U.S.
SECURITIES
AND EXCHANGE COMMISSION


Washington,
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: February 29, 2008







|__|
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number: 000-27225




DigitalTown,
Inc.


(Formerly BDC Capital,
Inc.)


(Name of
small business issuer in its charter)





Minnesota
            41-1427445(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)11974 Portland Avenue,
      Burnsville, Minnesota
            55337(Address
      of principal executive offices)
            (Zip
      Code)Registrant's
      telephone number: (952)
      890-2362





Securities
registered under Section 12(g) of the Exchange Act:





Title of Each
Class


Common
Stock


Par Value
$0.01 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


[  ]
Yes                                 [X]
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


[  ]
Yes                                 [X]
No





Check
whether the issuer (1) has 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.


[X]
Yes                                [  ]
No











Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |___|





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 “accelerated filer, large accelerated
filer, and smaller reporting company” in Rule 12b-2 of the Exchange
Act.   (check one):




Large Accelerated Filer [  ]
              
              Accelerated Filer [  ]Non-Accelerated Filer [  ]
              
              Smaller reporting company
[X]


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


[  ]
Yes                                [X]
No





The
aggregate value of the Company’s common stock held by non-affiliates of the
Company was approximately $ 22,782,541as of the last day of the Company’s most
recently completed fourth fiscal quarter, when the last reported sales price was
$ 2.30.





There
were 27,083,290 shares of the registrant’s common stock outstanding as of May
22, 2008.













DOCUMENTS
INCORPORATED BY REFERENCE





There are
incorporated by reference in this report on Form 10-K certain previously filed
exhibits identified in Part III, Item 13 hereof.
















ii


TABLE OF
CONTENTS







PART
      I
            1Item
      1.
            
            Business
            1Item
      1A.
            
            Risk
      Factors
            2Item
      2.
            
            Properties
            4Item
      3.
            
            Legal
      Proceedings
            4Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            4PART
      II
            5Item
      5.
            
            Market
      for the Registrant’s Common Equity and Related Stockholder Matters and
      Issuer Purchases of Equity Securities
            5Item
      6.
            
            Selected
      Financial Data
            6Item
      7.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            6Item
      7A.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            10Item
      8.
            
            Financial
      Statements and Supplementary Data
            10Item
      9.
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            10Item
      9A.
            
            Controls
      and Procedures
            11Item
      9B.
            
            Other
      Information
            13PART
      III
            14Item
      10.
            
            Directors
      and Executive Officers of the Registrant
            14Item
      11.
            
            Executive
      Compensation
            16Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            18Item
      13.
            
            Certain
      Relationships and Related Transactions
            18Item
      14.
            
            Principle
      Accountants and Fees and Services
            19PART
      IV
            21Item
      15.
            
            Exhibits,
      Financial Statement Schedules
            21SIGNATURES
            21








iii


PART
I





ITEM 1.
  BUSINESS





GENERAL





The
Company plans to form an Interactive Media Group Advisory Board made up of
proven industry leaders along with representation from the Company’s current
board.  The Interactive Media Group Advisory Board, once formed, will
actively seek a west coast management company to oversee the design and
development of its DigitalTown social-networking portal.  This portal,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news.  The Company owns the domains associated
with all of these communities.




The
Company was founded in 1982 under the laws of the State of Minnesota as Command
Small Computer Learning Center, Inc., a computer training company. Over a period
of years, the Company became involved in the sale of computer components and,
eventually, became a value added reseller (VAR) of major computer brands. In
1987, the Company changed its name to Command Electronics, Inc. In February
1995, the Company acquired CyberStar Computer Systems, a manufacturer and
marketer of microcomputers and servers, and in 1997 changed its name to
CyberStar Computer Corporation. In August 2000, the Company changed its name to
eNetpc, Inc. In December 2004, the Company elected to be regulated as a business
development company under the Investment Company Act of 1940 and changed its
name to BDC Capital Inc. On August 31, 2006, the Company filed with the SEC to
withdraw their “business development company” status. As part of that plan, the
Company changed its name to DigitalTown, Inc. on March 1,
2007.   The Company’s headquarters are located at 11974 Portland
Avenue, Burnsville, MN 55337, and its telephone and facsimile numbers are (952)
890-2362 and (952) 890-7451, respectively. The Company's Internet addresses are
www.bdccapital.com, www.bdcpartners.com and
www.digitaltown.com.   The company is traded in the over-the-
counter market under the ticker DGTW.







Current
Intellectual Property of DigitalTown, Inc.





PC
Related domains:  BuildtoOrderPc series, including Laptopcomputers.com and
Notebookcomputers.com.





GoSchools.com domains:Specializing
in High School domain names.














Page
1


EMPLOYEES





As of May
5, 2008, DigitalTown, Inc. has three employees.  The Company’s
employees are not represented by a union.  The Company considers its
relations with its employees to be outstanding.




ITEM
1A.  RISK FACTORS





We are
subject to various risks that may materially harm our business, financial
condition and results of operations.  You should carefully consider
the risks and uncertainties described below and the other information in this
filing before deciding to purchase our common stock.  If any of these
risks or uncertainties actually occurs, our business, financial condition or
operating results could be materially harmed.  In that case, the
trading price of our common stock could decline and you could lose all or part
of your investment.





RISKS
RELATED TO OUR BUSINESS





We
Have Historically Lost Money and Losses May Continue in the Future





We have
historically lost money.  The loss for the years ended February 29,
2008 and February 28, 2007 was $2,694,879 and $5,741,747 respectively and future
losses are likely to occur.  Our accumulated deficit at February 29,
2008 is $14,357,031. As of February 29, 2008, there exists positive working
capital of $11,549. We have negative cash flows from operations of
$803,252.Accordingly, we may
experience liquidity and cash flow problems if we are not able to collect on our
stock subscription receivables as needed or raise additional capital on
acceptable terms.  No assurances can be given that we will be
successful in reaching or maintaining profitable operations.  Our
current monthly cash operating expenses are approximately $73,000 per
month.  We believe our current cash reserves and amounts we expect to
collect on our outstanding stock subscription receivables should be sufficient
to enable us to operate for the next 12 months.





We
May Need to Raise Additional Capital to Finance Operations





Our
operations have relied almost entirely on external financing through collections
on outstanding subscription receivables to fund our operations.  Such
financing has historically come from a combination of borrowings and from the
sale of common stock.  We will need to raise additional capital to
fund our anticipated operating expenses and future development, design and
launching of portals for each school website.  We cannot assure you
that financing, whether from external sources or related parties, will be
available if needed or on favorable terms.  The sale of our common
stock to raise capital may cause dilution to our existing
stockholders.  Our inability to obtain adequate financing will result
in the need to curtail business operations.  Any of these events would
be materially harmful to our business and may result in a lower stock
price.





Page
2


Our
Common Stock May Be Affected By Limited Trading Volume and May Fluctuate
Significantly





There has
been a limited public market for our common stock and there can be no assurance
that an active trading market for our common stock will develop.  As a
result, this could adversely affect our stockholders' ability to sell our common
stock in short time periods, or possibly at all.  Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations that could adversely affect the market price of our common
stock without regard to our operating performance.  In addition, we
believe that factors such as quarterly fluctuations in our financial results and
changes in the overall economy or the condition of the financial markets could
cause the price of our common stock to fluctuate substantially.





Our
Common Stock is Traded on the "Over-the-Counter Bulletin Board," Which May Make
it More Difficult For Investors to Resell Their Shares Due to Suitability
Requirements





Our
common stock is currently traded on the Over the Counter Bulletin Board (OTCBB
Broker-dealers often decline to trade in OTCBB stocks given that the market for
such securities is often limited, the stocks are more volatile, and the risks to
investors are greater).  These factors may reduce the potential market
for our common stock by reducing the number of potential
investors.  This may make it more difficult for investors in our
common stock to sell shares to third parties or to otherwise dispose of
them.  This could cause our stock price to decline.  It is
the Company’s desire to have its common stock traded on a national
exchange.





We
Could Fail to Retain or Attract Key Personnel





Our
future success depends, in significant part, on the continued services of
Richard Pomije, our Chairman, President, Chief Executive Officer and
Secretary/Treasurer.  We cannot assure you that we would be able to
find an appropriate replacement for him or any other key
personnel.  Any loss or interruption of our key personnel's services
could adversely affect our ability to develop our business plan.  We
do not have an employment agreement with Mr. Pomije, nor do we presently
maintain key-man life insurance policies on him.





Minnesota
Law and Our Charter May Inhibit a Takeover of Our Company That Stockholders May
Consider Favorable





Provisions
of Minnesota law, such as its business combination statute, may have the effect
of delaying, deferring or preventing a change in control of our
Company.  As a result, these provisions could limit the price some
investors might be willing to pay in the future for shares of our common
stock.





Our
Officers and Directors Have the Ability to Exercise Significant Influence Over
Matters Submitted for Stockholder Approval and Their Interests May Differ From
Other Stockholders





Our
executive officers and directors, in the aggregate, will have the ability to
nominate two (2) members to the Board of Directors.  Accordingly, our
directors and executive officers, whether acting alone or together, may have
significant influence in determining the outcome of any corporate transaction or
other matter submitted to our Board for approval, including issuing common and
preferred stock, and appointing officers, which could have a material impact on
mergers, acquisitions, consolidations and the sale of all or substantially all
of our assets, and also the power to prevent or cause a change in
control.  The interests of these board members may differ from the
interests of the other stockholders.














Page
3


Our
Common Stock Price May be Volatile




The
trading price of our common stock may fluctuate substantially.  The
price of the common stock may be higher or lower than the price you pay for your
shares, depending on many factors, some of which are beyond our control and may
not be directly related to our operating performance.  These factors
include the following:




-
            Price
      and volume fluctuations in the overall stock market from time to
      time;


-
            Volatility
      resulting from trading in derivative securities related to our common
      stock including puts, calls, long-term equity anticipation securities, or
      Leaps, or short trading positions;


-
            Actual
      or anticipated changes in our earnings or fluctuations in our operating
      results or changes in the expectations of securities
    analysts;


-
            General
      economic conditions and trends;


-
            Loss
      of a major funding source; or


-
            Departures
      of key personnel





ITEM
2.  PROPERTIES





DigitalTown,
Inc. leases from a director of the Company approximately 2,650 square feet of
space used for offices and operations equipment storage at 11974 Portland
Avenue, Burnsville, Minnesota at a monthly rent of $2,650 for a five year term
which commenced on December 16, 2006.  The future rent obligations of
this lease as of February 29, 2008 totaled $120,575.





ITEM 3.
 LEGAL PROCEEDINGS





The
Company is exposed to asserted and unasserted claims encountered in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.




ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None


Page
4


PART
II





ITEM
5.  MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





DigitalTown,
Inc.’s common stock has been traded on the OTC Bulletin Board ("OTCBB") since
June 12, 1998. The following table sets forth the quarterly high and low sales
prices as reported during the last two fiscal years ended February 29, 2008 and
February 28, 2007.





Fiscal
      Year 2008
            
            Low
            
            
            HighFirst
      Quarter
            
            $
            1.70
            
            
            $
            3.05Second
      Quarter
            
            
            2.35
            
            
            
            5.35Third
      Quarter
            
            
            2.25
            
            
            
            3.50Fourth
      Quarter
            
            
            2.00
            
            
            
            3.50





Fiscal
      Year 2007
            
            Low
            
            
            HighFirst
      Quarter
            
            $
            1.18
            
            
            $
            2.53Second
      Quarter
            
            
            1.12
            
            
            
            2.25Third
      Quarter
            
            
            7.00
            
            
            
            1.50Fourth
      Quarter
            
            
            1.50
            
            
            
            2.70





These
quotations represent inter dealer prices, without retail markup, markdown, or
commission, and may not reflect actual transactions. Additionally, the per share
lows and highs included in this table have been retroactively restated to
reflect the reverse stock split of 75 to 1 on October 4, 2006.  As of
May 22, 2008, there were approximately 106 record holders of the Company's
common stock.





DIVIDEND
POLICY





The
Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future. Future dividend
policy will be determined by the Company's Board of Directors based upon the
Company's earnings, if any, its capital needs and other relevant
factors.




















Page
5


ITEM
6.  SELECTED FINANCIAL DATA





The
following table sets forth selected consolidated financial information for
DigitalTown, Inc. as of February 29, 2008 and February 28, 2007 and for the
years then ended, which have been derived from our audited consolidated
financial statements.







February
      29,
            
            
            February
      28,Balance Sheet
      Data
            
            2008
            
            
            2007Total
      Assets
            
            $
            746,620
            
            
            $
            453,069Total
      Liabilities
            
            
            126,140
            
            
            
            284,008Stockholders’
      Equity
            
            
            620,480
            
            
            
            169,061






Operating Statement
      Data
            
            For
      the year endedFebruary 29,2008
            
            
            For
      the year endedFebruary 28,2007Operating
      expenses
            
            $
            2,696,010
            
            
            $
            5,740,928Loss
      from operations
            
            
            (2,696,010
            )
            
            
            (5,740,928
            )Other
      income (expense), net
            
            
            1,131
            
            
            
            (819
            )Net
      loss
            
            $
            ( 2,694,879
            )
            
            $
            ( 5,741,747
            )Loss
      per common share-basic and diluted
            
            $
            (0.10
            )
            
            $
            (0.42
            )Weighted
      average shares outstanding-basic and diluted
            
            
            26,035,952
            
            
            
            13,537,116




The data
set forth below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our Consolidated
Financial Statements and related notes.





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





The
following is a discussion of the financial condition and results of operations
of the Company for the years ended February 29, 2008 and February 28, 2007,
which should be read in conjunction with, and is qualified in its entirety by,
the financial statements and notes thereto included elsewhere in this
report.











CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





This Form
10-K for the year ended February 29, 2008 contains forward-looking statements
within the meaning of Section 27A of Section 21E of the Securities Exchange Act
of 1934, as amended (“Exchange Act”).  Forward-looking statements may
be identified by the use of forward-looking terminology, such as “may,” “shall,”
“could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “should,”
“continue,” or similar terms, variations of those terms or the negative of those
terms.  The forward-looking statements specified in the following
information have been compiled by our management and are considered by
management to be reasonable.  Our future operating results, however,
are impossible to predict and no representation, guaranty, or warranty is to be
inferred from those forward-looking statements.





Page
6


Company
Overview





The
Company plans to form an Interactive Media Group Advisory Board made up of
proven industry leaders along with representation from the Company’s current
board.  The Interactive Media Group Advisory Board, once formed, will
actively seek a west coast management company to oversee the design and
development of its DigitalTown social-networking portal.  This portal,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news.  The Company owns the domains associated
with all of these communities.





Due to
extenuating circumstances, the Company has withdrawn its application, which was
applied for during the second quarter, for membership with the American Stock
Exchange.




RESULTS
OF OPERATIONS





YEARS
ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007





Selling,
general and administrative expenses for the year ended February 29, 2008
decreased by $3,044,918 to $2,696,010 and this was primarily due to a $3,372,762
reduction of stock option expense compared to the year ended February 28,
2007.  Excluding stock compensation expense for the two comparable
periods, selling, general, and administrative expenses were $895,199 for the
year ended February 29, 2008 compared to $567,355 for the year ended February
28, 2007.  The increase in selling, general, and administrative
expenses of $327,844 for the two comparable periods was primarily due to
increases in professional fees, payroll expense, investor relations expense and
occupancy expense.  The Company’s overall net loss for the year ended
February 29, 2008 decreased by $3,046,868 to $2,694,879 compared to the year
ended February 28, 2007.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company’s cash position at February 29, 2008 was $67,161, an increase of $58,228
from $8,933 at February 28, 2007.  During the year ended February 29,
2008, net cash used in operating activities was $803,252 which was primarily due
to losses from operations, an increase in other receivables and a decrease of
deferred officer compensation and accrued payroll, offset by intangible asset
impairment charge, stock based compensation expense and non-cash stock expense
along with an increase in accounts payable.  Net cash used in
investing activities for the year ended February 29, 2008 was $261,966 of which
$181,653 was used for the renewal of existing and the purchase of additional
domain names, $72,540 for website development costs and $7,773 was used for
property and equipment purchases.  Tiger Media, a wholly owned
subsidiary of DigitalTown, Inc., entered into an installment agreement in May
2007 with an online services vendor for the renewal of existing domain names and
assistance in purchasing additional domain names.  The total amount of
the non-interest bearing installment agreement was $214,080.  For the
year ended February 29, 2008, DigitalTown, Inc. made cash payments of $178,400
on the installment agreement. The remaining balance of $31,122 will be paid in
March and April 2008 and is included in accounts payable on the consolidated
balance sheet and non-cash investing and financing activities on the
consolidated statement of cash flows. Net cash provided by financing activities
for the year ended February 29, 2008 was $1,123,446 which consisted of payments
received on stockholder subscription receivables of $1,166,675 and exercise of
stock options of $43,125 less the payoff of a $70,000 shareholder note payable
and $16,354 of advances from officer/stockholder.





Page
7


Monthly
cash operating expenses for the year ended February 29, 2008, was approximately
$73,000 per month. We believe our
current cash reservesand amounts we expect to collect on our outstanding
stock subscription receivables should be sufficient to enable us to operate for
the next 12 months. We
anticipate that any additional financing would be through the sale of our common
stock or other equity-based securities.  In the event that we are
unable to obtain additional capital in the future, we would be forced to reduce
operating expenses and/or cease operations altogether.





Off
Balance Sheet Arrangements





We do not
have any off balance sheet arrangements.





Critical
Accounting Policies





The
discussion and analysis of DigitalTown, Inc.’s financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and related disclosure of contingent assets and liabilities. Management
reviews its estimates on an on going basis. Management bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. While DigitalTown Inc.’s significant accounting policies are
described in more detail in Note 1 to its financial statements, management
believes the following accounting policies to be critical to the judgments and
estimates used in the preparation of its financial statements:





Intangible
Assets- Domain Names/Website Development Costs





The
Company is in the development stage of its website portal, and accordingly, all
costs including license renewals, associated with domain names expected to be
utilized in its website portal and website development costs have been
capitalized.  Since the ownership of these domain names can be renewed
at a nominal fee each year prior to their expiration date, the useful lives of
the domain names are deemed to be indefinite and no amortization of the
capitalized costs for the domain names will be recorded.  Amortization
for any capitalized website development costs will start once a revenue
generating site is in service.





Impairment
of Long-Lived Assets





Long-lived
assets, such as property and equipment and intangible assets – domain
names/website development costs are reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset.





Page
8


Stock
Based Compensation





Effective
March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”)
Statement No. 123(R), “Share-Based Payment,” applying the modified prospective
method.  This standard requires the fair value of share-based
payments, including grants of employee stock options and employee stock purchase
plan shares, to be recognized in the income statement based on their grant date
fair values unless a fair value is not reasonably estimable.  The fair
value of the Company’s stock options issued under the requirements of SFAS No.
123(R) have been estimated using a Black-Scholes pricing model, which assumes no
expected dividends and estimates the option expected life, volatility and
risk-free interest rate at the time of the grant.








Recently
issued accounting pronouncements:





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No.
157"). This standard clarifies the principle that fair value should be based on
the assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. This standard is effective
for financial statements issued for fiscal years beginning after November 15,
2007. We are currently evaluating the impact of this statement. We believe the
adoption of SFAS No. 157 will not have a material impact on our consolidated
financial position or results of operations.





In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008.  These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.








In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” which permits entities to elect to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This election is irrevocable.
The Company adopted SFAS No. 159 effective January 1, 2008 and has not
elected the permitted fair value measurement provisions of SFAS No. 159 for any
additional items as of March 31, 2008.





Page
9


In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by us in the first
quarter 2009.  SFAS No. 160 is currently not expected to have a
material effect on the Company’s results of operations, cash flows or financial
position.





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





The
market risk inherent in the Company’s financial statements and in its financial
position represents the potential loss arising from adverse changes in interest
rates.  This risk is low as the Company has very limited debt and has
no third-party debt.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA





PageReport
      of Independent Registered Public Accounting Firm
            23Consolidated
      Financial Statements:Consolidated
      Balance Sheets
            24Consolidated
      Statements of Operations
            25Consolidated
      Statements of Stockholders' Equity
            26Consolidated
      Statements of Cash Flows
            27Consolidated
      Notes to Financial Statements
            28-38





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





None.











Page
10


ITEM 9A.
CONTROLS AND PROCEDURES




The
Company maintains disclosure controls and procedures designed to provide
reasonable assurance that information required to be disclosed in its reports
filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), are recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. Such
information is accumulated by management, including our Chief Executive Officer
and contract Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance the
objectives of the control system are met.




As of
February 29, 2008, our management, with the participation of our Chief Executive
Officer and contract Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures as such term is defined
in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the Chief
Executive Officer and contract Chief Financial Officer concluded that the
Company's disclosure controls and procedures were not effective as of February
29, 2008, because of the identification of the material weaknesses in internal
control over financial reporting described below. Notwithstanding the material
weaknesses that existed as of February 29, 2008, our Chief Executive Officer and
contract Chief Financial Officer have concluded that the financial statements
included in this Annual Report on Form 10-K present fairly, in all material
respects, the financial position, results of operations and cash flows of the
Company in conformity with accounting principles generally accepted in the
United States of America ("GAAP").









Report
of Management on Internal Control over Financial Reporting




The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Internal control over
financial reporting is a set of processes designed by, or under the supervision
of, the Company's CEO and contract CFO, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP and includes
those policies and procedures that:




Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and dispositions of our assets;




Provide
reasonable assurance our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and




Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statement.




Page
11


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of internal
control, however well designed and operated, can provide only reasonable, and
not absolute, assurance that the objectives of the system will be met. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.




Under the
supervision and with the participation of the Company's management, including
the Company's CEO and contract CFO, the Company conducted an assessment of the
effectiveness of its internal control over financial reporting based on criteria
established in "Internal Control-Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), as of February
29, 2008.




A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected. In connection with the assessment described above, management
identified the following control deficiencies that represent material weaknesses
at February 29, 2008:




Managements
internal control system, like many small start-up companies, was dependant
entirely on the founders. As such it had the inherent flaws of lack of
segregation of duties and being subject to time constraints of an ever expanding
set of demands that are part of growing a business. Consequently, management did
not maintain effective control relating to the quarter end closing and financial
reporting process in adequately preparing account reconciliations (stock option
activity). Additionally, the Company had insufficient internal personnel
resources and technical accounting and reporting expertise within the Company's
financial closing and reporting functions.




Due to
our small size, the Company did not maintain effective control to assure
segregation as the same employee was responsible for initiating and recording of
transactions, thereby creating the segregation of duties weakness.




As a
result of the material weaknesses described above, management has concluded
that, as of February 29, 2008, the Company's internal control over financial
reporting was not effective based on the criteria in "Internal
Control-Integrated Framework" issued by COSO. This annual filing 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 Securities and Exchange Commission that permit the Company to
provide only management's report in this annual filing.




The
Company intends to, and has already begun to initiate measures to remediate the
identified material weaknesses through various means including, but not
necessarily limited to, the following:




Applying
a more rigorous review of the quarterly close processes by the contract CFO to
ensure that the performance of the control is evidenced through appropriate
documentation which is consistently maintained.




During
the fiscal quarter ended February 29, 2008, there was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.








Page
12


ITEM 9B.
OTHER INFORMATION





None.


Page
13


PART
III





ITEM
      10.
            DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
REGISTRANT





Set forth
below is certain information concerning each of the directors and executive
officers of DigitalTown, Inc.





Name
            
            Age
            
            PositionRichard
      A. Pomije
            
            53
            
            Chairman,
      President, CEO & Secretary/TreasurerPaul
      R. Gramstad (1)
            
            47
            
            CFOMike
      W. Davis     (2)
            
            
            
            CTOJeff
      Mills
            
            46
            
            DirectorPierce
      McNally
            
            
            
            DirectorGary
      Hall
            
            
            
            Director





(1)-Mr
Gramstad is a contract CFO and not an employee of the Company


(2)-Mr
Davis is a contract CTO and not an employee of the Company





RICHARD
A. POMIJE has been with DigitalTown, Inc. since 1982 and has served as
President, Secretary, Treasurer, and a director since 1996. He had previously
served in such positions from 1983 through 1992. Mr. Pomije's primary
responsibilities include overall strategic planning. Mr. Pomije holds a degree
in Communication Technology, Audio Technology and Technical Services from Brown
Institute. Mr. Pomije also received a First Class FCC license with radar
endorsement.





PAUL R.
GRAMSTAD was appointed Chief Financial Officer on October 5,
2007.  Prior to his appointment as CFO, Mr. Gramstad was responsible
for the Company’s financial reporting and accounting function as a contract
consultant and has continued in that role as a contract CFO.  Mr.
Gramstad is a 1983 graduate of Gustavus Adolphus College and a Certified Public
Accountant.





MIKE W.
DAVIS was appointed Chief Technology Officer on December 1, 2007.  Mr.
Davis is responsible for the initial system design and architecture of a
platform.





JEFF
MILLS became a director in December 2003. Mr. Mills has worked for Xerox
Corporation for the past 17 years in various operation and sales positions. He
has also served as director for one private company and has served as president,
owner and operator of various business ventures. Mr. Mills is a 1984 graduate of
the University of Northern Iowa and has held several security
licenses.





PIERCE
MCNALLY became a director in March 2007.  Mr. McNally has extensive
experience with small-cap, publicly traded companies and private startup and
emerging companies.  An attorney and experienced investment and
merchant banker, Mr. McNally has been active with start-up and small-cap growth
companies in a variety of industries as a banker, investor, adviser, officer and
director.  Currently, he serves as a director of several NASDAQ-listed
and privately held companies throughout the United States and as a director of
Rainy River Resources, Inc., a Minneapolis based private investment
company.  Mr. McNally is a 1971 graduate of Stanford University and a
1978 graduate of the University of Wisconsin Law School.





Page
14


GARY HALL
became a director on August 1, 2007.  Mr. Hall currently serves as
President of Pringo Networks, a prominent Los Angeles based company fusing
social networking and media sharing platforms into cohesive online
communities.  Before joining Pringo, Mr. Hall was critical in
developing Reunion.com into a top ten interface, building broad outreaches in
both partnerships and users (currently 26 million) since the Company’s
inception.  He led all of the Company’s online marketing and overall
strategic development.  Mr. Hall is still an active owner in
Reunion.com.





Directors
are elected at the annual meeting of the stockholders and serve until their
successors are elected and qualified. Officers are elected by the Board of
Directors and serve at the discretion of the Board of Directors or until their
earlier resignation or removal.





Page
15


Audit
Committee





Mr. Mills
and Mr. McNally currently serve as members of the Audit Committee. This
committee met twice during the last fiscal year. The Audit Committee is
responsible for assisting the Board of Directors with respect to its oversight
of corporate accounting, reporting practices of the Company and the quality and
integrity of the financial reports of the Company. The Board has named Jeff
Mills as the "audit committee financial expert" as defined by Item 401(h)(2) of
Regulation S-K under the Securities Act of 1933. The Company acknowledges that
the designation of Mr. Mills as the “audit committee financial expert” does not
impose on Mr. Mills any duties, obligations or liability that are greater than
the duties, obligations and liability imposed on Mr. Mills as a member of the
Audit Committee and the Board of Directors in the absence of such designation or
identification.





ITEM
11.  EXECUTIVE COMPENSATION





The
following table sets forth the compensation paid for services rendered during
the fiscal years ended February 29, 2008 and February 28, 2007 to the Chairman
and Chief Executive Officer and the Chief Technolgy Officer. No other officers
earned cash compensation in excess of $100,000 in fiscal 2007.





Summary
Compensation Table





Name
      and Principle Position
            
            Fiscal
      year
            
            Salary
            
            
            Stock
      Option Awards (1)
            
            
            Other
      Annual Compensation (2), (3), (4)
            
            
            Total
      CompensationRichard
      Pomije, Chairman & CEO
            
            2008
            
            $
            180,192
            
            
            $
            0
            
            
            $
            45,544
            
            
            $
            225,7362007
            
            $
            185,000
            
            
            $
            4,312,420
            
            
            $
            12,952
            
            
            $
            4,510,372David
      Pomije, former CEO
            
            2007
            
            $
            0
            
            
            $
            431,242
            
            
            $
            0
            
            
            $
            431,242Mike
      Davis, contract CTO
            
            2008
            
            $
            0
            
            
            $
            151,051
            
            
            $
            0
            
            
            $
            151,051








(1)
            
            Option
      awards reflect the Black-Sholes values used for expensing options in the
      Company’s income statement.  For additional information, see
      Note 7 of the Company’s financial statements.  The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods(2)
            
            Automobile
      expenses.(3)
            
            Board
      member fees(4)
            
            Health
      insurance.











Page
16


OPTIONS
GRANTED IN THE LAST FISCAL YEAR





The
following table sets forth information regarding options granted to the named
executive officers and directors during the year ended February 29,
2008.




Name
            
            Grant
      Date
            
            Number
      of shares - Underlying options granted
            
            
            Exercise
      Price
              ($/share)
            
            
            Grant
      Date Fair Value
            
            Expiration
      dateGary
      Hall
            
            7/26/2007
            
            
            150,000
            
            
            $
            4.500
            
            
            $
            4.415
            
            7/26/2012Paul
      R. Gramstad
            
            9/11/2007
            
            
            20,000
            
            
            $
            3.300
            
            
            $
            3.222
            
            9/11/2012Mike
      W. Davis
            
            12/1/2007
            
            
            50,000
            
            
            $
            3.100
            
            
            $
            3.021
            
            12/1/2012





OUTSTANDING
OPTIONS AT FISCAL YEAR-END





The
following table provides information relating to the value of shares of common
stock subject to options held by the named executive officers and directors as
of February 29, 2008.





Name
            
            Number
      of Unexercised Options Exercisable
            
            
            Number
      of Unexercised Options Unexercisable
            
            
            Option
      Exercise Price ($/share)
            
            Option
      Expiration DateRichard
      A. Pomije
            
            
            2,500,000
            
            
            
            0
            
            
            $
            1.725
            
            11/6/2011Jeff
      Mills
            
            
            40,000
            
            
            
            0
            
            
            $
            1.725
            
            11/6/2011Pierce
      McNally
            
            
            100,000
            
            
            
            0
            
            
            $
            1.725
            
            11/6/2011Mike
      W. Davis
            
            
            10,000
            
            
            
            0
            
            
            $
            1.725
            
            11/6/2011Gary
      Hall
            
            
            150,000
            
            
            
            0
            
            
            $
            4.500
            
            7/26/2012Paul
      R. Gramstad
            
            
            20,000
            
            
            
            0
            
            
            $
            3.300
            
            9/11/2012Mike
      W. Davis
            
            
            50,000
            
            
            
            0
            
            
            $
            3.100
            
            12/1/2012





OPTIONS EXERCISES IN THE
LAST FISCAL YEAR




None





DIRECTORS'
COMPENSATION





The
Company currently pays its directors a $500.00 monthly fee.





On
January 1, 2008, the Company issued 6,200 restricted common shares at a price of
$2.50 per share, valued at $15,500, to the four directors of the Company for
payment of director fees ($500.00 per month).





On
February 15, 2008, the Company issued 2,860 restricted common shares at $2.10
per share, valued at $6,000 to the four directors of the Company for payment of
director fees ($500.00 per month).





The
following table summarizes cash payments and stock awards for the year ended
February 29, 2008:





Name
            
            Cash
      Earned
            
            
            Stock
      Awards
            
            
            Total
            
            PeriodRichard
      Pomije
            
            $
            1,000
            
            
            $
            5,500
            
            
            $
            6,500
            
            March
      2007- March 2008Jeff
      Mills
            
            $
            -
            
            
            $
            7,500
            
            
            $
            7,500
            
            January
      2007-March 2008Pierce
      McNally
            
            $
            -
            
            
            $
            5,000
            
            
            $
            5,000
            
            June
      2007-March 2008Gary
      Hall
            
            $
            -
            
            
            $
            3,500
            
            
            $
            3,500
            
            September
      2007-March 2008





Page
17





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





The
following table sets forth certain information as of February 29, 2008 with
respect to the number of shares of Common Stock beneficially owned by (i) each
shareholder known by DigitalTown, Inc. to own beneficially 10% or more of the
Common Stock; (ii) each director; (iii) the Chief Executive Officer, and (iv)
all directors and executive officers as a group. Unless otherwise noted, each
person listed below has sole voting and investment power with respect to his
shares. The address for each individual set forth below is 11974 Portland,
Burnsville, MN 55337.







Name
      of Beneficial Owner (1)
            
            Number
      of shares
            
            
            Percentage
      of
              Outstanding
      SharesRichard
      A. Pomije (CEO,director)
            
            
            16,739,566
            
            
            
            61.81
            %Jeff
      Mills (director)
            
            
            419,033
            
            
            
            1.55
            %Pierce
      McNally (director)
            
            
            15,503
            
            
            
            .06
            %Gary
      Hall (director)
            
            
            1,515
            
            
            
            .01
            %Paul
      R. Gramstad (contract CFO)
            
            
            680
            
            
            
            -All
      directors and executive officers as a group
            
            
            17,176,297
            
            
            
            63.43
            %





Common
shares issued and outstanding as of 2/29/2008 were 27,081,750





(1) The
securities "beneficially owned" by a person are determined in accordance with
the definition of "beneficial ownership" set forth in the regulations of the
Commission and, accordingly, may include securities owned by or for, among
others, the spouse, children or certain other relatives of such person as well
as other securities as to which the person has or shares voting or investment
power or has the right to acquire within 60 days.





Section
16 Beneficial Ownership Reporting Compliance





Section
16 of the Securities Exchange Act of 1934, as amended, and the rules promulgated
there under require the Company's officers, directors, and holders of 10% or
more of its outstanding common stock to file certain reports with the Securities
and Exchange Commission (the "Commission"). To the Company's best knowledge,
based solely on information provided by the reporting individuals, all of the
reports required to be filed by these individuals were filed.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





DigitalTown,
Inc. leases from a director of the Company approximately 2,650 square feet of
space used for offices and operations equipment storage at 11974 Portland
Avenue, Burnsville, Minnesota at a monthly rent of $2,650 for a five year term
which commenced on December 16, 2006.  The future rent obligations of
this lease as of February 29, 2008 totaled $120,575.











Page
18


ITEM
14.  Independent Registered Public Accounting Firm Fees.





Carver
Moquist & O’Connor, LLC (CMO) served as the Company’s independent registered
public accounting firm during fiscal 2008 and 2007.  The Company’s
audit committee has engaged CMO to perform three quarterly reviews in fiscal
2008.





During
the fiscal years ended February 29, 2008 and 2007, the following was paid to
CMO:





2008
            
            
            2007Audit
      fees (1)
            
            $
            41,599
            
            
            $
            36,732Total
      other fees (2)
            
            
            
            
            
            $
            1,215





(1) Total
fees include the annual audit and quarterly review fees.  Billing for
out-of-pocket costs are not included.





(2) Fees
in connection with the Company’s S-8 filing





During
the fiscal years ended February 29, 2008 and 2007, the following was paid to
Micheal G. Kissell, LTD:





2008
            
            
            2007Tax
      fees
            
            $
            120
            
            
            $
            1,810





Audit
Committee Policies and Procedures:





The
primary responsibility of the Audit Committee is to oversee the Company’s
financial reporting process on behalf of the Board and report the results of
their activities to the Board. Management is responsible for preparing the
Company’s financial statements, and the independent auditors are responsible for
auditing those financial statements. The Committee in carrying out its
responsibilities believes its policies and procedures should remain flexible in
order to best react to changing conditions and circumstances.





The
following shall be the principal recurring processes of the Audit Committee in
carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate.





·
            The
      Committee shall have a clear understanding with management and the
      independent auditors that the independent auditors are ultimately
      accountable to the board and the Audit Committee, as representatives of
      the Company’s stockholders. The Committee shall have the ultimate
      authority for and responsibility to evaluate and annually recommend the
      selection, retention, and, where appropriate, the replacement of the
      independent auditors. The Committee shall review and approve the
      performance by the independent auditors of any non-audit-related service
      if the fees for such service are projected to exceed 15% of the most
      recently completed fiscal year’s combined audit fees and audit-related
      service fees. The Committee shall review and discuss with the auditors
      their independence from management and the Company and the matters
      included in the written disclosures required by professional independence
      standards applicable to the independent auditors. Annually, the Committee
      shall review and assess whether the independent auditor’s performance of
      non-audit services is compatible with the auditor’s independence. In
      addition, the Audit Committee shall review any candidate for the senior
      accounting and/or financial executive position prior to his or her
      appointment by the Company.






Page
19




·
            The
      Committee shall review and discuss with the independent auditors and with
      the head of the Company’s finance department the overall scope and plans
      for the audits. Also, the Committee shall discuss with management and the
      independent auditors the adequacy and effectiveness of the accounting and
      financial controls, including the Company’s system to monitor and manage
      business risk, and legal and ethical compliance programs. Further, the
      Committee shall meet separately with the independent auditors, without
      management present, to discuss the results of their respective audit
      procedures.




·
            The
      Committee shall review and discuss the results of the quarterly review and
      any other matters required to be communicated to the committee by the
      independent auditors under generally accepted auditing standards. The
      chair of the Committee may represent the entire Committee for the purpose
      of this review.




·
            The
      Committee shall review and discuss with management and the independent
      auditors the financial statements to be included in the Company’s annual
      report on Form 10-K, including their judgment about the quality, not just
      the acceptability, of accounting principles, the reasonableness of
      significant judgments, the basis and appropriateness of any change in
      significant accounting policies and the clarity of the disclosures in the
      financial statements. Also, the Committee shall review and discuss the
      results of the annual audit and any other matters required to be
      communicated to the Committee by the independent auditors under generally
      accepted auditing standards.




·
            The
      Committee shall review and discuss with management and the independent
      auditors any material financial or non-financial arrangements of the
      Company which do not appear on the financial statements of the Company and
      any transactions or courses of dealing with parties related to the Company
      which transactions are significant in size or involve terms or other
      aspects that differ from those that would likely be negotiated with
      independent parties, in each case where such arrangements or transactions
      are relevant to an understanding of the Company’s financial
      statements.













Page
20


PART
IV


ITEM
15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES





(a)
            Consolidated
      Financial Statements


Audited
Consolidated Financial Statements for the year ended February 29, 2008 and
February 28, 2007




(b)
              Exhibits.
 3.1
              Articles
      of Incorporation, as amended (1)
 3.2
              Bylaws
      (1)
 10.2
              1996
      Employee Stock Option Plan, as amended to date
  (1)
 31
              Certifications
      of Chief Executive Officer and Chief Financial Officer under Rule
      13a-14(a)/15d-14(a)
 32
              Certifications
      under Section 1350
 
 (1)
      Incorporated by reference to exhibit filed as a part of Registration
      Statement on Form 10-SB (Commission File No.
  000-27225).


SIGNATURES








Pursuant
to the requirements of Section13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.







DigitalTown,
      INC.Dated:
      May 23, 2008
            By:
      /s/ Richard A.
      PomijeRichard
      A. Pomije, Chief Executive Officer(Principal
      executive officer)








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.








Dated:
      May 23, 2008
            By:
      /s/ Richard A.
      PomijeRichard
      A. Pomije, Director, Chief Executive Officer,(Principal
      executive officer)














Page
21
















DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)








CONSOLIDATED
FINANCIAL STATEMENTS





FEBRUARY
29, 2008 AND FEBRUARY 28, 2007


















Page
22





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







To the
Board of Directors and Stockholders


DigitalTown,
Inc.





We have
audited the accompanying consolidated balance sheets of DigitalTown, Inc.
(formerly BDC Capital, Inc.) as of February 29, 2008 and February 28, 2007, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. 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
audits.





We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. 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 DigitalTown, Inc. (formerly
BDC Capital, Inc.) as of February 29, 2008 and February 28, 2007, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.





/s/
Carver Moquist & O’Connor, LLC





Bloomington,
Minnesota


May 22,
2008








Page
23


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)


CONSOLIDATED BALANCE
SHEETS




ASSETSFebruary
      29,
              2008
            
            
            February
      28,
              2007Current
      assets:Cash
            
            $
            67,161
            
            
            $
            8,933Other
      receivables
            
            
            70,528
            
            
            
            999Total
      current assets
            
            
            137,689
            
            
            
            9,932Property
      and equipment, net
            
            
            6,737
            
            
            
            1,579Intangible
      assets, net
            
            
            602,194
            
            
            
            441,558Total
      assets
            
            $
            746,620
            
            
            $
            453,069




LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            100,683
            
            
            $
            137,144Advances
      from stockholders
            
            
            -
            
            
            
            16,354Accrued
      expenses:Accrued
      payroll
            
            
            14,301
            
            
            
            32,169Accrued
      interest
            
            
            11,156
            
            
            
            9,476Deferred
      officer compensation
            
            
            -
            
            
            
            18,865Notes
      payable – stockholder
            
            
            -
            
            
            
            70,000Total
      current liabilities
            
            
            126,140
            
            
            
            284,008Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value, 2,000,000,000 shares authorized, 27,081,750 and
      25,701,500 shares issued and outstanding at February 29, 2008
      and  February 28, 2007, respectively
            
            
            270,812
            
            
            
            257,010Additional
      paid-in-capital
            
            
            19,737,494
            
            
            
            14,521,673Subscription
      receivable
            
            
            (5,030,795
            )
            
            
            (2,947,470
            )Accumulated
      deficit
            
            
            (14,357,031
            )
            
            
            (11,662,152
            )Total
      stockholders’ equity
            
            
            620,480
            
            
            
            169,061Total
      liabilities and stockholders’ equity
            
            $
            746,620
            
            
            $
            453,069








The
accompanying notes are an integral part of these consolidated financial
statements.


Page
24


DigitalTown,
Inc


(formerly
BDC Capital, Inc.)





CONSOLIDATED
STATEMENTS OF OPERATIONS





Year
      ended
              February
      29, 2008
            
            
            Year
      ended
              February
      28, 2007Operating
      expenses:Selling,
      general and administrative expenses
            
            $
            2,696,010
            
            
            $
            5,740,928Loss
      from operations
            
            
            (2,696,010
            )
            
            
            (5,740,928
            )Other
      income (expense)Interest
      expense
            
            
            (1,680
            )
            
            
            (5,600
            )Other
      income
            
            
            2,811
            
            
            
            4,781Total
      other income (expense)
            
            
            1,131
            
            
            
            (819
            )Net
      loss before income taxes
            
            
            (2,694,879
            )
            
            
            (5,741,747
            )Income
      tax provision
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (2,694,879
            )
            
            $
            (5,741,747
            )Loss
      per common share – basic and diluted
            
            $
            (0.10
            )
            
            $
            (0.42
            )Weighted
      average common shares outstanding – basic and diluted
            
            
            26,035,952
            
            
            
            13,537,116





The
accompanying notes are an integral part of these consolidated financial
statements.


























Page
25


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


Years
Ended February 29, 2008 and February 28, 2007




Preferred
      Stock
            
            
            Common
      Stock
            
            
            AdditionalSeries
      A
            
            
            
            
            
            
            
            
            
            
            
            Paid-In
            
            
            Subscription
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Receivable
            
            
            Deficit
            
            
            TotalBalance
      February 28, 2006-(1)
            
            
            20,000,000
            
            
            $
            200,000
            
            
            
            5,701,500
            
            
            $
            57,010
            
            
            $
            9,368,100
            
            
            $
            (3,550,000
            )
            
            $
            (5,920,405
            )
            
            $
            154,705Payments
      received on subscription agreements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            602,530
            
            
            
            -
            
            
            
            602,530Pay
      finders fee on common stock issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (20,000
            )
            
            
            -
            
            
            
            -
            
            
            
            (20,000
            )Preferred
      stock converted to common stock on a 1 for 1 share basis, both common and
      preferred par value stated at $.01 per share
            
            
            (20,000,000
            )
            
            
            (200,000
            )
            
            
            20,000,000
            
            
            
            200,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,173,573
            
            
            
            -
            
            
            
            -
            
            
            
            5,173,573Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,741,747
            )
            
            
            (5,741,747
            )Balance
      February 28, 2007
            
            
            -
            
            
            
            -
            
            
            
            25,701,500
            
            
            
            257,010
            
            
            
            14,521,673
            
            
            
            (2,947,470
            )
            
            
            (11,662,152
            )
            
            
            169,061Stock
      issued in subscription agreements
            
            
            -
            
            
            
            -
            
            
            
            1,300,000
            
            
            
            13,000
            
            
            
            3,237,000
            
            
            
            (3,250,000
            )
            
            
            -
            
            
            
            -Payments
      received on subscription agreements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,166,675
            
            
            
            -
            
            
            
            1,166,675Stock
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,800,811
            
            
            
            -
            
            
            
            -
            
            
            
            1,800,811Common
      stock issued for payment of  accounts payable and
      services
            
            
            -
            
            
            
            -
            
            
            
            46,190
            
            
            
            461
            
            
            
            113,726
            
            
            
            -
            
            
            
            -
            
            
            
            114,187Common
      stock issued for director fees
            
            
            -
            
            
            
            -
            
            
            
            9,060
            
            
            
            91
            
            
            
            21,409
            
            
            
            -
            
            
            
            -
            
            
            
            21,500Stock
      options exercised
            
            
            -
            
            
            
            -
            
            
            
            25,000
            
            
            
            250
            
            
            
            42,875
            
            
            
            -
            
            
            
            -
            
            
            
            43,125Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,694,879
            )
            
            
            (2,694,879
            )Balance
      February 29, 2008
            
            
            -
            
            
            
            -
            
            
            
            27,081,750
            
            
            $
            270,812
            
            
            $
            19,737,494
            
            
            $
            (5,030,795
            )
            
            $
            (14,357,031
            )
            
            $
            620,480








(1)
            
            The
      beginning balances as of February 28, 2006 were retrospectively adjusted
      for the 1 for 75 reverse stock split which occurred on October
      4, 2006.





The
accompanying notes are an integral part of these consolidated financial
statements.


Page
26


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





CONSOLIDATED
STATEMENT OF CASH FLOWS





Year
      ended February 29, 2008
            
            
            Year
      ended February 28, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (2,694,879
            )
            
            $
            (5,741,747
            )Adjustments
      to reconcile net loss to net cash flows used in operating
      activities:Depreciation
            
            
            2,615
            
            
            
            1,185Intangible
      asset impairment charges
            
            
            124,679
            
            
            
            -Stock
      based compensation expense
            
            
            1,800,811
            
            
            
            5,173,573Non-cash
      stock issued for services
            
            
            81,062
            
            
            
            -Non-cash
      stock issued for rent
            
            
            26,500
            
            
            
            -Non-cash
      stock issued for director fees
            
            
            21,500
            
            
            
            -Changes
      in operating assets and liabilities:Other
      receivables
            
            
            (69,529
            )
            
            
            (999
            )Prepaid
      expenses
            
            
            -
            
            
            
            2,019Accounts
      payable
            
            
            (60,958
            )
            
            
            126,480Accrued
      expenses:Accrued
      payroll
            
            
            (17,868
            )
            
            
            32,169Accrued
      interest
            
            
            1,680
            
            
            
            5,600Deferred
      officer compensation
            
            
            (18,865
            )
            
            
            18,865Net
      cash used in operating activities
            
            
            (803,252
            )
            
            
            (382,855
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (7,773
            )
            
            
            -Purchases
      and  renewal of  intangible assets – domain
      names
            
            
            (181,653
            )
            
            
            (224,063
            )Purchase
      of intangible asset – website development
            
            
            (72,540
            )
            
            
            -Net
      cash used in investing activities
            
            
            (261,966
            )
            
            
            (224,063
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from officer/stockholder
            
            
            (16,354
            )
            
            
            15,556Note
      payable-shareholder
            
            
            (70,000
            )
            
            
            -Payments
      received on stockholder subscription receivables
            
            
            1,166,675
            
            
            
            582,530Payments
      received from exercise of stock options
            
            
            43,125
            
            
            
            -Net
      cash provided by financing activities
            
            
            1,123,446
            
            
            
            598,086Net
      change in cash and cash equivalents
            
            
            58,228
            
            
            
            (8,832
            )Cash
      and cash equivalents, beginning of period
            
            
            8,933
            
            
            
            17,765Cash
      and cash equivalents, end of period
            
            $
            67,161
            
            
            $
            8,933SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Non-cash
      flow information:Intangible
      assets-domain name renewals incurred with accounts payable
            
            $
            31,122
            
            
            $
            -Common
      stock issued in lieu of rent payments owed a director of the
      Companyincluded
      in accounts payable
            
            $
            (6,625
            )
            
            $
            -


Common
      stock issued with subscription agreements
            
            $
            3,250,000
            
            
            $
            -Cash
      paid for interest
            
            $
            -
            
            
            $
            -




The
accompanying notes are an integral part of these consolidated financial
statements.


Page
27


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Note 1. Nature of Business and
Summary of Significant Accounting Policies:





Nature of
Business





The
Company plans to form an Interactive Media Group Advisory Board made up of
proven industry leaders along with representation from the Company’s current
board.  The Interactive Media Group Advisory Board, once formed, will
actively seek a west coast management company to oversee the design and
development of its DigitalTown social-networking portal.  This portal,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news.  The Company owns the domains associated
with all of these communities.





The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At February
29, 2008, the Company had an accumulated deficit of
$14,357,031.  Subsequent to February 29, 2008, the Company has
received cash proceeds totaling approximately $65,000 from its stock
subscription receivable.  The Company anticipates that existing cash,
stock subscription proceeds received to date, expected future proceeds from its
stock subscription receivables and any additional financing needed through the
sale of its common stock or other equity-based securities will be sufficient to
meet its working capital and capital expenditures needs through at least
February 28, 2009.  In the event that we are unable to obtain
additional capital in the future, we would be forced to reduce operating
expenses and/or cease operations altogether.





Principles of
Consolidation





The
Company files consolidated financial statements that include its controlled
Subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.





Fair Value of Financial
Instruments





The
Company’s financial instruments consists of cash, other receivables, accounts
payable, accrued expenses and notes payable.  Pursuant to SFAS No. 107
“Disclosures About Fair Value of Financial Instruments,” the Company is required
to estimate the fair value of all financial instruments at the balance sheet
date.  The Company considers the carrying value of its financial
instruments in the financial statements to approximate fair value.





Page
28


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Revenue
Recognition





The
Company does not currently generate revenue from its operations.





Cash and Cash
Equivalents





The
Company considers all highly liquid investments with original maturity of three
months or less when purchased to be cash equivalents.





Intangible Assets – Domain
Names/Website Development Costs





The
Company is in the development stage of its website portal, and accordingly, all
costs including license renewals, associated with domain names expected to be
utilized in its website portal and website development costs have been
capitalized.  Since the ownership of these domain names can be renewed
at a nominal fee each year prior to their expiration date, the useful lives of
the domain names are deemed to be indefinite and no amortization of the
capitalized costs for the domain names will be recorded.  Amortization
for any capitalized website development costs will start once a revenue
generating site is in service.





Property
and Equipment





Property
and equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, ranging from two to five years. Leasehold
improvements are amortized over the shorter of the useful life or the term of
the related lease. Repairs and maintenance costs are expensed as incurred; major
renewals and improvements are capitalized.  As items of property or
equipment are sold or retired, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in operating
income.





Impairment of Long-Lived
Assets





Long-lived
assets, such as property and equipment and intangible assets – domain
names/website development costs are reviewed for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset.





Income
Taxes





Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating losses and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of the
enactment.


Page
29


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Stock-Based
Compensation





Effective
March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”)
Statement No. 123(R), “Share-Based Payment,” applying the modified prospective
method.  This standard requires the fair value of share-based
payments, including grants of employee stock options and employee stock purchase
plan shares, to be recognized in the income statement based on their grant date
fair values unless a fair value is not reasonably estimable.  The fair
value of the Company’s stock options issued under the requirements of SFAS No.
123(R) have been estimated using a Black-Scholes pricing model, which assumes no
expected dividends and estimates the option expected life, volatility and
risk-free interest rate at the time of the grant.





Comprehensive Income
(Loss)





Comprehensive
income (loss) includes net income (loss) and items defined as other
comprehensive income (loss). Items defined as other comprehensive income (loss)
include such items as foreign currency translation adjustments and unrealized
gains (losses) on certain marketable securities. For the years ended February
29, 2008 and February 28, 2007, the Company had no items defined as other
comprehensive income (loss).





Net Loss Per Common
Share





Basic
loss per share is computed using the weighted average number of shares
outstanding for the period. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding stock options. Incremental shares attributable
to the assumed exercise of stock options for the years ended February 29, 2008
and February 28, 2007 were excluded from the computation of diluted loss per
share as their effect would be anti-dilutive.





As of
February 29, 2008 and February 28, 2007, the Company had stock options
outstanding of 3,422,500 and 3,125,000, respectively.





Recently Issued Accounting
Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No.
157"). This standard clarifies the principle that fair value should be based on
the assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. This standard is effective
for financial statements issued for
fiscal years beginning after November 15, 2007. We are currently evaluating the
impact of this statement. We believe the adoption of SFAS No. 157 will not have
a material impact on our consolidated financial position or results of
operations.


Page
30


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008.  These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” which permits entities to elect to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This election is irrevocable.
The Company adopted SFAS No. 159 effective January 1, 2008 and has not
elected the permitted fair value measurement provisions of SFAS No. 159 for any
additional items as of March 31, 2008.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by us in the first
quarter 2009.  SFAS No. 160 is currently not expected to have a
material effect on the Company’s results of operations, cash flows or financial
position.




Cash Deposits in Excess of
Federally Insured Limits
 
 The
Company maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The balances are insured by the Federal Deposit
Insurance Company up to $100,000.  Account balances in excess of
federally insured limits were $0 at February 29, 2008 and February 28,
2007.  The Company has not experienced any losses in such
accounts.
 Page
31


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Advertising




Advertising
costs are charged to operations when incurred.  The Company did not
incur any advertising expense during the years ended February 29, 2008 and
February 28, 2007.





Note
2. Property and Equipment





Property
and equipment are as follows:




February
      29, 2008
              
              
              February
      28,2007Office
      equipment and furniture
              
              $
              480,993
              
              
              $
              473,220Less
      accumulated depreciation
              
              
              (459,618
              )
              
              
              (457,003
              )Less
      impairment of equipment
              
              
              (14,638
              )
              
              
              (14,638
              )$
              6,737
              
              
              $
              1,579


Depreciation
expense for the years ended February 29, 2008 and February 28, 2007 was $2,615
and $1,185, respectively.





Note
3. Intangible Assets





Intangible
assets are as follows:





February
      29, 2008
            
            
            February
      28,2007Domain
      names
            
            $
            654,333
            
            
            $
            441,558Website
      development costs
            
            
            72,540
            
            
            
            -Less
      accumulated amortization
            
            
            -
            
            
            
            -Less
      impairment of domain names
            
            
            (52,139
            )
            
            
            -Less
      impairment of website development costs
            
            
            (72,540
            )
            
            
            -$
            602,194
            
            
            $
            441,558





Since the
useful life of the domain names are deemed to be indefinite, no amortization has
been recorded.





At
February 29, 2008, due to legal constraints on the use of our college domain
names, the Company concluded that the carrying amount of their college domain
names would not be recoverable and the Company recorded an impairment loss of
$52,139.





During
the year ended February 29, 2008, the Company capitalized $72,540 of website
development costs.  As of February 29, 2008, due to changes in the
Company’s website development plan, the Company concluded that the carrying
amount of their website development costs would not be recoverable and the
Company recorded an impairment loss of $72,540 for the entire website
development costs incurred during the year.





Page
32


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Note
4. Notes Payable – Stockholder





On June
18, 2007, the Company paid all interest bearing advances from a stockholder in
the amount of $70,000.  The unsecured notes were due at various dates
from June 21, 2007 to August 1, 2007 with an interest rate of
8%.  Outstanding accrued interest owed on these advances was paid on
April 3, 2008.  Accrued interest at February 29, 2008 and February 28,
2007 totaled $11,156 and $9,476, respectively.





Total
interest expense incurred for the years ended February 29, 2008 and February 28,
2007 was $1,680 and $5,600, respectively.





Note
5. Income Taxes





At
February 29, 2008, the Company had net operating loss carryforwards of
approximately $6,052,000. The net operating loss carryforwards are available to
offset future taxable income through 2028 and may be subject to the limitations
under Section 382 of the Internal Revenue Code if significant changes in the
equity ownership of the Company have occurred. If not used, net operating loss
carryforwards will expire in varying amounts through fiscal year
2028.





The
Company has recorded a full valuation allowance against its net deferred tax
asset due to the uncertainty of realizing the related net benefits as
follows:





2008
            
            
            2007Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            2,260,000
            
            
            $
            1,939,000Stock
      compensation
            
            
            2,634,000
            
            
            
            1,966,000Total
      deferred tax assets
            
            
            4,894,000
            
            
            
            3,905,000Valuation
      allowance
            
            
            (4,894,000
            )
            
            
            (3,905,000
            )Net
      deferred tax assets
            
            $
            -
            
            
            $
            -





Reconciliation
between the federal statutory rate and the effective tax rate for the years
ended February 29, 2008 and February 28, 2007 is as follows:





2008
            
            
            2007Federal
      statutory tax rate
            
            
            34.0
            %
            
            
            34.0
            %State
      taxes, net of federal benefit
            
            
            4.0
            %
            
            
            4.0
            %Non-deductible
      items
            
            
            (1.0
            )%
            
            
            -Change
      in valuation allowance
            
            
            (37.0
            )%
            
            
            (38.0
            )%Effective
      tax rate
            
            
            0.0
            %
            
            
            0.0
            %











Page
33


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Note
6. Stockholders Equity





Stock
Transactions





On
February 22, 2008, the Company issued 10,690 restricted common shares at $2.90
per share, valued at $31,000, to a vendor of the Company, for payment of
outstanding invoices due for consulting services incurred during the
year.





On
February 15, 2008, the Company issued 2,860 restricted common shares at $2.10
per share, valued at $6,000, to four directors of the Company for payment of
director fees.





On
January 1, 2008, the Company issued 6,200 restricted common shares at a price of
$2.50 per share, valued at $15,500, to four directors of the Company for payment
of director fees.





On
December 20, 2007, the Company issued 25,000 restricted common shares at a price
of $1.725 per share for the exercise of stock options and received cash proceeds
of $43,125.





On
October 5, 2007, the Company issued 13,250 restricted common shares at a price
of $2.50 per share, valued at $33,125, to a director of the Company, for payment
of outstanding rent charges included in accounts payable as of February 28, 2007
totaling $6,625 and for rent charges during the year ended February 29, 2008
totaling $26,500.





On
October 5, 2007, the Company issued 1,300,000 restricted common shares at a
price of $2.50 per share, valued at $3,250,000, in exchange for stock
subscription agreements (see further details in note 10).





On April
20, 2007, the Company issued 22,250 restricted common shares at a price of $2.25
per share, valued at $50,062, to a Minneapolis area high school, for their
assistance in initially developing the portal revenue model.





Other





During
the period from May 2007 to September 2007, holders of previously subscribed
shares sold a portion of their shares to other subscription holders of the
Company in order to pay the Company the balance due on their subscription
agreements.  As of February 29, 2008, a total of 827,092 shares had
been sold and transferred to the new purchaser for a total purchase price of
$1,842,108 which is due to the original subscription holder. The underlying
original subscription receivable due the Company for these transferred shares
totaled $620,319.  As of February 29, 2008, the entire $620,319 has
been paid to the Company and has reduced their stock subscription receivable
accordingly.  Additionally, due to these shares being re-sold at
prices in excess of the original face amount of the shares purchased, a portion
of the proceeds is due back to the Company.  Per the 2006 stock
subscription agreements, the seller of the subscribed shares is entitled to up
to 200% of the face amount of each share sold and the Company is entitled to 50%
of any additional proceeds of the stock in excess of that
200%.  Therefore, the Company is owed $300,735 for their share of the
additional proceeds for sales that occurred through February 29,
2008.  As of May 7, 2008, no payments have been received and the
Company has not recorded the $300,735 in the stock subscription receivable
balance at February 29, 2008.  The Company will record those future
cash receipts to Additional Paid in Capital when received.


Page
34


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Stock
Split




On
October 4, 2006, the Company initiated a reverse stock split of 75 to
1.  Accordingly, all per share amounts reported in the financial
statements for all periods have been retroactively restated to reflect the
reverse stock split.





Note
7. Stock Options





The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of February 29, 2008, an aggregate of 5,000,000 shares of common stock
may be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are
non-qualified stock options and have exercise prices and vesting terms
established by the Board of Directors at the time of each
grant.  Vesting terms of outstanding options range from immediate to
two years of employment anniversary.  All options expire five years
from the date of grant.





Effective
March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”)
Statement No. 123(R), “Share-Based Payment,” which requires the fair value
of share-based payments, including grants of employee stock options and employee
stock purchase plan shares, to be recognized in the income statement based on
their grant date fair values. The fair value of the Company’s stock options
issued after the adoption of SFAS No. 123(R) has been estimated using the
Black-Scholes Merton (“Black-Sholes”) option-pricing model.





The
Black-Scholes valuation model incorporates a range of assumptions that are
disclosed in the table below. The risk-free interest rate is based on the United
States Treasury yield curve at the time of grant with a remaining term equal to
the expected life of the awards.  Due to a lack of historical data,
the expected life assumption was calculated based on the contractual term of the
options.  Expected volatility was computed based on fluctuations in
the daily price of the Company’s common stock.





For stock
options granted during the years ended February 29, 2008 and February 28, 2007,
we utilized the following key assumptions in computing fair value using the
Black-Scholes option-pricing model:





Year
      ended
              February
      29, 2008
            
            Year
      ended
              February
      28, 2007Weighted-average
      Volatility
            
            202%
            
            380%Expected
      dividends
            
            None
            
            NoneExpected
      term (in years)
            
            5
            
            5Weighted-average
      risk-free interest rate
            
            4.62%
            
            4.75%





Page
35


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





SFAS 123
(R) requires companies to estimate the fair value of share-based payment awards
on the date of grant using an option-pricing model. The value of the portion of
the award that is ultimately expected to vest is recognized as expense on a
straight-line basis over the requisite vesting periods in the Company’s
consolidated statements of operations. The adoption of SFAS 123 (R) also
requires certain changes to the accounting for income taxes and the method used
in determining diluted shares, as well as additional disclosure related to the
cash flow effects resulting from share-based compensation.





The
Company’s consolidated financial statements for the years ended February 29,
2008 and February 28, 2007, reflect the impact of SFAS 123(R).  For
the year ended February 29, 2008, the Company granted stock options to eleven
employees and consultants allowing for the purchase of up to an aggregate of
622,000 shares of common stock, with a weighted-average-grant-date fair value of
$2.935 per share.  The Company recorded related compensation expense
of $1,800,811.  For the year ended February 28, 2007, the Company
recorded related compensation expense of $5,173,573.  This expense is
included in selling, general and administrative expense. There was no tax
benefit from recording this non-cash expense due to the Company having a full
valuation allowance against its deferred tax asset. The compensation expense
impacted the basic loss per common share for the years ended February 29, 2008
and February 28, 2007 by $0.07 and $0.38 respectfully. As of February 29, 2008,
there remains $28,170 of total unrecognized compensation expense, which is
expected to be recognized over future periods through October 31,
2009.





The
following table summarizes information about the Company’s stock options as of
February 29, 2008 and changes during the year ended February 29,
2008:




Number
      of Options
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contract Life
            
            
            Aggregate
      Intrinsic Value (1)Options
      outstanding February 28, 2006
            
            
            422,200
            
            
            $
            1.04
            
            
            
            -
            
            
            
            -Granted
            
            
            3,125,000
            
            
            
            1.725
            
            
            
            -
            
            
            
            -Canceled
      or expired
            
            
            (422,200
            )
            
            
            (1.04
            )
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      outstanding - February 28,
      2007
            
            
            3,125,000
            
            
            $
            1.725
            
            
            
            -
            
            
            
            -Granted
            
            
            622,000
            
            
            
            3.019
            
            
            
            -
            
            
            
            -Canceled
      or expired
            
            
            (299,500
            )
            
            
            (1.936
            )
            
            
            -
            
            
            
            -Exercised
            
            
            (25,000
            )
            
            
            (1.725
            )
            
            
            -
            
            
            
            -Options
      outstanding - February 29,
      2008
            
            
            3,422,500
            
            
            $
            1.942
            
            
            
            3.74
            
            
            $
            1,226,238Exercisable
      at February 29,
      2008
            
            
            3,313,109
            
            
            $
            1.964
            
            
            
            3.64
            
            
            $
            1,113,771




(1)
            
            The
      intrinsic value of an option is the amount by which the fair value of the
      underlying stock exceeds its exercise
price.





Note
8. Related Party Transactions





The
Company entered into a 5 year lease with a director of the Company for
approximately 2,650 square feet of space used for offices and operations
equipment storage at 11974 Portland Avenue, Burnsville,
Minnesota.  The lease commenced on December 16, 2006 at a monthly rent
of $2,650 for the 5 year term of the lease and contains an option to renew for
an additional term of 1 year at a monthly rent of $3,650. The Company previously
sub-leased from the director 1,000 square feet of space at the same location at
a monthly rent of $750 renewable monthly.  The Company’s lease
payments made to the director for the years ended February 29, 2008 and February
28, 2007 totaled $31,800 and $12,827, respectively.  On October 5,
2007, the Company issued 13,250 restricted common shares, valued at $33,125, to
the director for rent payments due for the period of December 16, 2006 through
December 31, 2007.


Page
36


DigitalTown,
Inc.


(formerly
BDC Capital, Inc.)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended February 29, 2008 and February 28, 2007





Minimum
      lease payments at February 29, 2008 are as follows:2009
            
            $
            31,8002010
            
            
            31,8002011
            
            
            31,8002012
            
            
            25,175$
            120,575





Note
9. Commitments and Contingencies





The
Company is exposed to asserted and unasserted claims encountered in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.





Note
10. Common Stock Subscriptions Receivable





During
the year ended February 28, 2006, the Company received subscriptions for
4,811,709 restricted common shares at $0.75 per share.  Significant
terms of the subscription agreement are as follows:


·
            Payment
      is due in full in 60 months


·
            At
      24 months, the Company can demand at its option, monthly 1/36 payments on
      the subscription agreement.


·
            The
      Company has the option to charge simple annual interest of up to
      4%.


·
            The
      Company will provide downside protection of up to 30% of the stock price
      upon conversion.


·
            If
      the purchaser sells these common shares, the purchaser shall be entitled
      to an amount equal to 200% of the original purchase price of each share
      and the Company shall be entitled to 50% of any additional net sales
      proceeds from the stock sale.





On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share.  Significant terms of the
subscription agreement are as follows:


·
            The
      price per share of $2.50 was based on the closing price on October 4,
      2007.


·
            At
      24 months, 1/36 payments are due
monthly.


·
            The
      Company, at its option, may call up to 1/12 of the gross receivable per
      month if the preceding 30 day average trading price is at or above $7.00 a
      share with minimum trading volume of 5,000 shares per
  day.


·
            If
      the purchaser sells these common shares, the purchaser shall be entitled
      to an amount equal to 200% of the original purchase price of each share
      and the Company shall be entitled to 50% of any additional net sales
      proceeds from the stock sale.







Page
37




The
following tables summarize information about the stock subscription
receivable:





Receivable
      balance at February 28, 2006
            
            $
            3,550,000Cash
      collected
            
            
            (602,530
            )Receivable
      balance at February 28, 2007
            
            
            2,947,470Cash
      collected
            
            
            (1,166,675
            )New
      subscriptions received October 5, 2007
            
            
            3,250,000Receivable
      balance at February 29, 2008
            
            $
            5,030,795Summary
      of outstanding subscriptions:2006
      subscriptions
            
            $
            1,780,795October
      5, 2007 subscriptions
            
            
            3,250,000$
            5,030,795





No
interest has been charged on these subscription agreements.  The
Company has collected approximately $65,000 of additional outstanding
subscription receivables for the period from March 1, 2008 to May 20,
2008.












Page 38