##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
______________
to
______________
 Commission File No. 000-53235
 DIGITILITI, INC.
  Delaware
    
    26-1408538(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 266 East 7th Street, 4th FloorSt. Paul, Minnesota 55101
 (651) 925-3200
 N/A
 þ o
 o o
 Rule 12b-2
 Large
accelerated filer o
    
    Accelerated filer
oNon-accelerated
filer o
    
    Smaller reporting company þ(Do not check if smaller reporting company)
 o þ
  Class
    
    Outstanding at May 14,
2010Common Stock, $.001 par value per share
    
    45,614,501 shares




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##### 



DIGITILITI, INC.
Table of Contents
 PagePART I  Financial InformationItem 1. Financial Statements (unaudited):Consolidated Balance Sheets  As of March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations  Three-months ended March 31, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows  Three-months ended March 31, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4T. Controls and Procedures
    
    
    19PART II  Other InformationItem 1. Legal Proceedings
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    21CertificationsExhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 
 DIGITILITI, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 ASSETS
    
    March 31,
    
    
    December 31,2010
    
    
    2009Current AssetsCash
    
    $
    104,057
    
    
    $
    141,086Accounts receivable
    
    
    422,791
    
    
    
    484,203Prepaid and other current assets
    
    
    242,046
    
    
    
    220,304Total current assets
    
    
    768,894
    
    
    
    845,593Property and equipment, net
    
    
    401,734
    
    
    
    444,675Software license, net
    
    
    641,786
    
    
    
    713,199Deferred financing costs
    
    
    93,612
    
    
    
    113,334Other assets
    
    
    7,322
    
    
    
    7,322Total assets
    
    $
    1,913,348
    
    
    $
    2,124,123LIABILITIES AND STOCKHOLDERS DEFICITLIABILITIESCurrent LiabilitiesAccounts payable
    
    $
    359,282
    
    
    $
    436,389Accounts payable  related parties
    
    
    
    
    
    
    7,861Accrued expenses
    
    
    1,367,540
    
    
    
    1,222,143Notes payable
    
    
    231,540
    
    
    
    518,371Current maturities of convertible debt
    
    
    2,425,955
    
    
    
    2,032,771Current maturities of capital lease obligations
    
    
    47,178
    
    
    
    45,819Total current liabilities
    
    
    4,431,495
    
    
    
    4,263,354Other LiabilitiesConvertible debt, non-current
    
    
    1,251,920
    
    
    
    1,646,502Capital lease obligations, non-current
    
    
    11,855
    
    
    
    24,043Deferred rent
    
    
    9,156
    
    
    
    11,552Other liabilities
    
    
    3,607
    
    
    
    3,607Total liabilities
    
    
    5,708,033
    
    
    
    5,949,058STOCKHOLDERS DEFICITCommon stock, $.001 par value; 100,000,000 shares
authorized,
43,153,131 and 38,808,736 shares issued and outstanding
    
    
    43,153
    
    
    
    38,809Additional paid-in capital
    
    
    16,282,938
    
    
    
    15,448,392Accumulated deficit
    
    
    (20,120,776
    )
    
    
    (19,312,136
    )Total stockholders deficit
    
    
    (3,794,685
    )
    
    
    (3,824,935
    )Total liabilities and stockholders deficit
    
    $
    1,913,348
    
    
    $
    2,124,123
 See accompanying notes to consolidated financial statements.
  3




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##### Table of Contents



DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months EndedMarch 31,(Restated)2010
    
    
    2009REVENUES
    
    $
    625,127
    
    
    $
    860,279COST OF REVENUES
    
    
    (301,971
    )
    
    
    (462,405
    )GROSS PROFIT
    
    
    323,156
    
    
    
    397,874OPERATING EXPENSESSelling and marketing
    
    
    175,293
    
    
    
    86,751General and administrative
    
    
    458,631
    
    
    
    592,574Research and development
    
    
    269,742
    
    
    
    90,507Total Operating Expenses
    
    
    903,666
    
    
    
    769,832LOSS FROM OPERATIONS
    
    
    (580,510
    )
    
    
    (371,958
    )INTEREST EXPENSE
    
    
    228,130
    
    
    
    1,990,247NET LOSS
    
    $
    (808,640
    )
    
    $
    (2,362,205
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.02
    )
    
    $
    (0.07
    )WEIGHTED-AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED
    
    
    41,318,675
    
    
    
    32,175,280
 See accompanying notes to consolidated financial statements.
  4




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##### Table of Contents



DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,(Restated)2010
    
    
    2009OPERATING ACTIVITIESNet loss
    
    $
    (808,640
    )
    
    $
    (2,362,205
    )Adjustments to reconcile net loss to net cash used by
operating activities:Depreciation expense
    
    
    84,258
    
    
    
    174,502Amortization of software license
    
    
    75,195
    
    
    
    96,933Amortization of deferred financing costs
    
    
    19,722
    
    
    
    88,198Amortization of discount on convertible debt
    
    
    64,617
    
    
    
    651,803Beneficial conversion feature on converted notes
    
    
    
    
    
    
    979,809Warrant expense
    
    
    
    
    
    
    172,660Shares issued for services
    
    
    40,995
    
    
    
    Employee stock option expense
    
    
    19,715
    
    
    
    63,241Changes in operating assets and liabilities:Accounts receivable
    
    
    61,412
    
    
    
    (30,264
    )Prepaid and other current assets
    
    
    (21,742
    )
    
    
    (78,250
    )Accounts payable
    
    
    (7,148
    )
    
    
    78,553Accounts payable  related parties
    
    
    (7,861
    )
    
    
    Accrued expenses
    
    
    170,044
    
    
    
    88,112Due to related parties
    
    
    
    
    
    
    1,314Deferred rent
    
    
    (2,396
    )
    
    
    (1,712
    )Net cash used by operating activities
    
    
    (311,829
    )
    
    
    (77,306
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (41,317
    )
    
    
    Purchase of software license
    
    
    (3,782
    )
    
    
    (1,419
    )Net cash used by investing activities
    
    
    (45,099
    )
    
    
    (1,419
    )FINANCING ACTIVITIESProceeds from sale of common stock, net of issuance costs
    
    
    765,300
    
    
    
    Payments on capital lease obligations
    
    
    (10,829
    )
    
    
    (84,535
    )Proceeds from notes payable  related parties
    
    
    
    
    
    
    75,000Proceeds from note payable
    
    
    
    
    
    
    165,197Payments on notes payable
    
    
    (364,572
    )
    
    
    (54,485
    )Payments on convertible notes
    
    
    (70,000
    )
    
    
    Net cash provided by financing activities
    
    
    319,899
    
    
    
    101,177
  5




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##### Table of Contents



DIGITILITI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,(Restated)2010
    
    

2009NET INCREASE (DECREASE) IN CASH
    
    
    (37,029
    )
    
    
    22,452CASHBeginning of year
    
    
    141,086
    
    
    
    36,317End of year
    
    $
    104,057
    
    
    $
    58,769Cash paid for interest
    
    $
    12,842
    
    
    $
    21,509Cash paid for income taxes
    
    
    
    
    
    
    Non-Cash Financing and Investing ActivitiesNotes payable issued for maintenance fees
    
    
    56,634
    
    
    
    Accrued interest converted to debt principal
    
    
    24,646
    
    
    
    Equipment acquired under capital lease
    
    
    
    
    
    
    8,230Notes payable issued to acquire software
    
    
    
    
    
    
    104,025Shares issued for accrued interest on
convertible debt
    
    
    
    
    
    
    307,954Shares issued for convertible debt
    
    
    
    
    
    
    2,262,700
 See accompanying notes to consolidated financial statements.
  6




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##### Table of Contents



1. Basis of Presentation
  Correction of Prior Period
  As previouslyreported
    
    
    Adjustments
    
    
    AdjustedInterest expense
    
    $
    1,218,794
    
    
    $
    771,453
    
    
    $
    1,990,247Net loss
    
    
    1,590,752
    
    
    
    771,453
    
    
    
    2,362,205Loss per share  Basic and diluted
    
    
    0.05
    
    
    
    0.02
    
    
    
    0.07
 Reclassifications
  New Accounting Pronouncements
    7




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##### Table of Contents



2. Going Concern
    3. Notes Payable
  4. Convertible Debt
  Convertible debt at December 31, 2009
    
    $
    3,679,273Less: principal payments
    
    
    (70,000
    )Add: accrued interest converted into debt
    
    
    3,985Add: Amortization of discount
    
    
    64,617Subtotal
    
    $
    3,677,875Less: current maturities
    
    
    (2,425,955
    )Long-term portion of convertible debt
    
    $
    1,251,920
    8




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##### Table of Contents



5. Equity
    6. Stock Options
  WeightedWeighted-
    
    
    AverageAverage
    
    
    RemainingOptions
    
    
    Exercise Price
    
    
    Life (yrs)Outstanding at December 31, 2009
    
    
    4,163,000
    
    
    
    0.37Granted
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31,2010
    
    
    4,163,000
    
    
    
    0.37
    
    
    
    3.0Exercisable at March 31, 2010
    
    
    3,927,890
    
    
    
    0.37
    
    
    
    2.9
  7. Stock Warrants
    9




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##### Table of Contents



WeightedWeighted-
    
    
    AverageAverage
    
    
    RemainingWarrants
    
    
    Exercise Price
    
    
    Life (yrs)Outstanding at December 31, 2009
    
    
    9,510,348
    
    
    
    0.79Granted
    
    
    340,000
    
    
    
    0.30Forfeited
    
    
    (305,000
    )
    
    
    0.63Outstanding at March 31, 2010
    
    
    9,545,348
    
    
    
    0.78
    
    
    
    4.06Exercisable
    
    
    9,045,348
    
    
    
    0.80
    
    
    
    4.01
  8. Commitments and Contingencies
    9. Subsequent Events
     10




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##### Table of Contents



Item 2.
    
    Managements Discussions and Analysis of Financial Condition and Results of Operations.
 Forward-looking Statements
    Plan of Operation The Business
  Our emerging business product, announced in December, 2009, is called
DigiLIBE. We believe that DigiLIBE is a game-changing product that addresses the root cause of companies’
information problems of unmanaged growth, lack of information governance and lack of ability to utilize and
leverage stored data. We designed the DigiLIBE product from our experience in the storage and archiving business
because we know that:  •
  
  Organizations want to be able to govern their information;  •
  
  People want to be able to access their information;  •
  
  People and organizations want to be able to leverage the content of the
information stored at the company, even if it is archived;  •
  
  People and organizations want to be able to put disparate pieces of content
together in a context that can be used to advantage; and  •
  
  People and organizations want to be able to do this simply and
inexpensively. DigiLIBE was designed from the bottom up and from a human user
perspective to achieve those objectives described above.  11




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##### Table of Contents



The DigiBak legacy business
  Through our DigiBAK service, we combine powerful, agent-less backup
software with our highly protected facility, to deliver to our customers an efficient and effective online-offsite
data backup and restore solution. Our facilities enable us to provide offsite disaster recovery emphasizing
intraday protection and restore for all of our customer primary data centers and geographically dispersed offices
or campus settings. Our DigiBAK Vault is located in the base of the former Minneapolis Federal Reserve Bank. It is
a one of a kind facility providing web based on-demand backup/restore service with all the benefits of direct
fiber access to a “Level 5” data center. The Vault has 24/7 onsite physical security, including
security guards, motion detectors, security cameras, card-key access, separate cages with individual locking
cabinets racks. It also has battery generator back up power, temperature and humidity controls and fire
suppression systems. Geographically, we are located at the center point of the Metropolitan area network. Being
centrally located at the focal point of the Twin Cities Fiber Channel and Gig loop, the pipeline for data and load
capabilities are immense. The DigiBAK Vault houses all of the hardware and software needed for
our DigiBAK solution. At the customer site, DigiBAK administrator software is loaded on as many or as few
workstations as desired and requires a valid logon code, ensuring no unauthorized access. At the customer site,
the administrator software console acts as the interface with the DigiBAK Vault service and enables the
configuration of all backups and restores. The DigiBAK backup software is totally agent-less, requiring no
additional software to be installed on any machines. From the customer administration console, the customer sets
retention policies, schedules automatic backups and initiates restores. The customer decides what files to backup:
emails, Windows, Linux, Mac, Lotus, AS400 or many more. Customers typically start backing up one system and then
add more systems to their backup sets as they continue to see how easily our DigiBAK solution works. To ensure customer security, all data is encrypted before it leaves the
customer site and when stored offsite. The encryption key is known only to the customer. The data can be
unencrypted only by the customer, who would do so upon the need of a restore. If a customer loses their local
data, they simply enter the commands to restore it via the administration console and data flows from the Data
Storage Center back to the customer site. If the customer loses all data, DigiBAK can restore the latest data to a
location of the customer’s choosing using a portable disk unit. In addition to being encrypted, the data is
also highly compressed, making it safe and impenetrable from viruses and optimizing customers’ storage costs
per gigabyte. We contract with XO Communications for our DigiBAK Vault space and
communication lines. XO Communications provides voice, data and IP services to businesses and other
telecommunications companies in 80 metropolitan markets across the United States. This relationship helps control
capital expenditures yet maintains flexibility to set up a new data center in any one of 80 geographically
dispersed locations throughout the world, thereby reducing any geographic concerns. We utilize both direct in-house sales and sales through business
partners such as VAR’s (Value Added Remarketers) andthird party integrators. Our resellers have extensive data storage knowledge and expertise and an
established customer base. Our sales plan targets reseller, OEM and channel partnerships regionally and nationally
that possess utility-oriented sales systems. We and our partners target vertical markets in the Small Business
Market (SMB) and the Small and Intermediate size Enterprises (SME) of 100 – 500 employees, per
industry standard classification.  12




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As a result of our sales and marketing efforts of our existing product,
DigiBAK, our customer base has expanded from approximately 20 in fiscal 2005; to approximately 100 in fiscal 2006;
to 508 in 2007; to 731 in 2008; to 789 in 2009 and 805 as of March 31, 2010. Correspondingly, our annual
sales have increased from $402,638 in 2006; to $1,329,386 in 2007; to $3,075,308 in 2008, to $3,192,463 in 2009
and $625,127 as of March 31, 2010. Despite the significantly improved revenue from sales, we continue to
struggle with profitability because of new product development, legacy issues of past due accounts payable, and
potential convertible debt repayment requirements. Through most of 2009, we struggled to address those legacy
issues, offered incentive for convertible debt holders to convert to equity and worked diligently to complete the
new product development. As we entered into 2010, we have resolved many of the legacy issues and completed the new
product development of our DigiLIBE product. While we still need to raise cash in 2010 to fund the launch of our
new product, we are in a much better position than we were a year ago. The Emerging New DigiLibe Product
  In the development of our new DigiLIBE product, we implemented a
rigorous product development approach, established a concrete architectural framework and a very specific product
development plan, with key development milestones and with automated test and integration systems. We restructured
the product development team, and invested heavily in customer, reseller and industry expert demonstrations, to
gain feedback on the product and to identify critical features and functions needed for Release 1 of this product
and beyond. We established three key milestones in our development plan, the first being to have the
“reference platform” completed by May 15, 2009, where the basic technology underpinnings and
performance capabilities of DigiLIBE are operational and meeting requirements. This “reference
platform” is the core intellectual property we have and will further introduce to the market and validated
the feasibility of our approach. The second milestone was on June 15, 2009. In this milestone, we began to
integrate end user and back-office function. The third milestone was on July 15, 2009, which was Release 1
“Function-freeze.” We have successfully completed each milestone and entered customer Beta Testing in
the 3rd quarter 2009. In the 4th quarter, we integrated graphics with common look and feel and additional
administrator reporting capabilities. DigiLIBE has received excellent feedback on the capability, performance and
function our new product delivers since its December, 2009, initial release. In the second quarter, we are continuing to work with our existing reseller channel to sell and
support our DigiLIBE and DigiBAK product. In addition, we have signed new reseller agreements with
three companies. One of these is Northland Systems of Medina, MN. We are in the process of
developing go-to-market plans, doing technical product training and product evaluation, and working
through the details of the order, delivery, and revenue recognition cycle with Northland and the
other resellers. Once these actions are completed to a sufficient level of confidence that our
relationship will yield successful results, the other resellers will be announced. We continue to
engage additional resellers as part of our overall plan. In addition, our pipeline continues to
grow and our partners have sold DigiLIBE units. They are currently in the process of completing
installation and customer verification.  13




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Through confidential disclosures and demonstrations, and from industry
analysts, we believe that our new product is positioned to change the current information management and storage
approach and achieve significant market opportunity. Our new product represents a significant step toward our goal
of becoming a technology leader in the information content and context management marketplace. This product offers
a breakthrough approach to how companies store, archive and utilize information for competitive advantage. It will
finally enable customers to control the information they create and access that information to gain business
intelligence. DigiLIBE is disruptive technology in that it differs from the existing industry solutions in its
completely integrated and simplified approach in one solution (versus linking point solutions together), and in
the price point to implement and manage. DigiLIBE organizes CONTENT and puts information in CONTEXT for
organizations to gain more efficiency and for competitive advantage. It’s an entirely different way to look
at information. Today, the market is defined by the technology surrounding information management. With DigiLIBE,
the market is defined by content creation and use. We believe our DigiLIBE product offers new industry innovations
and have filed filed for patent protection in our initial patent application filing of January, 2009. Further, we
believe there are no competitors that currently offer the breadth and depth of this approach. The Market and Resellers
  Internal Operations and Capabilities
  (1) An operational arm to manage and focus on the
current DigiBAK operations, including customer support and satisfaction, continuous operational improvements and
on sales support and growth, both with business partners and direct customers. In addition, the operations
organization will build and manage internal IT infrastructure in support of DigiLIBE. (2) A new product
development team to focus on launching Release 1 of DigiLIBE, determining features and function for Release 2 and
strengthening the development and QA release system and process. (3) A sales and marketing team to
implement the marketing strategy, sales plan and technical customer support process for DigiLIBE, including
marketing deliverables, target markets, competitive intercept strategies, reseller development, and support
system. (4) A financial and administrative team to focus on business results, expense management,
business controls, investor and outside communications, and Human Resources. In order to fund the new product launch, we have been aggressively
reducing overall operating costs to increase profitability of our DigiBAK operations. Since 2008, we have reduced
our annual salaries and wages by over 20%, while increasing operational efficiencies and lowering overall costs of
goods sold. As previously stated, we implemented additional restructuring of our DigiBAK operations to increase
profitability, improve cash flow and reduce cash burn rate. Through these actions, we reduced our cash burn rate
per month by approximately $100,000 in 2009. From 2008 to 2009, we reduced our operating expenses by 47%. We
continue to raise additional capital to provide the financial resources needed to achieve our strategy, albeit we
are balancing our desire to aggressively launch our new product with the reality of available capital. During
2009, we agreed to a payment plan with our primary Vault software provider, Asigra. This payment plan addressed
the approximately $550,000 past due licenses from 2008 as well as those licenses due in 2009 and first three
months of 2010 of approximately $300,000. The payment plan addressed all of these costs, allocated in a monthly
payment plan which ended in March, 2010. We completed the Data Sales lease in November, 2009, and negotiated a
$480,000 liability to Exanet down to $80,000, which was paid off in December 2009. We believe the results of
these actions should enable us to achieve break-even cash flow in 2010 as we accelerate new product sales. We held
our first annual shareholder meeting on October 15, 2009.  14




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Continuing operations have been funded, in large part, through our
$5.5 million offering of 12% convertible notes initiated in March 2007, our $750,000 offering of 12%
secured convertible notes initiated in April 2009 and our $2,000,000 equity offering initiated in
October 2009. The October 2009 equity raise was originally up to a maximum of $1,000,000, but was
increased to $1,500,000 during the first quarter of 2010 and increased again to $2,000,000 in April 2010. This
equity round of financing was offered shares of our common stock at $0.20 per share. As of March 31, 2010,
this equity raise provided $1,364,500 of capital to fund business operations and development and marketing of our
new DigiLibe product. Prior to implementation of the Modification Proposal (discussed below),
the March 2007 12% convertible notes were convertible into common stock at $0.50 per share, provided a
registration statement covering the underlying common stock has been filed with the Securities and Exchange
Commission and declared effective and upon expiration of an 18 month term. In addition, for each $1 in principal
invested, the investor received a warrant to purchase one-half of a share of common stock with a five year term
exercisable at $1.50 per share (the “A warrants”) and a warrant to acquire one-half of a share of
common stock with a five year term exercisable at $2.25 per share (the “B warrants”) (see inducement
discussion below). Each warrant could not be exercised during the first 6-months and one day following issuance,
unless there was an effective registration statement covering the underlying common stock filed with the
Securities and Exchange Commission. In addition, the April 2009 12% secured convertible notes were
convertible into common stock at $0.35 per share, provided a registration statement covering the underlying common
stock has been filed with the Securities and Exchange Commission and declared effective and upon expiration of a
24 month term. In addition, for each $1 in principal invested, the investor received a warrant to acquire one
share of common stock with a five year term exercisable at $0.50 per share. These notes are secured against the
Data Store Center Vault. We completed the $750,000 12% secured convertible debt offering in October, 2009. In late 2008 and early 2009, we directly contacted our 12% convertible
note holders and 12% secured convertible note holders to seek to restructure the debt by asking the holders to
extend the due dates of their respective convertible notes or to encourage them to convert their respective
convertible notes (the “Modification Proposal”). On November 13, 2008, as a demonstration of
confidence in our current plan, and as an act of good faith, our Board of Directors unilaterally approved by board
resolutions a reduction in the $1.50 and $2.25 exercise prices of the A and B warrants to $1.00 for both classes
of warrants. In addition, our Board of Directors approved an overall reduction in the conversion price of all
convertible notes from $0.50 per share to $0.35 per share. The resolutions provided that the reduced conversion
price would be retroactive to include any convertible note holders who had already elected to convert their
respective convertible notes. $35,000 in convertible notes had already been converted at the time of these
resolutions. Accordingly, we were obligated to issue a total of 109,000 additional shares of our common stock for
division among these holders.  15




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Liquidity and Capital Resources
        16




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Outstanding Convertible Note Table at March 31, 2010
from the $5,500,000 Private Offering
 Principal &Principal
    
    
    Acc. Interest
    
    
    Accrued
    
    
    Quarter whenBalance of
    
    
    on
    
    
    Interest on
    
    
    Conv. NotesConv. Notes
    
    
    Conv. Notes
    
    
    Conv. Notes
    
    
    OuststandingOutstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    come due$
    716,785
    
    
    $
    219,459
    
    
    $
    936,244
    
    
    
    3/31/2010$
    55,000
    
    
    $
    19,402
    
    
    $
    74,402
    
    
    
    6/30/2010$
    560,000
    
    
    $
    178,313
    
    
    $
    738,313
    
    
    
    9/30/2010$
    275,000
    
    
    $
    81,098
    
    
    $
    356,098
    
    
    
    12/31/2010$
    490,000
    
    
    $
    122,647
    
    
    $
    612,647
    
    
    
    3/31/2011$
    387,500
    
    
    $
    87,161
    
    
    $
    474,661
    
    
    
    6/30/2011$
    272,000
    
    
    $
    55,624
    
    
    $
    327,624
    
    
    
    9/30/2011$
    2,756,285
    
    
    $
    763,704
    
    
    $
    3,519,989
   17




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##### Table of Contents



Results of Operations
 For the
three months ended March 31, 2010 and 2009
   st
    18




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4T.
    
    Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
         19




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
   
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
 Item 3.
    
    Defaults Upon Senior Securities.
   20




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##### Table of Contents



Outstanding Convertible Note Table at May 14, 2010
from the $5.5M Private Offering
 Principal &Principal
    
    
    Acc. Interest
    
    
    Accrued
    
    
    Quarter whenBalance of
    
    
    on
    
    
    Interest on
    
    
    Conv. NotesConv. Notes
    
    
    Conv. Notes
    
    
    Conv. Notes
    
    
    OuststandingOutstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    come due$
    716,785
    
    
    $
    229,193
    
    
    $
    945,978
    
    
    
    3/31/2010$
    55,000
    
    
    $
    20,093
    
    
    $
    75,093
    
    
    
    6/30/2010$
    560,000
    
    
    $
    186,527
    
    
    $
    746,527
    
    
    
    9/30/2010$
    275,000
    
    
    $
    85,132
    
    
    $
    360,132
    
    
    
    12/31/2010$
    490,000
    
    
    $
    129,833
    
    
    $
    619,833
    
    
    
    3/31/2011$
    387,500
    
    
    $
    92,844
    
    
    $
    480,344
    
    
    
    6/30/2011$
    272,000
    
    
    $
    59,613
    
    
    $
    331,613
    
    
    
    9/30/2011$
    2,756,285
    
    
    $
    803,235
    
    
    $
    3,559,520
  
 Item 6.
    
    Exhibits.
  
 SIGNATURES
  Digitiliti, Inc.Date: May 15, 2010
    By:
    /s/Roy A. BauerRoy A. Bauer, President, CEO Date: May 15, 2010
    By:
    /s/William McDonaldWilliam McDonald, CFO  21




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description of Exhibit31.1*
    
    
    302 Certification of CEO, Roy A. Bauer31.2*
    
    
    302 Certification of CFO, William McDonald32.1*
    
    
    906 Certification99.1
    
    
    Settlement Agreement and Release dated March 8, 2010
(incorporated by reference to Exhibit 99.1 to the registrants
Current Report on Form 8-K filed with the Commission on March
23, 2010).*
    Filed herewith
  22