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 28, 2009   |__|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934  Commission file number: 000-27225  DigitalTown, Inc. (Name of
registrant 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. Yes
X

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 $ 21,706,801 as of the last day of the Companys most recently
completed fourth fiscal quarter, when the last reported sales price was $ 2.75.  There were 27,083,290
shares of the registrants common stock outstanding as of April 11, 2009.     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.          TABLE OF
CONTENTS   PART I

1Item 1.
Business
1Item 1A.
Risk
Factors
2Item 2.
Properties
6Item 3.
Legal
Proceedings
6Item 4.
Submission of
Matters to a Vote of Security Holders
6PART II

7Item 5.
Market for the
Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
7Item 6.
Selected
Financial Data
7Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
8Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
14Item 8.
Financial
Statements and Supplementary Data
14Item 9.
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
14Item
9A(T).
Controls and
Procedures
14Item 9B.
Other
Information
17PART III

18Item 10.
Directors and
Executive Officers of the Registrant
18Item 11.
Executive
Compensation
20Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
22Item 13.
Certain
Relationships and Related Transactions
24       Item 14.
Principle
Accountants and Fees and Services
24PART IV
27Item 15.
Exhibits,
Financial Statement Schedules
27SIGNATURES
27            PART
I  ITEM 1.
  BUSINESS  GENERAL  DigitalTown, Inc.
(the Company) hired a CEO in January 2009 with extensive internet experience
and has engaged a development company to complete phase one of the development
of their nearly 27,000 high school domain names.  The expected launch date
for phase one is the second quarter of fiscal year 2010.  The
Company formed an advisory board in August 2008 to advise them on constructing
and integrating their approximately 27,000 online communities into a social
civic and school spirit network serving students, alumni, schools, local towns
and their citizens.  The advisory board is made up of innovative leaders in
the technology, entertainment, sports and content fields who are affiliated with
companies deeply rooted in interactive media.  The advisory board members
are based in the greater Los Angeles area.  This network, 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 Internet domain names associated with all of
these high school 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 address is
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.   1 Page     EMPLOYEES  As of
April 14, 2009, 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 28,
2009 and February 29, 2008 was $2,964,062 and $2,694,879 respectively and future
losses are likely to occur.  Our accumulated deficit at February 28, 2009
is $17,321,093. As of February 28, 2009, there exists negative working capital
of $98,891. We have negative cash flows from operations of $663,263.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.  Material terms of the subscription agreements received by the
Company on August 31, 2005 for 78,376 restricted common shares and on December
30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value
of $3,608,782) 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.  Material terms of the subscription agreements received by the
Company on October 5, 2007, for 1,300,000 restricted common shares at $2.50 per
share (total value of $3,250,000) 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.  2 Page     · 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.  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 remaining balance due on their
subscription agreements.  A total of 827,092 shares had been sold and
transferred to the new purchasers 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 28, 2009, the entire $620,319 has been paid to the Company
and has reduced the original investors 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 those
sales. As of April 14, 2009, no payments have been received for those excess
proceeds. The Company will record these future cash receipts as Additional Paid
in Capital when received.  As of
February 28, 2009, the Company had stock subscription receivables of $4,506,963
and for the twelve months ended February 28, 2009, the Company received stock
subscription payments of $523,832.  The following table summarizes the
stock subscription receivable, by quarter, for the twelve months ended February
28, 2009:  Quarter
Ended
Total Balance Due
Total Amount Collected
Participatory Rights in the Proceeds of the Resales
Collected
Amount of Downside Protection ProvidedFebruary 29, 2008
$
    5,030,795May 31, 2008
4,919,162
$
    111,632
-
-August 31, 2008
4,708,562
210,600
-
-November 30, 2008
4,616,963
91,600
-
-February 28, 2009
4,506,963
110,000
-
-  The
Company has not exercised its rights to charge up to 4% interest on the
subscription amounts outstanding and the Company has provided no downside
protection to the subscribers.  The downside protection in the terms for
the subscription agreements received on August 31, 2005 and December 30, 2005
requires the Company to reimburse the subscription holder up to 30% of the $.75
purchase price, or $.225, if the market price of the stock is below $.75 when
converted, the protection may be provided in additional shares if necessary.
 The subscription agreements do not define the term when converted.
 The Company has taken the position that if at the time that a purchaser
pays in full for the shares under a subscription agreement, the closing price of
the shares of the Companys stock are  3 Page     less
than $.75, the shareholder would be entitled to up to 30% additional shares,
depending on the trading share price.  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. In the event that we are unable to collect our
future stock subscription receivables as needed, we would be forced to reduce
operating expenses and/or cease operations altogether. No
assurances can be given that we will be successful in reaching or maintaining
profitable operations.  Our current monthly cash operating expenses are
approximately $62,000 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  Funding
of our operations has relied almost entirely on the collections of outstanding
subscription receivables.  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.  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.   4 Page     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 and Secretary/Treasurer and Jan Andersen, our CEO.
 We cannot assure you that we would be able to find appropriate replacement
for either of them 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 or
Mr. Andersen nor do we presently maintain key-man life insurance policies on
them.  We
Could Fail to Renew our Domain Names on a timely basis  Our
future success depends, in significant part, on the continued renewal of our
domain names on a timely basis.  In order to retain the rights to our
domain names, they need to be renewed on an annual basis by paying the annual
renewal fee within a specified time period.  If the domain names are not
renewed within the specified time period, they become available to the general
public and the rights could be obtained by any outside third party if they paid
the annual renewal fee.  Any loss of rights in our domain names could
adversely effect our ability to develop our business plan.  The Company
does have controls and procedures in place to ensure that all domain names are
renewed in a timely manner.  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.  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;  5 Page     · 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 Jeff Mills, a director and
stockholder 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 Company has the option to renew for an additional
term of one year at a monthly rent of $3,650.  The future rent obligations
of this lease as of February 28, 2009 totaled $88,775.  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  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 28, 2009 and February 29, 2008.  Fiscal Year
2009


Low


HighFirst
Quarter

$
1.90

$
3.35Second
Quarter


2.50


6.10Third
Quarter


2.00


4.50Fourth
Quarter


1.50


3.50  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  6 Page        These
quotations represent inter dealer prices, without retail markup, markdown, or
commission, and may not reflect actual transactions.  As of April 14, 2009,
there were approximately 100 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.  ITEM 6.
 SELECTED FINANCIAL DATA  The following table sets forth selected
consolidated financial information for DigitalTown, Inc.  as of February
28, 2009 and February 29, 2008 and for the years then ended, which have been
derived from our audited consolidated financial statements.  February 28,
February 29,Balance Sheet
Data
2009
2008Total Assets
$  858,203
$  746,620Total Liabilities
142,805
126,140Stockholders Equity
715,398
620,480  Operating Statement
Data
For the year endedFebruary
28,2009
For the year endedFebruary
29,2008Revenue
$
                  -
$
                    -Operating expenses
2,958,069
2,696,010Loss from operations
(2,958,069)
(2,696,010)Other income
(expense), net
(5,993)
1,131Net
loss
$  ( 2,964,062)
$  ( 2,694,879)Loss per
common share-basic and diluted
$(0.11)
$(0.10)Weighted average shares outstanding-basic and
diluted
27,125,928
26,035,952  Cash Flow Statement
Data
For the year endedFebruary
28,2009
For the year endedFebruary
29,2008Net cash used in operating activities
$      (663,263)
$      (803,252)Net cash used in investing activities
(207,796)
(261,966)Net cash
provided by financing activities
847,812
1,123,446Net change in cash
(23,247)
58,228Cash and cash
equivalents, beginning of period
67,161
8,933Cash and cash equivalents, end of period
$
         43,914
$
       67,161   7 Page     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 28, 2009 and February 29, 2008,
which should be read in conjunction with, and is qualified in its entirety by,
the financial audited statements and notes thereto included elsewhere in this
report.  Company
Overview  DigitalTown, Inc. (the Company) hired a CEO in January 2009 with
extensive internet experience and has engaged a development company to complete
phase one of the development of their nearly 27,000 high school domain names.
 The expected launch date for phase one is the second quarter of fiscal
year 2010.  The
Company formed an advisory board in August 2008 to advise them on constructing
and integrating their approximately 27,000 online communities into a social
civic and school spirit network serving students, alumni, schools, local towns
and their citizens.  The advisory board is made up of innovative leaders in
the technology, entertainment, sports and content fields who are affiliated with
companies deeply rooted in interactive media.  The advisory board members
are based in the greater Los Angeles area.  This network, 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 Internet domain names associated with all of
these high school communities.  RESULTS OF
OPERATIONS  YEARS ENDED FEBRUARY
28, 2009 AND FEBRUARY 29, 2008  To-date, the Company
has not yet begun to develop a revenue stream from its operations.  Selling, general and administrative expenses for the year ended
February 28, 2009 increased by $262,059 to $2,958,069 compared to a year ago due
to a $522,124 non-cash increase in stock option expense for the current year.
 Excluding non-cash stock compensation expense for the two comparable
periods, selling, general, and administrative expenses were $635,134 for the
year ended February 28, 2009 compared to $895,199 for the year ended February
29, 2008.  The decrease in selling, general, and administrative expenses of
$260,065 for the two comparable periods was primarily due to decreases in
professional fees, payroll expense and investor relations expense. The Companys
overall net loss for the year ended February 28, 2009 increased by $269,183 to
$2,964,062 compared to the year ended February 29, 2008.      8 Page     LIQUIDITY AND CAPITAL
RESOURCES  The
Companys cash position at February 28, 2009 was $43,914, a decrease of $23,247
from $67,161 at February 29, 2008.  During the year ended February 28,
2009, net cash used in operating activities was $663,263 which was primarily due
to losses from operations compared to net cash used of $803,252 for the
comparable period.  Net cash used in investing activities for the year
ended February 28, 2009 was $207,796 which was primarily used for the renewal of
existing and the purchase of additional domain names as compared to net cash
used of $261,966 for the comparable period.  The decrease was due to fewer
new domain names being purchased in fiscal 2009.  Net cash provided by
financing activities for the year ended February 28, 2009 was $847,812 which
consisted of payments received on stockholder subscription receivables of
$523,832, proceeds from director/stockholder loan of $145,000 less principal
payments on loan of $42,233, $114,073 of proceeds from the exercise of stock
options and $107,140 of proceeds from the issuance of stock. For the comparable
period for fiscal 2008, the Company received net cash provided by financing
activities of $1,123,446 which was almost entirely from subscription
receivables.  Monthly
cash operating expenses for the year ended February 28, 2009, were approximately
$55,000 per month. Based on current expense levels and actual increases in
payroll expense the Companys monthly operating expenses going forward will be
approximately $62,000 per month.  In addition to the normal monthly
operating expenses, the Companys committed cash requirements for the twelve
months ending February 28, 2010 include $15,000 of web site development cost,
monthly interest of $557 on its promissory note with Jeff Mills, a director and
stockholder of the Company and approximately $210,000 for the renewal of
existing and the purchase of additional domain names.  The promissory note
has a balance due of $102,767 at February 28, 2009 and is payable upon demand.
 The Company intends to pay the balance of the note in fiscal year 2010.
 The Company currently relies on collection of its stock subscription
receivables to fund its operations.  Material terms of the subscription
agreements received by the Company on August 31, 2005 for 78,376 restricted
common shares and on December 30, 2005 for 4,733,333 restricted common shares at
$0.75 per share (total value of $3,608,782) 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.  Material terms of the subscription agreements received by the
Company on October 5, 2007, for 1,300,000 restricted common shares at $2.50 per
share (total value of $3,250,000) 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.  9 Page     · 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.  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 remaining balance due on their
subscription agreements.  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 28, 2009, the entire $620,319 has been paid to the Company
and has reduced the original investors 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 those
sales. As of April 14, 2009, no payments have been received for those excess
proceeds. The Company will record future cash receipts as Additional Paid In
Capital when received.  As of
February 28, 2009, the Company had stock subscription receivables of $4,506,963
and for the twelve months ended February 28, 2009, the Company received stock
subscription payments of $523,832.  The following table summarizes the
stock subscription receivable, by quarter, for the twelve months ended February
28, 2009:  Quarter Ended
Total Balance Due
Total Amount Collected
Participatory Rights in the Proceeds of the Resales
Collected
Amount of Downside Protection ProvidedFebruary 29, 2008
$
     5,030,795May 31, 2008
4,919,162
$
     111,632
-
-August 31, 2008
4,708,562
210,600
-
-November 30, 2008
4,616,963
91,620
-
-February 28, 2009
4,506,963
110,000
-
-  The
Company has not exercised its rights to charge up to 4% interest on the
subscription amounts outstanding and the Company has provided no downside
protection to the subscribers.  The downside protection in the terms for
the subscription agreements received on August 31, 2005 and December 30, 2005
requires the Company to reimburse the subscription holder up to 30% of the $.75
purchase price, or $.225, if the market price of the stock is below $.75 when
converted, the protection may be provided in additional shares if necessary.
 The subscription agreements do not define the term when converted.
 The Company has taken the position that if at the time that a purchaser
pays in full for the shares under a subscription agreement, the closing price of
the shares of the Companys stock are  10 Page     less
than $.75, the shareholder would be entitled to up to 30% additional shares,
depending on the trading share price.  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. In the event that we are unable to collect our
future stock subscription receivables as needed, 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 each domain name 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.  Stock Based Compensation  11 Page      The Company follows Financial Accounting Standards Board (FASB)
Statement No. 123(R), Share-Based Payment, for recording its stock-based
compensation arrangements.  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. 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
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.
 The Company does not expect FAS 157-2 to have an impact to the financial
statements or reported earnings per share.  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 our first
quarter of fiscal 2010.  SFAS No. 160 is currently not expected to have a
material effect on the Companys results of operations, cash flows or financial
position.  In
June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance states that unvested share-based payment awards that
contain nonforfeitable rights to  12 Page     dividends or dividend equivalents are participating securities and
should be included in the computation of earnings per share using the two-class
method outlined in SFAS No. 128, Earnings per Share. The two-class method
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
and participation rights in undistributed earnings. The Company does not expect
EITF 03-6-1 to have an impact to the financial statements or reported earnings
per share.  In
April 2008, the FASB issued FASB Staff Position (FSP) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. This guidance
addresses the determination of the useful life of intangible assets which have
legal, regulatory or contractual provisions that potentially limit a companys
use of an asset. Under the new guidance, a company should consider its own
historical experience in renewing or extending similar arrangements. Per FAS
142-3, this effective for financial statements for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years.  We are
required to apply the new guidance to intangible assets acquired after
December 31, 2008.  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
30Consolidated
Financial Statements:Consolidated
Balance Sheets
31Consolidated
Statements of Operations
32Consolidated
Statements of Stockholders' Equity
33Consolidated
Statements of Cash Flows
34Notes to
Consolidated Financial Statements
35-46  ITEM 9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  None.  Item 9A(T). Controls
and Procedures.  Material
Weaknesses Previously Disclosed  As discussed in Item
9A of our 2008 Annual Report on 10-K, as of February 29, 2008, we identified
certain material weaknesses related to our accounting policies and
procedures;  13 Page     1. Management
did not maintain effective internal controls relating to the quarter end closing
and financial reporting process in adequately preparing account reconciliations
pertaining to stock option activity. 2. The
Company has insufficient internal personnel resources and technical accounting
and reporting expertise within the Companys financial closing and reporting
functions. 3. Due
to our small size, the Company did not maintain effective internal controls to
assure segregation as the same employee was responsible for initiating and
recording of transactions, thereby creating the segregation of duties
weakness.  1.  Evaluation of Disclosure Controls and
Procedures   Under
the supervision and with the participation of our management, including our
chief executive officer and chief financial officer, we conducted an evaluation
of the effectiveness, as of February 28, 2009, of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of
this evaluation was to determine whether as of the evaluation date our
disclosure controls and procedures were effective to provide reasonable
assurance that the information we are required to disclose in our filings with
the Securities and Exchange Commission, or SEC, under the Exchange Act
(i) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. Based on their evaluation, our management has concluded, as
discussed below, that material weaknesses existed in our internal control over
financial reporting as of February 28, 2009 and as a result our disclosures
controls and procedures were not effective.  Notwithstanding the material
weaknesses that existed as of February 28, 2009, our chief executive officer and
chief financial officer have concluded that the financial statements included in
this Annual Report on Form 10-K present fairly, in all material aspects, 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).  Changes in Internal Control over Financial Reporting  During
the fiscal quarter ending May 31, 2008, management implemented the following
controls and procedures to remediate their material weaknesses;  Material weakness #1, #2 and #3; · 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. Additional controls for material weakness #1; · Reconciliation of internal stock option register with new options
expensed on a quarterly basis; and · Review of new stock option agreements with CEO and Chairman on a
quarterly basis.  During
the fiscal quarter ending November 30, 2008, management implemented additional
controls to further remediate their material weaknesses;   14 Page     Material weakness #1; · All new stock option agreements will be sequentially numbered;
and · All new stock options granted will be documented in the board
minutes including grantee, date of grant, number of options granted, exercise
price, vesting terms, and length of agreement.  Managements
Annual Report on Internal Control Over Financial Reporting  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(e) and
15d-15(f) of the Exchange Act. We have designed our internal controls to provide
reasonable, but not absolute, assurance that our financial statements are
prepared in accordance with U.S. GAAP. We assess the effectiveness of our
internal controls based on the criteria set forth in the Internal
Control  Integrated Frameworkdeveloped by the Committee of Sponsoring
Organizations of the Treadway Commission.  This annual filing does not
include an attestation report of the Company's registered public accounting firm
regarding internal control over financial reporting. Management's report was not
subject to attestation by the Company's 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. In
performing the assessment, our management identified the following three
material weaknesses in internal control over financial reporting as of February
28, 2009:  1. Management
did not maintain effective internal controls relating to the quarter end closing
and financial reporting process in adequately preparing account reconciliations
pertaining to stock option activity; 2. The
Company has insufficient internal personnel resources and technical accounting
and reporting expertise within the Companys financial closing and reporting
functions; and 3. Due
to our small size, the Company did not maintain effective internal controls to
assure segregation as the same employee was responsible for initiating and
recording of transactions, thereby creating the segregation of duties
weakness;  Due to
these material weaknesses, management has concluded that our internal control
over financial reporting was not effective as of February 28, 2009.  During
the fiscal quarter ended February 28, 2009, 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.  Remediation  In response to the material weaknesses in our
internal controls noted above, we have formalized the following corrective
procedures to remediate them;  Material weakness #1, #2 and
#3; · Hired a seasoned contract CFO in September
2008 and retained our previous contract CFO as our contract
Controller; · During
the fiscal quarter ending May 31, 2008, applying a more rigorous review of the
quarterly close processes by the Controller and CFO to ensure that the  15 Page     performance
of the control is evidenced through appropriate documentation which is
consistently maintained; Additional controls for material weakness #1; · Reconciliation
of internal stock option register with new options expensed on a quarterly
basis; · Review of new stock option agreements with CEO
and Chairman on a quarterly basis; · All new stock option agreements will be sequentially numbered;
and · All new stock options granted will be documented in the board
minutes including grantee, date of grant, number of options granted, exercise
price, vesting terms, and length of agreement.  With the implementation of these corrective
actions we believe that the previously reported material weaknesses will be
remediated by the end of the first quarter of the fiscal year 2010; however such
procedures will not be tested until our first quarter close.  Inherent Limitation on the Effectiveness of
Internal Controls  The
effectiveness of any system of internal control over financial reporting,
including ours, is subject to inherent limitations, including the exercise of
judgment in designing, implementing, operating, and evaluating the controls and
procedures, and the inability to eliminate misconduct completely. Accordingly,
any system of internal control over financial reporting, including ours, no
matter how well designed and operated, can only provide reasonable, not absolute
assurances. In addition, 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. We intend to continue to monitor and
upgrade our internal controls as necessary or appropriate for our business, but
cannot assure you that such improvements will be sufficient to provide us with
effective internal control over financial reporting.  ITEM 9B. OTHER
INFORMATION  None.  16 Page     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
54

Chairman &
Secretary/TreasurerJan K.
Andersen
55

Chief Executive
Officer/DirectorJohn A. Witham
(1)
57

Executive Vice
President/Chief Financial OfficerMike W. Davis
  (2)
47

Chief Technical
OfficerJeff
Mills
47

DirectorPierce
McNally
60

DirectorGary
Hall
44

Director  (1) 
Mr. Witham is a contract CFO and not an employee of the Company (2) 
Mr. Davis is a contract CTO and is 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.  JAN K. ANDERSEN was named Chief Executive Officer/Director on
January 27, 2009.  Mr. Andersens primary responsibility is development of
the Companys domain names.  For the past eight years, Mr. Andersen served
as President and Chief Executive Officer of Bellacor.com, an internet sales
company. Prior to Bellacor.com, Mr. Andersen was Vice President of Marketing at
NetRadio.com, an internet streaming company.  Prior to NetRadio.com, Mr.
Andersen held a number of senior level positions in the business development,
sales and marketing area.  Mr. Andersen holds a B.A. Degree from Niels
Brooks College, Copenhagen, Denmark and an MBA from St Thomas University.  JOHN A. WITHAM was named Executive Vice President and Chief
Financial Officer on September 16, 2008.  Mr. Witham is primarily
responsible for the overall financial reporting and capital structure of the
Company.  For the past two years, Mr. Witham served as Executive Vice
President and Chief Financial Officer at Wireless Ronin Technologies, a start-up
software technology company in the digital signage industry.  Prior to
Wireless Ronin Technologies, Mr. Witham spent two years in the financial
consulting field.  Prior to that, he served as Executive Vice President and
Chief Financial Officer at Metris Companies, a credit card issuer in the
consumer finance industry.  Prior to Metris Companies, Mr. Witham held a
number of senior level financial positions in the accounting and finance area.
 Mr. Witham holds a B.A. in Accounting from Winona State University.       17 Page     MIKE W. DAVIS was appointed Chief Technology Officer on December
1, 2007.  Mr. Davis currently holds two positions; he has been the owner
and President of Sihope Communications since 1995 and an Enterprise/Software
Architect at Procedo Inc since 2006.  Mr. Davis has extensive experience as
a Project Manager for large scale websites, the design and deployment of
multi-site networking infrastructure and the design and direct development of
multisystem/multiplatform migration software from various hardware/software
compliance archives.  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.  For the past
seven years, Mr. McNally has been a senior attorney at Gray Plant Mooty, a
Minneapolis law firm, practicing in the areas of business law and
entrepreneurial services.  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.  GARY HALL became a director on August 1, 2007.  Mr. Hall
currently holds three positions, he is the CEO and President of Social Managers,
Inc, a social networking management company which he has been employed at since
2008, an Executive Consultant with Pringo since 2008 and an Executive
Consultant/Owner of Reunion.com, Inc. since 2008.   Mr. Hall served as
President of Pringo, a Los Angeles based social networking company from 2006 to
2008. Prior to that, Mr. Hall served as Vice President Business Development at
Reunion.com, Inc. from 2002 to 2006.  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.   18 Page     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 28, 2009 and February 29, 2008
to the Chairman, Chief Executive Officer, Chief Financial Officer and the Chief
Technolgy Officer. No other officers earned cash compensation in excess of
$100,000 in fiscal 2009.  Summary Compensation Table  Name and Principle Position

Fiscal year
Salary
Stock Option Awards (1)
Other Annual Compensation (2), (3),
(4)
Total CompensationRichard Pomije, Chairman &
Secretary/Treasurer

2009
$    226,731
$
             0
$     36,224
$
    262,9552008
$    180,192
$
             0
$     45,544
$
    225,736Jan K. Andersen, CEO/Director
(5)
2009
$
       7,692
$   304,869
$
             0
$
    312,561John A. Witham, EVP & CFO
(6)
2009
$
     73,750
$   284,937
$
             0
$
    358,687Mike Davis, CTO

2009
$
              0
$
             0
$
             0
$
               02008
$
              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 6
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.(5)
Jan K. Andersen
started January 27, 2009(6)
John A. Witham
started September 15, 2008 as a contract CFO       19 Page     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 28, 2009.    Name
Grant Date
Number of shares - Underlying options granted
Exercise Price
($/share)
Grant Date Fair Value
Expiration dateJan K.
Andersen
1/27/2009
200,000
$3.000
$2.567
1/27/2014Jan K.
Andersen
1/27/2009
70,000
$7.500
$2.333
1/27/2014Jan K.
Andersen
1/27/2009
75,000
$15.000
$2.115
1/27/2014John A.
Witham
9/16/2008
100,000
$4.000
$3.413
9/16/2013  OUTSTANDING
OPTIONS AT FISCAL YEAR-END  The
following table provides information relating to the value of shares of common
stock subject to options held by the named executive officers and directors as
of February 28, 2009.  Name
Number of Unexercised Options Exercisable
Number of Unexercised Options Unexercisable
Option Exercise Price ($/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
7/26/2012Mike W.
Davis
50,000
0
$3.100
12/1/2012Jan K.
Andersen
100,000
100,000
$3.000
1/27/2014Jan K.
Andersen
0
70,000
$7.50
1/27/2014Jan K.
Andersen
0
75,000
$15.000
1/27/2014John A.
Witham
34,000
66,000
$4.000
9/16/2013  OPTIONS
EXERCISED BY THE EXECUTIVE OFFICERS AND DIRECTORS  IN THE LAST FISCAL
YEAR None  DIRECTORS'
COMPENSATION  The
Company currently pays its directors a $500 monthly fee which the Company has
the option to pay with the issuance of restricted common stock.  For the
current fiscal year, the Company issued the following restricted common stock
valued at $22,000 for the payment of directors fees:   20 Page     On May
16, 2008, the Company issued 1,540 restricted common shares at $2.60 per share,
valued at $4,000, to four directors of the Company for payment of director fees
for a two month period.  The Company had prepaid $2,000 of the director
fees due for the first quarter ended May 31, 2008 as of February 29, 2008.  On
August 15, 2008, the Company issued 1,412 restricted common shares at $4.25 per
share, valued at $6,000, to four directors of the Company for payment of
director fees.  On
November 15, 2008, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.  On
February 28, 2009, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.  The following table
summarizes the payment of director fees for the year ended February 28,
2009:  Name
Prepaid Fees at February 29, 2008
Stock Awards
Total
PeriodRichard
Pomije
$
 500
$
 5,500
$
 6,000
March 2008- February 2009Jeff
Mills
$
 500
$
 5,500
$
 6,000
March 2008- February 2009Pierce
McNally
$
 500
$
 5,500
$
 6,000
March 2008- February 2009Gary
Hall
$
 500
$
 5,500
$
 6,000
March 2008- February 2009  ITEM 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS  The
following table sets forth certain information as of February 28, 2009 with
respect to the number of shares of common stock beneficially owned by (i) each
shareholder known by DigitalTown, Inc. to own beneficially 5% 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 (chairman)
21,133,715(2)
77.79%(2)Jan K. Andersen
(CEO/director)
100,000(3)
.36%(3)John A. Witham
(EVP & CFO)
67,000(4)
.25%(4)Mike Davis
(CTO)
50,000(5)
.20%(5)Jeff Mills
(director)
661,271(6)
2.43%(6)Pierce McNally
(director)
114,741(7)
.40%(7)Gary Hall
(director)
153,753(8)
.60%(8)All directors
and executive officers as a group (7)
22,280,480
82.01%  21 Page       Common shares issued
and outstanding as of February 28, 2009 were 27,166,862   (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.  (2) Mr. Pomije has the right to acquire 2,500,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Pomijes beneficial shares.  (3) Mr. Andersen has the right to acquire 100,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Andersens beneficial shares.  (4) Mr. Witham has the right to acquire 67,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Withams beneficial shares.  (5) Mr. Davis has the right to acquire 50,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Davis beneficial shares.  (6) Mr. Mills has the right to acquire 40,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Mills beneficial shares.  (7) Mr. McNally has the right to acquire 100,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. McNalleys beneficial shares.  (8) Mr. Hall has the right to acquire 150,000 shares through the
exercise of stock options within 60 days of February 28, 2009.  Per Rule
13d-3(d)(1) under the Securities and Exchange Act of 1934, these shares have
been included in Mr. Halls beneficial shares.        22 Page     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 5% 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 Jeff Mills, a director and
stockholder 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 Company has the option to renew for an additional
term of one year at a monthly rent of $3,650.  The future rent obligations
of this lease as of February 28, 2009 totaled $88,775.  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 2009 and 2008.  The Companys audit
committee has engaged CMO to perform three quarterly reviews in fiscal 2009.  During the fiscal
years ended February 28, 2009 and February 29, 2008, the following was paid to
CMO:  2009
2008Audit fees
(1)
$
41,234
$
41,599Total other
fees (2)
$
  2,195
$
         -  (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 SEC Comment Response letter  During the fiscal
years ended February 28, 2009 and February 29, 2008 the following was paid to
Micheal G. Kissell, LTD:  2009
2008Tax fees
(1)
$
 1,445
$
 1,730  (1) Preparation
of corporate tax returns.  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  23 Page     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.  ·
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.   24 Page      ·
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.   PART
IV ITEM 15.
 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES  (a) Consolidated
Financial Statements Audited
Consolidated Financial Statements for the year ended February 28, 2009 and
February 29, 2008  (b) Exhibits. 3.1
Articles of
Incorporation, as amended (1)3.2
Bylaws
(1)10.1
Lease agreement
with Jeff Mills10.2
1996 Employee
Stock Option Plan, as amended to date (1)10.3
Stock
Subscription Agreements22.1
List
of wholly owned subsidiaries23.1
Consent of
Independent Registered Public Accounting Firm31
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).    25 Page     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: April
15, 2009
By:***/s/
Richard A.
Pomije***Richard A.
Pomije, Chairman, Director(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: April
15, 2009
By:
***/s/ Richard A.
Pomije***Richard A.
Pomije, Chairman, Director
(Principal
Executive Officer)Dated: April
15, 2009
By:***/s/
Jan K.
Andersen***Jan K.
Andersen, Chief Executive Officer/DirectorDated: April
15, 2009
By:/s/
John A. Witham__________________John A. Witham,
Executive Vice President/Chief Financial Officer,
(Principal
Financial Officer)Dated: April
15, 2009
By:
/s/ Paul R. Gramstad________________Paul R.
Gramstad, Controller
(Principal
Accounting Officer),Dated: April
15, 2009
By:
/s/ Jeff
MillsJeff Mills,
DirectorDated: April
15, 2009
By:
/s/ Pierce
McNallyPierce McNally,
Director  26 Page      Dated: April
15, 2009
By:
/s/ Gary
HallGary Hall,
Director  27 Page                  DigitalTown, Inc.   CONSOLIDATED FINANCIAL STATEMENTS  FEBRUARY 28, 2009 AND FEBRUARY 29, 2008              28 Page      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. as of
February 28, 2009 and February 29, 2008, 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
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of DigitalTown, Inc. as of February
28, 2009 and February 29, 2008, 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 April 13, 2009    29 Page


DigitalTown, Inc.  CONSOLIDATED BALANCE SHEETS ASSETSFebruary 28,2009

February 29,2008Current
assets:Cash

$      43,914

$      67,161Other
receivables

-

70,528Total
current assets

43,914

137,689Property and
equipment, net

4,022

6,737Intangible
assets, net

810,267

602,194Total
assets

$
   858,203

$
   746,620LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
liabilities:Accounts
payable

$
      27,565

$
      100,683Loan
from director/stockholder

102,767

-Accrued
expenses:Accrued
payroll

12,473

14,301Accrued
interest

-

11,156Total
current liabilities

142,805

126,140Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,166,862 and
27,081,750 shares issued and outstanding at February 28, 2009 and
 February 29, 2008, respectively

271,665

270,812Additional
paid-in-capital

22,271,789

19,737,494Subscription
receivable

(4,506,963)

(5,030,795)Accumulated
deficit

(17,321,093)

(14,357,031)Total
stockholders equity

715,398

620,480Total
liabilities and stockholders equity

$
   858,203

$
   746,620   The
accompanying notes are an integral part of these consolidated financial
statements.


30 Page


DigitalTown, Inc  CONSOLIDATED STATEMENTS OF OPERATIONS  Year ended
February 28,
2009

Year ended
February 29,
2008Revenue
$
                   -

$
                  -Operating
expenses:Selling,
general and administrative expenses
2,958,069

2,696,010Loss from
operations
(2,958,069)

(2,696,010)Other income
(expense):Interest
expense
(7,742)

(1,680)Other
income
1,749

2,811Total
other income (expense)
(5,993)

1,131Net loss before
income taxes
(2,964,062)

(2,694,879)Income tax
provision
-

-Net loss
$
  (2,964,062)

$
 (2,694,879)Loss per common
share  basic and diluted
$
           (0.11)

$
         (0.10)Weighted
average common shares outstanding  basic and diluted
27,125,928

26,035,952  The
accompanying notes are an integral part of these consolidated financial
statements.


31 Page


DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years
Ended February 28, 2009 and February 29, 2008 Common Stock
AdditionalPaid-In
Subscription
AccumulatedShares
Amount
Capital
Receivable
Deficit
TotalBalance 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)
620,480Cancelation
of common stock issued previously for payment of outstanding accounts
payable
(10,690)
(106)
(30,894)
-
-
(31,000)Issuance
of common stock at $2.60 per share and $2.90
39,975
400
106,740
-
-
107,140Payments
received on subscription agreements
-
-
-
523,832
-
523,832Stock based
compensation
-
-
2,322,935
-
-
2,322,935Common
stock issued for director fees
8,952
90
21,910
-
-
22,000Stock options
exercised
46,875
469
113,604
-
-
114,073Net loss
-
-
-
-
(2,964,062)
(2,964,062)Balance February
28, 2009
27,166,862
$271,665
$22,271,789
$(4,506,963)
$(17,321,093)
$715,398    The
accompanying notes are an integral part of these consolidated financial
statements.


32 Page


DigitalTown, Inc.  CONSOLIDATED STATEMENT OF CASH FLOWS  Year ended February 28,
2009

Year ended February 29,
2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (2,964,062)

$  (2,694,879)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
2,493

2,615Intangible asset impairment
charges
-

124,679Stock based compensation
expense
2,322,935

1,800,811Non-cash stock
issued for services
-

81,062Non-cash stock
issued for rent
-

26,500Non-cash stock
issued for director fees
22,000

21,500Gain on sale of
asset
(55)

-Changes in
operating assets and liabilities:Other
receivables
70,528

(69,529)Accounts
payable
(104,118)

(60,958)Accrued
expenses:Accrued payroll
(1,828)

(17,868)Accrued interest
(11,156)

1,680Deferred officer
compensation
-

(18,865)Net
cash used in operating activities
(663,263)

(803,252)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchases of
property and equipment
(167)

(7,773)Proceeds from
sale of asset
444

-Purchases and
 renewal of  intangible assets  domain names
(208,073)

(181,653)Purchase of
intangible asset  website development
-

(72,540)Net
cash used in investing activities
(207,796)

(261,966)CASH FLOWS FROM FINANCING
ACTIVITIES:Advances from officer/stockholder
-

(16,354)Proceeds from loan  director/stockholder
145,000

-Payments on loan  director/stockholder
(42,233)

-Note payable-shareholder
-

(70,000)Payments
received on stockholder subscription receivables
523,832

1,166,675Proceeds from
issuance of stock
107,140

-Proceeds from
exercise of stock options
114,073

43,125Net cash provided by financing
activities
847,812

1,123,446Net change in cash and cash equivalents
(23,247)

58,228Cash and cash equivalents,
beginning of period
67,161

8,933Cash and cash equivalents,
end of period
$       43,914

$       67,161  The accompanying notes are an integral part of these consolidated
financial statements.





33 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Note 1. Nature of
Business and Summary of Significant Accounting Policies:  Nature of
Business  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 and focused their
efforts on developing a plan to integrate their nearly 27,000 high school domain
names into a social civic and school spirit network serving students, alumni,
schools, local towns and their citizens.  As part of that plan, the Company
changed its name to DigitalTown, Inc. on March 1, 2007.  The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At February 28,
2009, the Company had an accumulated deficit of $17,321,093.  Subsequent to
February 28, 2009, the Company has received cash proceeds totaling approximately
$60,000 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, 2010.  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 wholly-owned
subsidiary Tiger Media. 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.


34 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Fair Value of
Financial Instruments  The
Companys financial instruments consist of cash, other receivables, accounts
payable, accrued expenses and note payable.  The Company considers the
carrying value of its financial instruments in the financial statements to
approximate fair value due to their short-term nature.  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.  As of February 28,
2009, the Company had no 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 three 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.


35 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Income
Taxes  The
Company accounts for income taxes in accordance with SFAS No. 109, as clarified
by FIN No. 48, which requires an asset and liability approach to financial
accounting and reporting for income taxes. Accordingly, deferred tax assets and
liabilities arise from the difference between the tax basis of an asset or
liability and its reported amount in the financial statements. Deferred tax
amounts are determined using the tax rates expected to be in effect when the
taxes will actually be paid or refunds received, as provided under currently
enacted tax law. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable, respectively, for the period plus or
minus the change in deferred tax assets and liabilities during the period.   FIN No.
48 requires the recognition of a financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority.  Stock-Based
Compensation  The
Company follows Financial Accounting Standards Board (FASB) Statement No.
123(R), Share-Based Payment, for recording its stock-based compensation
arrangements.  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.  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 28, 2009 and February 29, 2008, 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 28, 2009
and February 29, 2008 were excluded from the computation of diluted loss per
share as their effect would be anti-dilutive.


36 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   As of
February 28, 2009 and February 29, 2008, the Company had stock options
outstanding of 4,478,000 and 3,422,500, respectively.  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. Accounts are insured by the Federal Deposit Insurance
Company up to $250,000.  At February 28, 2009, the Company had no uninsured
cash balances.  Advertising Advertising costs are charged to operations when incurred.
 The Company did not incur any advertising expense during the years ended
February 28, 2009 and February 29, 2008.  Recently Issued
Accounting Pronouncements  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.
 The Company does not expect FAS 157-2 to have an impact to the financial
statements of reported earnings per share.  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 our first
quarter of fiscal 2010.  SFAS No. 160 is currently not expected to have a
material effect on the Companys results of operations, cash flows or financial
position.


37 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   In
June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and should be included in the computation of earnings
per share using the two-class method outlined in SFAS No. 128, Earnings per
Share. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating security
according to dividends declared and participation rights in undistributed
earnings. The Company does not expect EITF 03-6-1 to have an impact to the
financial statements or reported earnings per share.  In
April 2008, the FASB issued FASB Staff Position (FSP) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. This guidance
addresses the determination of the useful life of intangible assets which have
legal, regulatory or contractual provisions that potentially limit a companys
use of an asset. Under the new guidance, a company should consider its own
historical experience in renewing or extending similar arrangements. Per FAS
142-3, this effective for financial statements for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years.  We are
required to apply the new guidance to intangible assets acquired after
December 31, 2008.   Note 2. Property
and Equipment  Property and
equipment are as follows:  February 28,      2008
February 29,  2008Office
equipment and furniture
$
       480,636
$
      480,993Less
accumulated depreciation
(461,976)
(459,618)Less impairment
of equipment
(14,638)
(14,638)$
           4,022
$
          6,737  Depreciation expense for the years ended February 28, 2009 and
February 29, 2008 was $2,493 and $2,615, respectively.  Note 3. Intangible
Assets  Intangible assets are
as follows:  February 28,  2009
February 29,  2008Domain
names
$
    810,267
$
     654,333Website
development costs
-
72,540Less
accumulated amortization
-
-Less impairment
of domain names
-
(52,139)Less impairment
of website development costs
-
(72,540)$
    810,267
$
     602,194


38 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Since
the useful life of the domain names are deemed to be indefinite by the Company,
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.  Note 4. Loan from
Director/Stockholder  On
March 25, 2008, the Company signed an unsecured promissory note for a working
capital loan of $145,000 from Jeff Mills a director and stockholder of the
Company.  The loan is due on demand and bears annual interest at 6.5%.
 As of February 28, 2009, the outstanding balance of the loan was $102,767
and the Company made principal payments of $42,233 during the twelve months
ended February 28, 2009.  Interest expense incurred on this loan for the
twelve months ended February 28, 2009 was $7,742.  Note 5. Income
Taxes  At
February 28, 2009, the Company had net operating loss carryforwards of
approximately $6,555,000. The net operating loss carryforwards are available to
offset future taxable income through 2029 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 2029.  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:  2009

2008Deferred tax
assets:Net
operating loss carryforwards

$
    2,419,000

$
    2,260,000Stock
compensation

3,037,000

2,634,000Total deferred
tax assets

5,456,000

4,894,000Valuation
allowance

(5,466,000)

(4,894,000)Net deferred
tax assets

$
                 -

$
                  -


39 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Reconciliation
between the federal statutory rate and the effective tax rate for the years
ended February 28, 2009 and February 29, 2008 is as follows:  2009
2008Federal
statutory tax rate

34.0%

34.0%State taxes,
net of federal benefit

4.0%

4.0%Non-deductible
items

(1.0)%

(1.0)%Change in
valuation allowance

(37.0)%

(37.0)%Effective tax
rate

0.0%

0.0%  In June
2006, the FASB issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement
109 ("FIN 48"). FIN 48 establishes a single model to address accounting
for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.  The
Company adopted the provisions of FIN 48 on March 1, 2008. As of the
date of adoption, the Company had no unrecognized tax benefits. The adoption of
FIN 48 did not result in an adjustment to retained earnings. The Company will
recognize interest and penalties related to unrecognized tax benefits as a
component of income tax expense. The Company had recognized no interest or
penalties upon the adoption of FIN 48.  At February 28, 2009 the Company has no
unrecognized tax benefits or associated interest and penalties. The Company does
not expect any significant increases or decreases to its unrecognized tax
benefits within twelve months of this reporting date.   The
Company is subject to U.S. Federal and Minnesota state income
tax.  However, to the extent allowed by law, the tax authorities may
have the right to examine prior periods where net operating losses or tax
credits were generated and carried forward, and make adjustments up to the
amount of the net operating loss or credit carryforward amount.  The Company is not
currently under Internal Revenue Service ("IRS") or Minnesota tax
examinations.  Note 6. Common
Stock Subscriptions Receivable  Material terms of the subscription agreements received by the
Company on August 31, 2005 for 78,376 restricted common shares and on December
30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value
of $3,608,782) 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.


40 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   · 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.  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
5,030,795Cash
collected
(523,832)Receivable
balance at February 28, 2009
$
   4,506,963Summary of
outstanding subscriptions:2006
subscriptions
$
  1,256,963October 5, 2007
subscriptions
3,250,000$
  4,506,963  The
Company has not exercised its rights to charge up to 4% interest on the
subscription amounts outstanding and the Company has provided no downside
protection to the subscribers.  The downside protection in the terms for
the subscription agreements received on August 31, 2005 and December 30, 2005
requires the Company to reimburse the subscription holder up to 30% of the $.75
purchase price, or $.225, if the market price of the stock is below $.75 when
converted, the protection may be provided in additional shares if necessary.
 The subscription agreements do not define the term when converted.
 The Company has taken the position that if at the time that a purchaser
pays in full for the shares under a subscription agreement, the closing price of
the shares of the Companys stock are less than $.75, the shareholder would be
entitled to up to 30% additional shares, depending on the trading share
price.  The
Company has collected approximately $267,500 of additional outstanding
subscription receivables for the period from March 1, 2009 to April 14,
2009.


41 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Note 7.
Stockholders Equity  Stock Transactions  On
February 28, 2009, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.  During
the quarter ended November 30, 2008, the Company issued 7,375 common shares at
an average price of $1.72 per share for the exercise of stock options and
received cash proceeds of $12,685.  On
November 15, 2008, the Company issued 3,000 restricted common shares at $2.00
per share, valued at $6,000, to four directors of the Company for payment of
director fees.  During
the quarter ended August 31, 2008, the Company entered into stock purchase
agreements and issued 29,285 restricted common shares at a price of $2.60 per
share, for total cash proceeds of $76,140.  During the quarter
ended August 31, 2008, the Company issued 39,500 common shares at an average
price of $2.57 per share for the exercise of stock options and received cash
proceeds of $101,388.  On
August 28, 2008, the Company cancelled 10,690 common shares that were previously
issued for payment of accounts payable for services.  The agreement with
the vendor was cancelled and the shares were put back into treasury
stock.  The accounts payable to this vendor was recorded back into the
accounts payable aging and paid in cash accordingly.  That same day, the
Company re-issued and sold the 10,690 common shares at $2.90 per share,
valued at $31,000 to a current shareholder and received cash proceeds of
$31,000.  On
August 15, 2008, the Company issued 1,412 restricted common shares at $4.25 per
share, valued at $6,000, to four directors of the Company for payment of
director fees.  On May
16, 2008, the Company issued 1,540 restricted common shares at $2.60 per share,
valued at $4,000, to four directors of the Company for payment of director
fees.  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 remaining balance due on their
subscription agreements.  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
was due to the original subscription holder. The underlying original
subscription receivable due the Company for these transferred shares totaled
$620,319.  The entire $620,319 has been paid to the Company and has reduced
the original investors stock subscription receivable accordingly during the
fiscal year ended February 29, 2008.  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%.


42 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Therefore, the Company is owed $300,735 for their share of the
additional proceeds for those sales. As of April 14, 2009, no payments have been
received and the Company has not recorded the $300,735 in the stock subscription
receivable balance at February 28, 2009.  The Company will record those
future cash receipts to Additional Paid in Capital when received.  Note 8. Stock
Options  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of February 28, 2009, 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 grant date anniversary.  The
terms of the options vary from one year to five years from the date of
grant.  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 option-pricing 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 28, 2009 and February 29,
2008, we utilized the following key assumptions in computing fair value using
the Black-Scholes option-pricing model:  Year ended
February 28, 2009
Year ended
February 29, 2008Weighted-average
Volatility
145%
168%Expected
dividends
None
NoneExpected term
(in years)
5
5Weighted-average
risk-free interest rate
2.62%
4.13%Weighted-average
fair value of options granted
$2.39
$2.94  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.


43 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   The
Companys consolidated financial statements for the years ended February 28,
2009 and February 29, 2008, reflect the impact of SFAS 123(R).  The Company
recorded related compensation expense of $2,322,935 for all outstanding options
for the year ended February 28, 2009.  For the year ended February 29,
2008, the Company recorded related compensation expense of $1,800,811.
 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 28, 2009 and February 29, 2008 by $0.09 and $0.07 respectfully.
As of February 28, 2009, there remains $1,035,194 of total unrecognized
compensation expense, which is expected to be recognized over future periods
through June 30, 2010.  The
following table summarizes information about the Companys stock options as of
February 28, 2009 and changes during the year ended February 28, 2009:   Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contract Life
Aggregate Intrinsic Value (1)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
-
-Granted
1,365,000
5.380
-
-Canceled or expired
(262,625)
(2.083)
-
-Exercised
(46,875)
(2.163)
-
-Options outstanding - February 28, 2009
4,478,000
$  2.979
3.06
$3,003,450Exercisable at February 28, 2009
4,046,584
$  2.683
2.90
$ 2,986,858  (1) The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price.  The following table
summarizes information about stock options outstanding as of December 31,
2008:  Exercise Price
Number Outstanding
Weighted Average Remaining Life
Weighted Average Exercise Price
Number Exercisable
Weighted Average Exercisable Price$1.75 -
$2.50
3,205,000
2.71
$1.82
3,153,333
$1.81$2.60 -
$4.50
903,000
4.25
$3.31
686,167
$3.42$7.50 -
$15.00
370,000
3.27
$12.20
207,084
$13.29$1.75 -
$15.00
4,478,000
3.06
$2.98
4,046,584
$2.68


44 Page


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2009 and February 29, 2008   Note 9. Related
Party Transactions  The
Company entered into a 5 year lease with Jeff Mills, a director and stockholder
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s lease
payments made to the Jeff Mills for the years ended February 28, 2009 and
February 29, 2008 totaled $31,800 and $31,800, respectively.  On October 5,
2007, the Company issued 13,250 restricted common shares, valued at $33,125, to
Jeff Mills for rent payments due for the period of December 16, 2006 through
December 31, 2007.  Minimum lease
payments at February 28, 2009 are as follows:FY 2010
$ 31,800FY 2011
31,800FY 2012
25,175$
88,775  Interest paid to Stockholder  Accrued
interest of $11,156 owed at February 29, 2008 was paid on April 3, 2008.
 This interest relates to advances to the Company from a stockholder in
2007.  These advances were paid during the fiscal year ending February 29,
2008 except for the accrued interest  Note 10.
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
11. Supplemental Disclosure of Cash Flow Information  Year ended February 28, 2009
Year ended February 29, 2008Non-cash flow information:Cash paid for interest
$
    18,898Intangible assets-domain name renewals incurred with
accounts     payable
-
$
        31,122Common stock issued in lieu of
rent payments owed a director of the
       Company included in accounts
payable
-
$
       (6,625)Common stock issued with
subscription agreements
-
$
  3,250,000Cancelation of common stock
issued previously for payment of outstanding accounts payable
$
      31,000
$
               -


45 Page