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, 2009   |__|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934   Commission file number: 000-27225   DigitalTown, Inc. (Name of
registrant in its charter)  Minnesota
41-1427445(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)11974 Portland Avenue, Burnsville, Minnesota
55337(Address of principal executive offices)
(Zip Code)Registrant's telephone number: (952)
890-2362  Securities registered under Section 12(g) of the Exchange Act:   Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
X

No  Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
       [  ]  Yes  [X]  No
 (Not required)      Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definitions of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.   (check one):  Large
Accelerated Filer [  ] Accelerated
Filer [  ] Non-Accelerated
Filer [  ] Smaller reporting
company [X]  Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).      [  ]  Yes  [X]
 No  There were 27,358,196
shares of the registrants common stock outstanding as of July 15, 2009.  ii      TABLE OF
CONTENTS   PART IItem 1.
Financial
Statements
1-11Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
12-16Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
16Item
4.
Controls and
Procedures
16PART IIItem 1.
Legal
Proceedings
18Item 1A
Risk
Factors
18Item 2.
Unregistered
sales of Equity Securities and Use of Proceeds
18Item 3.
Defaults Upon
Senior Securities
18Item 4.
Submission of
Matters to a Vote of Security Holders
18Item 5.
Other
Information
18Item 6.
Exhibits
19-26    iii        PART I  ITEM 1. 
FINANCIAL STATEMENTS  PageFinancial
Statements:Consolidated
Balance Sheets
1Consolidated
Statements of Operations
2Consolidated
Statements of Cash Flows
3Notes to
Financial Statements
4-11


DigitalTown, Inc. CONSOLIDATED BALANCE SHEETS  ASSETSMay 31,2009

February 28,2009(unaudited)

(audited)Current
assets:Cash

$      40,895

$      43,914Prepaid
domain name renewal fees

142,752

-Total
current assets

183,647

43,914Property and
equipment, net

3,448

4,022Intangible
assets, net

823,385

810,267Total
assets

$
  1,010,480

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

$
       17,041

$
      27,565Loan
from director/stockholder

142,194

102,767Accrued
expenses:Accrued
payroll

6,995

12,473Total
current liabilities

166,230

142,805Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,358,196 and
27,166,862 shares issued and outstanding at May 31, 2009 and
 February 28, 2009, respectively

273,577

271,665Additional
paid-in-capital

22,788,683

22,271,789Subscription
receivable

(4,476,963)

(4,506,963)Accumulated
deficit

(17,741,047)

(17,321,093)Total
stockholders equity

844,250

715,398Total
liabilities and stockholders equity

$
   1,010,480

$
   858,203   The
accompanying notes are an integral part of these consolidated financial
statements.  1      DigitalTown, Inc  CONSOLIDATED STATEMENTS OF OPERATIONS  Three months ended
May 31, 2009

Three months ended
May 31, 2008(unaudited)

(unaudited)Operating
expenses:Selling,
general and administrative expenses
$   
          419,713

$   
          903,311Loss from
operations
(419,713)

(903,311)Other income
(expense)Interest
expense
(2,056)

(1,756)Other
income
1,815

64Total
other income (expense)
(241)

(1,692)Net loss before
income taxes
(419,954)

(905,003)Income tax
provision
-

-Net loss
$
          (419,954)

$
          (905,003)Loss per common
share  basic and diluted
$
                (0.02)

$
                (0.03)Weighted
average common shares outstanding  basic and diluted
27,230,714

27,082,018  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, 2009

Three months ended
May 31, 2008(unaudited)

(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (419,954)

$  (905,003)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
574

755Stock-based compensation
expense
230,306

721,814Non-cash stock
issued for director fees
6,000

4,000Changes in
operating assets and liabilities:Other
receivables
-

70,528Prepaid
domain name renewal fees
(142,752)

-Accounts
payable
(10,524)

(7,833)Accrued
expenses:Accrued payroll
(5,478)

(10,522)Accrued interest
-

(11,156)Net
cash used in operating activities
(341,828)

(137,417)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of
intangible asset-website development
(8,299)

-Purchases and
 renewal of  intangible assets  domain names
(4,819)

(148,522)Net
cash used in investing activities
(13,118)

(148,522)CASH FLOWS FROM FINANCING
ACTIVITIES:Proceeds from loan  director/stockholder
39,482

145,000Payments on loan  director/stockholder
(55)

-Payments
received on stockholder subscription receivables
30,000

111,633Proceeds from
issuance of stock
282,500

-Net cash provided by financing
activities
351,927

256,633Net change in cash and cash equivalents
(3,019)

(29,306)Cash and cash equivalents,
beginning of period
43,914

67,161Cash and cash equivalents,
end of period
$       40,895

$       37,855SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Non-cash flow information:Cash payments for
interest
$
            2,056

$
       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. 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, 2009.  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. Over a period
of years, the Company became involved in the sale of computer components and,
eventually, became a value added reseller (VAR) of major computer brands. In
1987, the Company changed its name to Command Electronics, Inc. In February
1995, the Company acquired CyberStar Computer Systems, a manufacturer and
marketer of microcomputers and servers, and in 1997 changed its name to
CyberStar Computer Corporation. In August 2000, the Company changed its name to
eNetpc, Inc. In December 2004, the Company elected to be regulated as a business
development company under the Investment Company Act of 1940 and changed its
name to BDC Capital Inc.  On August 31, 2006, the Company filed with the
SEC to withdraw their business development company status and focused their
efforts on developing a plan to integrate their nearly 27,000 high school domain
names into a social civic and school spirit network serving students, alumni,
schools, local towns and their citizens.  As part of that plan, the Company
changed its name to DigitalTown, Inc. on March 1, 2007.  The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At May 31, 2009,
the Company had an accumulated deficit of $17,741,047.  Subsequent to May
31, 2009, the Company has received cash proceeds totaling approximately $35,000
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, 2010.  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.


4


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Principles
of Consolidation  The
Company files consolidated financial statements that include its wholly-owned
subsidiary Tiger Media. All material intercompany accounts and transactions have
been eliminated in consolidation.  Use of
Estimates  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period.
 Actual results could differ from those estimates.  Revenue
Recognition  The
Company does not currently generate revenue from its operations.  Intangible
Assets  Domain Names/Website Development Costs  The
Company is in the development stage of its website portal, and accordingly, all
website development costs have been capitalized.  Since the ownership of
each domain name 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 website development
costs will start once a revenue generating site is in service.  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 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 in accordance with SFAS No. 109, as clarified
by FIN No. 48, which requires 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


5


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   refundable, respectively, for the period plus or minus the change
in deferred tax assets and liabilities during the period.   FIN No.
48 requires the recognition of a financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority.  Stock-Based
Compensation  The
Company follows Financial Accounting Standards Board (FASB) Statement No.
123(R), Share-Based Payment, for recording its stock-based compensation
arrangements.  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.  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, 2009
and 2008 were excluded from the computation of diluted loss per share as their
effect would be anti-dilutive.  As of
May 31, 2009 and 2008, the Company had stock options outstanding of 4,248,000
and 3,874,292, respectively.  Recently
Issued Accounting Pronouncements  In April 2009, FASB
issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.  This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to be also required for interim period reporting.  In
addition, the FSP requires certain additional disclosures regarding the methods
and significant assumptions used to estimate the fair value of financial
instruments.  These additional disclosures will be required beginning
with the quarter ending August 31, 2009.  The Company is
currently evaluating the requirement of these additional disclosures.


6


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3. Intangible
Assets  Intangible assets are
as follows:  May 31,     2009
February 28,     2009Domain
names
$
      815,086
$
        810,267Website
development and portal costs
8,299
-Less
accumulated amortization
-
-$
      823,385
$
       810,267  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, 2009, the Company incurred $142,752 for domain name annual
license renewals and $4,819 in additional domain name purchases.  The
Company recorded the $142,752 for domain name annual license renewals as a
prepaid expense and will be amortized over future periods.  During
the three months ended May 31, 2009, the Company capitalized $8,299 of website
development costs.  Amortization of capitalized website development costs
will begin once the websites are activated for revenue generation.  Note 4.
Stockholders Equity  Stock Transactions  On May
20, 2009, the Company issued 3,000 restricted common shares at $2.00 per share,
valued at $6,000, to four directors of the Company for payment of director
fees.  During
the quarter ended May 31, 2009, the Company entered into stock purchase
agreements and issued 188,334 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 share, for total cash
proceeds of $282,500.  Other  During
the period from May 2007 to September 2007, holders of previously subscribed
shares sold a portion of their shares to other subscription holders of the
Company in order to pay the Company the remaining balance due on their
subscription agreements.  A total of 827,092 shares had been sold and
transferred to the new purchasers for a total purchase price of $1,842,108,
which is due to the original subscription holder. The underlying original
subscription receivable due the Company for these transferred shares totaled
$620,319.  The entire $620,319 has been paid to the Company and has reduced
the original investors stock subscription receivable accordingly.
 Additionally, due to these shares being re-sold at prices in excess of the
original face amount of the shares purchased, a portion of the proceeds is due
back to the Company.  Per the 2006 stock subscription agreements, the
seller of the subscribed shares


7


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   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 those sales. As of July 15, 2009, no payments have been received
and the Company has not recorded the $300,735 in the stock subscription
receivable balance at May 31, 2009.  The Company will record those future
cash receipts to Additional Paid in Capital when received.  Note 5. Stock
Options  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of May 31, 2009, an aggregate of 5,000,000 shares of common stock may
be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are non-qualified
stock options and have exercise prices and vesting terms established by the
Board of Directors at the time of each grant.  Vesting terms of outstanding
options range from immediate to two years from the grant date anniversary.
 The terms of the options vary from one year to five years from the date of
grant.  The
Companys consolidated financial statements for the three months ended May 31,
2009 and 2008, reflect the impact of SFAS 123(R).  For the three months
ended May 31, 2009, the Company granted stock options to one employee and one
consultant allowing for the purchase of up to an aggregate of 160,000 shares of
common stock, with a weighted-average-grant-date fair value of $1.27. Total
stock compensation expense for all option grants was $230,306 and $721,814 for
the three months ended May 31, 2009 and 2008, respectively.
   This expense is included in selling, general and
administrative expense. As of May 31, 2009, there was no tax benefit from
recording this non-cash expense due to the Company having a full valuation
allowance against its deferred tax assets. The compensation expense impacted the
three months ended May 31, 2009, and 2008, basic loss per common share by $0.008
and $0.027, respectively. There remains $748,874 of total unrecognized
compensation expense, which is expected to be recognized over future periods
through May 31, 2012.  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 29, 2009
4,478,000
$  2.979

-Granted
160,000
2.625
-
-Canceled or expired
(390,000)
4.590
-
-Exercised
-
-
-
-Options outstanding  May 31, 2009
4,248,000
$  2.818
2.90
$   728,750Exercisable at May 31, 2009
3,648,000
$  2.448
2.65
$
  728,750  (1) The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price.


8


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Note 6. 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, 2009 and
2008 totaled $7,950 and $7,950, respectively.  Minimum lease
payments at May 31, 2009 are as follows:FY
2010-remainder
23,850FY 2011
31,800FY 2012
25,175$
  80,825   Loan from
Director/Stockholder  As of
May 31, 2009 the Company had an outstanding working capital loan of $142,194
from Jeff Mills, a director/stockholder of the Company.  The loan is due on
demand and bears annual interest at 6.5%.  The Company made principal
payments of $55 and received an additional draw of $39,482 during the three
months ended May 31, 2009.  Interest expense incurred on this loan for the
three months ended May 31, 2009 and 2008 was $2,056 and $1,756, respectively.  Note 7.
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 8. Common
Stock Subscriptions Receivable  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.


9


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   · 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.  The following tables
summarize information about the stock subscription receivable:  Receivable
balance at February 28, 2006
$
   3,550,000Cash
collected
(602,530)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
(523,832)Receivable
balance at February 28, 2009
4,506,963Cash
collected
(30,000)Receivable
balance at May 31, 2009
$
   4,476,963Summary of
outstanding subscriptions:2006
subscriptions
$
  1,226,963October 5, 2007
subscriptions
3,250,000$
  4,476,963  The
Company has not exercised its rights to charge up to 4% interest on the
subscription amounts outstanding and the Company has provided no downside
protection to the subscribers.  The downside protection in the terms for
the subscription agreements received on August 31, 2005 and December 30, 2005
requires the Company to reimburse the subscription holder up to 30% of the $.75
purchase price, or $.225, if the market price of the stock is below $.75 when
converted.  The protection may be provided in additional shares if
necessary.  The subscription agreements do not define the term when
converted.  The Company has taken the position that if at the time that a
purchaser pays in full for the shares under a subscription agreement, the
closing price of the shares of the Companys stock are less than $.75, the
shareholder would be entitled to up to 30% additional shares, depending on the
trading share price.


10


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   The
Company has collected approximately $35,000 of additional outstanding
subscription receivables for the period from June 1, 2009 to July 15, 2009.


10


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, 2009, and its results of operations for the three months
ended May 31, 2009 and 2008, 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, 2009, 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  DigitalTown, Inc. (the Company) launched on-line content and
news hubs for over 14,000 of their approximately 27,000 high school websites on
June 9, 2009 which represents the first phase of the Companys plans to develop
powerful, user generated and interactive sites that will serve all the
constituents of local high schools, and by extension, their local communities.
 This phase aggregates existing content from across the web that is
relevant to each high school.  Each school site is customized to reflect
each schools colors, with links to their official high school web page.
 This phase will allow us to aggressively engage with partners to add
functionality and features unique to each domain.  The
Company also announced www.AmericasProdigy.com, a premier talent
discovery website for high school students.  The website will be focused on
promoting musical contestants who will be able to post their songs and videos
online.  They will compete for prizes aimed at furthering their musical
careers as well as benefiting the school.  The project will commence later
in the 2009/2010 school year.  RESULTS OF
OPERATIONS  THREE MONTHS ENDED
MAY 31, 2009 and 2008  Selling, general and administrative expenses for the most current
three months decreased by $483,598 to $419,713 compared to a year ago due to a
non-cash decrease in stock compensation expense of $491,508 for the most current
three months.  Excluding non-cash stock compensation expense for the two
comparable periods, selling, general, and administrative expenses were $189,407
for the three months ended May 31, 2009, compared to $181,497 for the three
months ended May 31, 2008.  The increase in selling, general, and
administrative expenses of $7,910 for the two comparable quarters was primarily
due to increases in professional fees of $17,987 and compensation expense of
$12,742 and decreases in travel and entertainment of $10,633, real estate tax of
$6,182 and benefits cost of $3,109.  The Companys overall net loss for the
current three months decreased by $485,049 to $419,954.


11


LIQUIDITY AND CAPITAL
RESOURCES  THREE MONTHS ENDED
MAY 31, 2009  The
Companys cash position at May 31, 2009, was $40,895, a decrease of $3,019 from
$43,914 at February 28, 2009.  During the three months ended May 31, 2009,
net cash used in operating activities was $341,828 compared to cash used of
$137,417 for the comparable period.  The difference between the two
comparable periods was due mainly to $142,752 of prepaid expense pertaining to
annual domain name renewal fees for the three months ended May 31, 2009 and a
reduction of other receivables pertaining to the collection of a $70,000 deposit
and the payment of $11,156 of accrued interest for the three months ended May
31, 2008,.  Net cash used in investing activities for the three months
ended May 31, 2009, was $13,118 which was used for the purchase of additional
domain names and website development costs as compared to net cash used of
$148,522 for the comparable period.  The decrease during the current period
was due mainly to expensing $142,752 of the annual domain name renewal fees
instead of capitalizing the renewal costs as was done in the previous year.
 Net cash provided by financing activities for the three months ended May
31, 2009, was $351,927 which consisted of $282,500 of proceeds from the issuance
of stock, proceeds from director/stockholder loan of $39,482 less principal
payments on the loan of $55 and payments received on stockholder subscription
receivables of $30,000. For the comparable period of the three months ended May
31, 2008, the Company received net cash provided by financing activities of
$256,633 which consisted of proceeds from director/stockholder loan of $145,000
and payments received on stockholder subscription receivables of $111,633.  Monthly cash operating expenses for the three months ended May 31,
2009, were approximately $61,000 per month. Based on current expense levels, the
Companys monthly cash operating expenses going forward will be approximately
$62,000 per month.  In addition to the normal monthly operating expenses,
the Companys committed cash requirements for the twelve months ending February
28, 2010, include $7,500 of additional web site development cost, monthly
interest of $770 on its promissory note with Jeff Mills, a director and
stockholder of the Company and approximately $62,500 for the renewal of existing
and purchase of additional domain names.  The promissory note has a balance
due of $142,194 at May 31, 2009 and is payable upon demand.  The Company
intends to pay the balance of the note during our current fiscal year ending
February 28, 2010.  The Company currently relies on collection of its stock
subscription receivables to fund its operations.  Material terms of the
outstanding 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. · 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.  Material terms of the subscription agreements received by the
Company on October 5, 2007, for 1,300,000 restricted common shares at $2.50 per
share (total value of $3,250,000) are as follows:


12


· 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.  During
the period from May 2007 to September 2007, holders of previously subscribed
shares sold a portion of their shares to other subscription holders of the
Company in order to pay the Company the remaining balance due on their
subscription agreements.  A total of 827,092 shares had been sold and
transferred to the new purchasers for a total purchase price of $1,842,108,
which is due to the original subscription holders. The underlying original
subscription receivable due the Company for these transferred shares totaled
$620,319.  As of May 31, 2009, the entire $620,319 has been paid to the
Company and has reduced the original investors stock subscription receivable
accordingly.  Additionally, due to these shares being re-sold at prices in
excess of the original face amount of the shares purchased, a portion of the
proceeds is due back to the Company.  Per the 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 those
sales. As of July 14, 2009, no payments have been received for those excess
proceeds. The Company will record future cash receipts as Additional Paid-In
Capital when received.  As of
May 31, 2009, the Company had stock subscription receivables of $4,476,963 and
for the three months ended May 31, 2009, the Company received stock subscription
payments of $30,000.  The following table summarizes the stock subscription
receivable, by quarter, since February 29, 2008:  Quarter Ended
Total Balance Due
Total Amount Collected
Participatory Rights in the Proceeds of the Resales
Collected
Amount of Downside Protection ProvidedFebruary 29, 2008
$
     5,030,795May 31, 2008
4,919,162
$
     111,632
-
-August 31, 2008
4,708,562
210,600
-
-November 30, 2008
4,616,963
91,620
-
-February 28, 2009
4,506,963
110,000
-
-May 31, 2009
4,476,963
30,000
-
-  The
Company has not exercised its rights to charge up to 4% interest on the
subscription amounts outstanding and the Company has provided no downside
protection to the subscribers.  The downside protection in the terms for
the subscription agreements received on August 31, 2005, and December 30, 2005,
requires the Company to reimburse the subscription holder up to 30% of the $.75
purchase price, or $.225, if the market price of the stock is below $.75 when
converted, the protection may be provided in additional shares if necessary.
 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


13


subscription agreement, the closing price of the shares of the
Companys stock are less than $.75, the shareholder would be entitled to up to
30% additional shares, depending on the trading share price.  We
believe our current cash reserves and amounts we expect to collect on our
outstanding stock subscription receivables should be sufficient to enable us to
operate for the next 12 months. In the event that we are unable to collect our
future stock subscription receivables as needed, we would be forced to reduce
operating expenses and/or cease operations altogether.  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 on going 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  The Company is in the development stage of its website portal, and
accordingly, all website development costs have been capitalized.  Since
the ownership of each domain name 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 website
development costs will start once a revenue generating site is in service.
 We anticipate starting to amortize the website costs during our fiscal
quarter ending August 31, 2009.  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 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 follows Financial Accounting Standards Board (FASB)
Statement No. 123(R), Share-Based Payment, for recording its stock-based
compensation arrangements.  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. 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,


14


which assumes no expected dividends and estimates the option
expected life, volatility and risk-free interest rate at the time of the
grant.  Recently issued
accounting pronouncements:  In
April 2009, FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments.  This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to be also required for interim period
reporting.  In addition, the FSP requires certain additional
disclosures regarding the methods and significant assumptions used to estimate
the fair value of financial instruments.  These additional disclosures
will be required beginning with the quarter ending August 31,
2009.  The Company is currently evaluating the requirement of these
additional disclosures.  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, 2009, the Company did not have any off-balance sheet
investments or hedging investments.   ITEM 4. CONTROLS
AND PROCEDURES  (a) Evaluation of
Disclosure Controls and Procedures.  Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness, as of May 31, 2009, 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, 2009, that
material weaknesses existed in our internal control over financial reporting as
of May 31, 2009, and as a result our disclosures controls and procedures were
not effective.  Notwithstanding the material weaknesses that existed as of
May 31, 2009, 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


15


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, 2009, 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.


16


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, 2009.  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
20, 2009, the Company issued 3,000 restricted common shares at $2.00 per share,
valued at $6,000, to four directors of the Company for payment of director
fees.  During
the quarter ended May 31, 2009, the Company entered into stock purchase
agreements and issued 188,334 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 share, for total cash
proceeds of $282,500.  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. 
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, 2009, 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.


17


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).


18


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 15, 2009  /s/
Jan K. Andersen_____________ Jan
K. Andersen, CEO  /s/
Paul R. Gramstad____________ Paul
R. Gramstad, CFO


19