SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM
10-Q   [X] QUARTERLY REPORT
UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30,
2008  [ ] TRANSITION REPORT
UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT  For the transition period from
____________ to____________  Commission File No. 000-53235  DIGITILITI, INC. (Exact name of Registrant as specified in
its charter)  Delaware
26-1408538(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)incorporation or organization)  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)  N/A (Former name, former address and former
fiscal year, if changed since last report)  Indicate by check mark whether the
Registrant has (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 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. Yes [X]
No [  ]    Yes [  ] No [X]  Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.  (Check one):  Large accelerated filer [  ]
     Accelerated filer [  ]
      Non-accelerated filer [  ]
     Smaller reporting company [X]  Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]  As of August 13, 2008, the Registrant had 25,526,808
shares of common stock issued and outstanding.   1    PART I Table of
Contents    PART
I   Item 1. Financial
Statements Item 2. Management
s Discussion and Analysis of Financial Condition and Results of
Operations. Item 3. Quantitative and Qualitative Disclosures About Market
Risk Item 4T. Controls
and Procedures  PART
II   Item 1. Legal
Proceedings Item 1A. Risk
Factors Item 2. Unregistered Sale of Equity Securities and Use of
Proceeds Item 3. Defaults
Upon Senior Securities Item 4. Submission
of Matters to a Vote of Security Holders Item 5. Other
Information Item 6. Exhibits
and Reports on Form 8-K SIGNATURES  EX-31.1
(Certifications required under Section 302 of the Sarbanes-Oxley Act of
2002)  EX-31.2
(Certifications required under Section 302 of the Sarbanes-Oxley Act of
2002)  EX-32.1
(Certifications required under Section 906 of the Sarbanes-Oxley Act of
2002)  EX-32.2
(Certifications required under Section 906 of the Sarbanes-Oxley Act of
2002)  2    Item 1.
 Financial Statements  DIGITILITI, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)  ASSETS

June 30,
2008



December 31,
2007CURRENT ASSETSCash

$
140,858



$
241,333Accounts receivable, net of
allowance of $35,612 and $26,990


530,287




292,542Prepaid and other current
assets


160,227




95,527TOTAL CURRENT ASSETS


831,372




629,402PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,072,031 and $707,508


1,169,647




1,433,482SOFTWARE LICENSE, net of accumulated amortization
of $390,906 and $233,111


1,367,244




1,153,999DEFERRED FINANCING COSTS, net of accumulated
amortization of $195,358 and $77,049


299,997




242,906TOTAL ASSETS

$
3,668,260



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

$
125,457



$
92,000Accrued expenses


793,449




377,308Current
maturities of note payable and other short-term debt


432,570




45,906Current maturities of capital
lease obligations


497,876




687,159Current maturities of notes
payable  related parties


308,788




301,716Current maturities of
convertible debt


1,945,806




1,062,631TOTAL CURRENT LIABILITIES


4,103,946




2,566,720NOTE PAYABLE, net of current maturities


343,067




439,094CAPITAL LEASE OBLIGATIONS, net of current
maturities


73,073




198,162CONVERTIBLE DEBT, net of unamortized discount of
$1,554,945 and $1,082,629


1,452,799




1,054,290DEFERRED RENT


22,647




21,153TOTAL LIABILITIES


5,995,532




4,279,419STOCKHOLDERS DEFICITPreferred stock,
$.001 par value, 10,000,000 shares authorized, no
shares
issued or outstanding


-




-Common stock, $.001 par value;
100,000,000 shares authorized,
25,526,808 and
25,081,444 shares issued and outstanding


25,526




25,081Additional paid-in
capital


8,156,382




6,206,496Accumulated deficit


(10,509,180
)



(7,051,207
)TOTAL STOCKHOLDERS
DEFICIT


(2,327,272
)



(819,630
)TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT

$
3,668,260



$
3,459,789  See accompanying notes to consolidated financial
statements.  3    DIGITILITI,
INC. CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)   Three Months
Ended
June 30,


Six Months Ended
June 30,2008

2007


2008



2007REVENUES
$
768,203
$
291,048

$
1,331,409


$
501,350COST OF REVENUES

193,048

203,598


366,637



397,701GROSS MARGIN

575,155

87,450


964,772



103,649OPERATING EXPENSESSelling and marketing

175,933

188,826


325,123



468,836General and
administrative

1,175,814

817,833


1,775,709



1,192,130Depreciation

267,787

177,675


522,318



322,522Research and development

641,792

-


936,871



784Total Operating Expenses

2,261,326

1,184,334


3,560,021



1,984,272LOSS FROM OPERATIONS

(1,686,171)

(1,096,884)


(2,595,249
)


(1,880,623
)INTEREST EXPENSE

526,646

73,057


862,724



115,300NET LOSS
$
(2,212,817)
$
(1,169,941)

$
(3,457,973
)

$
(1,995,923
)NET LOSS PER SHARE  BASIC AND DILUTED
$
(0.09)
$
(0.06)

$
(0.14
)

$
(0.10
)WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED

25,476,751

20,778,043


25,313,318



19,571,441    See accompanying notes to consolidated financial
statements.  4    DIGITILITI,
INC.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
DEFICIT   Common StockShares


Amount


Additional
Paid-in
Capital


Accumulated
Deficit


Stockholders DeficitBalances at
December 31, 2007


25,081,444

$
25,081

$
6,206,496

$
(7,051,207
)
$
(819,630
)Warrants
issued in connection with convertible debt


-


-


820,257


-


820,257Common stock
issued for purchased R&D


250,000


250


374,750





375,000Common stock
issued to settle debt


108,004


108


161,898





162,006Common stock
issued for services


87,360


87


125,087





127,174Employee
stock option compensation








467,894





467,894Net
loss











(3,457,973
)

(3,457,973
)Balances at
June 30, 2008


25,526,808

$
25,526

$
8,156,382

$
(10,509,180
)
$
(2,327,272
)    See accompanying notes to consolidated financial
statements.   5    DIGITILITI,
INC. CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED) Six Months Ended
June 30,2008


2007OPERATING ACTIVITIESNet loss

$
(3,457,973
)

$
(1,995,923
)Adjustments to reconcile net
loss to net cash used by
operating
activities:Depreciation and amortization


522,318



388,440Common
stock issued for services


249,486



-Amortization of deferred
financing costs


118,309



12,357Amortization of discount on
convertible debt


347,942



11,142Employee stock option
expense


467,894



-Common
stock issued for purchase of R & D


375,000



-Warrants issued for services


-



20,149Changes in operating assets and
liabilities:Accounts
receivable


(237,744
)


(52,294
)Prepaid
and other current assets


(64,699
)


19,557Accounts
payable


71,149



884,672Accrued
expenses


416,141



7,750Deferred
rent


1,494



-Net cash used by operating
activities


(1,190,683
)


(704,150
)INVESTING ACTIVITIESPurchases of property and
equipment


(471,728
)


(1,036,060
)Investment in Cyclone Holdings,
Inc.






(175,000
)Net cash used by investing
activities


(471,728
)


(1,211,060
)FINANCING ACTIVITIESProceeds from issuance of
convertible debt


2,044,637



1,108,550Financing costs


(175,400
)


(110,855
)Payments on capital lease
obligations


(333,206
)


(155,015
)Proceeds from capital lease
obligations


18,833



329,460Proceeds from note payable 
related party


7,072



259,610Payments on notes payable 
related party


-



(284,174
)Payment on
stock rescission






(105,000
)Proceeds from sales of common
stock






748,179Net cash provided by financing
activities


1,561,936



1,790,755NET DECREASE IN CASH


(100,475
)


(124,455
)CASHBeginning of year


241,333



188,670End of year

$
140,858


$
64,215  See
accompanying notes to consolidated financial statements.   6    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  1. Organization, Basis of Presentation and Significant Accounting
Policies  The accompanying unaudited interim
financial statements of Digitiliti, Inc. have been prepared in accordance with
accounting principles generally accepted in the United States of America and
rules of the Securities and Exchange Commission, and should be read in
conjunction with the audited financial statements and notes thereto contained in
Digitilitis audited financial statements for the year ended December 31, 2007,
and its registration statement on Form 10 filed with the Securities and Exchange
Commission on May 13, 2008 (the Registration Statement) and amended on August
13, 2008. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the consolidated financial statements, which would substantially duplicate the
disclosure contained in the audited financial statements, included in
Digitilitis Registration Statement, have been omitted.  The Company and Nature of
Operations  Digitiliti, Inc. (the Company or
Digitiliti) began operations in 2004 and provides secure online data storage
solutions to companies in the United States and Canada. The Company is also
developing software products to offer data storage solutions for Apple networks
and to other small, medium and enterprise level markets.  New Accounting
Pronouncements  In September 2006, the FASB issued SFAS
157,Fair Value Measurements, as amended in February 2008 by FASB Staff
Position (FSP) FAS 157-2,Effective Date of FASB Statement
No. 157.SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.FSP FAS 157-2 defers the effective date of SFAS 157 for all nonfinancial
assets and liabilities, except those items recognized or disclosed at fair value
on an annual or more frequently recurring basis, until January 1, 2009.As such, the Company partially adopted the provisions of SFAS 157 effective
January 1, 2008.The partial adoption of this statement did not have a
material impact on our financial statements.We expect to adopt the
remaining provisions of SFAS 157 beginning in 2009.We do not expect this
adoption to have a material impact on our financial statements.  In February 2007, FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilitiesincluding
an Amendment of FASB Statement No. 115.This standard permits an
entity to choose to measure many financial instruments and certain other items
at fair value.Most of the provisions in SFAS 159 are elective; however
the amendment to SFAS 115,Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale securities.The fair value option established by SFAS
159 permits all entities to choose to measure eligible items at fair value at
specified election dates.A business entity will report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date.The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.We have adopted this statement as of January 1,
2008.The adoption created no impact to our financial statements.  2. Going Concern  The accompanying consolidated financial
statements for the six months ended June 30, 2008, and 2007, have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business.  As shown in the accompanying financial
statements, we have incurred a net loss of $3,457,973 for the six months ended
June 30, 2008. In addition, we have an accumulated deficit of $10,509,180 and a
working capital deficit of $3,272,574 as of June 30, 2008. These conditions
raise substantial doubt as to our ability to continue as a going concern.  We continue to be dependent on our ability
to generate future revenues, positive cash flows and additional financing.
Management acknowledges that its ability to continue executing its current
business plan, even on a short-term basis, is dependent on its ability to obtain
additional debt or equity financing. There can be no guarantee that the Company
will be successful in generating future revenues, in obtaining additional debt
of equity financing or that such additional debt or equity financing will be
available on terms acceptable to the Company.  7     3. 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
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, 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.  4. Employee Stock
Options, Warrants and Restricted Stock Awards and Equity  On March 15,
2008, we issued 108,004 shares of restricted stock, valued at $162,006 using the
grant-date quoted stock price, in settlement of $37,694 of outstanding debt with
a related party. The difference between the fair value of the stock and the
outstanding debt was recorded as Compensation expense and is included under
General and administrative expenses in our accompanying financial
statements.  In April 2008, the Company amended and
restated its Certificate of Incorporation to add a class of preferred stock with
10,000,000 shares authorized at a par value of $0.001 per share.  At June
30, 2008, no shares were issued or outstanding.  In April 2008, the Board of Directors
approved a modification of the Companys Stock Option Plan increasing the total
number of shares from 4,000,000 shares of common stock to 9,000,000 shares
reserved for issuance.  In April 2008, under the approved
modification of the Companys Stock Option Plan mentioned above, the Board of
Directors approved the issuance of 3,900,000 stock options to new and existing
employees and cancelled 525,000 options upon an employees termination. The
additional 3,900,000 stock options have a weighted average exercise price of
$0.38 per share. During the six months ended June 30, 2008, no options were
exercised, and the Company recognized $467,894 of compensation expenses related
to employee stock options.  The following table summarizes employee stock options
issued and outstanding:  Options

Weighted
average
exercise
price

Aggregate
intrinsic
value

Weighted
average
remaining
contractual
life (years)Outstanding at December 31, 2007

3,441,000

$
             0.37

$
                    -Granted

3,900,000

0.38Exercised

-

-  8     Forfeited

(525,000)

0.35Expired

-

-Outstanding at June 30, 2008

6,816,000

$
             0.37

$
                    -

4.48  On June 30, 2008, we had $3,572,475 of
unamortized employee stock option expense, which will be recognized through May
2011.  In addition, there were 2,499,405 options exercisable at June 30,
2008.  During six months ended June 30, 2008, the fair value of
each employee stock option award was determined as of the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 113%; expected term of 3.29 years; risk-free
interest rate of 2.9% and an expected dividend yield of 0.  The following table summarizes stock warrants issued and
outstanding:  Warrants

Weighted
average
exercise
price

Aggregate
intrinsic
value

Weighted
average
remaining
contractual
life (years)Outstanding at December 31, 2007

3,536,148

$
             1.75

$
                 -Granted

1,754,000

1.88Exercised

-

-Forfeited

-

-Expired

-

-Outstanding at June 30, 2008

5,290,148

$
             1.80

$
                 -

3.83  During the six months ended June 30, 2008,
the Company issued 250,000 shares of common stock in connection with the
purchase of software and 87,360 shares of common stock for services provided in
connection with the purchased software. The software was classified as research and
development and the cost was expensed on the date of purchase in accordance with
SFAS No. 2. The cost of the software included the fair value of the common stock
issued in connection with the purchase. The value of the stock was based on the
quoted stock price on the date of the acquisition.  During six months ended June 30, 2008, the fair value of
each warrant issued in connection with our convertible debt was determined as of
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: expected volatility of 113%; expected
term of 5.0 years; risk-free interest rate of 3.09% and an expected dividend
yield of 0.  5. Convertible
Debt  During the six months
ended June 30, 2008, we issued $1,754,000 in convertible debt, along with
877,000 warrants with an exercise price of $1.50 and 877,000 warrants with an
exercise price of $2.25. During the six months ended June 30, 2008, we recorded
$820,258 as a discount to the convertible debt related to the issuance of the
warrants, which is being amortized using the effective interest rate over the
term of the convertible debt. In addition, we incurred additional financing
costs of $175,400, which was capitalized as deferred financing cost and is also
being amortized using the effective interest method over the 18-month term of
the convertible debt. During the six months ended June 30, 2008 and 2007, we
recorded $118,309 and $12,357, respectively, of deferred financing cost
amortization.   9    The following
summarizes the financial presentation of our convertible debt at June 30, 2008
and December 31, 2007:  June 30,
2008

December 31,
2007Face value of convertible debt
$  4,953,550

$  3,199,550Adjustments:Discount for
warrants issued
(2,080,670)

(1,260,412)Amortization of
debt discount
525,725

177,783Convertible notes balance, net
$   3,398,605

$
  2,116,921  6. Supplementary
Disclosures of Cash Flow Information  Additional cash flow information consisted
of the following:  Three Months Ended June
30,
2008
2007Cash paid for interest
$    70,086
$
    5,676Noncash financing and investing activities:Conversion of debt to equity
37,694
-Stock issued for Cyclone merger
-
525,000Discount on convertible debt
820,257
81,687  7. Subsequent
Events  On August 7, 2008, our Board of Directors
and one or our 12% convertible note holders waived the registration rights
requirement of conversion and one $35,000 12% convertible note was converted to
70,000 shares at $0.50 per share, along with an additional 6,300 shares being
issued for accrued interest of $3,150.  In July 2008, we issued $125,000 in
convertible debt, along with 125,000 warrants with an exercise price of $1.50
and 125,000 warrants with an exercise price of $2.25.  In July 2008, the Company entered into a lease for
computer equipment that is conditional upon the successful completion of a
45-day trial period, after which time the terms reflect a 36 month operating
lease.  10    Item 2. Managements Discussions and Analysis of Financial Condition and
Results of Operations.  Forward-looking Statements  Statements made in this Quarterly Report which are not
purely historical are forward-looking statements with respect to the goals, plan
objectives, intentions, expectations, financial condition, results of
operations, future performance and our business, including, without limitation,
(i) our ability to raise capital, and (ii) statements preceded by, followed by
or that include the words may, would, could, should, expects,
projects, anticipates, believes, estimates, plans, intends,
targets or similar expressions.  Forward-looking statements involve inherent risks and
uncertainties, and important factors (many of which are beyond our control) that
could cause actual results to differ materially from those set forth in the
forward-looking statements, including the following, general economic or
industry conditions, nationally and/or in the communities in which we may
conduct business, changes in the interest rate environment, legislation or
regulatory requirements, conditions of the securities markets, our ability to
raise capital, changes in accounting principles, policies or guidelines,
financial or political instability, acts of war or terrorism, other economic,
competitive, governmental, regulatory and technical factors affecting our
current or potential business and related matters.  Accordingly, results actually achieved may differ
materially from expected results in these statements.  Forward-looking
statements speak only as of the date they are made.  We do not undertake,
and specifically disclaim, any obligation to update any forward-looking
statements to reflect events or circumstances occurring after the date of such
statements.  Plan of Operation  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 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 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 primary focus for fiscal 2008 is increasing the
number of customers using our digitiliti services.  We will aggressively
promote the benefits of secure, online data storage and highlight the
discernible differences between digitiliti and other solutions available in the
marketplace. We will expand our digitiliti product offering by developing
leading edge software.  We will strive to become a technology leader in the
data storage marketplace.  This will require us to refine our digitiliti
products, our sales and marketing systems, our product packaging, our
infrastructure scaling methods and revenue generation offerings.  We will
focus on technology, pricing, product positioning and building solid
partnerships with a goal of reducing our cost of goods sold percentage.  We will be seeking other distribution channels of our
services, in addition to our in-house sales group.  We will be targeting
resellers that have extensive data storage knowledge and expertise and an
established customer base.  Our sales plan for 2008 focuses on establishing
strong reseller and OEM and channel partnerships at the regional and national
level that possess utility-oriented sales systems.  Regional and national
level partners will become our sales force.  We will define and attack
vertical markets specifically in the SMB/SME market. Our ability to provide
outstanding training and support utilizing teleconferencing will allow us to
develop a national distribution network without incurring significant  11    support and travel costs.
 We will also provide our sales partners with marketing and technical
material to assist their sales efforts.  These marketing efforts will
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 will
also assist in building the digitiliti brand.  Finally, our sales and
technical staff will be available to assist with sales opportunities as
appropriate.  As a result of our sales and marketing efforts, our
customer base has expanded from approximately 20 in fiscal 2005; to
approximately 100 in fiscal 2006; to 508 in 2007; and as of July 31, 2008, to
approximately 694 .  Operationally, we will be adding experienced technical
personnel and expanding our vault system infrastructure to accommodate the
expected growth in storage capacity required as new customers are added.  We will need to raise additional capital in order to
execute our Plan of Operation.  We estimate the funds required through 2008
will be in the range of $5 million to $7 million and will be a combination of
equity, bank debt and equipment leases.  The capital will cover the
acquisition of computer hardware and software, as well as covering operating
losses until we reach the breakeven point.  We may launch the marketing of our Mythos Storage
Management Solutions or consider granting an exclusive license or negotiating an
outright sale of this technology, depending upon our cash requirements.  In
terms of Mythos development, a significant amount of servers, workstations,
networking and storage hardware is required for testing and development.  Results of Operations  For the three month periods ended June 30, 2008, and
2007  Our sales for the June 30, 2008, quarter increased
$477,155 to $768,203 compared to $291,048 for the quarter ended June 30, 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.
Consistent with this pattern of growth, our customer base grew from 243 as of
June 30, 2007, to 694 as of June 30, 2008. The growth of customer contracts is a
direct result of the heavy emphasis we have placed on marketing our
digitilitiservice.  Our efforts included attending industry
tradeshows throughout the country, as well as revamping our website.  We
also concentrated significant resources refining our product presentation,
product positioning and pricing models.  Finally, we continued to enhance
our network of resellers throughout the country by providing strong dealer
support services and offering a compelling pricing program.  Our quarterly gross margin reflects an increase of
$487,705 with a gross margin of $575,155 through June 30, 2008, versus $87,450
through June 30, 2007. Factors contributing to this increase in our gross margin
are our deliberate targeting of a larger profile customer, which resulted in (1)
more efficient customer pricing; (2) a significant increase or growth in
customer base; and (3) an increase in organic growth of our customers data.
 In short, we have learned that our sales and marketing efforts are better
expended targeting larger customers in the SMB and SME markets.  We have
learned how to sell our digitiliti service to this larger profile customer,
which has increased our revenue, proportionately reduced our costs of revenue
and has allowed us to leverage our infrastructure and efficiently bill for our
customers data growth in our Fortress Storage Center vault.  Research and development expenses increased from $0 to
$641,792 during the quarterly periods ended June 30, 2007, and 2008,
respectively.  This significant increase reflects our efforts in new
product development as we learn from the successes of our digitiliti service.
 We are also in the process of developing enhanced storage service
offerings that we can deploy through larger, more economical sales channels,
thereby enabling faster growth.  Selling and marketing expenses decreased to $175,933
from $188,826 for the quarterly periods ended June 30, 2008, and 2007,
respectively, reflecting a decrease of $12,893.  This decrease principally
reflects our success in learning to market our digitiliti service to resellers
who have the requisite expertise to produce immediate results.  Again, we
have not only learned to market our digitiliti service to larger profile
customers, but also to larger profile and more technically proficient resellers,
thereby resulting in increased sales with fewer (or more efficient) marketing
expenditures.  General and administrative expenses increased by
$357,981 to $1,175,814 compared to $817,833 during the quarterly periods
ended June 30, 2008, and 2007, respectively.  This increase is attributable
to consulting fees, stock-based compensation, legal and accounting expense
associated with completing the reverse merger between us and Storage  12    Elements, Inc., a Minnesota
corporation (Storage), upgrading the financial information in preparation for
Securities and Exchange Commission anticipated filings and the issuance of
convertible debt with associated warrants.  Interest expense during the quarter ended June 30, 2008,
increased by $453,589 to $526,646, compared to $73,057 for the quarter ended
June 30, 2007.  The increase reflects interest expense associated with the
convertible debt issued during the quarter ended June 30, 2007, versus interest
expense associated with convertible debt issued during the quarter ended June
30, 2008, along with the related amortization of the deferred financing costs
and discount of the associated warrants.  For the six month periods ended June 30, 2008, and
2007  Our sales through June 30, 2008, increased $829,879 to
$1,331,409 compared to $501,530 compared to sales through the six months ended
June 30, 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.
Consistent with the pattern of growth as detailed above, our customer base grew
from 243 as of June 30, 2007, to 694 as of June 30, 2008. The growth of customer
contracts is a direct result of the heavy emphasis we placed on marketing our
digitilitiservice.  Our efforts included attending industry
tradeshows throughout the country as well as revamping our website.  We
also concentrated significant resources refining our product presentation,
product positioning and pricing models.  Finally, we continued to enhance
our network of resellers throughout the country by providing strong dealer
support services and offering a compelling pricing program.  Our quarterly gross margin reflects an increase of
$861,123 with a gross margin of $964,772 through June 30, 2008, versus 103,649
through June 30, 2007. Factors contributing to this increase in our gross margin
are our deliberate targeting of a larger profile customer, which resulted in (1)
more efficient customer pricing; (2) a significant increase or growth in
customer base; and (3) an increase in organic growth of our customers data.
 In short, we have learned that our sales and marketing efforts are better
expended targeting larger customers in the SMB and SME markets.  We have
learned how to sell our digitiliti service to this larger profile customer,
which has increased our revenue, proportionately reduced our costs of revenue
and has allowed us to leverage our infrastructure and efficiently bill for our
customers data growth in our Fortress Storage Center vault.  Research and development expenses increased from $784 to
$936,871 during the six months ended June 30, 2007, and 2008, respectively.
 This significant increase reflects our efforts in new product development
as we learn from the successes of our digitiliti service and our current process
of developing enhanced storage service offerings that we can deploy through
larger, more economical sales channels, thereby enabling faster growth.  Selling and marketing expenses decreased to $325,123
from $468,836 for the six months ended June 30, 2008, and 2007, respectively,
reflecting a decrease of $143,713.  This decrease principally reflects our
success in learning to market our digitiliti service to resellers who have the
requisite expertise to produce immediate results.  Again, we have not only
learned to market our digitiliti service to larger profile customers, but also
to larger profile and more technically proficient resellers, thereby resulting
in increased sales with fewer (or more efficient) marketing expenditures.  General and administrative expenses increased by
$583,580 to $1,775,709 compared to $1,192,129 during the six months ended
June 30, 2008, and 2007, respectively.  This increase is attributable to
consulting fees, stock-based compensation, legal and accounting expense
associated with completing the Storage Merger, upgrading the financial
information in preparation for Securities and Exchange Commission anticipated
filings and the issuance of convertible debt with associated warrants.  Interest expense during the six months ended June 30,
2008, increased by $747,424to $862,724, compared to $115,300 for the six months
ended June 30, 2007.  The increase reflects interest expense associated
with the convertible debt issued during the six months ended June 30, 2007,
versus interest expense associated with convertible debt issued during the six
months ended June 30, 2008, along with the related amortization of the deferred
financing costs and discount of the associated warrants.  Liquidity  Our liquidity is dependent, in the short term, on
proceeds from newly issued debt and the sale of our common stock for cash. In
the long term, we need to continue expanding our capacity of the Fortress
Storage Center by investing in property  13    and equipment and software
licenses. During the year ended December 31, 2007, we received proceeds of
$3,149,550 and $755,393, respectively, from the issuance of convertible debt
securities and the sale of common stock.  For the six month periods ended June 30, 2008, and
2007  During the six months ended June 30, 2008, we received
proceeds of $2,044,636 from a note payable and the issuance of convertible debt
securities, which funded our cash used in operations of $1,190,683 and
investments in property and equipment.  Net cash used by operating activities during the first
six months of 2008 was $1,190,683 compared to $704,150 during the second quarter
of 2007.  Net cash used by operating activities during the six months ended
June, 30 2008 was primarily impacted by:  · Net loss of ($3,457,973). · Depreciation and amortization of
$522,318. · Amortization of discount on
convertible debt issued of $347,942. · Increase in accounts receivable of
$237,744. · Increase in accounts payable and
accrued expenses of $487,290.  Net cash used by operating activities during the six
months ended June, 30 2007 was primarily impacted by:  · Net loss of ($1,995,923). · Depreciation and amortization of
$388,440. · Increase in other current assets of
$19,557. · Increase in trade accounts payable
and accrued expenses of $892,422.  Net cash used by investing activities during the first
six months of 2008 was $471,728, primarily related to the purchase of software
licenses totaling $371,050 and equipment of $100,678.  Net cash used by
investing activities during the first six months of 2007 was $1,211,060 and was
comprised of $1,036,060 for equipment and software license purchases and
$175,000 for investment in Cyclone Holdings, Inc.  Net cash provided by financing activities during the
first six months of 2008 was $1,561,936 primarily comprised of $1,754,000 from
the issuance of convertible debt and $290,637 from a note payable.
 Offsetting these items were $175,400 in payments of financing costs and
$333,206 in principal payments on capital leases.  Net cash provided by
financing activities during the first six months of 2007 was $1,790,755,
primarily comprised of $748,179 from the sale of common stock, $1,108,550 from
the sale of convertible securities and $329,460 in proceeds from equipment
financing.  Offsetting these items were $155,015 in principal payments on
capital leases, $110,855 in payments of financing costs.  At June 30, 2008, our cash balance was $140,858 compared
to $64,215 at June 30, 2007.  Item 3.  Quantitative and
Qualitative Disclosures About Market Risk.  As a smaller reporting company, we are not
required to provide disclosure under this Item 3.   Item 4T.  Controls and Procedures.  Evaluation of disclosure controls and procedures  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, 2007, and the quarterly periods ended June 30, 2008, and March 31,
2008.  In making our  14    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 the date of this Quarterly
Report.  Based on such evaluation of the above referenced periods, due to
the material weaknesses in 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 file
under the Exchange Act were recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions 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
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.  It is 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, 2007, and for the
quarterly period ended June 30, 2008.  We continue to address and evaluate
these issues.  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, 2007, and 2006, 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 $50,000 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.  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.  PART II - OTHER INFORMATION   Item 1. Legal Proceedings.  None; not applicable.  15     Item 1A.  Risk
Factors.  Not required.   Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.  During the three months ended June 30,
2008, the we issued 250,000 shares of common stock in connection with the
purchase of software and 87,360 shares of common stock for services provided in
connection with the purchased software.  During the three months ended June 30,
2008, we issued $945,500 in convertible debt, along with 472,750 warrants with
an exercise price of $1.50 and 472,750 warrants with an exercise price of
$2.25.  We issued all of these securities to persons who were
accredited 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 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.   Item 3. Defaults Upon Senior Securities.  None; not applicable.   Item 4. Submission of Matters to a Vote of Security
Holders. **** Effective April 17, 2008, our
Board of Directors and certain stockholders owning a majority (12,705,013 shares
of 50.65%) of our outstanding voting securities (the Majority Stockholders)
adopted, ratified and approved the following:  1.  Changed
the name of the Companys employee stock option plan to Digitiliti, Inc. Stock
Option Plan (the Stock Option Plan) and increased the number of shares
subject to options or stock purchase rights under the Stock Option Plan from
4,000,000 shares to 9,000,000 shares;  2.  Granted
3,900,000 stock option grants under the Stock Option Plan to various employees
and officers and/or directors of the Company;  3.  
Amended and restated the Companys Certificate of Incorporation to add a class
of preferred stock with 10,000,000 shares authorized at a par value of $0.001
per share, incorporate the original Certificate of Incorporation of Cyclone
Holdings, Inc. and each of its amendments, and to add amendments to allow the
Board of Directors, without stockholder approval, to (i) adopt, amend or repeal
the Bylaws of the company, (ii) change the name of the Company under certain
circumstances, and (iii) effect recapitalizations of the Company in the form or
forward and reverse splits that do not require an amendment to the Companys
Certificate of Incorporation;  4.  Adopted
new Bylaws;  5.  Elected
and reconfirmed and/or realigned the Board of Directors and officers of the
Company as follows:  Board of
Directors: Brad Wenzel, Chairman of the Board; Larry D. Ingwersen; Mark
Savage; Laura Wenzel; Pamela J. Miner; and Jonathan S. Miner.  Officers: Brad
Wenzel, Chairman of the Board; Larry D. Ingwersen, President and CEO; Laura
Wenzel, Vice President and Secretary; Roderick D. Johnson, COO; and William
McDonald, CFO and Treasurer  6. Approved the
filing of our Form 10 Registration Statement.  16     Item 5. Other Information.   On August 7, 2008, our Board of Directors
and one or our 12% convertible note holders waived the registration rights
requirement of conversion and one $35,000 12% convertible note was converted to
70,000 shares at $0.50 per share, along with an additional 6,300 shares being
issued for accrued interest of $3,150.  In July 2008, we issued $125,000 in
convertible debt, along with 125,000 warrants with an exercise price of $1.50
and 125,000 warrants with an exercise price of $2.25.  In July 2008, the Company entered into a lease for
computer equipment that is conditional upon the successful completion of a
45-day trial period, after which time the terms reflect a 36 month operating
lease.  Item 6. Exhibits.   Exhibit No.                       Identification
of Exhibit     3.1
Initial Certificate of Incorporation filed March
31, 2006.
Exhibit to our Form 103.2
Bylaws.
Exhibit to our Form 103.3
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.
Exhibit to our Form 1010.1
Stock Purchase Agreement between Storage and our
former principal shareholders 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-216.1
Letter of Auditors regarding termination.
Exhibit to our Form 10/A-221
Subsidiaries.
Exhibit to our Form 1031.1
302 Certification of CEO, Larry D. Ingwersen31.2
302 Certification of CFO, William McDonald32
906 Certification99.1
Digitiliti, Inc. Stock Option Plan.
Exhibit to our Form 10  17      SIGNATURES  Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized  Digitiliti, Inc.  Date:
August 18, 2008

By:
/s/Larry D. IngwersenLarry D. Ingwersen, President, CEO and DirectorDate:
August 18, 2008

By:
/s/William McDonaldWilliam McDonald, CFO/Treasurer   18