U.S.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  Form
10-Q  (Mark
One)  | X |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934   For the
quarterly period ended: November 30, 2010   |__|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934   Commission file number: 000-27225   DigitalTown, Inc. (Name of
registrant in its charter)  Minnesota
41-1427445(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)11974 Portland Avenue, Burnsville, Minnesota
55337(Address of principal executive offices)
(Zip Code)Registrant's telephone number: (952)
890-2362   Indicate by check
mark whether the registrant (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  Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
       [  ]  Yes  [X]  No
 (Not required)  Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.  See definitions of accelerated filer and
large accelerated filer 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
Exchange Act).      [  ]  Yes  [X]
 No  There were 28,032,213
shares of the registrants common stock outstanding as of January 13, 2011.  ii      TABLE OF
CONTENTS   PART
IItem
1.
Financial
Statements
1-16Item
2.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
17-23Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
24Item
4.
Controls
and Procedures
24PART
IIItem
1.
Legal
Proceedings
25Item
1A
Risk
Factors
25Item
2.
Unregistered
sales of Equity Securities and Use of Proceeds
25Item
3.
Defaults
Upon Senior Securities
26Item
4.
(Removed
and Reserved)
26Item
5.
Other
Information
26Item
6.
Exhibits
26    iii        PART
I  ITEM
1.  FINANCIAL STATEMENTS  PageFinancial
Statements:Consolidated
Balance Sheets
1Consolidated
Statements of Operations
2Consolidated
Statements of Cash Flows
3Notes to
Financial Statements
4-16


DigitalTown, Inc. CONSOLIDATED BALANCE SHEETS  ASSETSNovember 30,2010

February 28,2010(unaudited)

(audited)Current
assets:Cash

$      45,633

$      34,178Prepaid
domain name renewal fees

76,438

54,825Prepaid
expense

38,309

20,000Total
current assets

160,380

109,003Property and
equipment, net

16,835

1,719Intangible
assets, net

1,139,854

830,177Total
assets

$
  1,317,069

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

$
      320,904

$
      55,412Loan
from director/stockholder

136,113

137,370Other
liability

-

15,000Accrued
payroll

7,864

2,563Deferred
officer compensation

55,288

21,723Total
current liabilities

520,169

232,068Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 28,027,213 and
27,476,246 shares issued and outstanding at November 30, 2010 and
 February 28, 2010, respectively

280,267

274,759Additional
paid-in-capital

21,507,002

20,894,677Subscriptions
receivable

(1,692,388)

(1,894,463)Accumulated
deficit

(19,297,981)

(18,566,142)Total
stockholders equity

796,900

708,831Total
liabilities and stockholders equity

$
   1,317,069

$
   940,899   The
accompanying notes are an integral part of these consolidated financial
statements.  1      DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months Ended

Nine Months EndedNovember 30,

November 30,2010

2009

2010

2009(unaudited)

(unaudited)

(unaudited)

(unaudited)Revenues
$
          2,917

$
          2,937

$
          12,064

$
          4,888Cost of revenues
55,061

54,618

163,558

98,760Loss from operations
(52,144)

(51,681)

(151,494)

(93,872)Operating expenses:Selling, general and
administrative expenses
161,121

234,686

584,425

606,320Income (loss) from operations
(213,265)

(286,367)

(735,919)

(700,192)Other
income (expense):Interest
expense
(2,034)

(2,445)

(5,826)

(7,010)Other
income
-

-

9,906

1,815Total
other income (expense)
(2,034)

(2,445)

4,080

(5,195)Net
income (loss) before income taxes
(215,299)

(288,812)

(731,839)

(705,387)Income
tax provision
-

-

-

-Net
income (loss)
$
     (215,299)

$
     (288,812)

$   (731,839)

$   (705,387)Income (loss) per common share  basic and diluted
$
       (0.01)

$
       (0.01)

$
       (0.03)

$
       (0.03)Weighted
average common shares outstanding  basic and dilutive
27,920,788

27,380,231

27,740,300

27,323,546  The accompanying notes are an integral part of these
consolidated financial statements.    2     DigitalTown, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS  Nine months
   ended
November 30, 2010

Nine months
   ended
November 30, 2009(unaudited)

(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (731,839)

$  (705,387)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
4,885

1,729Amortization of website
development cost
11,293

2,633Stock-based compensation
expense
151,269

129,809Non-cash stock
issued for director fees
21,360

19,500Non-cash stock
issued for deferred officer compensation
28,204

-Changes in
operating assets and liabilities:Prepaid
domain name registration fees
(21,613)

(106,326)Prepaid
expense
(18,309)

-Accounts
payable
(25,116)

30,621Accrued
payroll
5,301

(11,073)Deferred
officer compensation
33,565

60,500Other
liability
(15,000)

-Net
cash used in operating activities
(556,000)

(577,994)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of
property and equipment
(20,001)

-Purchase of
intangible asset-website development
(12,115)

(23,349)Purchases and
 renewal of  intangible assets -domain names
(18,247)

(13,242)Net
cash used in investing activities
(50,363)

(36,591)CASH FLOWS FROM FINANCING
ACTIVITIES:Net advance from officer
-

14,350Proceeds from loan  director/stockholder
50,000

39,482Payments on loan  director/stockholder
(51,257)

(3,235)Payments
received on stockholder subscription receivables
514,075

194,000Proceeds from
issuance of common stock
105,000

334,500Net cash provided by financing
activities
617,818

579,097Net change in cash and cash equivalents
11,455

(35,488)Cash and cash equivalents,
beginning of period
34,178

43,914Cash and cash equivalents,
end of period
$       45,633

$       8,426  The accompanying notes are an integral part of these consolidated
financial statements.





3


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Note 1. Basis of
Presentation  The
accompanying unaudited consolidated financial information has been prepared
by DigitalTown, Inc. (the Company) in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission
(SEC).  Accordingly, it does not include all of the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of this financial information have
been included.  Financial results for the interim period presented are
not necessarily indicative of the results that may be expected for the fiscal
year as a whole or any other interim period.  This financial
information should be read in conjunction with the audited consolidated
financial statements and notes included in the Companys Annual Report on Form
10K for the year ended February 28, 2010.  Note 2. 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 a platform to monetize the domain names. The Companys
headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its
telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451,
respectively. The Company's Internet address is www.digitaltown.com.   The
Company is traded in the over-the-counter market under the ticker DGTW.  The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At November 30,
2010, the Company had an accumulated deficit of $19,297,981.  Subsequent to
November 30, 2010, the Company has received cash proceeds totaling $77,000 from
its stock subscription receivables.  The Company anticipates that existing
cash, stock subscription proceeds received to date, expected future proceeds
from its stock subscription receivables and expected sales of its common stock
through a drawdown equity financing agreement signed on December 3, 2010 with
Auctus Private Equity Fund, LLC (see Note 12) should be sufficient to meet its
working capital and capital expenditures needs through at least November 30,
2011.  In the event that we are unable to obtain additional capital in the
future, we would be forced to reduce operating expenses and/or cease operations
altogether.  Principles
of Consolidation  The
Company files consolidated financial statements that include its wholly-owned
subsidiary Tiger Media. All material intercompany accounts and transactions have
been eliminated in consolidation.


4


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    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).  Intangible
Assets  Domain Names/Website Development Costs  Domain
name costs are accounted for in accordance with the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC 350-30) guidance
pertaining to Intangibles-Goodwill and Other, Website Development Costs.
 Certain modules and components of the Companys overall website
development are ready for their intended use and the Companys resulting
websites are currently operational. Accordingly, the annual domain name renewal
fees are currently being amortized over one year and the purchase of any new
domain names are the only amounts being capitalized.  Previously, during
the infrastructure development stage of its websites, the Company capitalized
the purchase of new domain names and the annual domain name renewal fees.
Additionally, since the ownership of each domain name can be renewed for a
nominal renewal fee each year prior to their expiration date, the useful lives
of the domain names are deemed to be indefinite and no amortization of the
capitalized costs for the domain names will be recorded.  Website
development costs are accounted for in accordance with the FASB Accounting
Standards Codification (ASC 350-30) guidance pertaining to Intangibles-Goodwill
and Other, Internal-Use Software which requires that all internal and external
costs incurred to develop the internal-use software necessary to operate the
websites be capitalized.  The guidance further states, amortization should
begin when an individual module or component of the overall internal-use
software is ready for its intended use.  The cost of such module or
component will be amortized on a straight-line basis over its estimated useful
life, as determined by the Company, after taking into account the effects of
obsolescence, technology, competition and other economic factors.  The
Company has components of its website development that are operational and are
being amortized on a straight-line basis over a three year life.  Impairment
of Long-Lived Assets  Long-lived assets, such as property and equipment and intangible
assets  domain names/website development costs are reviewed for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used is


5


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   measured by comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.  Income
Taxes  The
Company accounts for income taxes by following an asset and liability approach
to financial accounting and reporting for income taxes. Accordingly, deferred
tax assets and liabilities arise from the difference between the tax basis of an
asset or liability and its reported amount in the financial statements. Deferred
tax amounts are determined using the tax rates expected to be in effect when the
taxes will actually be paid or refunds received, as provided under currently
enacted tax law. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable, respectively, for the period plus or
minus the change in deferred tax assets and liabilities during the period.
 The Company has three open years of tax returns subject to
examination.  The
Company follows the recognition of a financial statement benefit of a tax
position only after determining that the relevant tax authority would
more-likely-than-not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
consolidated financial statements is the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement with the
relevant tax authority.  Stock-Based
Compensation  The
Company measures and recognizes compensation expense for all stock-based payment
awards made to employees, directors and consultants 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.  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


6


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   beginning after December 15, 2010. The adoption of this guidance
did not have an impact on our financial statements.  Note 3. Intangible
Assets  Intangible assets,
net are as follows:  November 30,     2010
February 28,     2010Domain
names
$
    830,283
$
     812,036Website
development costs
326,072
23,349Less
accumulated amortization
(16,501)
(5,208)$
    1,139,854
$
     830,177  During
the nine months ended November 30, 2010, the Company capitalized $18,247 in
additional domain name purchases.  Since the useful life of the domain
names is deemed to be indefinite, no amortization has been recorded.  During
the nine months ended November 30, 2010, the Company incurred $167,876 of annual
domain name renewal fees and recorded them as prepaid domain name renewal fees.
 During the three and nine months ended November 30, 2010, the Company
expensed $45,660 and $146,262, respectively, on a straight line basis to cost of
revenues in the Companys consolidated statement of operations. At November 30,
2010, the Company had $76,438 of prepaid domain name renewal fees which will be
amortized over future periods.  During
the nine months ended November 30, 2010, the Company capitalized $302,723 of
website development costs and had a total recorded cost of $326,072 at November
30, 2010.  The Company has determined that $106,367 of website development
costs capitalized during the nine month period ended November 30, 2010 pertains
to components of the Companys website development that is not ready for its
intended use and no amortization has been recorded for these costs.  The
Company has determined that $219,705 of the $326,072 total capitalized website
development costs at November 30, 2010 pertained to components of its website
development that is ready for its intended use and has an estimated useful life
of three years.  During the three and nine months ended November 30, 2010,
the Company recorded $7,400 and $11,293, respectively,  to cost of revenues
for amortization expense pertaining to these website components.  Note 4. Deferred
Officer Compensation  Richard
Pomije, the CEO and Chairman of the Company, has elected to forego a portion of
his salary at various times due to limited operating funds.  These amounts
do not accrue interest and are due and payable as funds become available in the
future.  On 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 next six
months ended November 30, 2010, the Company


7


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   recorded $55,288 of additional deferred officer compensation and
that amount is still owed as of November 30, 2010.  Note 5.
Stockholders Equity  Stock Transactions  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.  As of
November 30, 2010, $95,000 in cash has been received and $12,000 remained unpaid
until it was received on December 1, 2010.  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 9,
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.  Stock Warrants  As of
November 30, 2010, the Company has a total of 336,668 stock purchase warrants
outstanding with an exercise price of $4.00.  The warrants expire two years
from their date of issuance.  The weighted average remaining exercise
period as of November 30, 2010 is 0.94 years.


8


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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 $20,000 as an advance on expenses and any
potential commission earned and recorded the advance as a prepaid expense as of
November 30, 2010.  On November 12, 2010, the Company ended its agreement
with the investment banker and signed a drawdown equity financing agreement with
an institutional investor on December 3, 2010.  The Company did not receive
any proceeds from the sale of common stock from the agreement with the
investment banker.  On December 10, 2010, the Company received $3,989 back
from the investment banker on the initial $20,000 advance and recorded $1,011 of
expenses reported from the investment banker pertaining to their efforts to
promote and sell shares of the Companys common stock.  The Company
believes that it is still owed $15,000 from an advance against commissions that
it tendered to the investment banker and in the Companys view, that sum is
still owing to it since no commissions were charged against it.  Note 6. Stock
Options  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of November 30, 2010, an aggregate of 5,000,000 shares of common stock
may be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are non-qualified
stock options and have exercise prices and vesting terms established by the
Board of Directors at the time of each grant.  Vesting terms of the
outstanding options range from immediate to two years from the grant date
anniversary.  The terms of the options are five years from the date of
grant.  The
Companys consolidated financial statements as of and for the nine months ended
November 30, 2010 and 2009, reflect the impact of their stock-based
compensation.  For the three months ended November 30, 2010, the Company
granted no stock options. Total stock compensation expense for all option grants
was $25,229 and $82,643 for the three months ended November 30, 2010 and 2009,
respectively.  For the nine months ended November 30, 2010 and 2009, the
Company has recorded $151,269 and $129,809 in stock compensation expense,
respectively.  This expense is included in selling, general and
administrative expense. As of November 30, 2010, there was no tax benefit from
recording this non-cash expense due to the Company having a full valuation
allowance against its deferred tax assets. The compensation expense impacted the
three and nine months ended November 30, 2010 basic (loss) per common share by
$(0.001) and $(0.005), respectively. There remains $113,984 of total
unrecognized compensation expense, which is expected to be recognized over
future periods through July 31, 2012.


9


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   The
following table summarizes information about the Companys stock options:   Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contract Life (years)
Aggregate Intrinsic Value (1)Outstanding - February 28, 2010
4,003,000
$  2.326
-
-Granted
200,000
1.720
-
-Canceled or expired
(518,000)
(5.289)
-
-Exercised
-
-
-
-Outstanding  November 30, 2010
3,685,000
$  1.877
1.40
-Exercisable at November 30, 2010
3,552,000
$  1.879
1.28
-  (1) The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price.  Note 7. Related
Party Transactions  The
Company entered into a five year lease with Jeff Mills, a director/stockholder
of the Company, for approximately 2,650 square feet of space used for offices
and operations equipment storage at 11974 Portland Avenue, Burnsville,
Minnesota.  The lease commenced on December 16, 2006 at a monthly rent of
$2,650 for the five year term of the lease and contains an option to renew for
an additional term of one year at a monthly rent of $3,650.  The Companys
lease payments made to the director for the three months ended November 30, 2010
and 2009 totaled $7,950 each period. For the nine months ended November 30, 2010
and 2009, the Company recorded $23,850 in lease payments to the director for
each period.  Minimum lease
payments at November 30, 2010 are as follows:FY
2011-remainder
$   7,950FY 2012
25,175$
  33,125  Loan from
Director/Stockholder  As of
November 30, 2010, the Company had an outstanding working capital loan of
$136,113 from Jeff Mills, a director/stockholder of the Company.  The loan
is due on demand and bears annual interest at 7.0%.  The Company made
principal payments of $51,257 and received an additional draw of $50,000 during
the nine months ended November 30, 2010.  Interest expense incurred on this
loan for the three and nine months ended November 30, 2010 and 2009 was $2,034
and $5,826 and $2,445 and $7,010, respectively.


10


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 8.
Commitments and Contingencies  The
Company is exposed to asserted and unasserted claims encountered in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.  Note 9. Common
Stock Subscriptions Receivable  As of November 30,
2010, the Company has the following stock subscription agreements outstanding of
which the majority is due from a related party:   2005 Agreements  Material terms of the subscription agreements 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 November 30, 2010 is
$405,388.  The Company recognizes that this receivable is now past due and
deems it to be fully collectable and it intends to do so.  2007
Agreements  On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000).  Significant
terms of the original subscription agreement are as follows:  · The
price per share of $2.50 was based on the closing price on October 4, 2007. · At
24 months, 1/36 payments are due monthly. · The
Company, at its option, may call up to 1/12 of the gross receivable per month if
the preceding 30 day average trading price is at or above $7.00 a share with
minimum trading volume of 5,000 shares per day. · If
the purchaser sells these common shares, the purchaser shall be entitled to an
amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
stock sale.  On
February 25, 2010, due to the recent economic downturn and the market value
decline of the Companys stock, which was trading below $2.50 per share, the
Company amended the pricing terms of


11


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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 November
30, 2010 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 November 30, 2010 is
$300,000.


12


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Summary  As of
November 30, 2010, the Company had stock subscription receivables of $1,680,388
for the 2005, 2007, and 2010 agreements and for the three months ended November
30, 2010, the Company received stock subscription payments of $82,625.  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
(514,075)Receivable
balance at November 30, 2010
1,680,388Miscellaneous
subscription amount owed (3)
12,000$
     1,692,388Summary of
outstanding subscriptions:2005
subscriptions
$
     405,3882007
subscriptions
975,0002010
subscriptions
300,000Miscellaneous
stock purchase agreement (3)
12,000$
  1,692,388  (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. (3) Balance
due on November 15, 2010 stock purchase agreement.  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 nine month period ended November
30, 2010, there was no downside protection provided because the stock price did
not go below $.75 when converted.  The subscription agreements do not
define the term when converted.  The Company has taken the position that
if at the time that a purchaser 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


13


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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.  Note
10. 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 three
and nine month periods ended November 30, 2010 and 2009:  Three months endedNovember 30,2010

2009Basic
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (215,299)

$
        (288,812)Weighted
average of common shares outstanding
27,920,788

27,380,231Basic net
earnings (loss) per share
$
                  (0.01)

$
              (0.01)Diluted
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (215,299)

$
       (288,812)Weighted
average of common shares outstanding
27,920,788

27,380,231Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,920,788

27,380,231Diluted net
income (loss) per share
$
                  (0.01)

$
              (0.01)


14


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Nine months endedNovember 30,2010

2009Basic
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (731,839)

$
            (705,387)Weighted
average of common shares outstanding
27,740,300

27,323,546Basic net
earnings (loss) per share
$
                  (0.03)

$
                  (0.03)Diluted
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (731,839)

$
            (705,387)Weighted
average of common shares outstanding
27,740,300

27,323,546Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,740,300

27,323,546Diluted net
income (loss) per share
$
                  (0.03)

$
                 (0.03)  (1)
At November 30,
2010 and 2009, there were outstanding stock options equivalent of
3,685,000 and 3,793,000 common shares, respectively.  The stock
options are anti-dilutive at November 30, 2010 and 2009 and therefore have
been excluded from diluted earnings per share.(2)
At November 30,
2010 and 2009, there were outstanding warrants equivalent to 336,668 and
223,001 common shares, respectively.   The warrants are
anti-dilutive at November 30, 2010 and 2009 and therefore have been
excluded from diluted earnings per share.  Note
11. Supplemental Disclosure of Cash Flow Information  Nine months endedNovember 30,2010
2009Non-cash flow
information:Cash
paid for interest
$
         5,826
$
       7,010Non-cash
investing and financing activities:Accounts
payable incurred for web-site development costs
$
     290,608
$
              -Common
stock issued with subscription agreement
$
     300,000
$
              -Common
stock issued with stock purchase agreement
$
       12,000
$
              -  Note
12. Subsequent Events  On
December 3, 2010, the Company signed a drawdown equity financing agreement with
Auctus Private Equity Fund, LLC (Auctus).  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 agreement becomes effective the date on which the
Securities and Exchange Commission


15


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   (SEC)
first declares effective the Companys registration statement filed with the SEC
on December 23, 2010.  As of the date of this 10-Q filing, the Company has
not received an effective S-1 registration statement from the SEC.


16


ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS  The following is a discussion of the financial condition of the
Company as of November 30, 2010, and its results of operations for the three and
nine months ended November 30, 2010 and 2009, which should be read in
conjunction with, and is qualified in its entirety by, the financial statements
and notes thereto included elsewhere in this report.  CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION  This
Form 10-Q for the quarter ended November 30, 2010, contains forward-looking
statements.  Forward-looking statements may be identified by the use of
forward-looking terminology, such as may, shall, could, expect,
estimate, anticipate, predict, probable, should, continue, or
similar terms, variations of those terms or the negative of those terms.
 The forward-looking statements specified in the following information have
been compiled by our management and are considered by management to be
reasonable.  Our future operating results, however, are impossible to
predict and no representation, guaranty, or warranty is to be inferred from
those forward-looking statements.  Company Overview  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 the Company will work together to establish a
national, standardized system for recording schedules, scores, rosters and
statistics for interscholastic sports teams and individual students.  The
partnership will serve to create the first standardized system for collecting
and publishing scholastic team information to state athletic associations, media
and other interested parties.  The scholastic portal will be integrated
into DigitalTowns current roll out of more than 20,000 local online communities
(spirit sites) for high schools.  On
December 3, 2010, the Company signed a drawdown equity financing agreement with
Auctus Private Equity Fund, LLC (Auctus).  Per the agreement, the Company
has the right, at its discretion, to sell up to $10,000,000 of common stock to
Auctus over a 36 month period.  There are no upper limits to the price
Auctus may pay to purchase the Companys common stock and the purchase price of
the shares will be based on 94% of the volume weighted purchase pricing during
the pricing period as outlined in the agreement.  The agreement becomes
effective the date on which the Securities and Exchange Commission (SEC) first
declares effective the Companys S-1 registration statement filed with the SEC
on December 23, 2010.  In October,
DigitalTown completed the initial rollout of its new spirit sites featuring
content from The Active Network, MusicSkins, WeatherBug, Bing and other
providers on 20,057 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 including schedules and scores on 11,757 sites
with the number of sites growing to more than 18,000 as the season progresses.
 Active Power Rankings for high school basketball will be added to the
sites during the season as sufficient data becomes available.  The Company
will add high school lacrosse in the spring.  The
Company continues its development of a user interface (UI) for a call center
sales system integrating DigitalTowns database with Actives self-serve ad
system allowing ads to be targeted to specific


17


DigitalTown spirit sites.  This will allow advertisers to
choose single or multiple sites to cover geographic areas, including sub
categories by team sport, conference or other interest areas.  With nearly
27,000 spirit sites covering the United States, national advertisers will be
able to run both local and nationwide advertising campaigns together.   RESULTS OF
OPERATIONS  THREE MONTHS ENDED
NOVEMBER 30, 2010 and 2009  During
the three months ended November 30, 2010, the Company recorded revenue of $2,917
and cost of revenue of $55,061 for a negative gross profit of $(52,144) compared
to revenue of $2,937 and cost of revenue of $54,618 for a negative gross profit
of $(51,681) for the same period in 2009.  For the two comparable periods,
revenue consisted of commissions generated from advertising on our websites and
cost of revenue consisted of amortization of prepaid annual domain name renewal
fees of $45,660 for 2010 compared to $51,300 for 2009, server/bandwidth expense
of $2,001 for 2010 and 2009 and amortization of website development fees were
$7,400 for 2010 and $1,317 for 2009.  Selling, general and administrative expenses for the most current
three months decreased by $73,565 to $161,121 compared to a year ago due mainly
to a non-cash decrease in stock compensation expense of $57,414 for the most
current three months.  Stock compensation expense was $25,229 for the three
months ended November 30, 2010 compared to $82,643 for the three months ended
November 30, 2009.  Excluding non-cash stock compensation expense for the
two comparable periods, selling, general, and administrative expenses were
$135,892 for the three months ended November 30, 2010, compared to $152,043 for
the three months ended November 30, 2009.  The decrease in selling, general
and administrative expenses of $16,151 for the two comparable quarters was
primarily due to decreases in salary expense of $11,863 and professional fees of
$7,048.  The Companys overall net loss for the current three months
decreased by $73,513 to $215,299.  NINE MONTHS ENDED
NOVEMBER 30, 2010 and 2009  During
the nine months ended November 30, 2010, the Company recorded revenue of $12,064
and cost of revenue of $163,558 for a negative gross profit of $(151,494)
compared to revenue of $4,888 and cost of revenue of $98,760 for a negative
gross profit of $(93,872) for the same period in 2009.  For the two
comparable periods, revenue consisted of commissions generated from advertising
on our websites and cost of revenue consisted of amortization of prepaid annual
domain name renewal fees of $146,262 for 2010 compared to $94,126 for 2009,
server/bandwidth expense of $6,003 for 2010 and $4,669 for 2009 and amortization
of website development fees were $11,293 for 2010 and $2,633 for 2009.  Selling, general and administrative expenses for the most current
nine months decreased by $21,895 to $584,425 compared to a year ago and non-cash
stock compensation increased $21,460 for the most current nine months. Stock
compensation expense was $151,269 for the nine months ended November 30, 2010
compared to $129,809 for the nine months ended November 30, 2009.
   Excluding non-cash stock compensation expense for the two
comparable periods, selling, general and administrative expenses were $433,156
for the nine months ended November 30, 2010, compared to $476,511 for the nine
months ended November 30, 2009.  The decrease in selling, general and
administrative expenses of $43,355 for the two comparable periods was primarily
due to decreases in professional fees of $36,670 and salary expense of $23,361
offset by an increase in administrative fees of $6,500. The Companys overall
net loss for the current nine months increased by $26,452 to $731,839.


18


LIQUIDITY AND CAPITAL
RESOURCES  NINE MONTHS ENDED
NOVEMBER 30, 2010  The
Companys cash position at November 30, 2010, was $45,633, an increase of
$11,455 from $34,178 at February 28, 2010.  During the nine months ended
November 30, 2010, net cash used in operating activities was $556,000 compared
to cash used of $577,994 for the comparable period.  When comparing the two
periods, the decrease in cash used in operating activities of $21,994 for the
nine months ended November 30, 2010 is primarily due to a decrease in prepaid
domain name renewal fees of $84,713 and a decrease of $55,737 in accounts
payable compared to the same period last year.  Net
cash used in investing activities for the nine months ended November 30, 2010
was $50,363, of which $12,115 was used for website development costs, $20,001
for the purchase of property and equipment and $18,247 for the purchase of
additional domain names as compared to net cash used of $36,591, of which
$23,349 was used for website development costs and $13,242 for the purchase of
additional domain names for the comparable period.  Net
cash provided by financing activities for the nine months ended November 30,
2010 was $617,818 which consisted of payments received on stockholder
subscription receivables of $514,075, proceeds from the issuance of common stock
of $105,000 and proceeds from a director/stockholder loan of $50,000 offset by
principal payments of $51,257 on the loan.  For the comparable period ended
November 30, 2009, the Company received net cash provided by financing
activities of $579,097 which consisted of payments received on stockholder
subscription receivables of $194,000, proceeds from the issuance of common stock
of $334,500, net cash advance from an officer of $14,350 and proceeds from a
director/stockholder loan of $39,482 less principal payments on the loan of
$3,235.  Monthly
cash operating expenses for the nine months ended November 30, 2010, were
approximately $62,000 per month, which included payment of $167,876 of the
projected yearly cost of $174,000 for annual domain name renewals. Based on
current projections, the Companys monthly cash operating expenses going forward
for the remainder of the fiscal year should be approximately $62,000 per month,
which includes the remaining yearly cost of the renewal of the existing domain
names totaling $5,502.   In addition to the normal monthly operating
expenses, the Companys committed cash requirements for the three months ending
February 28, 2011 will need to include $290,607 for website development
services. A promissory note with Jeff Mills, a director and stockholder of the
Company, has a balance due of $136,113 at November 30, 2010, and is payable upon
demand.  The Company intends to pay the balance of the note prior to
February 28, 2011.  From December 1, 2010, to January 13, 2011, the Company
has received cash proceeds of $77,000 from stock subscription receivables and
will continue to collect on its remaining stock subscription receivables to fund
its operations.  As of
November 30, 2010, the Company has the following stock subscription agreements
outstanding of which the majority is due from a related party:  2005 Agreements  Material terms of the subscription agreements 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.


19


· 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 November 30, 2010 is
$405,388.  The Company recognizes that this receivable is now past due and
deems it to be fully collectable and it intends to do so.  2007
Agreements  On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000).  Significant
terms of the original subscription agreement are as follows:  · The
price per share of $2.50 was based on the closing price on October 4, 2007. · At
24 months, 1/36 payments are due monthly. · The
Company, at its option, may call up to 1/12 of the gross receivable per month if
the preceding 30 day average trading price is at or above $7.00 a share with
minimum trading volume of 5,000 shares per day. · If
the purchaser sells these common shares, the purchaser shall be entitled to an
amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
stock sale.  On
February 25, 2010, due to the recent economic downturn and the market value
decline of the Companys stock, which was trading below $2.50 per share, the
Company amended the pricing terms of the subscription agreements received by the
Company on October 5, 2007.  The amendment changed the following
significant terms of the subscription agreement:  The
parties agree that the Initial Pricing terms in the Confidential Binding Term
Sheet dated October 5, 2007 of the Agreement will be amended to state as
follows:  1. The Subscriber offers to purchase shares of the Company for $0.75
per share.  After the price adjustment, the revised total value of this
subscription agreement is $975,000.  The
following other provisions of the Initial Pricing and Final Pricing terms in the
Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be
deleted, and are not enforceable by either party:  · Beginning October 5, 2009, 1/36 payments are due each month
thereafter on the 5th of every month. · The Company at its option may call up to 1/12 of the (gross)
receivable note per month if the preceding 30 day average trading price is at or
above $7.00 a share.  Minimum trading volume must be 5,000 shares a
day. · As total consideration for the purchase and sale of the Companys
stock, purchaser shall ultimately pay to the Company the following amount (the
Purchase Price): A. Purchaser shall first be entitled to an amount equal to 200% of
the face amount of each share.


20


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 November
30, 2010 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 November 30, 2010 is
$300,000.  Summary  As of
November 30, 2010, the Company had stock subscription receivables of $1,680,388
and for the nine months ended November 30, 2010, the Company received stock
subscription payments of $514,075.  The
following table summarizes the stock subscription receivable, by quarter, at
November 30, 2010:  Quarter Ended
Total Balance Due
Total Amount Collected
New Subscription Agreements

Amended Purchase Price
(1)
Participatory Rights in the
Proceeds of the Resales Collected
Amount of Downside Protection
ProvidedMay 31, 2009
$4,476,963




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



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



-
-February 28, 2010
1,894,463
143,500


2,275,000
(2)
-May 31, 2010
1,535,513
358,950August 31, 2010
1,763,013
72,500
$ 300,000
(3)November 30, 2010
1,680,388
82,625  (1) Amendment to the terms of the
subscription agreements received by the Company on October 5, 2007 for 1,300,000
restricted common shares reducing the price paid per share from $2.50 to
$0.75. (2) The participatory right terms of the
original subscription agreements were cancelled on February 25, 2010. (3) 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


21


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 nine month period ended November 30, 2010, there was
no downside protection provided because the stock price did not go below $.75
when converted.  The subscription agreements do not define the term when
converted.  The Company has taken the position that if at the time that a
purchaser 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.  In
summary, 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 Private Equity Fund, LLC per the drawdown equity
financing agreement that the Company signed on December 3, 2010 should be
sufficient to enable us to operate for the next 12 months. In the event that we
are unable to collect in the future our stock subscription receivables as needed
or if the Company is unable to receive an effective S-1 registration statement
from the SEC, we would be forced to reduce operating expenses and/or cease
operations altogether.  Critical
Accounting Policies  The
discussion and analysis of DigitalTown, Inc.s financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and related disclosure of contingent assets and liabilities. Management
reviews its estimates on an 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 2 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 the ownership of
each domain name can be renewed for a nominal renewal fee each year prior to
their expiration date, the useful lives of the domain names are deemed to be
indefinite and no amortization of the capitalized costs for the domain names
will be recorded.  Website development costs are accounted for in accordance with the
FASB Accounting Standards Codification (ASC 350-30) guidance pertaining to
Intangibles-Goodwill and Other, Internal-Use Software which requires that all
internal and external costs incurred to develop the internal-use software
necessary to operate the websites be capitalized.  The guidance further
states,


22


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 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.  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 an
impact on our financial statements.  FORWARD-LOOKING
INFORMATION  Any
statements contained herein related to future events are forward-looking
statements.  Readers are cautioned not to place undue reliance on
forward-looking statements. DigitalTown, Inc. undertakes no obligation to update
any such statements to reflect actual events.


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ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  We are
exposed to market risk for the effect of interest rate changes.
 Information relating to quantitative and qualitative disclosure about
market risk is set forth below and in Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources.
 As of November 30, 2010, the Company did not have any off-balance sheet
investments or hedging investments.  ITEM
4. CONTROLS AND PROCEDURES  (a) 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 November 30, 2010, of our
disclosure controls and procedures, as defined in Rules 13(a)-13(e) and
15(d)-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 previously discussed
in Item 9A(T) of our Form 10-K for the fiscal year ended February 28, 2010, that
material weaknesses continue to exist in our internal control over financial
reporting as of November 30, 2010, and as a result our disclosures controls and
procedures were not effective.  Notwithstanding the material weaknesses
that continue to exist as of November 30, 2010, our chief executive officer and
chief financial officer have concluded that the financial statements included in
this Quarterly Report on Form 10-Q 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).  (b) Changes in
Internal Controls over Financial Reporting.  Management continues to
evaluate the Companys Internal Controls over Financial Reporting to insure that
the design and implementation of corrective procedures are adequate to remediate
the previously identified material weaknesses.   Management also
continues to analyze the cost effectiveness of adding additional corrective
procedures to remediate their existing material weaknesses.  During
the fiscal quarter ended November 30, 2010, there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


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PART
II  ITEM
1.  LEGAL PROCEEDINGS  DigitalTown, Inc. is, from time to time, a party to litigation
arising in the normal course of its business.  The Company believes that
none of these actions will have a material adverse effect on its financial
condition or results of operations.  ITEM
1A.  RISK FACTORS  The
most significant risk factors applicable to the Company are described in Part I,
Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended
February 28, 2010.  There have been no material changes from the risk
factors previously disclosed in our Annual Report on Form 10-K.  ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  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 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,
valued at $300,000 in exchange for a stock subscription agreement (see further
details in note 9, 2010 Agreement).  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 price of $1.50 per unit, for total cash
proceeds of $10,000.  These shares are
unregistered with no underwriter used for the sale of common stock.  The
shares of stock were sold pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D
promulgated thereunder.


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**ITEM
3.  DEFAULTS UPON SENIOR SECURITIES**  None.  ITEM
4.  (REMOVED AND RESERVED)  ITEM
5.  OTHER INFORMATION  (a) All
information required to be disclosed on a report on Form 8-K during the period
ended November 30, 2010, has previously been reported. (b) There
have been no material changes to the procedures by which security holders may
recommend nominees to the registrants board of directors.   ITEM
6.  EXHIBITS  3.1
Articles of
Incorporation, as amended (1)
Previously
Filed3.2
Bylaws
(1)
Previously
Filed31
Certifications
of Chief Executive Officer and Chief Financial Officer under Rule
13a-14(a)/15d-14(a)
Included32
Certifications
under Section 1350
Included  (1) Incorporated by
reference to exhibit filed as a part of Registration Statement on Form 10-SB
(Commission File No. 000-27225).


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SIGNATURES  Pursuant
to the requirements 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:
January 14, 2011  **/s/
Richard A. Pomjie___________** Richard
A. Pomije, CEO  **/s/
Paul R. Gramstad___________** Paul
R. Gramstad, CFO


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