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 September
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 November 7, 2008, the Registrant had 25,527,664
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

September 30,
2008



December 31,
2007CURRENT ASSETSCash

$
15,739



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


660,443




292,542Prepaid and other current
assets


121,141




95,527TOTAL CURRENT ASSETS


797,323




629,402PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,261,972 and $707,508


1,076,291




1,433,482SOFTWARE LICENSE, net of accumulated amortization
of $480,096 and $233,111


1,308,454




1,153,999DEFERRED FINANCING COSTS, net of accumulated
amortization of $293,584 and $77,049


271,108




242,906Other assets


6,322




-TOTAL ASSETS

$
3,459,498



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

$
210,073



$
92,000Accrued expenses


1,075,218




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


419,709




45,906Current maturities of capital
lease obligations


373,442




687,159Current maturities of notes
payable  related parties


316,728




301,716Current maturities of
convertible debt


2,558,869




1,062,631TOTAL CURRENT LIABILITIES


4,954,039




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


292,860




439,094CAPITAL LEASE OBLIGATIONS, net of current
maturities


97,263




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


1,408,580




1,054,290DEFERRED RENT


20,389




21,153TOTAL LIABILITIES


6,773,131




4,279,419STOCKHOLDERS DEFICITCommon stock, $.001 par value;
100,000,000 shares authorized,
25,735,508 and
25,081,444 shares issued and outstanding


25,735




25,081Additional paid-in
capital


9,174,880




6,206,496Accumulated deficit


(12,514,248
)



(7,051,207
)TOTAL STOCKHOLDERS
DEFICIT


(3,313,633
)



(819,630
)TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT

$
3,459,498



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


Nine Months Ended
September 30,2008

2007


2008



2007REVENUES
$
880,549
$
369,209

$
2,211,958


$
870,559COST OF REVENUES

242,612

262,219


609,249



725,510GROSS MARGIN

637,937

106,990


1,602,709



145,049OPERATING EXPENSESSelling and marketing

195,692

152,081


520,815



620,918General and
administrative

1,122,346

841,085


2,898,055



1,864,142Depreciation and amortization

279,131

138,779


801,449



564,782Research and development

402,542

24,000


1,339,413



24,784Total Operating Expenses

1,999,711

1,155,945


5,559,732



3,074,626LOSS FROM OPERATIONS

(1,361,774)

(1,048,955)


(3,957,023
)


(2,929,577
)INTEREST EXPENSE

643,294

168,203


1,506,018



283,506NET LOSS
$
(2,005,068)
$
(1,217,158)

$
(5,463,041
)

$
(3,213,083
)NET LOSS PER SHARE  BASIC AND DILUTED
$
(0.08)
$
(0.06)

$
(0.22
)

$
(0.15
)WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED

25,701,388

21,286,026


25,386,626



20,842,521    See accompanying notes to consolidated financial
statements.  4    DIGITILITI,
INC. CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED) Nine Months Ended
September 30,2008


2007OPERATING ACTIVITIESNet loss

$
(5,463,041
)

$
(3,213,016
)Adjustments to reconcile net
loss to net cash used by
operating
activities:Depreciation and amortization


801,449



564,782Common stock issued for services


568,149



525,000Amortization of deferred
financing costs


201,848



39,688Amortization of discount on
convertible debt


675,520



78,673Employee stock option
expense


910,402



336,989Common stock issued for purchase of R & D


375,000



-Warrants issued for services


-



67,872Changes in operating assets and
liabilities:Accounts receivable


(367,900
)


(124,715
)Prepaid and other current assets


(31,935
)


44,502Accounts payable


155,766



150,528Accrued expenses


697,909



92,986Deferred rent


(764
)


5,053Net cash used by operating
activities


(1,477,597
)


(1,431,658
)INVESTING ACTIVITIESPurchases of property and
equipment


(480,318
)


(783,116
)Investment in Cyclone Holdings,
Inc.


-



(175,000
)Net cash used by investing
activities


(480,318
)


(958,116
)FINANCING ACTIVITIESProceeds from issuance of
convertible debt


2,480,370



2,298,550Financing costs


(230,050
)


(229,855
)Payments on capital lease
obligations


(533,011
)


(296,488
)Proceeds from note payable 
related party


25,012



-Payments on notes payable 
related party


(10,000
)


(40,598
)Payment on
stock rescission


-



(105,000
)Proceeds from sales of common
stock


-



755,393Net cash provided by financing
activities


1,732,321



2,382,002NET DECREASE IN CASH


(225,594
)


(7,772
)CASHBeginning of year


241,333



188,670End of year

$
15,739


$
180,898  See
accompanying notes to consolidated financial statements.   5    DIGITILITI,
INC. **CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' DEFICIT** (UNAUDITED)  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


-


-


1,077,793


-


1,077,793Common 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


219,760


219


405,467





405,686Common stock issued for conversion of convertible
debt


76,300


76


38,074





38,150Employee
stock option compensation








910,402





910,402Net
loss











(5,463,041
)

(5,463,041
)Balances at
September 30, 2008


25,735,508

$
25,734

$
9,174,880

$
(12,514,248
)
$
(3,313,634
)    See accompanying
notes to consolidated financial statements.   6      **DIGITILITI, INC.** **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**  1. Organization, Basis of Presentation and Significant Accounting
Policies  The accompanying unaudited interim
financial statements of Digitiliti, Inc. (the Company, or Digitiliti, and
we, our or us and words of similar import) 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.  Certain prior year amounts have been
reclassified to conform with the current year presentation.  The Company and Nature of
Operations  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 condensed consolidated
financial statements for the nine months ended September 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 $5,463,041 for the nine months ended
September 30, 2008. In addition, we have an accumulated deficit of $12,514,248
and a working capital deficit of $4,156,716 as of September 30, 2008. Further,
$2,558,869 of our convertible debt is due within the next 12 months. 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.  7    **DIGITILITI, INC.** **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**  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.  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, up through August 1, 2008, we will make the following payments to two
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  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.  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 nine months ended September 30, 2008, no options
were exercised, and the Company recognized $464,268 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

-

-Forfeited

(735,500)

0.35Expired

-

-  Outstanding at September 30, 2008

6,605,500

$  0.37

$ -

4.48  8    **DIGITILITI, INC.** **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**  On September 30, 2008, we had $2,781,654 of
unamortized employee stock option expense, which will be recognized through May
2011.  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

2,300,450

1.88Exercised

-

-Forfeited

-

-Expired

-

-Outstanding at September 30, 2008

5,836,598

$  1.80

$ -

3.88  During the nine months ended September 30,
2008, the Company issued 250,000 shares of common stock in connection with the
purchase of software and 149,760 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.  5. Convertible
Debt  During the nine months
ended September 30, 2008, we issued $2,300,450 in convertible debt, together
with 1,150,225  warrants with an exercise price of $1.50 and 1,150,225
warrants with an exercise price of $2.25. During the nine months ended September
30, 2008, we recorded $1,077,794 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 $230,050, 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 nine months ended
September 30, 2008, and 2007, we recorded $201,848 and $39,688, respectively, of
deferred financing cost amortization.  The following summarizes the financial
presentation of our convertible debt at September 30, 2008, and December 31,
2007:  September 30,
2008

December 31,
2007Face value of convertible debt
5,465,000

$ 3,199,550Adjustments:Discount for
warrants issued
(2,338,206)

(1,260,412)Amortization of
debt discount
852,341

177,783Conversion of
debt, net of discount
(11,686)Convertible notes balance, net
3,967,449

$ 2,116,921   9      **DIGITILITI, INC.** **NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**  6. Supplementary
Disclosures of Cash Flow Information  Additional cash flow information consisted
of the following:  Nine Months Ended September 30
,
2008
2007Cash paid for interest
$ 70,086
$
5,676Cash paid for taxes
-
-Noncash financing and investing activities:Conversion of debt to equity
$
     38,150
$
            -Stock issued for Cyclone merger
-
525,000Discount on convertible debt
1,077,793
81,687  7. Subsequent
Events  On October 13, 2008, we completed our
$5,500,000 Second Bridge Loan Offering.  On October 13, 2008, the Board of Directors approved the
offer and sale of a $250,000 Convertible Note. The proceeds of this note will be
used to supplement new product development cost and working capital. To
facilitate the offering, Jonathon S. Miner, a director of the Company,
guaranteed the repayment of this convertible note. In return,  Mr.
 Miner received 100,000 warrants exercisable at $.50 per share. The term of
the warrants is five years.  On October 13, 2008, the Board of Directors accepted the
resignation of Larry D. Ingwersen as director and Chief Executive
Officer/President of the Company, along with the resignation of Roderick D.
Johnson as Chief Operating Officer. Subsequently, the Board approved the
termination of the Consulting Services Agreement between 5X Partners and the
Company. Of the aggregate total of 2,850,000 stock options granted Messrs.
Ingwerson and Johnson, at the time of their resignations, each party had 356,250
vested stock options, respectively. Mr. Ingwerson and Mr, Johnson forfeited the
remaining 2,137,500 unvested stock options on termination of the Consulting
Services Agreement, and the forfeited stock options will be returned to the
Stock Option Plan for reissuance by the Board thereunder.  At this meeting, the Board approved the election of
Daniel J. Herbeck as Chief Executive Officer/President, as well as Director of
the Company.  In addition, the Board accepted the resignation of Laura
Wenzel as a Board member of the Company and approved the elections of Roy A.
Bauer and Benno G. Sand as Board members of the Company.  During October of 2008, two employees left the Company
prior to full vesting of their respective stock options. Under the terms of the
Companys Stock Option Plan, their unvested stock options totaling 183,065 will
be forfeited and returned to the Stock Option Plan for reissuance by the Board
thereunder.   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  Our current business focuses 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 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 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.  11     We have invested significant resources in 2008 to expand
our digitiliti product offering by developing a new generation of  leading
edge software.  Our new product, Pyramid, represents a significant step
toward our goal to become a technology leader in the data information management
marketplace.  The Pyramid product is entering beta testing in Q4 with a
product launch targeted for the first part of next year.  This represents a
delay in product release originally anticipated for Q3, 2008, due to changes in
the scope of work on this product that were not anticipated and a delay in the
funding required to complete development.  The process of refining our
digitiliti products, our sales and marketing systems, our product packaging, our
infrastructure scaling methods and revenue generation offerings are well
underway.  We will focus on product positioning and building solid
partnerships with a goal of increasing market share as well as reducing our cost
of goods sold.  As a result of our sales and marketing efforts in our
existing product, Pharoah, our customer base has expanded from approximately 20
in fiscal 2005; to approximately 100 in fiscal 2006; to 508 in 2007; and as of
November 7, 2008, to approximately 722. Correspondingly, our annual sales have
increased from $402,638 in 2006, to $1,329,386 in 2007 and now are now estimated
to surpass $3,000,000 by 2008 year end.  This reflects an average monthly
revenue exceeding $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.  The Company has been aggressively taking steps to reduce
overall operating costs as we conserve cash.  We have reduced personnel
costs by 35% and gained additional efficiencies in product delivery resulting in
a 10% reduction in our costs of goods sold.   Further, we have reduced
our contract development staff thereby reducing development expenditures by an
additional 40% per month.  This will not significantly impact the
introduction of the Pyramid product in 2009.  We continue to seek
additional opportunities for operating cost reductions, 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.  Our increase in customer count and overall sales have
been funded, in large part, through our $5.5 million offering of 12% convertible
notes initiated in March 2007. These convertible notes reflected a $0.50 per
share conversion rate upon expiration of an 18-month maturity date, currently
resulting in principal and accrued interest as detailed below:  Periods

Total convertible notes issued

Total accrued interest on convertible
notes

Total accrued interest and convertible
notes

Due date for accrued interest and
convertible notes for Qtr. EndedQ1 2007

$    401,050

$    80,298

$    481,346

September 2008Q2 2007

707,500

123,384

830,884

December 2008Q3 2007

1,165,000

170,165

1,335,165

March 2009Q4 2007

926,000

114,977

1,040,977

June 2009Q1 2008

808,500

66,598

872,098

September 2009Q2 2008

945,500

54,651

1,000,151

December 2009Q3 2008

546,450

15,924

562,374

March 2010Total  At this time, we are implementing an action plan of
approaching our convertible note holders to request a restructuring of this debt
through an extension of the due dates of their respective convertible notes or
to encourage them to convert their respective convertible notes.  Although
there is no guarantee that our note holders will agree to either of these two
options, recent communications with a number of convertible note holders has
indicated an overall willingness by some note holders to extend or convert their
convertible note.  However, if we are unable to restructure this debt, we
may not be able to pay the convertible notes that are due and become due, with
accrued interest. This would have a substantial adverse impact on our ability to
continue our business operations.   12    We are also working on
positioning Mythos, an internally developed storage solution for the MAC
Market.  Mythos has not been brought to market.  We are considering
several options for Mythos, including but not limited to outright sale of the
software or exclusive licensing.  Results of Operations  For the three month periods ended September 30, 2008,
and 2007  Our sales for the September 30, 2008, quarter increased
$511,340 to $880,549 compared to $369,209 for the quarter ended September 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 September 30, 2007 to
720 as of September 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
$530,947 with a gross margin of $637,937 through September 30, 2008, versus
$106,990 through September 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, who 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 $24,000
to $402,542 during the quarterly periods ended September 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 increased to $195,692
from $152,081 for the quarterly periods ended September 30, 2008, and 2007,
respectively, reflecting an increase of $43,611. 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
$281,261 to $1,122,346 compared to $841,085 during the quarterly periods ended
September 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 Elements,
Inc., a Minnesota corporation (Storage and 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 quarter ended September 30,
2008, increased by $475,091 to $643,294, compared to $168,203 for the quarter
ended September 30, 2007. The increase reflects interest expense associated with
the convertible debt issued during the quarter ended September 30, 2007, versus
interest expense associated with convertible debt issued during the quarter
ended September 30, 2008, along with the related amortization of the deferred
financing costs and discount of the associated warrants.  For the nine month periods ended September 30, 2008,
and 2007  Our sales through September 30, 2008, increased
$1,341,399 to $2,211,958 compared to $870,559 through the nine months ended
September 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 September 30, 2007, to 720 as of September 30, 2008. The growth
of customer contracts is a direct result of the heavy emphasis we placed on  13    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
$1,457,660 with a gross margin of $1,602,709 through September 30, 2008, versus
145,049 through September 30, 2007. Factors contributing to this increase in our
gross margin are outlined above under the discussion of our Results of
Operations for the three months ended September 30, 2008, and 2007.  Research and development expenses increased from $24,784
to $1,339,413 during the nine months ended September 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 $520,815
from $620,918 for the nine months ended September 30, 2008, and 2007,
respectively, reflecting a decrease of $100,103. 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
$1,033,913 to $2,898,055 compared to $1,864,142 during the nine months ended
September 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 nine months ended September
30, 2008, increased by $1,222,512 to $1,506,018, compared to $283,506 for the
nine months ended September 30, 2007. The increase reflects interest expense
associated with the convertible debt issued during the six months ended
September 30, 2007, versus interest expense associated with convertible debt
issued during the nine months ended September 30, 2008, together 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 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 nine month periods ended September 30, 2008,
and 2007  During the nine months ended September 30, 2008, we
received proceeds of $2,505,382 from a note payable and the issuance of
convertible debt securities, which funded our cash used in operations of
$1,477,597 and investments in property and equipment.  Net cash used by operating activities during the first
nine months of 2008 was $1,477,597 compared to $1,431,658 during the third
quarter of 2007. Net cash used by operating activities during the nine months
ended September, 30 2008, was primarily impacted by:  · Net loss of ($5,463,041). · Depreciation and amortization of
$801,449. · Amortization of discount on
convertible debt issued of $675,520. · Increase in accounts receivable of
$367,900. · Increase in accounts payable and
accrued expenses of $910,402.   14    Net cash used by operating
activities during the nine months ended September, 30 2007, was primarily
impacted by:  · Net loss of ($3,213,016). · Depreciation and amortization of
$564,782. · Increase in trade accounts payable
and accrued expenses of $243,514.  Net cash used by investing activities during the first
nine months of 2008 was $480,318, primarily related to the purchase of software
licenses totaling $78,868 and equipment of $401,450. Net cash used by investing
activities during the first nine months of 2007 was $958,116 and was comprised
of $783,116 for equipment and software license purchases and $175,000 for
investment in Cyclone Holdings, Inc. (now the Registrant), which was acquired
by Storage to complete the Storage Merger.  Net cash provided by financing activities during the
first nine months of 2008 was $1,732,321 primarily comprised of $2,480,370 from
the issuance of convertible debt and from a note payable. Offsetting these items
were $230,050 in payments of financing costs and $533,011 in principal payments
on capital leases. Net cash provided by financing activities during the first
nine months of 2007 was $2,382,002, primarily comprised of $755,393 from the
sale of common stock, $2,298,550 from the sale of convertible securities and
$329,460. Offsetting these items were $296,488 in principal payments on capital
leases, $229,855 in payments of financing costs.  At September 30, 2008, our cash balance was $15,739
compared to $180,898 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 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.  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.  15    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 2006, and for the quarterly
period ended September 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 $4 0,000 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.  Item 1A. Risk
Factors.  Not required; however, various risk factors
about us and our business prospects and products is contained in Item 1A of our
Form 10 Registration Statement that was filed with the Securities and Exchange
Commission on or about August 13, 2008, all of which are still applicable to
us.   Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.  During the three months ended September 30,
2008, we issued 62,400 shares of our common stock for services provided in
connection with the purchased software.  During the three months ended September 30,
2008, we issued 70,000 shares of common stock for services provided in
connection with a public relations initiative.  During the three months ended September 30,
2008, we issued $546,450 in convertible debt, along with 273,225 warrants with
an exercise price of $1.50 and 273,225 warrants with an exercise price of
$2.25.   16    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.  None; not applicable.   Item 5. Other Information.   None; not applicable.   17    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    18    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:
November 19, 2008

By:
/s/Daniel J. HerbeckDaniel J. Herbeck, President, CEO and DirectorDate:
November19, 2008

By:
/s/William McDonaldWilliam McDonald, CFO/Treasurer       19