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, 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  []  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 27,906,296
shares of the registrants common stock outstanding as of June 30, 2010.  ii      TABLE OF
CONTENTS   PART IItem 1.
Financial
Statements
1-13Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
14-19Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
19Item
4.
Controls and
Procedures
20PART IIItem 1.
Legal
Proceedings
21Item 1A
Risk
Factors
21Item 2.
Unregistered
sales of Equity Securities and Use of Proceeds
21Item 3.
Defaults Upon
Senior Securities
21Item 4.
(Removed and
Reserved)
21Item 5.
Other
Information
21Item 6.
Exhibits
22    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
4-13


DigitalTown, Inc. CONSOLIDATED BALANCE SHEETS  ASSETSMay 31,2010

February 28,2010(unaudited)

(audited)Current
assets:Cash

$      23,952

$      34,178Prepaid
domain name renewal fees

127,496

54,825Prepaid
expense

20,000

20,000Total
current assets

171,448

109,003Property and
equipment, net

20,819

1,719Intangible
assets, net

858,784

830,177Total
assets

$
  1,051,051

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

$
       59,599

$
      55,412Loan
from director/stockholder

87,522

137,370Other
liability

-

15,000Accrued
payroll

3,810

2,563Deferred
officer compensation

28,204

21,723Total
current liabilities

179,135

232,068Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,485,404 and
27,476,246 shares issued and outstanding at May 31, 2010 and
 February 28, 2010, respectively

274,851

274,759Additional
paid-in-capital

20,941,935

20,894,677Subscription
receivable

(1,535,513)

(1,894,463)Accumulated
deficit

(18,809,357)

(18,566,142)Total
stockholders equity

871,916

708,831Total
liabilities and stockholders equity

$
   1,051,051

$
   940,899   The
accompanying notes are an integral part of these consolidated financial
statements.  1      DigitalTown, Inc  CONSOLIDATED STATEMENTS OF OPERATIONS  Three months ended May 31,2010

2009(unaudited)

(unaudited)Revenues
$
                  4,070

$
                         -Cost of
revenues
56,654

-Loss from
operations
(52,584)

-Operating
expenses:Selling,
general and administrative expenses
195,986

419,713Loss from
operations
(248,570)

(419,713)Other income
(expense)Interest
expense
(2,248)

(2,056)Other
income
7,603

1,815Total
other income (expense)
5,355

(241)Net loss before
income taxes
(243,215)

(419,954)Income tax
provision
-

-Net loss
$
          (243,215)

$
          (419,954)Net loss per
common share  basic and diluted
$
                (0.01)

$
                (0.02)Weighted
average common shares outstanding  basic and diluted
27,479,723

27,230,714  The
accompanying notes are an integral part of these consolidated financial
statements.  2     DigitalTown, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS   Three months ended May 31,2010

2009(unaudited)

(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (243,215)

$  (419,954)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
901

574Amortization of website
development costs
1,947

-Stock-based compensation
expense
32,991

230,306Non-cash Stock
issued for director fees
4,359

6,000Changes in
operating assets and liabilities:Prepaid
domain name renewal fees
(72,671)

(142,752)Accounts
payable
4,187

(10,524)Accrued
payroll
1,247

(5,478)Deferred
officer compensation
6,481

-Other
liability
(15,000)

-Net
cash used in operating activities
(278,773)

(341,828)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of
property and equipment
(20,001)

-Purchase of
intangible asset-website development
(30,300)

(8,299)Purchases of
 intangible assets  domain names
(254)

(4,819)Net
cash used in investing activities
(50,555)

(13,118)CASH FLOWS FROM FINANCING
ACTIVITIES:Proceeds from loan  director/stockholder
-

39,482Payments on loan  director/stockholder
(49,848)

(55)Payments
received on stockholder subscription receivables
358,950

30,000Proceeds from
issuance of common stock
10,000

282,500Net cash provided by financing
activities
319,102

351,927Net change in cash and cash equivalents
(10,226)

(3,019)Cash and cash equivalents,
beginning of period
34,178

43,914Cash and cash equivalents,
end of period
$       23,952

$       40,895   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 May 31, 2010,
the Company had an accumulated deficit of $18,809,357.  Subsequent to May
31, 2010, the Company has received cash proceeds totaling approximately $25,000
from its stock subscription receivable.  The Company anticipates that
existing cash, stock subscription proceeds received to date, expected future
proceeds from its stock subscription receivables and any additional financing
needed through the sale of its common stock or other equity-based securities
will be sufficient to meet its working capital and capital expenditures needs
through at least May 31, 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
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


5


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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 and Warrants  The
Company measures and recognizes compensation expense for all stock-based payment
awards made to employees and directors on a straight-line basis over the
respective vesting period of the awards.  The compensation expense for
the Company's stock-based payments is based on estimated fair values at the time
of the grant of the portion of stock-based payment awards that are ultimately
expected to vest.  The
Company estimates the fair value of stock-based payment awards on the date of
grant using the Black-Scholes option pricing model. This option pricing model
involves a number of assumptions, including the expected lives of stock options,
the volatility of the public market price for the Company's common stock and
interest rates.  Recently
Issued Accounting Pronouncements  In
December 2009, the FASB issued guidance on the qualitative approach to
identifying a controlling financial interest in a variable interest entity
(VIE), and requires ongoing assessment of whether an entity is a VIE and
whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance is effective for annual reporting periods beginning after
November 15, 2009. The adoption of this standard on March 1, 2010 did not
have an impact on our financial statements.  In
January 2010, the FASB issued Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements


6


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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.  Note 3. Intangible
Assets  Intangible assets,
net are as follows:  May 31,     2010
February 28,     2010Domain
names
$
    812,290
$
     812,036Website
development costs
53,649
23,349Less
accumulated amortization
(7,155)
(5,208)$
    858,784
$
     830,177  During
the three months ended May 31, 2010, the Company capitalized $254 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 three months ended May 31, 2010, the Company incurred $125,377 of annual
domain name renewal fees and recorded them as prepaid domain name renewal fees
and expensed $52,706, on a straight line basis, to cost of revenues in the
Companys consolidated statement of operations for the three months ended May
31, 2010.  At May 31, 2010, the Company had $127,496 of prepaid domain name
renewal fees which will be amortized over future periods.  During
the three months ended May 31, 2010, the Company capitalized $30,300 of website
development costs and had a total of $53,649 at May 31, 2010.   Since
these new costs pertain to components of the Companys website development that
is not ready for its intended use, no amortization has been recorded.
   The Company had previously determined that $23,349 of these
costs pertain to components of their website development that is ready for its
intended use and has an estimated useful life of three years.  During the
three months ended May 31, 2010, the Company recorded $1,947 of website
development amortization expense pertaining to these components to cost of
revenues in the Companys consolidated statement of operations.  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.
 During the three months ended May 31, 2010, the Company recorded $6,481 of
additional deferred officer compensation.  The total balance owed as of May
31, 2010 is $28,204.


7


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5.
Stockholders Equity  Stock Transactions  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
May 31, 2010, the Company has a total of 229,668 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 May 31, 2010 is 0.98 years.  Other  In
February 2010, the Company entered into an agreement with an investment banker
to promote and sell shares of common stock to accredited and institutional
investors.  In conjunction with the potential sale of shares of common
stock, the investment banker will receive a 10% commission, be reimbursed
for expenses, granted five-year warrants of the Company's common stock
equal to 10% of the shares of common stock sold.  As of July 13, 2010, the
Company has not received any proceeds from the sales of shares of common stock
associated with this agreement.  In February 2010, the Company paid the
investment banker $20,000 as an advance on expenses and any potential commission
earned.  The Company has recorded the advance as a prepaid expense as of
May 31, 2010.  Note 6. Stock
Options  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of May 31, 2010, an aggregate of 5,000,000 shares of common stock may
be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are non-qualified
stock options and have exercise prices and vesting terms established by the
Board of Directors at the time of each grant.  Vesting terms of outstanding
options range from immediate to two years from the grant date anniversary.
 The terms of the options are five years from the date of grant.  The
Companys consolidated financial statements as of and for the three months ended
May 31, 2010 and 2009, reflect the impact of their stock-based compensation.
 For the three months ended May 31, 2010, the Company granted no stock
options. Total stock compensation expense for all option grants was $32,991 and
$230,306 for the three months ended May 31, 2010 and 2009, respectively.
 This expense is included in selling, general and administrative expense.
As of May 31, 2010, there was no tax benefit


8


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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 months ended May 31, 2010, and 2009, basic loss per common share by $0.001
and $0.008, respectively. There remains $8,623 of total unrecognized
compensation expense, which is expected to be recognized over future periods
through December 31, 2010.  The
following table summarizes information about the Companys stock options:   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
-
-
-
-Canceled or expired
(150,000)
(10.583)
-
-Exercised
-
-
-
-Outstanding  May 31,
2010
3,853,000
$  2.005
1.85
-Exercisable at May 31,
2010
3,798,000
$  1.989
1.83
-  (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 May 31, 2010 and
2009 totaled $7,950 and $7,950, respectively.   Minimum lease
payments at May 31, 2010 are as follows:FY
2011-remainder
$   23,850FY 2012
25,175$
  49,025  Loan from
Director/Stockholder  As of
May 31, 2010 the Company had an outstanding working capital loan of $87,522 from
Jeff Mills, a director/stockholder of the Company.  The loan is due on
demand and bears annual interest at 7.0%.  The


9


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Company
made principal payments of $49,848 during the three months ended May 31, 2010.
 Interest expense incurred on this loan for the three months ended May 31,
2010 and 2009 was $2,248 and $2,056, respectively.  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 May 31, 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 August 31, 2005, for 78,376 restricted common shares and on December
30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value
of $3,608,782) are as follows:  · Payment
is due in full in 60 months. · At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The outstanding
balance owed on the 2005 subscription agreements at May 31, 2010 is
$560,513.  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.


10


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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. 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 May 31,
2010 is $975,000.  Summary  As of
May 31, 2010, the Company had stock subscription receivables of $1,535,513 and
for the three months ended May 31, 2010, the Company received stock subscription
payments of $358,950.  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)


11


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Receivable
balance at February 28, 2010
1,894,463Cash
collected
(358,950)Receivable
balance at May 31, 2010
$
   1,535,513Summary of
outstanding subscriptions:2005
subscriptions
$
     560,5132007
subscriptions
975,000$
  1,535,513  (1) Amendment
to the terms of the subscription agreements received by the Company on October
5, 2007 for 1,300,000 restricted common shares reducing the price paid per share
from $2.50 to $0.75.  The
Company has not exercised its rights, 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 three month period ended May 31,
2010, there was no downside protection provided because the stock price did not
go below $.75 when converted.  The subscription agreements do not define
the term when converted.  The Company has taken the position that if at
the time that a purchaser pays in full for the shares under a subscription
agreement and the closing price of the shares of the Companys stock is less
than $.75, the shareholder would be entitled to 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
month periods ended May 31, 2010 and 2009:  Three months endedMay 31,2010

2009Basic
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (243,215)

$
        (419,954)Weighted
average of common shares outstanding
27,479,723

27,230,714


12


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Basic net
earnings (loss) per share
$
                  (0.01)

$
                  (0.02)Diluted
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (243,215)

$
        (419,954)Weighted
average of common shares outstanding
27,479,723

27,230,714Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,479,723

27,230,714Diluted net
income (loss) per share
$
                  (0.01)

$
              (0.02)  (1)
At May 31, 2010
and 2009, there were outstanding stock options equivalent to 3,853,000 and
4,248,000 common shares, respectively.  The stock options are
anti-dilutive at May 31, 2010 and 2009 and therefore have been excluded
from diluted earnings per share.(2)
At May 31, 2010
and 2009, there were outstanding warrants equivalent to 229,668 and
188,334 common shares, respectively.  The warrants expire 2
years from their 2010 and 2009 date of issuance and have an exercise price
of $4.00 per share. The warrants are anti-dilutive at May 31, 2010 and
2009 and therefore have been excluded from diluted earnings per
share.  Note
11. Supplemental Disclosure of Cash Flow Information  Three months endedMay 31,2010
2009Non-cash flow
information:Cash
paid for interest
$
         2,248
$
       2,056


13


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 May 31, 2010, and its results of operations for the three months
ended May 31, 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 May 31, 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  The
Company continues to develop their nearly 27,000 spirit sites per their
Contractor Services Agreement with The Active Network Inc. (Active).  On
February 3, 2010, the Company signed a Contractor Services Agreement with Active
to perform certain development services.  The specific services will be
defined in Statements of Work (SOW) which will be entered into from time to time
between the two parties.  The following design and development projects are
currently under way:  · System design and development services for the creation of a new
database integrating certain Active data with DigitalTowns database.  · System design and development services for the creation 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
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.  · Graphic design and UI services for the spirit sites and
Digitaltown.com landing page/director.  · System development services to build the DigitalTown spirit sites.  RESULTS OF
OPERATIONS  THREE MONTHS ENDED
MAY 31, 2010 and 2009  During
the three months ended May 31, 2010, the Company recorded revenue of $4,070 and
cost of revenue of $56,654 for a negative gross profit of $(52,584) compared to
no revenue operations in 2009.  The revenue consisted of commissions
generated from advertising on our websites and the cost of revenue consisted of
amortization of prepaid annual domain name renewal fees of $52,706,
server/bandwidth


14


expense
of $2,001 and amortization of website development fees of $1,947.  Our
websites were not operational during the comparable period, therefore there were
no costs of revenue.  Selling, general and administrative expenses for the most current
three months decreased by $223,727 to $195,986 compared to a year ago due mainly
to a non-cash decrease in stock compensation expense of $197,315 for the most
current three months.  Excluding non-cash stock compensation expense for
the two comparable periods, selling, general, and administrative expenses were
$162,995 for the three months ended May 31, 2010, compared to $189,407 for the
three months ended May 31, 2009.  The decrease in selling, general, and
administrative expenses of $26,412 for the two comparable quarters was primarily
due to decreases in professional fees of $25,925. The Companys overall net loss
for the current three months decreased by $176,739 to $243,215.  LIQUIDITY AND CAPITAL
RESOURCES  THREE MONTHS ENDED
MAY 31, 2010  The
Companys cash position at May 31, 2010, was $23,952, a decrease of $10,226 from
$34,178 at February 28, 2010.  During the three months ended May 31, 2010,
net cash used in operating activities was $278,773 compared to cash used of
$341,828 for the comparable period.  When comparing the two periods, the
decrease in cash used in operating activities of $63,055 for the three months
ended May 31, 2010 is primarily due to a decrease in prepaid domain name renewal
fees of $70,081 compared to the same period last year.  Net
cash used in investing activities for the three months ended May 31, 2010 was
$50,555, of which $30,300 was used for website development costs, $20,001 for
the purchase of property and equipment and $254 for the purchase of additional
domain names as compared to net cash used of $13,118, of which $8,299 was used
for website development costs and $4,819 for the purchase of additional domain
names for the comparable period.  Net
cash provided by financing activities for the three months ended May 31, 2010
was $319,102 which consisted of payments received on stockholder subscription
receivables of $358,950, proceeds from the issuance of common stock of $10,000
partially offset by principal payments of $49,848 on the loan from
director/stockholder.  For the comparable period ended May 31, 2009, the
Company received net cash provided by financing activities of $351,927 which
consisted of payments received on stockholder subscription receivables of
$30,000, proceeds from the issuance of common stock of $282,500 and proceeds
from director/stockholder loan of $39,482 less principal payments on the loan of
$55.  Monthly
cash operating expenses for the three months ended May 31, 2010, were
approximately $93,000 per month, which included payment of $125,377 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 $48,623.  In addition to the normal monthly operating
expenses, the Companys committed cash requirements for the nine months ending
February 28, 2011, include $35,700 for system design services. A promissory note
with Jeff Mills, a director and stockholder of the Company, has a balance due of
$87,522 at May 31, 2010, and is payable upon demand.  The Company intends
to pay the balance of the note in fiscal year 2011.  From June 1, 2010, to
July 13, 2010, the Company has received cash proceeds of $25,000 from stock
subscription receivables and will continue to collect on its remaining stock
subscription receivables to fund its operations.


15


As of May 31, 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 August 31, 2005, for 78,376 restricted common shares and on December
30, 2005, for 4,733,333 restricted common shares at $0.75 per share (total value
of $3,608,782) are as follows:  · Payment
is due in full in 60 months. · At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The outstanding
balance owed on the 2005 subscription agreements at May 31, 2010, is
$560,513.  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 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, 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.


16


· 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 May 31,
2010, is $975,000.  Summary  As of
May 31, 2010, the Company had stock subscription receivables of $1,535,513 and
for the three months ended May 31, 2010, the Company received stock subscription
payments of $358,950.  The
following table summarizes the stock subscription receivable, by quarter, at May
31, 2010:   Quarter Ended
Total Balance Due
Total Amount Collected
Amended Purchase Price
(1)
Participatory Rights in the
Proceeds of the Resales Collected
Amount of Downside Protection
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
358,950  (1) Amendment to the terms of the
subscription agreements received by the Company on October 5, 2007 for 1,300,000
restricted common shares reducing the price paid per share from $2.50 to
$0.75. (2) The participatory right terms of the
original subscription agreements were cancelled on February 25, 2010.  The
Company has not exercised its rights, per the 2005 subscription agreements, to
demand monthly 1/36 payments or to charge up to 4% interest on the subscription
amounts outstanding and they have provided no downside protection to the
subscribers.  The downside protection in the terms for the 2005
subscription agreements requires the Company to reimburse the subscription
holder up to 30% of the $.75 purchase price, or $.225, if the market price of
the stock is below $.75 when converted. The protection may be provided in
additional shares if necessary.  For the three month period ended May 31,
2010, there was no downside protection provided because the stock price did not
go below $.75 when converted.  The subscription agreements do not define
the term when converted.  The Company has taken the position that if at
the time that a purchaser pays in full for the shares under a subscription
agreement and the closing price of the shares of the Companys stock is less
than $.75, the shareholder would be entitled to 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.


17


In
summary, we believe our current cash reserves and the amounts we expect to
collect on our outstanding stock subscription receivables should be sufficient
to enable us to operate for the next 12 months. In the event that we are unable
to collect our future stock subscription receivables as needed, we would be
forced to reduce operating expenses and/or cease operations altogether.  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, 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


18


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
December 2009, the FASB issued guidance on the qualitative approach to
identifying a controlling financial interest in a variable interest entity
(VIE), and requires ongoing assessment of whether an entity is a VIE and
whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance is effective for annual reporting periods beginning after
November 15, 2009. The adoption of this standard on March 1, 2010, did not
have an impact on our financial statements.  In
January 2010, the FASB issued Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The 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.  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, 2010, the Company did not have any off-balance sheet
investments or hedging investments.


19


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 May 31, 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 May 31, 2010, and as a result our disclosures controls and
procedures were not effective.  Notwithstanding the material weaknesses
that continue to exist as of May 31, 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 May 31, 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.


20


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 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.  ITEM 3.
 DEFAULTS UPON SENIOR SECURITIES  None.  ITEM 4. 
(REMOED AND RESERVED)  ITEM 5. 
OTHER INFORMATION  (a) All
information required to be disclosed on a report on Form 8-K during the period
ended May 31, 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.


21


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).


22


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:
July 13, 2010  /s/
Richard A. Pomije____________ Richard
A. Pomije, CEO  /s/
Paul R. Gramstad____________ Paul
R. Gramstad, CFO


23