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, 2010   |__|
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        Indiciate by
checkmark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). [
 ] Yes  [X] No (Not required by smaller reporting companies.)  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 $ 10,154,844 as of the last day of the Companys most recently
completed second fiscal quarter (August 31, 2009), when the last reported sales
price was $1.51.  There were 27,478,737
shares of the registrants common stock outstanding as of May 28, 2010.     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
5Item 3.
Legal
Proceedings
5Item 4.
[Removed and
Reserved]
5PART II

6Item 5.
Market for the
Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
6Item 6.
Selected
Financial Data
6Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
7Item 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
15Item
9A(T).
Controls and
Procedures
15Item 9B.
Other
Information
17PART III

17Item 10.
Directors and
Executive Officers of the Registrant
17Item 11.
Executive
Compensation
19Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
22Item 13.
Certain
Relationships and Related Transactions and Direcgtor Independence
24       Item 14.
Principle
Accountants and Fees and Services
24PART IV
26Item 15.
Exhibits,
Financial Statement Schedules
26SIGNATURES
26           PART
I  ITEM 1.
  BUSINESS  GENERAL  DigitalTown owns the
domain names for approximately 27,000 high school spirit sites throughout the
United States.  The domain names include the name of the school and their
mascot (i.e. www.pasadenabulldogs.com) and the majority of the domain names are
in the .com format.  The Company is currently creating a nationwide network
of local communities built around these domain names, and the schools and
communities they represent.  On
September 29, 2009, the Company signed a Strategic Alliance Agreement with The
Active Network Inc. (Active) covering a range of content, technology and
business services.  The companies (Active and DigitalTown) intend to
leverage Actives extensive data and applications suite to leverage
DigitalTowns unique portfolio of 27,000 URLs in the market for hyper-local
content.  Through the strategic alliance, the companies will initially
focus on integrating Active.com content, including an extensive directory of
events and facilities, school schedules, scores and rankings, with DigitalTowns
websites.  The companies will also collaborate on a number of technology
solutions including event registration and organization, team and organizational
websites, and localized online communities.  The companies intend to
monetize the sites through online advertising and a variety of subscription and
transaction services that are being contemplated.  DigitalTown,
completed its nationwide rollout of nearly 27,000 high school spirit content
websites in December 2009, which represents the first phase of the Companys
plans to develop powerful, user generated and interactive sites that will serve
all the constituents of local high schools, and by extension, their local
communities. This phase aggregates existing content from across the internet
that is relevant to each high school. Each school site is customized to reflect
each schools colors, with links to their official high school web page.
 This phase will allow us to aggressively engage with partners to add
functionality and features unique to each domain.  On
February 3, 2010, the Company signed a Contractor Services Agreement with Active
to perform certain development services.  The specific services will be
defined in Statements of Work (SOW), which will be entered into from time to
time between the two parties.  · On February 10, 2010, the Company entered into its first SOW with
Active to perform software development services consisting of engaging an
independent third party consultant to perform a software technology platform
analysis of existing software and supporting technologies in order to evaluate
DigitalTowns software development strategy.  · On March 5, 2010, the Company entered into a SOW with Active to
provide systems design services for the creation of a new database integrating
certain Active data with DigitalTowns database.   Page| 1     · On April 22, 2010, the Company entered into a SOW with Active to
provide systems development services to build the system that will integrate
certain Active data with DigitalTowns database.  · On April 22, 2010, the Company entered into a SOW with Active to
provide systems design services for the creation of a user interface for a call
center sales system integrating DigitalTowns database with Actives self-serve
ad system allowing ads to be targeted to specific DigitalTown spirit sites.
 This will allow advertisers to choose single or multiple sites to cover
geographic areas, including sub categories by team sport, conference or other
interest area.  With 27,000 spirit sites covering the United States,
national advertisers will be able to run both local and nationwide advertising
campaigns together. 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 and operated under several different names in the computer hardware and
training sector. In 2005, the Company began acquiring domain names.  On
March 1, 2007, the Company changed its name to DigitalTown, Inc. and began
developing a business plan to develop their platform and monetize their domain
names. 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. EMPLOYEES  As of
May 28, 2010, DigitalTown, Inc. has four 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 losses for the years ended February 28,
2010 and 2009 were $1,245,049 and $2,964,062 respectively and future losses are
likely to occur.  Our accumulated deficit at February 28, 2010 is
$18,566,142. As of February 28, 2010, there exists negative working capital of
$123,065. For the year ended February 28, 2010, we had negative cash flows from
operations of $691,221.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.   Page| 2     We May
Not Be Able To Collect On Our Stock Subscription Receivables As Needed To Fund
Our Operations  As of
February 28, 2010, the Company had stock subscription receivables of $1,894,463
and for the year ended February 28, 2010, the Company received stock
subscription payments of $337,500.  On
February 25, 2010, due to the recent economic downturn and the market value of
the Companys stock, which was trading below $2.50 per share, the Company
amended the initial pricing terms of the subscription agreements received on
October 5, 2007 for 1,300,000 shares.  The amendment decreased the amount
due per share from $2.50 to $0.75 and as a result, the Companys subscription
receivable decreased $2,275,000 from $4,169,463 to $1,894,463.  Additionally, as of
February 28, 2010, the Company cancelled the final pricing terms on their 2005
subscription agreements, which had entitled the Company to receive 50% of the
additional net sales proceeds, after the initial purchaser received 200% of the
purchase price. As a result, the Company is no longer owed $300,735 for their
share of these additional proceeds from sales that occurred during the period
from May 2007 to September 2007.  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 $58,000 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 our websites.  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  Page| 3     factors
such as quarterly fluctuations in our financial results and changes in the
overall economy or the condition of the financial markets could cause the price
of our common stock to fluctuate substantially.  Our
Common Stock is Traded on the "Over-the-Counter Bulletin Board," Which May Make
it More Difficult For Investors to Resell Their Shares Due to Suitability
Requirements  Our
common stock is currently traded on the Over the Counter Bulletin Board (OTCBB).
Broker-dealers often decline to trade in OTCBB stocks, given that the market for
such securities is often limited, the stocks are more volatile, and the risks to
investors are greater.  These factors may reduce the potential market for
our common stock by reducing the number of potential investors.  This may
make it more difficult for investors in our common stock to sell shares to third
parties or to otherwise dispose of them.  This could cause our stock price
to decline.  It is the Companys desire to have its common stock traded on
a national exchange.  We
Could Fail to Retain or Attract Key Personnel  Our
future success depends, in significant part, on the continued services of
Richard Pomije, our Chairman, CEO and Secretary/Treasurer.  We cannot
assure you that we would be able to find an appropriate replacement for him or
any other key personnel.  Any loss or interruption of our key personnel's
services could adversely affect our ability to develop our business plan.
 We do not have an employment agreement with Mr. Pomije nor do we presently
maintain a key-man life insurance policy on him.  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,  Page| 4     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; · 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 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, 2010 totaled $56,975.  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. 
[REMOVED AND RESERVED]    Page| 5     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, 2010 and 2009.  Fiscal Year
2010


Low


HighFirst
Quarter

$
1.30

$
3.20Second
Quarter


1.25


3.50Third
Quarter


0.18


3.00Fourth
Quarter


0.29


1.70  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  These
quotations represent inter dealer prices, without retail markup, markdown, or
commission, and may not reflect actual transactions.  As of May 28, 2010,
there were approximately 107 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. Any 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, 2010 and 2009 and for the years then ended, which have been derived from our
audited consolidated financial statements.  February 28,Balance Sheet
Data
2010
2009Total Assets
$  940,899
$  858,203Total Liabilities
232,068
142,805Stockholders Equity
708,831
715,398   Page| 6      Year ended February
28,Operating Statement
Data
2010
2009Revenues
$
         7,511
$
                  -Cost of revenues
170,890
-Gross profit (loss)
(163,379)
-Operating expenses
1,073,960
2,958,069Loss from operations
(1,237,339)
(2,958,069)Other income
(expense), net
(7,710)
(5,993)Net
loss
$  ( 1,245,049)
$  ( 2,964,062)Loss per
common share-basic and diluted
$(0.05)
$(0.11)Weighted average shares outstanding-basic and
diluted
27,350,072
27,125,928  Year ended February
28,Cash Flow Statement
Data
2010
2009Net cash used in operating activities
$      (691,221)
$      (663,263)Net cash used in investing activities
(25,118)
(207,796)Net cash
provided by financing activities
706,603
847,812Net change in cash
(9,736)
(23,247)Cash and cash
equivalents, beginning of period
43,914
67,161Cash and cash equivalents, end of period
$
         34,178
$
         43,914  The data set forth above 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, 2010 and 2009, which should be
read in conjunction with, and is qualified in its entirety by, the audited
financial statements and notes thereto included elsewhere in this report.  Company
Overview  On
September 29, 2009, the Company signed a Strategic Alliance Agreement with The
Active Network Inc. covering a range of content, technology and business
services.  The companies intend to leverage Actives extensive data and
applications suite to leverage DigitalTowns unique portfolio of 27,000 URLs in
the market for hyper-local content.  Through the strategic alliance, the
companies will initially focus on integrating Active.com content, including an
extensive directory of events and facilities, school schedules, scores and
rankings, with DigitalTowns websites.  The companies will also collaborate
on a number of technology solutions including event registration and
organization, team and organizational websites, and localized online
communities.  The companies intend to monetize the sites through online
advertising and a variety of subscription and transaction services that are
being contemplated.  Page| 7      DigitalTown, Inc. (the Company) completed its nationwide rollout
of nearly 27,000 high school spirit content websites in December 2009, which
represents the first phase of the Companys plans to develop powerful, user
generated and interactive sites that will serve all the constituents of local
high schools, and by extension, their local communities. This phase aggregates
existing content from across the Internet that is relevant to each high school.
Each school site is customized to reflect each schools colors, with links to
their official high school web page.  This phase will allow us to
aggressively engage with partners to add functionality and features unique to
each domain.  Phase two of the design roll out is expected to start in
January 2010. This design phase will start interacting with our content partners
with user profiles and professional website templates for sport teams, school
clubs, booster clubs, alumni groups and more and will provide hyper-local
information down to the demographics of every school district in the United
States.  On
February 3, 2010, the Company signed a Contractor Services Agreement with Active
to perform certain development services.  The specific services will be
defined in Statements of Work (SOW) which will be entered into from time to time
between the two parties.  · On February 10, 2010, the Company entered into its first SOW with
Active to perform software development services consisting of engaging an
independent third party consultant to perform a software technology platform
analysis of existing software and supporting technologies in order to evaluate
DigitalTowns software development strategy.  · On March 5, 2010, the Company entered into a SOW with Active to
provide systems design services for the creation of a new database integrating
certain Active data with DigitalTowns database.  · On April 22, 2010, the Company entered into a SOW with Active to
provide systems development services to build the system that will integrate
certain Active data with DigitalTowns database.  · On April 22, 2010, the Company entered into a SOW with Active to
provide systems design services for the creation of a user interface for a call
center sales system integrating DigitalTowns database with Actives self-serve
ad system allowing ads to be targeted to specific DigitalTown spirit sites.
 This will allow advertisers to choose single or multiple sites to cover
geographic areas, including sub categories by team sport, conference or other
interest area.  With 27,000 spirit sites covering the United States,
national advertisers will be able to run both local and nationwide advertising
campaigns together.  RESULTS OF
OPERATIONS  YEARS ENDED FEBRUARY
28, 2010 AND 2009  During
the year ended February 28, 2010, the Company recorded revenue of $7,511 and
cost of revenue of $170,890 for a negative gross profit of $(163,379) compared
to no revenue from operations during the year ended February 28, 2009.  The
revenue consisted of minimal commissions generated from advertising and
merchandise sales on our websites and the cost  Page| 8     of
revenue consisted of amortization of the prepaid annual domain name renewal fees
of $159,490, domain register fees of $2,190, server/bandwidth expense of $4,002
and amortization of website development fees of $5,208.  Selling, general and administrative expenses for the year ended
February 28, 2010 decreased by $1,884,109 to $1,073,960 compared to a year ago
due mainly to a decrease in non-cash stock compensation expense of $1,860,383
for the current year.  The decrease in stock compensation expense was
primarily due to the Company granting fewer new stock option agreements and the
reversal of previously recorded stock compensation expense of $235,482 for the
year ended February 28, 2009 due to forfeitures.  The $235,482 of
previously recorded stock compensation expense consisted of stock options that
were previously expensed, but not fully vested on the termination date of
various employees and advisors.  Excluding non-cash stock compensation
expense for the two comparable periods, selling, general, and administrative
expenses were $611,408 for the year ended February 28, 2010, compared to
$635,134 for the year ended February 28, 2009.  The decrease in selling,
general, and administrative expenses of $23,726 for the two comparable periods
was primarily due to decreases in professional fees of $72,211 and travel and
entertainment of $11,731 partially offset by an increase in salary expense of
$40,638, legal fees of $11,797 and administrative fees of $5,750.  The
Companys overall net loss for the current year decreased by $1,719,013 to
$1,245,049.  LIQUIDITY AND CAPITAL
RESOURCES  The
Companys cash position at February 28, 2010, was $34,178, a decrease of $9,736
from $43,914 at February 28, 2009.  During the year ended February 28,
2010, net cash used in operating activities was $691,221 compared to cash used
of $663,263 for the comparable period.  When comparing the two periods, the
increase in cash used in operating activities of $27,958 for the year ended
February 28, 2010 is primarily due to expensing domain name renewal fees of
$159,489 versus capitalizing them a year ago.  This increase in operating
costs was partially offset by non-cash and deferred salary payments of $93,262
to our CEO.  Net
cash used in investing activities for the year ended February 28, 2010 was
$25,118, of which $23,349 was used for website development costs and $1,769 for
the purchase of additional domain names as compared to net cash used of
$207,796, of which $204,360 was used for annual domain name renewal fees, $3,713
for the purchase of additional domain names and $167 used for purchase of fixed
assets offset with $444 of proceeds from the sale of an asset for the comparable
period.  The change in the current period was due mainly to the annual
domain name renewal fees which are now treated as an operating expense versus a
capitalized cost for the year ended February 28, 2009.  Net
cash provided by financing activities for the year ended February 28, 2010 was
$706,603 which consisted of payments received on stockholder subscription
receivables of $337,500, proceeds from the issuance of common stock of $334,500
and proceeds from director/stockholder loan of $39,482 less principal payments
on the loan of $4,879.  For the comparable period ended February 28, 2009,
the Company received net cash provided by financing activities of $847,812 which
consisted of payments received on stockholder subscription receivables of
$523,832, proceeds from the exercise of stock options of $114,073, proceeds from
the issuance of common stock of $107,140 and proceeds from director/stockholder
loan of $145,000 less principal payments on the loan of $42,233.  Page| 9      Monthly
cash operating expenses for the year ended February 28, 2010 were approximately
$58,000 per month. Based on current projections, the Companys monthly cash
operating expenses going forward should be approximately $59,000 per month,
which includes the yearly cost of the renewal of the existing domain names
totaling $174,000.  In addition to the normal monthly operating expenses,
the Companys committed cash requirements for the twelve months ending February
28, 2011 include $7,500 for system design services. A promissory note with Jeff
Mills, a director and stockholder of the Company, has a balance due of $137,370
at February 28, 2010 and is payable upon demand.  The Company intends to
pay the balance of the note in fiscal year 2011.  From March 1, 2010 to May
28, 2010, the Company has received cash proceeds of $358,950 from stock
subscription receivables and $10,000 for the issuance of 6,667 shares of common
stock at $1.50 per share.  In addition, the Company will also continue to
collect on its remaining stock subscription receivables to fund its operations.  As of February 28,
2010, the Company has the following stock subscription agreements
outstanding:  2005 Agreements  Material terms of the subscription agreements, after the
cancellation of the final pricing terms (see note 5), 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.  The outstanding
balance owed on the 2005 subscription agreements at February 28, 2010 is
$919,463.  2007
Agreements  On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000).  Significant
terms of the original subscription agreement are as follows:  · The
price per share of $2.50 was based on the closing price on October 4, 2007. · At
24 months, 1/36 payments are due monthly. · The
Company, at its option, may call up to 1/12 of the gross receivable per month if
the preceding 30 day average trading price is at or above $7.00 a share with
minimum trading volume of 5,000 shares per day. · If
the purchaser sells these common shares, the purchaser shall be entitled to an
amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
stock sale.  Page| 10      On
February 25, 2010, due to the recent economic downturn and the market value of
the Companys stock, which was trading below $2.50 per share, the Company
amended the pricing terms of the subscription agreements received by the Company
on October 5, 2007.  The amendment changed the following significant terms
of the subscription agreement:  The
parties agree that the initial pricing terms in the Confidential Binding Term
Sheet dated October 5, 2007 of the Agreement will be amended to state as
follows:  1. The Subscriber offers to purchase shares of the Company for $0.75
per share.  After the price adjustment, the revised total value of this
subscription agreement is $975,000.  The
following other provisions of the initial pricing and final pricing terms in the
Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be
deleted, and are not enforceable by either party:  · Beginning October 5, 2009, 1/36 payments are due each month
thereafter on the 5th of every month. · The Company at its option may call up to 1/12 of the (gross)
receivable note per month if the preceding 30 day average trading price is at or
above $7.00 a share.  Minimum trading Volume must be 5,000 shares a
day. · As total consideration for the purchase and sale of the Companys
stock, purchaser shall ultimately pay to the Company the following amount (the
Purchase Price): A. Purchaser shall first be entitled to an amount equal to 200% of
the face amount of each share. B. After the purchaser receives the amount in A above, the Company
shall be entitled to 50% of any additional net sales proceeds of the stock.
 Net sales proceeds shall mean the gross proceeds received from the sale of
the stock, less reasonable brokerage commissions. C. Final adjusted net sales proceeds will be wired to the Company
within 7 days from the final settlement of the sale of stock sold.  The
outstanding balance owed on the revised 2007 subscription agreements at February
28, 2010 is $975,000.  Summary  As noted above, the
Company cancelled the terms relating to future sales by the purchasers,
therefore, as of February 28, 2010, the Company is no longer owed the $300,735
for their share of the additional proceeds from these sales.  There was no
accounting required for this transaction, because the amount owed to the Company
was never recorded.  As of
February 28, 2010, the Company had stock subscription receivables of $1,894,463
and for the twelve months ended February 28, 2010, the Company received stock
subscription payments of $337,500.  The
following table summarizes the stock subscription receivable, by quarter, for
the twelve months ended February 28, 2010:  Page| 11      Quarter Ended
Total Balance Due
Total Amount Collected
Amended Purchase Price
(1)
Participatory Rights in the
Proceeds of the Resales Collected
Amount of Downside Protection
ProvidedFebruary 29, 2009
$
    4,506,963May 31, 2009
4,476,963
$     30,000

-
-August 31, 2009
4,371,463
105,500

-
-November 30,  2009
4,312,963
58,500

-
-February 28, 2010
1,894,463
143,500
$ 2,275,000
(2)
-  (1) Amendment to the terms of the
subscription agreements received by the Company on October 5, 2007 for 1,300,000
restricted common shares reducing the price paid per share from $2.50 to
$0.75. (2) The participatory right terms of the
original subscription agreements were cancelled on February 25, 2010.  The
Company has not exercised its rights, per the 2005 subscription agreements, to
demand monthly 1/36 payments or to charge up to 4% interest on the subscription
amounts outstanding and they have provided no downside protection to the
subscribers.  The downside protection in the terms for the 2005
subscription agreements 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 is less than
$.75; the shareholder then would be entitled to up to 30% additional shares,
depending on the trading share price.  In
summary, we believe our current cash reserves, the amounts we expect to collect
on our outstanding stock subscription receivables and the cash received from our
stock issuance in May 2010 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 audited 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 ongoing 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,  Page| 12     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  Domain name costs are accounted for in accordance with the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC 350-30) guidance pertaining to Intangibles-Goodwill and Other, Website
Development Costs.  Certain modules and components of the Companys overall
website development are ready for their intended use and the Companys resulting
websites  are currently operational. Accordingly, the annual domain name
renewal fees are currently being amortized over one year and the purchase of any
new domain names are capitalized.  Previously, during the infrastructure
development stage of its websites, the Company capitalized the purchase of new
domain names and the annual domain name renewal fees. Since the ownership of
each domain name can be renewed for a nominal renewal 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.  Website development costs are accounted for in accordance with the
FASB Accounting Standards Codification (ASC 350-30) guidance pertaining to
Intangibles-Goodwill and Other, Internal-Use Software which requires that all
internal and external costs incurred to develop the internal-use software
necessary to operate the websites be capitalized.  The guidance further
states, amortization should begin when an individual module or component of the
overall internal-use software is ready for its intended use.  The cost of
such module or component will be amortized on a straight-line basis over its
estimated useful life, as determined by the Company, after taking into account
the effects of obsolescence, technology, competition and other economic factors.
 The Company has components of its website development that are operational
and are being amortized on a straight-line basis over a three year life.  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 a 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  The Company recognizes the cost of stock-based compensation plans
and awards in operations on a straight-line basis over the respective vesting
period of the awards.  The Company measures and recognizes
compensation expense for all stock-based payment awards made to employees and
directors. The compensation expense for the Company's stock-based payments is
based on estimated fair values at the time of the grant.   Page| 13     The Company estimates the fair value of stock-based payment awards
on the date of grant using an option pricing model. These option pricing models
involve a number of assumptions, including the expected lives of stock options,
the volatility of the public market price for the Company's common stock and
interest rates. The Company is using the Black-Scholes option pricing model.
Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that are ultimately expected
to vest.   Recently Issued
Accounting Pronouncements  In
December 2009, the FASB issued guidance on the qualitative approach to
identifying a controlling financial interest in a variable interest entity
(VIE), and requires ongoing assessment of whether an entity is a VIE and
whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance is effective for annual reporting periods beginning after
November 15, 2009. The Company does not expect the adoption of Accounting
Standards Update (ASU) 2009-17 to have a material impact on its financial
statements.  In
January 2010, the FASB issued Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The Company does not expect the adoption of
this guidance to have a material impact on its financial statements.  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
29Consolidated
Financial Statements:Consolidated
Balance Sheets
30Consolidated
Statements of Operations
31Consolidated
Statements of Stockholders' Equity
32Consolidated
Statements of Cash Flows
33Notes
to Consolidated Financial Statements
34-48   Page| 14     ITEM 9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  None. ITEM 9A(T). CONTROLS
AND PROCEDURES.  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, 2010, 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, 2010 and as a result, our disclosures
controls and procedures were not effective.  Notwithstanding the material
weaknesses that existed as of February 28, 2010, 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).  Managements
Annual Report on Internal Control Over Financial Reporting  Management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the
Securities Exchange Act of 1934. The Companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those
policies and procedures that:  (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;  (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and  (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could
have a material effect on the financial statements.  Page| 15      Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Under the
supervision of our chief executive officer and chief financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment and those criteria, management
concluded that the Company did not maintain effective internal controls
over financial reporting as of February 28, 2010.   Management
identified the following material weaknesses which were previously identified
last year:  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;  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.  Changes in Internal Controls over Financial Reporting  During
the fiscal quarter ended February 28, 2010, 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; · Apply
a more rigorous review of the quarterly close processes by the 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;  Page| 16     · 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 2011; 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.  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
55

Chairman, Chief
Executive Officer,  & Secretary/TreasurerPaul R.
Gramstad (1)
49

Chief Financial
OfficerMike W. Davis
  (2)
48

Chief Technical
OfficerJeffrey L.
Mills
48

DirectorPierce
McNally
61

DirectorGary
Hall
45

DirectorJohn A. Witham
58

DirectorDonald M.
Fisher
56

Director  (1) 
Mr. Gramstad 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   Page| 17     RICHARD A. POMIJE was appointed Chief Executive Officer on August
21, 2009.  Mr. Pomije has been with DigitalTown, Inc. since 1982 and has
served as President, Secretary, Treasurer, and a director since 1996. He had
previously served in such positions from 1983 through 1992. Mr. Pomije's primary
responsibilities include overall strategic planning. Mr. Pomije holds a degree
in Communication Technology, Audio Technology and Technical Services from Brown
Institute. Mr. Pomije also received a First Class FCC license with radar
endorsement.  PAUL R. GRAMSTAD was appointed Chief Financial Officer on July 2,
2009.  For the past five years Mr. Gramstad has worked as a financial
consultant and for the past three years has been responsible for the Companys
financial reporting and accounting function and continues in that role as their
contract CFO.  Prior to that, he owned and operated a tax business, and
held a number of senior level financial positions in the accounting and finance
area.  Mr. Gramstad is a 1983 graduate of Gustavus Adolphus College and a
Certified Public Accountant.  MIKE W. DAVIS was appointed Chief Technology Officer on December
1, 2007.  Mr. Davis currently holds two positions; Owner and President of
Sihope Communications since 1995 and 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.  JEFFREY L. MILLS became a director in December 2003. Mr. Mills has
worked for Xerox Corporation for the past 23 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
securities 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; CEO and President of Social Managers, Inc, a
social networking management company since 2008, Executive Consultant with
Pringo since 2008 and 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.   Page| 18     JOHN A. WITHAM became a director on August 21, 2009.  Mr.
Witham served as Executive Vice President and Chief Financial Officer at
DigitalTown from September 2008 to June 2009.  From 2006 - 2008, 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.  DONALD M. FISHER became a director on January 21, 2010.
 Since 2007, Mr. Fisher has served as the Director of Strategic Services at
the Active Network focusing on the web and new media, including substantial work
in the areas of syndication, aggregation, search engine marketing and community
building.  From 2003-2007, he was a principal at Talisman Interactive.
 Mr. Fisher is a seasoned marketing and sales executive with substantial
experience in business to business and business to consumer marketing.  He
has lead two separate firms to the ranks of the Philly 100 Fastest Growing
Companies.  Mr. Fisher is a graduate of the University of Pennsylvania.   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.  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, 2010 and 2009 to the
Principal Executive Officer, Principal Financial Officer and Chief Executive
Officer. There were no other compensated officers in fiscal 2010.   Page| 19     Summary
Compensation Table  Name and Principal Position

Fiscal year
Salary
Stock Option Awards (1)
Other Annual Compensation (2), (3),
(4)
Total CompensationRichard Pomije, Principal Executive Officer (PEO),
CEO & Chairman
(5)
2010
$  209,161
$
             -
$   46,075
$
    255,2362009
$  226,731
$
             -
$   36,224
$
    262,955John A. Witham, Principal Financial Officer (PFO)
& CFO
(6)
2010
$
     5,150
$
             -
$
            -
$
      5,1502009
$    73,750
$  341,242
$
            -
$
    414,992Paul R. Gramstad, Principal Financial Officer (PFO)
& CFO
(7)
2010
$    23,400
$     49,010
$
           -
$
     72,4102009
$    33,340
$     96,126
$
           -
$    129,466Jan K. Andersen, CEO/Director
(8)
2010
$    41,538
$
              -
$
          -
$
      41,5382009
$
     7,692
$   835,216
$
          -
$
    842,908   (1)
The amounts
shown are the aggregate grant date fair values of these awards computed in
accordance with Financial Accounting Standards Board (FASB) guidance now
codified as Accounting Standards Codification (ASC) FASB ASC Topic 718,
Stock Compensation (formerly under FASB Statement No. 123(R)). The
assumptions and methodologies used to calculate these amounts are
discussed in Note 6 in the Notes to Financial Statements contained
elsewhere in this Annual Report. The SECs disclosure rules previously
required that we present stock award and option award information for 2009
based on the amount recognized during the corresponding year for financial
statement reporting purposes with respect to these awards (which meant, in
effect, that in any given year we could recognize for financial statement
reporting purposes amounts with respect to grants made in that year as
well as with respect to grants from past years that vested in or were
still vesting during that year). However, recent changes in the SECs
disclosure rules require that we now present the stock award and option
award amounts in the applicable columns in the table above with respect to
2009 on a similar basis as the 2010 presentation using the grant date fair
value of the awards granted during the corresponding year, regardless of
the period over which the awards are scheduled to vest. Since this
requirement differs from the SECs past disclosure rules, the amounts
reported in the table above for stock awards and option awards for 2009
differ from the amounts previously reported in our Summary Compensation
Table for that year. As a result, to the extent applicable, each named
executive officers total compensation amount for 2009 may differ from the
amount previously reported in our Summary Compensation Table for that
year.(2)
Automobile
expenses - Richard A. Pomije
FY2010
$11,497
FY2009
$11,531(3)
Board member
fees Richard A. Pomije
FY2010 $6,844
paid with issuance of restricted common stock
FY2009 $6,000
paid with issuance of restricted common stock  Page| 20      (4)
Medical
 insurance  FY2010 Richard A. Pomije $27,734
FY2010
$27,734
FY2009
$18,693(5)
Richard A.
Pomije was appointed CEO on August 21, 2009(6)
John A. Witham
was appointed as contract CFO/PFO on September 16, 2008 and resigned on
July 2, 2009.(7)
Paul R.
Gramstad was appointed contract CFO/PFO on July 2, 2009Paul R.
Gramstad was appointed contract Controller on September 16, 2008(8)
Jan K. Andersen
was appointed as CEO on January 27, 2009 and dismissed on August 21, 2009.  OPTIONS GRANTED IN
THE LAST FISCAL YEAR  The
following table sets forth information regarding options granted to the named
executive officers and directors during the year ended February 28, 2010.  Grants of Plan-Based Awards  Name
Grant
Date
Number of shares - Underlying options granted
Exercise
Price
($/Share)
Grant
Date
Fair
Value
Expiration
DateJeffrey L.
Mills (director)
12/23/2009
110,000
$1.75
$107,822
12/23/2014Donald M.
Fisher (director)
12/23/2009
100,000
$1.75
$98,020
12/23/2014John A. Witham
(director)
12/23/2009
100,000
$1.75
$98,020
12/23/2014Paul R.
Gramstad (officer)
12/23/2009
50,000
$1.75
$49,010
12/23/2014  OUTSTANDING
OPTIONS AT FISCAL YEAR-END  The
following table provides information relating to the value of shares of common
stock subject to options held by the named executive officers and directors as
of February 28, 2010.  Outstanding Equity Awards at Fiscal Year-End  Name
Number of Unexercised Options Exercisable
Number of Unexercised Options Unexercisable
Option Exercise Price ($/share)
Option Expiration DateRichard A.
Pomije (officer)
2,500,000
0
$1.725
11/6/2011Paul R.
Gramstad (officer)
50,000
0
$1.750
12/23/2014Paul R.
Gramstad (officer)
25,000
0
$4.250
8/25/2013Jeffrey L.
Mills (director)
40,000
0
$1.725
11/6/2011Jeffrey L.
Mills (director)
110,000
0
$1.750
12/23/2014Pierce McNally
(director)
100,000
0
$1.725
11/6/2011Gary Hall
(director)
150,000
0
$4.500
7/26/2012John A. Witham
(director)
100,000
0
$1.750
12/23/2014Donald M.
Fisher (director)
100,000
0
$1.750
12/23/2014  Page| 21       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.  Richard A.
Pomijes director fees compensation is reported in the above Summary
Compensation Table.  For the current fiscal year, the Company issued the
following restricted common stock valued at $32,391 for the payment of directors
fees:  On May
20, 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.  On
August 20, 2009, the Company issued 4,612 restricted common shares at $1.30 per
share, valued at $6,000, to four directors of the Company for payment of
director fees.  On
November 25, 2009, the Company issued 6,250 restricted common shares at $1.20
per share, valued at $7,500, to five directors of the Company for payment of
director fees.  On
February 24, 2010, the Company issued 10,313 restricted common shares at $1.25
per share, valued at $12,891, to six directors of the Company for payment of
director fees.  The following table
summarizes the payment of director fees for the year ended February 28,
2010:  Director Compensation Table  Name
Stock Awards
Option Awards
Prepaid Fees at February 28, 2010
TotalJeffrey L.
Mills
$
 6,000
$
107,822
$
 844
$
 114,666Pierce
McNally
$
 6,000
$
            -
$
 844
$
     6,844Gary
Hall
$
 6,000
$
            -
$
 844
$
     6,844John A.
Witham
$
 3,000
$
  98,020
$
 844
$
   98,864Donald M.
Fisher
$
    750
$
  98,020
$
 423
$
   98,443   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, 2010, 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) all officers and directors; and (iii) 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.    Page| 22      Name of
Beneficial Owner (1)
Number of shares
Percentage of
Outstanding SharesRichard A.
Pomije (CEO & chairman)
20,666,101(2)
68.94%(2)Paul R.
Gramstad (CFO)
95,680(3)
.35%(3)Mike Davis
(CTO)
55,000(4)
.20%(4)Jeffrey L.
Mills (director)
719,856(5)
2.61%(5)Pierce McNally
(director)
122,981(6)
.45%(6)Gary Hall
(director)
158,781(7)
.57%(7)John A.
Witham (director)
103,125(8)
.37%(8)Donald M.
Fisher (director)
100,938(9)
.37%(9)Thomas B.
Pomije
2,208,978
8.04%All directors
and executive officers as a group
22,022,462
71.73%  Common shares issued
and outstanding as of February 28, 2010 were 27,476,246  (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, per rule
13d-3(d)(1) under the Securities and Exchange Act of 1934.  (2) Includes the right to acquire 2,500,000 shares through the
exercise of stock options within 60 days of February 28, 2010.  (3) Includes the right to acquire 75,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  (4) Includes the right to acquire 60,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  (5) Includes the right to acquire 150,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  (6) Includes the right to acquire 100,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  (7) Includes the right to acquire 150,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  (8) Includes the right to acquire 100,000 shares through the exercise
of stock options within 60 days of February 28, 2010.  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  Page| 23     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 AND DIRECTOR INDEPENDENCE  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, 2010 totaled $56,975.  Director Independence  Our Board of
Directors has determined that it does not have a member that is independent as
the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities
Exchange Act of 1934, as amended.  ITEM 14. 
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES.  Moquist Thorvilson Kaufmann Kennedy &
Pieper LLC (MTK) (formerlyCarver Moquist & OConnor, LLC) served as the Companys
independent registered public accounting firm during fiscal 2010 and 2009.
 The Companys audit committee has engaged MTK to perform three quarterly
reviews in fiscal 2011.  During the fiscal
years ended February 28, 2010 and 2009, the following was paid to MTK:  2010
2009Audit fees
(1)
$
42,500
$
41,234Total other
audit related fees (2)
$
  3,690
$
  2,195Tax fees
$
         0
$
         0  (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 letters and SOX 404
planning.  Audit Committee
Policies and Procedures:  The
primary responsibility of the Audit Committee is to oversee the Companys
financial reporting process on behalf of the Board and report the results of
their activities to the Board. Management is responsible for preparing the
Companys financial statements, and the independent auditors are responsible for
auditing those financial statements. The Committee in carrying out its
responsibilities believes its policies and procedures should remain flexible in
order to best react to changing conditions and circumstances.   Page| 24     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.  ·
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 in 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  Page| 25    PART
IV  ITEM
15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES  (a) Consolidated
Financial Statements Audited
Consolidated Financial Statements for the year ended February 28, 2010 and
2009  (b) Exhibits. 3.1
Articles
of Incorporation, as amended (1)3.2
Bylaws
(1)10.1
Lease
agreement with Jeff Mills (3)10.2
1996
Employee Stock Option Plan, as amended to date (1)10.3
Stock
Subscription Agreements (3)10.4
Amendments
to Stock Subscription Agreements14.1
Code
of Ethics(2)22.1
List
of wholly owned subsidiaries (3)23.1
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). (2) Incorporated
by reference to exhibit filed as a part of Current Report on Form 8K filed June
9, 2009. (3) Incorporated
by reference to exhibits filed as a part of our Annual Report on Form 10K filed
April 16, 2009.   SIGNATURES  Pursuant
to the requirements of Section13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.   DigitalTown,
Inc.Dated:
May 28, 2010
By:/s/
Richard A.
PomijeRichard
A. PomijeChief
Executive Officer &  Chairman/Director(Principal
Executive Officer)    Page| 26     Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.   Dated:
May 28, 2010
By:
/s/ Richard A.
PomijeRichard
A. PomijeChief
Executive Officer &  Chairman/Director(Principal
Executive Officer)Dated:
May 28, 2010
By:/s/
Paul R.
GramstadPaul
R. GramstadChief
Financial Officer(Principal
Financial Officer)Dated:
May 28, 2010
By:
/s/ Jeff
MillsJeff
Mills, DirectorDated:
May 28, 2010
By:
/s/ Pierce McNallyPierce
McNally, DirectorDated:
May 28, 2010
By:
/s/ Gary HallGary
Hall, DirectorDated:
May 28, 2010
By:
/s/ Donal M. FisherDonald
M. Fisher, Director  Page| 27                  DigitalTown, Inc.   CONSOLIDATED FINANCIAL STATEMENTS  FEBRUARY 28, 2010 AND 2009              Page| 28      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, 2010 and 2009, 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 audits 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
audits provide 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, 2010 and 2009, 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/
Moquist Thorvilson Kaufmann Kennedy & Pieper LLC  Edina,
Minnesota May
28, 2010    Page| 29


DigitalTown, Inc.  CONSOLIDATED BALANCE SHEETS ASSETSFebruary 28,2010

2009Current
assets:Cash

$      34,178

$      43,914Prepaid
domain name renewal fees

54,825

-Prepaid
expense

20,000

-Total
current assets

109,003

43,914Property
and equipment, net

1,719

4,022Intangible
assets, net

830,177

810,267Total
assets

$    940,899

$    858,203LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
liabilities:Accounts
payable

$       55,412

$       27,565Loan
from director/stockholder

137,370

102,767Other
liability

15,000

-Accrued
payroll

2,563

12,473Deferred
officer compensation

21,723

-Total
current liabilities

232,068

142,805Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,476,246 and
27,166,862 shares issued and outstanding at February 28, 2010 and 2009,
respectively

274,759

271,665Additional
paid-in-capital

20,894,677

22,271,789Subscription
receivable

(1,894,463)

(4,506,963)Accumulated
deficit

(18,566,142)

(17,321,093)Total
stockholders equity

708,831

715,398Total
liabilities and stockholders equity

$    940,899

$    858,203   The accompanying notes are an integral part of these consolidated
financial statements.


Page| 30


DigitalTown, Inc  CONSOLIDATED STATEMENTS OF OPERATIONS  Year ended February 28,2010

2009Revenues
$        7,511

$
                  -Cost
of revenues
170,890

-Loss
from operations
(163,379)

-Operating
expenses:Selling,
general and administrative expenses
1,073,960

2,958,069Income
(loss) from operations
(1,237,339)

(2,958,069)Other
income (expense):Interest
expense
(9,526)

(7,742)Other
income
1,816

1,749Total
other income (expense)
(7,710)

(5,993)Net
loss before income taxes
(1,245,049)

(2,964,062)Income
tax provision
-

-Net
loss
$   (1,245,049)

$  (2,964,062)Net
loss per common share  basic and diluted
$
           (0.05)

$
         (0.11)Weighted
average common shares outstanding  basic and diluted
27,350,072

27,125,928  The accompanying notes are an integral part of these consolidated
financial statements.


Page| 31


DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended February 28, 2010 and 2009 Common Stock
AdditionalPaid-In
Subscription
AccumulatedShares
Amount
Capital
Receivable
Deficit
TotalBalance
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 and $2.90 per share
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)
715,398Issuance
of common stock at $1.50 per share
223,001
2,230
332,270
-
-
334,500Payments
received on subscription agreements
-
-
-
337,500
-
337,500Amendment
of subscription agreements (Note 11)
-
-
(2,275,000)
2,275,000
-
-Stock
based compensation
-
-
462,552
-
-
462,552Common
stock issued for director fees
24,175
242
32,149
-
-
32,391Common
stock issued for deferred compensation
62,208
622
70,917
-
-
71,539Net
loss
-
-
-
-
(1,245,049)
(1,245,049)Balance
February 28, 2010
27,476,246
$274,759
$20,894,677
$(1,894,463)
$(18,566,142)
$708,831    The accompanying notes are an integral part of these consolidated
financial statements.


Page| 32


DigitalTown, Inc.  CONSOLIDATED STATEMENT OF CASH FLOWS  Year
ended February 28,2010

2009CASH FLOWS FROM
OPERATING ACTIVITIES:Net
loss
$  (1,245,049)

$  (2,964,062)Adjustments to
reconcile net loss to net cash flows used in operating activities:Depreciation
2,303

2,493Amortization
of website development cost
5,208

-Stock
based compensation expense
462,552

2,322,935Non-cash
stock issued for director fees
32,391

22,000Non-cash
stock issued for deferred compensation
71,539

-Gain
on sale of asset
-

(55)Changes
in operating assets and liabilities:Other
receivables
-

70,528Prepaid
domain name renewal fees
(54,825)

-Prepaid
expense
(20,000)

-Accounts
payable
27,847

(104,118)Accrued
expenses:Accrued
payroll
(9,910)

(1,828)Accrued
interest
-

(11,156)Deferred
officer compensation
21,723

-Deferred
revenue
15,000

-Net
cash used in operating activities
(691,221)

(663,263)CASH
FLOWS FROM INVESTING ACTIVITIES:Purchases
of property and equipment
-

(167)Proceeds
from sale of asset
-

444Purchase
of intangible asset  website development
(23,349)

-Purchase
of intangible assets  domain names
(1,769)

(3,713)Payments
made for renewal of domain names
-

(204,360)Net
cash used in investing activities
(25,118)

(207,796)CASH
FLOWS FROM FINANCING ACTIVITIES:Proceeds from loan 
director/stockholder
39,482

145,000Payments on loan 
director/stockholder
(4,879)

(42,233)Payments
received on stockholder subscription receivables
337,500

523,832Proceeds
from issuance of common stock
334,500

107,140Proceeds
from exercise of stock options
-

114,073Net
cash provided by financing activities
706,603

847,812Net change in cash
and cash equivalents
(9,736)

(23,247)Cash
and cash equivalents, beginning of period
43,914

67,161Cash
and cash equivalents, end of period
$       34,178

$       43,914  The accompanying notes are an integral part of these consolidated
financial statements.





Page| 33


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   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 and operated under several different names in the computer hardware and
training sector. In 2005, the Company began acquiring domain names.  On
March 1, 2007, the Company changed its name to DigitalTown, Inc. and began
developing a business plan to develop their platform and monetize their domain
names. 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. The Company has sustained losses and negative cash flows from
operations and expects these conditions to continue into the foreseeable future.
 At February 28, 2010, the Company had an accumulated deficit of
$18,566,142.  Subsequent to February 28, 2010, the Company has received
cash proceeds totaling approximately $358,950 from its stock subscription
receivable.  The Company anticipates that existing cash, stock subscription
proceeds received to date, expected future proceeds from its stock subscription
receivable 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, 2011.
 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.  Revenue
Recognition  The Company recognizes revenue when it is realized or realizable
and has been earned.  Revenue is generated from commerce based transactions
generated from our websites and display of graphical advertisements (display
advertising).


Page| 34


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   **Fair
Value of Financial Instruments**  The Companys financial instruments consist of cash, 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.  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, 2010, the Company had no cash equivalents.  Intangible
Assets  Domain Names/Website Development Costs  Domain name costs are accounted for in accordance with the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC 350-30) guidance pertaining to Intangibles-Goodwill and Other, Website
Development Costs.  Certain modules and components of the Companys overall
website development are ready for their intended use and the Companys resulting
websites  are currently operational. Accordingly, the annual domain name
renewal fees are currently being amortized over one year and the purchase of any
new domain names are the only amounts being capitalized.  Previously,
during the infrastructure development stage of its websites, the Company
capitalized the purchase of new domain names and the annual domain name renewal
fees. Additionally, since the ownership of each domain name can be renewed for a
nominal renewal 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.  Website development costs are accounted for in accordance with the
FASB Accounting Standards Codification (ASC 350-30) guidance pertaining to
Intangibles-Goodwill and Other, Internal-Use Software which requires that all
internal and external costs incurred to develop the internal-use software
necessary to operate the websites be capitalized.  The guidance further
states, amortization should begin when an individual module or component of the
overall internal-use software is ready for its intended use.  The cost of
such module or component will be amortized on a straight-line basis over its
estimated useful life, as determined by the Company, after taking into account
the effects of obsolescence, technology, competition and other economic factors.
 The Company has components of its website development that are operational
and are being amortized on a straight-line basis over a three year life.  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 a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.


Page| 35


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   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.  Income
Taxes  The Company accounts for income taxes by following 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.  The Company has three open years of tax
returns subject to examination.  The Company follows 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 and Warrants  The Company measures and recognizes compensation expense for all
stock-based payment awards made to employees and directors on a straight-line
basis over the respective vesting period of the awards.  The
compensation expense for the Company's stock-based payments is based on
estimated fair values at the time of the grant of the portion of stock-based
payment awards that are ultimately expected to vest.  The Company estimates the fair value of stock-based payment awards
on the date of grant using the Black-Scholes option pricing model. This option
pricing model involves a number of assumptions, including the expected lives of
stock options, the volatility of the public market price for the Company's
common stock and interest rates.  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, 2010 and 2009, the Company had no items defined as
other comprehensive income (loss).


Page| 36


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   **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, 2010, 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, 2010 and 2009.  Recently
Issued Accounting Pronouncements  In December 2009, the FASB issued guidance on the qualitative
approach to identifying a controlling financial interest in a variable interest
entity (VIE), and requires ongoing assessment of whether an entity is a VIE
and whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance is effective for annual reporting periods beginning after
November 15, 2009. The Company does not expect the adoption of Accounting
Standards Update (ASU) 2009-17 to have a material impact on its financial
statements.  In January 2010, the FASB issued Improving Disclosures About Fair
Value Measurements, which requires reporting entities to make new disclosures
about recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The Company does not expect the adoption of
this guidance to have a material impact on its financial statements.  Note
2. Property and Equipment  Property
and equipment are as follows:  February 28,2010
2009Office
equipment and furniture
$        480,636
$       480,636Less
accumulated depreciation
(464,279)
(461,976)Less
impairment of equipment
(14,638)
(14,638)$
           1,719
$
          4,022  Depreciation expense for the fiscal years ended February 28, 2010
and 2009 was $2,303 and $2,493, respectively.


Page| 37


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   **Note
3. Intangible Assets**  Intangible
assets, net are as follows:  February 28,2010
2009Domain
names
$     812,036
$      810,267Website
development costs
23,349
-Less
accumulated amortization
(5,208)
-$     830,177
$
     810,267  During the twelve months ended February 28, 2010 and 2009, the
Company capitalized $1,769 and $3,713, respectively, of additional domain name
purchases.  Since the useful life of the domain names is deemed to be
indefinite, no amortization has been recorded.  During the twelve months ended February 28, 2010, the Company
incurred $214,314 of annual domain name renewal fees and has expensed $159,489
to cost of revenues on a straight line basis and has recorded the remaining
$54,825 as prepaid expense as of February 28, 2010. During the twelve months
ended February 28, 2009, the Company was still in the development stage of its
websites and had capitalized $204,360 of annual domain name renewal fees and
thus no cost of revenue or prepaid expense was recorded.  During the twelve months ended February 28, 2010, the Company
capitalized $23,349 of website development costs.  The Company has
determined that these costs pertain to a component that is ready for its
intended use and have an estimated useful life of three years.  During the
twelve months ended February 28, 2010, the Company recorded $5,208 of website
development amortization expense pertaining to this component to cost of
revenues in the Companys consolidated statement of operations.  Future amortization expense at February 28, 2010 is as
follows:  February 28, 2011
$    7,783February 28, 2012
7,783February 28, 2013
2,575$   18,141  Note
4. Deferred Officer Compensation  Richard
Pomije, the CEO and Chairman of the Company, has elected to forego a portion of
his salary at various times due to limited operating funds.  These amounts
do not accrue interest and are due and payable as funds become available in the
future.  On January 25, 2010, the Company issued 62,208 restricted common
shares at $1.15 per share, valued at $71,539, to pay the entire deferred
compensation balance accrued as of December 31, 2009.  The total balance
owed as of February 28, 2010 is $21,723.


Page| 38


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   **Note
5. Stockholders Equity**  Fiscal 2010 Stock Transactions  On February 24, 2010, the Company issued 10,313 restricted common
shares at $1.25 per share, valued at $12,891, to six directors of the Company
for payment of director fees.  On January 25, 2010, the Company issued 62,208 restricted common
shares at $1.15 per share, valued at $71,539, to Richard Pomije, the CEO and
Chairman of the Company for payment of deferred compensation.  On November 25, 2009, the Company issued 6,250 restricted common
shares at $1.20 per share, valued at $7,500, to five directors of the Company
for payment of director fees.  From May 2009 to November 2009, the Company entered into stock
purchase agreements and issued 223,001 units (each unit consisting of one share
of common stock and a two-year warrant to purchase one share of common stock at
an exercise price of $4.00 per share) at a unit price of $1.50 per share, for
total cash proceeds of $334,500.  On August 20, 2009, the Company issued 4,612 restricted common
shares at $1.30 per share, valued at $6,000, to four directors of the Company
for payment of director fees.  On May 20, 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.  Fiscal 2009 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


Page| 39


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   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.  Stock Warrants  As of February 28, 2010, the Company has a total of 223,001 stock
purchase warrants outstanding with an exercise price of $4.00.  The
warrants expire two years from their 2009 dates of issuance.  The weighted
average remaining exercise period as of February 28, 2010 is 1.20 years.  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 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.  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 2005 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%.  As of February 28, 2010, no payments
have been received and the Companys $300,735 share of the proceeds from these
sales has not been recorded in the stock subscription receivable balance.  On
February 28, 2010, the Company cancelled the Final Pricing terms of the
subscription agreements received by the Company on August 31, 2005 and December
30, 2005 pertaining to these sales.  The following terms of the agreements
were cancelled:  · After
the purchaser receives 200% of the purchase price, the Company shall be entitled
to 50% of any additional net sales proceeds of the stock.  Net sales
proceeds shall mean the gross proceeds received from the sale of the stock, less
reasonable brokerage commissions.  · Final
adjusted net sales proceeds will be wired to the Company within 7 days from the
date of the final settlement of the sale of stock from the conversion of all of
the outstanding debentures.  Therefore, as of February 28, 2010, the Company is no longer owed
the $300,735 for their share of the additional proceeds from these sales.


Page| 40


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   In February 2010, the Company entered into an agreement with an
investment banker to promote and sell shares of common stock to accredited and
institutional investors.  In conjunction with the potential sale of shares
of common stock, the investment banker will receive a 10% commission, be
reimbursed for expenses, granted five-year warrants of the Company's
common stock equal to 10% of the shares of common stock sold.  As of May
28, 2010, the Company has not received any proceeds from the sales of shares of
common stock associated with this agreement.  In February 2010, the Company
paid the investment banker $20,000 as an advance on expenses and any potential
commission earned.  The Company has recorded the advance as a prepaid
expense as of February 28, 2010.  Note 6. Stock Options  The Company has one stock option plan called The 2006 Employee
Stock and Option Plan. As of February 28, 2010, 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 from the grant
date anniversary.  The terms of the options vary from two to five years
from the date of grant.  The Company records its stock-based compensation arrangements
calculating the fair value of share-based payments, including grants of employee
stock options and employee stock purchase plan shares, to be recognized in the
consolidated statement of operations based on their grant date fair values.
 The fair value of the Companys stock options have been estimated using
the Black-Scholes pricing model, which requires assumptions as to expected
dividends the options expected life, volatility and risk-free interest rate at
the time of the grant.  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.  For stock options granted during the years ended February 28, 2010
and 2009, we utilized the following key assumptions in computing fair value
using the Black-Scholes option-pricing model:  Year ended February 28,2010
2009Weighted-average
volatility
186%
145%Expected
dividends
None
NoneExpected
term (in years)
5
5Weighted-average
risk-free interest rate
2.30%
2.62%Weighted-average
fair value of options granted
$1.05
$2.39   The Company recorded stock-based compensation expense of $462,552
and $2,322,935 for all outstanding options for the years ended February 28, 2010
and 2009, respectively.  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, 2010


Page| 41


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   and 2009 by $0.02 and $0.09 respectfully. As of February 28, 2010,
there remains $82,456 of total unrecognized compensation expense, which is
expected to be recognized over future periods through December 31, 2010.  The following table summarizes information about the Companys
stock options as of February 28, 2010 and changes during the year ended February
28, 2010:   Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contract Life (years)
Aggregate Intrinsic Value (1)Outstanding February
28, 2008
3,422,500
$
 1.942
-
-Granted
1,365,000
5.380
-
-Canceled or
expired
(262,625)
(2.083)
-
-Exercised
(46,875)
(2.163)
-
-Outstanding -
February 28, 2009
4,478,000
$
 2.979
-
-Granted
630,000
1.972
-
-Canceled or
expired
(1,105,000)
(4.770)
-
-Exercised
-
-
-
-Outstanding -
February 28, 2010
4,003,000
$
 2.326
2.08
-Exercisable at
February 28, 2010
3,877,000
$
 2.310
2.04
-  (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
February 28, 2010:  Exercise Price
Number Outstanding
Weighted Average Remaining Life (years)
Weighted Average Exercise Price
Number Exercisable
Weighted Average Exercisable Price$1.73
- $1.75
3,070,000
1.96
$1.73
3,065,000
$1.73$2.25
- $2.60
448,000
2.66
$2.40
382,000
$2.37$3.00
- $4.50
385,000
2.93
$3.68
330,000
$3.79$15.00
100,000
0.17
$15.00
100,000
$15.00$1.73
- $15.00
4,003,000
2.08
$2.33
3,877,000
$2.31  Note
7. Related Party Transactions  The Company entered into a five year lease with Jeff Mills, a
director/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 five year term of the lease and contains an
option to renew for an additional term of one


Page| 42


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   year at a monthly rent of $3,650.  The Companys lease
payments made to the Jeff Mills for the years ended February 28, 2010 and
February 28, 2009 totaled $31,800 and $31,800, respectively.  Future
minimum lease payments at February 28, 2010 are as follows:FY
2011
$   31,800FY
2012
25,175$   56,975  Note
8. Loan from Director/Stockholder  On March 25, 2008, the Company signed an unsecured promissory note
with Jeff Mills, a director and stockholder of the Company, for a working
capital loan of $145,000, due on demand at an annual interest rate of 6.5%,. In
May 2009, the annual interest rate was increased to 7.0%.  The outstanding
balance of the loan as of February 28, 2010 and 2009, was $137,370 and $102,767,
respectively.  For the fiscal years ended February 28, 2010 and 2009, the
Company made principal payments of $4,879 and $42,233, respectively, and
received additional advances of $39,482 and $0, respectively.  Interest
expense incurred on this loan for the fiscal years ended February 28, 2010 and
2009 was $9,526 and $7,742, respectively.  Note
9. Income Taxes  At February 28, 2010, the Company had net operating loss
carryforwards of approximately $7,380,000. 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.  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:  2010

2009Deferred
tax assets:Net
operating loss carryforwards

$     2,721,000

$     2,419,000Stock
compensation

2,775,000

3,037,000Total
deferred tax assets

5,496,000

5,456,000Valuation
allowance

(5,496,000)

(5,456,000)Net
deferred tax assets

$
                 -

$
                  -   Reconciliation
between the federal statutory rate and the effective tax rate for the years
ended February 28, 2010 and 2009 is as follows:  2010
2009Federal
statutory tax rate

34.0%

34.0%State
taxes, net of federal benefit

4.0%

4.0%Non-deductible
items

(1.0)%

(1.0)%


Page| 43


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009    Stock
compensation adjustment

(34.6)%

-Change
in valuation allowance

(2.4)%

(37.0)%Effective
tax rate

0.0%

0.0%  The
Company adopted the provisions of FASB ASC 740-10 on March 1, 2008. As
of the date of adoption, the Company had no uncertain tax positions. The
adoption of ASC 740-10 did not result in an adjustment to retained earnings. The
Company will recognize interest and penalties related to uncertain tax positions
as a component of income tax expense. The Company had recognized no interest or
penalties upon the adoption of this standard.  At February 28,
2010, the Company has no uncertain tax positions or associated interest and
penalties. The Company does not expect any significant increases or decreases to
its unrecognized tax positions 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
10. Commitments and Contingencies  The Company is exposed to asserted and unasserted claims
encountered in the normal course of business.  While the outcome of these
matters cannot be predicted,  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, or cash flows.  Note
11. Common Stock Subscriptions Receivable  As
of February 28, 2010, the Company has the following stock subscription
agreements outstanding of which the majority is due from a related party:  2005
Agreements  Material terms of the subscription agreements, after the
cancellation of the final pricing terms (see Note 5), 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%.


Page| 44


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The
outstanding balance owed on the 2005 subscription agreements at February 28,
2010 is $919,463.  2007
Agreements  On October 5, 2007, the Company received subscriptions for
1,300,000 restricted common shares at $2.50 per share (total value of
$3,250,000).  Significant terms of the original 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.  On February 25, 2010, due to the recent economic downturn and the
market value decline of the Companys stock, which was trading below $2.50 per
share, the Company amended the pricing terms of the subscription agreements
received by the Company on October 5, 2007.  The amendment changed the
following significant terms of the subscription agreement:  The parties agree that the Initial Pricing terms in the
Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be
amended to state as follows:  1. The Subscriber offers to purchase shares of the Company for $0.75
per share.  After the price adjustment, the revised total value of this
subscription agreement is $975,000.  The following other provisions of the Initial Pricing and Final
Pricing terms in the Confidential Binding Term Sheet dated October 5, 2007 of
the Agreement will be deleted, and are not enforceable by either party:  · Beginning October 5, 2009, 1/36 payments are due each month
thereafter on the 5th of every month. · The Company at its option may call up to 1/12 of the (gross)
receivable note per month if the preceding 30 day average trading price is at or
above $7.00 a share.  Minimum trading Volume must be 5,000 shares a
day. · As total consideration for the purchase and sale of the Companys
stock, purchaser shall ultimately pay to the Company the following amount (the
Purchase Price): A. Purchaser shall first be entitled to an amount equal to 200% of
the face amount of each share.


Page| 45


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   B. After the purchaser receives the amount in A above, the Company
shall be entitled to 50% of any additional net sales proceeds of the stock.
 Net sales proceeds shall mean the gross proceeds received from the sale of
the stock, less reasonable brokerage commissions. C. Final adjusted net sales proceeds will be wired to the Company
within 7 days from the final settlement of the sale of stock sold.  The outstanding balance owed on the revised 2007 subscription
agreements at February 28, 2010 is $975,000.  Summary  As of February 28, 2010, the Company had stock subscription
receivables of $1,894,463 and for the twelve months ended February 28, 2010, the
Company received stock subscription payments of $337,500.  The following
table summarizes the stock subscription receivables, for the twelve months ended
February 28, 2010 and 2009, respectively:  The
following tables summarize information about the stock subscription
receivable:  Receivable
balance at February 29, 2008
$   5,030,795Cash
collected
(523,832)Receivable
balance at February 28, 2009
4,506,963Cash
collected
(337,500)2007
Subscription agreement pricing revised (1)
(2,275,000)Receivable
balance at February 28, 2010
$   1,894,463Summary
of outstanding subscriptions:2005
subscriptions
$      919,4632007
subscriptions
975,000$   1,894,463  (1) Amendment
to the terms of the subscription agreements received by the Company on October
5, 2007 for 1,300,000 restricted common shares reducing the price paid per share
from $2.50 to $0.75.  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.  For the twelve month period ended February 28, 2010, there
was no downside protection provided because the stock price did not go below
$.75 when converted.  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 and
the closing price of the shares of the Companys stock is less than $.75, the
shareholder would be entitled to


Page| 46


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   up to 30% additional shares, depending on the trading share price.
 Once the subscription shares have been paid for in their entirety, the
downside protection ceases.  Note 12. Earnings (Loss) Per Share  The Company computes earnings per share using two different
methods, basic and diluted, and presents per share data for all periods in which
statements of operations are presented. Basic earnings per share are computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding. Diluted earnings per share are computed by dividing net
income (loss) by the weighted average number of common stock and common stock
equivalents outstanding.  The following tables provide a reconciliation of the numerators
and denominators used in calculating basic and diluted earnings (loss) per share
for the years ended February 28, 2010 and 2009:  Years endedFebruary 28,2010

2009Basic
income (loss) per share calculation:Net
income (loss) to common shareholders
$
          (1,245,049)

$
         (2,964,062)Weighted
average of common shares outstanding
27,350,072

27,125,928Basic
net income (loss) per share
$
                   (0.05)

$
                  (0.11)Diluted
income (loss) per share calculation:Net
income (loss) to common shareholders
$
          (1,245,049)

$
         (2,964,062)Weighted
average of common shares outstanding
27,350,072

27,125,928Stock
options (1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,350,072

27,125,928Diluted
net income (loss) per share
$
                 (0.05)

$
                 (0.11)  (1)
At
February 28, 2010 and 2009, there were outstanding stock options
equivalent to 4,003,000 and 4,478,000 common shares,
respectively.  The stock options are anti-dilutive at February
28, 2010 and 2009 and therefore, have been excluded from diluted earnings
per share.(2)
At
February 28, 2010 and 2009, there were outstanding warrants equivalent to
223,001 and none common shares, respectively.   The warrants are
anti-dilutive at February 28, 2010 and therefore, have been excluded from
diluted earnings per share.


Page| 47


DigitalTown, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended February 28, 2010 and 2009   **Note** 13. Supplemental Disclosure of Cash Flow
Information  Years ended February 28,2010
2009Non-cash
flow information:Cash
paid for interest
$
         9,526
$        18,898Subscription
receivable amendment
$   2,275,000
$
                 -Cancelation
of common stock issued previously for payment of outstanding accounts
payable
$
                 -
$
       31,000  Note
14. Subsequent Events  The Company has collected $358,950 from stock subscription
receivables for the period from March 1, 2010 to May 28, 2010 and $10,000 for
the issuance of 6,667 shares of common stock including 6,667 warrants with an
exercise price of $4.00, at a unit price of $1.50.


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