UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM
10-K  [X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended:  December
31, 2008  or  [ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from
                 to  Commission File Number: 000-53235 DIGITILITI, INC. (Exact Name of Registrant as specified in
its Charter)  Delaware
26-1408538(State or
other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification
No.)  266 East 7th Street,
4th Floor St. Paul, Minnesota  55101 (Address of Principal Executive
Offices)  (651) 925-3200 (Registrants Telephone Number, including
area code)  Securities registered pursuant to Section
12(b) of the Act: None  Securities registered pursuant to Section
12(g) of the Act: Common Stock, par value $0.001  Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]  Indicate by check mark if the Registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [
 ]   No [X]  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 preceding 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. (1) Yes [X] No [  ]     (2)
Yes [X] No [  ]  Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part IV of this Form 10-K or
any amendment to this Form 10-K. [  ]   1    Indicate by check mark whether
the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company: Large accelerated filer
      [   ]
Accelerated filed
                    [ 
 ]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 [  ] No [X]  Market Value of Non-Affiliate
Holdings  State the aggregate market value of the voting and
non-voting common stock held by non-affiliates computed by reference to the
price at which the common stock was last sold, or the average bid and asked
price of such common stock, as of the last business day of the Registrants most
recently completed second quarter.  The aggregate market value of these shares of voting and
non-voting common stock of the Registrant was $32,334,107, based on 26,075,893
shares being presently held by non-affiliates and the closing price of $1.24 for
the Registrants common stock on the Pink OTC Markets, Inc. (the Pink Sheets)
on June 30, 2008.  Presently, the aggregate market value of these shares of
voting and non-voting common stock is $6,518,973, based upon the last trading
price of the Registrants common stock on the Pink Sheets on April 22, 2009.  Applicable only to Registrants Involved
in Bankruptcy Proceedings During the Preceding Five Years  Indicate by check mark whether the Registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities and Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.  Yes [  ]   No [
 ]  Not applicable.  Outstanding Shares  As of April 22, 2009, the Registrant had 33,287,642
shares of common stock outstanding.  Documents Incorporated by
Reference  See Part IV, Item 15.   2    TABLE OF
CONTENTS  PART I 4 ITEM 1.  BUSINESS 4 ITEM 1A.  RISK FACTORS 20 ITEM 2:  PROPERTIES 27 ITEM 3:  LEGAL PROCEEDINGS 28 ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 28 PART II 28 ITEM 5:  MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES                                                                                                                                       
28 ITEM 6:  SELECTED FINANCIAL DATA 33 ITEM 7:  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION                                                                                                                                                                                      33 ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 38 ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 38 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                                                                                                                                                    
66 ITEM 9A(T):  CONTROLS AND PROCEDURES 66 ITEM 9B:  OTHER INFORMATION 68 PART III 69 ITEM 10:  DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE 69 ITEM 11:  EXECUTIVE COMPENSATION 73 ITEM 12:
 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER
MATTERS                                                                                                                                                          
75 ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTORS INDEPENDENCE      
77 ITEM 14:  PRINCIPAL ACCOUNTANT FEES AND
SERVICES 80 PART IV 81 ITEM 15:  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES 81 SIGNATURES 82    3    PART I  FORWARD-LOOKING STATEMENTS  In this Annual Report, references to Digitiliti, Inc.,
Digitiliti, the Company, we, us, our and words of similar import)
refer to Digitiliti, Inc., a Delaware corporation (the Registrant); and, where
applicable, such references include its wholly-owned subsidiary, Digitiliti,
Inc., a Minnesota corporation, which was formerly Storage Elements, Inc., a
predecessor (sometimes called Storage herein).  This Annual Report contains certain forward-looking
statements, and for this purpose, any statements contained in this Annual Report
that are not statements of historical fact may be deemed to be forward-looking
statements.  Without limiting the foregoing, words such as may, will,
expect, believe, anticipate, estimate or continue or comparable
terminology are intended to identify forward-looking statements.  These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors, many of
which are not within our control.  These factors include, but are not
limited to, economic conditions generally and in the markets in which we may
participate, competition within our chosen industry, technological advances and
any failure by us to successfully develop continuing business relationships and
customers.   ITEM 1.  BUSINESS  Introduction  We were organized pursuant to the laws of the State of
Delaware on March 31, 2006, under the name Cyclone Holdings, Inc.  At
that time, we had no operations or assets.  Our predecessor, Storage acquired a controlling interest
in us in January, 2007. We effected a pro rata recapitalization comprised of a
reverse split and a dividend in March, 2007, and we completed a reverse merger
with Storage, effective August 17, 2007, by which we became a successor to
Storage and its business operations.  References to Storage throughout
this Annual Report are often made to provide a clearer understanding of the
information referenced in those locations.  Business Development  Years ended December 31, 2006, 2007 and 2008  Holding Company Merger  Pursuant to an Agreement and Plan of Merger dated as of
March 31, 2006, we became a holding company under Section 251(g) of the Delaware
General Corporation Law.  Change in Control  Effective January 5, 2007, Storage acquired a controlling
interest in us for $225,000 under a Stock Purchase Agreement dated December 15,
2006, for the purpose of effecting a reverse reorganization or merger of
Storage, if approved by Storage stockholders, with us and under which Storage
would become a publicly-held company.  Name Change  On February 27, 2007, we filed a Certificate of Amendment
that changed our name to Digitiliti, Inc. in the State of Delaware.  Company Recapitalization  Effective February 27, 2007, we completed a
recapitalization whereby we effected a 40,000 for one reverse split of our
outstanding common stock, with all fractional shares being rounded up to the
nearest whole share, followed by an immediate 200 for one pro rata stock
dividend that required a mandatory exchange of stock certificates resulting in
the dividend having the same effect as a 200 for one forward stock split, which
became effective on March 5, 2007 (the Recapitalization).  Depository
Trust Company (DTC) participants and the beneficial holders of our common
stock held by DTC were deemed to be holders of record for all purposes of the
Recapitalization, provided that we received advice of these respective positions
from DTC participants within 30 days of the effective date of the
Recapitalization; a number of extensions to that date were granted to reasonably
ensure that all defined record stockholders entitled to participate in the
Recapitalization and to receive the dividend were accounted for; these
extensions have all passed, and no further adjustments will be made as a result
of the Recapitalization.  All common stock computations regarding our
outstanding securities in this Annual Report take in account this
Recapitalization.  4     Storage Elements, Inc.
Merger  Effective August 17, 2007, Cyclone Acquisition Corp., a
Minnesota corporation formed by us and our wholly-owned subsidiary (Cyclone
Acquisition), merged with and into Storage (the Storage Merger).  The
Storage Merger was approved by persons owning a majority of the outstanding
voting securities of Storage on August 16, 2007; by us as the sole stockholder
of Cyclone Acquisition; and by the respective Boards of Directors of all of the
parties.  There were no dissenting stockholders.  All outstanding
shares of common stock of Storage were exchanged on a one for one basis for
shares of our common stock; and all outstanding convertible debt and common
stock equivalents of Storage like options, warrants or convertible notes
remained outstanding and were assumed by us, with our common stock to be issued
on exercise or conversion of these convertible securities.  Storage was
organized in the State of Minnesota on October 3, 2003, by Brad D. Wenzel,
Ronald G. Wenzel and Laura Wenzel, to engage in the business of providing cost
effective data protection solutions to enterprises and organizations of all
sizes.  All founders shares were part of the shares exchanged for our
shares under the Storage Merger.  On the effective date of the Storage
Merger, we succeeded to the business operations of Storage; Storage became our
wholly-owned subsidiary; and we changed the name of Storage in Minnesota to
Digitiliti, Inc.  Storage Common Stock
Offering  From mid-summer 2006 through January, 2007, Storage
offered and sold 10,011,455 shares of its common stock that were restricted
securities as that term is defined in Rule 501 of Regulation D of the
Securities and Exchange Commission at a price of $0.35 per share, for total
aggregate proceeds of $3,504,010, to certain accredited investors as that term
is also defined in Rule 501.  These shares were part of the shares
exchanged for our shares under the Storage Merger.  Bridge Loan Offering of 12%
Convertible Notes  From March 1, 2007, Storage sold $1,618,550 of 12%
convertible notes to the effective date of the Storage Merger, which was August
17, 2007,and we continued the offering of these convertible notes, selling an
additional amount of $1,531,000 through December 31, 2007, and $2,350,450 until
the offering was closed on November 6, 2008, for a combined total of $5,500,000.
The 12% convertible notes were also restricted securities and were convertible
into shares of our common stock at $0.50 per each share, subject to there being
an effective registration statement covering the underlying shares that has been
filed with the Securities and Exchange Commission.  We assumed these
convertible notes and the other components of the unit offered (the Unit).
 The Unit was comprised of the convertible note, one-half warrant to
acquire one-half share of common stock for each $1.00 invested, with a five year
term and exercisable at $1.50 per share of common stock (the A Warrants), and
with no exercise during the first six months and one day following issuance,
unless there was an effective registration statement covering the underlying
common stock that had been filed with the Securities and Exchange Commission
(callable at $0.01 per warrant, if the underlying common stock traded for 20
consecutive days on its principal market above $2.25 per share, also provided
there was an effective registration statement covering the underlying shares
that had been filed with the Securities and Exchange Commission); and one-half
warrant to acquire one-half share of common stock for each $1.00 invested, with
a five year term and exercisable at $2.25 per share (the B Warrants), under
the same terms and conditions, but callable at $0.01 per warrant if the
underlying common stock traded for 20 consecutive days on its principal market
above $3.00 per share.  The convertible notes had a maturity date that was
18 months from the date of issuance.  Convertible note holders are not
considered stockholders until the convertible notes are converted; and are not
entitled to vote on any matter submitted to stockholders until converted.  Bridge Loan Offering 12%
Convertible Note Extension and Modification Proposal  On December 8, 2008, we extended a proposal to our
convertible note holders which had not previously converted their respective
convertible notes, and the proposal was retroactive to those convertible note
holders which had already converted their respective convertible notes ($35,000
in convertible notes were converted in July, 2008 [sometimes called the
Modification Proposal]).  The Modification Proposal allowed the
convertible note holders two options: If the convertible notes were converted,
we proposed to: (i) reduce the exercise price of the convertible notes from
$0.50 to $0.35 per share; (ii) reduce the exercise price of the associated
warrants from $1.50 and $2.25 per share to $1.00 per share, respectively, for
both the A and B Warrants; and (iii) to extend the term of the associated
warrants from five years to six and one-half years; or, if the convertible notes
were extended rather than converted by their holders, we proposed to: (i) reduce
the exercise price of the associated warrants from $1.50 and $2.25 per share, to
$1.00 per share, respectively, for both the A and  B Warrants; and (ii) to
extend the term of the associated warrants from five years to six and one-half
years.  At December 31, 2008, $270,000 in these convertible notes had been
converted under our first proposal; and $570,000 in convertible notes had been
extended under our second proposal.  Also, 109,000 shares of our common
stock were issued to the convertible note holder which had converted the $35,000
convertible note in July, 2008, at $0.50 per share because of the retroactive
effect of our first proposal to reduce the conversion price to $0.35 per share.
 $5,230,000 of our convertible notes was outstanding at December 31,
2008.  5     Outstanding Convertible Notes from
Offering, with Principal and Interest, without taking into account Conversions
under Modification Proposal at December 31, 2008  Prior to the implementation of the Modification Proposal
referenced above, the following table reflects, at December 31, 2008, each
quarter in which convertible notes were issued and the aggregate amount issued
in each such quarter; accrued interest; and the quarters in which the
convertible notes were due and the aggregate amount due in each such
quarter: Total of Convertible Notes Sold at
12/31/08

Total Accrued Interest on
Convertible Notes at 12/31/08

Principal and Accrued Interest on
Convertible Notes at 12/31/08

Due Date For Principal &
Accrued Interest on Convertible Notes at 12/31/081st Qtr 2007
$
401,050

$
88,451

$
489,501

Sept 20082nd Qtr 2007
$
707,500

$
137,769

$
845,269

Dec 20083rd Qtr 2007
$
1,165,000

$
193,853

$
1,358,853

Mar 20094th Qtr 2007
$
926,000

$
128,719

$
1,054,719

June 20091st Qtr 2008
$
808,500

$
80,038

$
888,538

Sept 20092nd Qtr 2008
$
945,500

$
73,876

$
1,019,376

Dec 20093rd Qtr 2008
$
546,450

$
27,035

$
573,485

Mar 20104th Qtr 2008
$
0

$
0

$
0

June 20101st Qtr 2009
$
0

$
0

$
0

Sept 2010$
5,500,000

$
729,741

$
6,229,741  Outstanding Convertible Notes from
Offering, with Principal and Interest, after taking into account Conversions
 under Modification Proposal, at December 31, 2008  After implementation of our Modification Proposal
referenced above, the following table reflects, at December 31, 2008, the total
amount of the convertible notes that were outstanding during each quarter when
sold; principal and accrued interest converted under our first proposal; and the
number of shares of our common stock issued for principal and accrued interest
for prior conversions under our first proposal that was retroactive:  Total of Convertible Notes
Sold

Amount of Notes Converted Prior to
12/31/08

Amount of Accrued Interest on
Convertible Notes Prior to 12/31/08

Principal and Accrued
Interest on Notes Converted Prior to 12/31/08

Number of Shares from Conversion
Prior to 12/31/081st Qtr 2007
$
401,050

$
-

$
-

$
-

-2nd Qtr 2007
$
707,500

$
20,000

$
3,706

$
23,706

67,2953rd Qtr 2007
$
1,165,000

$
100,000

$
16,348

$
116,348

332,2864th Qtr 2007
$
926,000

$
100,000

$
13,811

$
113,811

320,8381st Qtr 2008
$
808,500

$
-

$
-

$
-

-2nd Qtr 2008
$
945,500

$
-

$
-

$
-

-3rd Qtr 2008
$
546,450

$
50,000

$
2,086

$
52,086

149,1434th Qtr 2008
$
-

$
-

$
-

$
-

-1st Qtr 2009
$
-

$
-

$
-

$
-

-$
5,500,000

$
270,000

$
35,951

$
305,951

869,562  StorageSwitch, LLC
Acquisition  On March 13, 2008, we acquired a commercially-proven
technology from StorageSwitch, LLC, a Colorado limited liability company
(StorageSwitch). This technology compliments our current business model that
is discussed below and also provides a base layer that we will build upon to
develop enhanced storage service offerings.  On May 13, 2008, our Board of Directors and certain
persons who owned a majority of our outstanding voting securities, adopted the
following actions by written consent, as applicable, effective April 17, 2008:  · Voted to amend and restate our
Certificate of Incorporation to add the following provisions: (i) a class of
preferred stock consisting of 10,000,000 shares, par value $0.001 per share,
reserving to our Board of Directors  6    the right
to set the series, classes, rights, privileges and preferences of the preferred
stock or any class or series thereof, by amendment to the Certificate of
Incorporation, without stockholder approval; and (ii) to allow our Board of
Directors, without stockholder approval, to adopt, amend or repeal our Bylaws,
change the name of our Company under certain circumstances and to effect
recapitalizations of our Company by way of forward or reverse splits that do not
require amendments to the Certificate of Incorporation.  The Amended and
Restated Certificate of Incorporation that contains all provisions of the
initial Certificate of Incorporation and all prior and present amendments was
filed with the State of Delaware on May 13, 2008.   The amendment
allowing our Board of Directors to adopt, amend or repeal Bylaws does not divest
our stockholders of the right to adopt, amend or repeal Bylaws under Section 109
of the Delaware General Corporation Law.  A copy of the Amended and
Restated Certificate of Incorporation was filed as an Exhibit to our 10
Registration Statement.  See Part IV, Item 15.  · Voted to adopt new Bylaws that set
the current number of members of our Board of Directors at six.  Other
changes in the new Bylaws were: (i) allowing 24 hours notice of special meetings
by telegraphing, telexing, facsimile, email or similar electronic transmission;
(ii) adding a Chairman, Chief Executive Officer, Chief Financial Officer and
Chief Operating Officer to the designation of positions of officers; (iii)
allowing us by Board resolution to take action as may be necessary to make our
shares eligible for trading via a direct registration system operation by a
securities depository, including, without limitation, by authorizing
uncertificated or electronic shares, subject to the Delaware General Corporation
Law; (iv) allowing facsimile, emailed or electronic signatures of Board members
or officers to be relied upon whenever provided after authorization of action by
our Board of Directors; (v) indicating that our record books shall not be closed
so long as we are authorized for trading on any National Securities Exchange (as
defined in the Securities Exchange Act of 1934, as amended (the Exchange Act);
(vi) setting time tables for indemnitee demands for payment based upon
indemnification prior to the institution of any actions against us for
indemnification; (vii) allowing us to maintain insurance for all purposes to
protect us and our directors, officers and agents, among others, where no
provision previously existed; and (viii) allowing our Board of Directors to
determine the number of directors that will constitute our Board.  This
summary is modified in its entirety to the actual copy of our new Bylaws that
was filed as an Exhibit to our 10 Registration Statement.  See Part IV,
Item 15.  · Changed the name of our 2007 Stock
Plan to the Digitiliti, Inc. Stock Option Plan and increased the shares
available for grant thereunder from 4,000,000 shares to 9,000,000 shares.  Resignations of 5X Partners, LLC
Principals  Effective October 13, 2008, Larry D. Ingwersen resigned
as our CEO, President and a director; and Roderick D. Johnson resigned as our
COO.  Both were principals of 5X Partners, LLC (5X), which was a
consultant to us until just prior to their respective resignations.  At the
time of their resignations, an aggregate of $93,801.50 was purportedly due to
them, along with 356,250 in vested stock options to each under the Digitiliti,
Inc. 2007 Stock Option Plan, as of December 31, 2008.  Discussions
respecting a settlement of these obligations are underway.  Issuance of Convertible Note,
Security Agreement and Confession of Judgment in the Event of Default  Effective December 5, 2008, our Board of Directors
approved the issuance of a convertible note (the Miner Convertible Note) and
warrant (the Warrant) to Jonathan S. Miner and Pamela J. Miner (the Miners),
who both currently serve on our Board of Directors, for their advance to us of
the sum of $175,000 and their agreement to advance up to an additional $75,000
(which additional sum has been advanced to us), all to be utilized in the
development of our Pyramid software storage product.  We also executed a
Security Agreement with the Miners whereby we granted to them as collateral and
security a lien for the payment of the Miner Convertible Note and additional
indebtedness of the Miners or indebtedness the Miners have guaranteed in the
past on our behalf in the further aggregate amount of $500,000, for a total
secured amount of $750,000, in the following:  · A first position security interest in
all of our software program known as Pyramid, which comprises a new storage
solution of ours that is set for release in 2009, together with all existing
software, corrected software, enhanced software and new software relating to
Pyramid;  · All of our interest and rights
 in our vault, which comprise our principal ongoing business operations
described as our Pharaoh Enterprise Online Data Protection and Backup
operations, known as our Pharaoh Business Fortress Storage Center (the vault
security interest is a second position lien to Data Sales, Inc. (Data Sales),
including but not limited to our Assigra software, our Exanet storage hardware,
our networking switches, our Assigra server hardware, our Assigra software
licenses and computer programs and all of our interest in contracts and
agreements associated therewith and receivables therefrom;   7    · A first security interest in all of
our rights and interest in non-disclosure agreements, non-competition agreements
and similar agreements, whether now existing or hereafter acquired, that are
associated with the collateral, except the StorageSwitch software and
technology; and  · A first security interest in any
enhancements, intellectual property and related materials pertaining to the
collateral, except the StorageSwitch software and technology.  See our 8-K Current Report dated December 2, 2008, which
was filed with the Securities and Exchange Commission on December 12, 2008,
referenced in Part IV, Item 15.  Adoption of Corporate Governance
and Nomination Committee, an Audit and Finance Committee and a Compensation
Committee Charters  On December 16, 2008, our Board of Directors adopted
Corporate Governance and Nomination Committee, Audit and Finance Committee and
Compensation Committee Charters, copies of which are filed as Exhibits 99.2,
99.3 and 99.4 to our 8-K Current Report dated December 16, 2008, which was filed
with the Securities and Exchange Commission on December 22, 2008, referenced in
Part IV, Item 15.  The Corporate Governance and Nomination Committee
consists of Roy A. Bauer and Pamela J. Miner, with Roy A. Bauer being the Chair.
 The Audit and Finance Committee consisted of Benno Sand and Jonathan S.
Miner, with Benno Sand being the Chair; however, Mr. Sand resigned as a director
on April 13, 2009, and we are presently seeking a qualified person to fill his
vacancy.  The Compensation Committee consisted of Jonathan S. Miner, Roy A.
Bauer and Benno Sand, until Mr. Sands resignation, with Jonathan S. Miner being
the Chair.  Master Lease Revision and
Restructuring  On December 18, 2008, we and Data Sales entered into a
Letter Agreement whereby Data Sales agreed to amend the Master Lease between us
and Data Sales with Equipment Schedule No. 5., pursuant to which Data Sales
restructured our Master Lease to defer all payments due of us for the months of
December, 2008, and January, 2009, and to change our lease payment terms to 10
months, commencing February 1, 2009, and ending November 1, 2009, with a new
monthly payment of $40,300 per month of the restructured total balance under the
Master Lease.  At December 31, 2008, $381,946 was due and owing on the
Master Lease, and this amount is secured by a first position lien on our vault
and all of our other assets, except those assets in which the Miners have a
first position security interest as stated above, and on those assets, Data
Sales has a second position lien.  See our 8-K Current Report dated
December 16, 2008, which was filed with the Securities and Exchange Commission
on December 22, 2008, referenced in Part IV, Item 15.  Standard & Poors
Listing  We were listed in the March 17, 2008, edition of Standard
& Poors Daily News Section of Corporation Records, with our audited
financial statements for the years ended December 31, 2006, and 2005, and our
reviewed financial statements for the nine months ended September 30, 2007,
along with other information about us; subsequently, we provided Standard and
Poors with our audited financial statements for the years ended December 31,
2007, and 2006, along with certain other updated information, which was included
in the May 15, 2008, edition of Standard & Poors Daily News Section of
Corporation Records.  Business Development Events Subsequent to December 31,
2008  Possible Sale of Pharaoh
Business  We have evaluated our current portfolio of products and
services and have determined strategic and non-strategic business opportunities.
 From this strategic analysis, we have determined that our new product,
Pyramid, is positioned to achieve significantly more market opportunity
potential than our current Pharaoh Business operations.  Therefore, we are
currently evaluating the sale of our Pharaoh Business Fortress Storage Center in
order to more sufficiently fund our strategic new product direction.  We
are currently negotiating the sale of our Pharaoh Business operations.  It
is anticipated that any sale of the Pharaoh Business Fortress Storage Center
that may be negotiated will be submitted to our stockholders for approval in
accordance with the Delaware Business Corporation Act.  Settlement of Former Employee
Claim  On January 8, 2009, we entered into an out-of-court
settlement with a former employee who sought recovery of unpaid commissions and
unused vacation compensation totaling $44,000. A settlement was reached
requiring incremental payments over a four month period ending April 10, 2009;
and all payments have been made.   8    New
Related Party Lease  In February 2009, we entered into a lease with a leasing
company owned by related parties, including Brad D. Wenzel, who recently
resigned as our Chief Technical Officer and a director, and Jonathan S. Miner, a
director. The lease payments are guaranteed by Mr. Wenzel and Mr. Miner. We were
unable to lease the equipment covered by this lease directly, so COR Equipment
Financing, which is owned by Mr. Wenzel and his father, Ronald G. Wenzel, and
Mr. Miner, leased the equipment by financing a bank loan in the amount of
$10,000 that each had to personally guarantee.  The outstanding lease
obligation to related parties is $8,300 as of April 9, 2009; and the terms were
no less favorable than could have been obtained from non-affiliated parties.
 See Part III, Item 13.  Severance Package with Former Board
Member and Acting CEO  On February 10, 2009, we accepted the resignation of Dan
Herbeck, acting through his company, Continental Technologies Solutions, LLC
(Continental), as interim CEO and one of our Board members. The severance
arrangement recognized unpaid invoices owed Continental of $105,344, payable at
a rate of $4,000 per month, commencing in April, 2009. As recognition for our
delay in payment, we also granted Continental 100,000 cashless five year
warrants to purchase 100,000 shares of our common stock at $0.35 per share.
 We have not paid the April, 2009, payment, because of cash shortages.  Vendor Settlement Agreement  On March 19, 2009, we executed a Settlement Agreement
with a former vendor seeking recovery of $24,000 of unpaid invoices.  We
disputed this claim, and an out-of-court settlement was reached requiring a
total reimbursement of $13,000 payable in $3,000 monthly installment commencing
April 10, 2009, and continuing thereafter until paid in full.  We have paid
the April installment on this obligation.  Planned Secured and Unsecured
Funding  On or about March 23, 2009, we agreed to pay a 10%
introduction fee to M2 Capital Advisors, Inc. (M2), under their current Letter
Agreement with us, on any funds raised by us in a planned $1,500,000 financing
through the sale of secured and unsecured convertible notes.   We will
be making the offer and sale of these convertible notes following any
introductions by M2; and purchasers of the secured portion of this planned
convertible note offering will be granted a third position security interest in
our vault, behind the security interests of the Miners and Data Sales in our
vault that is discussed above under the headings Issuance of Convertible Note,
Security Agreement and Confession of Judgment in the Event of Default and
Master Lease Revision and Restructuring.  It is anticipated that $750,000
of this funding would provide us with the necessary capital to continue our
current business operations for two to three months, with present cash flows,
and approximately $275,000 of this amount would be paid to current vendors,
based upon discussed arrangements.  Further information regarding M2 and
its prior relationships with us and its principal, Mark Savage, our former
President and a former director, is discussed below under the caption
Business, under the headings Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements or Labor Contracts, including Duration and M2
Capital Advisors, Inc.  Brad D. Wenzel  On April 20, 2009, Brad D. Wenzel, our Chief Technical
Officer, resigned from this position and as a member of our Board of Directors.
  Mr. Wenzel resigned to pursue new business opportunities in related,
non-competing areas of mutual interest and in a potential partnership with us.
 We do not intend to replace this position. The terms and conditions of a
mutual Confidential Separation and Release Agreement include items such as
severance, non-compete and non-solicitation, assignment of any claims of
intellectual property rights of Mr. Wenzel to us, provisions for potential a
future potential business partnership on existing and new storage solution
products and other items typically found in these typesof agreements.
 See our 8-K Current Report dated April 20, 2009, which was filed with the
Securities and Exchange Commission on April 24, 2009, and is referenced in Part
IV, Item 15.  Additional Convertible Note
Extensions and Conversions  Subsequent to December 31, 2008, an additional $2,167,700
in convertible notes and accrued interest were converted pursuant to our first
proposal outlined above under the heading Bridge Loan Offering 12% Convertible
Note Extension and Modification Proposal, and an additional $1,107,182 in
convertible notes and accrued interest were extended pursuant to our second
proposal.   6,622,622 shares of our common stock were issued for the
principal and interest for the conversion of the $2,167,700 in convertible notes
and accrued interest.  The following tables reflect this information:   9    Outstanding
Convertible Notes from Offering, with Principal and Interest due, following
Conversion, Subsequent to December 31, 2008  After implementation of our modification proposal
referenced above, the following table reflects, at April 20, 2009, the total
amount of the convertible notes that were outstanding during each quarter when
sold; the principal and accrued interest converted under our first proposal
after December 31, 2008; and the number of shares of our common stock issued for
principal and accrued interest converted after December 31, 2008, under our
first proposal that was retroactive:  Total of Convertible Notes
Sold

Amount of Notes Converted After
12/31/08

Amount of Accrued Interest on
Convertible Notes After 12/31/08

Principal and Accrued
Interest on Notes Converted After 12/31/08

Number of Shares from Conversion
After 12/31/081st Qtr 2007
$
401,050

$
196,250

$
44,678

$
240,928

688,3652nd Qtr 2007
$
707,500

$
407,500

$
81,806

$
489,306

1,055,9213rd Qtr 2007
$
1,165,000

$
375,000

$
65,355

$
440,355

1,268,1584th Qtr 2007
$
926,000

$
311,000

$
46,937

$
357,937

1,006,3211st Qtr 2008
$
808,500

$
303,500

$
32,302

$
335,802

879,8412nd Qtr 2008
$
945,500

$
415,000

$
36,478

$
451,478

1,140,7953rd Qtr 2008
$
546,450

$
159,450

$
8,227

$
167,677

583,2214th Qtr 2008
$
-

$
-

$
-

$
-1st Qtr 2009
$
-

$
-

$
-

$
-$
5,500,000

$
2,167,700

$
315,783

$
2,483,483

6,622,622  Outstanding Convertible Notes from
Offering, with Principal and Interest due, following Conversion, Subsequent to
December 31, 2008  After implementation of our Modification Proposal
referenced above, the following table reflects as of April 20, 2009, the total
amount of the convertible notes that were outstanding during each quarter when
sold and the principal and accrued interest extended under our first
proposal:  Principal
&Principal
Acc.
Interest
AccruedBalance
of
on
Interest
onConv. Notes
Conv. Notes
Conv. NotesTotal of
Extended
Extended
ExtendedConv.
Notes
as of
as of
as ofSold
4/20/2009
4/20/2009
4/20/20091st qtr
2007
$
   401,050
$
   144,800
$
        37,168
$
      181,9682nd qtr
2007
$
   707,500
$
     55,000
$
        13,077
$
        68,0773rd qtr
2007
$
 1,165,000
$
   560,000
$
      113,897
$
      673,8974th qtr
2007
$
    926,000
$
   275,000
$
        49,455
$
      324,4551st qtr
2008
$
    808,500
$
   490,000
$
        66,297
$
      556,2972nd qtr
2008
$
    945,500
$
   387,500
$
        42,580
$
      430,0803rd qtr
2008
$
    546,450
$
   272,000
$
        24,344
$
      296,3444th qtr
2008
$
              -
$
               -
$
               -
$
               -1st qtr
2009
$
              -
$
               -
$
               -
$
               -$
 5,500,000
$ 2,184,300
$
      346,818
$
   2,531,118  Outstanding Convertible Notes from
Offering, with Principal and Interest due, following Conversion and Extension,
Subsequent to December 31, 2008    After implementation of our Modification Proposal
referenced above, the following table reflects as of April 20, 2009, the total
amount of the convertible notes that were outstanding during each quarter when
sold and the remaining principal and accrued interest outstanding from those
convertible note holders which did not convert or extend their convertible
notes:  10     Principal &
Due DatePrincipal
Acc. Interest
Accrued
for PrincipalBalance of
on
Interest on
& AccruedConv. Notes
Conv. Notes
Conv. Notes
InterestTotal of
Outstanding
Outstanding
Outstanding
onConv. Notes
as of
as of
as of
Conv. NotesSold
4/20/2009
4/20/2009
4/20/2009
at 12-31-081st qtr 2007
$     401,050
$
       60,000
$
        13,746
$
        73,746
Sep-082nd qtr 2007
$     707,500
$      225,000
$
        45,562
$       270,562
Dec-083rd qtr 2007
$  1,165,000
$      130,000
$
        21,518
$       151,518
Mar-094th qtr 2007
$     926,000
$      240,000
$
        36,423
$       276,423
Jun-091st qtr 2008
$     808,500
$
       15,000
$
          1,524
$
        16,524
Sep-092nd qtr 2008
$     945,500
$      143,000
$
        11,463
$       154,463
Dec-093rd qtr 2008
$     546,450
$
       65,000
$
          3,376
$
        68,376
Mar-104th qtr 2008
$
              -
$
               -
$
               -
$
               -
Jun-101st qtr 2009
$
              -
$
               -
$
               -
$
               -
Sep-10$  5,500,000
$      878,000
$
      133,612
$    1,011,612  An aggregate of $420,000 of these convertible notes was
due at December 31, 2008; and an aggregated of $495,826 of these convertible
notes were due at March 31, 2009 (this amount includes the sum due at December
31, 2008), though we are continuing to discuss payment and/or conversion or
extension of these convertible notes with the holders.  Issuers Involved in Bankruptcy Proceedings During the
Past Five Years  Except as indicated above under this heading, Business
Development, we have not been involved in any bankruptcy, receivership or any
similar proceeding, and have not had or been party to any material
reclassifications, mergers or consolidations during the previous five years.  Voluntary Filing of Registration Statement  We voluntarily filed a Registration Statement on Form 10
of the Securities and Exchange Commission so that we could become a reporting
issuer under the Exchange Act, which became effective on July 14, 2008; that
may allow us in the future to seek to have our common stock publicly quoted on
the OTC Bulletin Board of the Financial Industry Regulatory Authority (FINRA).
 Our common stock is currently quoted in the Pink Sheets under the trading
symbol (DIGI).  We cannot ensure that we will be successful in obtaining
quotations of our common stock on the OTC Bulletin Board; however, our
management believes that being a reporting issuer will facilitate this process
for us if and when management decides to seek such quotations.  Presently,
FINRA requires companies seeking quotations on the OTC Bulletin Board to be
reporting issuers, and management also believes that in the present corporate
regulatory climate, being a reporting issuer will soon become a requirement for
every nationally recognized medium on which securities of companies are publicly
traded.  The information required to be filed by us with the Securities and
Exchange Commission as a reporting issuer may also provide us with additional
credibility that may be advantageous in the conduct of our business operations
and stockholder and customer relations.  Business  We presently focus on providing a cost effective data
protection solution to the small to medium business (SMB) and small to medium
enterprise (SME) markets.  This data protection solution is geared
specifically to help organizations properly manage and protect their entire
network from one centralized location, with offsite redundancy.  Our
solution can backup and restore data on every machine in a network, including
desktops, laptops, file and print servers.  We are dedicated to developing and delivering superior
storage technologies and methodologies that will enable our customers to manage
and protect massive data growth with ease.  We combine a powerful, agent-less backup software with
our remote Pharaoh Business Fortress Storage Center to deliver to our customers
a powerful and effective online-offsite data backup and restore solution.
 We provide storage from a utility based computing philosophy, whereby
customers pay only for the gigabytes of data they store in our Fortress Storage
Center.  Our facilities allow us to provide offsite disaster
recovery with an emphasis on intraday protection and restore for all of our
customer primary data centers and geographically dispersed offices or campus
settings.  Our Fortress Storage Center is located in the base of the former
Minneapolis Federal Reserve Bank.  It is a one of a kind facility that
provides our  11    web based on-demand
backup/restore service (digitiliti) with all the benefits of direct fiber
access to a Level 5 data center.  The Fortress Storage Center has 24/7
onsite physical security, including security guards, motion detectors, security
cameras, card-key access, separate cages with individual locking cabinets and
ladder racking.  It also has battery generator back up power, temperature
and humidity controls and fire suppression systems.  Geographically, we are
located at the center point of the Metropolitan area network.  Being
centrally located at the focal point of the Twin Cities Fiber Channel and Gig
loop, the pipeline for data and load capabilities are immense.  This allows
us to send data back and forth in real time.  The Fortress Storage Center houses all of the hardware
and software needed for our digitiliti solution to work.  At the customer
site, digitiliti administrator software is loaded on as many or as few
workstations as desired and will require a valid logon code, ensuring no
unauthorized access.  At the customer site, the administrator software
console acts as the interface with digitiliti in the Fortress Storage Center
and enables the configuration of all backups and restores.  The
digitiliti backup software is totally agent-less, requiring no additional
software to be installed on any machines.  From the customer administration
console, the customer sets retention policies, schedules automatic backups and
initiates restores.  The customer decides what files to backup: emails,
Windows, Linux, Mac, Lotus, AS400 or many more. Customers typically start
backing up one system and then add more systems to their backup sets as they
continue to see how easily our digitiliti works.  For large data volumes, the initial data backup may be
downloaded to a portable disk unit at the customer site.  When the full
backup of data is complete, the disks are transported to the Fortress Storage
Center where the data is loaded onto the equipment in the Fortress Storage
Center.  From then on, all data is backed up in incremental changes over
the Internet. All data is encrypted at all times  before it leaves the customer
site and when stored offsite.  The encryption key is known only to the
customer.  The data can be unencrypted only by the customer, who would do
so upon the need of a restore.  If a customer loses data, the customer
simply enters the commands to restore it via the administration console. At that
time, the data would flow from the Fortress Storage Center back to the customer
site.  If the customer loses all data, digitiliti can restore the latest
data to a location of the customers choosing using a portable disk unit.
 In addition to being encrypted, the data is also highly compressed, making
it extremely safe and impenetrable from viruses.  We maintain two copies of
the customer data at all times.  We have contracted with XO Communications for our data
center and communications.  We lease our Fortress Storage Center space from
them, and they own the Internet lines we use.  This relationship helps keep
capital expenditures at a minimum, while maintaining the flexibility to set up a
new data center in any one of 80 geographically dispersed locations throughout
the world, thereby reducing any geographic concerns about our digitiliti.
 XO Communications provides voice, data and IP services to businesses and
other telecommunications companies in 75 metropolitan markets across the United
States.  Our operations facilities currently include:  · Nine full-time employees and four
independent contractors.. · Fortress Storage Center in
Minneapolis, MN, the former home of the Federal Reserve Bank. · Leased administration offices in St.
Paul, MN. · Various servers, workstations, RAID
systems that protect against data loss, networking gear, operating systems, and
storage area networks (SAN) and network attached storage (NAS) hardware. · In-house website development. · Strategic partnerships with Network
Engines, Inc. (Network Engines), a developer and manufacturer of server and
appliance solutions that deliver software applications on server appliances;
Asigra, Inc. (Asigra), a provider of comprehensive software solutions and IT
expertise to back up data to customer secure vaults;  XO Communications, a
United States telecommunications firm and one of the largest Competitive Local
Exchange Carriers (CLEC) in the country that provides voice, data and IP
services to businesses and other telecommunications companies in 75 metropolitan
markets across the United States; and Exanet, Inc. (Exanet), a network
attached storage (NAS) software company that addresses the trends that are driving the future of data centers:
virtualization, standardized hardware and applications demanding the most
extreme standards of performance, availability and scalability.  All of
these partnerships were made in the ordinary course of our business; there are
no written understandings; and none is a reseller for us; however, we are a
standard licensee reseller for Asigras software product.  When we designed
and constructed our Fortress Storage Center vault, we chose the Exanet/Asigra
hardware/software solution to use in our facilities.  We chose to use
Exanet because we believed it to be robust and the best fit with the Asigra
software we were licensed to sell.  We built our software/hardware
infrastructure around the Exanet product (hardware and software) and the Asigra
product (software).  When we fully consume existing storage capacity, we
purchase additional Exanet or Asigra licenses as needed, using standard purchase
orders.  The purchase orders usually list the payment terms or the
payment terms are reached in subsequent correspondence.   12    Our digitiliti Fortress
Storage Center is made up of the following:  · XO Communications Level 5 RAID System
Data Center. · High performance fiber channel and
iSCSI RAID Systems or Arrays (RAID Systems). · Foundry Networks Fast Iron Gigabit
Ethernet Switches. · Qlogic fiber channel switches and
iSCSI adapters. · Dell Power Edge servers. · N+1 Grid Architecture for backup. · Diesel powered generators to protect
against power outages. · Unlimited bandwidth for digitiliti
to grow into. · Exanet Global Files System and IBM
DS4100 RAID Systems.  Products, Software, Services and Related Technologies
Utilized  The following describe various products, services,
software and other amenities utilized at our Fortress Storage Center.
Alternative providers of these products, services, software and other amenities
are reasonably available.  ISCSI or a methodology for computers to
communicate without being in close proximity.  RAID Systems or a series of disks that hold the
data and are considered fault-tolerant because they are automatically backed up,
short for Redundant Array of Independent (or Inexpensive) Disks, a category of
disk drives that employ two or more drives in combination for fault tolerance
and performance and are configured in such a way that if one disk fails, the
virtual volume that has the data will still remain intact.  It is more
reliable than having all of your data on one spinning disk; if that disk fails,
you have lost everything; RAID helps mitigate that loss.  RAID disk drives
are used frequently on servers; they are not generally used on personal
computers.  Level 5 or Block Interleaved Distributed Parity,
provides data striping at the byte level and also stripe error correction
information. This results in excellent performance and good fault tolerance.
 Level 5 is one of the most popular implementations of RAID.  A high performance fiber channel that is presently
one of fastest transport mechanisms to move data from one system to another, or
from a disk to a computer processor.  It still relies on a protocol like
SCSI, to communicate with hardware from completely different vendors.  A
fiber channel is simply the railroad car in a super fast train.  SCSI is a common format for the packing slips to
be able to do something meaningful with the payload.  iSCSI is a language
that allows the same SCSI protocol to be used over simple copper networks
instead of expensive fiber-optic wires, and it is easier to manage and deploy
and ultimately less expensive to own.  Foundry Networks Fast Iron Gigabit Ethernet Switchesare simple network switches that can run at a gigabit line speed, which are
able to move packets of data at one gigabit per second.  Foundry is the
brand name.  Gig-E (Gigabit Ethernet) is the fast standardized networking
line speed.  There are faster systems available, but the cost of those
systems simply makes them un-usable for our business purposes.  The
switches are like traffic cops at a busy intersection.  They ensure that
the flow of traffic is clean and consistent and that there are no collisions.
 The faster the switch is able to perform this function, the greater/faster
the amount of traffic that can pass through the intersection.  Qlogic fiber channel switches and iSCSI adapterscreate network switches that can handle traffic over fiber-optic wires;
iSCSI adapters are used on the computers that need to talk over the network
using the iSCSI protocol.  Ologic is a brand name.  Dell Power Edge servers,one of Dell Computers
brand names, are simply workhorse type computers.  N+1 Grid Architecture for backupdescribes a
computing term that is made up of a series of computers.  All of the
computers, as a collective, perform a specific task.  They rely on each
other to perform this task and need each other around in order to perform the
task.  N+1 means that the collective of computers need at least 1/2 + 1 of
the computers to be working in order to complete the task.  If the number
of computers is less than that amount, the entire collective stops working on
its task.  As an example, if 10 computers were needed to perform a task
working in an N+1 setup, four of the computers could crash, and the task would
still be processed.  This is used for redundancy and processing power.
 It is better than one computer performing the task or a series of
computers performing individual tasks; and it is a very reliable configuration.
 In our case, the task is performing backups of other computers.  Bandwidthis important because as we continue to
add customers on to our service, there is a linear curve to the amount of
networking capacity that the collection of our customers consumes.  One
customer may only consume a small percentage of our networking capacity, but if
you add 10 or 50 or 100 customers, the network consumption climbs in a very
linear curve.  In the case of our digitiliti, the building and facilities
that our digitiliti relies on for our network  13    capacity is capable of growing
at a linear curve as well and its technology ceiling is very high, which means
that we will be able to sustain linear customer growth for a very long time; and
by the time that we hit any style of ceiling from a technology level, the
technology will have also improved, again, allowing us to grow further.  Exanet Global Files System and
IBM DS4100 RAID Systemstake each computers storage and allows it to be
accessed as if it were one large computer, creating a global namespace.
 Each disk in a computer has a certain size. A modern computer system is
only able to count so high, and ultimately is only able to use or consume a
certain amount of storage. This means that a single computer has a limit to the
amount of storage that it realistically can use and work with. If you place a
number of computers together, collectively you will have more storage capacity
than one server alone, but each computer can only consume the storage that it is
able to see.  Each would not be able to use the storage that other
computers are consuming.  In a global file system, a virtual layer is
placed on top of the physical systems and each system is actually responsible
for figuring out where its data is, but the virtual layer placed on top of the
file system knows about each individual computers file system without regard to
each of the other computers.This
allows our digitiliti to expand past a single computers capacity and allows
our digitiliti to grow almost infinitely.  Principal Products or Services and their
Markets  Markets  The market for storage solutions can be divided into
three basic tiers, Primary, Secondary and Archival. A description of each as
follows.  Primary-This is where data is created and
stored.  Solutions for primary storage consist of disk drives, disk arrays,
Storage Area Networks (SAN), Network Attached Storage (NAS), Direct Attached
Storage (DAS) and any other product in which primary data is stored and
managed.  The best products for primary storage are those that offer the
fastest read and write speed, scalability and fault tolerance.  The Primary
is sometimes described as data accessibility, data availability and is the first
part of the data management lifecycle where files are created, reside and
accessed frequently.  Secondary -Secondary storage consists of
solutions that protect the Primary data stored. These technologies include tape
drives and libraries, backup software, mirroring, replication, snapshot, less
expensive disk arrays and continuous data protection (CDP).  This tier of
storage products is to protect the Primary.  Archival - Archival solutions consist of high
quality tape, Magneto-Optical, CD-R, DVD-R and inexpensive disk technologies
(MAID).  The goal for these products is to be durable and have a long
shelf life.  More sophisticated solutions, like Hierarchical Storage
Management (HSM), will automatically migrate and archive data to this these
long term inexpensive solutions. Archiving is often confused with backup.
 They actually differ in that an archive is the only copy of the data
whereas a backup is not the only copy of data; it is the protection of the
Primary. Eventually, depending on specific retention policies, the data is
destroyed as it is no longer needed.  The remote online backup market is still in its infancy
so we will be aggressively pricing our products to achieve significant market
penetration to attempt to become an industry leader.  We will continue to
manage our overhead and leverage our partnerships for software development,
storage infrastructure, data center facilities, connectivity and referrals. Our
goal is to concentrate on business development and refining/improving our sales
methods to attract additional customers more rapidly.  In terms of
marketing strategy, we are focusing on No hardware and no software, and on our
data reduction technology, where customers backup less data than ever
before.  The SMB/SME markets were labeled fragmented and
underserved by the storage industry, in December, 2006; and we believe these
labels are applicable to these markets today because they have not reached
critical mass.  The regulatory compliance pressures that exist in these
markets are a principal reason why customers and potential customers are
beginning to outsource their data protection requirements more than ever
before.  Products  Our main product and service is online backup and
recovery services as described above.   It is a web based online
backup/restore service that backs up mission critical data for companies of any
size.  A second part of our business is our new product
development:  We develop superior storage technologies and methodologies
that will enable companies to better control and manage their information within
the context of their corporate information technology policies.  This
technology further enables companies to better control data growth, duplication,
and proliferation.  History has shown that customers data volumes grow at
a rate of 2% - 3% monthly.  Our new technology is intended to change the
way companies think and act about data backup, archiving, and recovery.   14    Objectives  Our objective is to update the technological capabilities
of our digitiliti product with functionality desirable to the SMB/SME market.
 Through on-line research and customer contact, we believe we have
identified the most pressing data management issues the SMB/SME managers
struggle with today.  Various ad-hoc collections of single purpose (point)
software/hardware products and employee processes like data de-duplication,
encryption devices or application integration are a few examples of some of the
different data management issues we feel should be addressed.  Our product
releases for these issues and others will align with our research and
development budget.  We believe that we can become a significant competitor in
the backup and restore market, especially in the SMB/SME market.  In order
for us to achieve our forecasts, an aggressive sales model and dealer channel is
planned and will be implemented with branded sales partners with
utility-oriented sales systems. We believe our experience in this area gives us
an edge over the typical storage related companies that are tightly tied to box
sales business models with large up-front revenues, and very different
scalability parameters.  Many business plans of companies detail excellent
products, but fall short in the area of sales.  This is an area where we
believe we excel.  To support this mission, we will:  · Deliver affordable storage solutions
with enterprise level capabilities. · Utilize local and regional reseller
partners and national level channel partners. · Align with major storage participants
to cooperatively work together within the same opportunities. · Continue to build and deliver our
Fortress Storage Center to support our growing customer base and continue to add
valuable features to our digitiliti service to keep ahead of our
competitors. · Require additional funding to fulfill
our product development and sales and marketing objectives.  We have entered the mature data protection and backup
market with a utility based backup service that has changed the way companies
backup their data.  This market has been dominated for 30 years by tape
devices and current software backup suppliers.  These suppliers charge for
software and tape hardware to accomplish what digitiliti can do for a more
economical monthly service fee.  The cost of locally managing tape backup
systems is a serious concern because of the data explosion rate companies are
experiencing and the complexity of managing it.  With digitiliti,
customers no longer have to outlay capital for backup software and hardware.
 They simply download the digitiliti data collection agent, install it
and begin their first backup to our Fortress Storage Center in a matter of
minutes.  If the data set is too large to transfer the first full backup
over the Internet, a technician will send out a portable disk array where the
customer backs up its data to it.  The customer will then send the array
back to our Fortress Storage Center for the data to be loaded onto the system.
 From there, the customer backs up only the daily changes to the data made
each day.  The customer pays a monthly fee based on the number of
compressed gigabytes of data they have stored in our Fortress Storage
Center.  Targets  For 2007, we concentrated on our vertical markets and
setting up key resellers of these storage solutions; we expanded our reseller
base in the Midwestern states in 2008; and look to expand and ramp up these
reseller partners in 2009.  Our lead registration database will help us
with identification of strong resellers.  We are working on partnerships
with national level enterprise sales channel programs that will build revenue in
the long run.  We recently began a focused regional level channel partner
development program that will build sales in the short term.  In addition,
we have identified 30,000 end-user prospects for our in-house sales team to
call.  Our end-user customer base has expanded from approximately 20 in
fiscal 2005; to approximately 100 in fiscal 2006; to 508 in fiscal 2007; to 731
in fiscal 2008; and currently, to approximately 798.  digitiliti Product Operational
Methodology  Our digitiliti online backup and recovery solution
simplifies the entire data backup and restore process into a few easy steps
beginning with our data collection agent.  Load our collection agent on a
Windows, Linux or Macintosh server to scan the entire network for all available
data to protect.  This data may be a servers operating system state,
files, databases, messaging systems or even email messages.  Determine
which data to backup and the number of revisions of each file or backup set.
 Schedule and automate the backup.  When the backup executes,
digitiliti looks for changed blocks within your files, eliminates common
blocks, encrypts, compresses and transfers customer data to our Fortress Storage
Center.  Should a customer lose data at their site, the restore process is
just as easy.  Determine what data to restore and from which generation.
 Restore the data either from the customers local storage or from the
Fortress Storage Center by entering a few commands.  The latest copy of the
customers data can be stored locally for restoring massive amounts of data in a
timely fashion.  The second copy and the third disaster recovery copy are
ready and waiting at our Fortress Storage Center.  Our Fortress Storage Center is a one-of-a-kind facility
that provides our customers with all the benefits of direct fiber access to a
Level 5 data center.  The data center delivers the highest speed
telecommunications, data service, satellite  15    and wireless capabilities in
the region.  Being centrally located at the focal point of the Twin Cities
Fiber Channel and Gig loop, the pipeline for data and load capabilities are
immense.  This allows us to send data back and forth in real time.  Distribution Methods of the Products or
Services  We sell and support these solutions and services through
direct sales and through relationships with Value-Added Remarketers and
third-party integrators. We have standard contracts governing the terms and
conditions of these direct and indirect customer and business partner
relationships. Our primary focus for fiscal 2008 was to drive growth in
customers using our digitiliti Pharaoh Business services and to manage the
natural growth of current customers data archival needs.   In 2009,
we look to expand our digitiliti Pharaoh Business and new storage solution
products service through aggressive partnering and marketing, while continuing
to deliver superior service.  We also market through traditional methods, including the
web, trade publications, trade shows, and advertising.  Our Web Site is
www.Digitiliti.com.  Our customers typically sign a 36 month contract that
provides for easy billing, stable recurring revenue and easy forecasting.
 We believe growth can be controlled and managed through customer backup
set retention policies.  Our success and size is based upon our ability to
deliver a reliable cost effective storage solution, define our target market and
effectively sell our storage solution over the telephone with ease.
 digitiliti has been sold successfully through resellers.  This is
proven by the significant customers we have signed using our resellers.
 Over 90% of our current base of more than 798 customers has been signed
through resellers.  Due to the success of our resellers, we will continue
to aggressively set up key resellers at local, regional and national levels
throughout the United States, concentrating first in the Midwest.  In
addition to our marketing and sales efforts, operations consist of managing our
customers data in our Fortress Storage Center.  Status of any Publicly Announced New Product or
Service  We are currently developing the first release of an
advanced storage solution service, Pyramid, which builds upon the foundation of
our existing product by adding functionality we believe is desirable to the
SMB/SME market we serve. Pyramid is a new product currently in development by
us.  The idea of Pyramid was derived from the experience and insight we
have gained from the years of Pharaoh Business services Vault operations helping
customers protect and archive their data and manage the increasing growth and
complexity of their data.  The Pyramid product is designed to solve the
problems of data proliferation and growth, data control and data recovery. 
Pyramid indexes, organizes and categorizes a customers unstructured data and
stores this data into a database where it can be archived and retrieved on
demand by the user(s) who created the data.  Further, this data is
organized under control of a policy engine which ensures all unstructured
customer data complies with corporate information policy.  Pyramid brings a
totally new dimension to how our customers will more efficiently and effectively
manage their information in the future.  We call this new dimension in
information management, the Information Area Network Tm.  The
research and development budget for the first release is currently set at
approximately $1,500,000, with these funds anticipated to come from operational
cash flow and debt or equity financing.  There is no assurance that
adequate funds for this budget will be available to us from any of these or
other sources.  We anticipate having the first release of this product
ready by the end of the third quarter of 2009; however, changes in the scope of
work on this product release that were not anticipated or the loss of key
development personnel could delay the timing of this release.  We intend to
continue our research and development and update the functionality of our
products on an ongoing basis so our products do not become technologically
obsolete.  The exact number and budget of all these ongoing releases have
not been finalized  Competitive Business Conditions, Competitive Position
in the Industry and Methods of Competition  We compete with current and potential customers internal
information protection and storage services capabilities. We can provide no
assurance that these organizations will begin or continue to use an outside
company like us for their future information protection and storage
services.  We also compete with multiple information protection and
storage services providers in all geographic areas where we operate.  We
believe that competition for customers is based on price, reputation for
reliability, quality of service and scope and scale of technology, and that we
attempt to compete effectively based on these factors.  Some of our competitors may possess greater financial and
other resources than we do.  If any such competitor were to devote
additional resources to the information protection and storage services business
and acquisition candidates in these areas or focus their strategy in our
markets, our results of operations could be adversely affected.   16    The following are know
material direct competitors to our digitiliti, and their products are:  Competing Enterprise Name

Competing Product NameLive Vault/Iron Mountain, Inc.

Live Vault Online Backup ServiceSeagate (EVault)

Seagate 365 (EVault InControl)EMC

Mozy Pro  LiveVault /Iron
Mountain Incorporated Marlborough, MA  LiveVault was recently purchased by Iron Mountain, Inc.
(Iron Mountain).  LiveVault is targeted for customers of less than 250GB.
It can backup Windows, Linux and Solaris.  We believe that LiveVaults
service is very expensive in relation our digitiliti.  There is believed
to be no common file elimination and agents are believed to be required on every
single computer you backup.  We believe LiveVault does not scale as elegantly as we do
because they require agents and only offer 30 days worth of backups, while we
offer three years.  We are priced more competitively to customers with over
250GB.  When customers exceed 100GB, we become even more cost effective.  Iron Mountain has an estimated net worth of over $1.5
billion, with over $2.73 billion in estimated storage related products and
services income.  Seagate (EVault) Emeryville, CA  EVault was acquired by Seagate Technology (Seagate) in
January, 2007, for $186 million.  Seagates core business is as a disk
drive manufacturer.  EVault is a competitor in the small business market,
primarily serving customers having well under 100GB.  EVault is believed to
be much more expensive in the small to medium business and the small to medium
enterprise market.  We believe that it charges for consulting, setup,
software fees and data stored so this service may end up costing as much as a
tape solution with the benefit of getting data offsite.  EVault requires
agents on all servers/workstations and charge for these software agents.
 EVault only allows customers to keep some of their data online; the rest
has to be archived or deleted.  Our product is so easy to use that it is
possible to engage the customer for no more than a couple hours for a complete
setup, often without a charge.  If our competitive position in this industry is based
solely upon assets, current cash resources and the number of customers we now
have, our present competitive position in this industry would not be deemed to
be significant; however, we believe our business strategy, management, employees
and products will result in us becoming a competitive force in this industry.
 Our current marketing approach and competitive differentiator is to target
intermediate and larger companies who want premium archival facilities and
capabilities like those offered by our Fortress Storage Center.
  However, we are focused strategically on changing the competitive
playing field by changing the nature of how companies store, archive and
retrieve its information.  Sources and Availability of Raw Materials and Names of
Principal Suppliers  Our principal supplier partners are two software vendors
providing systems management tools and a computer hardware lease company and our
data transmission supplier.  Asigra is a provider of comprehensive software
solutions and IT expertise to back up data to customers secure vaults.
 Exanet is an NAS Software Company that addresses the trends that are
driving the future of data centers: virtualization, standardized hardware and
applications demanding the most extreme standards of performance, availability
and scalability. With both these suppliers, we pay for licenses and for annual
maintenance agreements based on the gigabytes of storage used.  We chose
Exanet because we believed it to be robust and the best fit with the Asigra
software.  We built our software/hardware infrastructure around the Exanet
product (hardware and software) and the Asigra product (software). When we fully
consume existing storage capacity, we purchase additional Exanet or Asigra
licenses as needed. Data Sales provides leased hardware for our Pharaoh Business
Fortress Storage Center.  XO Communications provides voice, data and IP
services to businesses and other telecommunications companies in 75 metropolitan
markets across the United States.  Our expertise in open and proprietary system environments
includes UNIX, Microsoft Windows, Linux and in-depth knowledge of all major
hardware platforms manufactured by industry leaders, including Hewlett-Packard
Company, International Business Machines Corp., Sun Microsystems, Inc., Hitachi
Data Systems Corporation, EMC, Foundry Logics, Qlogic, Dell and Apple.   17    Dependence on One or a Few
Major Customers  Our customers trust us with the ability to archive,
protect, and retrieve their information assets.  We serve customers
throughout the United States in a diverse group of data intensive industries
including financial services, engineering and scientific, construction, health
care, education and legal services, being the most important.  We have
strong relationships with our customers and high customer satisfaction with our
sales and technical support, and those of our business partners.  Our Pharaoh Business has grown to over 700 customers in
2008 across the United States and Canada.  Of those customers,
approximately 40% of the revenue (based on gigabytes of stored data) is with our
10 largest customers.  While loss of one or two of these large customers
would present a challenge to continued revenue growth, our contracts are for
three years.  Further, larger customers drive more generic growth in data
from the initial stored amounts over time.  Our sales direction is toward
more intermediate sized customers similar to those in our top 10.  Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements or Labor Contracts, including Duration  In 2008, we applied for an Information Area
Network Patent representing the underlying technology and process of our new
product under development, Pyramid.  We have customary software licenses required to conduct
current and intended operations; and we are in the process of filing certain
service mark applications that are deemed to be necessary or beneficial to us.
 We have no patents.  We have or are party to the following service agreements
that are deemed to be material:  M2 Capital Advisors, Inc.  On May 3, 2006, Storage executed a Consulting Agreement
with M2 Capital Advisers, Inc., a Minnesota corporation (M2), and a related
party of which Mark Savage, our former President and a former director , is the
President and a principal stockholder, to render various consulting services,
including introducing us to various sources of funding and providing management
consulting services.  As consideration for these services, M2 was to be
paid $3,000 per month for one year; 10% fee for introduction of funding sources
that actually provided  funding; receive 1,050,000 seven year $0.50
warrants, subject to the introduction and receipt of not less than the sum of
$750,000; 1.4 seven year warrants for every additional $1.00 of funding
introduced and received; piggy-back registration and cashless exercise rights on
all warrants; and other fees based upon a sliding scale for the introduction of
a merger or acquisition to which Storage was introduced and that was actually
completed.  An Addendum to this Consulting Agreement was entered into in
March, 2007, effective May 6, 2006, that raised the monthly fee from $3,000 to
$5,000, as compensation to Mr. Savage for filling the role as President of
Storage; reduced the warrant exercise price to $0.35, which coincided with the
then current offering price of Storage common stock; and that indicated that the
total warrants issuable under the Consulting Agreement were 3,726,520.
 This Consulting Agreement was extended by us following the Storage Merger
on February 28, 2008, until May 31, 2008.  M2 was paid approximately
$350,000 under this Consulting Agreement for funding introduced and received by
Storage in the approximate amount of $3,500,000 in connection with the offer and
sale of certain shares of Storage common stock that were restricted securities
and was (it and its designees) issued the 3,726,520 warrants to acquire shares
of common stock of Storage as outlined in Item 5.  In September and
October, 2007, warrants for 3,643,270 shares were exercised cashless with the
issuance of 3,359,397 shares of our common stock in accordance with our
assumption of these warrants under the Storage Merger.  M2 was also paid $319,955 through December 31, 2007, in
connection with the introduction of persons who acquired $3,199,550 in 12%
convertible notes in an aggregate offering of up to $5.5million commenced by
Storage in the first quarter of 2007and extended by us following the closing of
the Storage Merger on August 17, 2007.  See the Tables under the heading
Business Development above.  Effective on or about April 25, 2007, Storage also
executed and completed a Consulting Agreement with M2 whereby it agreed to issue
750,000 shares of Storage common stock that were restricted securities to M2 and
its associates for the introduction of us as a potential reverse merger
candidate to Storage.  297,166 of these shares were issued directly to Mr.
Savage.  All of these shares were exchanged under the Storage Merger.
 All of these securities were also restricted securities.  M2 was also paid a 5% introduction fee of $28,550 for a
computer lease executed by us in November, 2006; $15,448 for the introduction of
two additional computer equipment leases executed by us in January and February,
2007; and $13,600 for the introduction of an additional computer equipment lease
we executed in December, 2007.  A Letter Agreement was entered into between M2 and us on
June 19, 2008, to cover compensation for M2 for any additional funding source
introductions made by M2 to us in the completion of our current 12% convertible
note  18    offering, which was completed
in November, 2008.  M2 was paid a 10% introduction fee on the funds
realized from any introductions; all sales efforts in connection with these
introductions were conducted by us; and M2s Letter Agreement has been extended
through May 31. 2009.  These Consulting Agreements contain various provisions
regarding independent contractor status, confidentiality, due performance and
care in performing services and mutual indemnification, among other
provisions.  StorageSwitch, LLC  In January 2008, we executed a nonbinding
Letter of Intent (the LOI) with StorageSwitch to purchase selective existing
software technology.  In addition, this LOI addressed the compensation paid
for any related software product development consulting services and
sales/marketing consulting services.  The LOI had a due diligence period to
confirm required compatibility with our present technology base.  The due
diligence process was completed in March, 2008, and we signed and completed a
Technology Purchase Agreement for a purchase of certain technology software with
a total payment of $250,000 cash and 500,000 shares of our common stock that
were restricted securities.  We also entered into a Consulting Service
Agreement with a monthly payment of $25,000 and monthly issuance of 24,960
shares of our common stock that were also restricted securities.  These Agreements contain various provisions regarding
independent contractor status, confidentiality, due performance and care in
performing services, various representations and warranties, notice, venue for
disputes and indemnification, among other provisions.  Copies of the Consulting Services Agreement, the Covenant
Not to Compete Agreement and the Technology Purchase Agreement with
StorageSwitch were filed as Exhibits to our Form 10 Registration Statement.
 The Scope of Work outline referenced in any of these documents was not
filed as an Exhibit as it considered confidential and proprietary information to
us and our storage technology.  See Part IV, Item 15.  Vision to Practice, Inc.  On February 6, 2008, we entered into a
Consulting Agreement with Vision to Practice, Inc., a Minnesota corporation
(Vision), to assist in bringing our new product initiatives to market
utilizing the technology software purchased from StorageSwitch. We will pay
semi-monthly payments of $7,680 based on full-time service provided to us under
this Consulting Agreement.  We will also issue to the consultants
principal 225,000 stock options at $0.35 per share, which vest over 36 months.
 Vision is owned by Rodd Johnson.  This Consulting Agreement contains various provisions
regarding independent contractor status, confidentiality, due performance and
care in performing services, notice of disputes and time for correction,
arbitration of disputes and indemnification by Vision, among other provisions.
 The Scope of Work outline referenced in the Consulting Agreement is not
filed as an Exhibit as it considered confidential and proprietary information to
us and our storage technology.  Need for any Governmental Approval of Principal
Products or Services  None of our products are subject to prior governmental
approvals.  Effect of Existing or Probable Governmental
Regulations on the Business  Once our Form 10 Registration Statement became effective,
we became a reporting issuer under the Exchange Act, and this may allow us to
seek to qualify our shares of common stock for public quotations on the OTC
Bulletin Board of FINRA.  As a reporting issuer, the following will be
applicable to us:  Smaller Reporting Company  We are subject to the reporting requirements of Section
13 of the Exchange Act, subject to the disclosure requirements of Regulation S-K
of the Securities and Exchange Commission, as a smaller reporting company.
 That designation will relieve us of some of the informational requirements
of Regulation S-K.  Sarbanes/Oxley Act  We are subject to the Sarbanes-Oxley Act of 2002.
 The Sarbanes/Oxley Act created a strong and independent accounting
oversight board to oversee the conduct of auditors of public companies and
strengthens auditor independence.  It also requires steps to enhance the
direct responsibility of senior members of management for financial reporting
and for the quality of financial disclosures made by public companies;
establishes clear statutory rules to limit, and to expose to public view,
possible conflicts of interest affecting securities analysts; creates guidelines
for audit committee members appointment, compensation and oversight of the work
of public companies auditors; management  19     Exchange Act Reporting
Requirements  Section 14(a) of the Exchange Act requires all companies
with securities registered pursuant to Section 12(g) of the Exchange Act to
comply with the rules and regulations of the Securities and Exchange Commission
regarding proxy solicitations, as outlined in Regulation 14A.  Matters
submitted to stockholders at a special or annual meeting thereof or pursuant to
a written consent will require us to provide our stockholders with the
information outlined in Schedules 14A (where proxies are solicited) or 14C
(where consents in writing to the action have already been received or
anticipated to be received) of Regulation 14, as applicable; and preliminary
copies of this information must be submitted to the Securities and Exchange
Commission at least 10 days prior to the date that definitive copies of this
information are forwarded to our stockholders.  We are also required to file annual reports on Form 10-K
and quarterly reports on Form 10-Q with the Securities Exchange Commission on a
regular basis, and will be required to timely disclose certain material events
(e.g., changes in corporate control; acquisitions or dispositions of a
significant amount of assets other than in the ordinary course of business; and
bankruptcy) in a Current Report on Form 8-K.  Research and Development Costs during the Last Two
Fiscal Years  We have invested significant resources in 2007 to
structure our Pharaoh Fortress Storage Center, and in 2008, to expand our
digitiliti product offering by developing a new generation of leading edge
software.  We will launch Release 1 of this product in 2009.  Our
total 2008 research and development expense was $1,731,766, comprised of $4,361
for normal business research and development expenses and $1,727,405 allocated
to the development of our new Pyramid product. During 2007, we had $24,784 in
research and development expenses, all related to the Pyramid product.  Cost and Effects of Compliance with Environmental
Laws  We do not believe that our current or
intended business operations are subject to any material environmental laws,
rules or regulations that would have an adverse material effect on our business
operations or financial condition or result in a material compliance cost.
 Facilities energy cost is the only non-regulatory environmental cost.
 We work to minimize our energy costs by utilizing the latest in technology
to save power and cooling.  Number of Total Employees and Number of Full Time
Employees  At year end 2008, our employee headcount
was 13.  This included three  four subcontract employees  the remaining
being full-time employees; we presently have nine full-time employees and four
independent contractors.  We utilized contract employees for specific
skills required in short-term activities.  We hire full-time employees
where we intend to focus on strategic skill needs.  We are a small, highly
productive team, and intend to continue as such.  Reports to Security Holders  We are required to file annual reports on
Form 10-K and quarterly reports on Form 10-Q with the Securities Exchange
Commission on a regular basis, and will be required to timely disclose certain
material events (e.g., changes in corporate control; acquisitions or
dispositions of a significant amount of assets other than in the ordinary course
of business; and bankruptcy) in a Current Report on Form 8-K.  You may read and copy any materials that we file with the
Securities and Exchange Commission at the Securities and Exchange Commissions
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official
business days during the hours of 10:00 am to 3:00 pm.   You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.   You may also find all of the reports
that we have filed electronically with the Securities and Exchange Commission at
their Internet site www.sec.gov.   ITEM 1A.  RISK FACTORS  As a smaller reporting company, we are not required to
provide risk factors; however, we have included our risk factors from our 10
Registration Statement, all of which are still applicable to us.  An
investment in us involves a high degree of risk, and is suitable only for
persons of substantial financial means who have no need for initial liquidity in
their investments. Prospective investors should carefully consider the following
risk  20    factors, which are not all inclusive, along with all types of risk
factors that generally relate to undercapitalized companies and companies that
have limited revenues and that depend upon equity or debt financing to continue
operations:  Risks Related to Our Business  We have not
recorded annual profitable operations since our inception, and continued losses
may require us to curtail or terminate our business operations. We have experienced
operating losses each year since our inception. Even though our revenues
increased $1,745,922 to $3,075,308 in 2008 compared to $1,329,386 in 2007, our
net loss increased to $7,322,846 for the year ended December 31, 2008, compared
to the net loss of $4,097,008 for the year ended December 31, 2007, and we may
still incur additional future operating losses. Continued losses on our
operations may require us to curtail or terminate our business operations.
 Our operating results may fluctuate significantly and any failure to meet
financial expectations may disappoint securities analysts or investors and
result in a decline in our common stock price on the Pink Sheets or any other
nationally recognized quotation system upon which our common stock may be
publicly traded in the future.  Our substantial
short term debt could adversely affect our financial condition and our ability
to continue our present and planned business operations. As of December 31,
2008, and December 31, 2007, we had short term debt in the form of our 12%
convertible notes in the amount of $2,435,466 and $1,062,631, respectively. With
our Modification Proposal, most reflect a conversion rate of $0.35 per share,
and with the extremely current limited public trading market for our shares of
common stock, it is highly unlikely that many of the holders of these debt
instruments will convert them to purchase shares of our common stock. The
amendments that have been approved by the Securities and Exchange Commission to
shorten the holding period for unlimited sales of restricted securities by
non-affiliates after a six month holding period under Rule 144 are not effective
for former shell companies like we are until one year after we filed our Form
10 Registration Statement, or on or about May 13, 2009.   See the
heading Rule 144, Part II, Item 5, regarding the conditions of resale under
Rule 144. Our inability to pay these 12% convertible notes and accruing interest
when they become due may require us to curtail or terminate our business
operations. An aggregate of $420,000
of these convertible notes was due at December 31, 2008; and an aggregated of
$495,826 of these convertible notes were due at March 31, 2009 (this amount
includes the sum due at December 31, 2008), though we are continuing to discuss
payment and/or conversion or extension of these convertible notes with the
holders. See the heading Known trends, events or uncertainties
that have or are reasonably likely to have a material impact on the small
business issuers short-term or long-term liquidity, Part II, Item 7.  Given that it is
highly unlikely that many of the holders of these debt instruments will convert
them to purchase shares of our common stock, we under took an initiative (our
Modification Proposal discussed under the heading Business Development of Part
I, Item I, with all the convertible note holders associated with our $5.5
million funding that was completed in November, 2008, requesting each
convertible note holder to either extend their respective convertible notes for
another 18 months or to convert their principal and accrued interest into shares
of our common stock.  After implementation of our Modification Proposal
referenced above, the following table reflects as of April 20, 2009, the total
amount of the convertible notes that were outstanding during each quarter when
sold and the remaining principal and accrued interest outstanding from those
convertible note holders which did not convert or extend their convertible
notes:  Principal &
Due DatePrincipal
Acc. Interest
Accrued
for PrincipalBalance of
on
Interest on
& AccruedConv. Notes
Conv. Notes
Conv. Notes
InterestTotal of
Outstanding
Outstanding
Outstanding
onConv. Notes
as of
as of
as of
Conv. NotesSold
4/20/2009
4/20/2009
4/20/2009
at 12-31-081st qtr 2007
$     401,050
$
       60,000
$
        13,746
$
        73,746
Sep-082nd qtr 2007
$     707,500
$      225,000
$
        45,562
$       270,562
Dec-083rd qtr 2007
$  1,165,000
$      130,000
$
        21,518
$       151,518
Mar-094th qtr 2007
$     926,000
$      240,000
$
        36,423
$       276,423
Jun-091st qtr 2008
$     808,500
$
       15,000
$
          1,524
$
        16,524
Sep-092nd qtr 2008
$     945,500
$      143,000
$
        11,463
$       154,463
Dec-093rd qtr 2008
$     546,450
$
       65,000
$
          3,376
$
        68,376
Mar-104th qtr 2008
$
              -
$
               -
$
               -
$
               -
Jun-101st qtr 2009
$
              -
$
               -
$
               -
$
               -
Sep-10$  5,500,000
$      878,000
$
      133,612
$    1,011,612   21    An aggregate of $420,000 of
these convertible notes was due at December 31, 2008; and an aggregated of
$495,826 of these convertible notes were due at March 31, 2009 (this amount
includes the sum due at December 31, 2008), though we are continuing to discuss
payment and/or conversion or extension of these convertible notes with the
holders.  We continue to plan
to sell additional units comprised of 12% convertible notes and warrants,
secured and otherwise.  If we are unable to pay these notes when due,
including interest, and the holders of these convertible notes do not elect to
convert them to purchase shares of our common stock or extend them, our
financial condition could worsen substantially, and we may be required to cease
operations entirely.  We also have
substantial other current liabilities as of December 31, 2008, in the form of a
note payable ($875,365); capital lease obligations ($439,318); notes payable to
related parties ($156,540); trade accounts payable ($234,957); related party
accounts payable ($104,869); accrued expenses ($1,136,408); and amounts due to a
stockholder ($87,622), for total current liabilities of $5,470,545, which
includes the $2,435,466 in 12% convertible notes.  Our substantial
indebtedness could have important adverse consequences on our ability to carry
on our present and planned business operations. For example, it
could:  · make
it more difficult for us to satisfy our obligations with respect to the current
or new 12% convertible notes still being offered; · make
us more sensitive to adverse economic conditions than some of our competitors
with less debt; · limit
our ability to fund future working capital, acquisitions, capital expenditures
and other general corporate requirements; · limit
our flexibility in planning for, or reacting to, changes in our business and the
records and information management services industry; and · make
it more difficult for us to obtain additional financing for future.  Also, working
capital needs or for possible future acquisitions or other purposes, including
possible required payments of the past and new 12% convertible notes.  Despite our
current debt position, we may still need to incur substantial additional debt or
we will be unable to continue our planned operations. We continue to plan
to sell additional units comprised of our 12% convertible notes and warrants.
However, if we are unable to pay the currently outstanding 12% convertible notes
and accrued interest, our financial condition may be adversely affected to the
point that no debt or equity financing may be available to us. That could
require us to cease or substantially limit our business operations, including
termination of employees and business associations necessary for us to continue
in our business.  We
have deficiencies in our internal controls that could adversely affect our
financial statements reporting, which could cause our financial statements to be
inaccurate or un-auditable. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system is intended to provide
reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial statements and that we
have controls and procedures designed to ensure that the information required to
be disclosed by us in our reports that we will be required to file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and our principal financial officers or persons performing
similar functions, as appropriate to allow timely decisions regarding financial
disclosure . Managements current assessment of the effectiveness of our
internal controls is based principally on our financial reporting as of December
31, 2008, 2007, and 2006. In making our assessment of internal control over
financial reporting, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
 Integrated Framework.  Accordingly, our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Exchange
Act, as of December 31, 2008, 2007, and 2006. Based on such evaluation of the
above referenced periods, due to the material weaknesses of our internal
controls over financial reporting further described below, our Chief Financial
Officer concluded that such disclosure controls and procedures were not
effective in providing reasonable assurance that information required to be
disclosed by us in the reports we intended to file under the Exchange Act were
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules, regulations and forms.  For the periods
referenced above, managements assessment identified material deficiencies in
our internal control over financial reporting. These deficiencies include lack
of segregation of duties, lack of adequate documentation of our system of
internal control, deficiencies in our information technology systems, limited
capability to interpret and apply  22    United
States generally accepted accounting principles and lack of formal accounting
policies and procedures and related documentation. Managements efforts to
resolve these internal control weaknesses started with the hiring of a full-time
Controller on October 1, 2007. In April 2008, our Board of Directors approved
this persons promotion to Chief Financial Officer.  Beginning in October
2007, management prepared a written review of every facet of our information
processing system, like cash disbursements, sales and billing, cash receipts and
other procedures. We continue to evaluate and address these weaknesses to ensure
adherence to written policy, completeness of reporting, segregation of
incompatible duties and compliance with generally accepted accounting
principles; and we intend to continue to monitor and evaluate these and other
factors affecting our internal controls. The cost of these remediation efforts
were primarily reflected in the compensation package provided our new Controller
who is now our Chief Financial Officer.  On December 16, 2008, our Board of Directors adopted
Corporate Governance and Nomination Committee, Audit and Finance Committee and
Compensation Committee Charters, that should help us in resolving our internal
control weaknesses.  See Part II, Item
9(A)T, for additional information about our internal controls.  If we fail to
develop new products, or if we incur unexpected expenses or delays in product
development, we may lose our competitive position and incur substantial
additional losses on our operations or may be required to curtail or terminate
our present and planned business operations. Although we
currently have fully developed products and services available for sale, we are
also developing various new products and technologies that we will rely on to
remain competitive. Due to the risks in developing new products and
technologies, limited financing, competition, obsolescence, loss of key
personnel and other factors, we may fail to develop these technologies and
products, or we may experience lengthy and costly delays in doing so. Although
we may be able to license some of our technologies in their current stage of
development, we cannot assure you that we will be able to do so.  Our business may
be adversely affected by downturns in the economy that may limit the sale of
storage solutions and our present and planned business operations may fail as a
result. We are subject to
the capital spending patterns of this industry. If our customers and potential
customers do not increase their capital spending budgets, we could face a weaker
demand for our products; however, such an event may not be materially adverse to
us as our storage solution products offers a more cost-effective methodology of
data backup and restoring services.  We depend on our
key personnel, and the loss of any would impair our ability to compete and gain
any market share in the storage solutions industry that we presently serve and
intend to serve. We are highly
dependent on the principal members of our management. The loss of services of
any of these persons could seriously harm the growth and success of our current
and intended business operations. In addition, research, product development and
commercialization will require additional skilled personnel in the backup and
storage retention services industry procedures and products. Competition for and
retention of personnel, particularly for employees with technical expertise, is
intense and the turnover rate for these qualified personnel is high. If we are
unable to hire, train and retain a sufficient number of qualified employees, our
ability to conduct and expand our business could be reduced. The inability to
retain and hire qualified personnel could also hinder the planned expansion of
our business.  Our intellectual
property rights or contractual provisions may not protect us and our products
and as a result, our business may fail. Our storage solution
products could infringe on the intellectual property rights of others, which may
involve us in costly litigation and, if we are not successful in defending such
claims, could also cause us to pay substantial damages and prohibit us from
selling our products. Third parties may assert infringement or other
intellectual property claims against us. Even if these claims are without merit,
defending lawsuits takes significant time, may be expensive and may divert
managements attention from other business concerns. We are not currently aware
of any third-party patents claims against us or other legal proceedings.  We may need to
initiate lawsuits to protect or enforce our proprietary rights in our products,
which would also be expensive and, if we unsuccessful, may cause us to lose some
of our intellectual property rights, which would reduce our ability to compete
in the market. In the future, we may rely on patents to protect our intellectual
property and our competitive position. The rights we rely upon to protect the
intellectual property underlying our products may not be adequate, which could
enable third parties to use this technology and would reduce our ability to
compete in our markets.  We presently have a
patent in process. We also rely on a combination of trade secrets, nondisclosure
agreements and other contractual provisions and technical measures to protect
our intellectual property rights. Nevertheless, these measures may not be
adequate to safeguard the technology underlying our storage solutions products.
Notwithstanding our efforts to protect our intellectual property, our
competitors may independently develop similar or alternative  23    technologies
or products that are equal or superior to our technology and storage solutions
products without infringing on any of our intellectual property rights or design
around our proprietary technologies.  We need
additional capital to continue or expand our current business operations, and
our business operations may prove unsuccessful without additional
funding. Failure to raise
additional capital or generate the significant capital necessary to continue and
expand our operations and launch, sell or license our Mythos product could
reduce our ability to compete and result in lower revenue. We anticipate that
our existing capital resources will only enable us to maintain currently planned
operations at least through the second quarter of 2008; and we continue to seek
funding through the sale of our units consisting of our12% convertible notes and
warrants. See the caption Recent Sales of Unregistered Securities, Part II,
Item 5, for a complete description of our funding efforts. However, we premise
this expectation on our current operating plans, which may change as a result of
many factors. Consequently, we may need additional funding sooner than
anticipated. Our inability to raise needed capital would harm our business. In
addition, we may choose to raise additional capital due to market conditions or
strategic considerations even if we believe we have sufficient funds for our
current operating plans. To the extent that additional capital is raised through
the sale of equity, debt, convertible debt securities or other combinations of
our securities, including our newly authorized preferred stock, the issuance of
these securities could result in substantial dilution to our stockholders.  We currently have no
credit facility or committed sources of capital. To the extent operating and
capital resources are insufficient to meet our future funding requirements, we
will have to raise additional funds to continue the commercialization of our
products. These funds may not be available on favorable terms, or at all. If
adequate funds are not available on attractive terms, we may be required to
cease or curtail operations significantly or to obtain funds by entering into
financing, supply or collaboration agreements on unfavorable terms.  We face a higher
risk of failure and loss of our entire business because we cannot accurately
forecast our future revenues and operating results. Our short operating
history, lack of adequate internal controls and the rapidly changing nature of
the market in which we compete make it difficult to accurately forecast our
revenues and operating results. Furthermore, we expect our revenues and
operating results to fluctuate in the future due to a number of factors,
including the following:  · The
timing of sales of our products and services; · The
timing of product implementation; · Unexpected
delays in introducing new products and services; · increased
expenses, whether related to sales and marketing, product development or
administration; · The
mix of product license and services revenue; and · Costs
related to possible acquisitions of technology or businesses.  Our limited
resources may make it harder for us to manage growth, and the future of our
business model maybe adversely harmed if we are unable to adequately manage this
growth. We have a limited
basis upon which to evaluate our Storage Management Solutions systems ability to
handle controlled or full commercial availability of our products and services.
We anticipate that we will expand our operations significantly in the near
future, and we will have to expand further to address the anticipated growth in
our user base and market opportunities. To manage the expected growth of
operations and personnel, we will need to improve existing, and implement new
systems, procedures and internal controls. In addition, we will need to expand,
train and manage an increasing employee base. We will also need to expand our
finance, administrative and operations staff. We may not be able to effectively
manage this growth. Our planned expansion in the near future will place, and we
expect our future expansion to continue to place, a significant strain on our
managerial, operational and financial resources. Our planned personnel, systems,
procedures and controls may be inadequate to support our future operations. If
we cannot manage growth effectively or if we experience disruptions during our
expansion, the expansion may not be cost-effective.  If we do not
respond effectively to technological change, our products and services could
become obsolete and our business may fail. The development of
our products and services and other technology entails significant technical and
business risks. To remain competitive, we must continue to improve our Storage
Management Solutions products and their Responsiveness, functionality and
features. High technology
industries are characterized by:  · Rapid
technological change; · Changes
in user and customer requirements and preferences; · Frequent
new product and services introductions embodying new technologies; and · The
emergence of new industry standards and practices.   24    The
evolving nature of the Internet could render our existing technology and systems
obsolete. Our success will depend, in part, on our ability to:  · license
or acquire leading technologies useful in our business; · develop
new services and technologies that address our users increasingly sophisticated
and varied needs; and · Respond
to technological advances and emerging industry and regulatory standards and
practices in a cost effective and timely way.  Future advances in
technology may not be beneficial to, or compatible with, our business.
Furthermore, we may not use new technologies effectively or adapt our technology
and systems to user requirements or emerging industry23standards in a timely
way. In order to stay technologically competitive, we may have to spend large
amounts of money and time. If we do not adapt to changing market conditions or
user requirements in a timely way, our business, financial condition and results
of operations could be adversely affected.  We face
competition for customers that could effectively keep us from being successful
in our planned business operations. We compete with our
current and potential customers internal records and information management
services capabilities. We can provide no assurance that these organizations will
begin or continue to use an outside company, such as us, for their future
records and information management services needs or that they will use us to
provide these services. We also compete with multiple records and information
management services providers in all geographic areas where we operate.
Potential competitors with established market share and greater financial
resources may introduce competing products. Thus, there can be no assurance that
we will be able to compete successfully in the future, or that competition will
not have a material adverse affect on our results of operations. We also compete
with multiple information protection and storage services providers in all
geographic areas where we operate.  Our storage
systems may fail, and we may be subject to substantial liabilities and could
lose a substantial portion of our customer base. Our disaster
recovery framework to control and address systems risks is not fully redundant,
and we may incur and/or suffer the costs, delays and customer complaints
associated with system failures and may not be able to efficiently and
accurately provision new orders for services on a timely basis to begin to
generate revenue related to those services.  Our operating
results could be impaired if we become subject to burdensome government
regulation and legal uncertainties, all of which would increase our cash
requirements and may cause our business to fail. We are not currently
subject to direct regulation by any domestic or foreign governmental agency,
other than regulations applicable to businesses generally. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, relating
to:  · User
privacy; · pricing; · Content; · Copyrights; · Distribution;
and · Characteristics
and quality of products and services.  The adoption of any
additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products and
services and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many issues, including
property ownership, export of specialized technology, sales tax, libel and
personal privacy. Our business, financial condition and results of operations
could be seriously harmed by any new legislation or regulation. The application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and other online services could also harm our business.  Our Storage
Management Solutions products rely substantially on the Internet in multiple
states. These jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each state or foreign country. Our failure
to qualify as a foreign corporation in a jurisdiction where we are required to
do so could subject us to taxes and penalties. Other states and foreign
countries may also attempt to regulate our business or prosecute us
for24violations of their laws. Further, we might unintentionally violate the
laws of foreign jurisdictions and those laws maybe modified and new laws may be
enacted in the future.  The United States
Congress has enacted legislation limiting the ability of the states to impose
taxes on Internet accessory to impose multiple or discriminatory taxes on
electronic commerce. This legislation, known as the Internet Tax
Nondiscrimination Act, imposed a moratorium, which commenced November 1, 2003
and ended on November 1,2007,  25    on
state and local taxes on electronic commerce, where such taxes are
discriminatory, and Internet access, unless the taxes were generally imposed and
actually enforced prior to October 1, 1998. Though there are various bills
pending in the United States Congress to extend these prohibitions, failure to
renew this legislation beyond November, 2007 or adopt new similar legislation,
will allow various states to impose taxes on Internet-based commerce. The
imposition of these taxes could seriously adversely affect Internet commerce and
hinder our ability to become profitable.  The Internet may
fail or providers of these services may increase their costs for these and
related services, which could increase our costs and make our services less
attractive to customers. The secure
transmission of confidential information over public networks is a significant
barrier to electronic commerce and communications. Anyone who can circumvent our
security measures could misappropriate confidential information or cause
interruptions in our operations. We may have to spend large amounts of money and
other resources to protect against potential security breaches or to alleviate
problems caused by any breach. Peering agreements of our business partners like
XO Communications with Internet service providers, allow access to the Internet
and exchange traffic with these providers. Depending on the relative size of the
providers involved, these exchanges may be made without settlement charges.
Recently, many Internet service providers that previously offered peering have
reduced or eliminated peering relationships or are establishing new, more
restrictive criteria for peering and an increasing number of these providers are
seeking to impose charges for transit. Increases in costs associated with
Internet and exchange transit could have an adverse effect on our revenues for
our services, most of which require Internet access. Our providers may not be
able to renegotiate or maintain peering arrangements on favorable terms, which
could increase our costs and expenses and impair our growth and performance.  Our auditors
Going Concern qualification in our consolidated financial statements might
create additional doubt about our ability to stay in business, potentially
resulting in total stockholder loss on investment. The following is a
quotation from our auditors report that is filed as a part of this Annual
Report: The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a stockholders deficit. These conditions raise
substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regards to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.  Note 2 of our
consolidated financial statements states: The Company has incurred net losses of
$7,322,846 and $4,097,008 for the years ended December 31, 2008 and 2007,
respectively. In addition, the Company has an accumulated deficit of $14,374,053
and a working capital deficit of $4,683,613 as of December 31, 2008. These
conditions raise substantial doubt as to our ability to continue as a going
concern. In response to these conditions, we may raise additional capital
through the sale of equity securities, through an offering of debt securities or
through borrowings from financial institutions or individuals. There can
be no guarantee that the Company will be successful in generating future
revenues, in obtaining additional debt or equity financing, or that such
additional debt or equity financing will be available on terms acceptable to the
Company.  Multiple acts of
God could result in data loss and subject us to substantial liabilities and the
loss of our business and customers. The operation of our
business depends on the efficient and uninterrupted operation of the Internet
and our Storage Management Solutions hardware systems. Our systems and
operations will be vulnerable to damage or interruption from many sources,
including fire, flood, power loss, telecommunications failure, break-ins,
earthquakes and similar events. Our servers will also be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions.  Any
substantial interruptions in the future could result in the loss of data and
could destroy our ability to generate revenues from operations.  Risks Related to
Our Common Stock our common stock is penny stock under Securities and Exchange
Commission Rules and Regulations, which means there is a very limited trading
market for our shares. Our common stock is
deemed to be penny stock as that term is defined in Rule 3a51-1 of the
Securities and Exchange Commission. Penny stocks are stocks (i) with a price of
less than five dollars per share; (ii) that are not traded on a recognized
national exchange; (iii) whose prices are not quoted on the NASDAQ automated
quotation system (NASDAQ-listed stocks must still meet requirement (i) above);
or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer
has been in continuous operation for at least three years); or $5,000,000 (if in
continuous operation for less than three years); or with average revenues of
less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act
and Rule 15g-2 of the Securities and Exchange Commission require broker dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investors account. Potential investors in our common stock are
urged to obtain and read such disclosure carefully before purchasing any shares
that are deemed to be penny stock.  Moreover, Rule 15g-9
of the Securities and Exchange Commission requires broker dealers in penny
stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure  26    requires
the broker dealer to (i) obtain from the investor information concerning his,
her or its financial situation, investment experience and investment objectives;
(ii) reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor, and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions;(iii) provide the investor with a written statement
setting forth the basis on which the broker dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investors financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for investors in our common stock
to resell their shares to third parties or to otherwise dispose of them.  Due to the
substantial instability in our common stock price, you may not be able to sell
your shares at a profit or at all, and as a result, any investment in our shares
could be totally lost. The public market
for our common stock is very limited and volatile. As with the market for many
other small companies, any market price for our shares is likely to continue to
be very volatile. In addition, factors such as the following may significantly
affect our share price:  · Our
competitors announcements and successes or failures; · Other
evidence about the safety or efficacy of our products; · Announcements
of new competitive products or successes by our competitors; · Increased
or new governmental regulation of our products; · Our
competitors developments of competing patents or proprietary rights or other
technology; and · Fluctuations
in our operating results.  Our common stock
has a limited trading history, and it will be difficult to determine any market
trends or prices for our shares where this present limited market is believed to
be based primarily on supply and demand. Our common stock
currently is quoted on the Pink Sheets, under the symbol DIGI. However, with
very little trading history, a trading market that does not represent an
established trading market, a limited current public, volatility in the bid
and asked prices and the fact that our common stock is very thinly traded, you
could lose all or a substantial portion of your funds if you make an investment
in us.  The sale or
potential sale of shares of our common stock that may become publicly tradable
under Rule 144 in the future will have a severe adverse impact on any market
that develops for our common stock , and you may lose your entire investment or
be unable to resell any shares in us that you purchase . We presently have a
very limited public float in our shares of common stock that can adversely
affect the market price. 12 months from the
filing of our Form 10 Registration Statement or on or about May 13, 2009, and
provided that we are current in the filing of all of our reports that are then
required to have been filed with the Securities and Exchange Commission,
substantially all shares of our common stock will have been held for at least
six months and will be available for public sale under Rule 144. That will
substantially increase the shares available to be freely publicly traded. See
the heading Recent Sales of Unregistered Securities; Use of Proceeds from
Unregistered Securities, Part II, Item 5, for information about the number of
shares that may become available for resale under Rule 144. Also, see the
heading Rule 144, Part II, Item 5,for information about the possibility of
certain shares of common stock that are restricted securities as defined in
Rule144 being available for public resale under Section 4(1) of the Securities
Act of 1933, as amended (the Securities Act).   ITEM 2:  PROPERTIES  Our Fortress Storage Center is located at 250 Marquette
Plaza, Minneapolis, MN 55401, and we have contracted with XO Communications for
data center space and communications (the XO Communications Contract); XO
Communications is a vendor that provides cabinet space, power and Internet
connectivity.  This arrangement ensures capital expenditures are at a
minimum, while maintaining the flexibility to set up a new data center in any
one of the 80 geographically dispersed locations throughout the world.  Our
digitiliti service is not limited by geographic concerns.  As new
customers are added, we will also add capacity to our Fortress Storage Center
that has virtually unlimited scalability.  Our Fortress Storage Center
occupies approximately 1,500 square feet of this facility, at a cost of $3,300
per month, and houses our equipment and software.  Also located at 250 Marquette Plaza, we lease office
space comprised of approximately 3,093 rentable square feet,  at a monthly
base rent of $2,834.33 and $3,092.00 in 2007 and 2008, respectively (the FRM
Associates Lease).  With monthly operating expenses and monthly real
estate tax assessments added to these base 5,755.90 rental amounts, the overall
monthly lease cost on this space approximates to $5,153.00 and $5,576 for 2007
and 2008, respectively.  We vacated these premises in August, 2007.
 This office space lease has been sublet to a local company effective May,
2008, throughout the duration of the lease period.  Sublease income is
$3,607.33 for June 1, 2008  April 30, 2009, and $3,865 for May 1, 2009 
September 30, 2010 (the EBC Minneapolis, Inc. Sublease Agreement).  The
landlord under the FRM Associates Lease consented to this sublease, subject to
the guarantee of Brad D. Wenzel, our current Chairman of the Board, and Ronald
G. Wenzel, a former officer and director of Storage.  In December 2008, the
subtenant filed for  27    Chapter 11 bankruptcy and was
two months delinquent at that time. We have reflected this delinquent amount as
a rent receivable as of December 31, 2008. The subtenant has been current on all
sublease payments throughout 2009.  On April 23, 2007, we leased approximately 8,736 square
feet, consisting of floors three and four of the building located at 266 East
7th Street, St. Paul, MN 55101 (the Upper Corner Lease), for
a term of four years and seven months, ending on December 31, 2011, for $4,450
per month from June 1, 2007, to December 31, 2007; $6,450 from January 1, 2008,
to December 31, 2008; and at a lease rate to be determined in line with other
commercial properties in the downtown area, including yearly increases, from
January 1, 2009, until December 31, 2011.  For additional information about our facilities, see the
heading Introduction of the heading Business, Part 1, Item 1.  Copies of the XO Communications Contract, the FRM
Associates Lease, as amended, the EBC Minneapolis, Inc. Sublease Agreement and
the Upper Corner Lease were filed as Exhibits to our Form 10 Registration
Statement.  See Part IV, Item 15.   ITEM 3:  LEGAL PROCEEDINGS  We are not a party to any pending legal
proceeding. To the knowledge of our management, no federal, state or local
governmental agency is presently contemplating any proceeding against us.
 To the knowledge of our management, no director, executive officer or
affiliate of ours or owner of record or beneficially of more than five percent
of our common stock is a party adverse to us or has a material interest adverse
to us in any proceeding.   ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS  We have not submitted a matter to a vote of
our stockholders during the fourth quarter of our fiscal year ended December 31,
2008.    PART II    ITEM 5:  MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES  Market Information  The following table sets forth, for
the periods indicated, the high and low bid information for our common stock on
the Pink Sheets for the quarterly periods commencing January 1, 2007, and ending
December 31, 2008.These quotations do not
reflect actual transactions or retail mark-ups, mark-downs or commissions.
 Our Pink Sheets trading symbol is DIGI. There has never been a public
market for shares of common stock of Storage.  Closing BidQuarter Ended
High

LowMarch 31, 2007*
$
1.75

$
1.05June 30, 2007*
$
4.05

$
1.25September 30, 2007*
$
3.00

$
2.50December 31, 2007*
$
2.50

$
1.25March 31, 2008*
$
1.50

$
1.05June 30, 2008*
$
1.80

$
1.05September 30, 2008*
$
2.25

$
0.51December 31, 2008*
$
1.01

$
0.20  * Reflects the Recapitalization that was
comprised first of the 40,000 for one reverse split with rounding up to the
nearest whole share, and second the 200 for one dividend.  See the heading
Company Recapitalization of the heading Business Development, Item 1.  Presently, there are only 1,290,720 of our outstanding
shares that are freely publicly tradable; however, assuming we are current in
our filings under Section 13 of the Exchange Act on May 13, 2009, a date that is
one year from the filing of our 10 Registration Statement, all of our shares
that have been held for at least six months or those converted into shares by
the conversion of convertible notes that have been held for at least six months
and other shares with a six month holding period, with the satisfaction of other
conditions outlined directly below, can be resold under Rule 144.  That
will substantially increase the shares available to be freely publicly traded.
 See the heading Recent Sales of Unregistered Securities; Use of Proceeds
from Unregistered Securities. of this Item, for information about the number of
shares that may become available for resale under Rule 144.  Also, see the
heading Rule 144, of this Item, directly below, for summary information about
the other terms and conditions required to be complied with for resales under
Rule 144.   28    Rule 144  The following is a summary of the current requirements of
Rule 144:  Affiliate or Person Selling on Behalf of an
Affiliate
Non-Affiliate (and has not been an Affiliate During
the Prior Three Months)Restricted Securities of Reporting Issuers
During six-month holding period  no resales
under Rule 144 Permitted.

After Six-month holding period  may resell
in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for
equity securities, and
·
Filing of Form 144.
During six- month holding period  no
resales under Rule 144 permitted.

After six-month holding period but before one
year  unlimited public resales under Rule 144 except that the current
public information requirement still applies.

After one-year holding period  unlimited
public resales under Rule 144; need not comply with any other Rule 144
requirements.Restricted Securities of Non-Reporting
Issuers
During one-year holding period  no resales
under Rule 144 permitted.

After one-year holding period  may resell
in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for
equity securities, and
·
Filing of Form 144.
During one-year holding period  no resales
under Rule 144 permitted.

After one-year holding period  unlimited
public resales under Rule 144; need not comply with any other Rule 144
requirements.  Holders  We currently have approximately 364
stockholders, not including an indeterminate number who may hold shares in
street name.  Dividends  Other than our 200 for one stock dividend discussed under
the heading Company Recapitalization of the heading Business Development of
Part I, Item 1, we have not declared any cash dividends with respect to our
common stock, and do not intend to declare dividends in the foreseeable future.
 Our future dividend policy cannot be ascertained with any certainty,
because we are presently involved in funding our business operations and our
intended Plan of Operations.  There are no material restrictions limiting,
or that are likely to limit, our ability to pay dividends on our securities.   29    Securities Authorized for
Issuance under Equity Compensation Plans  Plan Category
Number of Securities to be issued upon exercise of
outstanding options, warrants and rights
Weighted-average exercise price of outstanding
options, warrants and rights
Number of securities remaining available for future
issuance under equity compensation plans excluding securities reflected in
column (a)(a)
(b)
(c)Equity compensation plans approved by security
holders
4,116,806*
$0.37
1,659,000(2)Equity compensation plans not approved by security
holders
None
None
NoneTotal
4,116,806(1)
$0.37
1,659,000(2)  (1)
 Reflects the overall grant of five year options totaling 7,341,000 that
vest over various periods, less (1) the cancellation, effective April 17, 2008,
of an option to purchase 525,000 shares granted to an employee who is no longer
employed by us and (2) the forfeiture during the 4th quarter of 2008
of unvested options totaling 2,699,194 pertaining to employees who are no longer
employed by us.  (2)
  Reflects the total 9,000,000 shares authorized for issuance less the
overall grant of five year options totaling 7,341,000.  Recent Sales of Unregistered Securities; Use of
Proceeds from Registered Securities  Digitiliti, Inc. Sales  Common Stock and Bridge Loan Offering of 12%
Convertible Note Units  To whom
Date
Number of shares/
$ for described Units
Consideration*Eric S. Nelson
1/13/2006
75,000
Issued for services renderedSEC Consulting Group LLC
1/13/2006
75,000
Issued for services renderedAlan Shelton
3/17/2006
6,784
Issued for payment of a liabilityEdgar Thomas
3/17/2006
7,789
Issued for payment of a liabilityErik S. Nelson
5/31/2006
50,000
Issued for services renderedSEC Consulting Group LLC
5/31/2006
50,000
Issued for services renderedStorage Merger
8/17/2007
21,439,427
Exchange of securities in Storage
Merger(1)Bridge Loan Offering
8/07/2008
$3,881,450
12% Convertible Note Unit Offering(2)StorageSwitch, LLC
4/17/2008
299,920
Services rendered in connection with software
purchaseMartin Janis & Company
4/17/2008
70,000
Issued pursuant to a Letter AgreementStorageSwitch
6/30/08
74,880
Services rendered in connection with software
purchaseStorageSwitch
9/30/08
24,960
Services rendered in connection with software
purchaseMartin Janis & Company
12/31/08
70,000
Pubic relations services
rendered  Warrants  A
summary of warrant activities for the years of 2007 and 2008 is as follows:  Warrants

Weighted-Average Exercise
PriceOutstanding at December 31,
2006
4,025,484

$
0.35Granted
3,461,924


1.78Exercised
(3,951,260)


0.35Outstanding at December 31,
2007
3,536,148


1.75Granted
2,800,450


1.51Exercised
(136,250)


0.75Outstanding at December 31,
2008
6,200,348


1.59   30    All warrants
were fully vested and exercisable at December 31, 2008.  The weighted-average remaining contractual life of
warrants outstanding at December 31, 2008, and 2007, was  4 years and 5.12
years, respectively. The weighted-average grant date fair value of warrants
granted in 2008 and 2007 was $1.11 and $0.51respectively.  Please note the Modification Proposal made to our
convertible note holders who were also warrant holders that is discussed in Part
I, Item 1, under the heading Business Development.  Options  A
summary of option activities for the year of 2007 and 2008 was as follows:  Options


Weighted-Average Exercise
PriceOutstanding at December 31, 2006


-


$
-Granted


3,441,000



0.37Outstanding at December 31, 2007


3,441,000



0.37Granted


3,900,000



0.38Canceled


(525,000
)


0.35Forfeited


(2,699,194
)


0.38Outstanding at December 31, 2008


4,116,806



0.37  The weighted-average remaining life of all
options outstanding at December 31, 2008, and 2007, was 3.8 years and 4.55
years, respectively. The weighted-average grant date fair value of options
granted in 2008 and 2007 was $1.07 and $0.15, respectively.  Note on Storage Merger Exchange  (1)  The following table reflects the outstanding
securities of Digitiliti and Storage on a pre-Merger and combined post-Merger
basis:  Digitiliti Pre-Merger
Outstanding Shares
Storage Pre-Merger
Outstanding Shares (i)
Storage Pre-Merger
Outstanding Convertible
Securities (ii)
Digitiliti Post-Merger Outstanding Shares
(iii)
Digitiliti Post-Merger  Outstanding
Convertible Securities (ii)369,211 Shares
21,320,216 Shares
12,415,014 Shares
21,439,427 Shares
12,415,014 Shares  (i) Includes 10,571 shares issued by us to
Storages Chief Accounting Officer that were required to have been issued before
closing; 4,000 shares issued by us to Storages public relations firm pursuant
to a Letter Agreement executed prior to the closing of the Storage Merger that
were required to have been issued before closing; 20,614 shares issued at $0.35
per share to four stockholders who had pre-emptive rights to acquire additional
shares of common stock of Storage at the closing of the Storage Merger; and
3,051 shares issued pursuant to rounding in connection with the
Recapitalization.  (ii) We assumed (i) 4,118,364 outstanding
Storage warrants to acquire 4,118,364 shares of common stock at $0.35 - $0.50
per share; (ii) $1,618,550 in 12% convertible notes which are convertible into
shares of our common stock at a conversion price of $0.50 per share (3,237,100
shares), and one (1) warrant for each $1.00 invested (1,618,550 warrants), half
at an exercise price of  $1.50 per share and half at exercise price $2.25
per share; and (iii) 3,441,000 options to purchase shares of our common stock
for shares underlying stock options granted by Storage pursuant to its 2007
Stock Option Plan, with the latter being subject to vesting requirements of the
respective stock option grants.  (iii) Takes into account the one for one
exchange of our shares of common stock for outstanding shares of common stock of
Storage under the Storage Merger and the cancellation of 250,000
post-Recapitalization shares of our common stock owned and acquired by Storage
on January 5, 2007, which were cancelled under the Storage Merger.  Note on 12% Bridge Loan Offering of 12% Convertible
Note Units  After the Storage Merger, we continued offering
convertible notes, selling an additional amount of $1,531,000 through December
31, 2007, and $2,350,450 as part of the total of $5,500,000 offered.  The
12% convertible notes were restricted securities as defined in Rule 144 of the
Securities and Exchange Commission and were convertible into shares of our
common stock at $0.50 per each share, subject to there being an effective
registration statement covering the underlying shares that has been filed with
the Securities and Exchange Commission.  We assumed these convertible notes
and the other components of the unit offered (the Unit).  The Unit was
comprised of the convertible note, one-half warrant to acquire one-half share of
our common stock for each $1.00 invested, with a five year term and exercisable
at $1.50 per share of common stock (the A Warrants), and with no exercise
during the first six months and  31    one day following issuance,
unless there is an effective registration statement covering the underlying
common stock that has been filed with the Securities and Exchange Commission
(callable at $0.01 per warrant, if our common stock trades for 20 consecutive
days on its principal market above $2.25 per share, also provided there is an
effective registration statement covering the underlying shares that has been
filed with the Securities and Exchange Commission); and one-half warrant to
acquire one-half share of our common stock for each $1.00 invested, with a five
year term and exercisable at $2.25 per share (the B Warrants) under the same
terms and conditions, but callable at $0.01 per warrant if our common stock
trades for 20 consecutive days on its principal market above $3.00 per share.
 The convertible notes had a maturity date that was 18 months from the date
of issuance.  Convertible note holders are not considered stockholders
until the convertible note are converted; and are not entitled to vote on any
matter submitted to stockholders by us. Many of these convertible notes were the
subject of our Modification Proposal discussed under the heading Business
Development of Part I, Item 1.  Storage Elements, Inc. Sales (Subject to Adjustment to
the Computations in Note (1) on Storage Merger Exchange Above)  Common Stock Table  Name or Group
No. of Shares
ConsiderationFounders (1)
9,000,000
(1)Private Offering Investors
10,011,455
$0.35 - $3,504,010Ronald G. & Laura Wenzel
536,237
$0.35 - $187,683Jonathan S. & Pamela J. Miner
214,286
$0.35 - $75,000Martin Janis & Co., Inc. (2)
24,000
Services (2)Consultants (3)
1,500,000
Services (3)Total
21,285,980  (1)  Brad D. Wenzel and Ronald G. and Laura Wenzel,
his father and step mother, respectively, founders of Storage, acquired
5,397,302 and 1,801,349 shares of Storage at inception for nominal
consideration; Pamela J. Miner acquired 1,801,349 shares of  at or near
inception of Storage for the sum of $250,000 or approximately $0.14 per share,
by executing a bank loan in that amount that is still outstanding and that was
guaranteed by Storage, with the understanding that if Storage had to repay any
of the loan, a proportionate share of these shares would be returned to Storage,
subject to a floor of 94,453 shares.  For example, if Storage was required
to pay $125,000 of this loan, 50% of Ms. Miners shares would be returned.
 All of these shares were exchanged under the Storage Merger.  See the
heading Digitiliti, Inc. Sales of this Item, above, specifically Note 1 and
the table respecting the Storage Merger and related notes.  (2)  Martin Janis & Company, Inc., a public
relations firm, agreed to provide public relations services to Storage for the
period from September 1, 2006, to and including August 31, 2007, in
consideration of these shares; subject to full performance of these services,
20,000 of these shares were issued on July 3, 2007, and 4,000 of these shares
were issued on October 31, 2007 (authorized for issuance in April, 2007), of an
aggregate total of 24,000 shares reserved for these services.  These shares
are valued at $1.00 under the Letter Agreement with this party.  All of
these shares were exchanged under the Storage Merger.  See the heading
Digitiliti, Inc. Sales of this Item, above, specifically Note 1 and the table
respecting the Storage Merger and related notes.  (3)  Storage agreed to cause to be issued for
services rendered in connection with the acquisition of its controlling interest
in us and for other consulting services, an amount of shares of Storage that
would represent not less than 1,500,000 post-Storage Merger shares of our common
stock. These services were valued at $0.35 per share.  All of these shares
were exchanged under the Storage Merger.  See the heading Digitiliti, Inc.
Sales of this Item, above, specifically Note 1 and the table respecting the
Storage Merger and related notes.  Bridge Loan
Offering  From March 1, 2007, Storage sold $1,618,550 of 12%
convertible notes to the effective date of the Storage Merger, which was August
17, 2007.  All of these 12% convertible notes were exchanged under the
Storage Merger, and we assumed the issuance of our shares of common stock on
conversion.  See the heading Digitiliti, Inc. Sales of this Item, above,
specifically Note 1 and the table respecting the Storage Merger and related
notes.   32    Warrant Table  Name or Group
No. of Warrants
Consideration
Exercise Price
Expiration DateM2 & Assoc. (1)
3,726,520
Services
$0.35 (1)(6)
2013Data Sales (2)
307,990
Financing
$0.35 (2)(6)
2014J. Ringer, CPA (3)
67,854
Services
$0.35 (3)(6)
2012JPR Communications  (4)
16,000
Services
$0.50 (4)(6)
2012Note Offering (5)
1,618,550
12% Notes (5)(6)
(5)(6)
2012  (1)  
These warrants were issued to M2 or its associates for services rendered in
introducing potential investors to Storage. (2)  These
warrants were issued under an agreement by which Data Sales provided financing
services regarding certain leased equipment for Storage. (3)   Issued for consulting
services, primarily in-house accounting services. (4)   Issued for pubic
relations and marketing services. (5)   Issued as part of
Storages Bridge Loan Offering. (6)
  All of these warrants were exchanged under the Storage Merger, and
we assumed the issuance of our shares of common stock on exercise.  See the
heading Digitiliti, Inc. Sales of this Item, above, specifically Note 1 and
the table respecting the Storage Merger and related notes.  Exemptions from Registration for Sales of Restricted
Securities.  We issued all of these securities to persons who were
accredited investors or sophisticated investors as those terms are defined
in Rule 501 of Regulation D of the Securities and Exchange Commission; and each
such person had prior access to all material information about us. We believe
that the offer and sale of these securities were exempt from the registration
requirements of the Securities Act, pursuant to Sections 4(2) and 4(6) thereof,
and Rule 506 of Regulation D of the Securities and Exchange Commission.
 Registration of sales to accredited investors and a limited number of
sophisticated investors are preempted from state regulation, though states may
require the filing of  notices, a fee and other administrative
documentation like consents to service of process and the like.  Some of these securities that we assumed under the
Storage 2007 Stock Option Plan were issued pursuant to Rule 701 of the
Securities and Exchange Commission, and the issuance of these securities were
registered with the State of Minnesota pursuant to Minn. Stat. §80A.15 Subd.
2(s).  Use of Proceeds of Registered Securities  Neither we nor Storage have offered or sold any
registered securities, with the exception of options granted under the Storage
2007 Stock Option Plan (to which the Digitiliti, Inc. 2007 Stock Option Plan may
be deemed to be a successor stock option plan), which were registered by
notification with the State of Minnesota.  No proceeds were received in
connections with the grant of these stock options.  Purchases of Equity Securities by Us and
Affiliated Purchasers  There were no purchases of our equity
securities by us during the years ended December 31, 2008, and 2007.
 Further, except as outlined under the caption Recent Sales of
Unregistered Securities, above, none of our affiliates purchased any of our
equity securities during the periods indicated.    ITEM 6:  SELECTED FINANCIAL DATA  Not required for smaller reporting
companies.   ITEM 7:  MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION  When used in this Annual Report, the words may, will,
expect, anticipate, continue, estimate, project, intend, and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act
regarding events, conditions, and financial trends that may affect our future
plans of operations, business strategy, operating results, and financial
position.  Persons reviewing this Annual Report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and actual results may differ materially from
those included within the forward-looking statements as a result of various
factors.  Such factors are discussed further below under Trends and
Uncertainties, and also include general economic factors and conditions that
may directly or indirectly impact our financial condition or results of
operations.   33    Plan of
Operation  We are currently organized into four major areas of
focus.  The intent is to deploy resources for the short term current
Pharaoh Fortress Storage Center operations and for the strategic new product
development and launch.   The four major areas are:  (1) An operational arm to manage and
focus on the current Pharaoh operations including customer support and
satisfaction, continuous operational improvements, and on sales support and
growth, both with business partners and direct customers.  In addition, the
operations organization will build and manage the test development system for
the new product.  This will ensure independence in testing. (2) A new product development team to
focus on finishing development and launching the new product n 2009. (3) A sales and marketing team to
develop the marketing strategy and sales plan for the new product, including
marketing deliverables, target markets, competitive intercept strategies, and
business partnerships. (4) A financial and administrative
team to focus on business results, expense management, business controls,
investor and outside communications, and Human Resources.  Our facilities enable us to provide offsite disaster
recovery with an emphasis on intraday protection and restore for all our
customers primary data centers and geographically dispersed offices or campus
settings.  Our Fortress Storage Center is located in the base of the former
Minneapolis Federal Reserve Bank.  It is a one of a kind facility that
provides our web based on-demand backup/restore service (digitiliti) with all
the benefits of direct fiber access to a Level 5 data center. The Fortress
Storage Center has 24/7 onsite physical security, including security guards,
motion detectors, security cameras, card-key access, separate cages with
individual locking cabinets and ladder racking.  It also has battery
generator back up power, temperature and humidity controls and fire suppression
systems.  Our
digitiliti Fortress Storage Center utilizes the following
technologies:  · XO
Communications Level 5 RAID System Data Center. · High
performance fiber channel and iSCSI RAID Systems or Arrays (RAID Systems). · Foundry
Networks Fast Iron Gigabit Ethernet Switches. · Qlogic
fiber channel switches and iSCSI adapters. · Dell
Power Edge servers. · N+1
Grid Architecture for backup. · Diesel
powered generators to protect against power outages. · Unlimited
bandwidth to grow. · Exanet
Global Files System and IBM DS4100 RAID Systems.  We utilize both direct in-house sales and sales through
business partners such as VARs (Value Added Remarketers) and 3rd
Party Integrators.  Our resellers have extensive data storage knowledge and
expertise and an established customer base.  Our sales plan targets
reseller, OEM and channel partnerships regionally and nationally that possess
utility-oriented sales systems.  We and our partners target vertical
markets specifically in the Small Business Market (SMB) and the Small and
Intermediate size Enterprises of 100  500 employees with an average of 4 sites
and 5  20 TB of information to archive.  We provide our sales partners with marketing and
technical material to assist in sales effort.  These marketing efforts
include development of brochures, testimonials, white papers, trade journal
advertising and enhancements to our website, as well as attending a number of
trade shows and speaking engagements, both locally and nationally, which also
assists in building the digitiliti brand.  Our ability to provide outstanding training and support
utilizing web-based technology and teleconferencing enables a national
distribution network without incurring significant support and travel costs.
 Our team has a Pharaoh Business senior management meeting weekly to review
business results, review technical support incidences, customer issues and
opportunities, and to drive the continuous improvement in Fortress Storage
Center operations.  As a result of our sales and marketing efforts in our
existing product, Pharaoh, our customer base has expanded from approximately 20
in fiscal 2005; to approximately 100 in fiscal 2006; to 508 in 2007; and by year
end 2008, to over 700 customers. Correspondingly, our annual sales have
increased from $402,638 in 2006, to $1,329,386 in 2007 and $3,075,308 in 2008.
 This reflects average monthly revenue between $275,000 and $300,000.
  Despite the significantly improved cash flows provided by the
increased sales the Company is experiencing and anticipates cash flow shortages
resulting from new product development, product launch and potential convertible
debt repayment needs.  We have invested significant resource in 2008 to expand
our digitiliti product offering by developing a new generation of leading edge
information management software.  Our new product represents a significant
step toward our goal to become a technology leader in the information management
marketplace.  We call this new market the information  34    Area Network market.
 The new product is currently in development, with launch in 2009.  We
are very encouraged by the strong feedback from the customers and industry
analysts as we present our Information Area Network.  This product is
initially targeted to small and intermediate establishments and enterprises in
selected markets with a sales and support model similar to our current business
model. Our future plans include scaling the performance to operate in a large
enterprise environment.  The process of refining our digitiliti product plans,
sales and marketing approaches, our product packaging, our infrastructure
scaling methods and revenue generation offerings are underway.  We will
focus on product positioning, branding, and building solid partnerships with a
goal of increasing market share and reducing our cost of goods sold, while
maintaining strong profit margins.  To fund this effort, we have been aggressively taking
steps to reduce overall operating costs as we conserve cash.  Since January
2008, we have reduced our annual salaries and wages by 16%, while increasing
operational efficiencies and lowering our overall costs of goods sold.  We
are able to do this and maintain our current schedule and product content. We
continue to seek additional opportunities for operating cost reduction while
managing new product introduction timelines.  In addition, we are evaluating other opportunities to
raise additional capital by pursuing strategic alternatives including, but not
limited to: equity, debt, asset sales and lease restructure. To facilitate a
2009 roll-out of our new Pyramid product, we estimate funds required in the
range between $3 million and $5 million.  As a result of our cost
containment initiatives, this reflects a $2 million reduction in funds required
to roll-out the new product and support 2009 operations.  We have also evaluated our current portfolio of products
and services and have determined strategic and non-strategic business
opportunities.  From this strategic analysis, we have determined that our
new product, Pyramid, is positioned to achieve significantly more market
opportunity potential than our current Pharaoh Business operations.
 Therefore, we are currently evaluating the sale of our Pharaoh Business
Fortress Storage Center in order to more sufficiently fund our strategic new
product direction.  We currently have a non-binding Letter of Intent to
negotiate the sale of our Pharaoh Business operations.  It is anticipated
that any sale of the Pharaoh Business Fortress Storage Center that may be
negotiated will be submitted to our stockholders for approval in accordance with
the Delaware Business Corporation Act.  Our increase in customer growth and overall sales has
been funded, in large part, through our $5.5 million offering of 12% convertible
notes initiated in March 2007.  Prior to the implementation of the
Modification Proposal (discussed below), these convertible notes reflected a
$.50 per share conversion rate upon expiration of an 18-month maturity date,
currently resulting in unadjusted principal and accrued interest due of
$1,334,770 estimated as of December 31, 2008. In addition, for every dollar
invested, these convertible notes allowed each investor to receive one half
warrants to acquire one half of a share of our common stock with a five year
term at $1.50 per share and $2.25 per share. No warrant can be exercised during
the first 6-months and one day following issuance, unless there is an effective
registration statement covering the underlying common stock that has been filed
covering the shares underlying these warrants with the Securities and Exchange
Commission.  We contacted our convertible note holders to seek to
restructure this debt by asking the holders to extend the due dates of their
respective convertible notes or to encourage them to convert their respective
convertible notes.  On November 13, 2008, as a demonstration of confidence
in our current plan, and as an act of good faith, our Board of Directors
unilaterally approved a reduction in the $1.50 and $2.25 exercise price of the
convertible note holders warrants to $1.00 for both classes of warrants. In
addition, our Board of Directors approved an overall reduction in the conversion
price of all convertible notes, from $.50 per share to $.35 per share; the
resolutions provided that the reduced conversion price would be retroactive to
include any convertible note holders who had already elected to convert their
respective convertible notes.   $35,000.00 in convertible notes had
already been converted at the time of these resolutions; accordingly, we were
obligated to issue a total of 109,000 shares of our common stock for division
among these holders. Information about conversions and extensions of these
convertible notes under our Modification Proposal is contained in various table
under the heading Business Developments in Part I, Item 1.  Periods
Total of Convertible Notes Outstanding
at 04/20/09

Amount of Accrued Interest on
Convertible Notes Outstanding at 04/20/09

Principal and Accrued Interest on
Notes Outstanding at 04/20/09

Due Date For Accrued Interest &
Convertible Notes1st Qtr 2007
$
60,000

$
13,746

$
73,746

Sept 20082nd Qtr 2007
$
225,000

$
45,562

$
270,562

Dec 20083rd Qtr 2007
$
130,000

$
21,518

$
151,518

Mar 20094th Qtr 2007
$
240,000

$
36,423

$
276,423

June 2009  35     1st Qtr 2008
$
15,000

$
1,524

$
16,524

Sept 20092nd Qtr 2008
$
143,000

$
11,462

$
154,463

Dec 20093rd Qtr 2008
$
65,000

$
3,376

$
68,376

Mar 20104th Qtr 2008
$
0

$
0

$
0

June 20101st Qtr 2009
$
0

$
0

$
0

Sept 2010$
878,000

$
133,612

$
1,011,612  Liquidity and Capital Resources  In order to fund the 2008 net loss of $7,322,846, as well
as the need to continue investing in property and equipment and software
licenses to expand the capacity of the Fortress Storage Center, we relied on a
combination of the proceeds of the issuance of convertible debt of $2,800,450
and proceeds received from a note payable of $195,341 from a related party. In
2007, the net loss of $4,097,008 and capital expenditure requirements were met
by issuing convertible debt of $3,149,550, the receipt of $755,393 from the sale
of our common stock and entering into capital leases for equipment and software
licenses totaling $607,153.  At December 31, 2008, our cash balance was
$36,317 compared to $241,333 at December 31, 2007.  Net cash used by operating activities in
2008 was ($1,215,732) compared to ($2,266,486) in 2007.  Net cash used by
operating activities for 2008 was primarily impacted by:  · Net loss of
($7,322,846). · Depreciation and
amortization of $1,053,159. · Amortization of
discount on convertible debt issued of $1,124,548. · Stock issued for
professional services of $405,686. · Employee stock option
compensation expense of $1,217,738. · Increase in accounts
receivable of $354,961. · Increase in trade
accounts payable of $777,672. · Increase in accrued
expenses of $816,324.  Net cash used by operating activities in
2007 was primarily impacted by:  · Net loss of
($4,097,008). · Depreciation and
amortization of $709,831. · Amortization of
discount on convertible debt issued of $177,783. · Stock issued for
professional services of $525,000. · Employee stock option
compensation expense of $359,194 · Increase in accounts
receivable of $190,588. · Decrease in trade
accounts payable of $220,376. · Increase in accrued
expenses of $311,935.  Net cash used by investing activities in 2008 was
$559,635, primarily related to the purchase of software licenses totaling
$447,525 and the investment in property and equipment of $112,110. Net cash used
by investing activities in 2007 was $656,284 and was comprised of $44,629 for
equipment purchases, $436,655 for the purchase of software licenses and $175,000
for a deposit on the investment in Cyclone Holdings, Inc.  Net cash provided by financing activities in 2008 was
$1,570,351, primarily comprised of $2,800,450 from the issuance of convertible
debt and proceeds of $195,341 from a related party debt.  Offsetting these
items were $255,050 in payments of financing costs and $679,140 in principal
payments on capital leases.  Net cash provided by financing activities in
2007 was $2,975,433, primarily comprised of $3,149,550 from the issuance of
convertible debt and $755,393 from the sale of common stock.  Offsetting
these items were $319,955 in payments of financing costs and $448,419 in
principal payments on capital leases.  After implementation of our Modification Proposal
referenced above respecting our outstanding convertible notes, the following
table reflects as of April 20, 2009, the total amount of the convertible notes
that were outstanding during each quarter when sold and the remaining principal
and accrued interest outstanding from those convertible note holders which did
not convert or extend their convertible notes:  36     Principal &
Due DatePrincipal
Acc. Interest
Accrued
for PrincipalBalance of
on
Interest on
& AccruedConv. Notes
Conv. Notes
Conv. Notes
InterestTotal of
Outstanding
Outstanding
Outstanding
onConv. Notes
as of
as of
as of
Conv. NotesSold
4/20/2009
4/20/2009
4/20/2009
at 12-31-081st qtr 2007
$     401,050
$
       60,000
$
        13,746
$
        73,746
Sep-082nd qtr 2007
$     707,500
$      225,000
$
        45,562
$       270,562
Dec-083rd qtr 2007
$  1,165,000
$      130,000
$
        21,518
$       151,518
Mar-094th qtr 2007
$     926,000
$      240,000
$
        36,423
$       276,423
Jun-091st qtr 2008
$     808,500
$
       15,000
$
          1,524
$
        16,524
Sep-092nd qtr 2008
$     945,500
$      143,000
$
        11,463
$       154,463
Dec-093rd qtr 2008
$     546,450
$
       65,000
$
          3,376
$
        68,376
Mar-104th qtr 2008
$
              -
$
               -
$
               -
$
               -
Jun-101st qtr 2009
$
              -
$
               -
$
               -
$
               -
Sep-10$  5,500,000
$      878,000
$
      133,612
$    1,011,612  An aggregate of $420,000 of these convertible notes was
due at December 31, 2008; and an aggregated of $495,826 of these convertible
notes were due at March 31, 2009 (this amount includes the sum due at December
31, 2008).  Although we are continuing to discuss payment and/or conversion
or extension of these notes with note holders, these outstanding obligations
pose a risk to our ongoing operations..  Results of Operations  For the 12 month periods ended
December 31, 2008 and 2007  Our sales for 2008 increased to $3,075,308 compared to
$1,329,386 in 2007.   The increase in revenue is a direct result of an
increase in customers under contract and the resulting terabytes of data added
to our Fortress Storage Center combined with the growth in existing customer
data.   At the end of 2008, we had 731 customers with digitiliti
service contracts compared to 508 at the end of 2007.  The growth of
customer contracts is a direct result of the emphasis we placed on marketing our
digitilitiservice.  Our efforts included concentrating
significant resources refining our product presentation, product positioning and
pricing models.  Also, we continued to enhance our network of resellers
throughout the country by providing strong dealer support services and offering
a compelling pricing program.  Gross margin for 2008 was $1,028,027 compared to
$(125,143) in 2007, reflecting a 33.43% and (9.41)% gross margin percentage,
respectively. This increase in gross margin and gross margin percentage reflects
the inherent benefits of our business model that relies on the organic growth of
our customers data, yet does not require a proportionate expenditure in capital
costs. Our Fortress Storage Center can efficiently manage and support this data
growth without requiring significant capital cost.  Research and development expenses for 2008 were
$1,731,766 compared to $24,784 in 2007.  This significant increase
 reflects the continuing development of our Pyramid product.  During
2008, we purchased existing enterprise software and engaged a third party
development firm in India to refine this software to meet the service and
product designs of our primary customer base  the small to medium size
customer.   We are currently evaluating the market potential and
analyzing various distribution channels for the Pyramid product.  Selling and marketing expenses remained stagnant
between 2008 and 2007 with expenditure totaling $782,546 and $794,431,
respectively.  This even expenditure pattern reflects a disciplined
marketing program related to our current digitiliti service while the Company
continues to refine its marketing strategy related to the Pyramid product.  General and administrative expenses increased by
$862,295 to $3,469,272 in 2008 compared to $2,606,977 in 2007. The increase is attributable to consulting fees,
stock-based compensation, and legal and accounting expense associated with the
successful filing of our Form 10 Registration Statement in 2008, as well as the
issuance of convertible debt and associated warrants.  Interest expense for 2008 increased by $1,697,412 to
$2,243,085 compared to $545,673 for 2007.  The increase reflects interest
expense associated with the convertible debt issued during 2008 and the related
amortization of the deferred financing costs and discount of the associated
warrants.   37    Off-Balance
Sheet Arrangements  We had no off-balance sheet arrangements
for the year ended December 31, 2008.   ITEM 7A:  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK  Not required for smaller reporting
companies.    ITEM 8:  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA  DIGITILITI, INC.  CONSOLIDATED FINANCIAL
STATEMENTS  DECEMBER 31, 2008 AND
2007  38                       C O N T E N T S    Page(s)  REPORTS OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 40  CONSOLIDATED FINANCIAL STATEMENTS  Consolidated Balance Sheets 42  Consolidated Statements of Operations 43  Consolidated Statement of Stockholders Deficit 44  Consolidated Statements of Cash Flows 45  Notes to Consolidated Financial Statements 47 - 65    39         REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM    The Board of Directors Digitiliti, Inc. St. Paul, Minnesota   We have audited the accompanying
consolidated balance sheet of Digitiliti, Inc. as of December 31, 2008 and the
related consolidated statement of operations, cash flows and changes in
stockholders deficit for the year then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit.  We conducted our audit in accordance with
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of Digitiliti, Inc. as of December 31, 2008, and the results
of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.  The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has a working capital
deficit. These conditions raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regards to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.    /s/ Malone & Bailey, PC  www.malone-bailey.com Houston, Texas April 30, 2009   40         REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM    The Board of Directors Digitiliti, Inc. St. Paul, Minnesota   We have audited the accompanying
consolidated balance sheet of Digitiliti, Inc. as of December 31, 2007, and the
related consolidated statements of operations, stockholders deficit and cash
flows for the year ended December 31, 2007. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.  We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern.  As discussed in Note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has a
stockholders' deficit.  These conditions raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans in
regards to these matters are also described in Note 2.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainty.  In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Digitiliti, Inc. as of December 31, 2007, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.  /s/ Lurie Besikof
Lapidus & Company, LLP Lurie Besikof
Lapidus & Company, LLP  Minneapolis,
Minnesota May 13, 2008  41    DIGITILITI, INC. CONSOLIDATED BALANCE SHEETS  ASSETS

December 31,2008



2007CURRENT ASSETSCash

$
36,317



$
241,333Accounts receivable, net


549,127




292,542Other current assets


201,488




95,527Total current assets


786,932




629,402Property and equipment


1,105,113




1,433,482Software license


1,302,158




1,153,999Deferred financing costs


202,484




242,906Other assets


6,322




-Total assets

$
3,403,009



$
3,459,789LIABILITIES AND STOCKHOLDERS
DEFICITCURRENT LIABILITIESAccounts payable  trade

$
234,957


$

92,000Accounts payable  related
parties


104,869




-Accrued expenses


1,136,408




377,308Due to related parties


87,622




60,176Current maturities of notes
payable


875,365




45,906Current maturities of notes
payable  related parties


156,540




241,540Current maturities of
convertible debt


2,435,466




1,062,631Current maturities of capital
lease obligations


439,318




687,159Total current liabilities


5,470,545




2,566,720Notes payable, non-current


-




439,094Convertible debt, non-current


1,758,252




1,054,290Convertible debt  related parties,
non-current


342,532




-Capital lease obligations, non-current


65,037




198,162Deferred rent


18,130




21,153Other liabilities


3,607




-Total liabilities


7,658,103




4,279,419STOCKHOLDERS DEFICITCommon stock, $.001 par value;
100,000,000 shares authorized,
26,665,020
and 25,081,444 shares issued and outstanding


26,665




25,081Additional paid-in
capital


10,092,294




6,206,496Accumulated deficit


(14,374,053
)



(7,051,207
)Total stockholders
deficit


(4,255,094
)



(819,630
)Total liabilities and
stockholders deficit

$
3,403,009



$
3,459,789  See notes to consolidated financial
statements.  42    DIGITILITI, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS   Years Ended December
31,2008


2007Revenues

$
3,075,308


$
1,329,386Cost of revenues


2,047,281



1,454,529Gross profit


1,028,027



(125,143
)Operating expenses:Selling and marketing


782,546



794,431General and
administrative


3,469,272



2,606,977Research and development


1,731,766



24,784Total operating expenses


5,983,584



3,426,192Loss from operations


(4,955,557
)


(3,551,335
)Loss on settlement of debt


124,204



-Interest expense


2,243,085



545,673Net loss

$
(7,322,846
)

$
(4,097,008
)Net loss per common share  basic and diluted

$
(0.29
)

$
(0.19
)Weighted-average shares outstanding  basic and
diluted


25,613,237



21,885,026  See notes to consolidated financial
statements.   43


DIGITILITI, INC.  CONSOLIDATED STATEMENT OF STOCKHOLDERS
DEFICIT   Additional



StockholdersCommon Stock

Paid-In

AccumulatedShares

Amount

Capital

Deficit

DeficitBALANCE AT DECEMBER
31, 2006


17,172,520


$
17,172


$
2,961,358


$
(2,954,199
)

$
24,331Issuance of common stock, net of $83,131 fee


2,395,783



2,396



752,997



-



755,393Conversion of debt to equity


224,857



225



78,475



-



78,700Stock issued for services


1,524,000



1,524



547,476



-



549,000Merger of investment in Cyclone Holdings, Inc.


122,262



122



(230,622
)


-



(230,500)Warrants
exercised cashless


3,642,022



3,642



(3,642
)


-



-Warrants issued for:Services


-



-



113,596



-



113,596Capital leases


-



-



367,252



-



367,252Convertible debts


-



-



1,260,412



-



1,260,412Employee stock option expense


-



-



359,194



-



359,194Net loss


-



-



-



(4,097,008
)


(4,097,008
)BALANCE, DECEMBER 31, 2007


25,081,444



25,081



6,206,496



(7,051,207
)


(819,630
)Stock issued for convertible
debt


869,562



870



260,790



-



261,660Stock issued for settlement of
debt


108,004



108



161,898



-



162,006Stock issued for
services


219,760



220



405,466



-



405,686Stock issued for R&D
project


250,000



250



374,750



-



375,000Cashless exercise of warrants


136,250



136



(136
)


-



-Discount
on convertible debt relating to warrants


-



-



1,288,767



-



1,288,767Additional
Beneficial Conversion Feature on
converted
debts


-



-



85,812



-



85,812Warrants expense


-



-



90,713



-



90,713Employee stock option expense


-



-



1,217,738



-



1,217,738Net loss


-



-



-



(7,322,846)



(7,322,846)BALANCE, DECEMBER 31,
2008


26,665,020


$
26,665


$
10,092,294


$
(14,374,053)


$
(4,255,094)  See notes to consolidated financial
statements.   44    DIGITILITI, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,2008


2007OPERATING ACTIVITIESNet loss

$
(7,322,846
)

$
(4,097,008
)Adjustments to reconcile net
loss to net cash used by
operating activities:Depreciation expense


753,803



542,638Amortization of software
licenses


299,356



167,193Amortization of deferred
financing costs


295,472



77,049Amortization of discount on
convertible debt


1,124,548



177,783Loss on settlement of
debt


124,204



-Bad debt expense


98,376



-Accounts payable written
off


-



(76,140
)Interest added to due to related
party


-



5,703Common stock issued for
services


405,686



525,000Common stock issued for R&D
project


375,000



-Employee stock option
expense


1,217,738



359,194Additional Beneficial Conversion
Feature on
converted
debts


85,812



-Warrants expense


74,423



113,596Changes in operating assets and
liabilities:Accounts receivable


(354,961
)


(190,588
)Other current assets


(105,961
)


29,036Other assets


(5,172
)


-Accounts payable - trade


777,672



(220,376
)Accounts payable  related
parties


104,869



-Accrued expenses


816,324



311,935Due to related parties


19,341



-Deferred rent


584



8,499Net cash used by operating
activities


(1,215,732
)


(2,266,486
)INVESTING ACTIVITIESPurchases of property and
equipment


(112,110
)


(44,629
)Purchases of software
licenses


(447,525
)


(436,655
)Investment in Cyclone Holdings,
Inc.


-



(175,000
)Net cash used by investing
activities


(559,635
)


(656,284
)FINANCING ACTIVITIESProceeds from issuance of
convertible debt, net financing costs


2,545,400



2,829,595Payments on capital lease
obligations


(679,140
)


(448,419
)Payments on notes payable


(210,909
)


-Proceeds from notes payable 
related parties


175,000



-Payments on notes payable 
related parties


(260,000
)


(56,136
)Proceeds from sales of common
stock


-



755,393Payments on stock rescission
payable


-



(105,000
)Net cash provided by financing
activities


1,570,351



2,975,433NET INCREASE(DECREASE) IN CASH


(205,016
)


52,663CASHBeginning of year


241,333



188,670End of year

$
36,317


$
241,333  45     Cash paid for interest


103,382



113,946Cash paid for income tax


-



-  Non-Cash Financing and Investing Activities:  Equipment acquired under capital lease, including
issuance
of warrants for capital
lease


314,464



974,405Cashless exercise of warrants


136



3,642Discount on convertible debt relating to
warrants


1,288,767



1,260,412Conversion of debt and accounts payable to
equity


261,660



78,700Issuance of common stock through accrued
expense


37,802



24,000Merger of investment in Cyclone Holdings, Inc.


-



225,000Software licenses purchased with note
payable


-



485,000Reclassification of common stock and additional
paid-in-capital due to
change in par value from merger


-



15,456Conversion of payables to convertible debt


-



50,000  See notes to consolidated financial
statements.   46    DIGITILITI, INC.  NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  1. Summary of Significant
Accounting Policies  The Company and Nature of Operations  Digitiliti, Inc. (the
Company or Digitiliti (f/k/a Cyclone Holdings, Inc.)) provides cost effective
data protection solutions to the small to medium businesses and markets in the
United States. The Company is also developing software products to offer data
storage solutions for Apple networks.  In December 2006,
Storage Elements, Inc. (Storage) agreed to acquire a controlling interest in
Cyclone Holdings, Inc. for $225,000 and made an initial payment of $50,000
toward the purchase. On January 5, 2007, Storage paid the remaining balance of
$175,000. Digitiliti is currently filing with the Securities and Exchange
Commission and experiences limited public trading on the pink sheets. The
purpose of acquiring a controlling interest was to effect a reverse merger of
Storage with Digitiliti under which Storage would become a publicly traded
company. On August 16, 2007, Storage held a special meeting of its stockholders
and approved an Agreement and Plan of Merger among Storage, a Minnesota
corporation; Cyclone Acquisition Corp., a wholly-owned subsidiary of Digitiliti,
Inc., a Minnesota corporation (Subsidiary); and Digitiliti, Inc., a Delaware
corporation formerly known as Cyclone Holdings, Inc. (Digitiliti), sometimes
call the Storage Merger.  The consolidated
financial statements account for the merger as a capital transaction in
substance (and not a business combination of two operating entities) that would
be equivalent to Storage issuing securities to Digitiliti in exchange for the
net monetary liabilities of Digitiliti, accompanied by a recapitalization and,
as a result, no goodwill relating to the merger was recorded. Additionally, the
merger entities retained the Digitiliti name.  Principles of
Consolidation  The consolidated
financial statements included the accounts of Storage prior to the merger and
Digitiliti, Inc., a Delaware corporation and its wholly owned subsidiary,
Cyclone Acquisition Corp., a Minnesota corporation since the merger. All
significant intercompany balances and transactions were eliminated.  Use of
Estimates  The preparation of
these consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that may affect certain reported amounts and
disclosures in the consolidated financial statements and accompanying notes. The
significant estimates relate to the collectability of accounts receivable,
useful lives of software licenses, valuation of beneficial conversion feature on
convertible debts, valuation of warrants and stock options, and valuation
allowance for deferred income taxes. Actual results could differ from those
estimates.  Credit Risk  Cash is maintained in
bank accounts which, at times, may exceed federally insured limits.  The
Company has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risk on cash.  Cash and Cash
Equivalents  For purposes of the
statements of cash flows, cash equivalents include all highly liquid investments
with original maturities of three months or less.   47    Allowance for Doubtful Accounts  The allowance for
doubtful accounts is based on the aging, historical experience and managements
judgment of the individual accounts receivable.  Accounts receivable are
written off against the allowance when management determines a balance is
uncollectible and no longer actively pursues collection.  Accounts
receivable is presented net of the allowance for doubtful accounts of $100,366
and $1,990 at December 31, 2008 and 2007, respectively.  Property and
Equipment  Property and equipment
are recorded at cost less accumulated depreciation.  Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets.  Computer equipment and furniture and fixtures are
depreciated over three to five years.  Maintenance and repairs are charged
to operations when incurred.  Software
Licenses  Certain software is
licensed from two vendors to facilitate the secure online data storage solution.
The licenses are nonexclusive. The term of the licenses is for three years after
which the agreements automatically renew for additional one year periods. Either
party may terminate the agreements if notice is received sixty days prior to the
renewal date. The license fees are amortized over five years.  Long-Lived
Assets  All long-lived assets
are reviewed when events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable.  An impairment loss is
recognized when estimated undiscounted cash flows that can be generated by those
assets are less than the carrying value of the assets.  When an impairment
loss is recognized, the carrying amount is reduced to its estimated fair value
based on appraisals or other reasonable methods to estimate fair value.  Deferred Financing
Costs  Costs associated with
the issuance of debt is capitalized as deferred financing costs and amortized
into interest expense using the effective interest method over the life of the
related debt. At December 31, 2008 and 2007, deferred financing costs incurred
totaled $575,005 and $319,955, respectively. Accumulated amortization was
$372,521 and $77,049, respectively.  Income Taxes  Storage was organized
as an S corporation for income tax purposes. Effective April 2006, Storage
terminated its S corporation election and became a C corporation.  Deferred income tax
assets and liabilities are recognized for the expected future income tax
consequences of events that have been included in the consolidated financial
statements or income tax returns.  Deferred income tax assets and
liabilities are determined based on differences between the financial statement
and tax bases of assets and liabilities using tax rates in effect for the years
in which the differences are expected to reverse.  In evaluating the
ultimate realization of deferred income tax assets, management considers whether
it is more likely than not that the deferred income tax assets will be realized.
Management establishes a valuation allowance if it is more likely than not that
all or a portion of the deferred income tax assets will not be utilized. The
ultimate realization of deferred income tax assets is dependent on the
generation of future taxable income, which must occur prior to the expiration of
the net operating loss carryforwards.  In June 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN)
48, Accounting for Uncertainty in Income Taxes (as amended), which clarifies
the accounting for uncertainty in income taxes recognized in the financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes.  FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected  48    to be taken in a tax return.  Any change in the net assets or
liabilities recognized as a result of adopting the provisions of FIN 48 would be
recorded as an adjustment to the opening balance of retained earnings. FIN 48 is
effective for the Company as of January 1, 2007.  The adoption of FIN 48
did not have a significant impact on the Company's consolidated financial
statements.  It is the Company's
practice to recognize penalties and/or interest related to income tax matters in
interest and penalties expense.  The Company is subject
to income taxes in the U.S. federal jurisdiction and various states and local
jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply. The Company is not currently under examination by any taxing
jurisdiction.  Revenue
Recognition  Substantially all of
our revenues are derived from monthly fees for storages services pursuant to
each customer's service agreement. Service agreements with customers are
typically 36-months and allow for termination upon 30 days written notice. The
monthly fee is based on the volume data storage utilized. Revenues are
recognized in the month the services are provided. Our product offering does not
include hardware and we currently do not offer bundled arrangements. To the
extent that future revenues are derived from such offerings, those revenues will
be accounted for pursuant to SOP 97-2 and EITF 00-21.  Revenues from
monthly fees are recognized based on the Company's determination that the
criteria provided in SEC Staff Accounting Bulletin 104 - Revenue Recognition
have been met. These criteria include that persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's price
to the buyer is fixed or determinable and collectability is reasonably assured.
The Company determines that these criteria have been met by entering into
written service agreements with its customers that specifically state the fees
for set-up and monthly services. Set-up fees are invoiced after the actual
set-up has been performed. Monthly fees are invoiced based on the actual amount
of data stored on the Company's secure vault system during a particular month.
Collectability of revenues has not been an issue as of December 31, 2008 and
2007. If the monthly service fees were not paid, the monthly service would be
discontinued.  Research and
Development Costs  Research and
development costs are expensed as incurred. The Company expensed third party
development costs totaling $1,731,766 and $24,784 in 2008 and 2007,
respectively.  Share-Based
Payment  Effective January 1,
2006, the Company adopted the provisions of SFAS No. 123 (R), Share-Based
Payment (as amended), which establishes the accounting treatment for
transactions in which an entity exchanges its equity instruments for goods or
services.  Under the provisions of SFAS No. 123 (R), share-based payment
compensation is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite service period
(generally the vesting period).  Net Loss Per
Share  Basic net loss per
share is computed by dividing the net loss by the weighted-average number of
common shares outstanding.  Diluted net loss per share is computed based on
the weighted-average number of common shares outstanding increased by dilutive
common stock equivalents.  For the years ended December 31, 2008 and 2007,
potential dilutive securities had an anti-dilutive effect and were not included
in the calculation of diluted earnings per common share.  New Accounting
Pronouncements  Effective January 1,
2008, we adopted SFAS No. 157, Fair Value Measurements ("SFAS 157"), which
provides guidance on how to measure assets and liabilities that use fair value.
SFAS 157 applies whenever another U.S.  49    GAAP standard requires (or permits) measurement of assets or
liabilities at fair value, but does not expand the use of fair value to any new
circumstances. We also adopted FASB Staff Position ("FSP") No. FAS 157-2,
Effective Date of FASB Statement No. 157, which allows us to partially defer the
adoption of SFAS 157. This FSP defers the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or financial liability as defined in
paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. The adoption of SFAS No. 157 and FSP No. 157-2 had no
impact on our financial statements.  In December 2007, the
FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R") which
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and for disclosure to enable
evaluation of the nature and financial effects of the business combination. SFAS
141R is effective for us as to business combinations we make beginning in 2009.
We are evaluating the impact of SFAS No. 141R, but do not currently expect it to
have a significant impact on our financial statements when effective. However,
the nature and magnitude of the specific future effects will depend upon the
nature, terms and size of any acquisitions we consummate after the effective
date.  In December 2007, the
FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 introduces
significant changes in the accounting and reporting for business acquisitions
and noncontrolling interest in a subsidiary. SFAS 160 also changes the
accounting and reporting for the deconsolidation of a subsidiary. Companies are
required to adopt the new standard for fiscal years beginning after January 1,
2009. We adopted this standard as of January 1, 2009 and do not expect it to
have an impact on our financial statements.  In April 2008, the FASB
issued Staff Position FSP FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP FAS 142-3"). The FSP amends the factors considered in
developing renewal or extension assumptions for determining the useful life of a
recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets." The FSP's intent is to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under other accounting
principles generally accepted in the U.S. Companies must adopt the FSP for
fiscal years and interim periods beginning after December 15, 2008. Early
adoption is prohibited. Companies must apply the guidance for determining the
useful life of a recognized intangible asset prospectively to intangible assets
acquired after the effective date. Companies must also apply certain disclosure
requirements prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. We adopted this standard as of January 1,
2009 and do not expect it to have a significant impact on our financial
statements.  In May 2008, the FASB
issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement), which
specifies that issuers of convertible debt instruments that may be settled in
cash upon conversion should separately account for the liability and equity
components in a manner reflecting their nonconvertible debt borrowing rate when
interest costs are recognized in subsequent periods.  FSP APB 14-1 is
effective for interim periods and fiscal years beginning after December 15,
2008.  The Company will adopt FSP APB 14-1 effective January 1,
2009.  We are in the process of assessing the impact of the adoption of FSP
APB 14-1 on our financial statements.  In June 2008, the FASB
ratified EITF Issue 07-5, "Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-5"). Paragraph 11(a) of
Statement of Financial Accounting Standard No 133, Accounting for Derivatives
and Hedging Activities ("SFAS 133") specifies that a contract that would
otherwise meet the definition of a derivative, but is both (a) indexed our own
stock and (b) classified in stockholders' equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock, including
evaluating the instrument's contingent exercise and settlement provisions, and
thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. It  50    also clarifies the impact of foreign-currency-denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. EITF 07-5 will be effective for the first annual reporting period
beginning after December 15, 2008, and early adoption is prohibited. We are
assessing the impact of adopting EITF 07-5 on our financial statements.  2. Going Concern  As shown in the
accompanying financial statements, the Company has incurred net losses of
$7,322,846 and $4,097,008 for the years ended December 31, 2008 and 2007,
respectively. In addition, the Company has an accumulated deficit of $14,374,053
and a working capital deficit of $4,683,613 as of December 31, 2008. These
conditions raise substantial doubt as to our ability to continue as a going
concern. In response to these conditions, we may raise additional capital
through the sale of equity securities, through an offering of debt securities or
through borrowings from financial institutions or individuals. The financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.  3. Note Receivable  During August 2006, the
Company entered into a promissory note formalizing the payment terms related to
$25,000 owed to the Company.  During September 2007, the Company entered
into a promissory note with another party to repay the entire $25,000.  The
payments were not made in accordance with the promissory note. The Company has
fully reserved the balance of the note for years ending December 31, 2008 and
2007.  4. Acquisition of
Software  On March 13, 2008,
Digitiliti executed a Technology Purchase Agreement (TPA) with StorageSwitch,
LLC, a Colorado limited liability company (StorageSwitch), to acquire a
commercially-proven technology software. This technology software compliments
Digitilitis current business model and also provides a base layer that
Digitiliti will build upon to develop enhanced storage service offerings.  In connection with the
purchase, we made an initial cash payment of $10,000 upon execution of the
Letter of Intent in January 2008, and a cash payment of $200,000 on the date of
closing. In addition, we will make a $40,000 cash payment payable when the
software is fully developed and in production. We also issued 250,000 shares of
common stock in connection with the purchase, valued at $375,000 based upon the
quoted market price of our stock on the date of the purchase. We will issue an
additional 250,000 shares when the software is fully developed and in
production. These shares will be valued based on the quoted market price of our
stock on the date of issuance.  The software was not
technologically feasible on the date of the acquisition. As a result, this
transaction was accounted for as purchased research and development costs and
was expensed as research and development expense in accordance with SFAS No.
2.  In conjunction with the
execution of the TPA, Digitiliti and StorageSwitch also signed the following
agreements; (1) a Non-Compete Agreement, (2) a Non-Disclosure Agreement, (3) a
Statement of Work Agreement and (4) a Consulting Services Agreement. Under the
Consulting Service Agreement, up through August 1, 2008 we will make the
following payments to 2 principals of StorageSwitch: (1) semi-monthly cash
payments of $6,250 (totaling $25,000 per month) and (2) the issuance of 12,480
shares of Digitiliti common stock (totaling 24,960 share of common stock per
month). Stock issued under this arrangement is accounted for in accordance with
EITF 96-18 and valued using the quoted market price of our common stock at the
end of each month.   51    5. Property and Equipment  Property and equipment
consisted of the following:  December 31,2008



2007Computer equipment
$
2,551,913


$
2,126,479Furniture and fixtures

14,511



14,511Total cost

2,566,424



2,140,990Less accumulated depreciation

(1,461,311)



(707,508)Property and Equipment
$
1,105,113


$
1,433,482  Property and equipment
is carried at cost less accumulated depreciation. Depreciation is calculated by
the straight-line method over the estimated useful life of three to five years,
depending upon the type of equipment. Depreciation expense totaled $753,803 and
$542,638 in 2008 and 2007, respectively.  6. Software Licenses  Software licenses (Note
1) consisted of the following:  December 31,2008



2007Software licenses
$
1,834,625


$
1,387,110Less accumulated amortization

(532,467)



(233,111)Software Licenses
$
1,302,158


$
1,153,999  Amortization expense
totaled $299,356 and $167,193 in 2008 and 2007, respectively.  7. Related Parties
Transactions  At December 31, 2008
and 2007, balances due to the related parties consisted of the following: 2008 2007 --------------- ----------------   Note payable to a
stockholder, bearing interest at 2% above prime
rate, per annum, due on demand,
unsecured                    $
      66,481                           
$       60,176  Note payable to an
officer, bearing interest at 12.25% per annum, due on demand, unsecured 14,414 -  Note payable to an
officer, bearing interest at 12.25% per annum, due on demand, unsecured 6,727 - --------------- ---------------- Total due to related parties $       87,622 $
      60,176 ========= =========  Interest expense on
these payable was $16,912 and $5,704 for 2008 and 2007, respectively.   52    Management and Founders Agreements:  Jonathan S. Miner and Pamela J.
Miner  Effective December 5, 2008, we issued
a convertible note to Jonathan S. Miner and Pamela J. Miner, who both currently
serve on our Board of Directors, for their advance to us of the sum of $175,000
and their agreement to advance up to an additional $75,000 (which additional sum
has been advanced to us), all to be utilized in the development of the Pyramid
software storage product.  We also executed a Security Agreement with them
whereby we granted to them as collateral and security a lien for the payment of
the convertible note and additional indebtedness of theirs or indebtedness they
had guaranteed in the past on our behalf in the further aggregate amount of
$500,000. (Also see Note 10)  Dan Herbeck  Our interim CEO, Dan Herbeck, who
resigned in February 2009, provided consulting services to us through his
company, Continental Technologies Solutions, LLC (Continental). Total
consulting fees for 2008 was $121,969. As of December 31, 2008, accounts payable
to Continental was $104,869.  M2 Capital Advisors, Inc.  On May 3, 2006, we executed a
consulting agreement with M2. The duties of M2 include introducing the Company
to the financial community; researching and identifying potential business
partners, executives, consultants and Board of Director candidates; assisting
with securing leases or equipment financing; and other general business
consulting services. The agreement also provided for the payment of various fees
for raising capital, identifying an acquisition/reverse merger candidate,
assisting with capital lease arrangements, etc. This agreement was amended March
2007, effective May 6, 2006. Pursuant to the agreement, warrants for 3,643,270
shares were exercised cashless in September and October 2007 with the issuance
of 3,359,397 shares of common stock.  At the time, Mark Savage, our former
President and a former director, was the President and a principal stockholder
of M2. While M2 was engaged, they assisted in raising $3,504,010 of capital from
the sale of our common stock and received $350,401 in fees for these services.
In addition, M2 assisted in raising $2,035,950 and $3,199,550 in 12% convertible
notes and received fees totaling $203,595 and $319,955 in 2008 and 2007,
respectively.  In April 2007, M2 received 750,000
shares of restricted common stock as a fee for identifying a potential reverse
merger candidate. Of the total shares issued, 297,166 of these shares were
issued directly to Mr. Savage.  On or about March 23, 2009, we agreed
to pay a 10% introduction fee to M2 under their current Letter Agreement with us
that had been extended into May, 2009, on any funds raised by us in a planned
$1,500,000 financing through the sale of secured and unsecured convertible
notes.  We will be making the offer and sale of these convertible notes
following any introductions by M2.  M2 partners earned total fees of
$297,300 and $444,735 for the year ended December 31, 2008; and 2007,
respectively.  These expenses were included in balances of general and
administrative expenses in statements of operations.  M2
also received 3,726,520 warrants in 2006 to purchase our common stock at a
strike price of $0.35, which were valued at $894,365 on the date of grant and
was recognized into income within the year of grant.  5X Partners,
LLC.  In August 2007, we entered into a
consulting arrangement with 5X Partners, LLC (5X). Under the agreement, 5X
provided services such as senior leadership, business development, sales and
marketing, product packaging, infrastructure scaling methods and other key areas
of management, business assessment and strategies. Under the arrangement, which
was amended several times, we agreed to pay 5X a fixed fee of $60,484 and
monthly fees of $28,000, of which $8,000 would be deferred until reaching a
financial funding goal. In addition, we agreed to issue 5X stock options to
purchase 2,850,000 shares of our common stock at a strike price of $0.385 per
share, which vests over 24 months.   53    In October
2008, 5X principals resigned their executive positions with the Company, and we
are currently negotiating a settlement for amounts due under the consulting
arrangement (see Note 19  Commitments and Contingencies).  5X earned fees and received expense
reimbursements of $146,295 and $77,284 for the years ended December 31, 2008 and
2007, respectively.  These expenses were included in balances
of general and administrative expenses in statements of
operations.  Other Management and Founder
Transactions  In January 2006, we entered into two
leases for computer equipment, one of which expired in 2007 and one of which
will expire in 2008. One of the leasing companies, Wenzel Data, Inc., is owned
by Ronald G. Wenzel, a former officer and director of Storage and a current
stockholder of ours, and Brad D. Wenzel, our Chairman of the Board of Directors
until April 20, 2009. The lease payments are guaranteed by Messrs. Wenzel and
Wenzel. The amount outstanding for the capital lease obligation to Messrs.
Wenzel and Wenzel was $21,708 and $71,686 at December 31, 2008 and 2007
respectively.  During February, 2006, we entered
into a promissory note for $150,000 with Mr. Miner bearing interest at 12.25%
and due in monthly payments of $5,000. In January 2007, he converted $75,000 of
the debt into 214,286 shares of our common stock. The remaining balance of the
note was paid in full in November 2007. Interest expense was $3,863 for
2007.  We and two stockholders, Ronald G.
and Laura Wenzel (Ms. Wenzel is our Vice President, Secretary and a director),
were guarantors on a bank promissory note of a stockholder (Pamela J. Miner, a
current director) totaling $250,000 plus interest. The proceeds from the
promissory note were used by these stockholders to purchase 1,801,082 additional
shares of Storage common stock that were exchanged under the Storage Merger. If
these stockholders defaulted on any part of the note and we had to pay a portion
of the note, then the parties would have calculated the amount of such payment
as a percentage of the original note. These stockholders shares previously
received would be reduced by that percentage, but not below 94,439 common
shares. The note and accrued interest were approximately $230,000 at December
31, 2006. In March 2007, the bank released us as a guarantor on the note.  We made lease payments on a building
and computer equipment that was leased by Wenzel Data, Inc. which is owned by
Brad D. Wenzel, our Chairman of the Board of Directors until April 20, 2009, and
used by us. The building lease expired in 2006, and the equipment lease expired
in 2007. Related party rent expense for 2007 was $3,851.  8. Notes Payable  Related
Parties  We issued a $250,000
promissory note to a stockholder dated December 15, 2005.  The note mirrors
a promissory note between the stockholder and his bank, which matured on
December 15, 2008 and had an interest rate 0.5% above the banks index rate
(6.00% and 8.00% at December 31, 2008 and 2007, respectively).  In December
2008, the note was renewed to December 31, 2009. The balance of the note was
$156,540 and $241,540 at December 31, 2008 and 2007, respectively. Interest
expense was $14,360 and $22,656 for 2008 and 2007, respectively.  9. Notes Payable  In December 2007, we
entered into a Software Purchase Agreement (SPA) with Exanet, Inc. The terms of
the SPA reflect the financing of $485,000 of software over 36-months at 12%
interest. Commencing on January 15, 2008, we are obligated to make minimum
monthly interest only payments of $4,850 that increase to $20,000 effective  54    October 15, 2008. The terms of the SPA include a possible $2,500
increase to the minimum monthly interest only payments predicated on performance
goals. We have the right to prepay the outstanding balance without penalty
throughout the term of the agreement.  In May 2008, we entered
into negotiations with Exanet resulting in a tentative agreement to discharge
all debt owing to Exanet as of December 31, 2008 (including the SPA) in exchange
for the return of excess Exanet software license. At present, efforts are still
in process to effectuate the return of the excess Exanet software detailed in
the SPA. Accordingly, our financial statements reflect the inclusion of all debt
owed Exanet classified as current liability as of December 31, 2008.  In June 2008, we
negotiated a six-month payment plan with its primary software vendor  Asigra,
Inc. Under the terms of the arrangement, we were granted extended payment terms
in exchange for the revocation of 20% discount under net 30 payment terms. This
payment plan reflected monthly payments based on a percentage of outstanding
invoices owed for software licenses and maintenance, with any remaining
outstanding balance payable in December 2008. In December 2008, this payment
plan was extended for another 6 months with all outstanding debt payable in May
2009. As of December 31, 2008, outstanding balance under this payment plan is
$390,365.  10. Convertible Debt 
Related Parties  In October 2008, we
issued a $250,000 12% convertible debt to an individual. The debt can be
converted into our common stock at $0.50 per share, subject to an effective
registration statement covering the underlying common stock that has been filed
with the Securities and Exchange Commission. The debt is guaranteed by a
stockholder of the Company. In conjunction with this convertible debt, we issued
stock warrants to purchase 150,000 shares and 100,000 shares, respectively, of
Digitiliti common stock with a five year term at $0.50 per share.  In November 2008, we
issued a $250,000 12% convertible debt to a stockholder. The debt can be
converted into our common stock at $0.35 per share, subject to an effective
registration statement covering the underlying common stock that has been filed
with the Securities and Exchange Commission.  In conjunction with this
convertible debt, we issued stock warrants to purchase 250,000 shares of
Digitiliti common stock with a five year term at $0.50 per share.  Pursuant to a security
agreement with the stockholder, our Pyramid software and vaults along with other
intellectual properties serve as the collateral for the above guarantee,
convertible debt and the related party note payable.  We analyzed these two
convertible debt and the warrants issued for derivative accounting consideration
under SFAS 133 and EITF 00-19, and determined that derivative accounting is not
applicable for these debts.  Under the provisions of
EITF Issue 98-5 and 00-27, we discounted the relative fair value of warrants
attached to the debt and calculated the intrinsic value of the beneficial
conversion feature of the debt. The resulting discount of $210,974 is being
amortized over the life of the debts using the effective interest method. The
amortized amount for the year ended December 31, 2008 is $44,699.  A summary of the convertible debt 
related parties as of December 31, 2008 is as follows:  Gross
proceeds from the debts $
               500,000 Less:
discount on the warrants (120,844) Less:
beneficial conversion feature (90,130) Add:
amortization of discount 44,699 Add:
accrued interest 8,807 ------------------------ Carrying
amount as of December 31, 2008 $
               342,532 ==============   55    11. Convertible Debt  A summary of the convertible debt as
of December 31, 2008 and 2007 is as follows:  2008 2007 ------------------------ ------------------------ Gross
proceeds from the debts $
             5,500,000 $
            3,199,550 Less:
discount on the warrants (2,116,131) (1,260,412) Less:
principal converted to common stock (270,000) - Add:
amortization of discount 1,079,849 177,783 ------------------------ ------------------------ Subtotal $
             4,193,718 $
            2,116,921 Less:
current maturities (2,435,466) (1,062,631) ------------------------ ------------------------ Long-term
portion of convertible debt $
             1,758,252 $
            1,054,290 ============== ==============  In March 2007, we
engaged M2 (see Note 7  Related Party Transactions) to raise up to $5.5 million
from the sale of 12% convertible debt and warrants. This $5.5 million raise was
closed in September 2008. Under the initial conversion terms, the debt was
convertible into common stock at $0.50 per share, subject to an effective
registration statement covering the underlying common stock that has been filed
with the Securities and Exchange Commission. In addition, for each $1 invested,
the investor receives one half warrant to acquire one half of a share of common
stock with a five year term at $1.50 per share (the A warrants); and one half
warrant to acquire one half share of common stock with a five year term at $2.25
per share (the B warrants) (see inducement discussion below). Each warrant
cannot be exercised during the first 6-months and one day following issuance,
unless there is an effective registration statement covering the underlying
common stock that has been filed with the Securities and Exchange Commission.
The warrants are callable at $0.01 per warrant, if the common stock of the
Company trades for 20 consecutive days on its principal market above $2.25 for
the first one half warrant and $3.00 for the second one half warrant, provided
there is an effective registration statement covering the underlying common
stock that has been filed with the Securities and Exchange Commission.  In conjunction with the
sale of the 12% convertible debt referenced above, M2 received a 10%
introductory fee, which totaled $523,550 pursuant to a Consulting Agreement and
an officer also received a 10% introductory fee which totaled $26,450. These
introductory fees were accounted for as deferred financing cost and are being
amortized using the effective interest method over the term of the convertible
debt.  Through December 31,
2008, we have issued $5,500,000 in convertible debt and 840,000 warrants at
$1.00, 2,330,000 warrants at $1.50 and 2,330,000 warrants at $2.25. As of
December 31, 2007, we have issued $3,199,550 in convertible debt and 1,599,775
warrants at $1.50 and 1,599,775 warrants at $2.25.  We analyzed these
convertible debt and the warrants issued for derivative accounting consideration
under SFAS 133 and EITF 00-19, and determined that derivative accounting is not
applicable for these debts.  The convertible debt
was evaluated for a beneficial conversion feature under EITF Issue 98-5 and
00-27, at which time it was concluded that a contingent beneficial conversion
feature existed for a substantial portion of the convertible debt. The
beneficial conversion feature was measured using the commitment-date stock price
and will be recognized once the contingency is resolved. (see further discussion
below regarding induced conversion of debt below.)  In addition, the
relative fair value of the warrants were measured using the Black-Scholes Option
Pricing Model and recorded as a debt discount, which is being amortized over the
life of the debt using the effective interest method. The total discount
recorded was $2,338,205 and the unamortized balance at December 31, 2008 and
2007 was $1,036,282 and $1,082,629.  In November 2008, we
initiated a request to all of these convertible debt holders to either extend
their respective convertible debt for another 18 months or to convert their
principal and accrued interest into common stock.  56     In exchange for
extending their convertible debt for an additional 18 months, we agreed to
reduce the exercise price of the associated warrants from $1.50 and $2.25 per
share to $1.00 per share, respectively for the A and B warrants. In addition, we
agreed to extend the term of both the A and B warrants from 5 years to 6 1⁄2
years. Furthermore, the requirement of an effective registration was not removed
in the case of extending the note.  In exchange for
converting their convertible debt into common stock, we agreed to reduce the
exercise price from $0.50 to $0.35 per share. We also agreed to reduce the
exercise price of the associated warrants from the $1.50 and $2.25 per share to
$1.00 per share, respectively for the A and B warrants. In addition, we agreed
to extend the term of both the A and B warrants from 5 years to 6 1⁄2 years.
Furthermore, the requirement of an effective registration was removed to allow
conversion.  At present, this
extension/conversion initiative is still in progress and the deadline for
extending or converting is April 15th 2009.  We evaluated the
extension event in late December under FAS No. 15, EITF 02-4 and EITF 96-19.
Because the investors did not grant concession on these outstanding loans, the
transactions were no accounted for as troubled debt restructuring. Consequently,
we evaluated these transactions under EITF 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments to determine if the
modification was substantial. As a result, no gain or loss was recorded on the
date of the extension since the modification in terms is not considered
significant. Therefore, the Company recognized $46,214 warrant expense
associated with the extended debt under FAS 84 and charged the unamortized
warrant discount to interest expense over the remaining life of the convertible
debt under the new terms.  We accounted for the
conversion event in late December under the provisions of Financial Accounting
Standard (FAS) No. 84 Induced Conversions of Convertible Debtand
recognized expense totaling $74,423, which is equal to the fair value of the
incremental compensation cost created by the modification of the exercise price
of the warrants. The remaining unamortized warrant discount of $1,077,793 was
recognized through Additional Paid in Capital under the guidance of Emerging
Issues Task Force (EITF) 98-5.  In addition, the
contingency related to the contingent beneficial conversion feature was resolved
on the date of conversion. The beneficial conversion feature calculated on the
commitment date was fully recognized through interest expense and Additional
Paid in Capital according to EITF 00-27. During the fourth quarter of 2008,
$270,000 of debt was converted and $85,812 of the contingent beneficial
conversion feature was recognized into interest expense. At December 31, 2008,
unrecognized contingent beneficial conversion feature amounted to $1,767,041.  In total, we recognized
into expense $74,423 of expense related to inducements, $85,812 related to
additional beneficial conversion features.  The Company is also in
default on $420,000 convertible debt net of discount of $11,878 as of December
31, 2008.  12. Capital Leases
Obligations  In January 2006, the
Company entered into two leases for computer equipment that expire in 2007 and
2008. One of the leasing companies is owned by related parties. The lease
payments are guaranteed by the CEO and stockholder. The present value of the
monthly lease payments was capitalized using an imputed interest rate of 10%.
The amount outstanding for the capital lease obligation to related parties was
$21,708 and $71,686 at December 31, 2008 and 2007, respectively.  In November 2006, the
Company entered into a lease for computer equipment that expires in 2008
(hereafter referred to as Lease # 1). The present value of the monthly lease
payments was capitalized using an imputed interest rate of 10%. In addition, the
Company issued warrants to purchase 262,500 shares of common stock at $0.35 per
warrant to the lessor. The warrants have a seven-year term and include a
cashless exercise provision. The fair value of the warrants was $63,000 and was
capitalized in the cost of assets under capital leases. The warrants were
exercised cashless in September 2007 with the issuance of 240,882 shares of
common stock.  57     During January and
February 2007, the Company entered into two leases for computer equipment
(hereinafter referred to as Lease # 2 and # 3, respectively). The present value
of the monthly lease payments was capitalized using an imputed interest rate of
10%. In addition, the Company issued warrants to purchase 45,490 shares of
common stock at $0.35 per warrant. The warrants have a seven-year term and
include a cashless exercise provision. The fair value of the warrants was
$10,918 and was capitalized in the cost of assets under capital leases. The
warrants were exercised cashless in September 2007 with the issuance of 41,743
shares of common stock.  In December 2007, the
Company entered into a 24-month lease for computer equipment (hereinafter
referred to as Lease # 4). The present value of the monthly lease payments was
capitalized using an imputed interest rate of 10%. The lease payments are
guaranteed by the CEO and stockholder. In addition, the Company issued warrants
to purchase 136,250 shares of common stock at $0.75 per warrant. The warrants
have a seven-year term. The fair value of the warrants was $356,335 and was
capitalized in the cost of assets under capital leases. In a subsequent lease
with this lessor, the terms of the above-mentioned warrants were revised to
reflect a cashless exercise feature. These warrants were exercised cashless on
December 31, 2008 with the issuance of 136 shares of common stock.  In December 2008, the
Company negotiated the consolidation of Lease 1 through 4 into a 12-month lease
(hereinafter referred to as Lease # 5) for all associated computer equipment.
The present value of the monthly lease payments was capitalized using an imputed
interest rate of 10%. The amount outstanding for the capital lease obligation
was $381,946 at December 31, 2008  M2 Capital Advisors,
Inc. (M2), a related party as the CEO of M2 was also the Companys president in
2007, charged the Company a finders fee equal to 5% of the computer equipment
lease.  In August and September
2008, the Company entered into three 36-month leases for computer equipment with
two financial institutions. The present value of the monthly lease payments was
capitalized using an imputed interest rate of approximately 20% and 10%. The
amount outstanding for the capital lease obligation was $49,670, $34,798 and
$16,233, respectively, at December 31, 2008.  Amortization of capital
lease property is included in depreciation expense and was $640,153 and $453,932
in 2008 and 2007, respectively.  Assets under capital
leases, included in property and equipment, consisted of the following:  December 31,2008



2007Computer equipment
$
2,140,614


$
1,826,150Less accumulated depreciation

(1,194,803)



(554,649)Assets under Capital Leases
$
945,811


$
1,271,501  The following are the
minimum future lease payments for the capital leases:  Year

Amount2009

$
474,9532010


49,7462011


25,004Minimum lease payments under capital leases


549,703Less amount representing interest


(45,348
)Less current maturities


(439,318
)Capital Lease Obligations, net of current
maturities

$
65,037   58    13. Income Taxes  Income tax computed at
the U.S. federal statutory rate reconciled to the effective tax rate consisted
of the following:  Years Ended December 31,2008

2007Federal tax benefit at statutory
rate

$
(1,808,484)



(34.0
)%

$
(1,393,000
)


(34.0
)%Merger related costs


-




-


227,500



5.6Stock based compensation


679,464



12.8



40,500



1.0State income taxes, net of
federal tax benefit


(581,191)



(10.9
)


(200,200
)


(4.9
)Valuation allowance for deferred
tax assets


1,695,701



31.9



1,303,100



31.8Other


14,510



0.2



22,100



0.5Income Tax

$
-



-
%

$
-



-
%  The components of
deferred income taxes consisted of the following:  December 312008



2007Current Deferred Income Tax AssetsVacation accrual
$
11,283


$
13,300Allowance for uncollectible
accounts

34,124



10,500Stock based compensation

679,464



143,300Total

724,871



167,100Noncurrent Deferred Income Tax AssetsNet operating loss
carryforward

10,017,757



2,005,500Noncurrent Deferred Income Tax LiabilitiesDepreciation

(32,112
)


(150,800
)Deferred rent

(1,028
)


(3,300
)Deferred revenue

(1,338
)


(5,900
)Total

(35,478
)


(160,000
)Valuation Allowance

(10,707,150
)


(2,012,600
)Net Deferred Income Tax
$
-


$
-  The Company established
a valuation allowance to fully offset the net deferred income tax assets due to
the uncertainty of the Companys ability to generate the future taxable income
necessary to realize those net deferred income tax assets, considering the
Companys history of significant operating losses.  In addition, future
utilization of the available net operating loss carryforward may be limited
under Internal Revenue Code Section 382 as a result of changes in ownership that
have or may result from the issuance of common stock, and from options and
warrants for the purchase of common stock.   59    At December 31, 2008 and 2007 respectively, the Company had
federal net operating loss carryforward of approximately $10,707,000 and
$2,012,000 and state net operating loss carryforward of approximately $7,297,000
and $1,465,000 begin to expire in 2026.  14. Operating Leases  The Company leases
office space in Minneapolis that expires in October 2010 with monthly base
rentals plus common area maintenance and operating charges. The monthly base
rentals increase over the term of the lease. The Company is recording deferred
rent to equalize the monthly payments during the lease term. This lease was
guaranteed by certain officers and stockholders of the Company. This office
space was vacated in August 2007. In March 2008, the Company entered into a
sublease agreement which expires in October 2010 with monthly rental income that
range from $3,607 to $3,865 including all common area maintenance and operating
charges. In December 2008, the subtenant filed for Chapter 11 bankruptcy and was
2 months delinquent at that time. The company reflected this delinquent amount
as a rent receivable as of December 31, 2008. The subtenant has been current on
all sublease payments throughout 2009.  In April 2007, the
Company entered into a lease for office space. The lease expires December 2011
and requires monthly payments that range from $4,450 to $6,450 through December
2008.  Thereafter the rent will be determined consistent with other similar
commercial properties. The Company is recording deferred rent to equalize the
monthly payments during the lease term.  Rent expense was
$121,757, net of $25,250 sublease rental income for 2008 and $126,040 for 2007.  Approximate future
minimum lease payments are as follows:  Year


Amount2009

$
108,0152010


102,403
*2011


74,345
*Total


284,763Less sublease income


80,134Net

$
204,629  * The future minimum
lease payments will be determined consistent with other similar commercial
properties.  15. Professional Services  During May 2006, the
Company hired M2 as a consultant. (Also see discussion in Note 7  Related Party
Transactions)  During June 2006, the
Company hired a financial consultant to act as the temporary controller.
 The consultant's duties include assisting the Company with preparation of
financial statements, financial analysis, budget preparation and other financial
matters. The Company issued the consultant warrants to purchase shares of common
stock at a price of $0.35 per share.  The number of warrants to be issued
is based on the work performed. The warrants have a five-year term and include a
cashless exercise provision. For 2007, the Company recorded warrant cost of
$51,511 for 44,634 warrants. In January 2007, a $3,700 payable to the consultant
was converted into 10,571 shares of common stock.  During September 2006,
the Company hired a public relations consultant whose duties include assisting
the Company in planning and executing a public relations/publicity strategy.
 The Company will pay a $3,000 monthly fee, issue 24,000 shares of
restricted stock for services rendered and issue an additional 70,000 shares of
restricted stock upon completion of certain specified events.  During 2006,
the consultant earned 8,000 shares that were subsequently issued to the
consultant on July 31, 2007. During 2007, the consultant earned an additional
24,000 shares, of which 16,000 shares were issued in 2007.  In April 2008,
the Board of Directors approved the issuance of 70,000 shares of restricted
stock to the consultant as a publicity media fee. These shares were subsequently  60    issued in August 2008 valued at $210,000 based on the quoted stock
price on August 31, 2007.  During July 2006, the
Company entered into a Manufacturers Representative Agreement with Marketing
Technologies, LLC (MarketLink). The agreement required the Company to make
minimum monthly payments of $30,000. However, the Company terminated the
agreement in February 2007.  In June 2007, the Company was named as a
defendant in a lawsuit filed by MarketLink alleging breach of contract.
 The Company recorded a settlement in principal for $60,000 as an agreement
has been partially executed by delivery of a payment.  During March 2007, the
Company entered into a Public Relations/Marketing Services Agreement with JPR
Communications, Inc. (JPR). JPRs duties include development and maintenance of
editorial and special interests mailing lists, editorial discussions and
meetings, and ongoing publication of news releases. The agreement requires the
Company to make monthly payments of $6,000 through July 2007 followed by monthly
payments of $9,000. In addition, the Company will issue 4,000 warrants each
month throughout the first 12-months of the agreement at $0.50 per share. The
warrants have a five-year term. The Company recorded warrant cost of $62,085 in
2007. Effective January 1, 2008, the Company and JPR agreed to discontinue this
contract and it has not been renewed at this time.  16. Equity  For
the year ended December 31, 2007  On January 3, 2007, the
Board of Directors amended the Articles of Incorporation to change the par value
per share to $.0001. The par value designation was made retroactive to the
inception of the Company.  The accompanying consolidated financial
statements and related notes give retroactive effect to this change.  2,395,783 shares were
issued by the Company for cash. The Company received $755,393, net of $83,131
financing costs.  224,857 shares were
issued for conversion of debt.  In April 2007, the
Company issued 750,000 restricted shares to M2 for additional consulting
services for the introduction of Digitiliti as a reverse merger candidate for
Storage.  The shares are restricted as to when they can be sold.  In April 2007, the
Company issued 750,000 restricted shares to a consultant to assist the Company
in achieving several corporate and financial goals and activities. The shares
are restricted as to when they can be sold.  During September 2007,
certain stockholders exercised their preemptive rights and acquired 20,612
shares of common stock at $0.35 per share.  Effective August 17,
2007, pursuant to the Agreement and Plan of Merger, Digitiliti, just prior to
the merger, completed a reverse split of its then outstanding common stock on
the basis of one share for 40,000 shares with an immediate 200 for one dividend
to all stockholders of record. Digitiliti issued a total of 122,262 shares just
prior to the merger. Storage then had a one for one exchange of its common stock
at a par value of $.0001 per share for the Digitiliti common stock at a par
value of $.001 per share.  3,642,022 shares were
issued for exercise of warrants.   61    For
the year ended December 31, 2008  In March 2008, the
Company issued 250,000 shares of common stock in connection with the TPA with
StorageSwitch, LLC. (Note 4)  In March 2008, the
Company issued 108,004 shares of common stock valued at $162,006 to settle the
unpaid compensation for the amount of $37,802 with its consultant. Consequently,
the $124,204 loss on settlement was recognized.  From February to August
2008, the Company issued 219,760 shares of common stock valued at $405,686 based
upon the quoted market price of the Companys stock on the date of the issuance
for exchange of consulting services.  During December 2008,
several convertible debt holders converted Convertible Debt in the amount of
$261,660, net of discount of $44,291, in principal and accrued interest, to
common stock. Total shares issued in exchange for the debt were 869,562.  On December 31, 2008,
136,250 unites of warrants associated with capital lease #5 (Note 12) were
exercised cashless with issuance of 136 shares of common stock.  17. Stock Options  On July 23, 2007, the
Company adopted the 2007 Stock Option Plan to replace the 2006 Stock Option
Plan.  The 2007 plan is substantially identical to the 2006 Plan except
that 4,000,000 shares of common stock were reserved for issuance. On April 17,
2008, the Company increased the shares reserved to 9,000,000 shares. The term of
the options is five years and the options vest over various periods.  For
the year ended December 31, 2007  During 2007, options to
purchase 3,441,000 shares of common stock were granted by the Company to its
employees at the exercise prices ranging from $0.35 to $0.385. These options
have a term of 5 years, and have vesting dates that vary from either full or
partial vesting at date of grant to full vesting at the first and second year
anniversary of the date of grant. Fair value of $537,325 was recorded using the
Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model for warrants issued during the year include (1) discount
rate of 5%, (2) expected life of 2.96 years (3) expected volatility of 65.6% and
(4) zero expected dividends.  Stock option expense
for 2007 was $359,194.  For
the year ended December 31, 2008  During 2008, options to
purchase 3,900,000 shares of common stock were granted by the Company to its
employees and consultants at the exercise prices ranging from $0.35 to $0.385.
These options have a term of 5 years, and have vesting dates that vary from
either full or partial vesting at date of grant to full vesting at the first and
second year anniversary of the date of grant. Fair value of $4,172,205 was
recorded using the Black-Scholes option-pricing model. Variables used in the
Black-Scholes option-pricing model for warrants issued during the year include
(1) discount rate of 2.9%, (2) expected life of 2.5 to 3.5 years (3) expected
volatility of 113% and (4) zero expected dividends.  Included in the total
3,900,000 shares of options granted were the 2,850,000 stock options issued to
5X Partners, LLC and 225,000 stock options issued to Vision to Practice,
Inc.  In April 2008, the
Board of Directors approved the cancellation of 525,000 shares of unvested stock
options due to termination of an employee in March 2008.   62    During 2008, options to purchase 2,699,194 shares were forfeited.
Stock option expense for 2008 was $1,217,738.  A summary of option
activities for the year of 2007 and 2008 was as follows:  Options


Weighted-Average Exercise
PriceOutstanding at December 31, 2006


-


$
-Granted


3,441,000



0.37Outstanding at December 31, 2007


3,441,000



0.37Granted


3,900,000



0.38Canceled


(525,000
)


0.35Forfeited


(2,699,194
)


0.38Outstanding at December 31, 2008


4,116,806



0.37  The weighted-average
remaining life of all options outstanding at December 31, 2008 and 2007 was 3.8
years and 4.55 years, respectively. The weighted-average grant date fair value
of options granted in 2008 and 2007 was $1.07 and $0.15, respectively.  As of
December 31, 2008, there was approximately $502,463 of unrecognized
cost which is expected to be recorded through May 2011.  18. Stock Warrants  For
the year ended December 31, 2007  1. In connection with a
private offering, the Company issued warrants to purchase 3,199,550 shares of
its common stock to certain institutional and accredited investors. These
warrants expire in 5 years, are exercisable at $1.5 to $2.25 per share
immediately. These warrants are classified as equity and have a fair value of
$1,260,412.  2. The Company issued
warrants to purchase 262,374 shares of its common stock to several individuals.
These warrants expire in 5 to 7 years, are exercisable at $.35 to $.75 per share
immediately. These warrants are classified as equity and have a fair value of
$480,848.  3. 3,951,260 units of
warrants to purchase 3,642,022 shares of the Companys common stock were
exercised.  Fair value on the
warrants issued during the year ended December 31, 2007 was calculated using the
Black-Scholes option-pricing model.  Variables used in the Black-Scholes
option-pricing model for warrants issued during the year include (1) discount
rate of 5%, (2) warrant life is the contract term, (3) expected volatility of
65.6% and (4) zero expected dividends.  For the year
ended December 31, 2008  1. In connection with a
private offering, the Company issued warrants to purchase 2,300,450 shares of
its common stock to certain institutional and accredited investors. These
warrants expire in 5 to 6.5 years, are exercisable at $1 to $2.25 per share
immediately. These warrants are classified as equity and have a fair value of
$2,935,575.  2. During the fourth
quarter of 2008, warrants to purchase 500,000 shares of common stock were
granted by the Company to two individuals in connection with $500,000 borrowed
under two convertible debts, at an exercise price range from $0.35 to $0.5.
These warrants have a term of 5 years, vest immediately and have a fair value of
$162,306.  3. The Company reached an
agreement with one of its creditor and modified the terms of the outstanding
warrants to include a cashless exercise option. The Company recognized $16,290
incremental compensation costs as the result of this modification. These
warrants were exercised under the cashless option during the fourth quarter and  63    shares were issued by the Company.  Fair value on the
warrants issued during the year ended December 31, 2008 and the incremental
compensation costs were calculated using the Black-Scholes option-pricing model.
 Variables used in the Black-Scholes option-pricing model for warrants
issued during the year include (1) discount rate range of 1.94% to 3.73%, (2)
warrant life is the contract term, (3) expected volatility of 113% and (4) zero
expected dividends.  A summary of warrant
activities for the year of 2007 and 2008 was as follows:  Warrants


Weighted-Average Exercise
PriceOutstanding at December 31, 2006


4,025,484


$
0.35Granted


3,461,924



1.78Exercised


(3,951,260
)


0.35Outstanding at December 31, 2007


3,536,148



1.75Granted


2,800,450



1.51Exercised


(136,250)



0.75Outstanding at December 31, 2008


6,200,348



1.59  All warrants were fully
vested and exercisable at December 31, 2008.  The weighted-average
remaining contractual life of warrants outstanding at December 31, 2008 and 2007
was 4 years and 5.12 years, respectively. The weighted-average grant date fair
value of warrants granted in 2008 and 2007 was $1.11 and $0.51respectively.  19. Commitments and
Contingencies  Because some of our convertible note
holders have not accepted our Modification Proposal, we are presently in arrears
in principal and accrued interest payments in an aggregate total of $420,000 as
of December 31, 2008: and an aggregate total of $495,826 as of March 31, 2009.
Although we are continuing to discuss payment and/or conversion or extension of
these notes with note holders, these outstanding obligations pose a risk to our
ongoing operations.  From time to time, Digitiliti may be
subject to routine litigation, claims, or disputes in the ordinary course of
business. In the opinion of management; no pending or known threatened claims,
actions or proceedings against Digitiliti are expected to have a material
adverse effect on Digitilitis consolidated financial position, results of
operations or cash flows. Digitiliti cannot predict with certainty, however, the
outcome or effect of any of the litigation or investigatory matters specifically
described above or any other pending litigation or claims. There can be no
assurance as to the ultimate outcome of these lawsuits and investigations.  20. Major Customers  The Company earned 26 percent of its
revenues from one customer during the year ended December 31, 2008.  21. Subsequent Events  Settlement of Former Employee
Claim  On January 8, 2009, we entered into
an out-of-court settlement with a former employee who sought recovery of unpaid
commissions and unused vacation compensation totaling $44,000, of which $34,000
was accrued by us as of December 31, 2008. The settlement was reached requiring
incremental payments over a four month period ending April 10, 2009; and all
payments have been made.   64    New
Related Party Lease  In February 2009, we entered into a
lease with a leasing company owned by several related parties, including Brad D.
Wenzel, who recently resigned as our Chief Technical Officer and a director, and
Jonathan S. Miner, a director. The lease payments are guaranteed by Mr. Wenzel
and Mr. Miner.  We were unable to lease the equipment covered by this lease
directly, so COR Equipment Financing, which is owned by Mr. Wenzel and his
father, Ronald G. Wenzel, and Mr. Miner, leased the equipment by financing a
bank loan in the amount of $10,000 that each had to personally guarantee.
 The outstanding lease obligation to related parties is $8,300 as of April
9, 2009; and the terms were no less favorable than could have been obtained from
non-affiliated parties.  Severance Package with Former
Board Member and Acting CEO  On February 10, 2009, we accepted the
resignation of Dan Herbeck, acting through his company, Continental Technologies
Solutions, LLC (Continental), as interim CEO and one of our Board members. The
severance arrangement recognized unpaid invoices owed Continental of $105,344,
payable at a rate of $4,000 per month, commencing in April, 2009. As recognition
for our delay in payment, we also granted Continental 100,000 units five year
cashless warrants to purchase 100,000 shares of our common stock at $0.35 per
share.  We have not paid the April 2009 payment as of the date of this
report.  Vendor Settlement
Agreement  On March 19, 2009, we executed a
Settlement Agreement with a former vendor seeking recovery of $24,000 of unpaid
invoices.  We originally disputed this claim, and an out-of-court
settlement was reached requiring a total reimbursement of $13,000 payable in
$3,000 monthly installment commencing April 10, 2009, and continuing thereafter
until paid in full.  We have paid the April 2009 installment on this
obligation.  Additional Convertible Note
Extensions and Conversions  Subsequent to December 31, 2008, an
additional $2,167,700 in convertible notes and accrued interest were converted
pursuant to our first proposal outlined above under the heading Bridge Loan
Offering 12% Convertible Note Extension and Modification Proposal, and an
additional $1,107,182 in convertible notes and accrued interest were extended
pursuant to our second proposal. 6,622,622 shares of our common stock were
issued for the principal and interest for the conversion of the $2,167,700 in
convertible notes and accrued interest.      65    ITEM 9: CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE  There have been no changes or disagreements with our
accountants on accounting and financial disclosure; however, effective June 10,
2008, our Board of Directors terminated Lurie Besikof Lapidus & Company, LLP
(Lurie Besikof Lapidus) as our auditors, and engaged Malone & Bailey, PC
(Malone & Bailey) to audit our consolidated financial statements for the
year ended December 31, 2008.  Lurie Besikof Lapidus were the auditors of
Storage, and audited our consolidated financial statements for the years ended
December 31, 2007, and 2006, that are filed with our Form 10 Registration
Statement.  Malone & Bailey were our prior auditors, before the
completion of the Storage Merger, and audited our financial statements for the
years ended December 31, 2006, and 2005, prior to the Storage Merger.  There have been no disagreements between us and Lurie
Besikof Lapidus, during our two most recent fiscal years or to the date of
termination, whether resolved or not resolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved, would have caused Lurie Besikof Lapidus to
make reference to the subject matter of the disagreement in connection with
their reports.  The reports of Lurie Besikof Lapidus did not contain any
adverse opinion or disclaimer of opinion, and with the exception of a standard
going concern qualification because we have suffered recurring losses from
operations and have a substantial stockholders deficit and were not qualified
or modified as to uncertainty, audit scope or accounting principles.  During our two most recent fiscal years, and since then,
neither Lurie Besikof Lapidus nor Malone & Bailey has advised us that any of
the following exists or is applicable:  (1) That the internal controls necessary
for us to develop reliable financial statements do not exist, that information
has come to their attention that has lead them to no longer be able to rely on
our managements representations, or that has made them unwilling to be
associated with the financial statements prepared by management;  (2) That we need to expand significantly
the scope of our audit, or that information has come to their attention that if
further investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements or any
other financial presentation, or cause them to be unwilling to rely on our
managements representations or be associated with our financial statements for
the foregoing reasons or any other reason; or  (3) That they have advised us that
information has come to their attention that they have concluded materially
impacts the fairness or reliability of either a previously issued audit report
or the underlying financial statements for the foregoing reasons or any other
reason.  During our two most recent fiscal years and since then,
we have not consulted Malone & Bailey regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on our financial statements
or any other financial presentation whatsoever.  We provided Lurie Besikof Lapidus with a copy of the
disclosure provided under this heading of our Form 10 Registration Statement and
advised them to provide us with a letter addressed to the Securities and
Exchange Commission as to whether they agreed or disagreed with the disclosures
made herein.  A copy of their response was filed as Exhibit 16.1 to our
Form 10 Registration Statement, as amended.   ITEM 9A(T):  CONTROLS AND
PROCEDURES  Evaluation of Disclosure Controls and
Procedures  We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Securities
and Exchange Commission reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Our disclosure controls and procedures are also designed to
accumulate and communicate information to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing  66    and evaluating our disclosure
controls and procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Accordingly, management must apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.  Within the 90 days prior to the filing of
this Annual Report, we carried out an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Exchange Act. Based on their review of our disclosure controls and procedures,
the Chief Executive Officer and the Chief Financial Officer have concluded that
our disclosure controls and procedures are not effective in providing reasonable
assurance that information required to be disclosed by us in the reports we file
under the Exchange Act were recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules,
regulations and forms. In particular, we have identified the following material
weakness in our disclosure controls:  · There is an
over-reliance upon independent financial reporting consultants for review of
critical accounting areas and disclosures and material non-standard
transactions.  · There is a lack of
sufficient accounting staff which results in a lack of segregation of duties
necessary for a good system of internal control.  Management's Report on Internal Control over Financial
Reporting  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal
control system is intended to provide reasonable assurance to our management and
board of directors regarding the preparation and fair presentation of published
financial statements and that we have controls and procedures designed to ensure
that the information required to be disclosed by us in our reports that we will
be required to file under the Exchange Act is accumulated and communicated to
our management, including our principal executive and our principal financial
officers or persons performing similar functions, as appropriate to allow timely
decisions regarding financial disclosure.  Managements current assessment of the effectiveness of
our internal controls is based principally on our financial reporting as of
December 31, 2008, 2007, and 2006, and the quarterly periods ended September 30,
June 30, 2008, and March 31, 2008. In making our assessment of internal control
over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control  Integrated Framework.  For the periods referenced above, managements assessment
identified material weaknesses in our internal control over financial reporting.
These material weaknesses include lack of segregation of duties, lack of
adequate documentation of our system of internal control, deficiencies in our
information technology systems, limited capability to interpret and apply
accounting principles generally accepted in the United States and lack of formal
accounting policies and procedures and related documentation.  Managements efforts to resolve these internal control
weaknesses started with the hiring of a full-time Controller on October 1, 2007.
In April 2008, our Board of Directors approved this persons promotion to Chief
Financial Officer. Beginning in October 2007, management prepared a written
review of every facet of our information processing system, like cash
disbursements, sales and billing, cash receipts and other procedures. We
continue to evaluate and address these weaknesses to ensure adherence to written
policy, completeness of reporting, segregation of incompatible duties and
compliance with generally accepted accounting principles; and we intend to
continue to monitor and evaluate these and other factors affecting our internal
controls.  It is our managements intent to correct all identified
material deficiencies in our internal controls as reported in previous periods.
Until such time, our internal control over financial reporting may be subject to
additional material weaknesses and deficiencies that we have not yet identified.
Management has determined that these significant deficiencies, in the aggregate,
constitute material weaknesses in the design and operation of our internal
controls in effect prior to December 31, 2008, and 2007. We continue to address
and evaluate these issues.   67    Our former auditors have
advised us of certain other material weaknesses and significant deficiencies in
our internal controls in connection with auditing our consolidated financial
statements for the years ended December 31, 2008, and 2007, including, in
summary: (i) lack of accounting expertise, with recommended additional training
for our CFO; (ii) issues regarding reimbursement of unsubstantiated expenses;
(iii) segregation of duties of accounting functions among various personnel;
(iv) segregation of cash distribution responsibilities; (v) establishment of
initial control over cash receipts; (vi) material weaknesses on preparation of
our consolidated financial statements; and (vii) the establishment of an audit
committee. We are also addressing these concerns.  Our current costs to remediate our material weaknesses in
internal controls include the increase in salary of a full-time CFO at an annual
cost of approximately $40,000 more than our former part-time chief accounting
officer, together with substantial time and expense of other employees involved
in addressing these issues. Future costs will include fees and costs associated
with attendance at seminars and other programs by our CFO and certain employees
relative to recognizing and resolving these types of issues.  On December 16, 2008, our Board of Directors adopted
Corporate Governance and Nomination Committee, Audit and Finance Committee and
Compensation Committee Charters.  We believe these actions will help in
correcting our weaknesses in our internal controls.  Changes in internal control over financial reporting  Except as indicated in the preceding
paragraph about managements evaluation of disclosure controls and procedures,
our management, with the participation of our chief executive officer and chief
financial officer, has concluded there were no significant changes in our
internal controls over financial reporting that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.   ITEM 9B:  OTHER INFORMATION  Settlement of Former Employee
Claim  On January 8, 2009, we entered into an out-of-court
settlement with a former employee who sought recovery of unpaid commissions and
unused vacation compensation totaling $44,000. A settlement was reached
requiring incremental payments over a four month period ending April 10, 2009;
and all payments have been made.  New Related Party Lease  In February 2009, we entered into a lease with a leasing
company owned by related parties, including Brad D. Wenzel, who recently
resigned as our Chief Technical Officer and a director, and Jonathan S. Miner, a
director. The lease payments are guaranteed by Mr. Wenzel and Mr. Miner. We were
unable to lease the equipment covered by this lease directly, so COR Equipment
Financing, which is owned by Mr. Wenzel and his father, Ronald G. Wenzel, and
Mr. Miner, leased the equipment by financing a bank loan in the amount of
$10,000 that each had to personally guarantee.  The outstanding lease
obligation to related parties is $8,300 as of April 9, 2009; and the terms were
no less favorable than could have been obtained from non-affiliated parties.
 See Part III, Item 13.  Severance Package with Former Board
Member and Acting CEO  On February 10, 2009, we accepted the resignation of Dan
Herbeck, acting through his company, Continental Technologies Solutions, LLC
(Continental), as interim CEO and one of our Board members. The severance
arrangement recognized unpaid invoices owed Continental of $105,344, payable at
a rate of $4,000 per month, commencing in April, 2009. As recognition for our
delay in payment, we also granted Continental 100,000 cashless five year
warrants to purchase 100,000 shares of our common stock at $0.35 per share.
 We have not paid the April, 2009, payment, because of cash shortages.  Vendor Settlement Agreement  On March 19, 2009, we executed a Settlement Agreement
with a former vendor seeking recovery of $24,000 of unpaid invoices.  We
disputed this claim, and an out-of-court settlement was reached requiring a
total reimbursement of $13,000  68    payable in $3,000 monthly
installment commencing April 10, 2009, and continuing thereafter until paid in
full.  We have paid the April installment on this obligation.  Planned Secured and Unsecured
Funding  On or about March 23, 2009, we agreed to pay a 10%
introduction fee to M2 Capital Advisors, Inc. (M2), under their current Letter
Agreement with us, on any funds raised by us in a planned $1,500,000 financing
through the sale of secured and unsecured convertible notes.   We will
be making the offer and sale of these convertible notes following any
introductions by M2; and purchasers of the secured portion of this planned
convertible note offering will be granted a third position security interest in
our vault, behind the security interests of the Miners and Data Sales in our
vault that is discussed above under the headings Issuance of Convertible Note,
Security Agreement and Confession of Judgment in the Event of Default and
Master Lease Revision and Restructuring.  It is anticipated that $750,000
of this funding would provide us with the necessary capital to continue our
current business operations for two to three months, with present cash flows,
and approximately $275,000 of this amount would be paid to current vendors,
based upon discussed arrangements.  Further information regarding M2 and
its prior relationships with us and its principal, Mark Savage, our former
President and a former director, is discussed below under the caption
Business, under the headings Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements or Labor Contracts, including Duration and M2
Capital Advisors, Inc.  Brad D. Wenzel  On April 20, 2009, Brad D. Wenzel, our Chief Technical
Officer, resigned from this position and as a member of our Board of Directors.
  Mr. Wenzel resigned to pursue new business opportunities in related,
non-competing areas of mutual interest and in a potential partnership with us.
 We do not intend to replace this position. The terms and conditions of a
mutual Confidential Separation and Release Agreement include items such as
severance, non-compete and non-solicitation, assignment of any claims of
intellectual property rights of Mr. Wenzel to us, provisions for potential a
future potential business partnership on existing and new storage solution
products and other items typically found in these typesof agreements.
 See our 8-K Current Report dated April 20, 2009, which was filed with the
Securities and Exchange Commission on April 24, 2009, and is referenced in Part
IV, Item 15.  Benno Sand  On April 13, 2009, Benno Sand, resigned as one of our
directors.  There were no disagreements between Mr. Sand and us regarding
his resignation.  We have not yet filled the vacancy on the Board of
Directors created by Mr. Sands resignation.   PART III   ITEM 10:  DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE  Identification of Directors and
Executive Officers  The following table sets forth the names of
all of our current directors and executive officers. These persons will serve
until the next annual meeting of the stockholders or until their successors are
elected or appointed and qualified, or their prior resignation or termination.  Name
Positions Held
Date of Election or Designation
Storage/Digitiliti
Date of Termination or ResignationRoy A. Bauer
President, CEO
Chairman of the Board
02/09
12/08
*
*Daniel J. Herbeck
President, CEO
09/08
02/09Larry D. Ingwersen
President,
CEO
and Director
04/08
04/08
04/08
9/08
9/08
9/08  69     Mark Savage
President
Director
12/06     08/07
10/06     08/07
04/08
2/09Brad D. Wenzel
President
CEO
Chairman
Director
10/03
10/03    08/07
04/08
10/03    08/07
12/06
04/08
12/08
04/09Laura Wenzel
Director
Vice President
CFO
Treasurer
Secretary
04/06    08/07
10/06    08/07
10/06    08/07
10/03    08/07
10/03    08/07
10/08
11/08
04/08
04/08
11/08Pamela J. Miner
Director
4/06     08/07
*Jonathan S. Miner
Director
11/05    08/07
*Robert Fischer
Director
11/05
7/07Ronald G. Wenzel
Director
10/03
4/06CFO
10/03
10/06Vice President
10/03
10/06Treasurer
10/03
10/06William McDonald
CFO
04/08
*Roderick D. Johnson
COO
04/08
9/08Benno Sand
Director
10/08
4/09  * These persons presently serve in the
capacities indicated.  Each previously served during the dates and in the
capacities indicated at Storage; and those continuing, with the exception of
Larry D. Ingwersen, William McDonald and Roderick D. Johnson, were elected after
the effective date of the Storage Merger on August 17,2007.  Background and Business Experience  Roy A. Bauer.Mr. Bauer is 63 years of
age.  From January of 2007 to the present, Mr. Bauer has been the CEO of
Key Teknowledgy, a management consulting firm based in Wisconsin.  This
corporation specializes in strategy, business transformation, and management
development services for international clients.  From May of 2001 to
January of 2007, Mr. Bauer served as Vice President, General Manager, Rochester
Pemstar manufacturing Site; Executive Vice President, Pemstar United States
Operations; Executive Vice President, WW Operations; Executive Vice President,
Chief Operating Officer; and President and Chief Operating Officer of Pemstar
Corporation, a WW contract manufacturing and product development company
specializing in precision electro-mechanical devices, optical devices, and
computer systems.  Prior to that time, Mr. Bauer held various position up
to Executive level with IBM Corporation.  Brad D. Wenzel.  Mr. Wenzel is 41 years of
age and the Founder of Storage. For over 17 years, Mr. Wenzel has been involved
at virtually every level in the storage market from Manufacturer to OEM to
reseller.  He has acted in many roles including Sales, Engineer, Developer
and Owner/President of Wenzel Data, Inc. (WDI). He has architected and
installed some of the largest Storage Area Networks in the country.
   Mr. Wenzel earned a B.A. in Business Administration from the
University of St. Thomas.  Pamela J. Miner.  Ms. Miner is 55 years of
age, was a director of  Storage beginning in 2006 and a stockholder of
Storage since 2005.  Since 2004, she has been an officer and director of
Just 4 Fun Corporation and a 60% owner in that firm since 2003.  From 2000
to 2004, she was Special Projects Coordinator for The Miner Group, Limited, a
marketing company.  She is also active with her husband, Jonathan, in his
various businesses.  Jonathan S. Miner.  Mr. Miner is 67 years of
age.  He served as a director of Storage beginning in 2005.  From 1980
to 2004, he was the President/Owner/Founder of The Miner Group, Limited, which
included various businesses such as Advanced Web, Mello Smello and North Print
Intl.  All divisions of this enterprise were sold as of 2004.
  Since 2001, Mr. Miner has been Chairman of the Board of Just 4 Fun
Corporation.  William McDonald, CFO.Mr. McDonald is 44
years old.Mr. McDonald joined Storage in July of 2007.  He
has over 20 years experience in the public accounting and finance arena.
 He worked in public accounting for 11 years before  70    assuming the CFO position for
Kath fuel Oil Co. (with over $225 million in annual sales).  He holds a CPA
certificate (currently inactive status), as well as a J.D. from William Mitchell
College of Law.  He is a licensed attorney in the State of Minnesota.
 Prior to joining Digitiliti, Mr. McDonald was Vice President of Commercial
Lending at North Star Bank for three years.  He also graduated from
Augsburg College with a B.A. in Accounting and Finance.  Benno Sand, Director.  Mr. Sand is 54 years
of age.  He has served as Executive Vice President, Business Development
and Investor Relations of FSI International, Inc. (FSI) since January 2000.
 FSI is a global supplier of surface conditioning equipment and technology
to the worlds leading integrated circuit (IC) and microelectronics
manufacturers.   He also served as Executive Vice President of FSI
since January 1992 and Secretary since March 2002.  Mr. Sand also
served as Chief Administrative Officer of FSI from January 1998 to December
1999, as Chief Financial Officer from October 1990 to January 1998, and as Vice
President of Finance from October 1987 to January 1992.  Mr. Sand is a
director of various FSI-owned United States and foreign subsidiaries as well as
mFSI LTD and MathStar, Inc.  Significant Employees  Rodd Johnson, Product Development.  Mr.
Johnsons experience includes architecting and implementing a world-wide
identity intelligence system for AT&T, architecting a super-computer based
filtration modeling application for Donalson Corporation and developing custom
identity databases for a number of countries.  Mr. Johnson has a
wide-ranging career spanning the insurance, health care, multi-national
technology production, manufacturing, government, security, credit card and
factory automation arenas.  He earned a double major in Computer Science
and Business Administration from Mankato State University.  Mr. Johnson is
44 years old.  Kris Caulfield, Investor Relations.Ms.
Caulfield has been with Storage since its inception.  Prior to her position
at Storage, she spent six years as Operations Director at WDI.  She has 18
years of analyst experience at the Minnesota Department of Revenue, where she
supervised expenditures of $1 billion biennial budgets in state property tax
relief to governmental units and determined the impact of legislative property
tax law proposals.  She holds a Bachelor of Science degree from the
University of Minnesota.  She has continued in this capacity with us since
the closing of the Storage Merger.  She is 51 years old.  Family Relationships  There are no family relationships between our directors
and executive officers named above except that Ronald G. Wenzel is the father
and Laura Wenzel is the stepmother of Brad D. Wenzel; and Jonathan S. and Pamela
J. Miner are husband and wife.  Directorships Held in Other Reporting
Companies  None of our directors or executive officers is currently
a director of any other reporting issuer under the Exchange Act.  Involvement in Certain Legal Proceedings  During the past five years, no director, promoter or
control person:  · has filed a petition under federal
bankruptcy laws or any state insolvency laws, nor had a receiver, fiscal agent
or similar officer appointed by a court for the business or property of such
person, or any partnership in which he was a general partner at or within two
years before the time of such filing, or any corporation or business association
of which he was an executive officer at or within two years before the time of
such filing;  · was convicted in a criminal
proceeding or named subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses);  · was the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him or her
from or otherwise limiting his/her involvement in any type of business,
securities or banking activities; or  · was found by a court of competent
jurisdiction in a civil action, by the Securities and Exchange Commission or the  71    Commodity
Futures Trading Commission to have violated any federal or state securities law,
and the judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.  Promoters and control person.  See the heading Transactions with Related Persons below
of Part III, Item 13.  Compliance with Section 16(a) of the Exchange
Act  Our shares of common stock are registered under
the Exchange Act, and therefore the officers, directors and holders of
more than 10% of our outstanding shares are subject to the provisions of
Section 16(a), which requires them to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
common stock and our other equity securities. Officers, directors and
greater than 10% beneficial owners are required by Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a)
reports they file.  Based solely upon review of the copies of such forms
furnished to us during the fiscal year ended December 31, 2008, the
following were filed timely:  Name
Type
FiledBrad Wenzel
Form 3
July 22, 2008Laura Wenzel
Form 3
July 22, 2008Larry Ingwersen
Form 3
July 22, 2008Mark Savage
Form 3
July 23, 2008Jonathan Miner
Form 3
July 23, 2008Pamela Miner
Form 3
July 23, 2008William McDonald
Form 3
July 23, 2008Roderick Johnson
Form 3
July 23, 2008Brad Wenzel
Form 3/A
July 23, 2008Mark Savage
Form 4
September 26, 2008Jonathan Miner
Form 4
December 9, 2008Pamela Miner
Form 4
December 9, 2008Brad Wenzel
Form 4
December 9, 2008Pamela Miner
Form 4
February 12, 2009Benno Sand
Form 3
February 18, 2009Roy A. Bauer
Form 3
February 18, 2009Jonathan Miner
Form 4
February 18, 2009  Code of Ethics  We adopted a Code of Ethics for our
principal executive and financial officers on or about April 14, 2009. Our Code
of Ethics is filed as Exhibit 14 to this Annual Report, in Part IV, Item 15.  Corporate Governance  Corporate Governance and Nominating
Committee  We established a Corporate Governance and Nominating
Committee and attached the Charter outlining our procedures in an 8-K Current
Report dated December 16, 2008.  See Part IV, Item 15.  We will disclose any change to our procedures in our
corporate governance and the recommending of nominees to our Board of Directors
with an 8-K Current Report.  Audit Committee  We also established an Audit Committee in the same 8-K
Current Report dated December 16, 2008.  See Part IV, Item 15.  72     We will disclose any change to our procedures in
recommending nominees to our Audit Committee with an 8-K Current Report.  Compensation Committee  We also established a Compensation Committee in the same
8-K Current Report dated December 16, 2008.  See Part IV, Item 15.  We will disclose any change to our procedures in
recommending nominees to our Compensation Committee with an 8-K Current
Report.   ITEM 11:  EXECUTIVE COMPENSATION  All Compensation  The following table sets forth the aggregate compensation
paid by us for services rendered during the periods and in the capacities
indicated: Summary Compensation Table  Name and Principal Position

(a)
Year or
Period


(b)
Salary
($)


(c)
Bonus
($)


(d)
Stock Awards
($)

(e)
Option Awards


(f)
Non-Equity Incentive Plan Compensation
($)
(g)
Nonqualified  Deferred Compensation
($)
(h)
All Other Compensation
($)

(i)
Total
Earnings
($)

(j)Dan Herbeck
12/31/08
104,868
0
0
0
0
0
0
104,868Larry D. Ingwersen, President,CEO &
Director
12/31/08
12/31/07
141,268
0
0
0
356,250
0
0
0
47,123(1)
141,268
47,123(1)Mark Savage, President & Director
12/31/08
12/31/07
12/31/06
0
0
0
0
0
0
0
0
0
250,000
0
0
0
0
0
0
0
0
0
18,000(2)
0
250,000
18,000
0Laura Wenzel, VP, CFO/
Treasurer, Secretary & Director
12/31/08
12/31/07
12/31/06
0
6,625
47,167
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
6,625
47,167Ronald G. Wenzel, Director
12/31/08
12/31/07
12/31/06
0
6,000
32,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
6,000
32,000Pamela J. Miner, Director
12/31/08
12/31/07
12/31/06
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0Jonathan S. Miner,
Director
12/31/08
12/31/07
12/31/06
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0  73     Brad D.
Wenzel
CEO &
Director
12/31/08
12/31/07
12/31/06
231,230
231,230
189,578
0
0
0
0
0
0
0
1,500,000
0
0
0
0
0
0
0
0
0
0
231,230
231,230
189,578William McDonald, CFO
12/31/08
12/31/07
93,091
25,000
0
0
0
0
150,000
150,000
0
0
0
0
3,850
10,948(3)
96,941
35,948(3)Roderick D. Johnson, COO
12/31/08
12/31/07
141,268
0
0
0
0
0
356,250
0
0
0
0
0
0
47,123(1)
141,228
47,123(1)  (1) $141,228 and $47,123 represents the
amounts paid by us  to 5X Partners, LLC, of which Larry D. Ingwersen and
Roderick D. Johnson  each owned 50%.  Each was elected to their
respective positions effective April 17, 2008, and each resigned their positions
effective October 13, 2008. At the date of their resignations, each had
purported vested stock options of 356,250. (2) $18,000 was paid to M2 Capital
Advisors, Inc., which is principally owned by Mark Savage and of which he is the
President  For the services of Mr. Savage as our former President he was
issued 250,000 stock options during 2008. (3) $3,850 and $10,948 was paid to
McDonald Professional Services, which is principally owned by William McDonald,
for professional services rendered to us during 2008 and 2007, respectively.  Outstanding Equity Awards  Outstanding Equity Awards Table At Fiscal
Year-End  Option Awards
Stock AwardsName
Number of Securities Underlying Unexercised Options
(#) Exercisable
Number of Securities underlying Unexercised Options
(#) Unexercisable
Equity Incentive Plan Awards Number of Securities
Underlying Unexercised Unearned Options (#)
Option Exercise Price
($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not
Vested (#)
Market Value of Shares or Units of Stock That Have
Not Vested
($)
Equity Incentive Plan Awards: Number of Unearned
Shares, Vested Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout
Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)Brad D. Wenzel
1,500,000 (fully vested)
0
0
$0.385
7/23/2012
0
0
0
0   74    Compensation of
Directors  Director
Compensation  All Directors
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings
($)
All Other Compensation ($)
Total ($)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)All Directors
None
None
None
None
None
None
None   ITEM 12:  SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  Security Ownership of Certain Beneficial
Owners  The following table sets forth the share holdings of
those persons who own more than five percent (5%) of our common stock as of the
date of this Annual Report, respectively based upon 33,552,845 shares being
outstanding as of April 22, 2009:  Ownership of Principal
Stockholders  Title of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner
Percent of Class(1)Common Stock
Michael S. Kelly
1,723,419
5.14%Common Stock
Pamela J. and Jonathan S. Miner(2)
2,115,635(2)
6.31%Common Stock
Brad D. Wenzel(3)
3,004,302(3)
8.95%Common Stock
Ronald G. and Laura Wenzel(4)
2,024,729(4)
6.03%  (1)  Excludes
shares of our common stock underlying outstanding convertible securities, but
includes all shares that can be acquired by any of the foregoing within 60 days;
assumes that all Storage stockholders have exchanged their respective shares
under the Storage Merger and that there are currently 33,552,845 outstanding
shares of our common stock, except in the case of the computations reflecting
the percentage of beneficial ownership of Brad D. Wenzel, which computations
include the 1,500,000 shares underlying his employee stock option grant in his
ownership and in the total number of outstanding  shares.  See Note
(3) below.  For information about shares of our common stock underlying
outstanding convertible securities, see our consolidated financial statements
and related notes that are filed as a part of this Annual Report, in Part II,
Item 8, and the caption Recent Sales of Unregistered Securities, Part II, Item
5.  (2)  1,801,349 of
these shares of common stock are owned of record by Pamela J. Miner; and 314,286
of these shares of common stock are owned jointly by these two persons.  (3)  These
computations include the 1,500,000 shares underlying the 1,500,000 $0.385 five
year employee stock options granted to Mr. Wenzel, in his holdings and in the
outstanding shares utilized for computation of his holdings.  That
outstanding figure is the sum of 33,552,845 and 1,500,000 or 35,052,845.  (4)  2,024,729 of
these shares of common stock are jointly owned by these persons.  Security Ownership of Management  The following table sets forth the share holdings of
management as of the date of this Annual Report, based upon 33,552,845 shares
being outstanding as of April 15, 2009:   75    Ownership of
Officers and Directors  Title of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner
Percent of Class (1)Common Stock
Pamela J. and Jonathan S. Miner (2)
2,115,635 (2)
6.31%Common Stock
Brad D. Wenzel (3)
3,004,302 (3)
8.95%Common Stock
Ronald G. and Laura Wenzel(4)
2,024,729 (4)
6.03%Common Stock
Roy A. Bauer
332,286
0.99%Common Stock
William McDonald
0
0%Common Stock
Benno Sand
0
0All Directors and Officers as a group (5)

7,476,952 (5)
22.28%  (1)  Excludes
shares of our common stock underlying outstanding convertible securities, but
includes all shares that can be acquired by any of the foregoing within 60 days;
assumes that all Storage stockholders have exchanged their respective shares
under the Storage Merger and that there are currently 33,552,845 outstanding
shares of our common stock, except in the case of the computations reflecting
the percentage of beneficial ownership of Brad D. Wenzel, which computations
include the 1,500,000 shares underlying his employee stock option grant in his
ownership and in the total number of outstanding shares.  See Note (3)
below.  For information about shares of our common stock underlying
outstanding convertible securities, see our consolidated financial statements
and related notes that are filed as a part of Annual Report, in Part II, Item 8,
and the caption Recent Sales of Unregistered Securities, Part II, Item 5.  (2)  1,801,349 of
these shares of common stock are owned of record by Pamela J. Miner; and 314,286
of these shares of common stock are owned jointly by these two persons.  (3)  These
computations include the 1,500,000 shares underlying the 1,500,000 $0.385 five
year employee stock options granted to Mr. Wenzel, in his holdings and in the
outstanding shares utilized for computation of his holdings.  That
outstanding figure is the sum of 33,552,845 and 1,500,000 or 35,052,845.  (4)  2,024,729 of
these shares of common stock are jointly owned by these persons.  Ronald G.
Wenzel is not currently an executive officer or director.  (5)  The total
percentage of the five management members includes the 1,500,000 shares
underlying the 1,500,000 $0.385 five year employee stock options granted to Mr.
Wenzel, in total holdings and in the outstanding  shares utilized for
computation of these five persons holdings.  Changes in Control  There are no present arrangements or pledges of our
securities which may result in a change in control of our Company.  Securities Authorized for Issuance under Equity
Compensation Plans  Plan Category
Number of Securities to be issued upon exercise of
outstanding options, warrants and rights
Weighted-average exercise price of outstanding
options, warrants and rights
Number of securities remaining available for future
issuance under equity compensation plans excluding securities reflected in
column (a)(a)
(b)
(c)Equity compensation plans approved by security
holders
4,116,806*
$0.37
1,659,000(2)  76     Equity compensation plans not approved by security
holders
None
None
NoneTotal
4,116,806(1)
$0.37
1,659,000(2)  (1)
 Reflects the overall grant of five year options totaling 7,341,000 that
vest over various periods, less (1) the cancellation, effective April 17, 2008,
of an option to purchase 525,000 shares granted to an employee who is no longer
employed by us and (2) the forfeiture during the 4th quarter of 2008
of unvested options totaling 2,699,194 pertaining to employees who are no longer
employed by us.  (2)
  Reflects the total 9,000,000 shares authorized for issuance less the
overall grant of five year options totaling 7,341,000.   ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTORS INDEPENDENCE  Transactions with Related Persons  There were no material transactions or series of similar
transactions during the years ended December 31, 2008, or 2007, or any currently
proposed transactions, or series of similar transactions, to which we or any of
our subsidiaries was or is to be a party, in which the amount involved exceeded
the lesser of $120,000 or one percent of the average of our total assets at
year-end for the last two completed fiscal years and in which any director,
executive officer or any security holder who is known to us to own of record or
beneficially more than five percent of any class of our common stock, or any
member of the immediate family of any of the foregoing persons, had an interest,
except:  Management and Founders Share Issuances  The following shares have been issued to our management
and founders:  Name
No. of Shares
ConsiderationBrad D. Wenzel
5,397,302
Nominal ConsiderationRonald G. & Laura Wenzel
1,801,349
Nominal ConsiderationPamela J. Miner
1,801,349
$250,000Ronald G. & Laura Wenzel
536,237
$0.35 - $187,683Jonathan S. & Pamela J. Miner
214,286
$0.35 - $75,000  For further information, see the heading Recent Sales of
Unregistered Securities; Use of Proceeds from Registered Securities, Part II,
Item 5.  For information regarding the current beneficial
ownership, if applicable, of these persons, see the tables Ownership of
Principal Stockholders and Ownership of Officers and Directors, Part III,
Item 12.  For information regarding Mark Savage, one of our
directors and our former President, and Larry D. Ingwersen (our  former CEO
and President) and Roderick D. Johnson (our former Chief Operating Officer), see
the heading Management and Founders Agreements of this Item below.   77    Management and Founders
Agreements  Jonathan S. Miner and Pamela J.
Miner  Effective December 5 2008, our Board of Directors
approved the issuance of a convertible note Jonathan S. Miner and Pamela J.
Miner, who both currently serve on our Board of Directors, for their advance to
us of the sum of $175,000 and their agreement to advance up to an additional
$75,000 (which additional sum has been advanced to us), all to be utilized in
the development of our Pyramid software storage product.  We also executed
a Security Agreement with them whereby we granted to them as collateral and
security a lien for the payment of the convertible note and additional
indebtedness of theirs or indebtedness they had guaranteed in the past on our
behalf in the further aggregate amount of $500,000, for a total secured amount
of $750,000.  See the heading Business Development of Part I, Item 1.  Dan Herbeck  Our interim CEO, Dan Herbeck, who resigned in February,
2009, provided consulting services to us through his company, Continental
Technologies Solutions, LLC (Continental). Total consulting fees for 2008 was
$121,969. As of December 31, 2008, accounts payable to Continental was
$104,869.  M2 Capital Advisors, Inc.  On May 3, 2006, Storage executed a Consulting Agreement
with M2, then a related party of which Mark Savage, our former President and a
former director , is the President and a principal stockholder, to render
various consulting services, including introducing us to various sources of
funding and providing management consulting services.  Under an amendment
to this Consulting Agreement, M2 was paid approximately $350,000 under this
Consulting Agreement for funding introduced and received by Storage in the
approximate amount of $3,500,000 in connection with the offer and sale of
certain shares of Storage common stock that were restricted securities and M2
and its employees and consultants were issued the 3,726,520 warrants to acquire
shares of common stock of Storage.  The warrants were assumed by us under
the Storage Merger, and in September and October, 2007, warrants for 3,643,270
shares were exercised cashless by certain holders of these warrants, with the
issuance of 3,359,397 shares of our common stock in accordance with our
assumption of these warrants under the Storage Merger.  M2 was also paid $319,955 through December 31, 2007, in
connection with the introduction of persons who acquired $3,199,550 in 12%
convertible notes in an aggregate offering of up to $5.5 million commenced by
Storage in the first quarter of 2007 and extended by us following the closing of
the Storage Merger on August 17, 2007 and which was finally completed in
November, 2008.  A Letter Agreement was entered into between M2 and us on
June 19, 2008, which covered this compensation arrangement.  Effective on or about April 25, 2007, Storage also
executed and completed a Consulting Agreement with M2 whereby it agreed to issue
750,000 shares of Storage common stock that were restricted securities to M2 and
its associates for the introduction of us as a potential reverse merger
candidate to Storage.  297,166 of these shares were issued directly to Mr.
Savage.  All of these shares were exchanged under the Storage Merger.
 All of these securities were also restricted securities.  M2 was also paid a 5% introduction fee of $28,550 for a
computer lease executed by us in November, 2006; $15,448 for the introduction of
two additional computer equipment leases executed by us in January and February,
2007; and $13,600 for the introduction of an additional computer equipment lease
we executed in December, 2007.  On or about March 23, 2009, we agreed to pay a 10%
introduction fee to M2 under their current Letter Agreement with us that had
been extended into May, 2009, on any funds raised by us in a planned $1,500,000
financing through the sale of secured and unsecured convertible notes.
  We will be making the offer and sale of these convertible notes
following any introductions by M2.  Copies of the M2 agreements were filed as Exhibits to our
Form 10 Registration Statement.  See Part IV, Item 15.   78    5X
Partners, LLC.  We executed a Corporate Development Services Agreement
(the 5X Agreement) with 5X on August 20, 2007, that was extended by an
Addendum on November 15, 2007 (the First Addendum), and by an additional
Addendum effective April 17, 2008 (the Second Addendum).  This Agreement
and the Addendums focused on services in senior leadership, business
development, sales and marketing, product packaging, infrastructure scaling
methods and other key areas of management, business assessment and strategies.
 Compensation under the initial Agreement was $16,800, divided equally
between Larry D. Ingwersen, who became our CEO and President on April 17, 2008,
and Roderick D. Johnson,(who became our Chief Operating Officer on April 17,
2008, who the two of 5X principals and owners; the First Addendum increased this
amount to $30,241, again, to be divided equally, with a provision to discuss
deferred compensation in the form of warrants; and the Second Addendum, a 12
month extension, provided that we would pay 5X $60,484, consisting of a 50% cash
payment and 50% converted into common stock with a price of $0.35 per share. We
were also to pay a monthly fee of $28,000 of which $8,000 would be deferred
until reaching a financial funding goal, and issuance of 2,850,000 shares of our
stock options at a strike price of $0.385 per share, which would vest over 24
months.  Copies of the initial 5X Agreement and the First and
Second Addendums were filed as Exhibits to our Form 10 Registration Statement.
 See Part IV, Item 15.  In April 2008, our Board of Directors approved a 24-month
extension of  the 5X Agreement.  Effective October 13, 2008, Mr. Ingwersen resigned as our
CEO, President and a director; and Roderick D. Johnson resigned as our COO.
 At the time of their resignations, an aggregate of $93,801.50 was
purportedly due to them, along with 356,250 in vested stock options to each
under the Digitiliti, Inc. 2007 Stock Option Plan.  Discussions respecting
a settlement of these obligations are underway.  Stock Option Grants  The following members of management have been issued
options under the Digitiliti Stock Option Plan:  Name
No. of Options
Date of GrantBrad D. Wenzel
1,500,000
7/23/2007Mark Savage
250,000
4/17/2008William McDonald
150,000
7/23/2007William McDonald
150,000
4/17/2008Larry D. Ingwersen
356,250
4/17/2008Roderick D. Johnson
356,250
4/17/2008  Other Management and Founder Transactions  In January 2006, the Company entered into two leases for
computer equipment that expire in 2007 and 2008.  One of the leasing
companies is owned by related parties.  The lease payments are guaranteed
by CEO and stockholder.  The present value of the monthly least payments
was capitalized using an imputed interest rate of 10%.  The amount
outstanding for the capital lease obligation to related parties was $21,708 and
$71,686 at December 31, 2008, and 2007, respectively.  We have a $250,000 promissory note with Jonathan S.
Miner, one of our directors, dated December 15, 2005.  The note mirrors a
promissory note between him and his bank, which matured on December 15, 2007,
and had an interest rate 0.5% above the banks index rate (6.0% and 8.0% at
December 31, 2008, and 2007, respectively).  In December 2007, the note was
renewed to December 31, 2008.  The balance of the note was $156,540 and
$241,540 at December 31, 2008, and 2007, respectively.  Interest expense
totaled $14,360 and $22,656 for 2008 and 2007, respectively.  During February, 2006, we entered into a promissory note
for $150,000 with Mr. Miner bearing interest at 12.25% and due in monthly
payments of $5,000.  In January 2007, he converted $75,000 of the debt into
214,286 shares of our  79    common stock.  The
remaining balance of the note was paid in full in November 2007.  Interest
expense was $3,863 for 2007.  We and two stockholders, Ronald G. and Laura Wenzel (Ms.
Wenzel is our Vice President, Secretary and a director), were guarantors on a
bank promissory note of a stockholder (Pamela J. Miner, a current director)
totaling $250,000 plus interest.  The proceeds from the promissory note
were used by these stockholders to purchase 1,801,349 additional shares of
Storage common stock that were exchanged under the Storage Merger.  If
these stockholders defaulted on any part of the note and we had to pay a portion
of the note, then the parties would have calculated the amount of such payment
as a percentage of the original note. These stockholders shares previously
received would be reduced by that percentage, but not below 94,439 common
shares.  The note and accrued interest were approximately $230,000 at
December 31, 2006.  In March 2007, the bank released us as a guarantor on
the note.  We made lease payments on a building and computer
equipment that was leased by Wenzel Data, Inc. which is owned by Brad D. Wenzel,
our Chairman of the Board of Directors, and used by us. The building lease
expired in 2006 and the equipment lease expired in 2007.  Related party
rent expense for 2007 and 2006 was $3,851.  In May 2007, we were named as a defendant in a lawsuit
along with Wenzel Data, Inc.  A vendor is seeking to enforce its rights to
obtain payment of a 2005 promissory note signed by WDI and Storage.  The
note was also guaranteed by Brad D. Wenzel.  In June, 2007, the parties
agreed to a settlement amount of approximately $26,000, which was paid by Mr.
Wenzel.  Promoters and Certain Control Persons  See the heading Transactions with Related Persons
above.  Parents of the Smaller Reporting Company  We have no parents.  Director Independence  We have one independent director serving on our Board of
Directors, Benno Sand.   ITEM 14:  PRINCIPAL ACCOUNTANT FEES AND
SERVICES  The following is a summary of the fees billed to us by
our principal accountants during the fiscal years ended December 31, 2008, and
2007:  Fee Category

2008

2007Audit Fees
$
161,000

$
268,528Audit-related Fees
$
0

$
0Tax Fees
$
0

$
0All Other Fees
$
0

$
0Total Fees
$
161,000

$
268,528  Audit Fees -Consists of fees for professional
services rendered by our principal accountants for the audit of our annual
financial statements and review of the financial statements included in our
Forms 10-Q or services that are normally provided by our principal accountants
in connection with statutory and regulatory filings or engagements.  Audit-related Fees - Consists of fees for
assurance and related services by our principal accountants that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported under Audit fees.  Tax Fees - Consists of fees for professional
services rendered by our principal accountants for tax compliance, tax advice
and tax planning.  All Other Fees - Consists of fees for products and
services provided by our principal accountants, other than the services reported
under Audit fees, Audit-related fees, and Tax fees above.  80     Policy on Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditors  We have adopted an Audit Committee.  We do require
approval in advance of the performance of professional services to be provided
to us by our principal accountant. Additionally, all services rendered by our
principal accountant are performed pursuant to a written engagement letter
between us and the principal accountant.   See our 8-K Current Report
dated December 16, 2008 for more information regarding our Audit Committee.   PART IV   ITEM 15:  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES  (a)(1)(2)    Financial Statements.
 See the audited financial statements for the year ended December 31, 2008,
contained in Part II, Item 8, which are incorporated herein by this
reference.  (a)(3)         Exhibits.
 The following Exhibits are filed as part of this Annual Report:  No.            Description  3.1
Initial Certificate of Incorporation filed March
31, 2006.
Exhibit to our Form 103.2
Bylaws.3.3
Certificate of Amendment regarding the name change
to Digitiliti, inc. and the Recapitalization.
Exhibit to our Form 103.4
Certificate Correction regarding the name change to
Digitiliti, Inc.
Exhibit to our Form 103.5
Amended and Restated Certificate of Incorporation
filed May 13, 2008.10.1
Stock Purchase Agreement between Storage and our
former principal stockholders under which Storage acquired a controlling
interest in us.
Exhibit to our Form 1010.2
Agreement and Plan of Merger between us,
Themescapes and Bulldog under which we became a holding company.
Exhibit to our Form 1010.3
Agreement and Plan of Merger, as amended, between
us, Cyclone Acquisition and Storage under which Storage became our
wholly-owned subsidiary.
Exhibit to our Form 1010.4
XO Communications Contract.
Exhibit to our Form 1010.5
FRM Associates Lease, as amended.
Exhibit to our Form 1010.6
EBC Minneapolis, Inc. Sublease Agreement.
Exhibit to our Form 1010.7
Upper Corner Venture, LLC Lease Agreement.
Exhibit to our Form 1010.8
M2 Consulting Agreement of May 2006, with
Addendums.
Exhibit to our Form 1010.9
M2 Consulting Agreement of April 2007.
Exhibit to our Form 1010.10
5X Partners Corporate Development Services
Agreement with Addendums.
Exhibit to our Form 1010.11
StorageSwitch Consulting Services Agreement.
Exhibit to our Form 1010.12
StorageSwitch Non-Compete Agreement.
Exhibit to our Form 1010.13
StorageSwitch Technology Purchase Agreement.
Exhibit to our Form 1010.14
Vision to Practice, Inc. Development Services
Agreement.
Exhibit to our Form 1010.15
Form of 12% Convertible Note.
Exhibit to our Form 10/A-210.16
Form of A Warrant for 12% Convertible Note
Offering.
Exhibit to our Form 10/A-210.17
Form of B Warrant for 12% Convertible Note
Offering.
Exhibit to our Form 10/A-210.18
Letter Agreement with M2 of June, 2008.
Exhibit to our Form 10/A-214
Code of Ethics16.1
Letter of Auditors regarding termination.
Exhibit to our Form 10/A-221
Subsidiaries.
Exhibit to our Form 1031.1
302 Certification of CEO, Roy A. Bauer  81     31.2
302 Certification of CFO, William McDonald32
906 Certification99.1
Digitiliti, Inc. Stock Option Plan.
Exhibit to our Form 10  8-K Current Report dated December 2, 2008, filed with the
Securities and Exchange Commission on December 12, 2008.  8-K Current Report dated December 16, 2008, filed with
the Securities and Exchange Commission on December 22, 2008.  8-K Current Report dated April 20, 2009, filed with the
Securities and Exchange Commission on April 24, 2009.   SIGNATURES  Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.  DIGITILITI, INC.  Date:
April 30, 2009

By:
/s/Roy A. BauerRoy A. BauerCEO, President and Director  Pursuant to the requirements of the
Securities Exchange Act of 1934, this Annual Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.  DIGITILITI, INC.  Date:
April 30, 2009

By:
/s/Roy A. BauerRoy A. BauerCEO, President and DirectorDate:
April 30, 2009

By:
/s/William McDonaldWilliam McDonaldCFODate:
April 30, 2009

By:
/s/Pamela J. MinerPamela J. MinerDirectorDate:
April 30, 2009

By:
/s/Jonathan S. MinerJonathan S. MinerDirector   82