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, 2011   |__|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934  Commission file number: 000-27225  DigitalTown, Inc. (Name of
registrant in its charter)  Minnesota
41-1427445(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)11974 Portland Avenue, Burnsville, Minnesota
55337(Address of principal executive offices)
(Zip Code)Registrant's telephone number: (952)
890-2362  Securities registered under Section 12(g) of the Exchange Act:  Title
of Each Class Common
Stock Par
Value $0.01 per share  Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.    [  ] Yes
     [X] No  Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.      [  ] Yes
     [X] No  Check whether the
issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
X

No Check if there is no
disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |___|       Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company.  See definitions of
accelerated filer, large accelerated filer, and smaller reporting company in
Rule 12b-2 of the Exchange Act.   (check one):  Large
Accelerated Filer [  ] Accelerated
Filer [  ] Non-Accelerated
Filer [  ] Smaller reporting
company [X]  Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).  [  ] Yes    [X] No  The aggregate value
of the Companys common stock held by non-affiliates of the Company was
approximately $ 9,091,094 as of the last day of the Companys most recently
completed second fiscal quarter (August 31, 2010), when the last reported sales
price was $0.90.  There were 28,035,993
shares of the registrants common stock outstanding as of May 4, 2011.  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
8Item 3.
Legal
Proceedings
8Item 4.
[Removed and
Reserved]
8PART II

9Item 5.
Market for the
Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
9Item 6.
Selected
Financial Data
9Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
10Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
17Item 8.
Financial
Statements and Supplementary Data
17Item 9.
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
17Item 9A
Controls and
Procedures
17Item 9B.
Other
Information
20PART III

21Item 10.
Directors and
Executive Officers of the Registrant
21Item 11.
Executive
Compensation
23Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
26Item 13.
Certain
Relationships and Related Transactions
27Item 14.
Principle
Accountants and Fees and Services
27PART IV
30Item 15.
Exhibits,
Financial Statement Schedules
30SIGNATURES
30


PART
I  ITEM 1.
  BUSINESS  GENERAL  DigitalTown continues to develop its nationwide network of local
on-line communities built around their domain names and the schools and
communities they represent.  Last fall, the Company completed the initial
rollout of its new spirit sites featuring content from The Active Network,
MusicSkins, WeatherBug, Bing and other providers on approximately 20,000 of
their sites.  The sites initially featured 2010 football schedules, scores
and Active Power Rankings for high school football.  With this initial
rollout, the Company reached one million page/score views by the middle of
November.  In December, the Company launched its high school basketball
coverage and in April they launched their high school lacrosse coverage, both
featuring schedules, scores and Active Power Rankings. On December 8, 2010, the Company entered into a five year
strategic partnership agreement with the National Interscholastic Athletic
Administrators Association (NIAAA).  The NIAAA and DigitalTown will work
together to establish a national, standardized system for recording schedules,
scores, rosters and statistics for interscholastic sports teams and individual
students.  Pursuant to the agreement, the Company has committed to pay the
expenses related to this strategic partnership; however any expenses in excess
of $5,000 must be preapproved by the Company.  The Company has committed to
deposit $50,000 for such expenses for the first fiscal year of the contract and
an additional $50,000 for the second year.  In addition, the Company has
committed to donate 25% up to $3,000,000 of the annual net sponsorship revenue
in the scheduling and stats areas of its websites to yet to be named program
funds that promote youth activities and the NIAAA.  Lastly, the Company has
committed to a minimum revenue share of $100,000 per year with the future launch
of its beta 3 software. On
April 5, 2011, the Companys registration statement, initially filed December
23, 2010, was declared effective by the Securities and Exchange Commission
(SEC).  The effective registration statement allows the Company to sell
up to 3,000,000 of its shares to Auctus Private Equity Fund, LLC (Auctus) as
part of a drawdown equity financing agreement (Drawdown Agreement) the Company
signed with Auctus on December 3, 2010. Per the agreement, the Company, at its
discretion, has the right to sell up to $10,000,000 of common stock to Auctus
over a 36 month period per the conditions set forth in the agreement.
  The Company issued a drawdown notice to Auctus for $50,000.
 Auctus honored $2,108 of the notice, but has refused to honor the balance.
 The Company considers Auctus to be in breach of the drawdown
agreement.  EMPLOYEES  As of
February 28, 2011, DigitalTown, Inc. has three employees.  The Companys
employees are not represented by a union.  The Company knows of no adverse
labor issues with any employee.      Page 1     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,
2011 and 2010 were $1,264,772 and $1,245,049 respectively and future losses are
likely to occur.  Our accumulated deficit at February 28, 2011 is
$19,830,914. As of February 28, 2011, there exists negative working capital of
$314,818. For the year ended February 28, 2011, we had negative cash flows from
operations of $727,085. Accordingly, we may experience liquidity and cash flow
problems if we are not able to collect on our stock subscription receivables as
needed, sell stock through our drawdown agreement with Auctus or raise
additional capital on acceptable terms.  We may not be able to collect on our stock subscription
receivables or raise capital through our drawdown agreement with Auctus as
needed to fund our operations.  As of
February 28, 2011, the Company had stock subscription receivables of $1,422,654
and for the year ended February 28, 2011, the Company received stock
subscription payments of $771,809.  We
believe our current cash reserves, the amounts we expect to collect on our
outstanding stock subscription receivables and the proceeds from the sale of our
common stock to Auctus Private Equity Fund, LLC (Auctus) 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 or raise capital through
our drawdown agreement with Auctus, 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 $61,000 per month.  We may need to raise additional capital to finance
operations.  Funding
of our operations has relied almost entirely on the collection 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 the
Auctus agreement, other external sources or related parties, will be available
if needed or on favorable terms. Auctus has refused to honor the entire first
drawdown amount, and this financing option may not be available to us. 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.   Page 2     Any of
these events would be materially harmful to our business and may result in a
lower stock price.  Our common stock may be affected by limited trading volume
and may fluctuate significantly.  There
has been a limited public market for our common stock and there can be no
assurance that an active trading market for our common stock will develop.
 As a result, this could adversely affect our stockholders' ability to sell
our common stock in short time periods, or possibly at all.  Our common
stock has experienced, and is likely to experience in the future, significant
price and volume fluctuations that could adversely affect the market price of
our common stock without regard to our operating performance.  In addition,
we believe that factors such as quarterly fluctuations in our financial results
and changes in the overall economy or the condition of the financial markets
could cause the price of our common stock to fluctuate substantially.  Our common stock is traded on the OTC Markets OTCQB, which
may make it more difficult for investors to resell their shares due to
suitability requirements.  Our
common stock is currently traded on the OTC Markets OTCQB. Broker-dealers
often decline to trade in OTCQB 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.  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 affect 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.       Page 3     Minnesota law and our charter may inhibit a takeover of our
company that stockholders may consider favorable.  Provisions of Minnesota law, such as its business combination
statute, may have the effect of delaying, deferring or preventing a change in
control of our Company.  As a result, these provisions could limit the
price some investors might be willing to pay in the future for shares of our
common stock.  Our officers and directors have the ability to exercise
significant influence over matters submitted for stockholder approval and their
interests may differ from other stockholders.  Our
executive officers and directors, in the aggregate, will have the ability to
nominate two (2) members to the Board of Directors.  Accordingly, our
directors and executive officers, whether acting alone or together, may have
significant influence in determining the outcome of any corporate transaction or
other matter submitted to our Board for approval, including issuing common and
preferred stock, and appointing officers, which could have a material impact on
mergers, acquisitions, consolidations and the sale of all or substantially all
of our assets, and also the power to prevent or cause a change in control.
 The interests of these board members may differ from the interests of the
other stockholders.  Our shares may be defined as "penny stock", the rules
imposed on the sale of the shares may affect your ability to resell any shares
you may purchase, if at all.  Shares
of our common stock may be defined as a penny stock under the Securities and
Exchange Act of 1934, and rules of the SEC.  The Exchange Act and such
penny stock rules generally impose additional sales practice and disclosure
requirements on broker-dealers who sell our securities to persons other than
certain accredited investors who are, generally, institutions with assets in
excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 jointly with spouse, or in
transactions not recommended by the broker-dealer.  For transactions
covered by the penny stock rules, a broker-dealer must make a suitability
determination for each purchaser and receive the purchaser's written agreement
prior to the sale.  In addition, the broker-dealer must make certain
mandated disclosures in penny stock transactions, including the actual sale or
purchase price and actual bid and offer quotations, the compensation to be
received by the broker-dealer and certain associated persons, and deliver
certain disclosures required by the Commission.  Consequently, the penny
stock rules may affect the ability of broker-dealers to make a market in or
trade our common stock and may also affect your ability to resell any shares you
may purchase in the public markets.  Market for penny stock has suffered in recent years from
patterns of fraud and abuse  Stockholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse.  Such patterns include:  · Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; · Manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases;   Page 4     · Boiler room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced salespersons; · Excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and, · The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the resulting inevitable collapse of those prices and with consequential
investor losses.  Our
management is aware of the abuses that have occurred historically in the penny
stock market.  Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
 The occurrence of these patterns or practices could increase the
volatility of our share price.  Existing stockholders may experience significant dilution
from the sale of our common stock pursuant to the drawdown
agreement.  Assuming that Auctus fulfills the terms of the drawdown agreement,
the sale of our common stock to Auctus in accordance with the drawdown agreement
may have a dilutive impact on our shareholders.  As a result, our net
income per share could decrease in future periods and the market price of our
common stock could decline.  In addition, the lower our stock price is at
the time we exercise our put option, the more shares of our common stock we will
have to issue to Auctus in order to drawdown on the facility.  If our stock
price decreases, then our existing shareholders would experience greater
dilution for any given dollar amount raised in connection with the drawdown
agreement.  The
perceived risk of dilution may cause our stockholders to sell their shares,
which may cause a decline in the price of our common stock.  Moreover, the
perceived risk of dilution and the resulting downward pressure on our stock
price could encourage investors to engage in short sales of our common stock.
 By increasing the number of shares offered for sale, material amounts of
short selling could further contribute to progressive price declines in our
common stock.  However, under the terms of the drawdown agreement, the
number of shares Auctus is able to own at any given time is limited to 4.99% of
the total issued and outstanding shares of the Company.  Auctus will pay less than the then-prevailing market price
of our common stock which could cause the price of our common stock to
decline.  Assuming Auctus fulfills the terms of the drawdown agreement, our
common stock to be issued under the drawdown agreement will be purchased at a
six (6%) discount or 94% of the lowest closing volume weighted average price
(VWAP) during the five trading days immediately following our notice to Auctus
of our election to exercise our "put" right.  Auctus
has a financial incentive to sell our shares immediately upon receiving the
shares to realize the profit between the discounted price and the market price.
 If Auctus sells our shares, the price of our common stock may decrease.
 If our stock price decreases, Auctus may have a further incentive to sell
such shares.  Accordingly, the discounted sales price in the drawdown
agreement may cause the price of our common stock to decline.    Page 5     Auctus has entered into similar agreements with other public
companies and may not have sufficient capital to meet our drawdown
requests.  Auctus
has entered into similar financing agreements with at least six other public
companies, and those companies have all filed registration statements with the
intent of registering shares to be sold to Auctus pursuant to drawdown
arrangements.  Three of those registration statements are effective, and
three are pending.  We do not know if management at any of the companies
who have or will have effective registration statements intend to raise funds
now or in the future, what the size or frequency of each put request would be,
if floors will be used to restrict the amount of shares sold, or if the drawdown
agreement will ultimately be cancelled or expire before the entire amount of
shares are put to Auctus.  Since we do not have any control over the
requests of these other companies, if Auctus receives significant requests, it
may not have the financial ability to meet our requests.  If so, we may not
have funds available to us under this drawdown agreement, or the amount of
available funds may be significantly less than we anticipate.  Risk
Factors Related to Our Securities and the Drawdown Agreement .  We registered an aggregate of 3,000,000 shares of common
stock to be issued under the drawdown agreement.  The sale of such shares
could depress the market price of our common stock.  We
registered an aggregate of 3,000,000 shares of common stock for issuance
pursuant to the drawdown agreement.  Assuming that Auctus fulfills the
terms of the drawdown agreement, the sale of these shares into the public market
by Auctus could depress the market price of our common stock.  We may not have access to the full amount under the drawdown
agreement.  There
is no assurance that the market price of our common stock will increase
substantially in the near future.  The entire commitment under the drawdown
agreement is $10,000,000.  Based on our stock price, the number of
registered common shares that remains issuable could be lower than the number of
registered common shares we need to issue in order to have access to the full
amount under the drawdown agreement.  Therefore, we may not have access to
the full amount under the drawdown agreement.  The amount we can draw down may be affected by a limitation
of the percentage ownership of Auctus.  Pursuant to the drawdown agreement, Auctus shall not be issued
shares of the Companys common stock that would result in its beneficial
ownership equaling more than 4.99% of the outstanding common stock of the
Company.  If the ownership of Auctus reaches that limit, we may not be able
to secure any further advances from Auctus, and some of our business activities
may have to be postponed or curtailed.  There may not be sufficient trading volume in our common
stock to permit us to generate adequate funds.  The
drawdown agreement provides that the dollar value that we will be permitted to
draw from Auctus will be the higher of: (A) 200% of the average daily volume in
the US market of   Page 6     the
common stock for the ten (10) trading days prior to the drawdown notice, or (B)
$150,000.If the average daily trading volume in our common stock
is too low, it is possible that we would only be permitted to draw down $150,000
at a time, which may not provide adequate funding for our planned
operations.  Unless an active trading market develops for our securities,
investors may not be able to sell their shares.  Although, we are a reporting company and our common shares are
quoted on the OTC Markets OTCQB under the symbol DGTW, there is not
currently an active trading market for our common stock and an active trading
market may never develop or, if it does develop, may not be maintained.
 Failure to develop or maintain an active trading market will have a
generally negative effect on the price of our common stock, and you may be
unable to sell your common stock or any attempted sale of such common stock may
have the effect of lowering the market price and therefore your investment could
be a partial or complete loss.  Since our common stock is thinly traded it is more
susceptible to extreme rises or declines in price, and you may not be able to
sell your shares at or above the price paid.  Since
our common stock is thinly traded its trading price is likely to be highly
volatile and could be subject to extreme fluctuations in response to various
factors, many of which are beyond our control, including (but not necessarily
limited to):  ·
the trading volume of our shares;·
the number of securities analysts, market-makers and brokers
following our common stock;·
changes in, or failure to achieve, financial estimates by
securities analysts;·
new products or services introduced or announced by us or
our competitors;·
actual or anticipated variations in quarterly operating
results;·
general conditions or trends in our business
industries;·
announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;·
additions or departures of key personnel;·
sales of our common stock; and·
general stock market price and volume fluctuations of
publicly-traded, and particularly microcap,
companies.  Investors may have difficulty reselling shares of our common
stock, either at or above the price they paid for our stock, or even at fair
market value.  The stock markets often experience significant price and
volume changes that are not related to the operating performance of individual
companies, and because our common stock is thinly traded it is particularly
susceptible to such changes.  These broad market changes may cause the
market price of our common stock to decline regardless of how well we perform as
a company.  In addition, there is a history of securities class action
litigation following periods of volatility in the market price of a companys
securities.  Although there is no such litigation currently pending or
threatened against the Company, such a suit against us could result in the
incursion of substantial legal fees, potential liabilities and the diversion of
managements attention and resources from our business.  Moreover, and as
previously noted, our shares are currently traded on the OTC Market OTCQB and,
further, are subject to the penny stock regulations.   Page 7     Price
fluctuations in such shares are particularly volatile and subject to
manipulation by market-makers, short-sellers and option traders.  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, 2011totaled $25,175.  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 are not expected to have a material adverse effect on the Company's
financial position or results of operations.  ITEM 4. 
[REMOVED AND RESERVED]  None   Page 8     PART
II  ITEM 5.  MARKET
FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  DigitalTown, Inc.s common stock has been traded on the OTC
Markets OTCQB since February 23, 2011. Prior to that, it 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, 2011 and 2010.  Fiscal Year
2011


Low


HighFirst
Quarter

$
0.80

$
1.80Second
Quarter


0.90


1.38Third
Quarter


0.76


1.75Fourth
Quarter


1.35


7.50  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  These
quotations represent inter dealer prices, without retail markup, markdown, or
commission, and may not reflect actual transactions.  As of May 4, 2011,
there were approximately 95 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, 2011 and 2010 and for the years then ended, which have
been derived from our audited consolidated financial statements.  February 28,Balance Sheet
Data
2011
2010Total Assets
$  1,310,286
$  940,899Total Liabilities
486,484
232,068Stockholders Equity
823,802
708,831     Page 9      Year ended February
28,Operating Statement
Data
2011
2010Revenues
$
         18,102
$
         7,511Cost of revenues
235,303
170,890Gross profit (loss)
(217,201)
(163,379)Operating expenses
1,050,865
1,073,960Loss from operations
(1,268,066)
(1,237,339)Other income
(expense), net
3,294
(7,710)Net
loss
$  ( 1,264,772)
$  ( 1,245,049)Loss per
common share-basic and diluted
$(0.05)
$(0.05)Weighted average shares outstanding-basic and
diluted
27,812,364
27,350,072  Year ended February
28,Cash Flow Statement
Data
2011
2010Net cash used in operating activities
$      (727,085)
$      (691,221)Net cash used in investing activities
(97,310)
(25,118)Net cash
provided by financing activities
893,527
706,603Net change in cash
69,132
(9,736)Cash and cash
equivalents, beginning of period
34,178
43,914Cash and cash equivalents, end of period
$
         103,310
$
         34,178  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, 2011 and 2010, 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  DigitalTown continues to develop its nationwide network of local
on-line communities built around their domain names and the schools and
communities they represent.  Last fall, the Company completed the initial
rollout of its new spirit sites featuring content from The Active Network,
MusicSkins, WeatherBug, Bing and other providers on approximately 20,000 of
their sites.  The sites initially featured 2010 football schedules, scores
and Active Power Rankings for high school football.  With this initial
rollout, the Company reached one million page/score views by the middle of
November.  In December, the Company launched its high school basketball
coverage and in April they launched their high school lacrosse coverage, both
featuring schedules, scores and Active Power Rankings.    Page 10     On December 8, 2010, the Company entered into a five year
strategic partnership agreement with the National Interscholastic Athletic
Administrators Association (NIAAA).  The NIAAA and DigitalTown will work
together to establish a national, standardized system for recording schedules,
scores, rosters and statistics for interscholastic sports teams and individual
students.  Pursuant to the agreement, the Company has committed to pay the
expenses related to this strategic partnership; however any expenses in excess
of $5,000 must be preapproved by the Company.  The Company has committed to
deposit $50,000 for such expenses for the first fiscal year of the contract and
an additional $50,000 for the second year.  In addition, the Company has
committed to donate 25% up to $3,000,000 of the annual net sponsorship revenue
in the scheduling and stats areas of its websites to yet to be named program
funds that promote youth activities and the NIAAA.  Lastly, the Company has
committed to a minimum revenue share of $100,000 per year with the future launch
of its beta 3 software. On
April 5, 2011, the Companys registration statement, initially filed December
23, 2010, was declared effective by the SEC.  The effective registration
statement allows the Company to sell 3,000,000 shares of common stock to Auctus
Private Equity Fund, LLC (Auctus) as part of the drawdown equity financing
agreement the Company signed with Auctus on December 3, 2010. Per the agreement,
the Company, at its discretion, has the right to sell up to $10,000,000 of
common stock to Auctus over a 36 month period per the conditions set forth in
the agreement.  The Company issued a drawdown notice to Auctus for $50,000.
 Auctus honored $2,108 of the notice, but has refused to honor the balance.
 The Company considers Auctus to be in breach of the drawdown
agreement.  RESULTS OF
OPERATIONS  YEARS ENDED FEBRUARY
28, 2011 AND 2010  During
the year ended February 28, 2011, the Company recorded revenue of $18,102 and
cost of revenue of $235,303 for a negative gross profit of $(217,201) compared
to revenue of $7,511 and cost of revenue of $170,890 for a negative gross profit
of $(163,379) from operations during the year ended February 28, 2010.  The
revenue for both years consisted of minimal commissions generated from
advertising and merchandise sales on our websites and the cost of revenue
consisted of amortization of the prepaid annual domain name renewal fees of
$189,871 and $159,490, domain register fees of $0 and $2,190, server/bandwidth
expense of $15,831 and $4,002 and amortization of website development fees of
$29,602 and $5,208 for the two comparable periods.  Selling, general and administrative expenses for the year ended
February 28, 2011 decreased by $23,095 to $1,050,865 compared to a year ago due
mainly to a decrease in non-cash stock compensation expense of $33,826 for the
current year.  The decrease in stock compensation expense was primarily due
to longer vesting periods for the new stock option agreements granted during the
current year. Excluding non-cash stock compensation expense for the two
comparable periods, selling, general, and administrative expenses increased by
$10,731 to $622,139 compared to a year ago.  The
Companys overall net loss for the current year increased by $19,723 to
$1,264,772.      Page 11     LIQUIDITY AND CAPITAL
RESOURCES  The
Companys cash position at February 28, 2011, was $103,310, an increase of
$69,132 from $34,178 at February 28, 2010.  During the year ended February
28, 2011, net cash used in operating activities was $727,085 compared to cash
used of $691,221 for the comparable period.  When comparing the two
periods, the increase in cash used in operating activities of $35,864 for the
year ended February 28, 2011 is primarily due to a decrease of $42,387 in
accounts payable.  Net
cash used in investing activities for the year ended February 28, 2011 was
97,310, of which $52,230 was used for website development costs, $25,449 for
purchases of property and equipment and $19,631 for the purchase of additional
domain names as compared to net cash used of $25,118 for the comparable period
one year ago, of which $23,349 was used for website development costs and $1,769
for the purchase of additional domain names.  Net
cash provided by financing activities for the year ended February 28, 2011 was
$893,527 which consisted of payments received on stockholder subscription
receivables of $771,809, proceeds from the issuance of common stock of $122,000
and proceeds from a director and stockholder loan of $50,000 less principal
payments on the loan of $50,282.  For the comparable period ended February
28, 2010, the Company received net cash provided by financing activities of
$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 a director and stockholder loan of $39,482 less principal
payments on the loan of $4,879.  Monthly
cash operating expenses for the year ended February 28, 2011 were approximately
$61,000 per month. Based on current projections, the Companys monthly cash
operating expenses going forward should be approximately $61,000 per month,
which includes the yearly cost of the renewal of the existing domain names
totaling approximately $174,000.  In addition to the normal monthly
operating expenses, the Companys committed cash requirements for the twelve
months ending February 28, 2012 include $245,878 for website development costs.
 A promissory note with Jeff Mills, a director and stockholder of the
Company, has a balance due of $137,088 at February 28, 2011 and is payable upon
demand.  Based on available cash proceeds, the Company intends to pay the
balance of the note in fiscal year 2012.  From March 1, 2011 to April 28,
2011, the Company has received cash proceeds of $115,000 from stock subscription
receivables and $2,108 for the issuance of 1,000 shares of common stock at
$2.108 per share pertaining to our Drawdown Agreement with Auctus.  In
addition, the Company will continue to collect on its remaining stock
subscription receivables and utilize its drawdown agreement with Auctus 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 received by the
Company on December 30, 2005 for 4,733,333 restricted common shares at $0.75 per
share (total value of $3,550,000) are as follows:    Page 12     · 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, 2011 is
$147,654.  The Company recognizes that this receivable is now past due and
deems it to be fully collectable.  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 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):   Page 13     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, 2011 is $975,000.  2010
Agreement  Material terms of the subscription agreement received by the
Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per
share (total value of $300,000) 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 2010 subscription agreement at February 28, 2011 is
$300,000.  Summary  As of
February 28, 2011, the Company had stock subscription receivables of $1,422,654
and for the twelve months ended February 28, 2011, the Company received stock
subscription payments of $771,809.  The
following table summarizes the stock subscription receivable, by quarter, for
the twelve months ended February 28, 2011:  Quarter Ended
Total Balance Due
Total Amount Collected
New Subscription Agreements

Participatory Rights in the
Proceeds of the Resales Collected
Amount of Downside Protection
ProvidedFebruary 28, 2010
1,894,463




-May 31, 2010
1,535,513
358,950August 31, 2010
1,763,013
72,500
$ 300,000
(1)November 30, 2010
1,680,388
82,625February 28, 2011
1,422,654
257,734  (1) New subscription agreement received
on June 22, 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   Page 14     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, assuming that Auctus fulfills the terms of the drawdown agreement
entered with the Company on December 3, 2010, we believe our current cash
reserves, the amounts we expect to collect on our outstanding stock subscription
receivables and proceeds from the sale of our common stock to Auctus should be
sufficient to enable us to operate for the next 12 months. In the event that we
are unable to collect our stock subscription receivables as needed or if the
Company is unable to sell an adequate number of shares to meet its cash flow
requirements to Auctus Private Equity Fund, LLC per the drawdown equity
financing agreement, 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, 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   Page 15     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 350-50) 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.  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
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   Page  16     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 adoption of this guidance
did not have a material impact on its consolidated 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
33Consolidated
Financial Statements:Consolidated
Balance Sheets
34Consolidated
Statements of Operations
35Consolidated
Statements of Stockholders' Equity
36Consolidated
Statements of Cash Flows
37Notes
to Consolidated Financial Statements
38-53  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, 2011, 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, 2011 and as a result, our disclosures
controls and procedures were not effective.  Notwithstanding   Page 17     the
material weaknesses that existed as of February 28, 2011, 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.  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, 2011.   Management
identified the following material weaknesses:  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 proper segregation of duties as the same employee was responsible for   Page 18     initiating
and recording of transactions, thereby creating a 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 an amendment to the Sarbanes-Oxley Act which
exempts Smaller Issuers from the requirements of Section 404(b).  Changes in Internal Controls over Financial Reporting  During
the fiscal quarter ended February 28, 2011, 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; · 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 option grants 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 2012; 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   Page 19     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.   Page 20     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
56

Chairman, Chief
Executive Officer,  & Secretary/TreasurerPaul R.
Gramstad (1)
50

Chief Financial
OfficerJeffrey L.
Mills
49

DirectorPierce
McNally
62

DirectorDonald M.
Fisher
57

DirectorMark
Turner
36

Director  (1) 
Mr. Gramstad is a contract CFO and not an employee of the Company  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.  Since 2005, Mr. Gramstad has worked as a financial consultant and
since 2007, has been responsible for the Companys financial reporting and
accounting function and continues in that role as their contract CFO.
 Prior to that, Mr. Gramstad 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.  JEFFREY L. MILLS became a director in December 2003. Mr. Mills has
worked for Xerox Corporation for the past 24 years in various operation and
sales positions. He has also served as director for one private company and has
served as president, owner and operator of various business ventures. Mr. Mills
is a 1984 graduate of the University of Northern Iowa and has held several
security licenses.  PIERCE MCNALLY became a director in March 2007.  For the past
nine 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, as a director of Rainy River
Resources, Inc., a Minneapolis based private investment company and as Chief
Strategic Officer and Legal Counsel for OutsourceOne, Inc. a Minneapolis based
provider of employee benefit services and online supplemental insurance
products.  Mr. McNally is a   Page 21     1971
graduate of Stanford University and a 1978 graduate of the University of
Wisconsin Law School.  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.  MARK TURNER became a director on August 9, 2010. He is Director of
Strategic Relationships for Microsoft Corp. (NasdaqGS: MSFT), Media &
Entertainment Group and has more than 13 years' experience in developing
innovative business and technology solutions for global media companies.
 He is based in Los Angeles.  Mr. Turner specializes in delivery of
media to all types of devices and through traditional and new media paths - from
the largest screens (Digital Cinema) down through HD (cable, broadcast and
satellite TV), via the Web (streaming, download or corporate IP networks) and to
mobiles and portable devices. Mr. Turners current responsibilities include
building innovative business models with major studio and music label partners
which cover the range of Microsoft's diverse media-facing solutions.  Mr.
Turner also works as an industry expert to internal Microsoft business groups
that are developing or refining products for the media industry, such as Xbox,
Zune, Windows, Bing and MSN.  Mr. Turner holds a BA in Management Studies
from the University of Leeds.  He is an active member of the Developing
Platforms Committee for industry group - the Digital Entertainment Group (DEG),
the Academy of TV Arts & Sciences (Interactive Media Chapter) and the
Content Committee of the Consumer Electronics Association.   Directors are elected at the annual meeting of the stockholders
and serve until their successors are elected and qualified. Officers are elected
by the Board of Directors and serve at the discretion of the Board of Directors
or until their earlier resignation or removal.    Page 22      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 Jeffrey
L. 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, 2011 and 2010 to the
Principal Executive Officer/Chief Executive Officer and the Principal Financial
Officer/Chief Financial Officer.  There were no other compensated officers
in fiscal 2011.  Summary Compensation Table  Name and Principal Position

Fiscal year
Salary
Contract Fees
Stock Option Awards (1)
Other Annual Compensation (2), (3),
(4)
Total CompensationRichard Pomije, Principal Executive Officer (PEO),
CEO & Chairman
(5)
2011
$  211,250
$
           -
$
          -
$   55,710
$
    266,9602010
$  209,161
$
           -
$
         -
$   46,075
$
    255,236John A. Witham, Principal Financial Officer (PFO)
& CFO
(6)
2011
$
            -
$
           -
$
         -
$
            -
$
               -2010
$
            -
$    5,150
$
          -
$
            -
$
       5,150Paul R. Gramstad, Principal Financial Officer (PFO)
& CFO
(7)
2011
$
            -
$  18,540
$ 74,595
$
           -
$
     93,1352010
$
            -
$  23,400
$ 49,010
$
           -
$
     72,410Jan K. Andersen, CEO/Director
(8)
2011
$
            -
$
           -
$
          -
$
           -
$
                -2010
$    41,538
$
           -
$
          -
$
           -
$
     41,538    Page 23      (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.(2)
Automobile
expenses - Richard A. Pomije
FY2011
$19,218
FY2010
$11,497(3)
Board member
fees Richard A. Pomije
FY2011 $5,185
paid with issuance of restricted common stock
FY2010 $6,844
paid with issuance of restricted common stock(4)
Medical
 insurance  FY2010 Richard A. Pomije
FY2011
$31,307
FY2010
$27,734(5)
Richard A.
Pomije was appointed CEO on August 21, 2009(6)
John A. Witham
resigned as contract CFO/PFO on July 2, 2009.(7)
Paul R.
Gramstad was appointed contract CFO/PFO on July 2, 2009(8)
Jan K. Andersen
was dismissed on August 21, 2009.   OPTIONS GRANTED IN
THE LAST FISCAL YEAR  The
following table sets forth information regarding options granted to the named
executive officers and directors during the year ended February 28, 2011.  Grants of Plan-Based Awards  Name
Grant
Date
Number of shares - Underlying options granted
Exercise
Price
($/Share)
Grant
Date
Fair
Value
Expiration
DateMark Turner
(director)
8/9/2010
200,000
$1.72
$228,540
8/9/2015Jeffrey L.
Mills (director)
12/2/2010
100,000
$1.75
$149,188
12/2/2015Donald M.
Fisher (director)
12/2/2010
100,000
$1.75
$149,188
12/2/2015Paul R.
Gramstad (officer)
12/2/2010
50,000
$1.75
$74,594
12/2/2015Pierce McNally
(director)
12/2/2010
50,000
$1.75
$74,594
12/2/2015  OUTSTANDING
OPTIONS AT FISCAL YEAR-END  The
following table provides information relating to the value of shares of common
stock subject to options held by the named executive officers and directors as
of February 28, 2011.       Page 24        Outstanding Equity Awards at Fiscal Year-End  Name
Number of Unexercised Options Exercisable
Number of Unexercised Options Unexercisable
Option Exercise Price ($/share)
Option Expiration DateRichard A.
Pomije (officer)
2,500,000
-
$1.725
11/6/2011Paul R.
Gramstad (officer)
-
50,000
$1.750
12/2/2015Paul R.
Gramstad (officer)
50,000
-
$1.750
12/23/2014Paul R.
Gramstad (officer)
25,000
-
$4.250
8/25/2013Jeffrey L.
Mills (director)
50,000
50,000
$1.750
12/2/2015Jeffrey L.
Mills (director)
110,000
-
$1.750
12/23/2014Jeffrey L.
Mills (director)
40,000
-
$1.725
11/6/2011Pierce McNally
(director)
-
50,000
$1.750
12/2/2015Pierce McNally
(director)
100,000
-
$1.725
11/6/2011Donald M.
Fisher (director)
50,000
50,000
$1.750
12/2/2015Donald M.
Fisher (director)
100,000
-
$1.750
12/23/2014Mark Turner
(director)
67,000
133,000
$1.750
12/2/2015   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 $29,004 for the payment of directors
fees:  On May
15, 2010, the Company issued 2,491 restricted common shares at $1.75 per share,
valued at $4,359, to six directors of the Company for payment of director
fees.  On
August 15, 2010, the Company issued 7,917 restricted common shares at $1.20 per
share, valued at $9,500, to seven directors of the Company for payment of
director fees.  On
November 15, 2010, the Company issued 6,000 restricted common shares at $1.25
per share, valued at $7,500, to five directors of the Company for payment of
director fees.  On
February 15, 2011, the Company issued 2,780 restricted common shares at $2.75
per share, valued at $7,645, to five directors of the Company for payment of
director fees.  The following table
summarizes the payment of director fees for the year ended February 28,
2011:    Page 25      Director Compensation Table  Name
Stock Awards
Option Awards
TotalJeffrey L.
Mills
$
 5,185
$
149,188
$
 154,373Pierce
McNally
$
 5,185
$
  74,594
$
   79,779Gary Hall
(1)
$
 2,156
$
            -
$
     2,156John A.
Witham (2)
$
 2,156
$
            -
$
     2,156Donald M.
Fisher
$
 5,608
$
149,188
$
 154,796Mark Turner
(3)
$
 3,529
$
228,540
$
 232,069  (1) Gary
Hall resigned August 9, 2010. (2) John
A. Witham is deceased. (3) Mark
Turner was appointed August 9, 2010.   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, 2011 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.   Name of
Beneficial Owner (1)
Number of shares
Percentage of
Outstanding SharesRichard A.
Pomije (CEO & chairman)
20,690,374(2)
67.76%(2)Paul R.
Gramstad (CFO)
95,680(3)
.34%(3)Jeffrey L.
Mills (director)
771,903(4)
2.73%(4)Pierce McNally
(director)
123,150(5)
.44%(5)Donald M.
Fisher (director)
154,560(6)
.55%(6)Mark Turner
(director)
72,073(7)
.26%(7)Thomas B.
Pomije
2,051,349
7.32%All directors
and executive officers as a group
21,907,740
70.38%  Common shares issued
and outstanding as of February 28, 2011 were 28,034,993  (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   Page 26     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, 2011.  (3) Includes the right to acquire 75,000 shares through the exercise
of stock options within 60 days of February 28, 2011.  (4) Includes the right to acquire 200,000 shares through the exercise
of stock options within 60 days of February 28, 2011.  (5) Includes the right to acquire 100,000 shares through the exercise
of stock options within 60 days of February 28, 2011.  (6) Includes the right to acquire 150,000 shares through the exercise
of stock options within 60 days of February 28, 2011.  (7) Includes the right to acquire 67,000 shares through the exercise
of stock options within 60 days of February 28, 2011.  Section 16 Beneficial
Ownership Reporting Compliance  Section
16 of the Securities Exchange Act of 1934, as amended, and the rules promulgated
there under require the Company's officers, directors, and holders of 5% or more
of its outstanding common stock to file certain reports with the Securities and
Exchange Commission (the "Commission"). To the Company's best knowledge, based
solely on information provided by the reporting individuals, all of the reports
required to be filed by these individuals were filed.  ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS  DigitalTown, Inc. leases from Jeff Mills, a director and
stockholder of the Company, approximately 2,650 square feet of space used for
offices and operations equipment storage at 11974 Portland Avenue, Burnsville,
Minnesota at a monthly rent of $2,650 for a five year term which commenced on
December 16, 2006.  The Company has the option to renew for an additional
term of one year at a monthly rent of $3,650.  The future rent obligations
of this lease as of February 28, 2011 totaled $25,175.  ITEM 14. 
Independent Registered Public Accounting Firm Fees.  Moquist Thorvilson Kaufmann Kennedy &
Pieper LLC (MTK) served as the Companys independent registered public
accounting firm during fiscal 2011 and 2010.  The Companys audit committee
engaged MTK to perform three quarterly reviews in fiscal 2012.  During the fiscal
years ended February 28, 2011 and 2010, the following was paid to MTK:  2011
2010Audit fees
(1)
$
36,000
$
42,500Total other
audit related fees (2)
$
  6,453
$
  3,690   Page 27      Tax 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 S-1 Registration
Statement.  Audit Committee
Policies and Procedures:  The
primary responsibility of the Audit Committee is to oversee the Companys
financial reporting process on behalf of the Board and report the results of
their activities to the Board. Management is responsible for preparing the
Companys financial statements, and the independent auditors are responsible for
auditing those financial statements. The Committee in carrying out its
responsibilities believes its policies and procedures should remain flexible in
order to best react to changing conditions and circumstances.  The
following shall be the principal recurring processes of the Audit Committee in
carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate.  ·
The Committee shall have a clear understanding with
management and the independent auditors that the independent auditors are
ultimately accountable to the board and the Audit Committee, as
representatives of the Companys stockholders. The Committee shall have
the ultimate authority for and responsibility to evaluate and annually
recommend the selection, retention, and, where appropriate, the
replacement of the independent auditors. The Committee shall review and
approve the performance by the independent auditors of any
non-audit-related service if the fees for such service are projected to
exceed 15% of the most recently completed fiscal years combined audit
fees and audit-related service fees. The Committee shall review and
discuss with the auditors their independence from management and the
Company and the matters included in the written disclosures required by
professional independence standards applicable to the independent
auditors. Annually, the Committee shall review and assess whether the
independent auditors performance of non-audit services is compatible with
the auditors independence. In addition, the Audit Committee shall review
any candidate for the senior accounting and/or financial executive
position prior to his or her appointment by the
Company.  ·
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   Page 28   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 likely
be negotiated with independent parties, in each case where such
arrangements or transactions are relevant to an understanding of the
Companys financial statements.     Page 29       PART IV ITEM 15.
 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES  (a) Consolidated
Financial Statements Audited
Consolidated Financial Statements for the year ended February 28, 2011 and
2010  (b) Exhibits. 3.1
Articles of
Incorporation, as amended (1)3.2
Bylaws
(1)10.1
Lease agreement
with Jeff Mills10.2
1996 Employee
Stock Option Plan, as amended to date (1)10.3
Stock
Subscription Agreements22.1
List
of wholly owned subsidiaries23.1
Consent of
Independent Registered Public Accounting Firm31
Certifications
of Chief Executive Officer and Chief Financial Officer under Rule
13a-14(a)/15d-14(a)32
Certifications
under Section 1350  (1)
Incorporated by reference to exhibit filed as a part of Registration Statement
on Form 10-SB (Commission File No. 000-27225).   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 4,
2011
By:***/s/
Richard A.
Pomije***Richard A.
PomijeChief
Executive Officer &  Chairman/Director(Principal
Executive Officer)   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.   Dated: May 4,
2011
By: ***/s/
Richard A.
Pomije***Richard A.
PomijeChief
Executive Officer &  Chairman/Director(Principal
Executive Officer)   Page 30      Dated: May 4,
2011
By:***/s/
Paul R.
Gramstad***Paul R.
GramstadChief
Financial Officer(Principal
Financial Officer)Dated: May 4,
2011
By:
***/s/ Jeff
Mills***Jeff Mills,
DirectorDated: May 4,
2011
By:
***/s/ Pierce
McNally***Pierce McNally,
DirectorDated: May 4,
2011
By:
***/s/ Donald
M. Fisher***Donald M.
Fisher, Director   Page 31                  DigitalTown, Inc.   CONSOLIDATED FINANCIAL STATEMENTS  FEBRUARY 28, 2011 AND 2010               Page 32      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. (the
Company) as of February 28, 2011 and 2010, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. The Companys management is responsible for these consolidated financial
statements.  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, 2011 and 2010, 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 4, 2011     Page 33


DigitalTown, Inc.  CONSOLIDATED BALANCE SHEETS ASSETSFebruary 28,2011

2010Current
assets:Cash

$      103,310

$      34,178Prepaid
domain name renewal fees

37,931

54,825Prepaid
expenses

30,425

20,000Total
current assets

171,666

109,003Property and
equipment, net

20,306

1,719Intangible
assets, net

1,118,314

830,177Total
assets

$
   1,310,286

$
   940,899LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
liabilities:Accounts
payable

$
      286,750

$
      55,412Loan
from director/stockholder

137,088

137,370Other
liability

-

15,000Accrued
payroll

12,358

2,563Deferred
officer compensation

50,288

21,723Total
current liabilities

486,484

232,068Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 28,034,993 and
27,476,246 shares issued and outstanding at February 28, 2011 and 2010,
respectively

280,347

274,759Additional
paid-in-capital

21,797,023

20,894,677Subscriptions
receivable

(1,422,654)

(1,894,463)Accumulated
deficit

(19,830,914)

(18,566,142)Total
stockholders equity

823,802

708,831Total
liabilities and stockholders equity

$
   1,310,286

$
   940,899   The
accompanying notes are an integral part of these consolidated financial
statements.


Page 34


DigitalTown, Inc  CONSOLIDATED STATEMENTS OF OPERATIONS  Year ended February 28,2011

2010Revenues
$
       18,102

$
       7,511Cost of
revenues
235,303

170,890Gross profit
(loss)
(217,201)

(163,379)Operating
expenses:Selling,
general and administrative expenses
1,050,865

1,073,960Loss from
operations
(1,268,066)

(1,237,339)Other income
(expense):Interest
expense
(9,371)

(9,526)Other
income
12,665

1,816Total
other income (expense)
3,294

(7,710)Net loss before
income taxes
(1,264,772)

(1,245,049)Income tax
provision
-

-Net loss
$
  (1,264,772)

$
  (1,245,049)Net loss per
common share  basic and diluted
$
           (0.05)

$
           (0.05)Weighted
average common shares outstanding  basic and diluted
27,812,364

27,350,072  The
accompanying notes are an integral part of these consolidated financial
statements.


Page 35


DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years
Ended February 28, 2011 and 2010 AdditionalCommon Stock
Paid-In
Subscription
AccumulatedShares
Amount
Capital
Receivable
Deficit
TotalBalance February
29, 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)
708,831Issuance
of common stock at $1.50 per share
6,667
67
9,933
-
-
10,000Issuance
of common stock at $1.00 per share
112,000
1,120
110,880
-
-
112,000Common stock
issued with subscription agreement
400,000
4,000
296,000
(300,000)
-
-Payments
received on subscription agreements
-
-
-
771,809
-
771,809Stock based
compensation
-
-
428,726
-
-
428,726Common
stock issued for director fees
19,188
192
28,812
-
-
29,004Common stock
issued for deferred compensation
20,892
209
27,995
-
-
28,204Net loss
-
-
-
-
(1,264,772)
(1,264,772)Balance February
28, 2011
28,034,993
$280,347
$21,797,023
$(1,422,654)
$(19,830,914)
$823,802    The
accompanying notes are an integral part of these consolidated financial
statements.


Page 36


DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF CASH FLOWS  Year ended February
28,2011

2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (1,264,772)

$  (1,245,049)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
6,862

2,303Amortization of website
development cost
29,602

5,208Stock based compensation
expense
428,726

462,552Non-cash stock
issued for director fees
29,004

32,391Non-cash stock
issued for deferred compensation
28,204

71,539Changes in
operating assets and liabilities:Prepaid
domain name renewal fees
16,894

(54,825)Prepaid
expense
(10,425)

(20,000)Accounts
payable
(14,540)

27,847Accrued
payroll
9,795

(9,910)Deferred officer
compensation
28,565

21,723Deferred revenue
(15,000)

15,000Net
cash used in operating activities
(727,085)

(691,221)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchases of
property and equipment
(25,449)

-Purchase of
intangible asset  website development
(52,230)

(23,349)Purchase of
intangible assets  domain names
(19,631)

(1,769)Net
cash used in investing activities
(97,310)

(25,118)CASH FLOWS FROM FINANCING
ACTIVITIES:Proceeds from loan  director/stockholder
50,000

39,482Payments on loan  director/stockholder
(50,282)

(4,879)Payments
received on stockholder subscriptions receivable
771,809

337,500Proceeds from
issuance of common stock
122,000

334,500Net cash provided by financing
activities
893,527

706,603Net change in cash and cash equivalents
69,132

(9,736)Cash and cash equivalents,
beginning of period
34,178

43,914Cash and cash equivalents,
end of period
$       103,310

$       34,178  The accompanying notes are an integral part of these consolidated
financial statements.





Page 37


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   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. 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).  Fair Value
of Financial Instruments  The
Companys financial instruments consist of cash, prepaid expenses, accounts
payable, accrued expenses and loan from a director.  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,
2011, the Company had no cash equivalents.


Page 38


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   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 350-50) 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 350-50) 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.  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  Deferred tax assets (net of any valuation allowance) and
liabilities resulting from temporary differences, net operating loss
carry-forwards and tax credit carry-forwards are recorded using an
asset-and-liability


Page 39


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   method.  Deferred taxes relating to temporary differences and
loss carry-forwards are measured using the tax rate expected to be in effect
when they are reversed or are realized.  Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be ultimately realized.  The Company has recorded a full valuation
allowance against the net deferred tax asset due to the uncertainty of realizing
the related future benefits.  The
Company accounts for income taxes pursuant to Financial Accounting Standards
Board guidance.  This guidance prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return.  For those
benefits to be recognized, a tax position must be more likely than not to be
sustained upon examination by taxing authorities.  The Companys adoption
on March 1, 2009 of the provisions specifically related to uncertain tax
positions resulted in no cumulative effect adjustment.  The Company
believes its income tax filing positions and deductions will be sustained upon
examination and, accordingly, no reserves or related accruals for interest and
penalties have been recorded at February 28, 2010 and 2011.  In accordance
with the guidance, the Company has adopted a policy under which, if required to
be recognized in the future, interest related to the underpayment of income
taxes will be classified as a component of interest expense and any related
penalties will be classified in operating expenses in the statements of
operations.  The Company has three open years of tax returns subject to
examination.  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, 2011 and 2010, the Company had no items defined as
other comprehensive income (loss).  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 and currently have unlimited insurance coverage.  At February 28,
2011, the Company had no uninsured cash balances.


Page 40


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   Advertising  Advertising costs are charged to operations when incurred.
 The Company did not incur any advertising expense during the years ended
February 28, 2011 and 2010.  Recently
Issued Accounting Pronouncements  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 adoption of this guidance did not have a
material impact on its consolidated financial statements. Note
2. Management Plans Regarding Liquidity The Company has sustained reoccurring losses and negative cash
flows from operations and expects these conditions to continue into the
foreseeable future.  At February 28, 2011, the Company had an accumulated
deficit of $19,830,914.  Subsequent to February 28, 2011, the Company has
received cash proceeds totaling approximately $115,000 from its stock
subscription receivable.  The Company anticipates that existing cash, stock
subscription proceeds received to date, expected future proceeds from its stock
subscription 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,
2012.  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. Note 3. Property
and Equipment  Property and
equipment are as follows:  February 28,2011
2010Office
equipment and furniture
$
       491,447
$
       465,998Less
accumulated depreciation
(471,141)
(464,279)$
         20,306
$
           1,719  Depreciation expense for the fiscal years ended February 28, 2011
and 2010 was $6,862 and $2,303, respectively.


Page 41


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   Note 4. Intangible
Assets  Intangible assets,
net are as follows:  February 28,2011
2010Domain
names
$
    831,667
$
     812,036Website
development costs
321,457
23,349Less
accumulated amortization
(34,810)
(5,208)$
    1,118,314
$
     830,177  During
the twelve months ended February 28, 2011 and 2010, the Company capitalized
$19,631 and $1,769, 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, 2011 and 2010, the Company incurred
$172,977 and $214,314, respectively, of annual domain name renewal fees and has
expensed $189,871 and $159,489, respectively, to cost of revenues on a straight
line basis and has recorded $37,931 and $54,825, respectively,  as prepaid
expense as of February 28, 2011 and 2010.  During
the twelve months ended February 28, 2011 and 2010, the Company capitalized
$298,108 and $23,349, respectively, of website development costs and has
determined that $196,356 and $23,349, respectively, of 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, 2011 and 2010,
the Company recorded $29,602 and $5,208, respectively, 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, 2011 is as follows:  FY 2012
$
    73,235FY 2013
68,027FY 2014
43,633$
  184,895  Note 5. 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 June 7, 2010, the Company issued 20,892 restricted common
shares at $1.35 per share, valued at $28,204, to pay the entire deferred
compensation balance accrued as of May 31, 2010.  During the fiscal year,
the Company recorded $50,288 of additional deferred officer compensation and
that amount is still owed as of February 28, 2011.


Page 42


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   Note 6.
Stockholders Equity  Fiscal 2011 Stock Transactions  On
February 15, 2011, the Company issued 2,780 restricted common shares at $2.75
per share, valued at $7,645, to five directors of the Company for payment of
director fees.  On
December 1, 2010, the Company entered into stock purchase agreements and issued
5,000 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 $1.00, for a total value of $5,000.  On
November 15, 2010, the Company issued 6,000 restricted common shares at $1.25
per share, valued at $7,500, to five directors of the Company for payment of
director fees.  On
November 15, 2010, the Company entered into stock purchase agreements and issued
107,000 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 $1.00, for a total value of $107,000.  On
August 15, 2010, the Company issued 7,917 restricted common shares at $1.20 per
share, valued at $9,500, to seven directors of the Company for payment of
director fees.  On June
22, 2010, the Company issued 400,000 restricted common shares at a price of
$0.75 per share to an existing shareholder (related party), valued at $300,000
in exchange for a stock subscription agreement (see further details in Note 12,
2010 Agreements).  On June
7, 2010, the Company issued 20,892 restricted common shares at $1.35 per share,
valued at $28,204, to Richard Pomije, the CEO and Chairman of the Company for
payment of deferred compensation.  On May
15, 2010, the Company issued 2,491 restricted common shares at $1.75 per share,
valued at $4,359, to six directors of the Company for payment of director
fees.  During
the quarter ended May 31, 2010, the Company entered into stock purchase
agreements and issued 6,667 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, for total cash
proceeds of $10,000.  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.


Page 43


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   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.  Stock Warrants  As of
February 28, 2011, the Company has a total of 341,668 stock purchase warrants
outstanding with an exercise price of $4.00.  The warrants expire two years
from their 2010 and 2009 dates of issuance.  The weighted average remaining
exercise period as of February 28, 2011 is 0.70 years.  Other  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 and granted a five-year warrant of the Company's common
stock equal to 10% of the shares of common stock sold.  In February 2010,
the Company paid the investment banker an advance of $20,000 consisting of
$15,000 as a retainer to be applied against any potential commission earned and
$5,000 as an advance on expenses.  On November 12, 2010, the Company had
not received any proceeds from the sale of common stock related to this
agreement and thus ended its agreement with the investment banker and signed a
drawdown equity financing agreement (Drawdown Agreement) with an institutional
investor on December 3, 2010.  The
drawdown agreement was entered into with Auctus Private Equity Fund, LLC
(Auctus).  In connection with the drawdown agreement, the Company
registered 3,000,000 shares of common stock (Note 15) and at its discretion, has
the right to sell common stock to Auctus over a thirty six month period for
maximum aggregated consideration of up to $10,000,000, subject to the following
terms and conditions.


Page 44


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   · The maximum advance amount available to the Company is limited to
the greater of $150,000 or 200% of the average daily volume based on the 10 days
preceding the Companys notice requesting a draw. · Auctus purchase price per common share will be 94% of the lowest
closing volume weighted average price (VWAP) of the Companys common stock
during the five trading days immediately following the Companys delivery of
notice to Auctus. · At its option, the Company can establish a floor price under which
Auctus may not sell the shares.  The floor price shall be 75% of the
closing VWAP for the 10 days prior to the notice requesting a draw.  Auctus
must cease selling any shares purchased in connection with the Drawdown
Agreement if the price falls below the established floor price.  The
Company, at its discretion, may waive the floor price and allow Auctus to sell
its shares below the floor price. · In no event can the number of shares owned by Auctus exceed 4.99%
of the then outstanding shares of the Companys common stock.  As of
February 28, 2011, this would translate into maximum ownership by Auctus of
approximately 1,400,000 shares of the Companys common stock.  The
Company issued a drawdown notice to Auctus for $50,000.  Auctus honored
$2,108 of the notice, but has refused to honor the balance.  The Company
considers Auctus to be in breach of the Drawdown Agreement.  Note
7. Stock Options  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of February 28, 2011, 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.  The potential vesting terms
of the outstanding options range from immediate to two years from the grant date
anniversary and the term of the options is 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
statements 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.


Page 45


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   For
stock options granted during the years ended February 28, 2011 and 2010, we
utilized the following key assumptions in computing fair value using the
Black-Scholes option-pricing model:  Year ended February 28,2011
2010Weighted-average
volatility
250%
186%Expected
dividends
None
NoneExpected term
(in years)
5
5Weighted-average
risk-free interest rate
1.64%
2.30%Weighted-average
fair value of options granted
$1.39
$1.05  The
Company recorded stock-based compensation expense of $428,726 and $462,552 for
all outstanding options for the years ended February 28, 2011 and 2010,
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 both the years ended February 28, 2011 and 2010 by $(0.02). As
of February 28, 2011, there remains $388,530 of total unrecognized compensation
expense, which is expected to be recognized over future periods through November
30, 2012.  The
following table summarizes information about the Companys stock options as of
February 28, 2011 and changes during the year ended February 28, 2011:    Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contract Life (years)
Aggregate Intrinsic Value (1)Outstanding February 28, 2009
4,478,000
$  2.979
-
-Granted
630,000
1.972
-
-Canceled or expired
(1,105,000)
(4.770)
-
-Outstanding - February 28, 2010
4,003,000
$  2.326
-
-Granted
670,000
1.741
-
-Canceled or expired
(518,000)
(5.289)
-
-Outstanding - February 28, 2011
4,155,000
$  1.862
1.56
$ 2,819,750Exercisable at February 28, 2011
3,672,000
$  1.875
1.15
$ 2,453,510  (1) The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price.


Page 46


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   The following table
summarizes information about stock options outstanding as of February 28,
2011:  Exercise Price
Number Outstanding
Weighted Average Remaining Life (years)
Weighted Average Exercise Price
Number Exercisable
Weighted Average Exercisable Price$1.72 -
$1.75
3,580,000
1.54
$1.73
3,097,000
$1.73$2.25 -
$2.60
350,000
1.51
$2.35
350,000
$2.35$3.00 -
$4.25
225,000
2.20
$3.16
225,000
$3.16$1.72 -
$4.25
4,155,000
1.57
$1.86
3,672,000
$1.88  Note 8. Related
Party Transactions  The
Company entered into a five year lease with Jeff Mills, a director and
stockholder of the Company, for approximately 2,650 square feet of space used
for offices and operations equipment storage at 11974 Portland Avenue,
Burnsville, Minnesota.  The lease commenced on December 16, 2006 at a
monthly rent of $2,650 for the five year term of the lease and contains an
option to renew for an additional term of one year at a monthly rent of $3,650.
 The Companys lease payments made to the Jeff Mills for the years ended
February 28, 2011 and February 28, 2010 totaled $31,800 and $31,800,
respectively.  Future
minimum lease payments at February 28, 2011 totaled $25,175 for Fiscal Year
2012.  Note 9. 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 August
2010, the annual interest rate was increased to 7.5%.  The outstanding
balance of the loan as of February 28, 2011 and 2010, was $137,088 and $137,370,
respectively.  For the fiscal years ended February 28, 2011 and 2010, the
Company made principal payments of $50,282 and $4,879, respectively, and
received additional advances of $50,000 and $39,482, respectively.
 Interest expense incurred on this loan for the fiscal years ended February
28, 2011 and 2010 was $9,371 and $9,526, respectively.  Note 10. Income
Taxes  At
February 28, 2011, the Company had net operating loss carryforwards of
approximately $8,210,000. 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.


Page 47


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   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:  2011

2010Deferred tax
assets:Net
operating loss carryforwards

$
    3,036,000

$
    2,721,000Stock
compensation

2,938,000

2,775,000Total deferred
tax assets

5,974,000

5,496,000Valuation
allowance

(5,974,000)

(5,496,000)Net deferred
tax assets

$
                 -

$
                  -  Reconciliation
between the federal statutory rate and the effective tax rate for the years
ended February 28, 2011 and 2010 is as follows:  2011
2010Federal
statutory tax rate

(34.0)%

(34.0)%State taxes,
net of federal benefit

(4.0)%

(4.0)%Non-deductible
items

0.6%

1.0%Stock
compensation adjustment

33.9%

34.6%Change in
valuation allowance

3.5%

2.4%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,
2011, 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.  The
Company has three open years of tax returns subject to examination. The Company
is not currently under Internal Revenue Service ("IRS")
or Minnesota tax examinations.  Note 11.
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.


Page 48


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   On December 8, 2010, the Company entered into a five year
strategic partnership agreement with the National Interscholastic Athletic
Administrators Association (NIAAA).  The NIAAA and DigitalTown will work
together to establish a national, standardized system for recording schedules,
scores, rosters and statistics for interscholastic sports teams and individual
students.  Pursuant to the agreement, the Company has committed to pay the
expenses related to this strategic partnership; however any expenses in excess
of $5,000 must be preapproved by the Company.  The Company has committed to
deposit $50,000 for such expenses for the first fiscal year of the contract and
an additional $50,000 for the second year.  In addition, the Company has
committed to donate 25% up to $3,000,000 of the annual net sponsorship revenue
in the scheduling and stats areas of its websites to yet to be named program
funds that promote youth activities and the NIAAA.  Lastly, the Company has
committed to a minimum revenue share of $100,000 per year with the future launch
of its beta 3 software. Note 12. Common
Stock Subscriptions Receivable  As of February 28,
2011, 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 received by the
Company on December 30, 2005 for 4,733,333 restricted common shares at $0.75 per
share (total value of $3,550,000) 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, 2011 is
$147,654. The Company recognizes that this receivable is now past due and deems
it to be fully collectable.  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 49


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   On
February 25, 2010, due to the 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. 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, 2011 is $975,000.  2010
Agreement  Material terms of the subscription agreement received by the
Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per
share (total value of $300,000) 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 2010 subscription agreement at February 28, 2011 is
$300,000.


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DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   Summary  As of
February 28, 2011, the Company had stock subscription receivables of $1,422,654
and for the twelve months ended February 28, 2011, the Company received stock
subscription payments of $771,809 and entered into a new stock subscription for
$300,000.  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
1,894,463New
subscription agreement (2)
300,000Cash
collected
(771,809)Receivable
balance at February 28, 2011
$
   1,422,654Summary of
outstanding subscriptions:2005
subscriptions
$
     147,6542007
subscriptions
975,0002010
subscriptions
300,000$
  1,422,654  (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) New
subscription agreement received on June 22, 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.  For the twelve month period ended February
28, 2011, 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 makes a payment 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 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.


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DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010   Note
13. 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, 2011 and 2010:  Years endedFebruary 28,2011

2010Basic income
(loss) per share calculation:Net income
(loss) to common shareholders
$
          (1,264,772)

$
         (1,245,049)Weighted
average of common shares outstanding
27,812,364

27,350,072Basic net
income (loss) per share
$
                   (0.05)

$
                  (0.05)Diluted
income (loss) per share calculation:Net income
(loss) to common shareholders
$
          (1,264,772)

$
         (1,245,049)Weighted
average of common shares outstanding
27,812,364

27,350,072Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,812,364

27,350,072Diluted net
income (loss) per share
$
                 (0.05)

$
                 (0.05)  (1)
At February 28,
2011 and 2010, there were outstanding stock options equivalent to
4,155,000 and 4,003,000 common shares, respectively.  The stock
options are anti-dilutive at February 28, 2011 and 2010 and therefore,
have been excluded from diluted earnings per share.(2)
At February 28,
2011 and 2010, there were outstanding warrants equivalent to 341,668 and
223,001 common shares, respectively.   The warrants are
anti-dilutive at February 28, 2011 and 2010 and therefore, have been
excluded from diluted earnings per share.


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DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Years
Ended February 28, 2011 and 2010    Note
14. Supplemental Disclosure of Cash Flow Information  Years ended February 28,2011
2010Non-cash flow
information:Cash
paid for interest
$
         9,371
$
         9,526Non-cash
investing and financing activities:Subscription
receivable amendment
$
                 -
$
  2,275,000Accounts
payable incurred for website development costs
$
     245,878
$
                -Common
stock issued with subscription agreement
$
     300,000
$
                -   Note 15.
Subsequent Events  The
Company has collected $115,000 of its 2005 stock subscription receivables during
the period from March 1, 2011 to May 4, 2011.  On
April 5, 2011, the Companys registration statement, initially filed December
23, 2010, was declared effective by the SEC.  The effective registration
statement allows the Company to sell up to 3,000,000 of its shares to Auctus
Private Equity Fund, LLC (Auctus) as part of the drawdown equity financing
agreement the Company signed with Auctus on December 3, 2010 (Note 6).  As
of May 4, 2011, the Company had sold 1,000 shares of common stock for an
aggregate purchase price of $2,108 pursuant to the drawdown agreement with
Auctus.  The Company issued a drawdown notice to Auctus for $50,000,
 but Auctus has refused to honor the balance above $2,108.  The
Company considers Auctus to be in breach of the drawdown agreement.


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