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: May 31, 2008
  
 o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 
 Commission
file number: 000-27225
  
 DigitalTown,
Inc.
 (Name of
small business issuer in its charter)
 
 Minnesota
              41-1427445(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)11974 Portland Avenue, Burnsville,
      Minnesota
              55337(Address
      of principal executive offices)
              (Zip
      Code)Registrant's
      telephone number: (952)
      890-2362
 
 Securities
registered under Section 12(g) of the Exchange Act:
 
 Title of Each
Class
 Common
Stock
 Par Value
$0.01 per share
 
 
 
 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
              o
 
  
  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]
 
 There
were 27,083,290 shares of the registrant’s common stock outstanding as of July
3, 2008.
 
 
  ii
  TABLE OF
CONTENTS
 
  PART
      IItem
      1.
              Financial
      Statements
              1-11Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12-15Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              15Item
                4.
              Controls
      and Procedures
              15PART
      IIItem
      1.
              Legal
      Proceedings
              16Item
      1A
              Risk
      Factors
              16Item
      2.
              Unregistered
      sales of Equity Securities and Use of Proceeds
              16Item
      3.
              Defaults
      Upon Senior Securities
              16Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              16Item
      5.
              Other
      Information
              16Item
      6.
              Exhibits
              16-21
  
  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
              4-11
 
  
  DigitalTown,
Inc.
 CONSOLIDATED
BALANCE SHEETS
 ASSETSMay
      31,
                2008
              
              
              February
      29,
                2008(unaudited)
              
              
              (audited)Current
      assets:Cash
              
              $
              37,855
              
              
              $
              67,161Other
      receivable
              
              
              -
              
              
              
              70,528Total
      current assets
              
              
              37,855
              
              
              
              137,689Property
      and equipment, net
              
              
              5,982
              
              
              
              6,737Intangible
      assets – domain names
              
              
              750,716
              
              
              
              602,194Total
      assets
              
              $
              794,553
              
              
              $
              746,620LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              92,850
              
              
              $
              100,683Loan
      from director/stockholder
              
              
              145,000
              
              
              
              -Accrued
      expenses:Accrued
      payroll
              
              
              3,779
              
              
              
              14,301Accrued
      interest
              
              
              -
              
              
              
              11,156Total
      current liabilities
              
              
              241,629
              
              
              
              126,140Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $.01 par value, 2,000,000,000 shares authorized, 27,083,290 and
      27,081,750 shares issued and outstanding at May 31, 2008
      and  February 29, 2008, respectively
              
              
              270,828
              
              
              
              270,812Additional
      paid-in-capital
              
              
              20,463,292
              
              
              
              19,737,494Subscription
      receivable
              
              
              (4,919,162
              )
              
              
              (5,030,795
              )Accumulated
      deficit
              
              
              (15,262,034
              )
              
              
              (14,357,031
              )Total
      stockholders’ equity
              
              
              552,924
              
              
              
              620,480Total
      liabilities and stockholders’ equity
              
              $
              794,553
              
              
              $
              746,620
 
 The accompanying notes are an integral
part of these consolidated financial statements.
 
 
 1
  DigitalTown,
Inc
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 Three
      months ended
                May
      31, 2008
              
              
              Three
      months ended
                May
      31, 2007(unaudited)
              
              
              (unaudited)Operating
      expenses:Selling,
      general and administrative expenses
              
              $
              903,311
              
              
              $
              540,933Loss
      from operations
              
              
              (903,311
              )
              
              
              (540,933
              )Other
      income (expense)Interest
      expense
              
              
              (1,756
              )
              
              
              (1,400
              )Other
      income
              
              
              64
              
              
              
              2,974Total
      other income (expense)
              
              
              (1,692
              )
              
              
              1,574Net
      loss before income taxes
              
              
              (905,003
              )
              
              
              (539,359
              )Income
      tax provision
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (905,003
              )
              
              $
              (539,359
              )Loss
      per common share – basic and diluted
              
              $
              (0.03
              )
              
              $
              (0.02
              )Weighted
      average common shares outstanding – basic and diluted
              
              
              27,082,018
              
              
              
              25,711,658
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
  2
  DigitalTown,
Inc.
 
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 
 Three
      months ended
                May
      31, 2008
              
              
              Three
      months ended
                May
      31, 2007(unaudited)
              
              
              (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (905,003
              )
              
              $
              (539,359
              )Adjustments
      to reconcile net loss to net cash flows used in operating
      activities:Depreciation
              
              
              755
              
              
              
              381Stock
      based compensation expense
              
              
              721,814
              
              
              
              315,620Non-cash
      stock issued for services
              
              
              -
              
              
              
              50,063Non-cash
      stock issued for director fees
              
              
              4,000
              
              
              
              -Changes
      in operating assets and liabilities:Other
      receivables
              
              
              70,528
              
              
              
              971Accounts
      payable
              
              
              (7,833
              )
              
              
              59,022Accrued
      expenses:Accrued
      payroll
              
              
              (10,522
              )
              
              
              (12,017
              )Accrued
      interest
              
              
              (11,156
              )
              
              
              1,400Deferred
      officer compensation
              
              
              -
              
              
              
              11,942Net
      cash used in operating activities
              
              
              (137,417
              )
              
              
              (111,977
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of fixed assets
              
              
              -
              
              
              
              (3,956
              )Purchases
      and  renewal of  intangible assets – domain
      names
              
              
              (148,522
              )
              
              
              (18,929
              )Net
      cash used in investing activities
              
              
              (148,522
              )
              
              
              (22,885
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      to officer/stockholder
              
              
              -
              
              
              
              (10,650
              )Proceeds
      from loan – director/stockholder
              
              
              145,000
              
              
              
              -Payments
      received on stockholder subscription receivables
              
              
              111,633
              
              
              
              151,969Net
      cash provided by financing activities
              
              
              256,633
              
              
              
              141,319Net
      change in cash and cash equivalents
              
              
              (29,306
              )
              
              
              6,457Cash
      and cash equivalents, beginning of period
              
              
              67,161
              
              
              
              8,933Cash
      and cash equivalents, end of period
              
              $
              37,855
              
              
              $
              15,390SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Non-cash
      flow information:Intangible
      assets-domain name renewals incurred with accounts payable
              
              $
              -
              
              
              $
              196,240Cash
      paid for interest
              
              $
              12,912
              
              
              $
              -
  
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 Note 1. Nature of Business and
Summary of Significant Accounting Policies:
 
 Nature of
Business
 
 DigitalTown,
Inc (the “Company”) plans to form an Interactive Media Group Advisory Board made
up of proven industry leaders along with representation from the Company’s
current board.  The Interactive Media Group Advisory Board, once
formed, will actively seek a west coast management company to oversee the design
and development of a DigitalTown social-networking portal.  This
portal, when complete, will connect approximately 27,000 local online spirit
sites formed around a town and its high school and will include easy-to-use and
free features such as email, alumni communication and reunion tools, calendar
and organizing tools for boosters, personal profiles, photo, video and music
sharing and timely community news.  The Company owns the Internet
domain names associated with all of these high school communities.
 
 The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At May 31,
2008, the Company had an accumulated deficit of
$15,262,034.  Subsequent to May 31, 2008, the Company has received
cash proceeds totaling approximately $95,800 from its stock subscription
receivable.  The Company anticipates that existing cash, stock
subscription proceeds received to date, expected future proceeds from its stock
subscription receivables and any additional financing needed through the sale of
its common stock or other equity-based securities will be sufficient to meet its
working capital and capital expenditures needs through at least May 31,
2009.  In the event the Company is unable to obtain additional capital
in the future, we would be forced to reduce operating expenses and/or cease
operations altogether.
 
 Basis of
Presentation
 
 The accompanying unaudited consolidated
financial information has been prepared by 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 three-month period ended May 31, 2008 are not
necessarily indicative of the results that may be expected for the year
ending February 28, 2009. The February 29, 2008 consolidated balance
sheet was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. This financial information should be read in conjunction with
the consolidated financial statements and notes included in the company’s Annual
Report on Form 10-K for the year ended February 29, 2008.
 
  4
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 Principles of
Consolidation
 
 The
Company files consolidated financial statements that include its controlled
Subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Revenue
Recognition
 
 The
Company does not currently generate revenue from its operations.
 
 Intangible Assets – Domain
Names
 
 The
Company is in the development stage of its social-networking portal, and
accordingly, all costs including license renewals, associated with domain names
expected to be utilized in its portal have been capitalized and any future costs
to get the portal operational will be capitalized or expensed.  Since
the ownership of these domain names can be renewed at a nominal fee each year
prior to their expiration date, the useful lives of the domain names are deemed
to be indefinite and no amortization of the capitalized costs for the domain
names will be recorded.  Amortization for any capitalized portal costs
will start once a revenue generating site is in service.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost and depreciated on a straight-line basis over
their estimated useful lives, ranging from two to five years. Leasehold
improvements are amortized over the shorter of the useful life or the term of
the related lease. Repairs and maintenance costs are expensed as incurred; major
renewals and improvements are capitalized.  As items of property or
equipment are sold or retired, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in operating
income.
 
 Impairment of Long-Lived
Assets
 
 Long-lived
assets, such as property and equipment and intangible assets – domain names
costs are reviewed for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
 
  5
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 Income
Taxes
 
 Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating losses and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion
 or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of the enactment.
 
 Stock-Based
Compensation
 
 Effective
March 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”)
Statement No. 123(R), “Share-Based Payment,” applying the modified prospective
method.  This standard requires the fair value of share-based
payments, including grants of employee stock options and employee stock purchase
plan shares, to be recognized in the income statement based on their grant date
fair values unless a fair value is not reasonably estimable.  The fair
value of the Company’s stock options issued under the requirements of SFAS No.
123(R) have been estimated using a Black-Scholes pricing model, which assumes no
expected dividends and estimates the option expected life, volatility and
risk-free interest rate at the time of the grant.
 
 Net Loss Per Common
Share
 
 Basic
loss per share is computed using the weighted average number of shares
outstanding for the period. Diluted loss per share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding stock options. Incremental shares attributable
to the assumed exercise of stock options for the three months ended May 31, 2008
and May 31, 2007 were excluded from the computation of diluted loss per share as
their effect would be anti-dilutive.
 
 As of May
31, 2008 and 2007, the Company had stock options outstanding of 3,982,500 and
3,005,000 respectively.
 
 Recently Issued Accounting
Pronouncements
 
 In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008.  These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.
 
  6
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” which permits entities to elect to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This election is irrevocable.
The Company adopted SFAS No. 159 effective March 1, 2008 and has not
elected the permitted fair value measurement provisions of SFAS No. 159 for any
additional items as of May 31, 2008.
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by us in the first
quarter 2009.  SFAS No. 160 is currently not expected to have a
material effect on the Company’s results of operations, cash flows or financial
position.
 
 Note
2. Intangible Assets
 
 Intangible
assets are as follows:
 
 May
      31, 2008
              
              
              February
      28,2008Domain
      names
              
              $
              750,716
              
              
              $
              654,333Website
      development and portal costs
              
              
              -
              
              
              
              72,540Less
      accumulated amortization
              
              
              -
              
              
              
              -Less
      impairment of domain names
              
              
              -
              
              
              
              (52,139
              )Less
      impairment of website development costs
              
              
              -
              
              
              
              (72,540
              )$
              750,716
              
              
              $
              602,194
 
 Since the
useful life of the domain names are deemed to be indefinite, no amortization has
been recorded.
 
 During
the three months ended May 31, 2008, the Company incurred $147,544 for license
renewals and $978 in additional domain purchases
 
 At
February 29, 2008, due to legal constraints on the use of our college domain
names, the Company concluded that the carrying amount of their college domain
names would not be recoverable and the Company recorded an impairment loss of
$52,139.
 
 
  7
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 During
the year ended February 29, 2008, the Company capitalized $72,540 of website
development costs.  As of February 29, 2008, due to changes in the
Company’s website development plan, the Company concluded that the carrying
amount of their website development costs would not be recoverable and the
Company recorded an impairment loss of $72,540 for the entire website
development costs incurred during the year.
 
 Note
3. Stockholders Equity
 
 Stock
Transactions
 
 On May
16, 2008, the Company issued 1,540 restricted common shares at $2.60 per share,
valued at $4,000, to four directors of the Company for payment of director
fees.
 
 Other
 
 During
the period from May 2007 to September 2007, holders of previously subscribed
shares sold a portion of their shares to other subscription holders of the
Company in order to pay the Company the remaining balance due on their
subscription agreements.  As of May 31, 2008, a total of 827,092
shares had been sold and transferred to the new purchaser for a total purchase
price of $1,842,108 which is due to the original subscription holder. The
underlying original subscription receivable due the Company for these
transferred shares totaled $620,319.  As of May 31, 2008, the entire
$620,319 has been paid to the Company and has reduced their stock subscription
receivable accordingly.  Additionally, due to these shares being
re-sold at prices in excess of the original face amount of the shares purchased,
a portion of the proceeds is due back to the Company.  Per the 2006
stock subscription agreements, the seller of the subscribed shares is entitled
to up to 200% of the face amount of each share sold and the Company is entitled
to 50% of any additional proceeds of the stock in excess of that
200%.  Therefore, the Company is owed $300,735 for their share of the
additional proceeds for sales that occurred through May 31, 2008.  As
of July 3, 2008, no payments have been received and the Company has not recorded
the $300,735 in the stock subscription receivable balance at May 31,
2008.  The Company will record those future cash receipts to
Additional Paid in Capital when received.
 
 Note
4. Stock Options
 
 The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of May 31, 2008, an aggregate of 5,000,000 shares of common stock may
be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are
non-qualified stock options and have exercise prices and vesting terms
established by the Board of Directors at the time of each
grant.  Vesting
 terms of
outstanding options range from immediate to two years of employment
anniversary.  All options expire five years from the date of
grant.
 
  8
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 The
Company’s consolidated financial statements for the three months ended May 31,
2008 and 2007, reflect the impact of SFAS 123(R).  For the three
months ended May 31, 2008, the Company granted stock options to seven employees
and consultants allowing for the purchase of up to an aggregate of 590,000
shares of common stock, with a weighted-average-grant-date fair value of $2.118
per share.  The Company recorded related compensation expense of
$721,814 and $315,620 for the three months ended May 31, 2008 and 2007,
respectively.  This expense is included in selling, general and
administrative expense. There was no tax benefit from recording this non-cash
expense due to the Company having a full valuation allowance against its
deferred tax asset. The compensation expense impacted the basic loss per common
share for the three months ended May 31, 2008 and 2007 by $0.027 and $0.012,
respectfully. As of May 31, 2008, there remains $618,118 of total unrecognized
compensation expense, which is expected to be recognized over future periods
through May 31, 2010.
 
 The
following table summarizes information about the Company’s stock
options:
  Number
      of Options
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contract Life
              
              
              Aggregate
      Intrinsic Value (1)Options
      outstanding - February 28,
      2007
              
              
              3,125,000
              
              
              $
              1.725
              
              
              
              -
              
              
              
              -Granted
              
              
              622,000
              
              
              
              3.019
              
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              (299,500
              )
              
              
              (1.936
              )
              
              
              -
              
              
              
              -Exercised
              
              
              (25,000
              )
              
              
              (1.725
              )
              
              
              -
              
              
              
              -Options
      outstanding - February 29,
      2008
              
              
              3,422,500
              
              
              $
              1.942
              
              
              
              
              
              
              
              -Granted
              
              
              590,000
              
              
              
              4.551Canceled
      or expired
              
              
              (30,000
              )
              
              
              3.107Exercised
              
              
              -
              
              
              
              -Options
      outstanding – May 31,
    2008
              
              
              3,982,500
              
              
              $
              2.319
              
              
              
              3.54
              
              
              $
              4,104,063Exercisable
      at May 31,
      2008
              
              
              3,662,001
              
              
              $
              2.050
              
              
              
              3.47
              
              
              $
              4,760,650
 
 (1)
              The
      intrinsic value of an option is the amount by which the fair value of the
      underlying stock exceeds its exercise
price.
 
 Note
5. Related Party Transactions
 
 The
Company entered into a 5 year lease with a director of the Company for
approximately 2,650 square feet of space used for offices and operations
equipment storage at 11974 Portland Avenue, Burnsville,
Minnesota.  The lease commenced on December 16, 2006 at a monthly rent
of $2,650 for the 5 year term of the lease and contains an option to renew for
an additional term of 1 year at a monthly rent of $3,650.  The
Company’s lease payments made to the director for the three months ended May 31,
2008 and 2007 totaled $7,950 and $7,950, respectively.
  9
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 Minimum
      lease payments at May 31, 2008 are as follows:2009
              
              $
              23,8502010
              
              
              31,8002011
              
              
              31,8002012
              
              
              25,175$
              112,625
 
 Loan from
Director/Stockholder
 During
the three-months ended May 31, 2008, the Company received a working capital loan
of $145,000 from a director/stockholder.  The loan is due on demand
and at an interest rate of 6.5%.  Interest expense incurred on this
loan as of May 31, 2008 was $1,756.
 
 Note
6. 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
7. Common Stock Subscriptions Receivable
 
 During
the year ended February 28, 2006, the Company received subscriptions for
4,811,709 restricted common shares at $0.75 per share.  Significant
terms of the subscription agreement are as follows:
 ·
              Payment
      is due in full in 60 months
 ·
              At
      24 months, the Company can demand at its option, monthly 1/36 payments on
      the subscription agreement.
 ·
              The
      Company has the option to charge simple annual interest of up to
      4%.
 ·
              The
      Company will provide downside protection of up to 30% of the stock price
      upon conversion.
 ·
              If
      the purchaser sells these common shares, the purchaser shall be entitled
      to an amount equal to 200% of the original purchase price of each share
      and the Company shall be entitled to 50% of any additional net sales
      proceeds from the stock sale.
 
 On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share.  Significant terms of the
subscription agreement are as follows:
 ·
              The
      price per share of $2.50 was based on the closing price on October 4,
      2007.
 ·
              At
      24 months, 1/36 payments are due
monthly.
 ·
              The
      Company, at its option, may call up to 1/12 of the gross receivable per
      month if the preceding 30 day average trading price is at or above $7.00 a
      share with minimum trading volume of 5,000 shares per
  day.
 ·
              If
      the purchaser sells these common shares, the purchaser shall be entitled
      to an amount equal to 200% of the original purchase price of each share
      and the Company shall be entitled to 50% of any additional net sales
      proceeds from the stock sale.
  10
  DigitalTown,
Inc.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 The
following tables summarize information about the stock subscription
receivable:
 
 Receivable
      balance at February 28, 2007
              
              $
              2,947,470Cash
      collected
              
              
              (1,166,675
              )New
      subscriptions received October 5, 2007
              
              
              3,250,000Receivable
      balance at February 29, 2008
              
              
              5,030,795Cash
      collected
              
              
              (111,633
              )Receivable
      balance at May 31, 2008
              
              $
              4,919,162Summary
      of outstanding subscriptions:2006
      subscriptions
              
              $
              1,669,162October
      5, 2007 subscriptions
              
              
              3,250,000$
              4,919,162
 
 No
interest has been charged on these subscription agreements.  The
Company has collected approximately $95,800 of additional outstanding
subscription receivables for the period from June 1, 2008 to July 11,
2008.
 
  11
  ITEM 2.
 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 three months ended May 31, 2008 and 2007, which should be
read in conjunction with, and is qualified in its entirety by, the financial
statements and notes thereto included elsewhere in this report.
 
 CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
 This Form
10-Q for the quarter ended May 31, 2008, contains forward-looking statements
within the meaning of Section 27A of Section 21E of the Securities Exchange Act
of 1934, as amended (“Exchange Act”).  Forward-looking statements may
be identified by the use of forward-looking terminology, such as “may,” “shall,”
“could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “should,”
“continue,” or similar terms, variations of those terms or the negative of those
terms.  The forward-looking statements specified in the following
information have been compiled by our management and are considered by
management to be reasonable.  Our future operating results, however,
are impossible to predict and no representation, guaranty, or warranty is to be
inferred from those forward-looking statements.
 
 Company
Overview
 
 The
Company plans to form an Interactive Media Group Advisory Board made up of
proven industry leaders along with representation from the Company’s current
board.  The Interactive Media Group Advisory Board, once formed, will
actively seek a west coast management company to oversee the design and
development of its DigitalTown social-networking portal.  This portal,
when complete, will connect approximately 27,000 local online spirit sites
formed around a town and its high school and will include easy-to-use and free
features such as email, alumni communication and reunion tools, calendar and
organizing tools for boosters, personal profiles, photo, video and music sharing
and timely community news.  The Company owns the domains associated
with all of these high school communities.
 
 It is the
Company’s intent to have its stock listed on a major stock exchange at a future
date when the Company’s financial condition and demand for its stock warrants
such a change.
 
 RESULTS
OF OPERATIONS
 
 THREE
MONTHS ENDED MAY 31 2008 and 2007
 
 Selling,
general and administrative expenses for the current three months increased by
$326,378 to $903,311 and this was primarily due to a $406,194 increase in stock
option expense.  Excluding stock compensation expense for the two
comparable quarters, selling, general, and administrative expenses were $181,497
for the three months ended May 31, 2008 compared to $225,313 for the three
months ended May 31, 2007.  The decrease in selling, general, and
administrative expenses of $43,816 for the two comparable quarters was primarily
due to a decrease in professional fees of $49,871 offset by an increase of
$8,750 in travel and entertainment expense.  The Company’s overall net
loss for the current three months increased by $365,644 to
$905,003.
 
  12
  LIQUIDITY
AND CAPITAL RESOURCES
 
 THREE
MONTHS ENDED MAY 31, 2008
 
 The
Company’s cash position at May 31, 2008 was $37,855, a decrease of $29,306 from
$67,161 at February 29, 2008.  During the three months ended May 31,
2008, net cash used in operating activities was $137,417 which was primarily due
to losses from operations, and decreases in accounts payable, accrued payroll
and accrued interest offset by stock based compensation expense, a non-cash
stock payment and a decrease in other receivables.  Net cash used in
investing activities for the three months ended May 31, 2008 was $148,522, of
which, $147,544 was used for the renewal of existing domain names and $978 was
used for the purchase of additional domain names.  Net cash provided
by financing activities for the three months ended May 31, 2008 was $256,633
which consisted of a $145,000 working capital loan from a director/stockholder
of the Company and  payments received on stockholder subscription
receivables of $111,633.
 
 Our current monthly operating expenses
for the three months ended May 31, 2008, adjusted for non cash stock based
compensation of $721,814, was approximately $61,000 per month. We believe our current cash reservesand amounts we expect to collect on our outstanding stock subscription
receivables should be sufficient to enable us to operate for the next 12
months. We anticipate that
any additional financing would be through the sale of our common stock or other
equity-based securities.  In the event that we are unable to obtain
additional capital in the future, we would be forced to reduce operating
expenses and/or cease operations altogether.
 
 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 1 to
its financial statements and year-end 10-K filed for February 29, 2008,
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
 
 The
Company is in the development stage of its social-networking portal, and
accordingly, all costs including license renewals, associated with domain names
expected to be utilized in its portal have been capitalized and any future costs
to get the portal operational will be capitalized or expensed.  Since
the ownership of these domain names can be renewed at a nominal fee each year
prior to their expiration date, the useful lives of the domain names are deemed
to be indefinite and no amortization of the capitalized costs for the domain
names will be recorded.  Amortization for any capitalized portal costs
will start once a revenue generating site is in service.
 
 
  13
  Impairment
of Long-Lived Assets
 
 Long-lived
assets, such as property and equipment and intangible assets – domain names are
reviewed for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
 
 
 Recently
issued accounting pronouncements:
 
 In
February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “
Effective Date of FASB Statement No. 157” which delays the effective date
of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008.  These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and non-financial liabilities assumed in a business combination. The
Company has not applied the provisions of SFAS No. 157 to its non-financial
assets and non-financial liabilities in accordance with FSP FAS
157-2.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” which permits entities to elect to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This election is irrevocable.
The Company adopted SFAS No. 159 effective March 1, 2008 and has not
elected the permitted fair value measurement provisions of SFAS No. 159 for any
additional items as of May 31, 2008.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. In general,
the statement 1) broadens the guidance of SFAS No. 141, extending its
applicability to all events where one entity obtains control over one or more
other businesses, 2) broadens the use of fair value measurements used to
recognize the assets acquired and liabilities assumed, 3) changes the accounting
for acquisition related fees and restructuring costs incurred in connection with
an acquisition, and 4) increases required disclosures. We are required to apply
SFAS No. 141(R) prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. Earlier application is not
permitted.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This new
consolidation method will
 significantly
change the accounting for transactions with minority interest holders. SFAS No.
160 is effective for fiscal years beginning after December 15, 2008, and will be
adopted by us in the first quarter 2009.  SFAS No. 160 is currently
not expected to have a material effect on the Company’s results of operations,
cash flows or financial position.
 
  14
  FORWARD-LOOKING
INFORMATION
 
 Any
statements contained herein related to future events are forward-looking
statements and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. 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.
 
 
 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 May
31, 2008, 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.
 
 An
evaluation made at the end of the period covered by this report was performed
under the supervision and with the participation of the Company's president,
chief executive officer ("CEO") and the chief financial officer ("CFO") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934 (“the Exchange Act”) to insure that the Company records, processes,
summarizes and reports in a timely and effective manner the information required
to be disclosed in reports filed with or submitted to the Securities and
Exchange Commission. Based on that evaluation and in taking into account the
limited number of employees noted in the following paragraph, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective in timely bringing to their attention
material information related to the Company required to be included in the
Company's periodic Securities and Exchange Commission filings. Since the date of
this evaluation, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls.
 
 Due to
the limited number of Company employees engaged in the authorization, recording,
processing and reporting of transactions, there is inherently a lack of
segregation of duties. The Company periodically assesses the cost versus benefit
of adding the resources that would remedy or mitigate this situation, and
currently does not consider the benefits to outweigh the costs of adding
additional staff in light of the limited number of transactions related to the
Company's operations.
 
 (b)
Changes in Internal Controls over Financial Reporting.
 
 There
have been no significant changes in internal control over financial reporting
that occurred during the fiscal period covered by this report that have
materially affected or are reasonably likely to materially affect the Company’s
internal control over financial reporting.
  15
  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
 
 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.
 
 ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 On May 16, 2008, the Company issued
1,540 restricted common shares at $2.60 per share, valued at $4,000, to four
directors of the Company for payment of director fees.
 
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 None.
  ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
  ITEM
5.  OTHER INFORMATION
 
 (a)
              All
      information required to be disclosed on a report on Form 8-K during the
      period ended May 31, 2008 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 AND REPORTS ON FORM 8-K
  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).
  
 16
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 DigitalTown, Inc.Dated:
      July 11, 2008_____________________________Richard
      A. Pomije, CEO_____________________________Paul
      R. Gramstad, CFO
    17