)1stQuarter 2009
    $0.43
    $0.152ndQuarter 2009
    $0.39
    $0.153rdQuarter 2009
    $0.30
    $0.174thQuarter 2009
    $0.35
    $0.191stQuarter 2010
    $0.55
    $0.282ndQuarter 2010
    $0.54
    $0.363rdQuarter 2010
    $0.53
    $0.364thQuarter 2010
    $0.48
    $0.30


The trades reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.

Holders of Common Stock

As of November 24, 2010 we had 50,628,347 shares of our common
stock outstanding and there were 73 registered shareholders of our common stock
including the Depository Trust's nominee, which represents an unknown number of
street form shareholders.

Dividends

We have neither declared nor paid any cash dividends on our
capital stock and do not anticipate paying cash dividends in the foreseeable
future. Our current policy is to retain any earnings in order to finance the
expansion of our operations. Our Board of Directors will determine future
declaration and payment of dividends, if any, in light of the then-current
conditions they deem relevant and in accordance with applicable corporate law.

Recent Sales of Unregistered Securities

During the year ended August 31, 2010, 336,000 shares were
issued in a cashless exercise of 600,000 warrants with an exercise price of
$0.22. 108,200 shares were issued in a cashless exercise of 289,000 options with
an exercise price of $0.25. 25,000 shares were issued in an exercise of 25,000
options with cash proceeds of $6,250.

Purchases of Equity Securities by the Issuer and Affiliated
Purchasers

On November 20, 2009 Destiny's board of directors authorized a
program to repurchase up to 1 million shares of the Company's common stock at a
maximum share purchase price of $0.80 per share. As of May 28, 2010 The Company
repurchased one million shares, representing approximately 2% of the shares
outstanding at an average price of $.446 for a total approximate cost of
$446,000. Repurchases were made at times and amount the Company deemed
appropriate and were made through open market transactions in compliance with
the Securities and Exchange Commission's Rule 10b-18.

On July 6, 2010, The board of directors authorized a second
tranche to repurchase up to 1.5 million shares of the Company's common stock at
a maximum share purchase price of $0.80 per share. As of August 31, 2010, the
Company has purchased 49,000 shares at an average price of $0.44. Future
repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions.
All repurchases will be made in compliance with the Securities and Exchange
Commission's Rule 10b-18, subject to market conditions, applicable legal
requirements and other factors. The board approved stock repurchase program runs
through June 30th, 2011. In addition to the applicable securities laws, the
Company will not make any purchases during a time at which its insiders are
subject to a blackout from trading in the company's common shares. The following
table sets forth information about our stock repurchases for the three months
ended August 31, 2010.

19

---

|Period (1)                        | Total Number of Shares
      (or Units) Purchased (2) | Average Price Paid
      per Share (or Unit) | Total Number of Shares (or Units)
      Purchased as Part of Publicly Announced Plans or
      Programs (3) | Maximum Number (or Approximate Dollar
      Value) of Shares (or Units) that May Yet Be Purchased
      Under the Plans or Programs (3)
|--------------------------------- | ----------------------------------------------------- | -------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|June 1, 2010 to June 30, 2010     | -                                                     | $ -                                          | -                                                                                                           | -                                                                                                                                      
|July 1, 2010 to July 31, 2010     | 49,000                                                | $ 0.44                                       | 49,000                                                                                                      | 1,451,000                                                                                                                              
|August 1, 2010 to August 31, 2010 | -                                                     | $ -                                          | -                                                                                                           | 1,451,000                                                                                                                              
|Total                             | 49,000                                                | $ 0.44                                       | 49,000                                                                                                      | 0                                                                                                                                      

(1) Based on trade date.(2) All of these shares were
repurchased pursuant to publicly announced share repurchase programs.(3)
During the year ended August 31, 2010, the company repurchased a total of
1,049,000 shares pursuant to publicly announced share repurchase programs. All
of 1,049,000 shares had been cancelled.

OTHER INFORMATION

In addition to publicly announced share repurchase programs,
the Company repurchased 150,000 stock options at a weighted average price of
$0.25 per unit not pursuant to publicly announced share repurchase programs.

20

---

ITEM
6.          SELECTED FINANCIAL DATA

|                                                                    |   |                                                                      |  |   |           |  |   | Fiscal year |   |   |            |   |   |          |  
|------------------------------------------------------------------- | - | -------------------------------------------------------------------- |  | - | --------- |  | - | ----------- | - | - | ---------- | - | - | -------- | -
|                                                                    |   | 2010                                                                 |  |   | 2009      |  |   | 2008        |   |   | 2007       |   |   | 2006     |  
|                                                                    |   | (Expressed in United States dollars, except
      per share amounts) | 
|Continuing Operations:                                              |   |                                                                      |  |   |           |  |   |             |   |   |            |   |   |          |  
|Service revenue                                                     | $ | 3,771,382                                                            |  | $ | 2,560,447 |  | $ | 1,578,888   |   | $ | 875,544    |   | $ | 884,082  |  
|Income (loss) from continuing 
        
    operations              |   | 689,062                                                              |  |   | 44,781    |  |   | (2,404,933  | ) |   | (2,119,068 | ) |   | (520,585 | )
|Net income (loss)                                                   |   | 1,686,073                                                            |  |   | 610,831   |  |   | (2,293,178  | ) |   | (2,096,974 | ) |   | (485,335 | )
|Net income (loss) per common share, 
        
    basic and diluted | $ | 0.03                                                                 |  | $ | 0.01      |  | $ | (0.05       | ) | $ | (0.04      | ) | $ | (0.01    | )
|                                                                    |   |                                                                      |  |   |           |  |   |             |   |   |            |   |   |          |  
|Balance Sheet:                                                      |   |                                                                      |  |   |           |  |   |             |   |   |            |   |   |          |  
|Working capital                                                     | $ | 976,139                                                              |  | $ | 658,673   |  | $ | (192,772    | ) | $ | 1,229,357  |   | $ | (59,429  | )
|Total assets                                                        |   | 2,578,817                                                            |  |   | 1,425,944 |  |   | 661,437     |   |   | 1,787,055  |   |   | 388,857  |  
|Long-term liabilities                                               |   | 3,745                                                                |  |   | 13,987    |  |   | 100,000     |   |   | 100,000    |   |   | 133,968  |  
|Stockholders equity (deficit)                                      |   | 2,059,369                                                            |  |   | 790,934   |  |   | (132,609    | ) |   | 1,351,629  |   |   | (101,495 | )
|                                                                    |   |                                                                      |  |   |           |  |   |             |   |   |            |   |   |          |  

The selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 of this Form 10-K.

|ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------------

The following discussion of our results of operations and
financial condition should be read together with the consolidated financial
statements and related notes that are included later in this Annual Report on
Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors.

RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2010

Revenue

Total revenue for the year grew to $3,771,382 (2009 -
$2,560,447), an increase of approximately 47% over the fiscal 2009 year. Fourth
quarter revenue increased to $901,607 (fourth quarter fiscal 2009 -
$872,569).

The growth in revenue is driven by the growth in our Play MPE®
system, where access fees for the year have grown by more than 55% over the
previous year. Play MPE® continues to see substantial revenue growth that it has
seen over the previous four years.

2007
    2008
    2009
    2010Play MPE® Revenue
    $446,594
    $1,154,845
    $2,256,871
    $3,501,743Growth over prior year
    138%
    159%
    95%
    55%


Play MPE® is the world leader in an evolving business which is
transforming the way record labels distribute pre-release music. We have seen
the transition from traditional distribution methods to Play MPE® begin
gradually and the growth seen in prior years has continued into 2010. The growth
in revenue over the previous year has been realized across formats, through
existing clients, and through new clients in new geographic areas and includes;
a 19% increase in North American Major Record Label revenue, and a 32% increase
in North American independent record label revenue. European revenue increased
by 188% mainly due to a continued rollout by two major labels to sublabels in
new territories. These labels intend to expand usage globally over the next two
years. Australasian revenue increased by 54% through expanded independent record label use.

21

---

During 2010 we established an expanded framework for
distribution and renewed agreements with three of the four major record labels.
We began to see preliminary use of Play MPE® in numerous European countries, and
tests in Asia, South America and Africa. While, the digital distribution of
pre-release music is still at an early stage, the value propositions of the Play
MPE® system are both compelling and numerous and we have found we compete well
against traditional and alternative methods of distribution in the market. Our
product provides significant advantages such as reducing the costs and lead
times, providing feedback on usage to the record labels, and enhanced global
security, with the added appeal of reducing the impact on the environment. Play
MPE® provides many significant advantages over competing solutions such superior
sound quality, superior security, constructive business relationships, more
advantageous partner relationships, a network of regular users and countless
added functions of the player software and total service offering.

The majority of our revenue is generated from digital media
distribution service. The service is billed on usage which is based on the
volume and size of distributions provided on a monthly basis (sends) A send
is a song, bundle of songs, album, box set, or video, authorized to be sent to a
particular recipient. The revenue associated with each send will be on a
sliding scale depending on the size of the particular send (song length for
example). The system provides each label under contract to manage their own
lists of recipients and directly encode and distribute their songs. This added
ability provided to our clients substantially eliminates the strain on our own
internal resources that can be seen in competing solutions and allows for high
growth potential. All such revenues are recognized on a monthly basis as the
services are delivered to customers, except where extended payment terms exist.
Such revenues are only recognized when the extended payment term expires.

We generally charge monthly and per send minimums, although
some contracts are grandfathered from before this policy was introduced

For customers where it is not appropriate to enter into a
formal contract we provide access to the Play MPE® system through www.myplaympe.com or through our staff quoting
system.

Real time usage statistics for Play MPE® are available at:
http://www.plaympe.com/v4/company/plaympestats.php

The MPE® security engine also powers our online music store
software suite (www.podds.ca) which provides for the remainder of MPE®
revenue.

Approximately 7% of our revenues are derived from sales of our
Clipstream® software which declined from the previous year by 13%. This reflects
a management strategy of focusing sales, marketing and support resources on MPE®
until the new automated system for Clipstream® is available. We hope to increase
sales of Clipstream® licenses through our hosted solution, and other license
opportunities.

Radio Destiny sales represent 0.3% of our total revenue.

Operating Expenses

Overview

As our technologies and products are developed and maintained
in-house, the majority of our expenditures is on salaries and wages and
associated expenses; office space, supplies and benefits. Our operations are
primarily conducted in Canada. The majority of our costs are incurred in
Canadian dollars while the majority of our revenue is in Euros and US dollars.
Thus, operating expenses and the results of operations are impacted to the
extent they are not hedged by the rise and fall of the relative values of
Canadian dollar to these currencies. During the year, the rise in the value of
the Canadian dollar relative to the US dollar had an adverse impact on the
Company.

For the year of 2010, our total operating expenses have
increased by 22% to $3,082,320 from $2,515,666. The majority of this increase
was due to an increase in the volume of legal work associated with litigation
with a Canadian competitor, higher salaries and wages, due in part to greater
staffing and exchange rate fluctuations, and one time costs associated with our
listing on the TSX Venture Exchange.

On October 12, 2010, the Company has been approved by TSX
Venture Exchange to commence trading under the symbol DSY.

22

---

Rent expense of $307,907 is offset by our sub-lease rental
income of $118,043 which is included in Other income in the Statement of
Operations.

|General and administrative     |  | 31-August         |   |  | 31-August         |  |  | $       |   |  | %       | 
|------------------------------ |  | ----------------- | - |  | ----------------- |  |  | ------- | - |  | ------- | 
|                               |  | 2010              |   |  | 2009              |  |  | Change  |   |  | Change  | 
|                               |  | (12
      months) |   |  | (12
      months) |  |  |         |   |  |         | 
|Wages and benefits             |  | 331,749           |   |  | 366,920           |  |  | (35,171 | ) |  | -9.6%   | 
|Rent                           |  | 63,438            |   |  | 71,139            |  |  | (7,701  | ) |  | -10.8%  | 
|Telecommunications             |  | 22,834            |   |  | 23,468            |  |  | (634    | ) |  | -2.7%   | 
|Bad debt (recovery)            |  | (10,696           | ) |  | 16,474            |  |  | (27,170 | ) |  | -164.9% | 
|Office and
      miscellaneous |  | 227,894           |   |  | 77,020            |  |  | 150,874 |   |  | 195.9%  | 
|Professional fees              |  | 414,149           |   |  | 205,024           |  |  | 209,125 |   |  | 102.0%  | 
|                               |  | 1,049,368         |   |  | 760,045           |  |  | 289,323 |   |  | 38.1%   | 

Our general and administrative expenses consist primarily of
salaries and related personnel costs including overhead, professional fees, and
other general office expenditures.

The increase in professional fees is due to an increase of
volume of legal work associated with litigation, and patents and trademark
applications. Litigation increased primarily due to an action with a small
regional competitor which has been dismissed subject to appeal. Office and
miscellaneous costs have increased due to fees associated with TSX Venture
listing application.

|Sales and marketing       |  | 31-August         |  |  | 31-August         |  |  | $       |   |  | %       | 
|------------------------- |  | ----------------- |  |  | ----------------- |  |  | ------- | - |  | ------- | 
|                          |  | 2010              |  |  | 2009              |  |  | Change  |   |  | Change  | 
|                          |  | (12
      months) |  |  | (12
      months) |  |  |         |   |  |         | 
|Wages and benefits        |  | 365,182           |  |  | 379,529           |  |  | (14,347 | ) |  | -3.8%   | 
|Rent                      |  | 66,001            |  |  | 71,139            |  |  | (5,138  | ) |  | -7.2%   | 
|Telecommunications        |  | 23,757            |  |  | 23,468            |  |  | 289     |   |  | 1.2%    | 
|Meals and entertainment   |  | 10,775            |  |  | 828               |  |  | 9,947   |   |  | 1201.3% | 
|Travel                    |  | 58,497            |  |  | 49,451            |  |  | 9,046   |   |  | 18.3%   | 
|Advertising and marketing |  | 262,016           |  |  | 297,510           |  |  | (35,494 | ) |  | -11.93% | 
|                          |  | 786,228           |  |  | 821,925           |  |  | (35,697 | ) |  | -4.3%   | 

Sales and marketing expenses consist primarily of salaries and
related personnel costs including overhead, sales commissions, advertising and
promotional fees, and travel costs. During the year ended August 31, 2010, Play
MPE® has received significant support from the worlds largest record labels and
achieved symbiotic relationships with partners within the music industry
resulting in cost effective and organic marketing efforts and the need for
higher cost marketing efforts has decreased. We expect that the business
relationships we have developed will provide catalysts to global expansion and
barriers to entry with potential competitors should they arise.

|Research and development |  | 31-August         |  |  | 31-August         |  |  | $       |  |  | %      | 
|------------------------ |  | ----------------- |  |  | ----------------- |  |  | ------- |  |  | ------ | 
|                         |  | 2010              |  |  | 2009              |  |  | Change  |  |  | Change | 
|                         |  | (12
      months) |  |  | (12
      months) |  |  |         |  |  |        | 
|Wages and benefits       |  | 933,307           |  |  | 701,655           |  |  | 231,652 |  |  | 33.0%  | 
|Rent                     |  | 178,469           |  |  | 136,038           |  |  | 42,431  |  |  | 31.2%  | 
|Telecommunications       |  | 64,656            |  |  | 44,878            |  |  | 19,778  |  |  | 44.1%  | 
|Other                    |  | 17,186            |  |  | 11,144            |  |  | 6,042   |  |  | 54.2%  | 
|                         |  | 1,193,618         |  |  | 893,715           |  |  | 299,903 |  |  | 33.6%  | 

Research and development costs consist primarily of salaries
and related personnel costs including overhead and consulting fees with respect
to product development and deployment. The increase is mainly due to increased
staffing and consulting requirements due to an increased ongoing investment in building
out the functionality of our Play MPE® (which accounts for over 90% of our
revenue) and the development of two new Clipstream® service offerings, which
have yet to launch.

23

---

During the year, ongoing research and development for Play MPE®
focused on:

| | 1. | Expanding the encoder system to better support
      collaborative encoding of content across various territories and reuse of
      assets for regional marketing campaigns,
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Developing the server infrastructure to support higher
      availability, failover and system self monitoring and self repair
      processes,                              
| | 3. | Improving security systems, including monitoring unusual
      recipient usage,                                                                                              
| | 4. | Designing a new player version,                                                                                                                                              
| | 5. | Integration with third party systems and networks,
    and                                                                                                                   
| | 6. | Responding to customer driven feature
  requests.                                                                                                                            

Costs associated with the above in connection to Play MPE® did
not meet the criteria for capitalization and, thus, were charged to expense as
incurred.

Depreciation and Amortization

Depreciation and amortization expense arose from fixed assets
and other assets. Depreciation and amortization increased to $53,106 for the
fiscal year ended August 31, 2010 from $39,981 for the fiscal year ended August
31, 2009, an increase of $13,125 or 32.80% . The increase was due to more
computer hardware purchased arising from more volume of deliveries.

Other earnings and expenses

Other income increased to $118,129 for the year ended August
31, 2010 from $102,351 for the year ended August 31, 2009 due to an increase on
rental income, an increase of $15,778.

Interest income increased to $3,359 for the year ended August
31, 2010 from $3,107 for the year ended August 31, 2009, an increase of
$252.

Interest expense decreased to $2,477 for the year ended August
31, 2010 from $4,692 for the year ended August 31, 2009, a decrease of
$2,215.

Income

During the year ended August 31, 2010, we have net income of
$1,686,073 (August 31, 2009 $610,831). The profit realized during the period is
the result of steady improvements of the Companys revenue. Earnings before
interest income and expenses, taxes, depreciation and amortization and stock
based compensation (EBITDA) reached $908,267 for the year ended August 31, 2010
(August 31, 2009 -$287,067).

LIQUIDITY AND FINANCIAL CONDITION

We had cash of $491,012 as at August 31, 2010 compared to cash
of $253,100 as at August 31, 2009. We had a working capital surplus of $976,139
as at August 31, 2010 compared to $658,673 as at August 31, 2009.

Cash Flows

Net cash generated in operating activities was $841,844 for the
year ended August 31, 2010, compared to $61,909 for the year ended August 31,
2009. The increase is mainly due to an increase in our sales in MPE which makes
up the majority of our total revenue increase of approximately $1,200,000. This
increase in revenue was offset somewhat by an increase in operating costs and a
reduction in accounts payable as the Company reduced accounts payable to avoid
or eliminate interest and other associated fees.

The cash used in investing activities was $54,250 for the year
ended August 31, 2010, compared to $27,649 for the year ended August 31, 2009.
The Company added another facility to improve reliability, availability and
capacity. Additional server hardware was required for the new location and to
update equipment at other locations.

24

---

Net cash used in financing activities was $572,397 for the year
ended August 31, 2010 compared to net cash of $117,894 provided by financing
activities for the year ended August 31, 2009. The change was mainly due to the
share buyback program during the fiscal year 2010. The company repurchased
1,049,000 shares with a cost of $497,660 during the fiscal year 2010. Also there
was a reduction of shareholder loans. The Company repaid shareholder loans of
$71,000 for year ended August 31, 2010 compared to net proceeds of shareholder
loans of $24,000 for the year ended August 31, 2009. The proceeds from exercise
of stock options decreased to $6,250 for the year ended August 31, 2010 compared
to $100,000 for year ended August 31, 2009.

Our cash from operations was able to provide sufficient funds
during the fiscal year end of August 31, 2010. We are encouraged by our revenue
growth in fiscal 2010 as our record label clients incorporate Play MPE® into
their work flow.

MATERIAL OFF-BALANCE SHEET ARRANGEMENTS

None.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America,
and make estimates and assumptions that affect our reported amounts of assets,
liabilities, revenue and expenses, and the related disclosures of contingent
liabilities. We base our estimates on historical experience and other
assumptions that we believe are reasonable in the circumstances. Actual results
may differ from these estimates.

The following critical accounting policies affect our more
significant estimates and assumptions used in preparing our consolidated
financial statements.

Revenue Recognition

We recognize revenue in accordance with Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC) 985-605,
Revenue Recognition. Accordingly, revenue is recognized when there is
persuasive evidence of an arrangement, delivery to the customer has occurred,
the fee is fixed and determinable, and collectability is considered probable.

The majority of our revenue is generated from digital media
distribution service. The service is billed on usage which is based on the
volume and size of distributions provided on a monthly basis. All revenues are
recognized on a monthly basis as the services are delivered to customers, except
where extended payment terms exist. Such revenues are only recognized when the
extended payment term expires.

At present, the Company does not have yet have a standard
business practice for contracts that contain extended payment terms, and
therefore recognizes revenue from such contracts when the payment terms lapse
and all other revenue criteria have been met.

Significant management judgments and estimates must be made in
connection with determination of the revenue to be recognized in any accounting
period. If we made different judgments or utilized different estimates for any
period material differences in the amount and timing of revenue recognized could
result.

Stock-Based Compensation

We recognize the costs of employee services received in
share-based payment transactions according to the fair value provisions of the
current share-based payment guidance. The fair value of employee services
received in stock-based payment transactions is estimated at the grant date and
recognized over the requisite service period. Determining the appropriate fair
value model and calculating the fair value of stock-based awards requires
judgment, including estimating stock price volatility, forfeiture rates and
expected life.

We selected the Black-Scholes option pricing model as the most
appropriate method for determining the estimated fair value of our share-based
awards. The Black-Scholes model requires the use of highly subjective and
complex assumptions which determine the fair value of share-based awards,
including the options expected term and the price volatility of the underlying
stock. Our current estimate of volatility is based on historical and
market-based implied volatilities of our stock price. To the extent volatility
of our stock price increases in the future, our estimates of the fair value of
options granted in the future could increase, thereby increasing stock-based
compensation cost recognized in future periods. We derive the expected term
assumption primarily based on our historical settlement experience, while giving
consideration to options that have not yet completed a full life cycle.
Stock-based compensation cost is recognized only for awards ultimately expected
to vest. Our estimate of the forfeiture rate is based primarily on our
historical experience. To the extent we revise this estimate in the future, our
share-based compensation cost could be materially impacted in the quarter of
revision, as well as in the following quarters. In the future, as empirical
evidence regarding these input estimates is available to provide more
directionally predictive results, we may change or refine our approach of
deriving these input estimates.

25

---

Research and Development Expense for Software Products

Research and development expense includes costs incurred to
develop intellectual property. The costs for the development of new software and
substantial enhancements to existing software are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. We have determined that technological feasibility is
established at the time a working model of software is completed. Because we
believe our current process for developing software will be essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.

Significant management judgments and estimates must be made in
connection with determination of any amounts identified for capitalization as
software development costs in any accounting period. If we made different
judgments or utilized different estimates for any period material differences in
the amount and timing of capitalized development costs could occur.

Accounts Receivable and Allowance for Doubtful Accounts

We extend credit to our customers based on evaluation of an
individual customer's financial condition and collateral is generally not
required. Accounts outstanding beyond the contractual payment terms are
considered past due. We determine our allowance for doubtful accounts by
considering a number of factors, including the length of time accounts
receivable are beyond the contractual payment terms, our previous loss history,
and a customer's current ability to pay its obligation to us. We write-off
accounts receivable when they are identified as uncollectible. All outstanding
accounts receivable accounts are periodically reviewed for collectibility on an
individual basis.

Income Taxes

Deferred income tax assets and liabilities are computed based
on differences between the carrying amount of assets and liabilities on the
balance sheet and their corresponding tax values using the enacted income tax
rates by tax jurisdiction at each balance sheet date. Deferred income tax assets
also result from unused loss carry-forwards and other deductions. The valuation
of deferred income tax assets is reviewed annually and adjusted, if necessary,
by use of a valuation allowance to reflect the estimated realizable amount.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We evaluate all
available evidence, such as recent and expected future operating results by tax
jurisdiction, and current and enacted tax legislation and other temporary
differences between book and tax accounting to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized. There is a risk that management estimates for operating results
could vary significantly from actual results, which could materially affect the
valuation of the future income tax asset. Although the Company has tax loss
carry-forwards and other deferred income tax assets, management has determined
certain of these deferred tax assets do not meet the more likely than not
criteria, and accordingly, these deferred income tax asset amounts have been
partially offset by a valuation allowance as disclosed in Note 5 of our
consolidated financial statements.

If managements estimates of the cash flows or operating
results do not materialize due to errors in estimates or unforeseen changes to
the economic conditions affecting the Company, it could result in an impairment
adjustment in future periods up to the carrying value of the deferred income tax
balance of $1,328,000.

Contingencies

As discussed in Part I, Item 3 of this Form 10−K under the
heading Legal Proceedings and in Note 8 Contingencies in Notes to
Consolidated Financial Statements, the Company is subject to various legal
proceedings and claims that arise in the ordinary course of business. In
accordance with US GAAP, the Company records a liability when it is probable
that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably
estimated. In managements opinion, the Company does not have a potential
liability related to any current legal proceedings and claims that would
individually or in the aggregate materially adversely affect its financial
condition or operating results. However, the outcomes of legal proceedings and
claims brought against the Company are subject to significant uncertainty.
Should the Company fail to prevail in any of these legal matters or should
several of these legal matters be resolved against the Company in the same
reporting period, the operating results of a particular reporting period could
be materially adversely affected.

26

---

Impairment of Long-Lived Assets

We evaluate the recoverability of our long-lived assets
including tangible assets in accordance with authoritative guidance. When events
or changes in circumstances indicate that the carrying amount of long-lived
assets may not be recoverable, we recognize such impairment in the event the
carrying amount of such assets exceeds the future undiscounted cash flows
attributable to such assets. We have not recorded any impairment losses to date.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles  a replacement of FASB Statement No. 162. The FASB Accounting
Standards Codification (Codification) will become the source of authoritative
U.S. generally accepted accounting principles (GAAP) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission SEC under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September 30,
2009. Effective September 1, 2009, references made to FASB guidance throughout
this consolidated financial statements have been updated for the
Codification.

Effective September 1, 2009, the Company adopted a new
accounting standard included in ASC 815, Derivatives and Hedging (ASC 815).
The new accounting standard requires enhanced disclosures about an entitys
derivative and hedging activities and is effective for fiscal years and interim
periods beginning after November 15, 2008. Since the new accounting standard
only required additional disclosure, the adoption did not impact materially the
Companys consolidated financial statements.

Effective September 1, 2009, the Company adopted a new
accounting standard included in ASC 810, Consolidations. The new accounting
standard establishes accounting and reporting standards for the noncontrolling
interest (or minority interests) in a subsidiary and for the deconsolidation of
a subsidiary by requiring all noncontrolling interests in subsidiaries be
reported in the same way, as equity in the consolidated financial statements. As
such, this guidance has eliminated the diversity in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. The adoption of this new accounting standard did not have a
material effect on the Companys consolidated financial statements.

Effective September 1, 2009, the Company adopted a new
accounting standard included in ASC 820, Fair Value Measurements and Disclosures
(ASC 820), which delayed the effective date for disclosing all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value on a recurring basis (at least annually). This standard
did not have a material impact on the Companys consolidated financial
statements.

In April 2009, the FASB issued a new guidance for determining
when a transaction is not orderly and for estimating fair value when there has
been a significant decrease in the volume and level of activity for an asset or
liability. The new guidance, which is now part of ASC 820, requires disclosure
of the inputs and valuation techniques used, as well as any changes in valuation
techniques and inputs used during the period, to measure fair value in interim
and annual periods.

In August 2009, the FASB issued a new guidance relating to the
accounting for the fair value measurement of liabilities. The new guidance,
which is now part of ASC 820, provides clarification that in certain
circumstances in which a quoted price in an active market for the identical
liability is not available, a company is required to measure fair value using
one or more of the following valuation techniques: the quoted price of the
identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when
traded as assets, or another valuation technique that is consistent with the
principles of fair value measurements. The new guidance clarifies that a company
is not required to include an adjustment for restrictions that prevent the
transfer of the liability and if an adjustment is applied to the quoted price
used in a valuation technique, the result is a Level 2 or 3 fair value
measurement. The new guidance is effective for interim and annual periods
beginning after August 27, 2009. The adoption of this standard did not have a
material effect on the Companys consolidated financial statements.

27

---

Effective September 1, 2009, the Company adopted a new
accounting standard included in ASC 820, The new standard requires disclosures
of the fair value of financial instruments for interim reporting periods of
publicly traded companies in addition to the annual disclosure required at
year-end. The provisions of the new standard were effective for the interim
periods ending after June 15, 2009. The adoption of this standard did not have a
material effect on the Companys consolidated financial statements.

In May 2009, the FASB issued a new guidance for subsequent
events. The new guidance, which is part of ASC 855, Subsequent Events is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this guidance sets forth
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. The new guidance is effective for fiscal years and interim periods
ended after June 15, 2009 and will be applied prospectively. The Companys
adoption of the new guidance did not have a material effect on the Companys
consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update
2010-09, Subsequent Events. This Update clarifies the financial statement
issuance dates that potentially conflict with some of the Securities and
Exchange Commissions guidance. The amendment is effective for interim or annual
periods ending after June 15, 2010. The Companys adoption of the new guidance
did not have a material effect on the Companys consolidated financial
statements.

Accounting Standards Not Yet Effective

In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements(ASU 2009-13). The new
standard changes the requirements for establishing separate units of accounting
in a multiple element arrangement and requires the allocation of arrangement
consideration to each deliverable based on the relative selling price. The
selling price for each deliverable is based on vendor-specific objective
evidence (VSOE) if available, third-party evidence if VSOE is not available,
or estimated selling price if neither VSOE or third-party evidence is available.
ASU 2009-13 is effective for revenue arrangements entered into in fiscal years
beginning on or after June 15, 2010. The Company does not expect that the
provisions of the new guidance will have a material effect on its consolidated
financial statements.

In October 2009, the FASB issued Accounting Standards Update
2009-14, Certain Revenue Arrangements That Include Software Elements  a
consensus of the FASB Emerging Issues Task Force. This Update removes tangible
products containing software components and nonsoftware components that function
together to deliver the tangible products essential functionality from the
scope of the software revenue guidance in Subtopic 985-605 of the Codification.
Additionally, ASU 2009-14 provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes both
tangible products and software that is not essential to the products
functionality. ASU 2009-14 requires the same expanded disclosures that are
included within ASU 2009-13. ASU 2009-14 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with early adoption permitted. A company is required to
adopt the amendments in both ASU 2009-13 and 2009-14 in the same period using
the same transition method. The Company does not expect that the provisions of
the new guidance will have a material effect on its consolidated financial
statements.

In April 2010, the FASB issued Accounting Standards Update
2010-13, Compensation  Stock Compensation (Topic 718). The objective of this
Update is to address the classification of an employee share-based payment award
with an exercise price denominated in the currency of a market in which the
underlying equity security trades. The Update provides guidance on the
classification of a share-based payment award as either equity or a liability. A
share-based payment award that contains a condition that is not a market,
performance, or service condition is required to be classified as a liability.
The amendments in this Update are effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2010. The
amendments in this Update should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings. The Company is
currently evaluating the impact of this update on the consolidated financial
statements.

28

---

Item 7A.      
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Exchange Risk

Our revenues are primarily in United States dollars and Euros
while our operating expenses are primarily in Canadian dollars. Thus, operating
expenses and the results of operations are impacted to the extent they are not
hedged by the rise and fall of the relative values of Canadian dollar to these
currencies. During the year, the rise in the value of the Canadian dollar
relative to the US dollar had an adverse impact on the Company. The effect of
the stronger Canadian dollar in 2010 contributed approximately $250,000 to the
increase in operating expenses during 2010 compared to 2009.

ITEM
8.          FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.

Index to Audited Consolidated Financial Statements for the Year
Ended August 31, 2010:

|1. | Report of Independent Registered Public Accounting Firm 
  BDO Canada LLP                                   
|-- | -------------------------------------------------------------------------------------------------------------
|   |                                                                                                              
|2. | Report of Independent Registered Public Accounting Firm 
      Manning Elliott LLP                          
|   |                                                                                                              
|3. | Consolidated Balance Sheets as at August 31, 2010 and
      2009;                                            
|   |                                                                                                              
|4. | Consolidated Statement of Operations for the Years Ended
      August 31, 2010 and 2009;                     
|   |                                                                                                              
|5. | Consolidated Statement of Changes in Stockholders' Equity
      for the Years Ended August 31, 2010 and 2009;
|   |                                                                                                              
|6. | Consolidated Statement of Cash Flows for the Years Ended
      August 31, 2010 and 2009;                     
|   |                                                                                                              
|7. | Notes to Consolidated Financial
  Statements.                                                                

29

---













Consolidated Financial Statements

Destiny Media Technologies Inc.August 31, 2010 and
      2009(Expressed in United States dollars)

---

Tel: 604 688 5421
      BDO Canada LLPFax: 604 688 5132
      600 Cathedral Placewww.bdo.ca
      925 West Georgia StreetVancouver BC V6C 3L2 Canada


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and StockholdersDestiny Media
      Technologies Inc.Vancouver, Canada

We have audited the accompanying consolidated balance sheet of
  Destiny Media Technologies Inc. (the Company) as of August 31, 2010, and the
  related consolidated statement of operations, changes in stockholders equity
  and cash flows for the year ended August 31, 2010. These financial statements
  are the responsibility of the Companys management. Our responsibility is to
  express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the
  Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audit to obtain reasonable assurance about
  whether the financial statements are free of material misstatement. The Company
  is not required to have, nor were we engaged to perform, an audit of its
  internal control over financial reporting. Our audit included consideration of
  internal control over financial reporting as a basis for designing audit
  procedures that are appropriate in the circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the Companys internal control
  over financial reporting. Accordingly, we express no such opinion. An audit also
  includes examining, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements. An audit also includes assessing the
  accounting principles used and significant estimates made by management, as well
  as evaluating the overall presentation of the financial statements. We believe
  that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
  to above present fairly, in all material respects, the financial position of
  Destiny Media Technologies Inc. at August 31, 2010, and the results of its
  operations and its cash flows for the year ended August 31, 2010, in conformity
  with accounting principles generally accepted in the United States of America.

/s/ BDO Canada LLP

Chartered Accountants

Vancouver, Canada 
  November 25, 2010

---



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of 
  Destiny Media
  Technologies Inc.

We have audited the accompanying consolidated balance sheet of
  Destiny Media Technologies Inc. as of August 31, 2009 and the related
  consolidated statement of operations, cash flows and stockholders equity for
  the year ended August 31, 2009. These consolidated financial statements are the
  responsibility of the Companys management. Our responsibility is to express an
  opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the
  Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform the audits to obtain reasonable assurance about
  whether the financial statements are free of material misstatement. An audit
  includes examining, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements. The Company is not required to have,
  nor were we engaged to perform, an audit of its internal control over financial
  reporting. An audit includes consideration of internal control over financial
  reporting as a basis for designing audit procedures that are appropriate in the
  circumstances, but not for the purpose of expressing an opinion on the
  effectiveness of internal control over financial reporting. Accordingly, we
  express no such opinion. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as
  evaluating the overall financial statement presentation.

In our opinion, the consolidated financial statements referred
  to above, present fairly, in all material respects, the consolidated financial
  position of Destiny Media Technologies Inc., as of August 31, 2009 and the
  results of its operations and its cash flows for the year ended August 31, 2009
  in conformity with accounting principles generally accepted in the United
  States.



CHARTERED ACCOUNTANTS

Vancouver, Canada

November 27, 2009

---

|Destiny Media Technologies Inc. |                                                              
|------------------------------- | -------------------------------------------------------------
|                                |                                                              
|CONSOLIDATED BALANCE SHEETS    
|                               
|As at August 31                 | (Expressed in United States dollars, except
      share data)

|                                                                                                                                             |  | 2010       |   |  | 2009       |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                                                                                                             |  | $          |   |  | $          |  
|                                                                                                                                             |  |            |   |  |            |  
|ASSETS                                                                                                                                       |  |            |   |  |            |  
|Current                                                                                                                                      |  |            |   |  |            |  
|Cash and cash equivalents                                                                                                                    |  | 491,012    |   |  | 253,100    |  
|Accounts receivable, net of allowance for
      doubtful accounts of $17,093 [2009  $2,289]                                                 |  | 542,932    |   |  | 502,275    |  
|Other receivables                                                                                                                            |  | 45,616     |   |  | 15,120     |  
|Prepaid expenses                                                                                                                             |  | 32,282     |   |  | 59,201     |  
|Deferred tax
      assets  current portion [note 5]                                                                                         |  | 380,000    |   |  | 450,000    |  
|Total current assets                                                                                                                         |  | 1,491,842  |   |  | 1,279,696  |  
|Deposits                                                                                                                                     |  | 9,496      |   |  | 9,158      |  
|Property and equipment, net [note 3]                                                                                                         |  | 129,479    |   |  | 123,770    |  
|Deferred commission costs                                                                                                                    |  |           |   |  | 13,320     |  
|Deferred tax assets  long term portion [note 5]                                                                                             |  | 948,000    |   |  |           |  
|Total assets                                                                                                                                 |  | 2,578,817  |   |  | 1,425,944  |  
|                                                                                                                                             |  |            |   |  |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                         |  |            |   |  |            |  
|Current                                                                                                                                      |  |            |   |  |            |  
|Accounts payable                                                                                                                             |  | 220,538    |   |  | 349,164    |  
|Accrued liabilities                                                                                                                          |  | 259,388    |   |  | 176,624    |  
|Shareholder loan payable [note 7]                                                                                                            |  |           |   |  | 68,681     |  
|Deferred revenue                                                                                                                             |  | 25,018     |   |  | 17,198     |  
|Obligation under
      capital leases  current portion [note 6]                                                                             |  | 10,759     |   |  | 9,356      |  
|Total current liabilities                                                                                                                    |  | 515,703    |   |  | 621,023    |  
|Obligation under
      capital leases  long term portion [note 6]                                                                           |  | 3,745      |   |  | 13,987     |  
|Total liabilities                                                                                                                            |  | 519,448    |   |  | 635,010    |  
|                                                                                                                                             |  |            |   |  |            |  
|Commitments and contingencies [notes 6
      and 8]                                                                                          |  |            |   |  |            |  
|Stockholders equity                                                                                                                         |  |            |   |  |            |  
|Common stock, par value $0.001 (Note 4)                                                                                                      |  |            |   |  |            |  
|Authorized: 100,000,000 shares 
         Issued and outstanding: 51,143,847 shares 
             [August 31, 2009 - 51,723,647
      shares] |  | 51,145     |   |  | 51,725     |  
|Additional paid-in capital                                                                                                                   |  | 9,049,308  |   |  | 9,492,168  |  
|Accumulated Deficit                                                                                                                          |  | (7,214,541 | ) |  | (8,900,614 | )
|Accumulated other comprehensive income                                                                                                       |  | 173,457    |   |  | 147,655    |  
|Total
      stockholders equity                                                                                                             |  | 2,059,369  |   |  | 790,934    |  
|Total liabilities and stockholders equity                                                                                                   |  | 2,578,817  |   |  | 1,425,944  |  

See accompanying notes

---

|Destiny Media Technologies Inc.            
|-------------------------------------------
|                                           
|CONSOLIDATED STATEMENTS OF
      OPERATIONS
|                                           
|Years ended August 31                      

|                                                  |  | 2010       |   |  | 2009       |  
|------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                  |  | $          |   |  | $          |  
|                                                  |  |            |   |  |            |  
|Service revenue[note 9]                           |  | 3,771,382  |   |  | 2,560,447  |  
|                                                  |  |            |   |  |            |  
|Operating expenses                                |  |            |   |  |            |  
|General and administrative                        |  | 1,049,368  |   |  | 760,045    |  
|Sales and marketing                               |  | 786,228    |   |  | 821,925    |  
|Research and development                          |  | 1,193,618  |   |  | 893,715    |  
|Depreciation and amortization                     |  | 53,106     |   |  | 39,981     |  
|                                                  |  | 3,082,320  |   |  | 2,515,666  |  
|Income from operations                            |  | 689,062    |   |  | 44,781     |  
|Other income (expenses)                           |  |            |   |  |            |  
|Other income                                      |  | 118,129    |   |  | 102,351    |  
|Gain on settlement of debt                        |  |           |   |  | 15,284     |  
|Interest income                                   |  | 3,359      |   |  | 3,107      |  
|Interest and other
      expense                  |  | (2,477     | ) |  | (4,692     | )
|Income before provision for income taxes          |  | 808,073    |   |  | 160,831    |  
|Recovery for
      deferred income taxes (Note 5) |  | 878,000    |   |  | 450,000    |  
|                                                  |  |            |   |  |            |  
|Net income                                        |  | 1,686,073  |   |  | 610,831    |  
|                                                  |  |            |   |  |            |  
|                                                  |  |            |   |  |            |  
|Net income per common share, basic and diluted    |  | 0.03       |   |  | 0.01       |  
|                                                  |  |            |   |  |            |  
|Weighted average common shares
      outstanding: |  |            |   |  |            |  
|Basic                                             |  | 51,637,922 |   |  | 51,515,428 |  
|Diluted                                           |  | 52,274,419 |   |  | 51,585,134 |  

See accompanying notes

---

|Destiny Media Technologies Inc.                                      |                                     
|-------------------------------------------------------------------- | ------------------------------------
|                                                                     |                                     
|CONSOLIDATED STATEMENTS OF
      CHANGES IN **STOCKHOLDERS EQUITY**
|                                                                    
|Years ended August 31                                                | (Expressed in United States dollars)

|                                          |  |                    |   |  |         |   |  |             |   |  |               |   |  | Accumulated |  |  | Total         |  
|----------------------------------------- |  | ------------------ | - |  | ------- | - |  | ----------- | - |  | ------------- | - |  | ----------- |  |  | ------------- | -
|                                          |  |                    |   |  |         |   |  | Additional  |   |  |               |   |  | other       |  |  | stockholders |  
|                                          |  | Common
      stock |   |  | paid-in |   |  | Accumulated |   |  | comprehensive |   |  | equity      | 
|                                          |  | Shares             |   |  | Amount  |   |  | capital     |   |  | Deficit       |   |  | income      |  |  |               |  
|                                          |  | #                  |   |  | $       |   |  | $           |   |  | $             |   |  | $           |  |  | $             |  
|Balance, September 1, 2008                |  | 51,090,314         |   |  | 51,092  |   |  | 9,208,131   |   |  | (9,511,445    | ) |  | 119,613     |  |  | (132,609      | )
|Net income for the year                   |  |                   |   |  |        |   |  |            |   |  | 610,831       |   |  |            |  |  | 610,831       |  
|Foreign currency translation gain         |  |                   |   |  |        |   |  |            |   |  |              |   |  | 28,042      |  |  | 28,042        |  
|Comprehensive income                      |  |                    |   |  |         |   |  |             |   |  |               |   |  |             |  |  | 638,873       |  
|Common stock issued on options exercised  |  | 500,000            |   |  | 500     |   |  | 99,500      |   |  |              |   |  |            |  |  | 100,000       |  
|Common stock issued for share settlement  |  | 133,333            |   |  | 133     |   |  | 99,867      |   |  |              |   |  |            |  |  | 100,000       |  
|Stock based compensation                  |  |                   |   |  |        |   |  | 84,670      |   |  |              |   |  |            |  |  | 84,670        |  
|Balance, August 31, 2009                  |  | 51,723,647         |   |  | 51,725  |   |  | 9,492,168   |   |  | (8,900,614    | ) |  | 147,655     |  |  | 790,934       |  
|Net income for the year                   |  |                   |   |  |        |   |  |            |   |  | 1,686,073     |   |  |            |  |  | 1,686,073     |  
|Foreign currency translation gain         |  |                   |   |  |        |   |  |            |   |  |               |   |  | 25,802      |  |  | 25,802        |  
|Comprehensive income                      |  |                    |   |  |         |   |  |             |   |  |               |   |  |             |  |  | 1,711,875     |  
|Common stock issued on options exercised  |  | 133,200            |   |  | 133     |   |  | 6,117       |   |  |              |   |  |            |  |  | 6,250         |  
|Common stock issued on warrants exercised |  | 336,000            |   |  | 336     |   |  | (336        | ) |  |              |   |  |            |  |  |              |  
|Common stock repurchased and cancelled    |  | (1,049,000         | ) |  | (1,049  | ) |  | (466,611    | ) |  |              |   |  |            |  |  | (467,660      | )
|Stock options repurchased and cancelled   |  |                   |   |  |        |   |  | (30,000     | ) |  |              |   |  |            |  |  | (30,000       | )
|Stock based compensation                  |  |                   |   |  |        |   |  | 47,970      |   |  |              |   |  |            |  |  | 47,970        |  
|Balance, August 31, 2010                  |  | 51,143,847         |   |  | 51,145  |   |  | 9,049,308   |   |  | (7,214,541    | ) |  | 173,457     |  |  | 2,059,369     |  

Seeaccompanyingnotes

---

|Destiny Media Technologies Inc.             |                                     
|------------------------------------------- | ------------------------------------
|                                            |                                     
|CONSOLIDATED STATEMENTS OF CASH
      FLOWS
|                                           
|Years ended August 31                       | (Expressed in United States dollars)

|                                                      |  | 2010      |   |  | 2009     |  
|----------------------------------------------------- |  | --------- | - |  | -------- | -
|                                                      |  | $         |   |  | $        |  
|                                                      |  |           |   |  |          |  
|OPERATING ACTIVITIES                                  |  |           |   |  |          |  
|Net income                                            |  | 1,686,073 |   |  | 610,831  |  
|Items not involving cash:                             |  |           |   |  |          |  
|Depreciation and amortization                         |  | 53,106    |   |  | 39,981   |  
|Gain on settlement of debt                            |  |          |   |  | (15,284  | )
|Stock-based compensation                              |  | 47,970    |   |  | 84,670   |  
|Loss on disposal of capital
      assets              |  |          |   |  | 2,228    |  
|Deferred commission costs                             |  | 13,908    |   |  | (12,348  | )
|Deferred income taxes                                 |  | (878,000  | ) |  | (450,000 | )
|Changes in non-cash working capital:                  |  |           |   |  |          |  
|Accounts receivable                                   |  | (22,340   | ) |  | (172,814 | )
|Other receivables                                     |  | (30,062   | ) |  | (2,529   | )
|Prepaid expenses                                      |  | 29,308    |   |  | 46,910   |  
|Accounts payable                                      |  | (146,431  | ) |  | (4,795   | )
|Accrued liabilities                                   |  | 81,076    |   |  | (61,626  | )
|Deferred revenue                                      |  | 7,236     |   |  | (3,315   | )
|Net cash provided by operating activities             |  | 841,844   |   |  | 61,909   |  
|                                                      |  |           |   |  |          |  
|INVESTING ACTIVITIES                                  |  |           |   |  |          |  
|Purchase of
      equipment                           |  | (54,250   | ) |  | (27,649  | )
|Net cash used in investing activities                 |  | (54,250   | ) |  | (27,649  | )
|                                                      |  |           |   |  |          |  
|FINANCING ACTIVITIES                                  |  |           |   |  |          |  
|Repayments on capital lease obligations               |  | (9,769    | ) |  | (5,877   | )
|Proceeds of shareholder loans                         |  |          |   |  | 201,456  |  
|Repayments of shareholder loans                       |  | (71,218   | ) |  | (177,685 | )
|Proceeds from exercise of stock options               |  | 6,250     |   |  | 100,000  |  
|Repurchase of
      stock and options                 |  | (497,660  | ) |  |         |  
|Net cash (used in) provided by financing activities   |  | (572,397  | ) |  | 117,894  |  
|                                                      |  |           |   |  |          |  
|Effect of foreign exchange rate changes
      on cash |  | 22,715    |   |  | 9,577    |  
|                                                      |  |           |   |  |          |  
|Net increase in cash during the year                  |  | 237,912   |   |  | 161,731  |  
|Cash, beginning of
      year                         |  | 253,100   |   |  | 91,369   |  
|Cash, end of year                                     |  | 491,012   |   |  | 253,100  |  
|                                                      |  |           |   |  |          |  
|Supplementary disclosure                              |  |           |   |  |          |  
|Interest paid                                         |  | 2,477     |   |  | 4,692    |  
|Income taxes paid                                     |  |          |   |  |         |  
|Non-cash investing activity                           |  |           |   |  |          |  
|Property and equipment acquired under capital lease   |  |          |   |  | 27,517   |  

See accompanying notes

---

|Destiny Media Technologies Inc.                 
|------------------------------------------------
|                                                
|NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS
|                                                
|                                                
|August 31, 2010 and 2009                        

1. ORGANIZATION

Destiny Media Technologies Inc. (the Company) was
  incorporated in August 1998 under the laws of the State of Colorado. The Company
  develops technologies that allow for the distribution over the Internet of
  digital media files in either a streaming or digital download format. The
  technologies are proprietary. The Company operates out of Vancouver, BC, Canada
  and serves customers predominantly located in the United States, Europe and
  Australia.

The Companys stock is listed for trading under the symbol
  DSNY on the OTC Bulletin Board in the United States, under the symbol DSY on
  the TSX Venture Exchange and under the symbol DME on the Berlin, Frankfurt,
  Xetra and Stuttgart exchanges in Germany.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting
  policies used in the preparation of these consolidated financial statements:

Basis of presentation and fiscal year

These consolidated financial statements and related notes are
  presented in accordance with accounting principles generally accepted in the
  United States, and are expressed in US dollars. The Companys fiscal year-end is
  August 31.

Principles of consolidation

The accompanying consolidated financial statements include the
  accounts of the Company, and its wholly-owned subsidiaries, Destiny Software
  Productions Inc. and MPE Distribution Inc. All inter-company balances and
  transactions have been eliminated on consolidation.

Use of estimates

The preparation of financial statements in accordance with
  United States generally accepted accounting principles requires management to
  make estimates and assumptions that affect the reported amounts of assets and
  liabilities at the dates of the financial statements and the reported amounts of
  net revenue and expenses in the reporting periods. We regularly evaluate
  estimates and assumptions related to revenue recognition, estimated useful lives
  for property and equipment, allowances for doubtful accounts, sales returns and
  allowances, stock-based compensation expense, deferred income tax asset
  valuation allowances, uncertain tax positions, litigation and other loss
  contingencies. These estimates and assumptions are based on current facts,
  historical experience and various other factors that we believe to be reasonable
  under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
  and the recording of revenue, costs and expenses that are not readily apparent
  from other sources. The actual results we experience may differ materially and
  adversely from our original estimates. To the extent there are material
  differences between the estimates and actual results, our future results of
  operations will be affected.

1

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Cash and cash equivalents

We consider all highly liquid investments that are readily
  convertible into cash and have an original maturity of three months or less at
  the time of purchase to be cash equivalents.

Revenue recognition

The Company recognizes revenue in accordance with Financial
  Accounting Standards Boards (FASB) Accounting Standards Codification (ASC)
  985-605, Revenue Recognition. Accordingly, revenue is recognized when
  there is persuasive evidence of an arrangement, delivery to the customer has
  occurred, the fee is fixed and determinable, and collectability is considered
  probable.

The majority of the Companys revenue is generated from digital
  media distribution service. The service is billed on usage which is based on the
  volume and size of distributions provided on a monthly basis. All revenues are
  recognized on a monthly basis as the services are delivered to customers, except
  where extended payment terms exist. Such revenues are only recognized when the
  extended payment term expires.

When significant post-delivery obligations exist, revenue is
  deferred until such obligations are fulfilled. Cash received in advance of
  meeting the revenue recognition criteria is recorded as deferred revenue.

2

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Long-lived assets

Long-lived assets held for use are evaluated for impairment
  when events or changes in business circumstances indicate that the carrying
  amount of the assets may not be fully recoverable. Impairment is measured by a
  two step process: Step 1) the carrying amount of the asset is compared with its
  estimated undiscounted future cash flows expected to result from the use of the
  assets and its eventual disposition. If the carrying amount is lower than the
  undiscounted future cash-flows, no impairment loss is recognized. Step 2) If the
  carrying amount is higher than the undiscounted future cash-flows then an
  impairment loss is measured as the difference between the carrying amount and
  fair value which may be based on internally developed discounted cash flow
  estimates, quoted market prices, when available, or independent appraisals. The
  determination of whether or not long-lived assets have become impaired involves
  a significant level of judgment in the assumptions underlying the approach used
  to determine the estimated future cash flows expected to result from the use of
  those assets. Changes in the Companys strategy, assumptions and/or market
  conditions could significantly impact these judgments and require adjustments to
  recorded amounts of long-lived assets. As of August 31, 2010, there were no
  impairment indicators present.

Litigation and settlement costs

We are involved in disputes, litigation and other legal
  actions. In accordance with ASC 450, Contingencies, we record a charge equal to
  at least the minimum estimated liability for a loss contingency when both of the
  following conditions are met: (i) information available prior to issuance of the
  financial statements indicates that it is probable that an asset had been
  impaired or a liability had been incurred at the date of the financial
  statements and (ii) the range of loss can be reasonably estimated.

Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts
  through review of open accounts, and historical collection and allowance
  amounts. The allowance for doubtful accounts is intended to reduce trade
  accounts receivable to the amount that reasonably approximates their fair value
  due to their short-term nature. The Companys exposure to credit risk has
  increased as a result of global market conditions and increased revenue. The
  amount ultimately realized from trade accounts receivable may differ from the
  amount estimated in the consolidated financial statements based on collection
  experience.

3

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Research and development costs

Research costs are expensed as incurred. Development costs are
  subject to capitalization beginning when a products technological feasibility
  has been established and ending when a product is available for general release
  to customers. The Companys products are generally released soon after
  technological feasibility has been established and therefore costs incurred
  subsequent to achievement of technological feasibility are not significant and
  have been expensed as incurred.

Property and equipment

Property and equipment are stated at cost. Depreciation and
  amortization is taken over the estimated useful lives of the assets and is
  calculated using the declining balance method at the following annual rates,
  commencing upon utilization of the assets:

Furniture and fixtures
      20%Computer hardware
      30%Computer software
      50%Leasehold improvements
      Straight-line over lease term


Translation of foreign currencies

The Companys functional currency is the U.S. dollar. Financial
  statements of foreign operations for which the functional currency is the local
  currency are translated into U.S. dollars with assets and liabilities translated
  at the rate of exchange in effect at the balance sheet date and revenue and
  expense items translated at the average rates for the period. Unrealized gains
  and losses resulting from the translation of the consolidated financial
  statements are deferred and accumulated in a separate component of stockholders
  equity as a foreign currency translation gain (loss) in accumulated other
  comprehensive income. Transactions denominated in foreign currencies are
  translated at the exchange rate in effect on the transaction date. Foreign
  currency gains and losses are included as a component of general and
  administrative expenses in the consolidated statements of operations.

The Company operates internationally, which gives rise to the
  risk that cash flows may be adversely impacted by exchange rate fluctuations.
  The Company has not entered into contracts for foreign exchange hedges.

4

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Advertising

Advertising costs are expensed as incurred and totaled $116,177
  and $118,147 during the years ended August 31, 2010 and 2009, respectively.

Income taxes

The Company utilizes the liability method of accounting for
  income taxes as set forth in ASC 740, Income Taxes(formerly SFAS No.
  109, Accounting for Income Taxes). Under the liability method, deferred
  taxes are determined based on the temporary differences between the financial
  statement and tax basis of assets and liabilities using tax rates expected to be
  in effect during the years in which the basis differences reverse. A valuation
  allowance is recorded when it is more likely than not that some of the deferred
  tax assets will not be realized. In determining the need for valuation
  allowances we consider projected future taxable income and the availability of
  tax planning strategies. If in the future we determine that we would not be able
  to realize our recorded deferred tax assets, an increase in the valuation
  allowance would be recorded, decreasing earnings in the period in which such
  determination is made.

We assess our income tax positions and record tax benefits for
  all years subject to examination based upon our evaluation of the facts,
  circumstances and information available at the reporting date. The Company and
  its subsidiaries are subject to U.S. federal income tax, Canadian income tax, as
  well as income tax of multiple state and local jurisdictions. Based on the
  Companys evaluation, the Company has concluded that there are no significant
  uncertain tax positions requiring recognition in the Companys financial
  statements. The Companys evaluation was performed for the tax years ended
  August 31, 1999 through August 31, 2010, the tax years which remain subject to
  examination by major tax jurisdictions. The Company may from time to time be
  assessed interest or penalties by major tax jurisdictions, although any such
  assessments historically have been minimal and immaterial to the Companys
  financial results. In the event the Company has received an assessment for
  interest and/or penalties, it has been classified in the financial statements as
  selling, general and administrative expense.

Investment tax credits

The Company uses the flow through method to account for
  investment tax credits earned on eligible scientific research and development
  expenditures. Under this method, the investment tax credits are recognized as a
  reduction to income tax expense.

5

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Capital stock or equivalent issued for consideration other
  than cash

Capital stock or equivalent issued for consideration other than
  cash is recorded at an estimate of the fair value of the stock or equivalent
  issued or issuable or at an estimate of the fair value of the goods or services
  received, whichever is more readily ascertainable.

Stock based compensation

The Company accounts for stock-based compensation arrangements
  in accordance with ASC 718, Stock Compensation. Under the fair value recognition
  provisions of ASC 718 stock based compensation cost is estimated at the grant
  date based on the fair value of the awards expected to vest and recognized as
  expense ratably over the requisite service period of the award. The Company has
  used the Black-Scholes option pricing model to estimate fair value of its
  stock-based awards which requires various judgmental assumptions including
  estimating stock price volatility and expected life. The Companys computation
  of expected volatility is based on a combination of historical and market-based
  implied volatility. In addition, the Company considers many factors when
  estimating expected life, including types of awards and historical experience.
  If any of the assumptions used in the Black-Scholes valuation model change
  significantly, stock-based compensation expense may differ materially in the
  future from that recorded in the current period.

Earnings per share

Net income per share basic is calculated by dividing net income
  by the weighted average number of common shares outstanding during the period.
  Net income per share (diluted) is calculated by dividing net income for the
  period by the weighted average number of common shares outstanding during the
  period, plus the dilutive effect of outstanding common share equivalents. This
  method requires that the dilutive effect of outstanding options and warrants
  issued be calculated using the treasury stock method. Under the treasury stock
  method, all common share equivalents have been exercised at the beginning of the
  period (or at the time of issuance, if later), and that the funds obtained
  thereby were used to purchase common shares of the Company at the average
  trading price of common shares during the period, but only if dilutive.

6

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

|                                                   |  | Year
      Ended | 
|-------------------------------------------------- |  | ---------------- | 
|                                                   |  | August 31,       | 
|                                                   |  | 2010             | 
|                                                   |  | $                | 
|Net income                                         |  | 1,686,073        | 
|Weighted average common shares outstanding         |  | 51,637,922       | 
|Effect of dilutive securities  warrants           |  | 210,053          | 
|Effect of dilutive securities  options            |  | 426,444          | 
|                                                   |  |                  | 
|Diluted weighted average common shares outstanding |  | 52,274,419       | 

Potentially dilutive securities of 2,469,794 and 6,531,831
  shares arising from stock options and share purchase warrants, respectively,
  were not included as their effect would be anti-dilutive for the year ended
  August 31, 2010 (2009  3,939,000 and 6,902,136 shares arising from stock
  options and share purchase warrants, respectively).

Comprehensive income

Comprehensive income includes all changes in equity except
  those resulting from investments by owners and distributions to owners.
  Accumulated other comprehensive income consists only of accumulated foreign
  currency translation adjustments for all years presented.

Recent accounting pronouncements

In June 2009, FASB issued SFAS No. 168, The FASB Accounting
  Standards Codification and the Hierarchy of Generally Accepted Accounting
  Principles  a replacement of FASB Statement No. 162. The FASB Accounting
  Standards Codification (Codification) will become the source of authoritative
  U.S. generally accepted accounting principles (GAAP) recognized by FASB to be
  applied by nongovernmental entities. Rules and interpretive releases of the
  Securities and Exchange Commission SEC under authority of federal securities
  laws are also sources of authoritative GAAP for SEC registrants. On the
  effective date of this statement, the Codification will supersede all
  then-existing non-SEC accounting and reporting standards. All other
  non-grandfathered non-SEC accounting literature not included in the Codification
  will become non-authoritative. This statement is effective for financial
  statements issued for interim and annual periods ending after September 30, 2009. Effective September 1,
  2009, references made to FASB guidance throughout this consolidated financial
  statements have been updated for the Codification.

7

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Effective September 1, 2009, the Company adopted a new
  accounting standard included in ASC 815, Derivatives and Hedging (ASC 815).
  The new accounting standard requires enhanced disclosures about an entitys
  derivative and hedging activities and is effective for fiscal years and interim
  periods beginning after November 15, 2008. Since the new accounting standard
  only required additional disclosure, the adoption did not impact materially the
  Companys consolidated financial statements.

Effective September 1, 2009, the Company adopted a new
  accounting standard included in ASC 810, Consolidations. The new accounting
  standard establishes accounting and reporting standards for the noncontrolling
  interest (or minority interests) in a subsidiary and for the deconsolidation of
  a subsidiary by requiring all noncontrolling interests in subsidiaries be
  reported in the same way, as equity in the consolidated financial statements. As
  such, this guidance has eliminated the diversity in accounting for transactions
  between an entity and noncontrolling interests by requiring they be treated as
  equity transactions. The adoption of this new accounting standard did not have a
  material effect on the Companys consolidated financial statements.

Effective September 1, 2009, the Company adopted a new
  accounting standard included in ASC 820, Fair Value Measurements and Disclosures
  (ASC 820), which delayed the effective date for disclosing all non-financial
  assets and non-financial liabilities, except for items that are recognized or
  disclosed at fair value on a recurring basis (at least annually). This standard
  did not have a material impact on the Companys consolidated financial
  statements.

In April 2009, the FASB issued a new guidance for determining
  when a transaction is not orderly and for estimating fair value when there has
  been a significant decrease in the volume and level of activity for an asset or
  liability. The new guidance, which is now part of ASC 820, requires disclosure
  of the inputs and valuation techniques used, as well as any changes in valuation
  techniques and inputs used during the period, to measure fair value in interim
  and annual periods.

In August 2009, the FASB issued a new guidance relating to the
  accounting for the fair value measurement of liabilities. The new guidance,
  which is now part of ASC 820, provides clarification that in certain
  circumstances in which a quoted price in an active market for the identical
  liability is not available, a company is required to measure fair value using
  one or more of the following valuation techniques: the quoted price of the
  identical liability when traded as an asset, the quoted prices for similar
  liabilities or similar liabilities when traded as assets, or another valuation
  technique that is consistent with the principles of fair value measurements. The
  new guidance clarifies that a company is not required to include an adjustment
  for restrictions that prevent the transfer of the liability and if an adjustment is
  applied to the quoted price used in a valuation technique, the result is a Level
  2 or 3 fair value measurement. The new guidance is effective for interim and
  annual periods beginning after August 27, 2009. The adoption of this standard
  did not have a material effect on the Companys consolidated financial
  statements.

8

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

Effective September 1, 2009, the Company adopted a new
  accounting standard included in ASC 820, The new standard requires disclosures
  of the fair value of financial instruments for interim reporting periods of
  publicly traded companies in addition to the annual disclosure required at
  year-end. The provisions of the new standard were effective for the interim
  periods ending after June 15, 2009. The adoption of this standard did not have a
  material effect on the Companys consolidated financial statements.

In May 2009, the FASB issued a new guidance for subsequent
  events. The new guidance, which is part of ASC 855, Subsequent Events is
  intended to establish general standards of accounting for and disclosure of
  events that occur after the balance sheet date but before financial statements
  are issued or are available to be issued. Specifically, this guidance sets forth
  the period after the balance sheet date during which management of a reporting
  entity should evaluate events or transactions that may occur for potential
  recognition or disclosure in the financial statements, the circumstances under
  which an entity should recognize events or transactions occurring after the
  balance sheet date in its financial statements, and the disclosures that an
  entity should make about events or transactions that occurred after the balance
  sheet date. The new guidance is effective for fiscal years and interim periods
  ended after June 15, 2009 and will be applied prospectively. The Companys
  adoption of the new guidance did not have a material effect on the Companys
  consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update
  2010-09, Subsequent Events. This Update clarifies the financial statement
  issuance dates that potentially conflict with some of the Securities and
  Exchange Commissions guidance. The amendment is effective for interim or annual
  periods ending after June 15, 2010. The Companys adoption of the new guidance
  did not have a material effect on the Companys consolidated financial
  statements.

Accounting Standards Not Yet Effective

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements(ASU 2009-13). The new
  standard changes the requirements for establishing separate units of accounting
  in a multiple element arrangement and requires the allocation of arrangement
  consideration to each deliverable based on the relative selling price. The
  selling price for each deliverable is based on vendor-specific objective
  evidence (VSOE) if available, third-party evidence if VSOE is not available,
  or estimated selling price if neither VSOE or third-party evidence is available.
  ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The Company does not
  expect that the provisions of the new guidance will have a material effect on
  its consolidated financial statements.

9

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)

In October 2009, the FASB issued Accounting Standards Update
  2009-14, Certain Revenue Arrangements That Include Software Elements  a
  consensus of the FASB Emerging Issues Task Force. This Update removes tangible
  products containing software components and nonsoftware components that function
  together to deliver the tangible products essential functionality from the
  scope of the software revenue guidance in Subtopic 985-605 of the Codification.
  Additionally, ASU 2009-14 provides guidance on how a vendor should allocate
  arrangement consideration to deliverables in an arrangement that includes both
  tangible products and software that is not essential to the products
  functionality. ASU 2009-14 requires the same expanded disclosures that are
  included within ASU 2009-13. ASU 2009-14 is effective prospectively for revenue
  arrangements entered into or materially modified in fiscal years beginning on or
  after June 15, 2010, with early adoption permitted. A company is required to
  adopt the amendments in both ASU 2009-13 and 2009-14 in the same period using
  the same transition method. The Company does not expect that the provisions of
  the new guidance will have a material effect on its consolidated financial
  statements.

In April 2010, the FASB issued Accounting Standards Update
  2010-13, Compensation  Stock Compensation (Topic 718). The objective of this
  Update is to address the classification of an employee share-based payment award
  with an exercise price denominated in the currency of a market in which the
  underlying equity security trades. The Update provides guidance on the
  classification of a share-based payment award as either equity or a liability. A
  share-based payment award that contains a condition that is not a market,
  performance, or service condition is required to be classified as a liability.
  The amendments in this Update are effective for fiscal years, and interim
  periods within those fiscal years, beginning on or after December 15, 2010. The
  amendments in this Update should be applied by recording a cumulative-effect
  adjustment to the opening balance of retained earnings. The Company is currently
  evaluating the impact of this update on the consolidated financial statements.

10

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

3. PROPERTY AND EQUIPMENT

|                       |  |         |  |  | Accumulated  |  |  | Net book | 
|---------------------- |  | ------- |  |  | ------------ |  |  | -------- | 
|                       |  | Cost    |  |  | amortization |  |  | value    | 
|                       |  | $       |  |  | $            |  |  | $        | 
|                       |  |         |  |  |              |  |  |          | 
|2010                   |  |         |  |  |              |  |  |          | 
|Furniture and fixtures |  | 122,119 |  |  | 89,037       |  |  | 33,082   | 
|Computer hardware      |  | 347,984 |  |  | 257,757      |  |  | 90,227   | 
|Computer software      |  | 59,372  |  |  | 53,202       |  |  | 6,170    | 
|                       |  | 529,475 |  |  | 399,996      |  |  | 129,479  | 
|                       |  |         |  |  |              |  |  |          | 
|2009                   |  |         |  |  |              |  |  |          | 
|Furniture and fixtures |  | 117,769 |  |  | 77,891       |  |  | 39,878   | 
|Computer hardware      |  | 294,246 |  |  | 223,017      |  |  | 71,229   | 
|Computer software      |  | 46,642  |  |  | 35,408       |  |  | 11,234   | 
|Leasehold improvements |  | 4,286   |  |  | 2,857        |  |  | 1,429    | 
|                       |  | 462,943 |  |  | 339,173      |  |  | 123,770  | 

The gross amount of assets related to property and equipment
  under capital lease was $30,779 and $29,683 for years ended August 31, 2010 and
  2009, respectively. The accumulated depreciation and amortization related to
  property and equipment under capital lease was $11,659 and $5,011 for the years
  ended August 31, 2010 and 2009, respectively.

4. STOCKHOLDERS EQUITY

[a] Common stock issued and authorized

The Company is authorized to issue up to 100,000,000 shares of
  common stock, par value $0.001 per share.

2010

During the year ended August 31, 2010, 336,000 shares were
  issued in a cashless exercise of 600,000 warrants with an exercise price of
  $0.22. 108,200 shares were issued in a cashless exercise of 289,000 options with
  an exercise price of $0.25. 25,000 shares were issued in an exercise of 25,000
  options with cash proceeds of $6,250.

11

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

4. STOCKHOLDERS EQUITY (contd.)

2009

During the year ended August 31, 2009, 500,000 stock options
  were exercised for cash proceeds of $100,000. A total of 133,333 previously
  issued common shares were released from treasury to settle an incomplete private
  placement between the Company and parties involved in the August 2000 private
  placement.

[b] Common stock cancelled

During the year ended August 31, 2010, the Company repurchased
  and cancelled 1,049,000 shares for a total cost of $497,600.

[c] Stock option plans

The Company has two existing stock option plans (the Plans),
  namely the Amended 1999 Stock Option Plan and the 2006 Stock Option Plan, under
  which up to 3,750,000 and 5,100,000 shares of the common stock, respectively,
  have been reserved for issuance. A total of 1,066,334 common shares remain
  eligible for issuance under the plans. The options generally vest over a range
  of periods from the date of grant, some are immediate, and others are 12 or 24
  months. Any options that do not vest as the result of a grantee leaving the
  Company are forfeited and the common shares underlying them are returned to the
  reserve. The options generally have a contractual term of five years.

Stock-Based Payment Award Activity

A summary of option activity under the Plans as of August 31,
  2010 and 2009, and changes during the years ended are presented below:

12

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

4. STOCKHOLDERS EQUITY (contd.)

|                                          |  |            |   |  |                |   |  | Weighted    |  |  |           | 
|----------------------------------------- |  | ---------- | - |  | -------------- | - |  | ----------- |  |  | --------- | 
|                                          |  |            |   |  |                |   |  | Average     |  |  | Aggregate | 
|                                          |  |            |   |  | Weighted       |   |  | Remaining   |  |  | Intrinsic | 
|                                          |  |            |   |  | Average        |   |  | Contractual |  |  | Value     | 
|Options                                   |  | Shares     |   |  | Exercise Price |   |  | Term        |  |  | $         | 
|Outstanding at September 1, 2008          |  | 4,339,000  |   |  | 0.48           |   |  | 2.83        |  |  | 179,850   | 
|Granted                                   |  | 1,164,000  |   |  | 0.24           |   |  |             |  |  |           | 
|Exercised                                 |  | (500,000   | ) |  | (0.20          | ) |  |             |  |  |           | 
|Expired                                   |  | (1,064,000 | ) |  | (0.42          | ) |  |             |  |  |           | 
|Outstanding at August 31, 2009            |  | 3,939,000  |   |  | 0.44           |   |  | 2.07        |  |  | 80,940    | 
|Granted                                   |  | 100,000    |   |  | 0.50           |   |  |             |  |  |           | 
|Exercised                                 |  | (314,000   | ) |  | 0.25           |   |  |             |  |  |           | 
|Repurchased and cancelled                 |  | (150,000   | ) |  | 0.25           |   |  |             |  |  |           | 
|Expired or forfeited                      |  | (350,000   | ) |  | 0.39           |   |  |             |  |  |           | 
|Outstanding at
      August 31, 2010      |  | 3,225,000  |   |  | 0.47           |   |  | 1.68        |  |  | 117,600   | 
|Vested and exercisable at August 31, 2010 |  | 3,182,292  |   |  | 0.47           |   |  | 1.64        |  |  | 117,600   | 

The following table summarizes information regarding the
  non-vested stock purchase options outstanding as of August 31, 2010:

Number of OptionsNon-vested options at August 31, 2009
      
      28,125Granted
      
      100,000Vested
      
      (72,920
      )Cancelled/forfeited
      
      (12,497
      )Non-vested options at August 31, 2010
      
      42,708


13

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

4. STOCKHOLDERS EQUITY (contd.)

The aggregate intrinsic value is calculated as the difference
  between the exercise price of the underlying awards and the quoted price of the
  Companys common stock for the options that were in-the-money at August 31,
  2010.

During the year ended August 31, 2010, total stock-based
  compensation expense related to employees of $41,008 and
  stock-based-compensation expense related to consultants of $6,962 are reported
  in the statement of operations as follows:

|                               |  | 2010   |  |  | 2009   | 
|------------------------------ |  | ------ |  |  | ------ | 
|                               |  | $      |  |  | $      | 
|Stock-based compensation       |  |        |  |  |        | 
|General and administrative     |  | 14,238 |  |  | 25,994 | 
|Sales and marketing            |  | 17,536 |  |  | 28,110 | 
|Research and development       |  | 16,196 |  |  | 30,566 | 
|Total stock-based compensation |  | 47,970 |  |  | 84,670 | 

Valuation Assumptions

The fair value of each option award is estimated on the date of
  grant using the Black-Scholes option-pricing model based on the following
  assumptions:

|                                       |  | 2010     |  |  | 2009        | 
|-------------------------------------- |  | -------- |  |  | ----------- | 
|                                       |  | $        |  |  | $           | 
|Expected term of stock options (years) |  | 0.55-2.5 |  |  | 0.5-2.5     | 
|Expected volatility                    |  | 76%-86%  |  |  | 88%-99%     | 
|Risk-free interest rate                |  | 0.2%-1%  |  |  | 0.11%-2.17% | 
|Dividend yields                        |  |         |  |  |            | 

Expected volatilities are based on historical volatility of the
  Companys stock. The Company uses historical data to estimate option exercise
  and employee termination within the valuation model. The expected term of
  options granted represents the period of time that options granted are expected
  to be outstanding. The risk-free rate for periods within the contractual life of
  the options is based on US Treasury bill rates in effect at the time of grant.

14

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

4. STOCKHOLDERS EQUITY (contd.)

During the year ended August 31, 2010, 100,000 options were
  granted. The options are exercisable at $0.50 per share for 5 years. Vesting
  term is between vested on the grant date and vesting over 24 months. During the
  year ended August 31, 2010, 150,000 options were extended to five more years.
  The weighted-average grant-date fair value of options granted and extended during the year ended August 31, 2010 were $0.21 and $0.19,
  respectively (August 31, 2009 - $0.05 and $Nil). As a result of the extension of
  the life of the 150,000 options, the Company recorded an incremental value of
  $28,376 as part of the total stock-based compensation of $47,970 on the
  statements of operations during the year ended August 31, 2010.

During the year ended August 31, 2010, 150,000 options at a
  weighted average exercise price of $0.25 were repurchased by the Company for a
  consideration of $30,000.

As of August 31, 2010 there was $8,880 of unrecognized
  stock-based compensation cost related to employee stock options granted under
  the plans, which is expected to be fully recognized over the next 19 months.

15

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

4. STOCKHOLDERS EQUITY (contd.)

[d] Warrants

As at August 31, 2010, the Company has the following common stock
  warrants outstanding:

|               |  | Number of Common |    |  | Exercise Price |  |  |                   | 
|-------------- |  | ---------------- | -- |  | -------------- |  |  | ----------------- | 
|               |  | Shares Issuable  |    |  | $              |  |  | Date of Expiry    | 
|               |  |                  |    |  |                |  |  |                   | 
|$0.22 Warrants |  | 350,000          |    |  | 0.22           |  |  | August 25, 2012   | 
|$0.40 Warrants |  | 361,000          |    |  | 0.40           |  |  | February 28, 2012 | 
|$0.50 Warrants |  | 5,800,000        | *  |  | 0.50           |  |  | February 28, 2012 | 
|$0.60 Warrants |  | 235,250          | ** |  | 0.60           |  |  | May 31, 2011      | 
|$0.70 Warrants |  | 500,000          |    |  | 0.70           |  |  | April 9, 2012     | 
|               |  | 7,246,250        |    |  |                |  |  |                   | 

*5,400,000 of the $0.50 warrants have a forced conversion
  feature by which the Company can demand exercise of the share purchase warrants
  if the common shares trades at a price equal to or greater than $1.25 if certain
  conditions are met.

**All of the $0.60 warrants have a forced conversion feature by
  which the Company can demand exercise of the share purchase warrants if the
  common shares trades at a price equal to or greater than $0.80 if certain
  conditions are met.

The intrinsic value for these warrants is $70,110 as at August
  31, 2010.

16

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

5. INCOME TAXES

The Company is subject to United States federal and state
  income taxes at an approximate rate of 34.00% and to Canadian federal and
  British Columbia provincial taxes in Canada at an approximate rate of 29.33% .
  The reconciliation of the provision (recovery) for income taxes at the United
  States federal statutory rate compared to the Companys income tax expense is as
  follows:

|                                                    |  | 2010       |   |  | 2009     |  
|--------------------------------------------------- |  | ---------- | - |  | -------- | -
|                                                    |  | $          |   |  | $        |  
|                                                    |  |            |   |  |          |  
|Tax at U.S. statutory rates                         |  | 275,000    |   |  | (55,000  | )
|                                                    |  |            |   |  |          |  
|Permanent differences                               |  | 18,000     |   |  | (29,000  | )
|Effect of lower foreign tax in Canada               |  | (32,000    | ) |  | 15,000   |  
|Other adjustments and change to valuation allowance |  | (1,139,000 | ) |  | (381,000 | )
|Provision
      (recovery) for income taxes         |  | (878,000   | ) |  | (450,000 | )

Deferred income taxes reflect the net tax effects of temporary
  differences between the carrying amounts of assets and liabilities for financial
  reporting purposes and the amounts used for income tax purposes. The Company has
  recognized a valuation allowance for those deferred tax assets for which
  realization is not more likely than not to occur.

Other adjustments and change to valuation allowance for the year ended August 31, 2010 includes $401,000 relating to the recognition of deferred tax assets as a result of adjustments to previously filed tax returns.

Significant components of the Companys deferred tax assets as
  of August 31 are as follows:

|                                     |  | 2010      |   |  | 2009       |  
|------------------------------------ |  | --------- | - |  | ---------- | -
|                                     |  | $         |   |  | $          |  
|                                     |  |           |   |  |            |  
|Deferred tax assets:                 |  |           |   |  |            |  
|Net operating loss carryforwards     |  | 1,218,000 |   |  | 1,954,000  |  
|Excess of book over tax depreciation |  | 687,000   |   |  | 82,000     |  
|Tax
      Credits carry forward      |  | 271,000   |   |  |           |  
|Total deferred tax asset             |  | 2,176,000 |   |  | 2,036,000  |  
|Valuation
      allowance            |  | (848,000  | ) |  | (1,586,000 | )
|Net deferred tax asset               |  | 1,328,000 |   |  | 450,000    |  
|Less: current
      portion          |  | 380,000   |   |  | 450,000    |  
|Non-current                          |  | 948,000   |   |  | -          |  

17

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

5. INCOME TAXES (contd.)

Net income (loss) by geographic region is as follows:

|              |  | 2010      |  |  | 2009    |  
|------------- |  | --------- |  |  | ------- | -
|              |  | $         |  |  | $       |  
|              |  |           |  |  |         |  
|United States |  | 463,091   |  |  | (37,578 | )
|Canada        |  | 1,222,982 |  |  | 648,409 |  
|              |  | 1,686,073 |  |  | 610,831 |  

If not utilized to reduce future taxable income, the Companys
  net operating loss carryforwards will expire as follows:

|                    |  | Canada |  |  | United States | 
|------------------- |  | ------ |  |  | ------------- | 
|                    |  | $      |  |  | $             | 
|2020 and thereafter |  | 32,514 |  |  | 3,556,227     | 
|                    |  | 32,514 |  |  | 3,556,227     | 

18

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

6. COMMITMENTS

The Company is committed to make payments under its capital
  leases for the remaining terms of the leases as follows:

|                                          |  | $       |  
|----------------------------------------- |  | ------- | -
|2011                                      |  | 11,831  |  
|2012                                      |  | 3,849   |  
|Total lease payments                      |  | 15,680  |  
|Less: Amounts
      representing interest |  | (1,176  | )
|Balance of obligation                     |  | 14,504  |  
|Less: Current
      portion               |  | (10,759 | )
|Long term portion                         |  | 3,745   |  

The Company entered into a sub-lease agreement for its new
  premises on September 15, 2010. It will commence on October 22 and will expire
  on October 30, 2013. The Company is committed to payments as followed:

|     |  | $       | 
|---- |  | ------- | 
|     |  |         | 
|2011 |  | 218,002 | 
|2012 |  | 218,311 | 
|2013 |  | 223,811 | 
|2014 |  | 37,454  | 

7. RELATED PARTY TRANSACTIONS

The Company entered into a sublease agreement with a Director
  effective January 1, 2009 on a month-to-month basis with a two month notice
  period. The term of the sublease calls for committed monthly payments of $1,434
  (CDN$1,500).

During the year ended August 31, 2010, the Company paid off the
  loan balance of $68,681 (CDN$75,000) due to the Companys Chief Financial
  Officer bearing interest at 7% per annum.

During the year ended August 31, 2010, the Company paid
  interest expense of $621 to related parties (2009: $99).

19

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

8. CONTINGENCIES

The Company is involved in three actions with a competitor in
  Canada (Yangaroo Inc. Yangaroo, formerly Musicrypt Inc.) regarding various
  patent claims as described below:

| | a) | On March 7, 2006, the Company filed a statement of claim
      in the Federal Court of Canada against Yangaroo (the Defendant) to
      assert that the Companys technology does not infringe on the stated
      patent owned by the Defendant and to further declare that Defendants
      patent is invalid. On June 7, 2006, the Companys counsel received a
      statement of defense and counterclaim from the Defendant, requesting
      specified damages or audited profits from the Play MPE® system sourced to
      Canada.                                                                                                                                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | b) | On May 3, 2007, the Company filed a claim in Ontario
      Superior Court against the Defendant (Yangaroo Inc.), and executives of
      the Defendant, Chief Executive Officer of the Defendant and Chief
      Financial Officer of the Defendant (collectively the Defendants) in the
      amount of $25,000,000 caused by the Defendants making statements
      constituting defamation and injurious falsehood, making false or
      misleading statements tending to discredit the business, making false or
      misleading representations contrary to the Competition Act of Canada, and
      unlawful interference with the Companys economic relations. On June 7,
      2007, the Defendant filed a statement of defense and counterclaim against
      the Company for the same amount and for the same causes.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | c) | On May 12, 2009, the Company was served with a complaint
      in the United States District Court for the Eastern District of Wisconsin
      by the Defendant (the Claimant) in the Canadian litigation above,
      alleging that the Company infringes on its recently issued one method
      claim in United States Patent No. 7,529,712. On September 18, 2009 the
      Company filed an Answer, which included a statement of its defenses. On
      June 7, 2010, based solely on the Companys first of five defenses, the
      District Court ruled in Destiny's favor to dismiss the claim in its
      entirety. This ruling is subject to appeal.                                                                                                                                                                 

The amount of damages awarded to the Company or the
  Defendants/Claimant, if any, cannot be reasonably estimated and no amount has
  been recognized in the financial statements. Management believes it is unlikely
  that the outcome of this matter will have an adverse impact on its result of
  operations and financial condition.

On August 12, 2009 the Company received a statement of claim in
  the Supreme Court of British Columbia from a former employee for wrongful
  dismissal and breach of contract after that employee relocated to Mexico and
  maintained he should keep his position. The claim is for approximately $170,000 ($180,000 CDN) plus an award of stock
  options and unspecified damages. The Company believes the claim is completely
  without merit and will defend its position. Management believes it is unlikely
  that the outcome of this matter will have an adverse impact on its result of
  operations and financial condition.

20

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

9. CONCENTRATIONS AND ECONOMIC DEPENDENCE

The Company operates solely in the digital media software
  segment and all revenue from its products and services are made in this segment.

Revenue from external customers, by product and location of
  customer, is as follows:

|                                                 |  | 2010      |  |  | 2009      | 
|------------------------------------------------ |  | --------- |  |  | --------- | 
|                                                 |  | $         |  |  | $         | 
|                                                 |  |           |  |  |           | 
|MPE®                                             |  |           |  |  |           | 
|                                                 |  |           |  |  |           | 
|North America                                    |  | 2,117,650 |  |  | 1,717,323 | 
|Europe                                           |  | 1,204,920 |  |  | 418,309   | 
|Australasia                                      |  | 187,733   |  |  | 121,836   | 
|Total MPE® Revenue                               |  | 3,510,303 |  |  | 2,257,468 | 
|                                                 |  |           |  |  |           | 
|Clipstream ® & Radio Destiny                     |  |           |  |  |           | 
|                                                 |  |           |  |  |           | 
|North America                                    |  | 261,079   |  |  | 298,921   | 
|Outside of North America                         |  |          |  |  | 4,058     | 
|Total Clipstream
      ® & Radio Destiny Revenue |  | 261,079   |  |  | 302,979   | 
|                                                 |  |           |  |  |           | 
|Total Revenue                                    |  | 3,771,382 |  |  | 2,560,447 | 

During the year ended August 31, 2010, three customers
  represented 61% of the total revenue balance [2009 - two customers represented
  44%].

As at August 31, 2010, three customers represented $333,312 (61%)
  of the trade receivables balance [2009  three customers represented 59%].

The Company has substantially all its assets in Canada and its
  current and planned future operations are, and will be, located in Canada.

21

---

|Destiny Media Technologies Inc.           
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|August 31, 2010 and 2009                  

10. SUBSEQUENT EVENTS

On July 6, 2010, the board of directors authorized a second
  tranche to repurchase up to 1,500,000 shares of the Company's common stock at a
  maximum share purchase price of $0.80 per share. As at November 24, 2010 and
  subsequent to August 31, 2010, the Company has purchased 587,250 shares at an
  average price of $0.43. Future repurchases will be at times and in amounts as
  the company deems appropriate and will be made through open market transactions.
  All repurchases will be made in compliance with the Securities and Exchange
  Commission's Rule 10b-18, subject to market conditions, applicable legal
  requirements and other factors. The board approved stock repurchase program runs
  through June 30, 2011. In addition to the applicable securities laws, the
  company will not make any purchases during a time at which its insiders are
  subject to a blackout from trading in the company's common stock.

Subsequent to August 31, 2010, the Company received approval
  from the TSX Venture Exchange for the listing of its common stock under the
  symbol "DSY". PI Financial Corp. acted as a sponsor in connection with the
  listing. The trading is commenced on October 12, 2010.

22

---

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------------

Effective December 21, 2009, we dismissed Manning Elliott LLP,
Chartered Accountant (Manning Elliott) as our independent registered public
accountant and we retained the accounting firm of BDO Canada LLP, Chartered
Accountants (BDO) as our new independent registered public accountant. The
decision to dismiss Manning Elliott and to appoint BDO was approved by The
Companys Audit Committee and Board of Directors.

Manning Elliott's reports in our audited financial statements
contained in our annual reports on Form 10-K for the fiscal years ended August
31, 2009 and 2010 did not contain any adverse opinions or disclaimers of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.

During the two most recent fiscal years and the subsequent
interim period, there were no disagreements with Manning Elliott, on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to Manning Elliott 's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its reports on our financial statements.
During the two most recent fiscal years, and in the subsequent interim periods
through the date of dismissal of Manning Elliott, there were no reportable
events (as described in Item 304(a)(1)(v) of Regulation S-K) with Manning
Elliott.

On December 21, 2009, we retained BDO as our independent
accountant. During the two most recent fiscal years and the subsequent interim
periods through the date of appointment, we have not consulted with BDO
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements, nor has BDO provided to us a
written report or oral advice that BDO concluded was an important factor
considered by us in reaching a decision as to any accounting, auditing or
financial reporting issue. In addition, during such periods, we have not
consulted with BDO regarding any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) and
the related instructions) or a reportable event (as described in Item
304(a)(1)(v) of Regulation S-K).

30

---

ITEM 9A.        CONTROLS
AND PROCEDURES

Disclosure Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of
the Company are responsible for evaluating the effectiveness of the Companys
disclosure controls and procedures and have concluded, based on our evaluation,
that they are effective as at August 31, 2010 to ensure that information
required to be disclosed in reports filed or submitted under Canadian and United
States securities legislation is recorded, processed, summarized and reported
within the same period specified in those rules and regulations. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Act is accumulated and communicated
to the issuer's management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.

Internal Controls Over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer of
the Company are responsible for designing internal controls over financial
reporting, or causing them to be designed under their supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

Using the framework provided by the Committee of Sponsoring
Organizations (COSO), the Company conducted an evaluation of the effectiveness
of the internal controls over financial reporting as at August 31, 2010 and
concluded that there are material weaknesses in internal controls over financial
reporting, which are as follows:

- Due to the limited number of staff resources, the Company believes there
  are instances where a lack of segregation of duties exist to provide effective
  controls;
- Our audit committee does not have a financial expert and is not
  independent; and
- Due to the limited number of staff resources, the Company may not have the
  necessary in- house knowledge to address complex accounting and tax issues
  that may arise.

As a result of these weaknesses, the Companys internal
controls over financial reporting are not effective. The weaknesses and their
related risks are not uncommon in a company the size of Destiny Media because of
limitations in size and number of staff. The Company believes it has taken
initial steps to mitigate these risks by consulting outside advisors and
involving the Audit Committee and Board of Directors in reviews and
consultations where necessary. However, these weaknesses in internal controls
over financial reporting could result in a more than remote likelihood that a
material misstatement would not be prevented or detected. The Company believes
that it must take additional steps to further mitigate these risks by consulting
outside advisors on a more regular and timely basis.

This annual report does not include an attestation report of
the Companys independent registered public accounting firm regarding internal
control over financial reporting. Managements report was not subject to
attestation by the Companys independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
managements report in this annual report.

Changes in Internal Control Over Financial Reporting

During the period covered by this annual report, there have
been no changes in the Companys internal controls over financial reporting that
occurred that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting.

ITEM 9B.        OTHER
INFORMATION

None.

31

---

PART III

ITEM 10.       
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following table sets forth the names, positions and ages of
our executive officers and directors. All our directors serve until the next
annual meeting of shareholders or until their successors are elected and
qualify. The Board of Directors elects officers and their terms of office are,
except to the extent governed by employment contract, at the discretion of the
Board of Directors.

Name
      Position Held with the Company
      Age
      Date First Elected or AppointedSteven Vestergaard(1)
    Chief Executive Officer and Director
    44
    January 1999Frederick Vandenberg
    Chief Financial Officer and Corporate
      Secretary
    42
    July 2007Edward Kolic(1)
    Director
    49
    February 1999Lawrence J. Langs
    Director
    49
    November 2000Yoshitaro Kumagai
    Director
    64
    August 2001Wayne Koshman(1)
    Director
    48
    May 2002


(1) Members of our Audit Committee

Set forth below is a brief description of the background and
business experience of each of our executive officers and directors for the past
five years:

Steven Vestergaard. Mr. Vestergaard has been our
President, Chief Executive Officer, Chairman and a Director since 1999. Mr.
Vestergaard's responsibilities include strategic planning and coordinating
strategic planning, marketing and product development. Mr. Vestergaard obtained
a B.Sc. from the University of British Columbia in 1989. He founded Tronic
Software in 1981 and Destiny Software in 1991, both as video game development
companies. In 1995, Destiny changed its focus to internet technologies, going
public in 1999 with streaming video and media security technology.

Fred Vandenberg, B. Comm. MBA, CA. Mr. Vandenberg has
been our Chief Financial Officer and Corporate Secretary since July 2007. Mr.
Vandenberg's core responsibilities include leading the accounting, treasury,
strategic planning, financial controls and financial reporting functions of the
Company. Mr. Vandenberg has over 17 years of public accounting experience in tax
advisory services, mergers and acquisitions, and financial reporting. Mr.
Vandenberg completed the Canadian Institute of Chartered Accountant's "In-depth"
taxation program while with Ernst & Young in 1998. Mr. Vandenberg obtained a
Bachelor of Commerce from McMaster University in 1991 and a Master of Business
Administration (Finance) from McMaster University in 1993. In 1996, Mr.
Vandenberg was designated as a Chartered Accountant in Ontario.

Edward Kolic. Mr. Kolic has been a director of the
Company since February 1999. Previously, Mr. Kolic acted as our Chief Operating
Officer from February 1999 to October 2001 during which time he was responsible
for the Companys overall product strategy and development of its core
technologies. Mr. Kolic was the president of WonderFall Productions Inc., a
computer game development company founded by Mr. Kolic, which Destiny purchased
in June 1999. Prior to founding Wonderfall Productions, he was as a principal
partner and vice-president of marketing for Jacqueline Conoir Designs. From 1988
until 1995, Mr. Kolic was partner and president of Target Canada Production
Ltd., a company engaged in the production of documentary television, educational
and information programming for the Canadian Educational Television Networks,
large screen interactive presentation media and a range of communication
programs for corporate, government and institutional clients. Mr. Kolic is
currently the founder of Eighth Avenue Development group, which undertakes
development projects in the luxury home market, multi-family residential and
land development.

Lawrence J. Langs.Mr. Langs has been a director of the
Company since August 2000. Currently, Mr. Langs is an attorney at Feldman LLP
and practices in the areas of intellectual property, entertainment and corporate
law. Since January 1991, Mr. Langs has also served as managing director of
iBusiness Partners, a private company primarily engaged in providing venture
capital advice for small to mid sized digital companies. Previously, Mr. Langs
served EVP of Sale & Business Development at ACD Systems International Inc.,
a company formerly listed on the TSX, from July 2004 to April 2005. Mr. Langs
has also served as an officer of a number of private entities, including as EVP
at Musician.com for Guitar Center, SVP of business development at MP3.com, VP of business
development for Sybase New Media, Investment Banker for JPMorgan/Chase/Chemical
Bank in New York, and Senior Consultant for Arthur D. Little in Boston. Mr.
Langs obtained a Master of Science from MIT in 1986 and a Juris Doctorate of Law
from Boston University in 1986. Mr. Langs has been a member of the New York bar
since 1989.

32

---

Yoshitaro Kumagai. Since 1981, Mr. Kumagai has held
positions with Singer, the Imaging Division of Mead Corporation, and IDEC
Corporation, where he was responsible for Japanese and US sales and operations.
Subsequently, he served as President of DPA Technology and as Chairman and CEO
of Vivitar Corporation, a major distributor of various camera and computer
peripheral devices. Mr. Kumagai currently serves as SVP/Business Development for
GestureTek, a company proving camera-enabled gesture-recognition software for
presentation and entertainment systems. Mr. Kumagai holds a BS in Mechanical
Engineering from Hosei University and a BS in Information Systems and
Mathematics from Georgia State University.

Wayne Koshman. Mr. Koshman has over 15 years of
international business development experience in China, Japan and Central Asia.
Mr. Koshman has been the executive vice president of Voyageur Oil and Gas Corp.,
a private company engaged in the acquisition and development of oil and gas
properties, since April 2006. In December 2003, Mr. Koshman was a director of
Dynasty Gold Inc., a company listed on the TSX and engaged in the exploration
and development of various mineral projects, a position which he held until
December 2005. From December 2002 to December 2005, Mr. Koshman was the
principal of Koshman International Holdings, a private consulting firm engaged
in mining and exploration in China. In addition, Mr. Koshman acted as Chief
Executive Officer of Terrawest Resource Holdings Inc. from December 2003 to
December 2005. Mr. Koshman obtained a Bachelor of Commerce degree from
University of Calgary in May 1988.

ELECTION OF DIRECTORS AND OFFICERS

Our directors are elected by our shareholders at our annual
general meetings. Each director holds office until our next annual general
meeting or until the director resigns or is removed in accordance with our
bylaws. We do not have a classified Board of Directors.

Our officers serve at the discretion of our Board of Directors.

AUDIT COMMITTEE

Our audit committee consists of Mr. Steven Vestergaard, our
Chief Executive Officer, Mr. Edward Kolic, and Mr. Wayne Koshman, two of which
are independent. Our board of directors has determined that it does not have an
audit committee member that qualifies as an audit committee financial expert
as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit
committee members are collectively capable of analyzing and evaluating our
financial statements and understanding internal controls and procedures for
financial reporting. In addition, we believe that retaining an independent
director who would qualify as an audit committee financial expert would be
overly costly and burdensome and is not warranted in our circumstances.

FAMILY RELATIONSHIPS

There are no family relationships among our officers and
directors.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Exchange Act requires our executive
officers and directors, and persons who beneficially own more than ten percent
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and greater
than ten percent shareholders are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file. Based on its review of the copies
of such forms received by us, we believe that during the fiscal year ended
August 31, 2010 all such filing requirements applicable to our officers and
directors were complied with.

33

---

CODE OF ETHICS

The Companys code of ethics is available on our website at
http://www.dsny.com/investor/

ITEM 11.        EXECUTIVE
  COMPENSATION

The particulars of compensation paid to the following
persons:

(a) our principal executive officer;

(b) each of our two most highly
compensated executive officers who were serving as executive officers at the end
of the year ended August 31, 2010; and

(c) up to two additional individuals
for whom disclosure would have been provided under (b) but for the fact that the
individual was not serving as our executive officer at the end of the year ended
August 31, 2010,

who we will collectively refer to as our named executive
officers, of our company for the years ended August 31, 2010 and 2009, are set
out in the following summary compensation table, except that no disclosure is
provided for any named executive officer, other than our principal executive
officer, whose total compensation does not exceed $100,000 for the respective
fiscal year:

Name and Principal
      Position
    Year
    Salary ($)
    Bonus ($)
    Stock Awards
      ($)
    Option Awards
      ($)(1)
    Other Annual
      Compen- sation ($)(2)
    Total ($)Steven Vestergaard (3)President, Chief Executive Officer and Director
    2010 2009
    148,211 131,587
    Nil Nil
    Nil Nil
    Nil Nil
    Nil Nil
    148,211 131,587Frederick Vandenberg (4)Chief
      Financial Officer, Treasurer and Secretary
    2010 2009
    119,525 106,118
    Nil Nil
    Nil Nil
    Nil 19,460
    Nil Nil
    119,525 125,578


|(1) | For a description of the methodology and assumptions used
      in valuing the option awards granted to our named executive officers and
      directors during the year ended August 31, 2010, please review Note 4 to
      the financial statements included herein.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The value of perquisites and other personal benefits,
      securities and property for the individuals included in the summary
      compensation table that does not exceed $10,000 is not reported
    herein.                                                      
|(3) | All salaries paid to Mr. Vestergaard are paid in Canadian
      dollars.                                                                                                                                                                                               
|(4) | All salaries paid to Mr. Vandenberg are paid in Canadian
      dollars.                                                                                                                                                                                                
|(5) | Compensation is stated in United States dollars and is
      based on an exchange rate of $0.9562 US dollars for each $1.00 Canadian
      dollar.                                                                                                                     

EMPLOYMENT AGREEMENT WITH OUR NAMED EXECUTIVE OFFICERS

We are not party to any written employment agreement or change
in control arrangements with Mr. Vestergaard. We do not have any agreements with
Mr. Vestergaard regarding the payments of bonus or other performance incentives.
Mr. Vestergaard is eligible to receive stock options as and when approved by our
Board of Directors.

We are not party to any written employment agreement or change
in control arrangements with Mr. Vandenberg. We do not have any agreements with
Mr. Vandenberg regarding the payments of bonus or other performance incentives.
Mr. Vandenberg is eligible to receive stock options as and when approved by our
Board of Directors.

34

---

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table summarizes equity awards granted to our
named executive officers that were outstanding as of August 31, 2010.

Option Awards
      Stock AwardsName
      Number of 
        Securities 
        Underlying 
        Exercisable 
        Options 
        (#)
      Number of 
        Securities 
        Underlying 
        Unexercisable 
        Options 
        (#)
      Equity 
        Incentive 
        Plan 
        Awards: 
        Number of 
        Securities 
        Underlying 
        Unexercised 
        Unearned 
        Options 
        (#)
      Option 
        Exercise 
        Price 
        ($)
      Option 
        Expiration 
        Date
      Number 
        of 
        Shares 
        of 
        Units of 
        Stock 
        that have 
        not 
        Vested 
        (#)
      Market 
        Value of 
        Shares or 
        Units of 
        Stock that 
        have not 
        Vested 
        ($)
      Equity  Incentive 
        Plan 
        Awards: 
        Number 
        of 
        Unearned 
        Shares, 
        Units or 
        Other 
        Rights 
        that have 
        not 
        Vested 
        (#)
      Equity  Incentive 
        Plan 
        Awards: 
        Market or 
        Payout 
        Value of 
        Unearned 
        Shares, 
        Units or 
        Other 
        Rights that 
        have not 
        Vested 
        ($)Steven Vestergaard
      300,000
      0
      N/A
      0.50
      Jan 29/2012
      N/A
      N/A
      N/A
      N/AFrederick 
        Vandenberg
      150,000 
        150,000 
        150,000
      0 
        0 
        0
      N/A
      0.50 
        0.50 
        0.25
      Jan 31/2015 
        Jan 29/2012 
        Jun 02/2014
      N/A
      N/A
      N/A
      N/A


LONG-TERM INCENTIVE PLANS

We do not have any long-term incentive plans other than the
registered stock option plans.

COMPENSATION OF DIRECTORS

Our directors are reimbursed for reasonable out-of-pocket
expenses in connection with attendance at Board of Director and committee
meetings. In addition, our directors are eligible for grants of options to
purchase shares of our common stock at the discretion of our Board of
Directors.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------------

The following table sets forth certain information concerning
the number of shares of our common stock owned beneficially as of November 24,
2010 by: (i) each person (including any group) known to us to own more than five
percent (5%) of any class of our voting securities, (ii) each of our directors
and each of our named executive officers, and (iii) officers and directors as a
group. Unless otherwise indicated, the shareholders listed possess sole voting
and investment power with respect to the shares shown.

35

---

Title of class
      Name and address 
        of beneficial owner
      Number of Shares of 
        Common Stock
      Percentage of Common 
        Stock(1)DIRECTORS AND OFFICERS:Common Stock
      Steven Vestergaard 
        President, Chief Executive Officer 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      11,136,355(7)
      18.2%Common Stock
      Frederick Vandenberg 
        Chief Financial Officer and 
        Corporate Secretary 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      895,000(2)
      1.5%Common Stock
      Edward Kolic 
        Director 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      461,300 (3)
      0.8%Common Stock
      Lawrence J. Langs 
        Director 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      300,000 (4)
      0.5%Common Stock
      Yoshitaro Kumagai 
        Director 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      544,200 (5)
      0.9%Common Stock
      Wayne Koshman 
        Director 
        c/o 800-570 Granville St. 
        Vancouver, BC, V6C 3P1
      150,000 (6)
      0.2%Common Stock
      All Officers and Directors as a 
        Group (6 persons)
      13,486,855
      22.1%5% SHAREHOLDERSCommon Stock
      Sabre Value Fund LP
      4,510,300(8)
      7.3%Common Stock
      Proximity Capital LLC
      3,811,775(9)
      6.2%


|(1) | Under Rule 13d-3 of the Securities Exchange Act of 1934,
      a beneficial owner of a security includes any person who, directly or
      indirectly, through any contract, arrangement, understanding,
      relationship, or otherwise has or shares: (i) voting power, which includes
      the power to vote, or to direct the voting of shares; and (ii) investment
      power, which includes the power to dispose or direct the disposition of
      shares. Certain shares may be deemed to be beneficially owned by more than
      one person (if, for example, persons share the power to vote or the power
      to dispose of the shares). In addition, shares are deemed to be
      beneficially owned by a person if the person has the right to acquire the
      shares (for example, upon exercise of an option) within 60 days of the
      date as of which the information is provided. In computing the percentage
      ownership of any person, the amount of shares outstanding is deemed to
      include the amount of shares beneficially owned by such person (and only
      such person) by reason of these acquisition rights. As a result, the
      percentage of outstanding shares of any person as shown in this table does
      not necessarily reflect the persons actual ownership or voting power with
      respect to the number of shares of common stock actually outstanding on
      November 24, 2010. As of November 24, 2010, there were 50,628,347 shares
      of our common stock issued and outstanding.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

|(2) | Consists of 407,500 shares held by Mr. Vandenberg and
      450,000 shares that are immediately acquirable upon the exercise of stock
      options held by Mr. Vandenberg within 60 days of November 24, 2010 and
      37,500 shares that are immediately acquirable upon the exercise of
      warrants held by Mr. Vandenberg within 60 days of November 24,
  2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(3) | Consists of 161,300 shares held by Mr. Kolic and 300,000
      shares that are immediately acquirable upon the exercise of stock options
      held by Mr. Kolic within within 60 days of November 24, 2010.                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(4) | Consists of 300,000 shares that are immediately
      acquirable upon the exercise of stock options held by Mr. Langs within 60
      days of November 24, 2010.                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(5) | Consists of 244,200 shares held by Mr. Kumagai and
      300,000 shares that are immediately acquirable upon the exercise of stock
      options held by Mr. Kumagai within 60 days of November 24, 2010.                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(6) | Consists of 150,000 shares that are immediately
      acquirable upon the exercise of stock options held by Mr. Koshman within
      60 days of November 24, 2010.                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(7) | Consists of 10,836,355 shares held by Mr. Vestergaard and
      300,000 shares that are immediately acquirable upon the exercise of stock
      options held by Mr. Vestergaard within 60 days of November 24,
  2010.                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(8) | Consists of 3,010,300 shares and 1,500,000 shares that
      are immediately acquirable upon the exercise of warrants within 60 days of
      November 24, 2010.                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                         
|(9) | Consists of 2,311,775 shares and 1,500,000 shares that
      are immediately acquirable upon the exercise of warrants within 60 days of
      November 24, 2010.                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                         

EQUITY COMPENSATION PLAN INFORMATION

We have two equity compensation plans, namely our Amended 1999
Stock Option Plan and our Amended 2006 Stock Option Plan, under which up to
3,750,000 and 5,100,000 shares of our common stock, respectively, have been
authorized for issuance to our officers, directors, employees and consultants.
Our plans have been approved by the Companys stockholders. The following
summary information is presented for our plans on an aggregate basis as of
August 31, 2010.

Number of Securities to be
      Issued Upon Exercise of Outstanding Options, Warrants and
      Rights
    Weighted-Average Exercise
      Price of Outstanding Options, Warrants and Rights
    Number of Securities Remaining Available
      for Future Issuance Under Equity Compensation Plans (Excluding
      Securities Reflected in column (a))Plan Category
    (a)
    (b)
    (c)Equity Compensation Plans Approved By Security
      Holders
    3,225,000 Shares of Common Stock
    $0.47 per Share
    1,066,334 Shares of Common StockEquity Compensation Plans Not Approved By Security
      Holders
    Not Applicable
    Not Applicable
    Not Applicable


37

---

ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


Except as described under Item 12 and under the title of
executive compensation, and under note 5 of the financial statements, none of
the following persons has any direct or indirect material interest in any
transaction to which we were or are a party during the past two years, or in any
proposed transaction to which the Company proposes to be a party:

|(A) | any director or officer;                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                       
|(B) | any proposed nominee for election as a
director;                                                                                                                                                      
|    |                                                                                                                                                                                                       
|(C) | any person who beneficially owns, directly or indirectly,
      shares carrying more than 5% of the voting rights attached to our common
      stock; or                                              
|    |                                                                                                                                                                                                       
|(D) | any relative or spouse of any of the foregoing persons,
      or any relative of such spouse, who has the same house as such person or
      who is a director or officer of any parent or
subsidiary.

SHARE ISSUANCES

None

ITEM 14.        PRINCIPAL
  ACCOUNTANT FEES AND SERVICES

Audit Fees

Our former independent registered public accounting firm
Manning Elliott LLP and our current sole principle independent registered public
accountant BDO Canada LLP, provided audit and other services during the year
ended August 31, 2010 as follows:

BDO Canada LLP

2010
    
    
    2009Audit Fees
    $
    87,794
    
    
    -Audit Related Fees
    
    -
    
    
    -Tax Fees
    
    2,773
    
    
    -All Other Fees
    
    -
    
    
    -Total Fees
    $
    90,567
    
    
    -


Manning Elliott LLP

2010
    
    
    2009Audit Fees
    
    -
    
    $
    36,505Audit Related Fees
    
    -
    
    
    -Tax Fees
    
    -
    
    
    -All Other Fees
    
    -
    
    
    -Total Fees
    
    -
    
    $
    36,505


38

---

Audit Fees. This category includes the fees for the
audit of our consolidated financial statements and the quarterly reviews of
interim financial statements. This category also includes advice on audit and
accounting matters that arose during or as a result of the audit or the review
of interim financial statements and services in connection with SEC filings.

Audit Related Fees. There were no audited related fees
  paid to BDO Canada LLP and Manning Elliott LLP.

Tax Fees. This category includes the fees for
professional services rendered for tax compliance, tax advice and tax planning.
There were no tax fees paid to Manning Elliott LLP.

All Other Fees. There were no other fees paid to BDO
Canada LLP and Manning Elliott LLP.

Effective May 6, 2003, the Securities and Exchange Commission
adopted rules that require that before BDO Canada LLP is engaged by the Company
or its subsidiaries to render any auditing or permitted non-audit related
service, the engagement be:

- approved by the Company's audit committee; or
  -
  entered into pursuant to pre-approval policies and procedures established by the
  audit committee, provided the policies and procedures are detailed as to the
  particular service, the audit committee is informed of each service, and such
  policies and procedures do not include delegation of the audit committee's
responsibilities to management.

The audit committee requires advance approval of all audit,
audit-related, tax, and other services performed by the independent auditor.
Unless the specific service has been previously pre-approved with respect to
that year, the audit committee must approve the permitted service before the
independent auditor is engaged to perform it. The audit committee has delegated
to the chair of the audit committee authority to approve permitted services
provided that the chair reports any decisions to the committee at its next
scheduled meeting.

The audit committee has considered the nature and amount of the
fees billed by BDO Canada LLP and Manning Elliott LLP, and believes that the
provision of the services for activities unrelated to the audit is compatible
with maintaining BDO Canada LLP's and Manning Elliott LLPs independence.

PART IV

ITEM 15.        EXHIBITS,
FINANCIAL STATEMENT SCHEDULES

LIST OF DOCUMENTS FILED AS PART OF THE REPORT

The following documents are filed as part of this report:

(a)(1)    Financial Statements:

| | 1. | Report of Independent Registered Public Accounting Firm 
      BDO Canada LLP;        
| | -- | ---------------------------------------------------------------------------------------
| |    |                                                                                        
| |    | 2.     Report of Independent Registered Public Accounting Firm 
  Manning Elliott LLP;
| |    |                                                                                        
| | 3. | Consolidated Balance Sheets;                                                           
| |    |                                                                                        
| | 4. | Consolidated Statements of Operations and Comprehensive
      Loss;                    
| |    |                                                                                        
| | 5. | Consolidated Statements of Cash Flows;                                                 
| |    |                                                                                        
| | 6. | Consolidated Statement of Changes in Stockholders
      Equity; and                   
| |    |                                                                                        
| | 7. | Notes to the Consolidated Financial
  Statements.                                      

(a)(2)    Financial Statement Schedules:

None.

39

---

(a)(3) Exhibits:

| | 3.1  | Amended Articles Of Incorporation (incorporated
        by reference from our Registration statement on Form 10SB12G filed on
        November 23, 1999).                                                                                                            
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                      
| | 3.2  | Bylaws (incorporated by reference from
        our Registration Statement on Form 10SB12G filed on November 23, 1999)                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                      
| | 4.1  | 1999 Stock Option Plan (Incorporated
        by reference from our Registration Statement on Form S-8 filed on November
        17, 2000).                                                                                                                           
| |      |                                                                                                                                                                                                                                                                      
| | 4.2  | Amended 1999 Stock Option Plan (Incorporated
        by reference from our Registration Statement on Form S-8 filed on April
        27, 2004).                                                                                                                      
| |      |                                                                                                                                                                                                                                                                      
| | 4.3  | 2006 Stock Option Plan (Incorporated
        by reference from our Registration Statement on Form S-8 filed on April
        26, 2006)                                                                                                                               
| |      |                                                                                                                                                                                                                                                                      
| | 4.4  | 2006 Amended And Restated Stock Option
        Plan (Incorporated by reference from our Registration Statement on Form
        S-8 filed on May 18, 2007)                                                                                                            
| |      |                                                                                                                                                                                                                                                                      
| | 10.1 | Stock Purchase Agreement among Steve
        Vestergaard And Euro Industries Ltd. And Destiny Software Productions
        Inc. dated on June 15, 1999(incorporated by reference from our Registration
        Statement on Form 10SB12G filed on November 23, 1999).
| |      |                                                                                                                                                                                                                                                                      
| | 10.2 | Consulting Agreement dated August 26,
        2002 between Destiny Media Technologies Inc. and Charles Van Musscher
        (Incorporated by reference from our Registration Statement on Form S-8
        filed on September 27, 2002).                             
| |      |                                                                                                                                                                                                                                                                      
| | 10.3 | Rule 506 Subscription Agreement dated
        February 24, 2006 between Destiny Media Technologies Inc. and Global Equity
        Trading & Finance Ltd. (Incorporated by reference from our Current
        Report on Form 8-K filed on March 3, 2006               
| |      |                                                                                                                                                                                                                                                                      
| | 10.4 | Rule 506 Subscription Agreement dated
        February 3, 2006 between Destiny Media Technologies Inc. and Global Equity
        Trading & Finance Ltd. (Incorporated by reference from our Current
        Report on Form 8-K filed on March 3, 2006)               
| |      |                                                                                                                                                                                                                                                                      
| | 10.5 | Unregistered Sales of Equity Securities
        with various investors dated on February 26, 2007 (Incorporated by reference
        from our Current Report on Form 8-K filed on March 1, 2007)                                                                     
| |      |                                                                                                                                                                                                                                                                      
| | 14.1 | Code of Ethics (Incorporated by reference
        from our Annual Report on Form 10-KSB filed on November 30, 2006)                                                                                                                                                  
| |      |                                                                                                                                                                                                                                                                      
| | 21.1 | Subsidiaries of Destiny Media Technologies
        Inc.
        Destiny Software Productions Inc. (incorporated
        in the Province of British Columbia, Canada) 
MPE Distribution, Inc. (incorporated in Nevada, United States)                                 
| |      |                                                                                                                                                                                                                                                                      
| | 23.1 | Consent of
        Independent Registered Public Accounting Firm - Manning Elliott LLP (filed
        herewith)                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                      
| | 23.2 | Consent of
        Independent Registered Public Accounting Firm - BDO CANADA LLP (filed
        herewith)                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                      
| | 31.1 | Section 302
        Certification of Chief Executive Officer (filed herewith)                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                      
| | 31.2 | Section 302
        Certification of Chief Financial Officer (filed herewith)                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                      
| | 32.1 | Section 906
        Certification of Chief Executive Officer (filed herewith)                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                      
| | 32.2 | Section 906
        Certification of Chief Financial Officer (filed herewith)                                                                                                                                                                                        

40

---

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

DESTINY MEDIA TECHNOLOGIES, INC.

|By: | /s/Steven Vestergaard                         | 
|--- | --------------------------------------------- | 
|    | Steven Vestergaard, President                 | 
|    | Chief Executive Officer                       | 
|    | Director                                      | 
|    | Date:        November 29,
      2010          | 
|    |                                               | 
|    | /s/Frederick Vandenberg                       | 
|    | Frederick Vandenberg, Chief Financial Officer | 
|    | Date:        November 29,
      2010          | 

In accordance with the Securities Exchange Act, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.



|By: | /s/Steven Vestergaard                                                | 
|--- | -------------------------------------------------------------------- | 
|    | Steven Vestergaard, President                                        | 
|    | Chief Executive Officer                                              | 
|    | (Principal Executive Officer)                                        | 
|    | Director                                                             | 
|    | Date:        November 29,
      2010                                 | 
|    |                                                                      | 
|By: | /s/Frederick Vandenberg                                              | 
|    | Frederick Vandenberg, Chief
      Financial Officer                  | 
|    | (Principal Financial Officer and
      Principal Accounting Officer) | 
|    | Date:        November 29,
      2010                                 | 
|    |                                                                      | 
|    |                                                                      | 
|By: | /s/Edward Kolic                                                      | 
|    | Edward Kolic                                                         | 
|    | Director                                                             | 
|    | Date:        November 29,
      2010                                 | 
|    |                                                                      | 
|    |                                                                      | 
|    |                                                                      | 
|By: | /s/Wayne Koshman                                                     | 
|    | Wayne Koshman                                                        | 
|    | Director                                                             | 
|    | Date:        November 29,
      2010                                 | 

41

---