~~Table~~UNITED ~~of Contents~~STATES

~~UNITED STATES~~ SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, ~~2010~~2011



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 Number: 000-53235

DIGITILITI, INC.

(Exact Name of Registrant as specified in its Charter)

Delaware		26-1408538
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
(State or other Jurisdiction of Incorporationor Organization)		(I.R.S. Employer Identification No.)

~~(Address~~266 ofEast ~~Principal~~7th ~~Executive~~Street, ~~Offices)~~4th Floor

~~(651) 925-3200 (Registrant’s~~St. ~~Telephone Number~~Paul, ~~including~~Minnesota ~~area code)~~55101

~~Securities registered pursuant to Section 12~~(b)Address of ~~the~~Principal ~~Act:~~Executive ~~None~~Offices)

~~Securities registered pursuant to Section 12~~(g651) ~~of the Act: Common Stock, par value $0.001~~ 925-3200

~~Indicate by check mark if the~~ (Registrant’s isTelephone ~~a well-known seasoned issuer~~Number, asincluding ~~defined~~area ~~in Rule 405 of the Securities Act. Yes o No þ~~ code)

~~Indicate~~Securities byregistered ~~check mark if the Registrant is not required to file reports~~ pursuant to Section ~~13 or 15~~12(db) of the ~~Exchange~~ Act~~. Yes o~~: ~~No þ~~ None

~~Indicate~~Securities byregistered ~~check~~pursuant ~~mark whether the Registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(dg) of the ~~Exchange~~ Act: ~~during~~Common ~~the preceding 12 months (or for such shorter period that the Registrant was required to file such reports)~~Stock, ~~and~~par ~~(2) has~~value ~~been subject to such filing requirements for the past 90 days~~$0. ~~Yes þ No o~~ 001

Indicate by check mark ~~whether~~if the ~~registrant~~Registrant ~~has~~is ~~submitted~~a ~~electronically~~well-known ~~and~~seasoned ~~posted on its corporate Website~~issuer, ifas ~~any,~~defined ~~every~~in ~~Interactive Data File required to be submitted and posted pursuant to~~ Rule 405 of ~~Regulation S-T (§232.405 of this chapter) during~~ the ~~preceding~~Securities ~~12 months (or for such shorter period that the registrant was required to submit and post such files)~~Act. Yes o No o þ

Indicate by check mark if ~~disclosure~~the ofRegistrant ~~delinquent filers pursuant to Item 405 of Regulation S-K~~ is ~~not~~ ~~contained herein, and will~~ not berequired ~~contained,~~ to ~~the~~file ~~best~~reports ofpursuant ~~Registrant’s~~to ~~knowledge,~~Section 13 ~~in definitive proxy~~ or ~~information~~15(d) ~~statements incorporated by reference in Part IV~~ of ~~this~~the ~~Form~~Exchange ~~10-K or~~Act. ~~any~~Yes ~~amendment~~o toNo ~~this Form 10-K. o~~ þ

Indicate by check mark whether the Registrant is(1) has afiled ~~large~~all ~~accelerated~~reports ~~filer,~~required anto ~~accelerated~~be ~~filer,~~filed ~~a non-accelerated~~by ~~filer~~Section 13 or a15(d) ~~smaller~~of ~~reporting~~the ~~company:~~ Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

~~Large~~Indicate ~~accelerated~~by ~~filer~~check omark ~~Accelerated~~whether ~~filed~~the oregistrant ~~Non~~has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-~~accelerated~~T ~~filer~~(§232.405 oof ~~Smaller~~this ~~reporting~~chapter) ~~company~~during þ

~~Indicate~~the bypreceding ~~check~~12 months ~~mark~~(or ~~whether~~for ~~the~~such ~~Registrant~~shorter isperiod athat ~~shell~~the ~~company~~registrant ~~(as~~was ~~defined~~required into ~~Rule 12b-2~~submit ofand ~~the Exchange~~post ~~Act~~such files). Yes o No þ o

~~Market~~Indicate ~~Value~~by check mark if disclosure of ~~Non~~delinquent filers pursuant to Item 405 of Regulation S-~~Affiliate~~K ~~Holdings~~ is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. o

~~State~~Indicate ~~the aggregate market value of the voting and non-voting common stock held~~ by ~~non-affiliates computed~~check bymark ~~reference~~whether to the ~~price~~Registrant atis ~~which~~a ~~the~~large ~~common~~accelerated ~~stock was last sold~~filer, oran ~~the~~accelerated ~~average bid and asked price of such common stock~~filer, asa ofnon-accelerated ~~the~~filer ~~last~~or ~~business~~a ~~day~~smaller ofreporting ~~the Registrant’s most recently completed third quarter.~~ company:

AtLarge ~~June 30,~~accelerated ~~2010,~~filer ~~the~~o ~~aggregate~~Accelerated ~~market~~filed ~~value~~o ~~of the shares of voting and non~~Non-~~voting~~accelerated ~~common~~filer ~~stock held~~o bySmaller ~~non-affiliates~~reporting ~~was~~company approximately $10,778,001, based on 59,887,782 shares being held by such persons and the closing price of $0.18 for the Registrant’s common stock on the Pink OTC Markets, Inc. (the “Pink Sheets”) on June 30, 2010. þ

~~Outstanding~~Indicate ~~Shares~~ by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

~~Indicate~~Market ~~the~~Value ~~number~~ of ~~shares~~Non-Affiliate ~~outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:~~ Holdings

Class		Outstanding at March 30, 2011
Common Stock, $.001 par value per share		65,599,753 shares

State the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant’s most recently completed second quarter.

~~Documents~~At ~~Incorporated~~June 30, 2011, the aggregate market value of the shares of voting and non-voting common stock held by ~~Reference~~non-affiliates was approximately $4,111,983, based on 68,533,042 shares being held by such persons and the closing price of $0.06 for the Registrant’s common stock on the Pink OTC Markets, Inc. (the “Pink Sheets”) on June 30, 2011.

~~Parts~~Outstanding of the definitive Proxy Statement for the 2011 Annual Meeting of Stockholders which the Registrant intends to file with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2010, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described herein. If the Registrant does not file its Proxy Statement with the Commission on or before 120 days after the end of its 2010 fiscal year, the Registrant will file the required information in an amendment to this Annual Report on Form 10-K. Shares

~~TABLE~~Indicate OFthe ~~CONTENTS~~ number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

PART I		3
Class	Outstanding at April 13, 2012
ITEM 1. BUSINESS		3
Common Stock, $.001 par value per share	70,683,241 shares
ITEM 1A. RISK FACTORS		11
ITEM 2: PROPERTIES		18
ITEM 3: LEGAL PROCEEDINGS		18
PART II		19
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		19
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		27
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		54
ITEM 9A: CONTROLS AND PROCEDURES		54
ITEM 9B: OTHER INFORMATION		55
PART III		55
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE		55
ITEM 11: EXECUTIVE COMPENSATION		64
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		65
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		67
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES		69
PART IV		55
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES		55
SIGNATURES		57
EX-10.10
EX-31.1
EX-31.2
EX-32

2 Documents Incorporated by Reference

~~Table~~None. ~~of Contents~~

~~PART~~TABLE IOF CONTENTS

FORWARD-LOOKING STATEMENTS



PART I	3

ITEM 1. BUSINESS	3

ITEM 1A. RISK FACTORS	11

ITEM 2: PROPERTIES	18

ITEM 3: LEGAL PROCEEDINGS	18

PART II	19

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	19

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	27

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	54

ITEM 9A: CONTROLS AND PROCEDURES	54

ITEM 9B: OTHER INFORMATION	55

PART III	55

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	55

ITEM 11: EXECUTIVE COMPENSATION	64

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	65

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	67

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES	69

PART IV	55

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES	55

SIGNATURES	57

EX-10.10
EX-31.1

In this Annual Report, references to “Digitiliti, Inc.,” “Digitiliti,” the “Company,” “we,” “us,” “our” and words of similar import) refer to Digitiliti, Inc., a Delaware corporation (the “Registrant”); and such references also include our whollyEX-~~owned subsidiary, Digitiliti, Inc~~31.,2 ~~a Minnesota corporation, which was formerly named “Storage Elements, Inc.,” our predecessor (sometimes called “Storage” herein).~~ EX-32

~~This~~PART Annual Report contains certain forward-looking statements, and for this purpose, any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited to, economic conditions generally and in the markets in which we may participate, competition within our chosen industry, technological advances and any failure by us to successfully develop continuing business relationships and customers or to successfully fund our current and intended operations. I

~~ITEM~~FORWARD-LOOKING ~~1. BUSINESS~~STATEMENTS

WeIn ~~were~~this ~~organized~~Annual ~~under~~Report, references to “Digitiliti, Inc.,” “Digitiliti,” the ~~name~~“Company,” “~~Cyclone~~we,” ~~Holdings~~“us,” “our” and words of similar import) refer to Digitiliti, Inc., a Delaware corporation (the “Registrant”); asand such references also include our wholly-owned subsidiary, Digitiliti, Inc., a ~~holding~~Minnesota ~~company~~corporation, ~~under~~which ~~Delaware~~was ~~Law on~~formerly ~~March 31~~named “Storage Elements, ~~2006~~Inc. ,” our predecessor (sometimes called “Storage” herein).

OnThis ~~February 27~~Annual Report contains certain forward-looking statements, ~~2007~~and for this purpose, weany ~~changed~~statements ~~our~~contained ~~name~~in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “~~Digitiliti~~may,” ~~Inc.~~“will,” “expect,” “believe,” “anticipate,” “estimate,” “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited to, economic conditions generally and in the markets in which we may participate, competition within our chosen industry, technological advances and any failure by us to successfully develop continuing business relationships and customers or to successfully fund our current and intended operations.

WeITEM acquired Storage Elements, Inc (the “Storage Merger”), effective August 17, 2007, and we became a successor to Storage and its business operations, with Storage becoming our wholly-owned subsidiary. References are often made to “Storage” throughout this Annual Report to provide a clearer understanding of the information presented. We also changed the name of Storage to “Digitiliti, Inc.” As a result, we both share the same name, respectively, in the States of Delaware and Minnesota. 1: BUSINESS

~~Currently,~~We ~~our~~were ~~principal~~organized ~~executive~~under ~~offices~~the ~~are~~name ~~located~~“Cyclone atHoldings, ~~266~~Inc.” ~~East~~as ~~7th~~a ~~Street, 4th~~holding ~~Floor,~~company ~~St.~~under ~~Paul,~~Delaware MnLaw ~~55101,~~on ~~(651)~~March ~~925-3000~~31, 2006.

On ~~March~~February 1327, ~~2008~~2007, we ~~acquired~~changed ~~a commercially-proven technology from StorageSwitch, LLC, a Colorado limited liability company (“StorageSwitch”), which led to the development of~~ our ~~new~~name ~~product discussed below under the heading “Business-DigiLIBE.” Since then we have made significant changes~~ to ~~the product~~“Digitiliti, ~~and it is now called the “Universal Archive Platform”~~Inc. ”

~~Our~~We ~~business~~acquired isStorage ~~developing~~Elements, ~~and~~Inc ~~delivering~~(the ~~superior~~“Storage ~~archiving~~Merger”), ~~and~~effective ~~information~~August 17, ~~management technologies~~2007, and ~~methodologies~~we ~~enabling~~became ~~our~~a ~~customers~~successor to ~~manage,~~Storage ~~control, protect~~ and ~~access~~its ~~their information~~business ~~and~~operations, ~~data~~with ~~simply~~Storage ~~and~~becoming ~~cost~~our ~~effectively~~wholly-owned subsidiary. ~~Our~~References ~~traditional~~are ~~business~~often ismade ~~providing~~to a“Storage” ~~cost effective~~throughout ~~on-line~~this ~~data~~Annual ~~protection~~Report ~~and~~to ~~data~~provide ~~recovery~~a ~~solution~~clearer tounderstanding of the ~~small~~information topresented. ~~medium~~We ~~business (“SMB”)~~also ~~and~~changed ~~small~~the toname ~~medium~~of ~~enterprise~~Storage (to “~~SME”)~~Digitiliti, ~~markets through our DigiBAK service~~Inc.”. ~~This~~As ~~on-line cloud~~a ~~storage~~result, ~~management~~we ~~solution~~both ~~helps~~share ~~organizations~~the ~~properly~~same ~~manage~~name, ~~and~~respectively, ~~protect~~in ~~their~~the ~~entire network~~States ~~from~~of ~~one~~Delaware ~~centralized~~and ~~location~~Minnesota.

~~Our emerging business product~~Currently, ~~released~~our inprincipal ~~the~~executive ~~first~~offices ~~quarter~~are oflocated ~~2010,~~at is266 ~~called~~East ~~the~~7th ~~Universal Archive Platform~~Street, ~~DigiLIBE.~~4th ~~We believe that DigiLIBE is a game-changing product that addresses the desperate need for a fiscally responsible~~Floor, ~~integrated~~St. ~~system to manage the increasing growth~~Paul, ~~volume,~~ ~~and~~Mn ~~diversity of unstructured data that now represents up to 85% of enterprise information and continues to grow rapidly. Content chaos is overwhelming companies’ ability to meet compliance~~55101, ~~utilize~~ ~~collaboration tools and optimize storage needs for their virtualized infrastructures~~(651) 925-3000.

~~DigiBAK~~On ~~and~~March 13, ~~DigiLIBE~~2008, ~~are~~we ~~complementary~~acquired ~~products~~a ~~with~~commercially-proven ~~DigiBAK~~technology ~~providing~~from ~~cloud~~StorageSwitch, ~~storage~~LLC, ~~backup~~a ~~and recovery~~Colorado oflimited ~~structured~~liability ~~data~~company ~~and~~(“StorageSwitch”), ~~operating~~which ~~system~~led ~~files~~to ~~and~~the ~~DigiLIBE~~development ~~offers~~of ~~archiving~~our ~~and information~~new ~~management~~product ~~and~~discussed ~~life~~below under the heading “Business-~~cycle~~DigiLIBE.” ~~control~~Since ofthen ~~unstructured~~we ~~data~~have ~~from~~made ~~end-user~~significant ~~through~~changes ~~archiving~~ to the product, and ~~back~~it tois now called the ~~end~~“Universal ~~user~~Archive Platform”.

Our ~~Internet~~business ~~website~~is ~~address~~developing isand ~~www.Digitiliti.com.~~delivering ~~The~~superior archiving and information onmanagement ~~this~~technologies ~~website~~and ismethodologies ~~not incorporated~~enabling byour ~~reference~~customers ~~into~~to ~~this~~manage, ~~Annual~~control, ~~Report~~protect onand ~~Form~~access ~~10-K.~~their Weinformation ~~make~~and ~~available~~data ~~free~~simply ofand ~~charge through~~cost ~~our~~effectively. ~~website~~Our ~~annual~~traditional ~~reports~~business onis ~~Form~~providing ~~10-K,~~a ~~quarterly~~cost ~~reports~~effective on-line ~~Form~~data ~~10-Q,~~protection ~~current~~and ~~reports~~data ~~on Form~~recovery ~~8-K,~~solution ~~Forms~~to 3,the 4small ~~and~~to 5medium ~~filings,~~business (“SMB”) and ~~all~~small ~~amendments~~ to ~~those~~medium ~~reports~~enterprise ~~and~~(“SME”) ~~filings~~markets asthrough ~~soon~~our ~~as reasonably~~DigiBAK ~~practicable~~service.”. ~~after~~This ~~such~~on-line ~~material~~cloud isstorage ~~electronically~~management ~~filed~~solution ~~with,~~helps ororganizations ~~furnished~~properly ~~to,~~manage ~~the Securities~~ and ~~Exchange~~protect ~~Commission~~their ~~(“SEC”)~~entire network from one centralized location.

3 Our emerging business product, released in the first quarter of 2010, is called the Universal Archive Platform, DigiLIBE. We believe that DigiLIBE is a game-changing product that addresses the desperate need for a fiscally responsible, integrated system to manage the increasing growth, volume, and diversity of unstructured data that now represents up to 85% of enterprise information and continues to grow rapidly. Content chaos is overwhelming companies’ ability to meet compliance, utilize collaboration tools and optimize storage needs for their virtualized infrastructures.

~~Table~~DigiBAK and DigiLIBE are complementary products with DigiBAK providing cloud storage backup and recovery of ~~Contents~~structured data and operating system files and DigiLIBE offers archiving and information management and life-cycle control of unstructured data from end-user through archiving and back to the end user.

Our Internet website address is www.Digitiliti.com. The ~~DigiBAK~~information ~~business~~ on this website is not incorporated by reference into this Annual Report on Form 10-K. We make available free of charge through our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to those reports and filings as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

~~Our~~The DigiBAK solution can backup and restore emails and all company data on every machine in a network, including desktops, laptops, file and print servers. We provide storage through a “utility based computing” philosophy, where customers pay for the gigabytes of data they store in DigiBAK’s Vault facility. business

~~Through~~Our ~~our~~ DigiBAK ~~service,~~solution wecan ~~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.~~emails ~~Our facilities enable us to provide offsite disaster recovery emphasizing intraday protection~~ and ~~restore for~~ all ofcompany ~~our customer primary~~ data ~~centers~~on ~~and geographically~~every ~~dispersed~~machine ~~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~~network, including ~~security guards~~desktops, ~~motion detectors~~laptops, ~~security~~ ~~cameras,~~file ~~card-key access, separate cages with individual locking cabinets~~ and ~~ladder racking~~print servers. ItWe ~~also~~provide ~~has~~storage ~~battery~~through ~~generator~~a ~~back~~“utility upbased ~~power,~~computing” ~~temperature and humidity controls and fire suppression systems. Geographically~~philosophy, wewhere ~~are~~customers ~~located~~pay atfor 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 and this capability allows us to send data back and forth in real time.

Wegigabytes ~~utilize~~of ~~both direct in-house sales and sales through business partner channels such as Value Added Resellers (VARs) and third party integrators. Our resellers have extensive~~ data ~~storage~~ ~~knowledge~~they ~~and~~store expertise and an established customer base. Our sales plan targets reseller, Original Equipment Manufacturer and channel partnerships regionally and nationally that possess utility-oriented sales systems. We and our partners target vertical markets specifically in ~~the Small~~DigiBAK’s ~~Business~~Vault ~~Market (SMB) and the Small and Intermediate size Enterprises of 100 — 5000 employees with an average of four sites and five — 20 Terabytes of information to archive~~facility.

AsThrough ~~a result of~~ our ~~sales~~DigiBAK ~~and~~service, ~~marketing~~we ~~efforts~~combine ofpowerful, ~~our~~agent-less ~~DigiBAK~~backup ~~product,~~software with our ~~customer~~SAS ~~base~~70 ~~has expanded~~compliant ~~from~~facility, ~~approximately~~to 20deliver into ~~fiscal~~our ~~2005~~customers toan ~~approximately~~efficient ~~100~~and ineffective ~~fiscal~~online-offsite ~~2006,~~data ~~508~~backup inand ~~2007,~~restore ~~731 in~~solution. ~~2008,~~Our ~~789~~facilities inenable ~~2009~~us ~~and~~to ~~890~~provide asoffsite ofdisaster ~~December 31,~~recovery ~~2010.~~emphasizing ~~Correspondingly,~~intraday ~~our~~protection ~~annual~~and ~~sales~~restore ~~have increased~~for ~~from~~all ~~$402,638~~of inour ~~2006;~~customer toprimary ~~$1,329,386~~data incenters ~~2007,~~and ~~$3,075,308~~geographically indispersed ~~2008~~offices ~~and~~or ~~$3,192,463~~campus ~~in 2009~~settings. In ~~2010,~~Our ~~while~~SAS ~~experienced~~70 ancompliant ~~increase~~DigiBAK inVault ~~customers,~~facility weis ~~experience~~located aat ~~decline~~511 in6th ~~sales~~Street ~~posting $2~~South,~~143,882~~ ~~through December 31~~Minneapolis, ~~2010~~MN. ~~Despite~~It ~~this~~is ~~strong~~a ~~overall~~one ~~customer~~of ~~trend,~~a wekind ~~continue~~facility ~~to struggle~~providing web based on-demand backup/restore service with ~~profitability~~all ~~because~~the benefits of ~~increasing~~direct ~~competitive~~fiber ~~pressure~~access ~~causing~~to ~~commodity-like pricing~~a ~~through~~“Level ~~cloud-like~~5” ~~storage~~data center. ~~While~~The weVault ~~have~~has ~~continued~~24/7 toonsite ~~grow~~physical ~~our customer base~~security, weincluding ~~have also~~security ~~had~~guards, tomotion ~~adjust~~detectors, ~~pricing~~security tocameras, ~~maintain~~card-key ~~competitive~~access, ~~advantage.~~separate Wecages ~~have~~with ~~significantly~~individual ~~improved~~locking ~~our support~~cabinets ~~infrastructure~~ and ~~have~~ladder ~~been~~racking. ~~able~~It toalso ~~hold~~has ~~our~~battery ~~margins.~~generator Weback ~~still~~up ~~need~~power, totemperature ~~raise~~and ~~cash~~humidity incontrols ~~2011 to~~and ~~grow~~fire ~~our~~suppression ~~overall~~systems. ~~business~~Geographically, ~~but~~ we ~~believe we~~ are inlocated aat ~~much~~the ~~better~~center ~~financial~~point ~~and~~of ~~expense~~the ~~position than~~Metropolitan wearea ~~were~~network. aBeing ~~year~~centrally ~~ago~~located ~~through~~at ~~targeted~~the ~~expense~~focal ~~reduction~~point ~~and~~of ~~debt~~the ~~conversion.~~Twin ~~The~~Cities ~~product features~~Fiber ~~that~~Channel weand ~~are~~Gig ~~offering~~loop, tothe ~~our~~pipeline ~~clients~~for wedata ~~believe~~and ~~have~~load ~~superior~~capabilities ~~functionality~~are toimmense ~~the mainstream competition~~ and ~~fill~~this acapability ~~customer~~allows ~~need.~~us Weto ~~expect~~send ~~this~~data ~~gain~~back ~~new~~and ~~business~~forth in ~~2011~~real time.

~~The~~We ~~Emerging~~utilize ~~New~~both ~~Universal~~direct ~~Archive~~in-house ~~Platform~~sales and sales through business partner channels such as Value Added Resellers (~~DigiLIBE~~VARs) ~~Product~~ and third party integrators. Our resellers have extensive data storage knowledge and expertise and an established customer base. Our sales plan targets reseller, Original Equipment Manufacturer and channel partnerships regionally and nationally that possess utility-oriented sales systems. We and our partners target vertical markets specifically in the Small Business Market (SMB) and the Small and Intermediate size Enterprises of 100 — 5000 employees with an average of four sites and five — 20 Terabytes of information to archive.

InAs ~~2008,~~a weresult ~~begun~~of toour ~~pursue~~sales aand ~~strategy~~marketing efforts of ~~expanding~~our DigiBAK product, our ~~solution~~customer tobase ~~address~~has ~~the~~expanded ~~need~~from ofapproximately ~~the industry~~20 ~~for~~in ~~managing~~fiscal ~~structured~~2005 ~~data~~to ~~through~~approximately ~~DigiBAK,~~100 ~~but~~in ~~also~~fiscal ~~provide~~2006, ~~information~~508 ~~management abilities~~in ~~for~~2007, ~~the~~731 ~~unstructured~~in ~~data.~~2008, ~~This~~789 ~~effort~~in ~~led~~2009, to890 ~~the~~in ~~development~~2010 and ~~release~~910 as of ~~the~~December 31, ~~product called~~2011. ~~Universal~~And, ~~Archive~~while ~~Platform,~~our ~~DigiLIBE,~~annual asales ~~platform~~increased ~~that~~from is$402,638 ~~designed~~in to2006 ~~consolidate~~up ~~together multiple~~to ~~disparate~~$3,192,463 ~~hardware~~in ~~and~~2009, ~~data~~in ~~storage~~2010 ~~environments~~we began to ~~provide~~experience ~~organizations~~a ~~with~~decline ~~the~~in ~~ability to~~annual ~~capture,~~sales ~~classify,~~posting ~~share~~$2, ~~preserve~~143,882 ~~protect~~in 2010 and $1,480,154 ~~achieve~~as of December 31, ~~and~~2011. Despite ~~deliver~~this ~~the~~strong ~~right~~overall ~~information~~customer trend, we continue to ~~the right~~struggle ~~people,~~with atprofitability ~~the~~because ~~right~~of ~~time,~~increasing ~~helping~~competitive ~~them~~pressure ~~make~~causing ~~informed~~commodity-like ~~business~~pricing ~~decisions~~through cloud-like storage. ~~DigiLIBE~~While ~~should~~we ~~be understood~~have ascontinued ~~follows~~to —grow asour acustomer ~~company~~base, ~~continues~~we have also had to ~~virtualize~~adjust ~~their~~pricing ~~hardware~~to ~~and~~maintain ~~data~~competitive ~~storage environments,~~advantage. ~~DigiLIBE~~We ~~provides~~have asignificantly ~~complementary~~improved ~~virtualized~~our ~~environment~~support ~~for~~infrastructure ~~the~~and ~~company’s~~have ~~primary asset~~been —able ~~its~~to ~~information~~hold ~~and~~our ~~data~~margins. ItWe ~~does~~still ~~not~~need ~~matter~~to ifraise ~~the~~cash ~~information~~in is2011 onto agrow ~~user~~our ~~machine~~overall business, ~~on a~~but ~~server,~~we orbelieve we are in ~~archive.~~a Amuch ~~customer~~better ~~can~~financial ~~control~~and ~~it,~~expense ~~secure~~position ~~it,~~than ~~and~~we ~~access~~were ita year ago through targeted expense reduction and atdebt conversion. The product features that we are offering to our clients we believe have superior functionality to the ~~same~~mainstream ~~time reduce~~competition ~~its~~and ITfill ~~storage~~a ~~costs~~customer need. We expect this gain new business in 2012.

~~Growing~~The ~~both~~Emerging ~~Business~~New ~~Segments:~~ Universal Archive Platform (DigiLIBE) Product

WeIn ~~believe~~2008, ~~the~~we ~~benefits~~began to pursue a strategy of expanding our ~~strategic~~solution ~~decision~~ to ~~grow~~address ~~both~~the need of the industry for managing structured data through DigiBAK, but also provide information management abilities for the unstructured data. This effort led to the development and release of the product called Universal Archive Platform, DigiLIBE, ~~businesses are:~~ a platform that is designed to consolidate together multiple disparate hardware and data storage environments to provide organizations with the ability to capture, classify, share, preserve, protect, achieve, and deliver the right information, to the right people, at the right time, helping them make informed business decisions. DigiLIBE should be understood as follows — as a company continues to virtualize their hardware and data storage environments, DigiLIBE provides a complementary virtualized environment for the company’s primary asset — its information and data. It does not matter if the information is on a user machine, on a server, or in archive. A customer can control it, secure it, and access it and at the same time reduce its IT storage costs.

~~(i)~~Growing ~~solving~~both aBusiness ~~major industry and customer problem of managing continually growing information volume and associated cost of storage and retrieval;~~Segments:

~~(ii)~~We ~~ability~~believe tothe ~~access~~benefits aof ~~larger~~our ~~share~~strategic ofdecision ~~opportunity~~to ingrow both the ~~information~~DigiBAK ~~management~~and ~~storage~~DigiLIBE ~~business;~~businesses are:

(~~iii~~i) ~~offering~~solving ~~significant~~a ~~technological~~major ~~advantages~~industry inand ~~control~~customer problem of ~~information~~managing atcontinually ~~the~~growing ~~corporate~~information ~~policy~~volume ~~level~~ and ~~ability~~associated tocost ~~leverage~~of ~~knowledge~~storage ~~from~~and ~~the information it creates~~retrieval; ~~and~~

(ivii) ~~optimization~~ability ofto ~~the~~access ~~synergistic~~a ~~allocation~~larger share of ~~capital~~opportunity ~~and~~in ~~resources~~the ~~between~~information ~~both~~management storage business.;

4 (iii) offering significant technological advantages in control of information at the corporate policy level and ability to leverage knowledge from the information it creates; and

~~Table~~(iv) optimization of ~~Contents~~the synergistic allocation of capital and resources between both business.

DigiLIBE has received excellent feedback on the capability, performance, and function it delivers since its initial release. Our sales and prospecting efforts have also reaffirmed the potential of selling DigiBAK services as part of a DigiLIBE sale.

To date, Digitiliti has achieved market recognition and brand value having successfully established its presence in several vertical markets such as Finance, Legal, Telecom, Managed Service Provider, Healthcare, Information Technology Services, and Management Consulting. In June 2010, DigiLIBE won the Tech Awards Circle Gold Award in the Midrange Software category. In briefings, leading industry analysts have described DigiLIBE as a unique and potentially disruptive product integrating both the storage management and information management markets.

We believe DigiLIBE is a fiscally responsible solution at a price, performance, and ease of use level that disrupts the current competitors’ point solution landscape and positions while exceeding customers’ expectations and needs. We believe our new product represents a significant step toward our goal of becoming a technology leader in the information content and context management marketplace.

We began providing on-line backup and recovery services to the small and medium business (“SMB”) and small to medium enterprise (“SME”) markets in 2005. This line of our business is referred to as our “DigiBAK” service. This data protection solution helps organizations easily manage and protect their entire network from one centralized location, with offsite redundancy. Our DigiBAK service can backup and restore data on every machine in a network, including desktops, laptops, file and print servers. The marketplace for on-line backup and recovery services is estimated to be a $3 billion dollar opportunity.

The advantages of outsourcing on-line backup and disaster recovery for customers is that it eliminates cumbersome tape storage and internal infrastructure costs associated with the effort and capital to provide redundancy, disaster recovery and to comply with legal and regulatory requirements for information management. We combine a powerful, agent-less backup software, with our remote DigiBAK service, to deliver to our customers a powerful and effective online-offsite data backup and restore solution ~~located~~from inour ~~the~~SAS ~~former~~70 ~~Minneapolis~~compliant ~~Federal~~data ~~Reserve~~center ~~Bank,~~located aat ~~highly secure~~511 ~~and~~6th ~~protected~~Street ~~facility~~South, Minneapolis, MN.

Our Data Storage Center is located inat ~~the~~511 ~~former~~6th ~~Minneapolis~~Street ~~Federal~~South, ~~Reserve~~Minneapolis, ~~Bank~~MN. It is a one of a kind facility providing our web based on-demand backup/restore service with all of the benefits of direct fiber access to a “Level 5” data center. The Data Storage Center has 24/7 onsite physical security, including security guards, motion detectors, security cameras, card-key access, separate cages with individual locking cabinets and ladder racking. It also has battery generator back-up power, temperature and humidity controls and fire suppression systems. Geographically, we are located at the center point of the Metropolitan area network, being centrally located at the focal point of the Twin Cities Fiber Channel and Gig loop. The pipeline for data and load capabilities are immense, and this capability enables us to send data back and forth in real time.

At the customer site, DigiBAK administrator software is loaded on as many or as few workstations as desired and requires a valid logon code, helps to eliminate any unauthorized access; the administrator software console acts as the interface with DigiBAK in the Data Storage Center; 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 and many more. To ensure security and confidentiality, customer data sent to our Data Storage Center is encrypted and compressed. The encryption key is known only to the customer. The data can be unencrypted only by the customer, affected upon the need of a restore of information. Encrypted data is also highly compressed, making it extremely safe and impenetrable from viruses.

We currently have two storage vaults in our Data Storage Center; 1-105 Terabyte system and 1-95 Terabyte system. We built this vault infrastructure upon a third-party software system called Asigra to efficiently manage the volumes of data being transmitted and stored. When we fully consume existing storage capacity, we purchase additional Asigra licenses, as needed.

Customers are charged monthly for the gigabytes of data they store in our Data Storage Center. The compelling business case is that industry statistics (and our own actual experience) show that organizations grow data at a rate of 3% per month, so gigabyte billing per customer is estimated to grow at that approximate rate. This model provides ongoing revenue growth from our existing customer base. However, the down side of this growth is that it results in increased monthly and annual costs for customers. At some point, the costs are such that the business case for outsourcing backup and recovery services can no longer be justified by larger customers.

5 In 2008, we began to develop a new product targeted to help customers deal with the ever-increasing burden of data growth and data proliferation that would also stem the potential of rising storage costs. In analyzing industry data growth issues, we determined that 80% of data being stored is either duplicate or proliferated, and 80% of that data is categorized as “unstructured” data, such as Word documents, PDF’s, Excel spread sheets, other Office documents, pictures and music, but with the greatest issue being emails. “Structured” data, representing 20% of data stored, is typically data contained in databases such as inventory, accounting data and the like. Our new product is named DigiLIBE, or the Universal Archive Platform, previously referred to as “Pyramid” in our previous reports and registration statements filed with the Securities and Exchange Commission.

~~Table~~The architecture of ~~Contents~~DigiLIBE was developed from the ground up, starting with the foundational database software purchased from StorageSwitch in March, 2008. During most of 2008, we refined and enhanced this base code and optimized it for our specific application. We struggled to define the overall architecture and went through a number of false starts in trying to develop the overall DigiLIBE system. In February, 2009, we brought in new management experienced in software development. We reorganized our development team and solidified the overall architecture of this product. We also identified significant areas of intellectual property in the architecture and design and filed for patent protection on these aspects.

In ~~2008,~~analyzing wethe ~~began~~opportunity tofor ~~develop~~this ~~a new~~ product, ~~targeted~~it tobecame ~~help~~clear ~~customers~~that ~~deal~~existing ~~with~~solutions to the ~~ever-increasing burden~~problem of data growth ~~and~~did ~~data~~not ~~proliferation~~address ~~that would also stem~~ the ~~potential~~root ~~of rising storage costs~~cause. InThey ~~analyzing~~addressed ~~industry~~pieces ~~data growth issues, we determined that 80%~~ of ~~data~~the ~~being stored is either duplicate or proliferated~~problem, ~~and~~attacking ~~80%~~symptoms ofwith ~~that data is categorized as~~ “~~unstructured~~point” ~~data,~~solutions such as ~~Word documents~~de-duplication, ~~PDF’s~~Indexing, ~~Excel spread sheets~~Compression, ~~other~~Mass ~~Office~~Storage ~~documents~~Devices, ~~pictures~~Archives and ~~music,~~so ~~but~~forth. ~~with the~~The ~~greatest~~aggregate ~~issue~~industry ~~being~~opportunity ~~emails.~~for ~~“Structured”~~all ~~data,~~these ~~representing~~different ~~20%~~solutions ~~of data stored,~~ is ~~typically data~~estimated ~~contained~~to inbe ~~databases~~somewhere ~~such~~between as$30 billion ~~inventory, accounting data~~ and ~~the like. Our new product is named DigiLIBE~~$45 billion, orand ~~the~~potentially ~~Universal~~even ~~Archive Platform~~more, ~~previously~~if ~~referred~~you toexpanded asbeyond ~~“Pyramid”~~storage ininto ~~our previous~~e-discovery ~~reports~~ and ~~registration~~business ~~statements filed with the Securities and Exchange Commission~~intelligence.

~~The~~Our ~~architecture~~approach ofwas ~~DigiLIBE~~to ~~was~~address ~~developed~~the ~~from~~root cause of the ~~ground~~data ~~up,~~growth ~~starting~~and ~~with~~proliferation ~~the~~problem/opportunity ~~foundational database~~by ~~software~~providing ~~purchased~~one ~~from~~universal ~~StorageSwitch~~architecture, in ~~March,~~a ~~2008~~simple-to-implement solution. ~~During~~Throughout most of ~~2008~~2009, we ~~refined~~worked ~~and enhanced~~diligently ~~this~~to ~~base~~complete ~~code~~this ~~and~~project, ~~optimized~~gathering itcontinuous ~~for~~feedback ~~our~~from ~~specific~~industry ~~application.~~analysts, Weexperts ~~struggled to define the overall architecture~~ and ~~went~~potential ~~through a number of false starts in trying to develop the overall DigiLIBE system~~customers. InOn ~~February~~December 19, 2009, we ~~brought~~announced inDigiLIBE ~~new~~as ~~management~~a ~~experienced~~break-through indata ~~software development.~~management ~~We reorganized our development team and solidified the overall architecture of this~~ product. ~~We also identified significant areas of intellectual property in the architecture and design and filed for patent protection on these aspects.~~

InDuring ~~analyzing~~this ~~the~~time, ~~opportunity~~we ~~for~~attempted ~~this~~to ~~product~~sell our DigiBAK service business, itbut ~~became~~abandoned ~~clear~~these ~~that~~efforts ~~existing~~because ~~solutions~~we could not agree to terms with the ~~problem~~ ofpotential ~~data~~buyer. ~~growth~~As ~~did~~a ~~not~~result, ~~address~~we restructured the ~~root~~DigiBAK ~~cause.~~business ~~They~~to ~~addressed~~become ~~pieces~~more efficient, and reinitiated our effort to grow that business. A component of ~~the~~our ~~problem, attacking~~new ~~symptoms~~DigiLIBE ~~with~~business is also an “~~point~~active” ~~solutions~~Vault ~~such~~where ascustomers ~~de-duplication,~~archive ~~Indexing,~~and ~~Compression,~~can ~~Mass Storage~~retrieve ~~Devices,~~DigiLIBE ~~Archives~~information ~~and~~objects sowithout ~~forth~~the assistance of IT personnel. ~~The~~We ~~aggregate~~believe ~~industry~~customers ~~opportunity~~are looking for ~~all~~a ~~these~~one ~~different solutions~~stop isshopping ~~estimated~~storage solution, so as our DigiLIBE business grows, we see the potential to bealso ~~somewhere~~increase ~~between~~our ~~$30 billion~~DigiBAK business. Unstructured data (information objects) sent to the DigiLIBE vault and ~~$45 billion,~~structured data and ~~potentially~~all ~~even more,~~other ifbackups ~~you~~sent ~~expanded~~to ~~beyond~~the ~~storage~~DigiBAK ~~into~~vault, ~~e-discovery~~are all done seamlessly and ~~business~~transparently ~~intelligence~~for the customer.

~~Our~~As ~~approach~~with ~~was~~DigiBAK, toDigiLIBE’s ~~address~~Vault ~~the~~component ~~root~~is ~~cause~~charged per gigabyte of ~~the~~customer ~~data~~storage. ~~growth~~DigiLIBE ~~and~~also ~~proliferation~~has ~~problem/opportunity by~~a ~~providing~~onetime ~~one~~charge ~~universal~~for ~~architecture~~its software license and storage device, inalong awith ~~simple-to-implement~~annual ~~solution~~maintenance. ~~Throughout~~We ~~most~~do ~~of 2009,~~not charge per client license fee as we ~~worked~~believe ~~diligently~~it will discourage using the system to ~~complete~~its ~~this~~full ~~project~~ability and capacity. While there are a limited number of direct sales, ~~gathering~~both ~~continuous~~products ~~feedback~~are ~~from~~distributed through industry ~~analysts,~~ ~~experts~~resellers nationwide. DigiBAK and ~~potential~~the ~~customers.~~DigiLIBE OnVaults ~~December 19,~~are ~~2009,~~basically weservice ~~announced~~businesses where our resellers can benefit by providing and gaining ongoing service revenue. DigiLIBE ashas also a ~~break-through~~ ~~data~~product ~~management~~component ~~product~~and a consulting services component, making it a compelling value equation for resellers.

~~During~~Our ~~this~~vision ~~time,~~for weDigiLIBE ~~attempted~~is to ~~sell~~change ~~our~~the ~~DigiBAK~~way ~~service~~customers ~~business,~~approach ~~but~~the ~~abandoned~~problem ~~these~~of ~~efforts because~~data wegrowth ~~could~~and ~~not~~proliferation. ~~agree~~In ~~to terms with~~ the ~~potential~~past ~~buyer.~~and Ascurrent ~~a result~~environment, wecustomers ~~restructured~~have ~~the DigiBAK~~labored ~~business~~on toimplementing ~~become~~technologies ~~more efficient, and reinitiated our effort~~ to ~~grow~~solve ~~that~~individual ~~business.~~issues ~~A component~~like ofusing ~~our~~indexers ~~new~~to ~~DigiLIBE~~find ~~business~~data, isde-duplication ~~also~~devices anto ~~“active”~~control ~~Vault~~growth ~~where customers archive~~ and ~~can retrieve~~email ~~DigiLIBE~~archivers ~~information~~to ~~objects~~manage ~~without~~ever-growing ~~the~~email ~~assistance~~storage. ofDigiLIBE IToffers ~~personnel.~~a Wedifferent ~~believe~~approach: ~~customers are~~one ~~looking~~where ~~for~~technology ais ~~one~~secondary ~~stop~~to ~~shopping~~the ~~storage~~problem solution, ~~so as our~~ DigiLIBE ~~business~~provides ~~grows,~~organizations wewith ~~see~~ the ~~potential~~ ability to ~~also~~focus ~~increase~~their ~~our~~energy ~~DigiBAK~~and ~~business.~~resources ~~Unstructured~~on ~~data~~managing ~~(information objects) sent to~~ the ~~DigiLIBE~~content ~~vault~~of ~~and~~information ~~structured~~created ~~data~~ and ~~all~~putting ~~other~~their ~~backups~~content ~~sent~~into tocontext ~~the~~for ~~DigiBAK~~competitive ~~vault~~advantage, ~~are~~rather ~~all done~~than ~~seamlessly~~concentrating ~~and~~on ~~transparently~~data ~~for~~growth ~~the customer~~problems.

~~As with DigiBAK~~Products, ~~DigiLIBE’s Vault component is charged per gigabyte of customer storage. DigiLIBE also has a onetime charge for its software license and storage device~~Software, ~~along~~Services ~~with annual maintenance. We do not charge per client license fee as we believe it will discourage using the system to its full ability~~ and ~~capacity.~~Related ~~While~~Technologies there are a limited number of direct sales, both products are distributed through industry resellers nationwide. DigiBAK and the DigiLIBE Vaults are basically service businesses where our resellers can benefit by providing and gaining ongoing service revenue. DigiLIBE has also a product component and a consulting services component, making it a compelling value equation for resellers. Utilized

~~Our~~The ~~vision~~following ~~for~~information ~~DigiLIBE~~describes isvarious toproducts, ~~change~~services, ~~the~~software ~~way~~and ~~customers~~other ~~approach~~technologies ~~the~~utilized ~~problem~~in ofour ~~data~~products ~~growth~~ and ~~proliferation~~ services. InWe ~~the~~will ~~past~~define ~~and~~these ~~current~~in ~~environment,~~two ~~customers~~categories; ~~have~~(1) storage ~~labored on implementing~~ technologies ~~to solve individual issues like using indexers to find data~~, ~~de-duplication devices to control growth~~ and ~~email~~(2) information ~~archivers to manage ever-growing email storage~~technologies. ~~DigiLIBE~~Where ~~offers~~it ~~a different approach: one where technology~~ is ~~secondary~~not tospecifically ~~the problem solution~~indicated, ~~DigiLIBE~~technologies ~~provides organizations~~identified ~~with~~are ~~the~~common ~~ability~~ to ~~focus~~both ~~their~~DigiLIBE ~~energy~~ and ~~resources on managing the content of information created and putting their content into context for competitive advantage, rather than concentrating on data growth problems~~DigiBAK.

~~Products,~~Storage ~~Software, Services and Related~~ Technologies ~~Utilized~~ :

~~The~~We ~~following~~use ~~information~~industry ~~describes~~standard ~~various~~computing ~~products,~~hardware ~~services, software~~ and ~~other~~operating ~~technologies utilized~~systems in our products ~~and services~~. WeOur ~~will~~goal ~~define~~is ~~these~~to inuse ~~two~~top-tier ~~categories;~~brand ~~(1) storage technologies,~~hardware and ~~(2) information~~state ~~technologies.~~of ~~Where~~the itart istechnology ~~not~~for ~~specifically~~overall ~~indicated, technologies~~system ~~identified~~and ~~are~~network ~~common~~performance, toreliability ~~both DigiLIBE~~ and ~~DigiBAK~~maintainability.

~~Storage~~We ~~Technologies:~~ employ SCSI hard drive protocol for speed and reliability and Level 5 RAID storage redundancy and fault-tolerance. We move data across high performance fiber channel networks between systems and from disks to computer processors. Our network switches are also top-tier vendor solutions.

WeIn ~~use~~DigiBAK, ~~industry~~we ~~standard~~rebranded ~~computing~~a ~~hardware~~third party application from Asigra, which manages and ~~operating~~controls ~~systems~~the indata being archived and retrieved from the customer to our ~~products~~Data Storage Center. ~~Our~~This ~~goal~~solution isprovides the capability to ~~use~~ ~~top-tier~~efficiently ~~brand~~and ~~hardware~~effectively move and ~~state~~manage very large blocks of data and to ensure the ~~art~~integrity ~~technology~~and ~~for~~security ~~overall~~of ~~system~~the information stored. It also provides the capability to track and ~~network performance~~report on storage volumes by customers, ~~reliability~~providing the basis for our monthly billing. We pay for their licenses and ~~maintainability~~maintenance based on the number of systems and gigabytes of storage allocated. We also pay them an annual “Branding” fee to employ a

6 customer-facing Digitiliti brand.

~~Table~~The ofDigiLIBE ~~Contents~~Vault does not use any third party software. Secure storage is implemented in an industry standard database.

WeArchiving ~~employ~~& ~~SCSI~~Information hard drive protocol for speed and reliability and Level 5 RAID storage redundancy and fault-tolerance. We move data across high performance fiber channel networks between systems and from disks to computer processors. Our network switches are also top-tier vendor solutions. Technologies:

InThis ~~DigiBAK,~~category weis ~~rebranded~~unique ato ~~third~~our ~~party~~Universal ~~application~~Archive ~~from~~Platform, ~~Asigra~~DigiLIBE. DigiLIBE moves and manages information objects, which, ~~manages~~in ~~and~~effect, ~~controls~~are human recognized content such as a Word document or an Excel spreadsheet. Technologies employed in DigiLIBE include de-duplication to remove type of unstructured of information from the ~~data being~~system. ~~archived~~One ~~and~~of ~~retrieved~~DigiLIBE’s patent applications involves “global de-duplication.” In other words, we de-duplicate objects from the ~~customer~~time of creation to ~~our~~the ~~Data~~time ~~Storage~~of ~~Center~~archive — over the life-cycle of the object. ~~This~~We ~~solution~~can ~~provides~~ assure there are no duplicates in the ~~capability~~system. toAnother ~~efficiently~~technology ~~and~~is ~~effectively~~indexing, ~~move~~where ~~and~~we ~~manage~~save ~~very~~the ~~large~~contents ~~blocks~~of information objects so that a user can search not only for title, but for any information contained in the content of ~~data~~the ~~and~~object. And this indexing supports multiple languages. Other technologies include compression to ~~ensure~~ reduce the ~~integrity~~object size and encryption to protect security of ~~the~~customer information ~~stored~~. ItDigiLIBE information object technology also ~~provides~~includes ~~the~~a ~~capability~~policy engine to ~~track~~ control factors like retention life, versioning and ~~report~~other onoptions ~~storage~~targeted ~~volumes~~to byallow ~~customers,~~users ~~providing~~and ~~the~~company ~~basis~~executives ~~for~~to ~~our~~define ~~monthly~~information ~~billing~~object storage parameters. ~~We pay~~Each ~~for~~information ~~their~~object ~~licenses~~has ~~and~~“meta-data” ~~maintenance~~stored ~~based~~with onthe object. Meta-data is basic information about the ~~number~~object such as who stored it, what type of ~~systems~~data is it, when was it stored and/or ~~gigabytes~~updated, ofwhat ~~storage allocated~~computer was its source and who accessed it. WeAll ~~also~~these ~~pay~~capabilities ~~them~~are anintegrated ~~annual~~into one package with DigiLIBE and contained on one storage appliance called an “~~Branding~~Information Director,” ~~fee~~making this a simple and easy to ~~employ~~use ainformation ~~customer-facing~~content ~~Digitiliti~~and ~~brand~~context delivery solution.

~~The~~Principal ~~DigiLIBE~~Products ~~Vault~~or ~~does~~Services ~~not~~and ~~use~~their ~~any third party software. Secure storage is implemented in an industry standard database.~~ Markets

~~Archiving & Information Technologies:~~ Markets

~~This~~The ~~category~~on-line isarchiving ~~unique~~market tocharacterized ~~our~~by ~~Universal~~DigiBAK ~~Archive~~is ~~Platform,~~projected ~~DigiLIBE.~~to ~~DigiLIBE~~be ~~moves and manages information objects, which, in effect, are human recognized content such as~~ a ~~Word~~$3 billion ~~document~~dollar ~~or an Excel spreadsheet~~opportunity. ~~Technologies~~The ~~employed~~market infor ~~DigiLIBE~~DigiBAK ~~include~~is ~~de-duplication~~a tohorizontal ~~remove~~market ~~type~~comprised of ~~unstructured~~ ofsmall ~~information~~and ~~from~~intermediate ~~the~~sized ~~system.~~establishments ~~One~~and ~~of DigiLIBE’s patent applications involves “global de-duplication~~enterprises.” InThe ~~other~~industry ~~words,~~definition weis ~~de-duplicate~~SMB ~~objects~~(Small ~~from~~and ~~the~~Medium ~~time~~Businesses) ofand ~~creation~~SME to(Small ~~the time~~and ofMedium ~~archive~~Enterprises) —with ~~over~~up ~~the~~to ~~life-cycle~~500 ~~of the object~~employees. WeOur ~~can~~DigiBAK ~~assure~~customer ~~there~~profile ~~are~~is notypically ~~duplicates~~ in the ~~system.~~ ~~Another~~50 ~~technology~~to is1000 ~~indexing,~~employee ~~where~~segment wewith ~~save~~500 ~~the~~gigabytes ~~contents~~to of3 ~~information~~terabytes ~~objects so that a user can search not only for title, but for any information contained in the content~~ of ~~the object.~~stored ~~And this indexing supports multiple languages~~data. ~~Other~~This ~~technologies~~business ~~include~~spans ~~compression~~horizontally ~~to reduce~~across ~~the~~all ~~object~~industry ~~size and encryption to protect security of customer information~~segments. ~~DigiLIBE information~~However, ~~object~~regulated ~~technology~~industries ~~also~~or ~~includes~~those ahaving ~~policy~~significant ~~engine~~concerns toabout ~~control~~data ~~factors~~protection ~~like retention life, versioning~~ and ~~other~~disaster ~~options~~recovery ~~targeted~~tend to ~~allow~~be ~~users~~the ~~and~~primary ~~company~~customer ~~executives to define information object storage parameters~~base. ~~Each~~North ~~information~~America ~~object has “meta-data” stored with the object. Meta-data~~ is ~~basic information about~~ the ~~object~~primary ~~such~~geographic asregion ~~who~~for ~~stored~~our ~~it, what type of data is it, when was it stored and/or updated, what computer was its source and who accessed it~~business. ~~All~~We ~~these capabilities~~expect ~~are~~to ~~integrated~~move into ~~one~~broader ~~package~~geographic ~~with~~areas ~~DigiLIBE~~within ~~and~~two ~~contained on one storage appliance called an “Information Director,” making this a simple and easy to use information content and context delivery solution~~years.

~~Principal~~Because ~~Products~~of orDigiLIBE’s ~~Services~~highly and ~~their~~uniquely ~~Markets~~ integrated architecture, the market opportunity is less well defined. In order to complete a market opportunity assessment, one has to roll up the individual opportunity for each “point” solution offering. Our estimates are that this industry opportunity ranges from between $30 to $45 billion. It is new market defined by Gartner as Enterprise Information Archiving (EIA) market. They issued a new magic quadrant report in October 2010 for the first time on this market. Not a data management and control market, but an information content and context market transforming the current market definition of Primary Storage, Secondary Storage and Archival Storage to a market of Content and Context Management that not only includes Storage, but also includes Business Intelligence, e-Discovery and Information Policy. DigiLIBE’s capability even makes the traditional file structures obsolete, encroaching into traditional operating system space, as it relates to file storage and file structures.

~~Markets~~ DigiLIBE’s target market is similar to DigiBAK — SMB / SME. However the market segmentation has more vertical tendencies and targeted to Health Care, Finance, Legal and some sectors of government. However, DigiLIBE’s policy engine and life cycle management make it ideal for any organization with regulatory compliance requirements. As with DigiBAK, North America is the primary geographic region for DigiLIBE sales, but we expect to move into broader geographic areas within two years.

The on-line archiving market characterized by DigiBAK is projected to be a $3 billion dollar opportunity. The market for DigiBAK is a horizontal market comprise of small and intermediate sized establishments and enterprises. The industry definition is SMB (Small and Medium Businesses) and SME (Small and Medium Enterprises) with up to 500 employees. Our DigiBAK customer profile is typically in the 50 to 1000 employee segment with 500 gigabytes to 3 terabytes of stored data. This business spans horizontally across all industry segments. However, regulated industries or those having significant concerns about data protection and disaster recovery tend to be the primary customer base. North America is the primary geographic region for our business. We expect to move into broader geographic areas within two years. Products

~~Because~~DigiBAK ofis ~~DigiLIBE’s~~an ~~highly~~on-line data backup and ~~uniquely~~restore ~~integrated~~service. ~~architecture,~~DigiLIBE ~~the~~is ~~market~~both ~~opportunity~~a isproduct ~~less well~~and ~~defined~~a service offering. InThe ~~order~~product tois ~~complete~~our ainformation ~~market~~management ~~opportunity~~software ~~assessment,~~contained ~~one~~in ~~has~~our toInformation ~~roll~~Director upstorage ~~the individual~~appliance ~~opportunity~~Customers ~~for~~pay ~~each~~a ~~“point”~~one-time ~~solution~~fee ~~offering.~~for ~~Our~~this ~~estimates~~appliance ~~are~~and ~~that~~a ~~this~~one-time ~~industry opportunity~~software ~~ranges~~license ~~from~~fee, ~~between~~plus ~~$30~~annual tomaintenance ~~$45 billion~~for this product. ItThe service component is ~~new~~a ~~market~~monthly ~~defined~~per-gigabyte byfee ~~Gartner~~for ~~as Enterprise~~archiving. ~~Information~~DigiLIBE ~~Archiving~~has ~~(EIA) market.~~an ~~They~~“active” ~~issued~~archive, ameaning ~~new~~that ~~magic~~individual ~~quadrant~~users ~~report~~have inreal-time ~~October 2010~~access ~~for~~to ~~the~~archived ~~first~~data ~~time~~(assuming onthey ~~this~~are ~~market~~authorized). ~~Not~~Customers acan ~~data~~use ~~management~~Digitiliti’s ~~and~~Data ~~control~~Storage ~~market~~Vault services, ~~but~~their ~~an information~~own ~~content~~storage ~~and~~or ~~context~~a ~~market~~third ~~transforming~~party ~~the~~for ~~current~~active ~~market~~archiving. ~~definition~~Another ofservice ~~Primary Storage,~~component ~~Secondary~~is ~~Storage~~consulting ~~and~~services ~~Archival Storage~~ to aassist ~~market~~customers ofin ~~Content~~enhancing ~~and~~the ~~Context~~DigiLIBE ~~Management~~policy ~~that not~~engine ~~only~~and ~~includes~~to ~~Storage,~~customize ~~but~~workflow ~~also~~applications ~~includes~~to ~~Business~~put ~~Intelligence,~~content ~~e-Discovery~~into ~~and Information Policy~~context. ~~DigiLIBE’s~~DigiBAK ~~capability~~is ~~even~~an ~~makes~~on-line ~~the~~data ~~traditional~~backup ~~file~~and ~~structures~~recovery ~~obsolete,~~service. ~~encroaching into~~Both ~~traditional~~the ~~operating~~DigiLIBE ~~system~~and ~~space,~~DigiBAK asservices itare ~~relates~~charged toby ~~file~~gigabyte of storage ~~and~~per ~~file structures~~month.

~~DigiLIBE’s~~An ~~target~~additional ~~market~~opportunity isfor ~~similar~~DigiLIBE tois ~~DigiBAK~~an —OEM ~~SMB~~solution ~~/ SME. However the market segmentation has more vertical tendencies~~ and ~~targeted~~business topartnership ~~Health~~where ~~Care,~~DigiLIBE ~~Finance,~~software ~~Legal~~is ~~and~~placed ~~some~~on ~~sectors~~another ~~of government. However, DigiLIBE~~vendor’s ~~policy~~storage ~~engine~~appliance and ~~life~~sold ~~cycle~~under ~~management~~that ~~make~~vendor’s ~~it ideal for any organization with regulatory compliance requirements~~brand. ~~As with DigiBAK, North America is the primary geographic region for DigiLIBE sales, but we expect to move into broader geographic areas within two years.~~

7 Objectives

~~Table~~Through on-line research, engaging industry experts and through continuous customer contact, we have identified the most pressing data management issues SMB/SME managers struggle with today. Various ad-hoc collections of ~~Contents~~single purpose (point) software/hardware products and functions like data de-duplication, encryption or application integration are a few examples of some of the different data management issues we are addressing.

~~Products~~ We believe our experience as a hybrid cloud backup/disaster recovery solution provider in the past 5 years brings us credibility in the market. We have learned from this experience and are in a better position going forward. One of the strengths of DigiLIBE is built from the heritage of our DigiBAK business. We believe that both our current business and our new product will complement each other with a very good chance that we can grow both in a complementary sales strategy where we provide an active archive for information objects of unstructured data and a traditional archive for all other data of customers. In effect, we can be the “cloud” provider, but with value added capability of using that content.

DigiBAK is an on-line data backup and restore service. DigiLIBE is both a product and a service offering. The product is our information management software contained in our Information Director storage appliance Customers pay a one-time fee for this appliance and a one-time software license fee, plus annual maintenance for this product. The service component is a monthly per-gigabyte fee for archiving. DigiLIBE has an “active” archive, meaning that individual users have real-time access to archived data (assuming they are authorized). Customers can use Digitiliti’s Data Storage Vault services, their own storage or a third party for active archiving. Another service component is consulting services to assist customers in enhancing the DigiLIBE policy engine and to customize workflow applications to put content into context. DigiBAK is an on-line data backup and recovery service. Both the DigiLIBE and DigiBAK services are charged by gigabyte of storage per month. Targets

AnSee ~~additional~~“Markets,” ~~opportunity~~above for ~~DigiLIBE~~our istargeted anmarket ~~OEM solution and business partnership where DigiLIBE software is placed on another vendor’s storage appliance and sold under that vendor’s brand.~~ focus

~~Objectives~~ “digitiliti” Product Operational Methodology

~~Through~~Our ~~on-line~~operational ~~research,~~model ~~engaging~~is ~~industry~~simply ~~experts~~defined ~~and~~in ~~through~~these continuous customer contact, we have identified the most pressing data management issues SMB/SME managers struggle with today. Various ad-hoc collections of single purpose (point) software/hardware products and functions like data de-duplication, encryption or application integration are a few examples of some of the different data management issues we are addressing. points:

We• ~~believe~~Develop ~~our~~simple ~~experience~~and asrobust ~~a hybrid cloud backup/disaster recovery solution provider in the past 5 years brings us credibility in the market~~technologies. WeMask ~~have~~technical ~~learned~~complexity from ~~this~~IT ~~experience~~ and ~~are in a better position going forward. One of the strengths of DigiLIBE is built~~ from the ~~heritage of our DigiBAK business~~users. We believe that both our current business and our new product will complement each other with a very good chance that we can grow both in a complementary sales strategy where we provide an active archive for information objects of unstructured data and a traditional archive for all other data of customers. In effect, we can be the “cloud” provider, but with value added capability of using that content.

~~Targets~~ • Develop technologies and process to scale sales through VARs

~~See~~• ~~“Markets,”~~Reduce ~~above~~total ~~for~~cost ~~our~~of ~~targeted~~ownership ~~market~~(TCO) ~~focus~~ of managing information and archiving for IT and organizations.

~~“digitiliti”~~• ~~Product~~Provide ~~Operational~~customers ~~Methodology~~ with the business knowledge of the content they create and store, to improve their efficiency and effectiveness.

~~Our~~Distribution ~~operational~~Methods ~~model~~of isthe ~~simply~~Products ~~defined~~or ~~in these points:~~ Services

•We ~~Develop~~sell ~~simple~~and support our solutions and ~~robust~~services ~~technologies~~through direct sales, and through relationships with Value-Added Remarketers and third-party integrators (resellers). ~~Mask~~We ~~technical~~have ~~complexity~~a ~~from~~current ITbase of about 15 resellers in North America for DigiBAK, most of whom are local to a city or are regional in nature. Over 80% of our current base of more than 900 DigiBAK customers has been signed through resellers. For DigiLIBE, we are targeting regional and national resellers who can sell the product, deploy the product and provide on-going consulting services. With DigiBAK, our value to resellers is an on-going monthly revenue stream from on-line archive volumes. With DigiLIBE, we have a more compelling reseller model. Resellers not only get revenue from the ~~users~~one-time sale of the product, but they gain service revenue from the monthly archive volumes. They also have the opportunity to engage the customer in business services such as consulting on policy setting details, developing workflow applications to leverage information object content or to write information applications that turn content into context.

•For ~~Develop~~DigiLIBE, ~~technologies~~another potential distribution channel is OEM — Original Equipment Manufacturer. We also market through traditional methods, including the web, trade publications, trade shows and ~~process~~advertising. We are aggressively pursuing a plan to ~~scale~~use our web site to grow our direct sales by strategically improving our ability through ~~VARs~~the new site to go Viral. We are developing a limited function assessment tool that will be distributed through the new website and help IT professionals realize the value of the product and the reduction in their TCO.

•Status ~~Reduce total cost~~ of ~~ownership~~any ~~(TCO)~~Publicly ofAnnounced ~~managing~~New ~~information~~Product ~~and~~or ~~archiving for IT and organizations.~~Service

•Release ~~Provide~~1 ~~customers with the business knowledge~~ of ~~the~~DigiLIBE ~~content~~was ~~they~~announced ~~create~~on ~~and store~~December 19, ~~to improve their efficiency and effectiveness~~2009.

8 Release 2 of DigiLIBE was announced on October, 2010. This release significantly improved the functionality, stability, and scalability of the product.

~~Table~~Release 3.5 of ~~Contents~~DigiLIBE was announced on February, 2011. This release provides new and improved features that created sharing, collocation and improved client connectivity. .

~~Distribution~~There ~~Methods~~are ofplans ~~the~~for ~~Products~~additional orreleases ~~Services~~ and future content targeted for new features and functions and for market expansion both to smaller size organizations to the larger enterprises.

WeCompetitive ~~sell~~Business ~~and support our solutions and services through direct sales~~Conditions, ~~and~~Competitive ~~through~~Position ~~relationships with Value-Added Remarketers and third-party integrators (resellers). We have a current base of about 30 resellers~~ in North America for DigiBAK, most of whom are local to a city or are regional in nature. Over 80% of our current base of more than 700 DigiBAK customers has been signed through resellers. For DigiLIBE, we are targeting regional and national resellers who can sell the ~~product,~~ ~~deploy~~Industry ~~the product~~ and ~~provide~~Methods on-going consulting services. With DigiBAK, our value to resellers is an on-going monthly revenue stream from on-line archive volumes. With DigiLIBE, we have a more compelling reseller model. Resellers not only get revenue from the one-time sale of ~~the~~ product, but they gain service revenue from the monthly archive volumes. They also have the opportunity to engage the customer in business services such as consulting on policy setting details, developing workflow applications to leverage information object content or to write information applications that turn content into context. Competition

For ~~DigiLIBE~~DigiBAK, ~~another~~we ~~potential~~compete ~~distribution~~with ~~channel~~multiple isinformation ~~OEM~~protection ~~— Original Equipment Manufacturer. We also market through traditional methods, including the web, trade publications, trade shows~~ and ~~advertising.~~ Westorage ~~are~~service ~~aggressively~~providers ~~pursuing~~in aall ~~plan~~geographic toareas ~~use~~where ~~our~~we web site to grow our direct sales by strategically improving our ability through the new site to go Viral. We are developing a limited function assessment tool that will be distributed through the new website and help IT professionals realize the value of the product and the reduction in their TCO.

~~Status~~operate. We also compete with current and potential customers’ internal information protection and storage service capabilities, especially larger customers where data growth is driving costs to the point where outsourcing this service is cost prohibitive. The most important competitive factors are, in order of ~~any~~priority: ~~Publicly~~price, ~~Announced~~reliability ~~New~~and ~~Product~~service. orOver ~~Service~~ the last few years, “Cloud” storage is emerging from a number of sources, including Amazon, Google, Barracuda and others. “Cloud” offers basic backup service for very low entry point and has attracted smaller business customers away from our more fully functional service.

~~Release~~Key 1national and international competitors for full function on-line archiving include Iron Mountain, EVault, HP, and EMC. These companies focus on larger enterprises and offer services similar to our services. Their competitive advantage is in financial strength, size and by the fact that they are also hardware providers. We differ in our competitive advantages by our agility, service and focus on small and intermediate businesses as our core business. Other competition is more limited and tends to be localized to geographic areas. These competitors operate with cost as a competitive advantage. However, they typically offer a subset of service and capabilities and are targeted more to smaller enterprises and establishments. Iron Mountain, EMC and some other large storage providers have made strategic purchases of companies offering point solutions, which when linked together, offer a subset of capabilities offered by DigiLIBE. ~~was~~They ~~announced~~are onclearly ~~December 19~~moving in a direction to offer a comprehensive solution to compete with DigiLIBE. The question is when will they reach that capability, ~~2009~~and that is presently unknown.

~~Release~~Competitive 2landscape ~~of DigiLIBE was announced on October, 2010. This release significantly improved the functionality, stability, and scalability of the product. There are plans~~ for ~~additional releases and future content targeted for new features and functions and for market expansion both to smaller size organizations to the larger enterprises.~~ DigiLIBE:

~~Competitive~~Currently, ~~Business~~there ~~Conditions,~~is ~~Competitive~~no ~~Position~~known competitor providing the comprehensive and integrated capability found in DigiLIBE. We have been able to confirm this through calls with industry analysts. DigiLIBE’s patent application architecture is “Client” based with a focus on the ~~Industry~~“Human” interface and ~~Methods~~on the need for information management and control, with content put into context. Most competitive products are individual “point” solutions offering technology to help solve a specific information area like content indexing or de-duplicating or archiving. Some companies are integrating multiple point solutions in a network to provide broader value, but most of ~~Competition~~ this integration is done at the storage layer versus the client or human point of data creation. This architectural limitation leaves these competitors at a significant disadvantage relative to capturing key meta-data at point of creation that can be used to put content into context. It also leaves them in a high cost, high complexity environment. Key competitive factors are function/capability, simplicity and cost.

~~For~~Competitors ~~DigiBAK,~~that wehave ~~compete~~similar DigiLIBE function (with ~~multiple~~limitations) ~~information~~by ~~protection~~integrating ~~and~~a ~~storage~~number ~~service~~of ~~providers~~point insolutions ~~all geographic~~together ~~areas~~include ~~where~~EMC, weEvault, ~~operate~~IBM, NetApp, Symantec, and HP. WeNo ~~also~~one ~~compete~~of ~~with~~these ~~current~~competitors ~~and~~offers ~~potential~~a ~~customers’~~complete ~~internal information~~suite ~~protection~~except ~~and~~EMC. ~~storage~~However, ~~service~~as ~~capabilities~~stated, ~~especially~~all ~~larger~~these ~~customers~~potential ~~where~~competitors’ ~~data growth~~weaknesses isare ~~driving~~the ~~costs~~“storage-centric toarchitecture versus the ~~point~~client ~~where~~(human)-based ~~outsourcing~~design, ~~this~~and ~~service~~the is cost ~~prohibitive~~of integrate and manage “point” solutions. ~~The~~It ~~most important~~is ~~competitive~~difficult ~~factors~~to ~~are,~~assess inhow ~~order~~much ofreengineering ~~priority:~~or ~~price,~~redesign ~~reliability~~would be required and ~~service.~~how ~~Over~~much ~~the last~~time ~~few~~it ~~years,~~would ~~“Cloud”~~take ~~storage~~for isa ~~emerging~~top-tier ~~from~~competitor a(like ~~number~~those oflisted ~~sources,~~above) ~~including~~to ~~Amazon,~~develop ~~Google, Barracuda~~a cost and ~~others~~performance competitive solution to compete directly with DigiLIBE. ~~“Cloud”~~It ~~offers~~is ~~basic~~more ~~backup~~likely ~~service~~that ~~for~~a ~~very~~second-tier ~~low~~or ~~entry~~startup ~~point~~company ~~and~~may ~~has attracted~~introduce ~~smaller~~a ~~business~~product ~~customers~~to ~~away~~compete ~~from~~with ~~our~~DigiLIBE. ~~more~~Our ~~fully~~patents, ~~functional~~if ~~service~~issued, will afford some level of protection against strongly similar architectural solutions.

~~Key~~Sources ~~national~~ and ~~international~~Availability competitors for full function on-line archiving include Iron Mountain, EVault, HP, and EMC. These companies focus on larger enterprises and offer services similar to our services. Their competitive advantage is in financial strength, size and by the fact that they are also hardware providers. We differ in our competitive advantages by our agility, service and focus on small and intermediate businesses as our core business. Other competition is more limited and tends to be localized to geographic areas. These competitors operate with cost as a competitive advantage. However, they typically offer a subset of ~~service and~~Raw ~~capabilities~~Materials and ~~are~~Names ~~targeted more to smaller enterprises and establishments. Iron Mountain, EMC and some other large storage providers have made strategic purchases~~ of ~~companies~~Principal offering point solutions, which when linked together, offer a subset of capabilities offered by DigiLIBE. They are clearly moving in a direction to offer a comprehensive solution to compete with DigiLIBE. The question is when will they reach that capability, and that is presently unknown. Suppliers

~~Competitive~~For ~~landscape~~DigiBAK, our principal supplier partners are Asigra, a software vendor providing system management tools; NetApp, which provides hardware and software and our data transmission supplier. Asigra is a provider of comprehensive software solutions and IT expertise to back up data to customers secure vaults. We pay for ~~DigiLIBE:~~ licenses and for annual maintenance agreements based on the gigabytes of storage used. We chose NetApp because we believed it to be robust and the best fit with the Asigra software. Our software/hardware infrastructure is built around the NetApp product (hardware and software) and the Asigra product (software). When we fully consume existing storage capacity, we purchase additional NetApp software and equipment or Asigra licenses as needed. Integra Telecom provides voice, data and IP services to businesses and other telecommunications companies in 80 metropolitan markets across the United States.

~~Currently~~For DigiLIBE, ~~there~~all isour nosoftware ~~known~~is ~~competitor~~developed ~~providing the comprehensive and integrated capability found~~ in ~~DigiLIBE~~-house. We ~~have~~use ~~been~~the ~~able~~Microsoft toDevelopers ~~confirm~~Suite ~~this~~to ~~through~~develop ~~calls~~our ~~with industry analysts~~software. ~~DigiLIBE’s patent~~Our ~~application~~hardware ~~architecture~~Information Director is ~~“Client”~~industry ~~based~~standard ~~with~~and awe ~~focus~~outsource on the ~~“Human”~~product ~~interface~~from ~~and~~multiple on the need for information management and control, with content put into context. Most competitive products are individual “point” solutions offering technology to help solve a specific information area like content indexing or detop-~~duplicating~~line ~~or archiving~~vendors. ~~Some~~Our ~~companies~~DigiLIBE ~~are~~vault ~~integrating~~hardware ~~multiple point solutions in a network to provide broader value, but most of this integration~~ is ~~done~~basically at the ~~storage~~ ~~layer~~same ~~versus~~hardware ~~the~~as ~~client~~our orInformation ~~human point of data creation~~Director. This ~~architectural~~hardware ~~limitation leaves~~is ~~these~~industry ~~competitors~~standard ~~at a significant disadvantage relative to capturing key meta-data at point of creation~~ that can be ~~used~~provided tofrom ~~put~~many ~~content~~different ~~into context~~sources. ~~It also leaves them in a high cost, high complexity environment. Key competitive factors are function/capability, simplicity and cost.~~

~~Competitors~~Dependence ~~that~~on ~~have~~One similar DigiLIBE function (with limitations) by integrating a number of point solutions together include EMC, Evault, IBM, NetApp, Symantec, and HP. No one of these competitors offers a complete suite except EMC. However, as stated, all these potential competitors’ weaknesses are the “storage-centric architecture versus the client (human)-based design, and the cost of integrate and manage “point” solutions. It is difficult to assess how much reengineering or ~~redesign would be required and how much time it would take for~~ a ~~top-tier~~Few ~~competitor~~Major (like those listed above) to develop a cost and performance competitive solution to compete directly with DigiLIBE. It is more likely that a second-tier or startup company may introduce a product to compete with DigiLIBE. Our patents, if issued, will afford some level of protection against strongly similar architectural solutions. Customers

9 Our customers trust us with the ability to archive, protect and retrieve their information assets. We serve customers throughout the United States in a diverse group of data intensive industries, including financial services, engineering and scientific, construction, health care, education and legal services, being the most important. We have strong relationships with our customers and high customer satisfaction with our sales and technical support, and those of our business partners.

~~Table~~Our DigiBAK business has grown to over 900 customers in 2011 across North America. Of those customers, approximately 72% of ~~Contents~~the revenue (based on gigabytes of stored data) is with our 10 largest customers. While loss of one or two of these large customers would present a challenge to continued revenue growth, our contracts are for three years. Further, larger customers drive more generic growth in data from the initial stored amounts over time. Our sales direction is toward more intermediate sized customers similar to those in our top 10. With the introduction of DigiLIBE, we offer customers alternatives to control their data growth as well as provide new functions. With the combination of DigiBAK and DigiLIBE, we expect to grow both of our data archiving businesses and retain larger customers who would otherwise leave the service because of escalating costs driven by their own data growth.

~~Sources~~Patents, ~~and~~Trademarks, ~~Availability~~Licenses, ofFranchises, ~~Raw~~Concessions, ~~Materials~~Royalty ~~and~~Agreements ~~Names~~or ofLabor ~~Principal~~Contracts, ~~Suppliers~~ including Duration

~~For DigiBAK~~Generally, ~~our~~we ~~principal~~rely ~~supplier~~on ~~partners are Asigra,~~ a ~~software~~combination ~~vendor~~of ~~providing~~patents, ~~system management~~copyrights, ~~tools; Exanet~~trademarks, ~~which~~trade ~~provides~~secrets ~~hardware~~(including ~~and~~know-how), ~~software~~employee ~~and~~intellectual ~~our~~property ~~data~~agreements, ~~transmission supplier. Asigra is a provider of comprehensive software solutions~~ and ITthird-party ~~expertise to back up data to customers secure vaults. We pay for licenses and for annual maintenance~~ agreements ~~based on the gigabytes of storage used. We chose Exanet because we believed it~~ to beestablish ~~robust~~ and ~~the~~protect ~~best~~proprietary ~~fit with~~rights ~~the~~in ~~Asigra software. We built~~ our ~~software/hardware~~products ~~infrastructure around the Exanet product (hardware~~ and ~~software) and the Asigra product (software)~~technologies. ~~When~~It weis ~~fully~~our ~~consume~~practice ~~existing~~to ~~storage capacity,~~seek weprotections ~~purchase~~in ~~additional~~all ~~Exanet~~jurisdictions orwhere ~~Asigra~~such ~~licenses~~protections asare ~~needed.~~deemed XOuseful ~~Communications provides voice, data~~ and IPdesirable ~~services~~ to ~~businesses~~our business and ~~other~~competitive ~~telecommunications companies in 80 metropolitan markets across the United States~~interests.

In ~~January 2010~~2008, we ~~learned~~applied ~~that~~for ~~Exanet~~and ~~was~~have ~~purchased by Dell Computers (“Dell”) in~~ a ~~distressed transaction.~~patent ~~Continued~~pending ~~long-term~~an ~~support~~Information ~~for~~Area ~~our~~Network ~~Exanet~~Patent ~~system~~representing ~~from~~the ~~Dell~~underlying istechnology ~~uncertain.~~and ~~We are in the~~ process of ~~evaluating a new hardware refresh of~~ our ~~current~~DigiLIBE ~~technology~~product. ~~platform~~Key ~~and~~claims ~~are~~filed ~~also evaluating~~in ~~alternative~~January, ~~vaulting~~2010 ~~solutions~~include; to(1) file ~~support our DigiBAK service~~creation, sometadata weattribution doand ~~not~~storage, ~~expect~~(2) persistent ~~this development~~access to ~~have~~files, ~~any~~(3) ~~adverse~~file ~~effect~~policies onand ~~our~~(4) global ~~business operations~~de-duplication.

~~For~~We ~~DigiLIBE,~~have ~~all~~customary ~~our~~ software islicenses ~~developed~~required ~~in-house. We use the Microsoft Developers Suite~~ to ~~develop~~ ~~our~~conduct ~~software.~~current ~~Our hardware Information Director is industry standard~~ and weintended ~~outsource the product from multiple vendors: Rorke Data, Inc, a division of Bell Micro; and PDS~~operations. We ~~chose~~are ~~Rorke and~~in ~~PDS~~the ~~because~~process of ~~their~~filing ~~reputation~~certain ~~and~~service ~~because~~mark ~~they~~applications ~~also~~that ~~provide~~are ~~effective~~deemed ~~and~~to ~~efficient hardware support. Our DigiLIBE vault hardware is basically the same hardware as our Information Director. This hardware is industry standard that can~~ be ~~provided~~necessary ~~from~~or ~~many~~beneficial ~~different~~to ~~sources~~us.

~~Dependence~~We onhave ~~One~~ or aare ~~Few~~party ~~Major~~to ~~Customers~~ the following service agreements that are deemed to be material.

~~Our customers trust us with the ability to archive~~StorageSwitch, protect and retrieve their information assets. We serve customers throughout the United States in a diverse group of data intensive industries, including financial services, engineering and scientific, construction, health care, education and legal services, being the most important. We have strong relationships with our customers and high customer satisfaction with our sales and technical support, and those of our business partners. LLC

~~Our~~In ~~DigiBAK~~January 2008, ~~business~~we ~~has~~executed ~~grown~~a tononbinding ~~over~~Letter ~~800 customers in 2010 across North America. Of those customers, approximately 71%~~ of ~~the~~Intent ~~revenue~~ (~~based~~the ~~on gigabytes of stored data~~“LOI”) is with ~~our~~StorageSwitch ~~10 largest~~to ~~customers.~~purchase ~~While~~selective ~~loss~~existing ofsoftware ~~one~~technology orand ~~two~~in ofMarch 2008 ~~these~~we ~~large~~signed ~~customers~~and ~~would~~completed ~~present~~ a ~~challenge~~Technology ~~to continued~~Purchase ~~revenue~~Agreement ~~growth, our contracts are~~ for ~~three~~a ~~years.~~purchase ~~Further,~~of ~~larger~~certain ~~customers~~technology ~~drive~~software ~~more generic~~with ~~growth~~a intotal ~~data~~payment ~~from~~of ~~the~~$250,000 ~~initial~~cash ~~stored~~and ~~amounts~~500,000 ~~over~~shares ~~time.~~of ~~Our~~our ~~sales~~common ~~direction~~stock isthat ~~toward more~~were ~~intermediate~~restricted ~~sized customers similar to those in our top 10~~securities. ~~With~~We ~~the~~also ~~introduction~~entered ~~of DigiLIBE,~~into wea ~~offer~~Consulting ~~customers~~Service ~~alternatives~~Agreement towith ~~control~~a ~~their~~monthly ~~data~~payment ~~growth~~of as$25,000 ~~well~~and asmonthly ~~provide~~issuance ~~new functions. With the combination~~ of ~~DigiBAK and DigiLIBE~~24,960 weshares ~~expect to grow both~~ of our ~~data archiving~~common ~~businesses~~stock ~~and~~that ~~retain~~were ~~larger~~also ~~customers~~“restricted ~~who~~securities”. ~~would~~This ~~otherwise~~Consulting ~~leave~~Services ~~the~~Agreement ~~service~~terminated ~~because~~on ~~of escalating~~August 1, ~~costs driven by their own data growth~~2008.

~~Patents,~~Vision ~~Trademarks,~~to ~~Licenses~~Practice, ~~Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration~~ Inc.

~~Generally~~On February 6, 2008, we ~~rely~~entered oninto a ~~combination~~Consulting ofAgreement ~~patents,~~with ~~copyrights~~Vision to Practice, ~~trademarks~~Inc., ~~trade~~a ~~secrets~~Minnesota corporation (~~including know-how~~“Vision”), ~~employee~~to ~~intellectual~~assist ~~property~~in ~~agreements,~~bringing ~~and~~our ~~third-party~~new ~~agreements~~product initiatives to ~~establish~~market ~~and protect~~utilizing ~~proprietary~~the ~~rights~~technology insoftware ~~our~~purchased ~~products~~from ~~and technologies~~StorageSwitch. ItWe ispay ~~our~~semi-monthly ~~practice~~payments toof ~~seek~~$7,680 ~~protections in~~based ~~all~~on ~~jurisdictions~~full-time ~~where~~service ~~such~~provided ~~protections~~to ~~are~~us ~~deemed~~under ~~useful~~this ~~and~~Consulting ~~desirable~~Agreement. We also issued to ~~our~~the ~~business~~consultant’s ~~and competitive~~principal ~~interests~~a comprehensive stock option package that vest over multiple years of service. Vision is owned by Rodd Johnson.

InThis ~~2008~~Consulting Agreement contains various provisions regarding independent contractor status, weconfidentiality, ~~applied~~due ~~for~~performance and ~~have~~care ain ~~patent~~performing ~~pending~~services, annotice ~~Information~~of ~~Area~~disputes ~~Network~~and ~~Patent~~time ~~representing the~~for ~~underlying~~correction, ~~technology~~arbitration of disputes and ~~process~~indemnification by Vision, among other provisions, a copy of ~~our~~which ~~DigiLIBE~~was ~~product~~filed as an Exhibit to our Form 10. ~~Key~~The ~~claims~~Scope ~~filed~~of Work outline referenced in ~~January,~~the ~~2010 include;~~Consulting ~~(1) file~~Agreement ~~creation,~~is ~~metadata~~not ~~attribution~~filed ~~and~~as ~~storage,~~an ~~(2) persistent~~Exhibit ~~access~~as toit ~~files,~~considered ~~(3) file~~confidential ~~policies~~and proprietary information to us and ~~(4)~~our storage technology. See Part ~~global~~IV, ~~de-duplication~~Item 15.

WeResearch ~~have customary software licenses required to conduct current~~ and ~~intended~~Development ~~operations.~~Costs Weduring ~~are in~~ the ~~process~~Last oftwo ~~filing~~Fiscal ~~certain service mark applications that are deemed to be necessary or beneficial to us.~~ Years

WeIn ~~have~~2010 orand ~~are~~2011, ~~party~~we toincurred ~~the~~research ~~following~~and ~~service~~development ~~agreements~~expenses ~~that~~of ~~are~~$447,476 ~~deemed~~and $992,210, respectively to bedevelop ~~material~~our new DigiLIBE product offering. We announced DigiLIBE on December 19, 2009, and launched Release 1 of our new DigiLIBE product in June 2010, and release 2 of DigiLIBE was in October of 2010, and release 3.5 in February of 2011.

10 Number of Total Employees and Number of Full Time Employees

~~Table~~At ofyear ~~Contents~~end 2010, our employee headcount was 20 full-time employees and one subcontractor. At year end 2011 our employee headcount was 13 full-time employees and one subcontractor. We utilized contract employees for specific skills required in short-term activities. We hire full-time employees where we intend to focus on strategic skill needs. Over the past two years, we have focused on maintaining a small and highly productive team and intend to continue as such.

~~StorageSwitch,~~Reports ~~LLC~~ to Security Holders

InWe ~~January 2008,~~are werequired ~~executed a nonbinding Letter of Intent (the “LOI”) with StorageSwitch~~ to ~~purchase~~ ~~selective~~file ~~existing~~annual ~~software~~reports ~~technology~~on ~~and~~Form in10-K ~~March 2008 we signed~~ and ~~completed~~quarterly ~~a Technology~~reports ~~Purchase~~on ~~Agreement~~Form ~~for~~10-Q awith ~~purchase~~the ofSecurities ~~certain~~Exchange ~~technology~~Commission, ~~software~~and ~~with~~on a ~~total~~regular ~~payment of $250~~basis,~~000~~ ~~cash~~are ~~and~~required ~~500,000~~to ~~shares~~timely ofdisclose ~~our~~certain ~~common~~material ~~stock~~events ~~that were restricted securities~~(e.g., Wechanges ~~also entered~~in ~~into~~corporate acontrol; ~~Consulting~~acquisitions ~~Service~~or ~~Agreement~~dispositions ~~with~~of a ~~monthly~~significant ~~payment~~amount of ~~$25,000~~assets ~~and~~other ~~monthly~~than ~~issuance of~~in ~~24,960~~the ~~shares~~ordinary course of ~~our~~business; ~~common~~and ~~stock~~bankruptcy) ~~that~~in ~~were~~a ~~also~~Current ~~“restricted~~Report ~~securities”. This Consulting Services Agreement terminated~~ on ~~August 1,~~Form ~~2008~~8-K.

~~Vision~~You tomay ~~Practice~~read and copy any materials that we file with the Securities and Exchange Commission at the Securities and Exchange Commissions’ Public Reference Room at 100 F Street, ~~Inc~~N. E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You may also find all of the reports that we have filed electronically with the Securities and Exchange Commission at their Internet site www.sec.gov.

OnITEM ~~February 6,~~1A: RISK 2008, we entered into a Consulting Agreement with Vision to Practice, Inc., a Minnesota corporation (“Vision”), to assist in bringing our new product initiatives to market utilizing the technology software purchased from StorageSwitch. We pay semi-monthly payments of $7,680 based on full-time service provided to us under this Consulting Agreement. We also issued to the consultant’s principal 225,000 stock options at $0.35 per share, which vest over 36 months. Vision is owned by Rodd Johnson. FACTORS

~~This~~Risks ~~Consulting~~Related Agreement contains various provisions regarding independent contractor status, confidentiality, due performance and care in performing services, notice of disputes and time for correction, arbitration of disputes and indemnification by Vision, among other provisions, a copy of which was filed as an Exhibit to ~~our~~Our Form 10. The Scope of Work outline referenced in the Consulting Agreement is not filed as an Exhibit as it considered confidential and proprietary information to us and our storage technology. See Part IV, Item 15. Business

~~Research~~We have not recorded annual profitable operations since our inception, and ~~Development~~continued ~~Costs~~losses ~~during~~may ~~the~~require ~~Last~~us ~~two~~to ~~Fiscal~~curtail ~~Years~~ or terminate our business operations.

InWe ~~2009~~have ~~and~~experienced ~~2010,~~operating welosses ~~incurred~~each ~~research~~year ~~and~~since ~~development~~our ~~expenses~~inception. ofOur revenues decreased by $~~830~~663,~~247~~728 ~~and~~to $~~967~~1,~~591~~480, ~~respectively~~154 in 2011 compared to ~~develop~~$2,143,882 in 2010, with our ~~new~~net ~~DigiLIBE~~loss ~~product~~decreasing ~~offering.~~to We$3,988,543 ~~announced~~for ~~DigiLIBE~~the onyear ended December 1931, ~~2009~~ 2011, ~~and~~compared ~~launched~~to ~~Release~~the 1net loss of ~~our~~$6,414,639 ~~new~~for ~~DigiLIBE~~the ~~product~~year inended ~~June~~December 31, 2010. We may still incur additional future operating losses. Without raising new capital, continued losses on our operations may require us to curtail or terminate our business operations. Our operating results may fluctuate significantly and ~~release~~any 2failure ofto ~~DigiLIBE was~~meet financial expectations may disappoint securities analysts or investors and result in ~~October~~a ofdecline ~~2010~~in our common stock price on the Pink Sheets or any other nationally recognized quotation system upon which our common stock may be publicly traded in the future.

~~Number~~Our ofsubstantial ~~Total~~short ~~Employees~~term debt could adversely affect our financial condition and ~~Number~~our ofability ~~Full~~to ~~Time~~continue ~~Employees~~ our present and planned business operations.

AtAs ~~year~~of ~~end~~December 31, ~~2009~~2011, ~~our~~and ~~employee~~December 31, ~~headcount~~2010, ~~was~~we 19had ~~comprised~~long ofterm 11debt ~~full-time~~in ~~employees~~the ~~and~~form ~~eight subcontractors.~~of ~~At year end 2010~~ our ~~employee~~12% ~~headcount was 20 full-time employees~~ and ~~one subcontractor.~~8% Weconvertible ~~utilized~~notes ~~contract employees for specific skills required~~ in ~~short-term activities. We hire full-time employees where we intend to focus on strategic skill needs. Over~~ the ~~past~~amount ~~two~~of ~~years~~$1,374,259 ~~we have focused on maintaining a small~~ and ~~highly~~$250,000, ~~productive team and intend to continue as such~~respectively.

~~Reports~~From April 2009 through October 2009, we raised $750,000 from the sale of 12% convertible debt and warrants that were secured against the assets associated with our DigiBAK vault located in the located in the base of the former Minneapolis federal Reserve Bank. These notes reflected a 24-month maturity date. To address the debt concerns reflected above, in June 2010 we initiated an Incentive Offer that requested all of our unsecured and secured convertible debt holders to ~~Security~~convert ~~Holders~~ their convertible notes at a preferential $0.20 per share conversion rate. In response to this offer, we converted $2,537,300 of its unsecured convertible debt and $728,673 of accrued interest into 16,329,868 shares of the Company’s common stock. In addition, we converted $650,000 of our secured convertible stock and $74,187 of accrued interest into 724,187 shares of the Company’s Series A Convertible Preferred Debt.

WeDuring ~~are~~the ~~required~~year toended ~~file~~December 31, ~~annual~~2010, ~~reports~~we onraised ~~Form~~$420,000 ~~10-K~~through ~~and quarterly reports on Form 10-Q with~~ the ~~Securities~~ ~~Exchange~~issuance ~~Commission~~of 420,000 ~~and~~shares onof aSeries B ~~regular~~Convertible ~~basis,~~Preferred ~~are~~Stock. ~~required~~Each toshare ~~timely~~of ~~disclose~~Series B ~~certain material~~Convertible ~~events~~Preferred ~~(e.g.,~~Stock ~~changes~~is inconvertible ~~corporate~~into ~~control;~~5 ~~acquisitions~~common orshares ~~dispositions~~at ofthe aoption ~~significant amount~~ of ~~assets other than in~~ the ~~ordinary~~holder ~~course~~and ofis ~~business;~~entitled ~~and~~to ~~bankruptcy)~~annual incumulative adividends ~~Current~~at ~~Report on~~the ~~Form~~rate ~~8-K~~of 5%.

~~You~~To ~~may~~satisfy ~~read~~a significant debt obligation owed to certain shareholders and ~~copy~~to ~~any~~address ~~materials~~cash ~~that~~flow concerns, on February 28, 2011, we ~~file~~completed ~~with~~the placement of $1,182,844 of Secured Convertible Promissory Note (the ~~Securities~~“Notes”) and ~~Exchange~~Warrants ~~Commission~~(collectively, atthe “First Secured Convertible Debt Offering”). The Lenders in the ~~Securities~~ ~~and~~First ~~Exchange~~Secured ~~Commissions’~~Convertible ~~Public~~Debt ~~Reference~~Offering ~~Room~~paid ata ~~100~~10% Fdiscount ~~Street,~~for ~~N.E.,~~their ~~Washington~~investment, ~~D.C. 20549~~resulting in a “stepped-up” basis in their individual Notes for a total principal amount of $1,301,128. onThe ~~official~~Notes ~~business~~bear ~~days~~interest ~~during~~at the ~~hours~~rate of ~~10:00~~12% amper annum, have an 18-month maturity date and are convertible to ~~3:00~~common pmshares at $0.20 ~~You~~per ~~may~~share. ~~obtain information~~The Notes are secured by a first lien on ~~the~~all ~~operation~~assets of the ~~Public~~Company. ~~Reference~~In ~~Room~~conjunction bywith ~~calling~~the First Secured Convertible Debt Offering, the ~~Commission~~Lenders ~~at 1-800-SEC-0330.~~received ~~You~~warrants ~~may~~to ~~also~~purchase ~~find~~an ~~all~~aggregate of ~~the~~3,252,821 ~~reports~~common ~~that~~shares. weThe warrants vested immediately, have ~~filed~~a ~~electronically~~five ~~with~~year ~~the Securities~~term, a $0.30 exercise price and ~~Exchange~~are ~~Commission~~redeemable atby ~~their~~the ~~Internet~~Company ~~site~~in ~~www~~the event of an acquisition.~~sec.gov.~~

~~ITEM~~In 1Aan effort to address low cash concerns, in June 2011, we initiated a Junior Secured Convertible Debt Offering that provides for the sale of up to an aggregate principal amount of $1,500,000 Junior Secured Convertible Promissory Notes (the “Junior Notes”) and Warrants. ~~RISK~~The ~~FACTORS~~investors in this Junior Secured Convertible Debt Offering receive five-year warrants to purchase that number of common shares equal to 10% of the principal amount of their Junior Note(s) divided by the exercise price of $.06 per share. The Junior Notes bear interest at 8% per annum, have a 24-month maturity date and are secured by the assets of the Company with the repayment being subordinated to the repayment of all secured notes previously issued by the Company.

~~Risks~~On ~~Related~~June to28, ~~Our~~2011, ~~Business~~ we closed on the first $500,000 tranche of the Junior Secured Convertible Debt Offering. In conjunction

Wewith ~~have~~the ~~not~~closing ~~recorded~~of ~~annual~~the ~~profitable~~first ~~operations~~tranche ~~since~~of ~~our~~the ~~inception,~~Junior ~~and~~Secured ~~continued~~Convertible ~~losses~~Debt ~~may require~~Offering, usthe investors received warrants to ~~curtail~~purchase oran ~~terminate~~aggregate ~~our~~of ~~business~~833,333 ~~operations~~common shares. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

WeOn ~~have~~September ~~experienced~~15, ~~operating~~2011, ~~losses~~we ~~each~~broke ~~year~~escrow ~~since~~on ~~our~~the ~~inception.~~remaining ~~Our revenues decreased by~~ $1,~~048~~000,~~581~~000 toavailable ~~$2,143,882~~under inthe ~~2010~~second ~~compared~~tranche toof the $31,~~192~~500,~~463~~000 inJunior ~~2009,~~Secured ~~with~~Convertible ~~our~~Debt ~~net~~Offering ~~loss~~by ~~increasing~~closing to on $6550,~~414,639~~000 ~~for~~of ~~the~~proceeds ~~year~~from ~~ended December 31, 2010, compared to~~ the ~~net~~sale ~~loss~~ of ~~$5,169,717 for~~ the ~~year~~ ~~ended~~Junior ~~December 31, 2009~~Notes. WeIn ~~may~~conjunction ~~still~~with ~~incur~~the ~~additional~~sale ~~future~~of ~~operating~~$550,000 ~~losses.~~of ~~Without raising~~these ~~new~~Junior ~~capital~~Notes, ~~continued~~the ~~losses~~investors onreceived ~~our~~an ~~operations~~aggregate ~~may~~of ~~require~~916,667 uscommon tostock ~~curtail or terminate our business operations~~warrants. ~~Our~~The ~~operating~~warrants ~~results~~vested ~~may~~immediately, ~~fluctuate~~have ~~significantly~~a ~~and~~five ~~any~~year ~~failure~~term ~~to meet financial expectations may disappoint securities analysts or investors~~ and ~~result~~an inexercise ~~a decline in our common stock~~ price on ~~the~~of ~~Pink~~$0.06 ~~Sheets~~per ~~or any other nationally recognized quotation system upon which our common stock may be publicly traded in the future~~share.

11 On December 5, 2011, we broke escrow on the third tranche of the $1,500,000 Junior Secured Convertible Debt Offering by closing on $30,000 of proceeds from the sale of Junior Notes. In conjunction with the sale of $30,000 of these Junior Notes, the investors received an aggregate of 50,000 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

~~Table~~On December 31, 2011, we closed the third tranche of ~~Contents~~the $1,500,000 Junior Secured Convertible Debt Offering by converting $379,534 of existing convertible debt and accrued interest into the Junior Secured Convertible Debt Offering. In conjunction with the conversion of this $379,534, the investors received an aggregate of 682,556 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

~~Our~~We ~~substantial~~plan ~~short~~to ~~term~~continue to raise additional funds in the form of equity or debt ~~could~~offerings, ~~adversely~~secured ~~affect~~and ~~our~~otherwise, ~~financial~~and ~~condition~~we are continuing to evaluate alternative incentive programs to reduce and/or ~~our~~eliminate ~~ability~~this debt. If we are unable to ~~continue~~ pay these notes when due, including interest, and the holders of these convertible notes do not elect to convert them to purchase shares of our ~~present~~common stock or extend them, our financial condition could worsen substantially, and ~~planned~~we ~~business~~may be required to cease operations entirely.

AsWe also have substantial amount of other current liabilities as of December 31, ~~2010~~2011, ~~and~~that ~~December 31~~are principally comprised of the following: notes payable to related parties of $66,000; ~~2009~~notes payable of $45,933; wecurrent ~~had~~maturities ~~long~~of ~~term~~convertible ~~debt~~notes in$1,212,098; ~~the~~current ~~form~~maturities of ~~our 12%~~ convertible notes in- ~~the~~related ~~amount~~parties $42,114, trade accounts payable $820,308; related party accounts payables of $~~250~~35,~~000~~287, deferred income $6,040 and accrued expenses $1694,~~899~~892; for total current liabilities of $2,~~500~~922,672. ~~respectively~~See also Notes to the Consolidated Financial Statements.

~~From~~Our ~~April 2009~~substantial ~~through~~indebtedness ~~October 2009,~~could wehave ~~raised~~important ~~$750,000~~adverse ~~from~~consequences ~~the~~on ~~sale of 12% convertible debt and warrants that were secured against the assets associated with~~ our ~~DigiBAK~~ability vault located in the located in the base of the former Minneapolis federal Reserve Bank. These notes reflected a 24-month maturity date. To address the debt concerns reflected above, in June 2010 we initiated an Incentive Offer that requested all of our unsecured and secured convertible debt holders to ~~convert their~~carry ~~convertible~~on notes at a preferential $0.20 per share conversion rate. In response to this offer, we converted $2,537,300 of its unsecured convertible debt and $728,673 of accrued interest into 16,329,868 shares of the Company’s common stock. In addition, we converted $650,000 of our ~~secured~~ ~~convertible~~present ~~stock~~ and ~~$74,187~~planned ofbusiness ~~accrued interest into 724,187 shares of the Company’s Series A Convertible Preferred Debt~~operations.

~~During~~For ~~the year ended December 31~~example, ~~2010,~~it we raised $420,000 through the issuance of 420,000 shares of Series B Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock is convertible into 5 common shares at the option of the holder and is entitled to annual cumulative dividends at the rate of 5%. could:

We• ~~plan~~make toit ~~continue~~more todifficult ~~raise~~for ~~additional~~us ~~funds in the form of equity or debt offerings, secured and otherwise, and we are continuing~~ to ~~evaluate~~satisfy ~~alternative~~our ~~incentive~~obligations ~~programs~~with torespect ~~reduce and/or eliminate this debt. If we are unable~~ to ~~pay these notes when due, including interest, and~~ the ~~holders~~ ofcurrent ~~these convertible notes do not elect to convert them to purchase shares of our common stock~~ or ~~extend~~new ~~them,~~debt ~~our financial condition could worsen substantially~~financing, ~~and~~if weany ~~may~~is beoffered ~~required~~in ~~to cease~~the ~~operations entirely.~~ future;

We• ~~also~~fund ~~have~~the ~~substantial~~selling ~~other~~and ~~current~~marketing ~~liabilities~~expenses ~~as of December 31, 2010,~~ that ~~are~~support ~~principally comprised of~~ the ~~following:~~national ~~notes~~roll-out ~~payable ($231,540); convertible notes ($790,000); trade accounts payable ($692,923); accrued expenses ($554,978); and obligations under capital leases ($23,308), for total current liabilities~~ of ~~$2,295,679. See also Note 15, Subsequent Events, in the Notes to the Consolidated Financial Statements.~~ DigiLIBE;

~~Our~~• ~~substantial~~make ~~indebtedness~~us ~~could~~more ~~have~~sensitive ~~important~~to adverse ~~consequences~~economic onconditions ~~our~~than ~~ability~~some toof ~~carry on~~ our ~~present~~competitors ~~and~~with ~~planned~~less ~~business operations.~~ debt;

~~For~~• ~~example~~limit our ability to fund future working capital, itacquisitions, ~~could:~~ capital expenditures and other general corporate requirements;

• ~~make~~limit itour ~~more~~flexibility ~~difficult~~in planning for, usor reacting to, ~~satisfy~~changes in our ~~obligations~~business ~~with~~and ~~respect to~~ the ~~current~~records orand ~~new~~information ~~debt~~management ~~financing,~~services ~~if any is offered in the future~~industry;

• ~~fund~~make ~~the~~it ~~selling~~more ~~and~~difficult ~~marketing~~for ~~expenses~~us ~~that~~to ~~support~~obtain ~~the~~additional ~~national~~equity ~~roll-out~~or ofdebt ~~DigiLIBE~~financing for future; and

• ~~make~~limit usour ~~more~~working ~~sensitive~~capital torequirements ~~adverse~~for ~~economic~~future ~~conditions~~acquisitions ~~than~~or ~~some~~other ofreasons ~~our~~important ~~competitors~~to ~~with~~our ~~less~~business ~~debt;~~strategy.

•Despite ~~limit~~ our ~~ability~~current debt position, we may still need to ~~fund~~incur ~~future~~substantial ~~working~~additional ~~capital,~~debt ~~acquisitions,~~or ~~capital~~we ~~expenditures~~will ~~and~~be ~~other~~unable ~~general~~to ~~corporate~~continue ~~requirements;~~our planned operations.

•We ~~limit~~expect ~~our~~to ~~flexibility~~continue to raise additional funding in ~~planning~~the ~~for~~form of equity or debt offerings, secured or ~~reacting~~otherwise. However, if we are unable to pay the currently outstanding convertible notes and accrued interest, ~~changes~~trade inaccounts payable and accrued expenses, our ~~business~~financial ~~and~~condition may be adversely affected to the ~~records~~point that no debt or equity financing may be available to us. That could require us to cease or substantially limit our business operations, including termination of employees and ~~information~~business ~~management~~associations ~~services~~necessary ~~industry;~~for us to continue in our business.

•We ~~make~~have itdeficiencies ~~more~~in ~~difficult~~our ~~for~~internal uscontrols tothat ~~obtain~~could ~~additional~~adversely ~~equity~~affect orour ~~debt~~financial ~~financing~~statements ~~for~~reporting, ~~future;~~which ~~and~~could cause our financial statements to be inaccurate or un-auditable.

•Our ~~limit~~disclosure ~~our~~controls ~~working~~and ~~capital~~procedures ~~requirements~~have ~~for~~been ~~future~~designed ~~acquisitions~~to orensure ~~other~~that ~~reasons~~information ~~important~~required to ~~our~~be ~~business~~disclosed ~~strategy~~by us is collected and communicated to management to allow timely decisions regarding required disclosures. Our Chief Executive Officer and the Chief Financial Officer have concluded, based on their evaluation as of December 31, 2011, that, as a result of material weaknesses in internal control over financial reporting as described further in this Annual Report were not effective in providing reasonable

~~Despite~~assurance ~~our~~that ~~current~~material ~~debt~~information ~~position,~~is wemade ~~may~~known ~~still need~~ to ~~incur~~them ~~substantial~~by ~~additional~~others ~~debt~~within ~~or we will be unable to continue~~ our ~~planned operations.~~ Company:

We ~~expect~~have tomaterial ~~continue~~weaknesses ~~to raise additional funding~~ in ~~the~~our ~~form~~internal ofcontrols ~~equity~~over ~~or debt offerings, secured or otherwise. However, if we are unable to pay the currently outstanding 12% convertible notes and accrued interest, trade accounts payable and accrued expenses, our~~ financial ~~condition~~reporting ~~may be adversely affected to the point~~ that ~~no debt or equity financing may be available to us. That~~ could ~~require~~ usadversely toaffect ~~cease or substantially limit~~ our ~~business~~financial ~~operations, including termination of employees and business associations necessary for us to continue in our business~~statements.

WeOur ~~have~~internal ~~deficiencies~~control insystem is intended to provide reasonable assurance to our ~~internal~~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 ~~could~~the ~~adversely~~information ~~affect~~required to be disclosed by us in our ~~financial~~reports ~~statements reporting,~~that ~~which~~we ~~could~~will ~~cause~~be required to file under the Exchange Act is accumulated and communicated to our ~~financial~~management ~~statements~~as appropriate to beallow ~~inaccurate~~timely ordecisions ~~un-auditable~~regarding financial disclosure.

~~Our~~Management ~~disclosure~~assessed ~~controls~~the ~~and~~effectiveness ~~procedures~~of ~~have~~our ~~been~~internal ~~designed~~control toover ~~ensure~~financial ~~that~~reporting ~~information~~as ~~required~~of toDecember 31, ~~be disclosed~~2011 ~~by us is collected~~ and ~~communicated~~concluded tothat ~~management~~there towere ~~allow~~material ~~timely decisions regarding required disclosures~~weaknesses. ~~Our~~Management ~~Chief Executive~~is ~~Officer~~taking ~~and~~steps ~~the~~to ~~Chief~~address ~~Financial~~these ~~Officer~~weaknesses. ~~have concluded~~However, ~~based~~these onweaknesses ~~their~~could ~~evaluation~~cause asour ~~of December 31,~~financial ~~2010,~~statements ~~that,~~to asbe ainaccurate ~~result~~and ofmay ~~material~~result ~~weaknesses~~ in ~~internal~~restatements ~~control~~of ~~over~~such financial ~~reporting~~ asstatements. ~~described~~There ~~further~~can inbe ~~this~~no ~~Annual Report were not effective in providing reasonable~~ assurance ~~that~~when ~~material~~and ~~information~~if iswe ~~made~~will ~~known~~be able to ~~them~~resolve bythe ~~others~~weaknesses ~~within~~in our ~~Company:~~ internal controls.

12 If we fail to develop new products, or if we incur unexpected expenses or delays in product development, we may lose our competitive position and incur substantial additional losses on our operations or may be required to curtail or terminate our present and planned business operations.

~~Table~~Although we currently have fully developed products and services available for sale, we are also developing various new products and technologies that we will rely on to remain competitive. Due to the risks in developing new products and technologies, limited financing, competition, obsolescence, loss of ~~Contents~~key personnel and other factors, we may fail to develop these technologies and products, or we may experience lengthy and costly delays in doing so. Although we may be able to license some of our technologies in their current stage of development, we cannot assure you that we will be able to do so.

WeOur ~~have~~business ~~material~~may ~~weaknesses~~be inadversely ~~our~~affected ~~internal~~by ~~controls~~downturns ~~over~~in ~~financial~~the ~~reporting~~economy that ~~could adversely~~may ~~affect~~limit the sale of storage and universal archiving solutions and our ~~financial~~present ~~statements~~and planned business operations may fail as a result.

~~Our~~We ~~internal~~are ~~control~~subject ~~system~~to isthe ~~intended~~capital tospending ~~provide~~patterns ~~reasonable~~of ~~assurance~~this toindustry. If our ~~management~~customers and ~~board~~ ofpotential ~~directors~~customers ~~regarding~~do ~~the~~not ~~preparation~~increase ~~and~~their ~~fair~~capital ~~presentation~~spending ofbudgets, ~~published~~we ~~financial statements~~could ~~and~~face ~~that~~a weweaker ~~have~~demand ~~controls~~for ~~and~~our ~~procedures~~products; ~~designed~~however, tosuch ~~ensure~~an ~~that~~event ~~the~~may ~~information required~~not to be ~~disclosed~~materially byadverse to us inas our ~~reports~~storage ~~that~~solution weproducts ~~will~~offers bea ~~required~~more tocost-effective ~~file~~methodology ~~under~~of ~~the~~data ~~Exchange Act~~backup ~~is accumulated~~ and ~~communicated~~restoring ~~to our management as appropriate to allow timely decisions regarding financial disclosure~~services.

~~Management~~We ~~assessed~~depend ~~the~~on ~~effectiveness of~~ our ~~internal~~key ~~control over financial reporting as of December 31~~personnel, ~~2010~~ and ~~concluded~~the ~~that~~loss ~~there~~of ~~were~~any ~~material~~would ~~weaknesses.~~impair ~~Management is taking steps to address these weaknesses. However, these weaknesses could cause~~ our ~~financial~~ability ~~statements~~ to ~~be inaccurate~~compete and ~~may~~gain ~~result~~any inmarket ~~restatements~~share ofin ~~such~~the ~~financials~~storage ~~statements.~~solutions ~~There~~industry ~~can~~that bewe nopresently ~~assurance when~~serve and ifintend ~~we will be able~~ to ~~resolve the weaknesses in our internal controls~~serve.

IfWith wethe ~~fail~~small tonumber ~~develop~~of ~~new~~people ~~products,~~in orour ifcompany, we ~~incur~~are ~~unexpected~~highly ~~expenses~~dependent oron ~~delays~~the inprincipal members of our management. The loss of services of any of these persons could seriously harm the growth and success of our current and intended business operations. In addition, research, product development and commercialization will require additional skilled personnel in the backup and storage retention services industry procedures and products. Competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for these qualified personnel is high. If we ~~may~~are ~~lose~~unable ~~our~~to ~~competitive~~hire, ~~position~~train and ~~incur~~retain ~~substantial~~a ~~additional~~sufficient ~~losses~~number onof qualified employees, our ~~operations~~ orability ~~may~~to conduct and expand our business could be ~~required~~reduced. The inability to ~~curtail~~retain orand ~~terminate~~hire ~~our~~qualified ~~present~~personnel ~~and~~could also hinder the planned expansion of our business. ~~operations~~We have utilized stock options as the primary method for retaining key personnel.

~~Although~~Our weintellectual ~~currently~~property ~~have~~rights ~~fully~~or ~~developed~~contractual ~~products~~provisions ~~and~~may ~~services~~not ~~available~~protect ~~for~~us ~~sale, we are also developing various new products~~ and ~~technologies~~our ~~that we will rely on to remain competitive. Due to the risks in developing new~~ products and ~~technologies,~~as ~~limited~~a ~~financing~~result, ~~competition, obsolescence,~~our ~~loss~~business ~~of key personnel and other factors, we~~ may fail ~~to develop these technologies and products, or we may experience lengthy and costly delays in doing so~~. ~~Although we may be able to license some of our technologies in their current stage of development, we cannot assure you that we will be able to do so.~~

Our ~~business~~products ~~may~~could beinfringe ~~adversely~~on ~~affected~~the byintellectual ~~downturns~~property inrights ~~the~~of ~~economy~~others, ~~that~~which may ~~limit~~involve ~~the~~us ~~sale~~in ~~of storage~~costly litigation and, ~~universal~~if ~~archiving~~we ~~solutions~~are not successful in defending such claims, could also cause us to pay substantial damages and prohibit us from selling our ~~present~~products. Third parties may assert infringement or other intellectual property claims against us. Even if these claims are without merit, defending lawsuits takes significant time, may be expensive and ~~planned~~may divert management’s attention from other business ~~operations~~concerns. ~~may~~We ~~fail as~~are anot ~~result~~currently aware of any third-party patents claims against us or other legal proceedings.

WeWith ~~are~~our ~~subject~~own topatents ~~the~~applications, ~~capital~~assuming ~~spending~~they ~~patterns~~result in the issuance of ~~this~~patents, ~~industry.~~we Ifmay need to initiate lawsuits to protect or enforce our ~~customers~~proprietary ~~and~~rights ~~potential customers~~in doour ~~not~~products, ~~increase~~which ~~their~~would ~~capital~~also ~~spending~~be ~~budgets~~expensive and, if we ~~could~~unsuccessful, ~~face~~may acause ~~weaker~~us ~~demand~~to ~~for~~lose some of our ~~products;~~ ~~however~~intellectual property rights, ~~such~~which anwould ~~event~~reduce ~~may~~our ~~not~~ability beto ~~materially~~compete ~~adverse~~in the market. In the future, we may rely on patents to usprotect asour intellectual property and our ~~storage~~competitive ~~solution~~ position. The rights we rely upon to protect the intellectual property underlying our products ~~offers~~may anot ~~more~~be ~~cost-effective~~adequate, ~~methodology~~which ofcould ~~data~~enable ~~backup~~third parties to use this technology and ~~restoring~~would ~~services~~reduce our ability to compete in our markets.

We ~~depend~~presently onhave ~~our~~filed ~~key~~certain ~~personnel,~~patent ~~and~~applications ~~the~~on ~~loss~~certain facets of ~~any would impair~~ our ~~ability~~products, ~~to compete~~ and ~~gain any~~no ~~market~~assurance ~~share~~can inbe ~~the~~given ~~storage solutions industry~~ that wethese ~~presently serve and intend to serve.~~

~~With~~filings ~~the~~will ~~small~~result ~~number of people~~ in ~~our~~patents ~~company~~being issued, weor ~~are~~if ~~highly~~issued, ~~dependent~~that onthey ~~the~~will ~~principal~~protect ~~members~~us ~~of our~~and ~~management.~~not ~~The~~infringe ~~loss~~on patents of ~~services~~others, ofin ~~any~~some ofpart. ~~these~~See ~~persons~~the ~~could~~heading ~~seriously~~“Patents, ~~harm~~Trademarks, ~~the~~Licenses, ~~growth~~Franchises, ~~and success~~Concessions, ofRoyalty ~~our~~Agreements ~~current~~or ~~and~~Labor ~~intended~~Contracts, ~~business~~including ~~operations.~~Duration” Inof ~~addition~~Part I, ~~research,~~Item 1. ~~product~~We ~~development and~~also ~~commercialization~~rely ~~will~~on ~~require~~a ~~additional~~combination ~~skilled~~of ~~personnel~~trade insecrets, ~~the~~nondisclosure ~~backup~~agreements and ~~storage~~other ~~retention services~~contractual ~~industry~~provisions ~~procedures~~ and ~~products.~~technical ~~Competition~~code ~~for~~security ~~and~~measures ~~retention~~to ofprotect ~~personnel~~our intellectual property rights. Nevertheless, ~~particularly for~~these ~~employees~~measures ~~with~~may ~~technical~~not ~~expertise,~~be isadequate ~~intense~~to ~~and~~safeguard the ~~turnover~~technology ~~rate~~underlying ~~for~~our ~~these~~storage ~~qualified personnel~~solutions ~~is high~~products. IfNotwithstanding weour ~~are~~efforts ~~unable~~ to ~~hire,~~protect ~~train~~our ~~and~~intellectual ~~retain~~property, aour ~~sufficient~~competitors ~~number~~may ofindependently ~~qualified employees,~~develop ~~our~~similar ~~ability~~or toalternative ~~conduct~~technologies ~~and~~or ~~expand~~products ~~our~~that ~~business~~are ~~could~~equal beor ~~reduced.~~superior ~~The~~to ~~inability~~our totechnology ~~retain~~ and ~~hire~~storage ~~qualified~~solutions ~~personnel~~products ~~could~~without ~~also~~infringing ~~hinder~~on ~~the~~any ~~planned expansion~~ of our ~~business.~~intellectual Weproperty ~~have utilized~~rights ~~stock~~or ~~options~~design asaround ~~the~~our ~~primary~~proprietary ~~method for retaining key personnel~~technologies.

~~Our~~We ~~intellectual~~need ~~property~~additional ~~rights~~capital orto ~~contractual~~continue ~~provisions~~or ~~may~~expand ~~not~~our ~~protect~~current usbusiness operations, and our ~~products~~business ~~and as~~operations amay ~~result,~~prove ~~our~~unsuccessful ~~business~~without ~~may~~additional ~~fail~~funding.

~~Our~~Failure ~~products~~to ~~could~~raise ~~infringe~~additional oncapital ~~the~~or ~~intellectual~~generate ~~property~~the ~~rights~~significant ofcapital ~~others,~~necessary ~~which~~to ~~may~~continue ~~involve~~and usexpand ~~in costly~~our ~~litigation~~operations and launched, ifsell weor ~~are~~license ~~not~~our ~~successful~~DigiLIBE product could reduce our ability to compete and result in ~~defending~~lower ~~such~~revenue. ~~claims,~~We ~~could~~anticipate ~~also~~that ~~cause~~our existing capital resources will only enable us to ~~pay~~ ~~substantial~~maintain ~~damages~~currently planned operations through the first quarter of 2012; and ~~prohibit~~we usexpect ~~from~~to ~~selling~~continue ~~our~~to ~~products.~~seek ~~Third~~funding ~~parties~~through ~~may~~equity ~~assert infringement~~and debt offerings, secured or ~~other~~otherwise. ~~intellectual~~See ~~property~~the ~~claims~~caption ~~against~~“Recent ~~us.~~Sales ~~Even~~of ifUnregistered ~~these~~Securities,” ~~claims~~Part II, ~~are~~Item 5, ~~without merit~~for a complete description of our prior funding efforts. However, ~~defending~~we ~~lawsuits~~premise ~~takes~~this ~~significant~~expectation ~~time~~on our current operating plans, which may bechange ~~expensive~~as ~~and~~a result of many factors. Consequently, we may ~~divert~~need ~~management’s attention~~additional ~~from~~funding ~~other~~sooner than anticipated. Our inability to raise needed capital would harm our business. ~~concerns~~In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current operating plans. WeTo ~~are~~the ~~not~~extent ~~currently~~that ~~aware~~additional capital is raised through the sale of ~~any~~equity, ~~third-party~~debt, ~~patents claims~~convertible ~~against~~debt ussecurities or other ~~legal~~combinations ~~proceedings~~of our securities, including our newly authorized preferred stock, the issuance of these securities could result in substantial dilution to our stockholders.

~~With~~We ~~our~~currently ~~own~~have ~~patents~~no ~~applications,~~credit ~~assuming~~facility ~~they~~or ~~result~~committed insources ~~the issuance~~ of ~~patents,~~capital. weTo ~~may~~the ~~need~~extent ~~to initiate~~operating ~~lawsuits~~and tocapital ~~protect~~resources orare ~~enforce~~insufficient ~~our~~to ~~proprietary~~meet ~~rights in~~ our ~~products,~~future ~~which~~funding ~~would also be expensive and~~requirements, if we ~~unsuccessful,~~will ~~may~~have ~~cause us~~ to ~~lose~~raise ~~some~~additional offunds ~~our~~to ~~intellectual~~continue ~~property~~the ~~rights, which~~commercialization ~~would~~of ~~reduce~~ our ~~ability to compete in the market~~products. InThese ~~the~~funds ~~future,~~may wenot ~~may~~be ~~rely~~available on ~~patents~~favorable ~~to protect~~terms, ~~our~~or ~~intellectual~~at ~~property and our competitive position~~all. ~~The~~If ~~rights~~adequate wefunds ~~rely~~are ~~upon~~not toavailable ~~protect the~~on ~~intellectual~~attractive ~~property~~terms, ~~underlying~~we ~~our~~may ~~products~~be ~~may~~required ~~not~~to becease ~~adequate,~~or ~~which~~curtail ~~could~~operations ~~enable~~significantly ~~third parties~~or to ~~use~~obtain ~~this~~funds ~~technology~~by ~~and~~entering ~~would~~into ~~reduce~~financing, ~~our~~supply ~~ability~~or tocollaboration ~~compete~~agreements inon ~~our~~unfavorable ~~markets~~terms.

13 We face a higher risk of failure and loss of our entire business because we cannot accurately forecast our future revenues and operating results.

~~Table~~Our short operating history, lack of ~~Contents~~adequate internal controls and the rapidly changing nature of the market in which we compete make it difficult to accurately forecast our revenues and operating results. Furthermore, we expect our revenues and operating results might fluctuate in the future due to a number of factors, including the following:

We• ~~presently~~The ~~have~~timing ~~filed certain patent applications on certain facets~~ of ~~our~~sales ~~products, and no assurance can be given that these filings will result in patents being issued, or if issued, that they will protect us and not infringe on patents~~ of others, in some part. See the heading “Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration” of Part I, Item 1. We also rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical code security measures to protect our ~~intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying our storage solutions~~ products. ~~Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology~~ and ~~storage solutions products without infringing on any of our intellectual property rights or design around our proprietary technologies.~~ services;

We• ~~need~~The ~~additional~~timing ~~capital~~of toproduct ~~continue or expand our current business operations, and our business operations may prove unsuccessful without additional funding.~~ implementation;

~~Failure~~• toUnexpected ~~raise~~delays ~~additional capital or generate the significant capital necessary to continue and expand our operations and launched, sell or license our DigiLIBE product could reduce our ability to compete and result~~ in ~~lower~~introducing ~~revenue.~~new Weproducts ~~anticipate that our existing capital resources will only enable us to maintain currently planned operations through the first quarter of 2011;~~ and we expect to continue to seek funding through equity and debt offerings, secured or otherwise. See the caption “Recent Sales of Unregistered Securities,” Part II, Item 5, for a complete description of our prior funding efforts. However, we premise this expectation on our current operating plans, which may change as a result of many factors. Consequently, we may need additional funding sooner than anticipated. Our inability to raise needed capital would harm our business. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current operating plans. To the extent that additional capital is raised through the sale of equity, debt, convertible debt securities or other combinations of our securities, including our newly authorized preferred stock, the issuance of these securities could result in substantial dilution to our stockholders. services;

We• ~~currently~~increased ~~have no credit facility or committed sources of capital. To the extent operating and capital resources are insufficient to meet our future funding requirements~~expenses, wewhether ~~will~~related ~~have~~ to ~~raise additional~~sales ~~funds~~and ~~to continue the commercialization of our products. These funds may not be available on favorable terms~~marketing, orproduct atdevelopment ~~all. If adequate funds are not available on attractive terms, we may be required to cease~~ or ~~curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unfavorable terms.~~ administration;

14 • The mix of product license and services revenue; and

~~Table~~• Costs related to possible acquisitions of ~~Contents~~technology or businesses.

WeOur ~~face~~limited aresources ~~higher~~may ~~risk~~make ofit ~~failure~~harder for us to manage growth, and ~~loss~~the future of our ~~entire~~ business ~~because~~model wemaybe ~~cannot~~adversely ~~accurately forecast~~harmed ~~our~~if ~~future~~we ~~revenues~~are ~~and~~unable ~~operating~~to ~~results~~adequately manage this growth.

~~Our~~We ~~short~~have ~~operating~~a ~~history,~~limited ~~lack~~basis ofupon ~~adequate~~which ~~internal~~to ~~controls~~evaluate ~~and~~our ~~the~~Storage ~~rapidly~~Management ~~changing~~Solutions ~~nature~~systems ability to handle controlled or full commercial availability of ~~the~~ ~~market~~our products and services. We anticipate that we may need to expand our operations significantly in ~~which~~the near future, and we ~~compete~~may ~~make~~need itto ~~difficult~~expand further to ~~accurately~~address ~~forecast~~the anticipated growth in our ~~revenues~~user base and ~~operating results~~market opportunities. ~~Furthermore~~To manage the expected growth of operations and personnel, we ~~expect~~may need need to improve existing systems, and implement new systems, procedures and internal controls. In addition, we may need to expand, train and manage an increasing employee base. We may also need to expand our ~~revenues~~finance, administrative and ~~operating~~operations ~~results~~staff. ~~might~~We ~~fluctuate~~may not be able to effectively manage this growth. Our planned expansion in the near future ~~due~~ will place, and we expect our future expansion to continue to place, a ~~number~~significant ofstrain ~~factors~~on our managerial, ~~including~~operational and financial resources. Our planned personnel, systems, procedures and controls may be inadequate to support our future operations. If we cannot manage growth effectively or if we experience disruptions during our expansion, the ~~following:~~ expansion may not be cost-effective.

•If ~~The~~we ~~timing~~do ofnot ~~sales~~respond ofeffectively to technological change, our products and services; could become obsolete and our business may fail.

• The ~~timing~~development of ~~product~~our ~~implementation;~~products and services and other technology entails significant technical and business risks. To remain competitive, we must continue to improve our Information and Storage Management Solutions products and their Responsiveness, functionality and features.

•High ~~Unexpected~~technology ~~delays~~industries inare ~~introducing~~characterized ~~new products and services;~~by:

• ~~increased~~Rapid ~~expenses,~~technological ~~whether related to sales and marketing, product development or administration~~change;

• ~~The~~Changes ~~mix~~in ofuser ~~product license~~ and ~~services~~customer ~~revenue;~~requirements and preferences;

• ~~Costs~~Frequent ~~related~~new toproduct ~~possible~~and ~~acquisitions~~services ofintroductions ~~technology~~embodying ornew ~~businesses.~~technologies; and

~~Our~~• ~~limited~~The ~~resources~~emergence ~~may~~of ~~make~~new itindustry ~~harder~~standards ~~for us to manage growth,~~ and ~~the future of our business model maybe adversely harmed if we are unable to adequately manage this growth~~practices.

WeThe ~~have~~rapid atechnological ~~limited~~change ~~basis~~could ~~upon~~render ~~which to evaluate~~ our ~~Storage~~existing ~~Management~~technology ~~Solutions systems ability to handle controlled or full commercial availability of our products~~ and services. We anticipate that we will expand our operations significantly in the near future, and we will have to expand further to address the anticipated growth in our user base and market opportunities. To manage the expected growth of operations and personnel, we will need to improve existing, and implement new systems~~, procedures~~ ~~and internal controls~~obsolete. InOur ~~addition,~~success we will ~~need to expand~~depend, ~~train and manage an increasing employee base. We will also need to expand our finance, administrative and operations staff. We may not be able to effectively manage this growth. Our planned expansion~~ in ~~the near future will place~~part, ~~and we expect our future expansion to continue to place, a significant strain~~ on ~~our~~ ~~managerial, operational and financial resources. Our planned personnel, systems, procedures and controls may be inadequate to support~~ our ~~future~~ability ~~operations. If we cannot manage growth effectively or if we experience disruptions during our expansion, the expansion may not be cost-effective.~~ to:

If• welicense door ~~not~~acquire ~~respond~~leading ~~effectively~~technologies touseful ~~technological~~in ~~change,~~ our ~~products and services could become obsolete and our~~ business ~~may fail.~~ ;

~~The~~• ~~development~~develop ofnew ~~our products and~~ services and ~~other~~technologies ~~technology~~that ~~entails~~address ~~significant technical and business risks. To remain competitive, we must continue to improve~~ our ~~Information~~users’ ~~and~~increasingly ~~Storage Management~~sophisticated ~~Solutions products~~ and ~~their~~varied ~~Responsiveness,~~needs; ~~functionality~~ and ~~features.~~

~~High~~• ~~technology~~Respond ~~industries~~to ~~are~~technological ~~characterized~~advances ~~by:~~ and emerging industry and regulatory standards and practices in a cost effective and timely way.

•Future ~~Rapid~~advances ~~technological~~in ~~change;~~technology may not be beneficial to, or compatible with, our business. Furthermore, we may not use new technologies effectively or adapt our technology and systems to user requirements or emerging industry standards in a timely way. In order to stay technologically competitive, we may have to spend large amounts of money and time. If we do not adapt to changing market conditions or user requirements in a timely way, our business, financial condition and results of operations could be adversely affected.

•We ~~Changes~~face incompetition ~~user~~for ~~and~~customers ~~customer~~that ~~requirements~~could ~~and~~effectively ~~preferences;~~keep us from being successful in our planned business operations.

•We ~~Frequent~~compete ~~new~~with ~~product~~our current and potential customers’ internal records and information management services ~~introductions~~capabilities. ~~embodying~~We ~~new~~can ~~technologies;~~provide no assurance that these organizations will begin or continue to use an outside company, such as us, for their future records and information management services needs or that they will use us to provide these services. We also compete with multiple records and information management services providers in all geographic areas where we operate. Potential competitors with established market share and greater financial resources may introduce competing products. Thus, there can be no assurance that we will be able to compete successfully in the future, or that competition will not have a material adverse affect on our results of operations. We also compete with multiple information protection and storage services providers in all geographic areas where we operate. We continue to evaluate competitive activities to keep abreast of industry changes with both large and well known competitors and emerging competition.

•Our ~~The~~storage ~~emergence~~systems ofmay ~~new~~fail, ~~industry~~and ~~standards~~we may be subject to substantial liabilities and ~~practices~~could lose a substantial portion of our customer base.

~~The~~Our ~~rapid~~disaster ~~technological~~recovery ~~change~~framework ~~could~~to ~~render~~control ~~our~~and ~~existing~~address ~~technology~~systems risks is not fully redundant, and ~~systems~~we ~~obsolete~~may incur and/or suffer the costs, delays and customer complaints associated with system failures and may not be able to efficiently and accurately provision new orders for services on a timely basis to begin to generate revenue related to those services. ~~Our success~~While ~~will~~our ~~depend~~storage system facilities are highly secure and virtually disaster proof, we will refresh our storage technology in ~~part~~2012 with new equipment, onwhich ~~our~~will ~~ability~~include ~~to:~~ full redundancy.

•Our ~~license~~operating orresults ~~acquire~~could ~~leading~~be ~~technologies~~impaired ~~useful~~if inwe become subject to burdensome government regulation and legal uncertainties, all of which would increase our cash requirements and may cause our business; to fail.

•Other ~~develop~~than ~~new~~the ~~services~~Company’s requirements to file all public reports under the regulations administered by the Securities and ~~technologies~~Exchange ~~that~~Commission, ~~address~~we ~~our~~are ~~users’~~not ~~increasingly~~currently ~~sophisticated~~subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally. However, due to the increasing popularity and ~~varied~~use ~~needs;~~of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to:

• ~~Respond~~User ~~to technological advances and emerging industry and regulatory standards and practices in a cost effective and timely way.~~privacy;

~~Future~~• advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not use new technologies effectively or adapt our technology and systems to user requirements or emerging industry standards in a timely way. In order to stay technologically competitive, we may have to spend large amounts of money and time. If we do not adapt to changing market conditions or user requirements in a timely way, our business, financial condition and results of operations could be adversely affected. pricing;

We• ~~face competition for customers that could effectively keep us from being successful in our planned business operations.~~ Content;

We• compete with our current and potential customers’ internal records and information management services capabilities. We can provide no assurance that these organizations will begin or continue to use an outside company, such as us, for their future records and information management services needs or that they will use us to provide these services. We also compete with multiple records and information management services providers in all geographic areas where we operate. Potential competitors with established market share and greater financial resources may introduce competing products. Thus, there can be no assurance that we will be able to compete successfully in the future, or that competition will not have a material adverse affect on our results of operations. We also compete with multiple information protection and storage services providers in all geographic areas where we operate. We continue to evaluate competitive activities to keep abreast of industry changes with both large and well known competitors and emerging competition. Copyrights;

15 • Distribution; and

~~Table~~• Characteristics and quality of ~~Contents~~products and services.

~~Our~~The ~~storage~~adoption ~~systems~~of ~~may~~any ~~fail,~~additional ~~and~~laws weor regulations may bedecrease ~~subject~~the toexpansion ~~substantial~~of ~~liabilities~~the ~~and~~Internet. ~~could~~A ~~lose~~decline ~~a substantial~~in ~~portion~~the growth of the Internet could decrease demand for our ~~customer~~products ~~base~~and services and increase our cost of doing business. Moreover, the applicability

~~Our~~of ~~disaster~~existing ~~recovery~~laws ~~framework~~ to ~~control~~the ~~and~~Internet ~~address~~is ~~systems~~uncertain ~~risks~~with isregard ~~not~~to ~~fully~~many ~~redundant~~issues, ~~and~~including ~~we may~~property ~~incur~~ownership, ~~and/or~~export ~~suffer~~of ~~the~~specialized ~~costs~~technology, ~~delays~~sales ~~and~~tax, ~~customer~~libel ~~complaints associated with system failures~~ and ~~may~~personal ~~not~~privacy. beOur ~~able~~business, tofinancial ~~efficiently~~condition and ~~accurately~~results ~~provision~~of ~~new~~operations ~~orders~~could ~~for~~be ~~services~~seriously onharmed aby ~~timely basis~~any tonew ~~begin~~legislation toor ~~generate~~regulation. ~~revenue~~The ~~related~~application toof ~~those~~laws ~~services.~~and ~~While~~regulations ~~our~~from ~~storage~~jurisdictions ~~system~~whose ~~facilities are~~laws ~~highly~~do ~~secure~~not ~~and~~currently ~~virtually~~apply ~~disaster~~to ~~proof~~our business, weor ~~will~~the ~~refresh~~application ~~our~~of ~~storage~~existing ~~technology~~laws inand ~~2010~~regulations ~~with new~~to ~~equipment,~~the ~~which~~Internet ~~will~~and ~~include~~other ~~full~~online ~~redundancy~~services ~~and~~could ~~SAS~~also 70harm ~~compliance~~our business.

Our ~~operating~~Information ~~results~~and ~~could~~Storage beManagement ~~impaired~~Solutions ifproducts rely substantially on the Internet in multiple states. These jurisdictions may claim that we ~~become~~are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to ~~burdensome~~taxes ~~government~~and ~~regulation~~ penalties. Other states and ~~legal~~foreign ~~uncertainties~~countries may also attempt to regulate our business or prosecute us for violations of their laws. Further, ~~all~~we might unintentionally violate the laws of ~~which~~foreign ~~would~~jurisdictions ~~increase~~and ~~our~~those ~~cash~~laws ~~requirements~~maybe modified and new laws may ~~cause~~be ~~our business~~enacted toin ~~fail~~the future.

~~Other~~The ~~than~~United States Congress has enacted legislation limiting the ~~Company’s~~ability ~~requirements~~of the states to ~~file~~impose ~~all~~taxes ~~public~~on ~~reports~~Internet ~~under~~accessory ~~the~~to ~~regulations~~impose ~~administered by~~multiple or discriminatory taxes on electronic commerce. This legislation, known as the ~~Securities~~Internet ~~and~~Tax ~~Exchange~~Nondiscrimination ~~Commission~~Act, weimposed ~~are~~a ~~not~~moratorium, ~~currently~~which ~~subject~~commenced November 1, 2003 and was extended to ~~direct~~2014, ~~regulation~~on bystate ~~any domestic~~and orlocal ~~foreign~~taxes ~~governmental~~on ~~agency~~electronic commerce, ~~other~~where ~~than~~such ~~regulations~~taxes ~~applicable~~are todiscriminatory, ~~businesses~~and ~~generally. However~~Internet access, ~~due~~unless to the ~~increasing~~taxes ~~popularity~~were generally imposed and ~~use~~actually ofenforced ~~the~~prior ~~Internet~~to October 1, it1998. isVarious ~~possible~~states ~~that~~continue ato ~~number~~attempt to regulate and tax Internet use and sales of ~~laws~~ products and ~~regulations~~services. ~~may~~The beimposition ~~adopted~~of ~~with~~these ~~respect~~taxes tocould ~~the~~seriously adversely affect Internet, ~~relating~~commerce and hinder our ability to: become profitable.

•The ~~User~~Internet ~~privacy;~~may fail or providers of these services may increase their costs for these and related services, which could increase our costs and make our services less attractive to customers.

•The ~~pricing;~~secure transmission of confidential information over public networks is a significant barrier to electronic commerce and communications. Anyone who can circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may have to spend large amounts of money and other resources to protect against potential security breaches or to alleviate problems caused by any breach. Peering agreements of our business partners like Integra Telecom with Internet service providers, allow access to the Internet and exchange traffic with these providers. Depending on the relative size of the providers involved, these exchanges may be made without settlement charges. Recently, many Internet service providers that previously offered peering have reduced or eliminated peering relationships or are establishing new, more restrictive criteria for peering and an increasing number of these providers are seeking to impose charges for transit. Increases in costs associated with Internet and exchange transit could have an adverse effect on our revenues for our services, most of which require Internet access. Our providers may not be able to renegotiate or maintain peering arrangements on favorable terms, which could increase our costs and expenses and impair our growth and performance.

•Our ~~Content;~~auditor’s “Going Concern” qualification in our consolidated financial statements might create additional doubt about our ability to stay in business, potentially resulting in total stockholder loss on investment.

•The ~~Copyrights;~~following is a quotation from our auditor’s report that is filed as a part of this Annual Report: “The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.” See Note 2 to our consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.”

•Note ~~Distribution;~~2 of our consolidated financial statements states: “As shown in the accompanying financial statements, the Company has incurred net losses of $3,988,543 for the year ended December 31, 2011 and has negative working capital at December 31, 2011 of $2,324,242. The Company continues to be dependent on its ability to generate future revenues, positive cash flows and additional financing. There can be no guarantee that the Company will be successful in generating future revenues, in obtaining additional debt or equity financing or that such additional debt or equity financing will be available on terms acceptable to the Company. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.”

•Multiple ~~Characteristics~~acts of God could result in data loss and ~~quality~~subject us to substantial liabilities and the loss of ~~products~~our business and ~~services~~customers.

The ~~adoption~~operation of ~~any~~our ~~additional~~business ~~laws~~depends oron ~~regulations may decrease~~ the ~~expansion~~efficient ofand ~~the~~uninterrupted ~~Internet.~~operation ~~A decline in the growth~~ of the Internet ~~could decrease demand for our products~~ and ~~services and increase~~ our ~~cost~~Storage ofManagement ~~doing~~Solutions ~~business~~hardware systems. ~~Moreover,~~Our ~~the~~systems ~~applicability~~and ofoperations ~~existing~~will ~~laws~~be vulnerable to ~~the~~damage ~~Internet is~~or ~~uncertain~~interruption ~~with~~from ~~regard to~~ many ~~issues~~sources, including ~~property~~fire, ~~ownership~~flood, ~~export~~power ~~of specialized technology~~loss, ~~sales~~telecommunications ~~tax~~failure, ~~libel~~break-ins, earthquakes and ~~personal~~similar ~~privacy~~events. Our ~~business,~~servers ~~financial~~will ~~condition~~also ~~and results of operations could~~ be ~~seriously~~vulnerable ~~harmed~~to bycomputer ~~any~~viruses, ~~new~~physical ~~legislation~~ or ~~regulation.~~electronic ~~The~~break-ins ~~application of laws~~ and ~~regulations~~similar ~~from~~disruptions. ~~jurisdictions~~Any ~~whose~~substantial ~~laws~~interruptions doin ~~not~~the ~~currently~~future ~~apply~~could toresult ~~our~~in ~~business, or~~ the ~~application~~ loss of ~~existing~~data ~~laws~~ and ~~regulations~~could todestroy ~~the~~our ~~Internet~~ability ~~and~~to ~~other~~generate ~~online~~revenues ~~services~~from ~~could also harm our business~~operations.

~~Our~~Risks ~~Information~~Related ~~and Storage Management Solutions products rely substantially on the Internet in multiple states. These jurisdictions may claim that we are required~~ to ~~qualify to do business as a foreign corporation in each state or foreign country.~~ Our ~~failure~~Common to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our business or prosecute us for violations of their laws. Further, we might unintentionally violate the laws of foreign jurisdictions and those laws maybe modified and new laws may be enacted in the future. Stock

~~The~~Our ~~United~~common ~~States~~stock ~~Congress~~is ~~has~~“penny ~~enacted~~stock” ~~legislation~~under ~~limiting~~Securities the ability of the states to impose taxes on Internet accessory to impose multiple or discriminatory taxes on electronic commerce. This legislation, known as the Internet Tax Nondiscrimination Act, imposed a moratorium, which commenced November 1, 2003 and ~~was~~Exchange ~~extended~~Commission toRules ~~2014, on state~~ and ~~local taxes on electronic commerce~~Regulations, ~~where such~~which ~~taxes~~means ~~are~~there ~~discriminatory,~~is ~~and~~a ~~Internet~~very ~~access,~~limited ~~unless~~trading ~~the~~market ~~taxes~~for were generally imposed and actually enforced prior to October 1, 1998. Various states continue to attempt to regulate and tax Internet use and sales of products and services. The imposition of these taxes could seriously adversely affect Internet commerce and hinder our ~~ability to become profitable~~shares.

~~The~~Our ~~Internet~~common ~~may~~stock ~~fail~~is ordeemed ~~providers~~to be penny stock as that term is defined in Rule 3a51-1 of ~~these~~the ~~services~~Securities ~~may~~and ~~increase~~Exchange ~~their~~Commission. ~~costs~~Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for ~~these~~at ~~and~~least ~~related services~~three years); or $5,000,000 ~~which~~(if ~~could~~in ~~increase~~continuous ~~our~~operation ~~costs~~for less than three years); or with average revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and ~~make~~Rule 15g-2 of the Securities and Exchange Commission require broker dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our ~~services~~common ~~less~~stock ~~attractive~~are urged to ~~customers~~obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock. ”

~~The~~Moreover, ~~secure~~Rule 15g-9 ~~transmission~~ of ~~confidential~~the ~~information~~Securities ~~over~~and ~~public~~Exchange ~~networks~~Commission isrequires abroker ~~significant~~dealers ~~barrier to~~in ~~electronic~~penny ~~commerce~~stocks ~~and~~to ~~communications.~~approve ~~Anyone~~the ~~who~~account ~~can~~of ~~circumvent~~any ~~our~~investor ~~security~~for ~~measures~~transactions ~~could misappropriate~~in ~~confidential~~such ~~information~~stocks orbefore ~~cause~~selling ~~interruptions~~any inpenny ~~our~~stock ~~operations.~~to Wethat ~~may~~investor. ~~have~~This ~~to spend~~procedure ~~large~~requires ~~amounts~~the ofbroker ~~money~~dealer ~~and~~to ~~other~~(i) obtain ~~resources~~from tothe ~~protect~~investor ~~against~~information ~~potential~~concerning ~~security~~his, ~~breaches~~her or to ~~alleviate~~its ~~problems~~financial ~~caused~~situation, byinvestment ~~any~~experience ~~breach.~~and ~~Peering~~investment ~~agreements~~objectives; of(ii) reasonably ~~our~~determine, ~~business~~based ~~partners~~on ~~like~~that ~~XO Communications~~information, ~~with~~that ~~Internet~~transactions ~~service~~in ~~providers,~~penny ~~allow~~stocks ~~access~~are tosuitable for the ~~Internet~~investor, and ~~exchange~~that ~~traffic with these providers. Depending on~~ the ~~relative~~investor ~~size~~has ofsufficient ~~the~~knowledge ~~providers~~and ~~involved,~~experience ~~these~~as ~~exchanges~~to ~~may~~ be ~~made~~reasonably ~~without~~capable ~~settlement~~of ~~charges.~~evaluating ~~Recently,~~the ~~many~~risks ~~Internet~~of ~~service~~penny ~~providers~~stock ~~that~~transactions;(iii) ~~previously offered~~provide ~~peering~~the ~~have~~investor ~~reduced~~with ora ~~eliminated~~written ~~peering~~statement ~~relationships~~setting orforth ~~are~~the ~~establishing~~basis ~~new,~~on ~~more restrictive~~which ~~criteria~~the ~~for~~broker ~~peering~~dealer ~~and~~made anthe ~~increasing~~determination ~~number~~in of(ii) above; ~~these~~and ~~providers~~(iv) receive ~~are~~a ~~seeking~~signed toand ~~impose charges~~dated ~~for~~copy ~~transit.~~of ~~Increases~~such instatement ~~costs~~from ~~associated~~the ~~with~~investor, ~~Internet~~confirming ~~and~~that ~~exchange~~it ~~transit~~accurately ~~could have~~reflects anthe ~~adverse~~investor’s ~~effect~~financial onsituation, ~~our~~investment ~~revenues~~experience ~~for~~and ~~our~~investment ~~services,~~objectives. ~~most~~Compliance ofwith ~~which~~these ~~require~~requirements ~~Internet access. Our providers~~ may ~~not~~make beit ~~able~~more todifficult ~~renegotiate~~for orinvestors ~~maintain~~in ~~peering~~our ~~arrangements~~common onstock ~~favorable~~to ~~terms,~~resell ~~which could~~their ~~increase~~shares ~~our~~to ~~costs~~third ~~and~~parties ~~expenses~~or ~~and~~to ~~impair~~otherwise ~~our~~dispose ~~growth~~of ~~and performance~~them.

16 Due to the substantial instability in our common stock price, you may not be able to sell your shares at a profit or at all, and as a result, any investment in our shares could be totally lost.

~~Table~~The ofpublic ~~Contents~~market for our common stock is very limited and volatile. As with the market for many other small companies, any market price for our shares is likely to continue to be very volatile. In addition, factors such as the following may significantly affect our share price:

• Our ~~auditor~~competitors’s ~~“Going~~announcements ~~Concern”~~and ~~qualification~~successes inor ~~our consolidated financial statements might create additional doubt about our ability to stay in business, potentially resulting in total stockholder loss on investment.~~ failures;

~~The~~• ~~following~~Other isevidence aabout ~~quotation~~the ~~from~~safety ~~our~~or ~~auditor’s~~efficacy ~~report that is filed as a part~~ of ~~this Annual Report: “The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.” See Note 2 to~~ our ~~consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.”~~ products;

~~Note~~• 2Announcements of ~~our~~new ~~consolidated~~competitive ~~financial~~products statements states: “As shown in the accompanying financial statements, the Company has incurred net losses of $6,414,639 for the year ended December 31, 2010 and a negative working capital at December 31, 2010 of $1,686,465. The Company continues to be dependent on its ability to generate future revenues, positive cash flows and additional financing. There can be no guarantee that the Company will be successful in generating future revenues, in obtaining additional debt or ~~equity~~successes ~~financing~~by orour that such additional debt or equity financing will be available on terms acceptable to the Company. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.” competitors;

~~Multiple~~• ~~acts~~Increased ofor ~~God~~new ~~could~~governmental ~~result~~regulation ~~in data loss and subject us to substantial liabilities and the loss~~ of our ~~business and customers.~~ products;

~~The~~• ~~operation~~Our ofcompetitors’ ~~our~~developments ~~business depends on the efficient and uninterrupted operation~~ of ~~the~~competing ~~Internet and~~patents ~~our Storage Management Solutions hardware systems. Our systems and operations will be vulnerable to damage~~ or ~~interruption~~proprietary ~~from~~rights ~~many sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. Our servers will also be vulnerable to computer viruses, physical~~ or ~~electronic~~other ~~break-ins~~technology; and ~~similar disruptions. Any substantial interruptions in the future could result in the loss of data and could destroy our ability to generate revenues from operations.~~

~~Risks~~• ~~Related~~Fluctuations toin ~~Our~~our ~~Common~~operating ~~Stock~~ results.

Our common stock ishas ~~“penny~~a ~~stock”~~limited ~~under~~trading ~~Securities~~history, and ~~Exchange~~it ~~Commission~~will ~~Rules~~be ~~and~~difficult ~~Regulations, which~~to ~~means~~determine ~~there~~any ismarket atrends ~~very~~or ~~limited~~prices ~~trading market~~ for our shares where this present limited market is believed to be based primarily on supply and demand.

Our common stock currently is ~~deemed~~quoted toon bethe ~~penny~~Pink ~~stock~~Sheets, asunder ~~that term is defined in Rule 3a51-1 of~~ the ~~Securities~~ ~~and~~symbol ~~Exchange Commission~~“DIGI.” ~~Penny~~However, ~~stocks are stocks (i)~~ with avery ~~price~~little oftrading ~~less~~history, ~~than~~a ~~five dollars~~trading ~~per~~market ~~share; (ii)~~ that ~~are~~does not ~~traded~~represent onan a “~~recognized”~~established ~~national~~trading exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2market,~~000,000~~” ~~(if~~a ~~the issuer~~limited ~~has~~current ~~been in continuous operation for at least three years); or $5~~public,~~000,000~~ ~~(if~~volatility in ~~continuous operation for less than three years); or with average revenues of less than $6,000,000 for~~ the ~~last three~~bid ~~years.~~and ~~Section~~asked ~~15(g)~~prices ~~of the Exchange Act~~ and ~~Rule 15g-2 of~~ the ~~Securities~~fact ~~and~~that ~~Exchange Commission~~our ~~require~~common ~~broker~~stock ~~dealers~~is ~~dealing~~very inthinly ~~penny~~traded, ~~stocks~~you tocould ~~provide~~lose ~~potential~~all ~~investors~~or ~~with~~ a ~~document~~ ~~disclosing~~substantial ~~the~~portion ~~risks~~ of ~~penny~~your ~~stocks~~funds ~~and~~if toyou ~~obtain~~make aan ~~manually~~investment ~~signed and dated written receipt of the document before effecting any transaction~~ in ~~a penny stock for the investor’s account~~us. ~~Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”~~

~~Moreover,~~The ~~Rule 15g-9~~sale ofor ~~the~~potential ~~Securities~~sale ~~and~~of ~~Exchange~~shares ~~Commission requires broker dealers in penny stocks to approve the account~~ of ~~any~~our ~~investor~~common ~~for transactions in such stocks before selling any penny~~ stock to that ~~investor.~~may ~~This~~become ~~procedure~~publicly ~~requires~~tradable ~~the~~under ~~broker dealer to (i)~~Rule ~~obtain~~144 ~~from~~in the ~~investor~~ ~~information~~future ~~concerning~~will ~~his,~~have ~~her~~a orsevere ~~its~~adverse ~~financial~~impact ~~situation, investment experience and investment objectives; (ii) reasonably determine, based~~ on ~~that~~any ~~information,~~market that ~~transactions~~develops ~~in penny stocks are suitable~~ for ~~the~~our ~~investor,~~common ~~and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny~~ stock transactions;(iii) provide the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, ~~confirming that it accurately reflects the investor’s financial situation, investment experience~~ and ~~investment~~you ~~objectives. Compliance with these requirements~~ may ~~make~~lose ~~it more~~your ~~difficult~~entire ~~for~~investment ~~investors~~or inbe ~~our~~unable ~~common stock~~ to resell ~~their~~any shares toin ~~third~~us ~~parties~~that oryou ~~to otherwise dispose of them~~purchase.

~~Due~~12 months tofrom the ~~substantial~~filing ~~instability~~of our Form 10 Registration Statement or on or about May 13, 2009, and provided that we are “current” in the filing of all of our reports that are then required to have been filed with the Securities and Exchange Commission under the Exchange Act, substantially all shares of our common stock ~~price,~~will ~~you~~have ~~may~~been ~~not~~held for at least six months and will be ~~able~~available tofor ~~sell~~public ~~your~~ sale under Rule 144. That will substantially increase the shares atavailable ato ~~profit~~be orfreely atpublicly ~~all,~~traded. ~~and~~See asthe aheading ~~result~~“Recent Sales of Unregistered Securities; Use of Proceeds from Unregistered Securities,” ~~any~~Part II, ~~investment~~Item 5, infor ~~our~~information about the number of shares ~~could~~that bemay ~~totally~~become ~~lost~~available for resale under Rule 144.

~~The~~ITEM public market for our common stock is very limited and volatile. As with the market for many other small companies, any market price for our shares is likely to continue to be very volatile. In addition, factors such as the following may significantly affect our share price2: PROPERTIES

•Our Data Storage Center is located at 511 6th Street South Minneapolis, MN 55401, and we have contracted with Integra Telecom for data center space and communications (the “Integra Telecom Contract”). Integra Telecom is a vendor that provides cabinet space, power and Internet connectivity. This arrangement ensures capital expenditures are at a minimum, while maintaining the flexibility to set up a new data center in any one of the 80 geographically dispersed locations throughout the world. Our ~~competitors’~~DigiBAK ~~announcements~~service is not limited by geographic concerns. As new customers are added, we will also add capacity to our Data Storage Center that has virtually unlimited scalability. Our Data Storage Center occupies approximately 1,500 square feet of this facility, at a cost of $3,300 per month and ~~successes~~houses orour ~~failures;~~equipment and software.

•We ~~Other~~lease ~~evidence~~8,736 ~~about~~square feet of office space, consisting of floors three and four of the ~~safety~~building orlocated ~~efficacy~~at 266 East 7th Street, St. Paul, MN 55101 (the “Upper Corner Lease”), for base rent of ~~our~~$6,450 ~~products;~~per month. This lease expired on December 31, 2011 and continue to lease the premises on a month-to-month basis.

17 ITEM 3: LEGAL PROCEEDINGS

~~Table~~In June 2011, the Company was made a party to a lawsuit initiated by one of ~~Contents~~its preferred stockholders seeking recovery of their investment in the Company based on, among other claims, an alleged breach of the state's securities regulations. The Company believes the preferred stockholder's claim lacks factual basis and is without merit. Accordingly, the Company has not accrued any manner of loss contingency related to this claim and litigation is currently pending.

•We ~~Announcements~~are not a party to any pending legal proceeding. To the knowledge of ~~new~~our ~~competitive~~management, ~~products~~no federal, state or ~~successes~~local bygovernmental agency is presently contemplating any proceeding against us. To the knowledge of our ~~competitors;~~management, no director, executive officer or affiliate of ours or owner of record or beneficially of more than five percent of our common stock is a party adverse to us or has a material interest adverse to us in any proceeding.

•PART ~~Increased or new governmental regulation of our products;~~II

•ITEM ~~Our~~5: ~~competitors’~~MARKET ~~developments~~FOR ofREGISTRANT'S ~~competing~~COMMON ~~patents~~EQUITY, orRELATED ~~proprietary~~STOCKHOLDER ~~rights~~MATTERS orAND ~~other~~ISSUER ~~technology;~~PURCHASES ~~and~~OF EQUITY SECURITIES

•Market ~~Fluctuations in our operating results.~~Information

Our common stock ~~has~~is atraded ~~limited~~on the PinkSheets under the trading ~~history,~~symbol ~~and~~of it“DIGI”. ~~will~~The befollowing ~~difficult~~table tosets ~~determine~~forth ~~any~~the ~~market trends~~high orand ~~prices~~low price for our ~~shares~~common ~~where~~stock ~~this~~as ~~present~~quoted ~~limited~~on ~~market~~the isinternet ~~believed~~trading toservices befor ~~based~~the ~~primarily on~~quarterly ~~supply~~periods Within the last two fiscal years. The quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and ~~demand~~may not necessarily represent actual transactions. On April 13, 2012, the closing bid price was $0.08 for the high and $0.08 for the low per share.

Our common stock currently is quoted on the Pink Sheets, under the symbol “DIGI.” However, with very little trading history, a trading market that does not represent an “established trading market,” a limited current public, volatility in the bid and asked prices and the fact that our common stock is very thinly traded, you could lose all or a substantial portion of your funds if you make an investment in us.



	Closing Bid
Quarter Ended	High		Low
March 31, 2010*	$	0.28	$	0.28
June 30, 2010*	$	0.19	$	0.18
September 30, 2010*	$	0.24	$	0.21
December 31, 2010*	$	0.21	$	0.21
March 31, 2011*	$	0.13	$	0.13
June 30, 2011*	$	0.07	$	0.06
September 30, 2011*	$	0.08	$	0.07
December 31, 2011*	$	0.04	$	0.04

The sale or potential sale of shares of our common stock that may become publicly tradable under Rule 144 in the future will have a severe adverse impact on any market that develops for our common stock, and you may lose your entire investment or be unable to resell any shares in us that you purchase. Holders

~~12 months~~According ~~from~~to the ~~filing~~records of our ~~Form 10~~transfer ~~Registration Statement or on or about May 13~~agent, ~~2009, and provided that~~ we ~~are~~had ~~“current”~~approximately in348 ~~the~~stockholders ~~filing~~ of ~~all of our reports that are then required to have been filed with the Securities and Exchange Commission under the Exchange Act~~record, ~~substantially~~not ~~all shares~~including ofan ~~our~~indeterminate ~~common~~number ~~stock~~who ~~will~~may ~~have~~hold ~~been held for at least six months and will be available for public sale under Rule 144. That will substantially increase the~~ shares ~~available~~in ~~to be freely publicly traded. See the heading~~ “~~Recent~~street ~~Sales of Unregistered Securities; Use of Proceeds from Unregistered Securities,” Part II, Item 5, for information about the number of shares that may become available for resale under Rule 144~~name. ”

~~ITEM 2: PROPERTIES~~Dividends

~~Our~~We ~~Data~~have ~~Storage~~not ~~Center~~declared isany ~~located~~cash atdividends ~~250 Marquette Plaza, Minneapolis, MN 55401, and we have contracted~~ with XOrespect ~~Communications~~to ~~for~~our ~~data~~common ~~center~~stock ~~space~~during ~~and communications (~~the ~~“XO~~last ~~Communications Contract”).~~two XOfiscal ~~Communications is a vendor that provides cabinet space~~years, ~~power~~ and ~~Internet connectivity.~~do ~~This~~not ~~arrangement~~intend ~~ensures capital expenditures are at a minimum, while maintaining the flexibility~~ to ~~set~~declare updividends ~~a new data center~~ in ~~any one of~~ the 80foreseeable ~~geographically dispersed locations throughout the world~~future. ~~Our DigiBAK service is not limited by geographic concerns. As new customers are added~~Instead, we ~~will~~intend ~~also~~to ~~add~~focus ~~capacity~~on tofunding our ~~Data~~business ~~Storage~~operations ~~Center~~and ~~that~~our ~~has~~intended ~~virtually~~Plan ~~unlimited scalability~~of Operation. ~~Our~~There ~~Data~~are ~~Storage~~no ~~Center~~material ~~occupies~~restrictions ~~approximately 1~~limiting,~~500~~ ~~square~~or ~~feet~~that ofare ~~this~~likely ~~facility~~to limit, ~~at a~~our ~~cost~~ability ofto ~~$3,300~~pay ~~per~~dividends ~~month~~on ~~and houses~~ our ~~equipment and software~~securities.

WeSecurities ~~Also~~Authorized leased office space located at 250 Marquette Plaza, of approximately 3,093 rentable square feet, at a monthly base rent of $3,349 and $3,352 in 2009 and 2010, respectively (the “FRM Associates Lease”). With monthly operating expenses and monthly real estate tax assessments added to these base $5,755.90 rental amounts, the overall monthly lease cost on this space approximates to $5,938 and $6,041 for ~~2009~~Issuance and 2010, respectively. We vacated these premises in August, 2007. We subsequently sublet the space to two successive tenants, with the most recent sublease reflecting a monthly sublease payment of $3,239, effective August 1, 2009, through October 31, 2010. The sublease was satisfied and our obligations under ~~the~~Equity ~~lease~~Compensation ~~terminated on October 31 2010.~~ Plans

We lease 8,736 square feet, consisting of floors three and four of the building located at 266 East 7th Street, St. Paul, MN 55101 (the “Upper Corner Lease”), for base rent of $6,450 per month. Our formal lease expires on December 31, 2011.



	Number of Securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders	8,535,707	*	$	0.34	0 1,928,635	(2) (3)
Equity compensation plans not approved by security holders	None		None		None
Total	8,535,707	(1)	$	0.34	0 1,928,635	(2) (3)

~~ITEM~~(1) 3:Reflects ~~LEGAL~~the ~~PROCEEDINGS~~overall grant of five year options totaling 12,112,365 that vest over various periods, less (1) the cancellation, effective April 17, 2008, of an option to purchase 525,000 shares granted to an employee who are no longer employed by us and (2) the forfeiture of options totaling 9,240,342 pertaining to employees who are no longer employed by us.

~~Currently~~(2) ~~pending~~Reflects isthe aapproval ~~suit~~by ~~regarding~~ the ~~disputed~~Company’s ~~payment~~Board ~~pertaining~~of Directors on July 15, 2010 to ~~public~~terminate ~~relation~~the ~~services rendered~~existing 2007 Stock Option Plan in favor of the 2010 Long Term Incentive Plan approved on July 15, 2010, subject to approval by athe ~~former~~shareholders ~~vendor~~at the Company’s next annual meeting.

We(3) ~~are~~Reflects ~~not~~the aapproval ~~party~~by tothe ~~any~~Company’s ~~pending~~Board ~~legal~~of ~~proceeding.~~Directors Toon ~~the~~July ~~knowledge of our management~~15, ~~no federal~~2010, ~~state~~ orand ~~local governmental agency is presently contemplating any proceeding against us. To~~ the ~~knowledge~~ ofsubsequent ~~our~~approval ~~management,~~by no director, executive officer or affiliate of ours or owner of record or beneficially of more than five percent of our common stock is a party adverse to us or has a material interest adverse to us in any proceeding. the

18 Company’s stockholders at the Company’s Annual Meeting on October 14, 2010, to enact the 2010 Long Term Incentive Plan. A narrative description of the material terms of the equity compensation plans is set forth in Note 11 to our Consolidated Financial Statements.

~~Table~~Exemptions from Registration for Sales of ~~Contents~~Restricted Securities.

~~PART~~We II issued all of these securities to persons who were “accredited investors” or “sophisticated investors” as those terms are defined in Rule 501 of Regulation D of the Securities and Exchange Commission; and each such person had prior access to all material information about us. We believe that the offer and sale of these securities were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Sections 4(2) and Rule 506 of Regulation D of the Securities and Exchange Commission.

~~ITEM~~Purchases 5:of ~~MARKET~~Equity ~~FOR~~Securities ~~REGISTRANT’S~~by ~~COMMON~~Us ~~EQUITY,~~and ~~RELATED~~Affiliated ~~STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~Purchasers

~~Market~~There ~~Information~~ were no purchases of our equity securities by us during the years ended December 31, 2011, and 2010.

~~Our~~ITEM ~~common~~7: ~~stock~~MANAGEMENT’S isDISCUSSION ~~traded~~AND onANALYSIS ~~the~~OF ~~PinkSheets~~FINANCIAL ~~under~~CONDITION ~~the~~AND ~~trading~~RESULTS ~~symbol~~OF of “DIGI”. The following table sets forththe high and low price for our common stock as quoted on the internet trading services for the quarterly periods Within the last two fiscal years. The quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 30, 2011, the closing bid price was $0.11 for the high and $0.11 for the low per share. OPERATION

	Closing Bid
Quarter Ended	High		Low
March 31, 2009*	$	.15	$	.12
June 30, 2009*	$	.35	$	.35
September 30, 2009*	$	.20	$	.20
December 31, 2009*	$	.18	$	.17
March 31, 2010*	$	.28	$	.28
June 30, 2010*	$	.19	$	.18
September 30, 2010*	$	.24	$	.20
December 31, 2010*	$	.21	$	.21

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate. This Annual Report on Form 10-K also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

~~Holders~~ Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

~~According~~Executive ~~to the records of our transfer agent, we had approximately 348 stockholders of record, not including an indeterminate number who may hold shares in “street name.”~~ Summary

~~Dividends~~ The Business

WeOur ~~have~~business ~~not~~is ~~declared~~developing ~~any~~and ~~cash~~delivering ~~dividends~~superior ~~with~~information ~~respect~~management totechnologies ~~our~~and ~~common~~methodologies ~~stock~~enabling ~~during~~our ~~the~~customers ~~last~~to ~~two~~manage, ~~fiscal years~~control, protect and doaccess ~~not~~their ~~intend~~information toand ~~declare~~data ~~dividends~~simply inand ~~the~~cost ~~foreseeable future~~effectively. ~~Instead,~~Our wetraditional ~~intend~~business ~~to focus~~is providing a cost effective on-line ~~funding~~data ~~our~~protection solution to the small to medium business ~~operations~~(“SMB”) and ~~our~~small ~~intended~~to ~~Plan~~medium ofenterprise ~~Operation~~(“SME”) markets through our DigiBAK service.”. ~~There~~This ~~are~~on-line nocloud ~~material restrictions~~storage ~~limiting,~~management orsolution ~~that~~helps ~~are~~organizations ~~likely~~properly tomanage ~~limit,~~and ~~our~~protect ~~ability~~their toentire ~~pay~~network ~~dividends~~from onone ~~our~~centralized ~~securities~~location.

~~Securities~~Our ~~Authorized~~emerging business product, released in the first quarter of 2010, is called DigiLIBE. We believe that DigiLIBE is a game-changing product that addresses the desperate need for ~~Issuance~~a ~~under~~fiscally ~~Equity~~responsible, ~~Compensation~~integrated ~~Plans~~ system to manage the increasing growth, volume, and diversity of unstructured data that now represents up to 85% of enterprise information and continues to grow rapidly. Content chaos is overwhelming companies’ ability to meet compliance, utilize collaboration tools and optimize storage needs for their virtualized infrastructures.

Number of securities

remaining available for

Number of Securities to be

Weighted-average exercise

future issuance under

issued upon exercise of

price of outstanding

equity compensation plans

outstanding options,

options, warrants and

excluding securities

warrants and rights

rights

reflected in column (a)

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

2,990,000

0.34

0 4,380,000

(2)(3)

Equity compensation plans not approved by security holders

None

Total

2,990,000

(1)

0.34

04,380,000

(2)(3)

DigiBAK and DigiLIBE are complementary products — DigiBAK providing cloud storage backup and recovery of structured data and operating system files and DigiLIBE offers information management and life-cycle control of unstructured data from end-user through archiving and back to the end user.

(1)		Reflects the overall grant of five year options totaling 9,661,000 that vest over various periods, less (1) the cancellation, effective April 17, 2008, of an option to purchase 525,000 shares granted to an employee who are no longer employed by us and (2) the forfeiture of options totaling 6,146,000 pertaining to employees who are no longer employed by us.
(2)		Reflects the approval by the Company’s Board of Directors on July 15, 2010 to terminate the existing 2007 Stock Option Plan in favor of the 2010 Long Term Incentive Plan approved on July 15, 2010, subject to approval by the shareholders at the Company’s next annual meeting.
(3)		Reflects the approval by the Company’s Board of Directors on July 15, 2010, and the subsequent approval by the Company’s stockholders at the Company’s Annual Meeting on October 14, 2010, to enact the 2010 Long Term Incentive Plan. A narrative description of the material terms of the equity compensation plans is set forth in Note 11 to our Consolidated Financial Statements.

The DigiBak business

19 Our DigiBAK solution can backup and restore emails and all company data on every machine in a network, including desktops, laptops, file and print servers. We provide storage through a “utility based computing” philosophy, where customers pay for the gigabytes of data they store in DigiBAK Vault facility.

~~Table~~Through our DigiBAK service, we combine powerful, agent-less backup software with our SAS 70 compliant 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 ~~Contents~~our customer primary data centers and geographically dispersed offices or campus settings. Our DigiBAK Vault is a top-line SAS 70 complaint facility that provides 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 and ladder racking. It also has battery generator back up power, temperature and humidity controls and fire suppression systems. Geographically, we are located at the center point of the Metropolitan area network. Being centrally located at the focal point of the Twin Cities Fiber Channel and Gig loop, the pipeline for data and load capabilities are immense.

~~Exemptions~~We ~~from~~utilize ~~Registration~~both ~~for~~direct ~~Sales~~in-house sales and sales through business partner channels such as VAR’s (Value Added Remarketers) and third party integrators. Our resellers have extensive data storage knowledge and expertise and an established customer base. Our sales plan targets reseller, Original Equipment Manufacturer and channel partnerships regionally and nationally that possess utility-oriented sales systems. We and our partners target vertical markets specifically in the Small Business Market (SMB) and the Small and Intermediate size Enterprises of ~~Restricted~~100 ~~Securities~~— 5000 employees with an average of four sites and five — 20 Terabytes of information to archive.

WeAs ~~issued~~a ~~all~~result of ~~these~~our ~~securities~~sales and marketing efforts of our DigiBAK product, our customer base has expanded from approximately 20 in fiscal 2005 to ~~persons~~approximately ~~who~~100 ~~were~~in ~~“accredited~~fiscal ~~investors”~~2006, or508 ~~“sophisticated investors”~~in as2007, ~~those~~731 ~~terms~~in ~~are~~2008, ~~defined~~789 in ~~Rule 501~~2009, 890 in 2010 and 910 as of ~~Regulation~~December D31, of2011. ~~the~~While ~~Securities~~our ~~and~~annual ~~Exchange Commission;~~sales increased from $402,638 in 2006 up to $3,192,463 in 2009, in 2010 we began to experience a decline in annual sales posting $2,143,882 in 2010 and ~~each~~$1,480,154 ~~such~~in2011. Despite ~~person~~this strong overall customer trend, we continue to struggle with profitability because of increasing competitive pressure causing commodity-like pricing through cloud-like storage. While we have continued to grow our customer base, we have also had ~~prior~~to ~~access~~adjust pricing to ~~all~~maintain ~~material~~competitive ~~information~~advantage. ~~about~~We ushave significantly improved our support infrastructure and have been able to hold our margins. We still need to raise cash in 2011 to grow our overall business, but we believe ~~that~~ ~~the~~we ~~offer~~are in a much better financial and ~~sale~~expense ofposition ~~these~~than ~~securities~~we were ~~exempt~~a ~~from~~year ~~the~~ago ~~registration~~through ~~requirements~~targeted ofexpense ~~the Securities~~reduction ~~Act~~and ofdebt ~~1933,~~conversion. asThe ~~amended~~product ~~(the~~features ~~“Securities~~that ~~Act”),~~we ~~pursuant~~are offering to ~~Sections 4(2)~~our ~~and~~clients ~~Rule 506 of~~we ~~Regulation D~~believe ofhave superior functionality to the ~~Securities~~mainstream competition and ~~Exchange~~fill ~~Commission~~a customer need. We expect this gain new business in 2012.

~~Purchases~~The ofEmerging ~~Equity~~New ~~Securities~~DigiLIBE ~~by Us and Affiliated Purchasers~~ Product

~~There~~In ~~were~~2008, nowe ~~purchases~~begun to pursue a strategy of expanding our ~~equity~~solution ~~securities~~to byaddress usthe ~~during~~need of the ~~years~~industry ~~ended~~for ~~December 31~~managing structured data through DigiBAK, ~~2019~~but also provide information management abilities for the unstructured data. This effort led to the development and release of the product called DigiLIBE, a virtual corporate library that is designed to link together multiple desperate hardware and ~~2009~~data storage environments to provide organizations with the ability to capture, classify, share, preserve, protect, achieve, and deliver the right information, to the right people, at the right time, helping them make smart informed business decisions. DigiLIBE should be understood as follows — as a company continues to virtualize their hardware and data storage environments, DigiLIBE provides a complementary virtualized environment for the company’s primary asset — its information. It does not matter if the information is on a user machine, on a server, or in archive. A customer can control it, secure it, and access it.

~~ITEM~~Growing 7:both ~~MANAGEMENT’S~~Business ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION~~Segments:

~~This~~We ~~Annual~~believe ~~Report on Form 10-K contains forward-looking statements, within~~ the ~~meaning~~benefits of ~~Section 27A~~making ofa ~~the~~strategic ~~Securities~~decision Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate. This Annual Report on Form 10-K also contains forward-looking statements attributed to ~~third~~grow ~~parties~~both ~~relating to their estimates regarding~~ the ~~size~~DigiBAK ~~of the future market for products~~ and ~~systems~~DigiLIBE ~~such~~businesses ~~as our products and systems, and the assumptions underlying such estimates. Forward-looking statements~~ are ~~only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.~~ :

~~Although~~(i) wesolving ~~believe~~a ~~that~~major ~~the~~industry ~~expectations~~and ~~reflected~~customer inproblem the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of ~~these~~ ~~risks,~~managing ~~uncertainties~~continually ~~and~~growing ~~assumptions,~~information ~~the~~volume ~~forward-looking statements, events~~ and ~~circumstances~~ ~~discussed~~associated incost this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of ~~performance~~storage or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors” and ~~elsewhere in this Annual Report on Form 10-K.~~ retrieval;

20 (ii) being able to access a larger share of opportunity in the information management storage business;

~~Table~~(iii) offering significant technological advantages in corporate policy level control of ~~Contents~~information and ability to leverage knowledge from the information it creates; and

~~Executive~~(iv) ~~Summary~~ optimizing how we synergistically allocate capital and resources between both business.

~~The~~DigiLIBE ~~Business~~ has received excellent feedback on the capability, performance, and function it delivers since its initial release.

Our ~~business~~sales ~~is developing~~ and ~~delivering~~prospecting ~~superior~~efforts ~~information~~have ~~management~~also ~~technologies~~reaffirmed and methodologies enabling our customers to manage, control, protect and access their information and data simply and cost effectively. Our traditional business is providing a cost effective on-line data protection solution to the ~~small~~potential toof ~~medium~~selling ~~business (“SMB”) and small to medium enterprise (“SME”) markets through our~~ DigiBAK ~~service.”.~~services ~~This~~as ~~on-line~~part ~~cloud~~of ~~storage~~a ~~management~~DigiLIBE ~~solution helps organizations properly manage and protect their entire network from one centralized location~~sale.

~~Our~~To ~~emerging~~date, ~~business~~Digitiliti ~~product,~~has ~~released~~achieved insignificant ~~the~~market ~~first~~recognition ~~quarter~~and ofbrand ~~2010,~~value ishaving ~~called~~successfully ~~DigiLIBE.~~established ~~We believe~~its ~~that~~presence ~~DigiLIBE~~in isseveral avertical ~~game-changing~~markets ~~product~~such ~~that~~as ~~addresses~~Finance, ~~the~~Legal, ~~desperate~~Telco, ~~need~~Managed ~~for~~Service aProvider, ~~fiscally responsible~~Healthcare, ~~integrated~~Information ~~system~~Technology toServices, ~~manage~~and ~~the~~Management ~~increasing~~Consulting. ~~growth,~~In ~~volume~~June 2010, ~~and~~DigiLIBE ~~diversity~~won ~~of unstructured~~the ~~data~~Tech ~~that~~Awards ~~now~~Circle ~~represents~~Gold upAward toin ~~85%~~the ofMidrange ~~enterprise~~Software ~~information~~category. ~~and~~In ~~continues~~briefings, toleading ~~grow rapidly.~~industry ~~Content~~analysts ~~chaos~~have isdescribed ~~overwhelming~~DigiLIBE ~~companies’~~as ~~ability~~a tounique ~~meet~~and ~~compliance,~~potentially ~~utilize~~disruptive ~~collaboration tools~~product ~~and~~integrating ~~optimize~~both the storage ~~needs~~management ~~for~~and ~~their~~information ~~virtualized~~management ~~infrastructures~~markets.

~~DigiBAK~~We ~~and~~believe DigiLIBE ~~are~~is ~~complementary~~a ~~products~~fiscally —responsible ~~DigiBAK~~solution ~~providing~~at ~~cloud~~a ~~storage~~price, ~~backup~~performance, and ~~recovery~~ ease of ~~structured~~use ~~data~~level ~~and~~that ~~operating~~disrupts ~~system~~the ~~files~~current competitors’ point solution landscape and ~~DigiLIBE~~positions ~~offers~~while ~~information~~exceeding ~~management~~ customers’ expectations and ~~life-cycle~~needs. ~~control~~Our ofnew ~~unstructured~~product ~~data~~represents ~~from~~a ~~end-user~~significant ~~through~~step ~~archiving~~toward ~~and~~our ~~back~~goal toof becoming a technology leader in the ~~end user~~information content and context management marketplace.

~~The~~Intellectual ~~DigiBak~~Property ~~business~~ Protection

~~Our~~We ~~DigiBAK~~have ~~solution~~taken ~~can~~action ~~backup~~to ~~and~~protect ~~restore~~our ~~emails~~key ~~and~~DigiLIBE ~~all~~technologies. Currently ~~company~~pending ~~data~~are four onkey ~~every~~claims ~~machine~~filed infor ~~a network,~~patent ~~including~~protection ~~desktops,~~in ~~laptops,~~our ~~file~~initial ~~and~~patent ~~print~~application ~~servers.~~filed Wein ~~provide~~January, ~~storage~~2009. Going ~~through~~forward, ~~a “utility~~we ~~based~~will ~~computing”~~strive ~~philosophy,~~to ~~where~~enhance ~~customers~~our ~~pay~~innovative ~~for~~products ~~the~~and ~~gigabytes~~we ofwill ~~data~~continue ~~they~~to ~~store~~protect ~~in DigiBAK~~Digitiliti’s ~~Vault~~Intellectual ~~facility~~Property.

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~~Market ~~has 24/7 onsite physical security, including security guards, motion detectors, security cameras, card-key access, separate cages with individual locking cabinets~~ and ladder racking. It also has battery generator back up power, temperature and humidity controls and fire suppression systems. Geographically, we are located at the center point of the Metropolitan area network. Being centrally located at the focal point of the Twin Cities Fiber Channel and Gig loop, the pipeline for data and load capabilities are immense. Resellers

WeOur ~~utilize~~channel ~~both~~strategy ~~direct~~for ~~in-house~~DigiBAK ~~sales~~and DigiLIBE is to target regional and ~~sales~~national ~~through~~resellers ~~business~~who ~~partner~~have ~~channels~~technical ~~such~~support asand ~~VAR’s (Value~~infrastructure ~~Added~~to ~~Remarketers)~~deploy the products into the small and ~~third~~intermediate ~~party~~size ~~integrators~~enterprises of 50 to 5000 employees or workstations. Our ~~resellers~~strategy ~~have~~is ~~extensive data~~to ~~storage~~target ~~knowledge~~ and ~~expertise~~develop ~~and~~these anchannels ~~established~~with ~~customer~~a ~~base.~~vertical ~~Our~~market ~~sales~~focus ~~plan~~on ~~targets reseller,~~regulation ~~Original~~and ~~Equipment~~compliance, ~~Manufacturer~~collaboration, and ~~channel~~virtualization. ~~partnerships~~For ~~regionally~~resellers, ~~and~~we ~~nationally~~believe their incentive is that ~~possess~~ ~~utility-oriented~~they ~~sales~~can ~~systems.~~grow Wetheir ~~and~~business ~~our~~by ~~partners~~selling ~~target~~the ~~vertical~~products, ~~markets~~they ~~specifically in~~get a monthly annuity from the ~~Small~~cost ~~Business~~of ~~Market~~data ~~(SMB) and~~archiving ~~the~~as ~~Small~~they ~~and~~improve ~~Intermediate~~cost ~~size~~and ~~Enterprises~~efficiency of ~~100~~their —client’s ~~5000 employees~~environment, ~~with~~and anthey ~~average~~can ofprovide ~~four~~value-added ~~sites~~consulting and ~~five~~software —services 20through ~~Terabytes~~DigiLIBE’s ofApplication ~~information~~Program toInterfaces, ~~archive~~(AP’s) and compliance engine.

AsCompany a result of our sale and marketing efforts of our DigiBAK product, our customer base has expanded from approximately 20 in fiscal 2005 to approximately 100 in fiscal 2006, 508 in 2007, 731 in 2008, 789 in 2009 and 890 as of December 31, 2010. Correspondingly, our annual sales have increased from $420,638 in 2006, to $1,329,386 in 2007, $3,075,308 in 2008, $3,192,463 in 2009. In 2010, while we experienced in increase in customers, we experienced a decline in sales posting $2,143,882 through December 31 2010. Despite this overall customer trend, we continue to struggle with profitability because of increasing competitive pressure causing commodity-like pricing through cloud-like storage. While we have continued to grow our customer base, we have also had to adjust our pricing to maintain competitive advantage. We have significantly improved our support infrastructure and have been able to hold the gross margins on our products and service. We still need to raise cash in 2011 to grow our overall business, but we believe we are in a much better financial and expense position that we were a year ago through targeted expense reductions and debt conversion. The product features that we are offering to our clients have superior functionality to the mainstream competition and answer the customer’s needs. W expect this will gain new business in 2011. Funding

~~The~~In ~~Emerging~~order ~~New~~to fund continuing operations and the growth of the new product DigiLIBE, ~~Product~~ we have aggressively reduced overall operating costs to increase profitability of our DigiBAK operations. We have continued to reduce the annual salaries and wages associated with our DigiBAK operations by over 20% in the past two years, 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 have continued to reduce our cash burn rate per month associated with DigiBAK business.

InAt ~~2008~~present, we ~~begun~~continue to ~~pursue~~raise aadditional ~~strategy~~capital ~~of expanding our solution~~ to ~~address the need of the industry for managing structured data through DigiBAK, but also~~ provide ~~information management abilities for~~ the ~~unstructured~~financial ~~data.~~resources ~~This~~needed ~~effort led~~ to ~~the~~achieve ~~development~~our ~~and release of the product called DigiLIBE~~strategy, awhile ~~virtual~~we ~~corporate~~are ~~library~~balancing ~~that~~our isdesire ~~designed~~ to ~~link~~aggressively ~~together~~launch ~~multiple~~our ~~desperate hardware~~new ~~and~~product ~~data storage environments to provide organizations~~ with the ~~ability~~reality ~~to capture,~~of ~~classify,~~available ~~share, preserve, protect, achieve, and deliver the right information, to the right people, at the right time, helping them make smart informed business decisions~~capital. DigiLIBE should be understood as follows — as a company continues to virtualize their hardware and data storage environments, DigiLIBE provides a complementary virtualized environment for the company’s primary asset — its information. It does not matter if the information is on a user machine, on a server, or in archive. A customer can control it, secure it, and access it.

21 Throughout 2011, our continuing operations have been funded, in large part, through the following:

~~Table~~1. On February 28, 2011, the Company completed the placement of ~~Contents~~$1,182,844 of Secured Convertible Promissory Note (the “Notes”) and Warrants (collectively, the “First Secured Convertible Debt Offering”). The Lenders in the First Secured Convertible Debt Offering paid a 10% discount for their investment, resulting in a “stepped-up” basis in their individual Notes for a total principal amount of $1,301,128. The Notes bear interest at the rate of 12% per annum, have an 18-month maturity date and are convertible to common shares at $0.20 per share. The Notes are secured by a first lien on all assets of the Company. In conjunction with the First Secured Convertible Debt Offering, the Lenders received warrants to purchase an aggregate of 3,252,821 common shares. The warrants vested immediately, have a five year term, a $0.30 exercise price and are redeemable by the Company in the event of an acquisition.

~~Growing~~2. ~~both~~On ~~Business~~June ~~Segments:~~ 28, 2011, the Company initiated the placement of a $1,500,000 Junior Secured Convertible Debt Offering that provides for the sale of up to an aggregate principal amount of $1,500,000 Junior Secured Convertible Promissory Notes (the “Junior Notes”) and Warrants. The Junior Notes bear interest at 8% per annum, have a 24-month maturity date and are secured by the assets of the Company with the repayment being subordinated to the repayment of all secured notes previously issued by the Company. In addition, the investors in this Junior Secured Convertible Debt Offering receive five-year warrants to purchase that number of common shares equal

Weto ~~believe~~10% of the ~~benefits~~principal amount of ~~making~~their aJunior ~~strategic~~Note(s) ~~decision~~divided toby ~~grow~~the ~~both~~exercise ~~the~~price ~~DigiBAK~~of ~~and~~$.06 ~~DigiLIBE businesses~~per ~~are:~~ share.

~~(i)~~On ~~solving~~June a28, ~~major~~2011, ~~industry~~we ~~and~~closed ~~customer~~on ~~problem~~the first $500,000 tranche of ~~managing~~the ~~continually~~Junior ~~growing~~Secured ~~information~~Convertible ~~volume~~Debt ~~and~~Offering. ~~associated~~In ~~cost~~conjunction with the closing of ~~storage~~the first tranche of the Junior Secured Convertible Debt Offering, the investors received warrants to purchase an aggregate of 833,333 common shares. The warrants vested immediately, have a five year term and ~~retrieval;~~an exercise price of $0.06 per share.

~~(ii)~~On ~~being~~September ~~able~~15, to2011, ~~access~~we abroke ~~larger~~escrow ~~share~~on the remaining $1,000,000 available under the second tranche of ~~opportunity~~the in$1,500,000 Junior Secured Convertible Debt Offering by closing on $550,000 of proceeds from the ~~information~~sale ~~management~~of ~~storage~~the ~~business;~~Junior Notes. In conjunction with the sale of $550,000 of these Junior Notes, the investors received an aggregate of 916,667 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

~~(iii)~~On ~~offering~~December ~~significant~~5, ~~technological~~2011, ~~advantages~~we inbroke ~~corporate~~escrow ~~policy~~on ~~level~~the ~~control~~third tranche of ~~information~~the ~~and~~$1,500,000 ~~ability~~Junior toSecured ~~leverage~~Convertible ~~knowledge~~Debt Offering by closing on $30,000 of proceeds from the ~~information~~sale itof ~~creates;~~Junior Notes. In conjunction with the sale of $30,000 of these Junior Notes, the investors received an aggregate of 50,000 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

~~(iv)~~And ~~optimizing~~on ~~how~~December 31, 2011, we ~~synergistically~~closed ~~allocate~~the ~~capital~~fourth tranche of the $1,500,000 Junior Secured Convertible Debt Offering by converting $379,534 of existing convertible debt into the Junior Secured Convertible Debt Offering. In conjunction with the conversion of this $379,534 of existing convertible debt through the issuance of the Junior Notes, the investors received an aggregate of 682,556 common stock warrants. The warrants vested immediately, have a five year term and ~~resources~~an ~~between~~exercise ~~both~~price ~~business~~of $0.06 per share.

~~DigiLIBE~~Liquidity ~~has received excellent feedback on the capability, performance,~~ and ~~function~~Capital ~~it delivers since its initial release. Our sales and prospecting efforts have also reaffirmed the potential of selling DigiBAK services as part of a DigiLIBE sale.~~ Resources

ToOur ~~date~~liquidity is dependent, ~~Digitiliti~~in ~~has~~the ~~achieved~~short ~~significant~~term, ~~market~~on ~~recognition~~proceeds from newly issued debt and ~~brand~~the ~~value~~sale ~~having successfully~~of ~~established~~our ~~its~~common ~~presence~~stock inand ~~several~~preferred ~~vertical~~stock ~~markets~~for ~~such~~cash. asIn ~~Finance,~~the ~~Legal,~~long ~~Telco~~term, ~~Managed~~ ~~Service~~we ~~Provider,~~may ~~Healthcare,~~need ~~Information~~to ~~Technology~~continue ~~Services,~~expanding our capacity of the Data Storage Center by investing in property and ~~Management~~equipment ~~Consulting~~and software licenses. In ~~June 2010,~~As ~~DigiLIBE~~discussed ~~won~~in ~~the~~Note ~~Tech~~2 ~~Awards~~to ~~Circle~~the ~~Gold~~consolidated ~~Award~~financial instatements, the ~~Midrange~~Company ~~Software~~has ~~category~~suffered recurring losses from operations and a working capital deficit. In ~~briefings,~~These ~~leading~~conditions ~~industry~~raise ~~analysts~~substantial ~~have~~doubt ~~described~~about ~~DigiLIBE~~the Company’s ability to continue as a ~~unique~~going ~~and~~concern. ~~potentially disruptive~~The ~~product~~consolidated ~~integrating~~financial ~~both~~statements ~~the~~do ~~storage~~not ~~management~~include ~~and~~any ~~information~~adjustments ~~management~~that ~~markets~~might result from the outcome of this uncertainty.

~~“The~~We ~~first~~have ~~company~~financed toour ~~demonstrate~~operations, ~~that~~debt itservice ~~can~~and ~~genuinely~~capital ~~bridge~~requirements through cash flows generated from operations, the ~~gap~~issuance ~~between~~of ~~storage~~secured and ~~information~~ ~~management~~unsecured ~~will~~convertible ~~make~~debt ~~existing~~financing, ~~products~~capital ~~look~~leases ~~archaic~~and byissuance ~~comparison”~~ of equity securities. We had a working capital deficit of $2,324,242 at December 31, 2011. We had cash of $499 as of December 31, 2011, compared to having cash of $27,557 at December 31, 2010.

~~Joseph~~We ~~Martins~~used $1,657,773 ~~Managing~~of ~~Director~~net cash in operating activities for the year ended December 31, ~~Data~~2011, ~~Mobility~~compared ~~Group~~to ~~LLC~~net cash flows used in operating activities of $1,916,844 for the year ended December 31, 2010. Cash used in operating activities during the year ended December 31, 2011, funded a net loss of $3,988,543. This net loss was offset by non-cash charges of $385,154 for amortization and depreciation, $755,409 associated with stock options expense, $414,402 related to amortization of the discount on our convertible debt and deferred financing costs, $67,614 loss on settlement of debt, $54,840 bad debts expense, $111,050 for common stock issued for services and $58,548 warrants expense. Cash used in operating activities during the year ended December 31, 2010, funded a net loss of $6,414,639. This net loss was offset by non-cash charges of $632,670 for amortization and depreciation, $310,967 associated with stock options expense, $372,836 related to amortization of the discount on our convertible debt and deferred financing costs, $306,428 loss on settlement of debt, $40,893 bad debt expense, $238,340 for common stock issued for services, $1,522,950 additional beneficial conversion feature on converted notes, and $456,329 of warrants expense.

WeNet ~~believe~~cash ~~DigiLIBE~~flows isused aby ~~fiscally~~investing ~~responsible~~activities ~~solution~~was ~~at a price~~$5,863 ~~performance,~~for ~~and~~the ~~ease~~year ofended ~~use level~~December 31, ~~that~~2011, ~~disrupts~~compared ~~the~~to ~~current~~net ~~competitors’~~cash ~~point~~flows ~~solution~~used ~~landscape~~in ~~and~~investing ~~positions~~activities ~~while~~of ~~exceeding customers’~~$69,509 ~~expectations~~for ~~and~~the ~~needs.~~year ~~Our~~ended ~~new~~December 31, ~~product~~2010. ~~represents~~Both acomparable ~~significant~~totals ~~step~~are ~~toward~~attributed to our ~~goal~~purchase of ~~becoming~~ aproperty ~~technology~~and ~~leader~~equipment inand ~~the~~software ~~information~~licenses ~~content~~during ~~and~~these ~~context~~two ~~management marketplace~~periods.

~~Intellectual~~Net ~~Property~~cash ~~Protection~~ flow provided by financing activities were $1,636,578 for the year ended December 31, 2011, compared to net cash provided by financing activities of $1,872,824 for the year ended December 31, 2010. During 2011, cash provided by financing activities is primarily due to net proceeds of $1,891,494 received from the issuance of convertible debt, proceeds from debt and related party debt of $166,000 and proceeds from the sale of common stock of $63,000 that supported payments of $23,308 on capital lease obligations, $235,607 payments on notes payable and $225,001 payments on convertible note. During 2010, cash provided by financing activities is primarily due to proceeds of $1,619,050 received

Wefrom ~~have~~the ~~taken~~issuance ~~action~~of toequity ~~protect~~securities, ~~our~~$509,900 ~~key~~received ~~DigiLIBE~~from ~~technologies.~~the ~~There~~exercise ~~are~~of ~~currently~~warrants ~~four~~and ~~key~~proceeds ~~claims filed~~of ~~for~~$250,000 ~~patent~~from ~~protection~~convertible innotes ~~our~~payable ~~initial~~that ~~patent~~supported ~~application~~payments ~~filed~~of ~~in January~~$46,554 ~~2009~~on ~~that~~capital ~~are currently~~lease ~~pending.~~obligations, We$364,572 ~~continue~~payments toon ~~enhance~~notes ~~our~~payable ~~innovative products~~ and we$95,000 ~~believe~~payments inon ~~protecting Digitiliti’s~~convertible ~~Intellectual Property~~notes.

~~The~~Results ~~Market~~of ~~and Resellers~~ Operations

~~Our~~Year ~~channel~~Ended strategy for DigiBAK and DigiLIBE is to target regional and national resellers who have technical support and infrastructure to deploy the products into the small and intermediate size enterprises of 50 to 5000 employees or workstations. Our strategy is to target and develop these channels with a vertical market focus on regulation and complianceDecember 31, ~~collaboration,~~2011 ~~and virtualization.~~as ~~During~~compared ~~2010, we added notable regional and national resellers~~ to the ~~Digitiliti family:~~Year ~~Northland~~Ended ~~Systems, a Minnesota Company; RSM McGladrey, a National Consulting Services firm; and Coolcat, Inc, a Florida Managed Services Provider (MSP)~~December ~~specializing in PCI (credit card) compliance and based on our sales pipeline. We anticipate this list will grow rapidly. For resellers~~31, we believe their incentive is that they can grow their business by selling the products, they get a monthly annuity from the cost of data archiving as they improve cost and efficiency of their client’s environment, and they can provide value-added consulting and software services through DigiLIBE’s Application Program Interfaces, (AP’s) and compliance engine. 2010

~~Company~~Our ~~Funding~~ sales for 2011 decreased to $1,480,154 compared to $2,143,882 in 2010, reflecting a $663,728 decrease in annual revenue, despite an increase in the number of our customers to 910 at December 31, 2011 from 890 at December 31, 2010. During 2011, we experienced considerable competitive and economic pressure on our pricing due to an ever-expanding range of viable alternative storage platforms and services offered throughout the industry and the weak economy. Concurrent with the pricing pressure, we took action to restructure our resources, strengthened our VAR relationships, repositioned our offering and refined other aspects of the DigiBAK business to increase our margins. Customers remain highly satisfied with the service and simplicity of our DigiBAK offering, attributes of which are competitive differentiators and sought after by new customers.

InGross ~~order~~profit tofor ~~fund~~2011 ~~continuing~~was ~~operations~~$165,930 ~~and~~compared ~~the~~to ~~growth~~$640,119 ofin ~~the~~2010, ~~new~~reflecting ~~product~~a ~~DigiLIBE,~~74% wedecrease ~~have aggressively~~from ~~reduced~~30% ~~overall~~in ~~operating~~2010 ~~costs~~down to ~~increase~~11% ~~profitability~~in of2011. ~~our~~Our ~~DigiBAK~~overall ~~operations. We~~gross ~~have~~margin ~~continued~~has remained stable due to ~~reduce~~actions ~~the~~taken ~~annual~~in ~~salaries~~2011 ~~and~~to ~~wages~~restructure the resources associated with our DigiBAK ~~operations~~business ~~by over~~and ~~20%~~the ininherent ~~the~~benefits ~~past~~of ~~two~~our ~~years,~~business ~~while~~model ~~increasing~~that ~~operational~~relies ~~efficiencies~~on ~~and~~the ~~lowering~~organic ~~overall costs~~growth of ~~goods~~our ~~sold.~~customer’s Asdata, ~~previously~~yet ~~stated,~~does wenot ~~implemented~~require ~~additional restructuring~~a ofproportionate expenditure in capital costs. We manage our ~~DigiBAK~~Data ~~operations~~Storage Center to ~~increase~~plan ~~profitability,~~for ~~improve~~growth ~~cash~~and ~~flow~~capacity and ~~reduce cash~~can ~~burn~~efficiently ~~rate~~manage and support this data growth without requiring significant capital cost in the short term. ~~Through~~We ~~these~~do, ~~actions~~however, weplan ~~reduced~~to ~~the~~refresh ~~cash~~our ~~burn~~hardware ~~rate~~technology ~~per~~on ~~month~~a ~~associated~~three ~~with DigiBAK~~to byfour ~~approximately~~year ~~$100~~cycle,~~000~~ which will be coming up in ~~2009~~2012.

22 Research and development expenses during 2011 were $447,476 compared to $992,210 in 2010. In 2009, we reorganized out development effort by redefining the DigiLIBE architecture and release plan, we brought the software development in-house with a combination of internal and targeted skilled contractors and streamlined the development process, which produced a much more efficient and effective approach. We continued this effort during 2010 and 2011 producing greater focus and oversight over design architecture and cost control which resulted in the successful development and first quarter 2010 roll-out of our DigiLIBE product.

~~Table~~During 2011, we incurred sales and marketing expense of ~~Contents~~$527,399, compared to $849,337 incurred during 2010. Our 2011 sales and marketing plan reflected a redesign of our website coupled with our transition to a new public relations firm, which helped get our message viral, generate qualified leads and be able to increase Digitiliti’s reach across the internet to potential customers more effectively.

AtGeneral ~~present~~and administrative expenses decreased by $262,080 weto ~~continue~~$2,419,445 in 2011 compared to ~~raise~~$2,681,525 ~~additional~~incurred ~~capital~~during 2010. The decrease is primarily attributable to ~~provide~~a ~~the~~reduction ~~financial~~in our overall personnel and those attendant costs including associated insurance cost and other resources. ~~needed~~This reduction in general and administrative expenses reflects the company's disciplined cost containment system that has historically reduced the general overhead expenses through personnel realignment to ~~achieve~~ ~~our~~priorities ~~strategy~~and goals, ~~while~~vendor wecontract ~~are~~negotiations, ~~balancing~~stock ~~our~~based ~~desire~~compensation toalternatives, ~~aggressively~~insurance ~~launch~~costs ~~our~~and ~~new~~a ~~product~~daily/weekly ~~with~~ focus between the ~~reality~~CEO ofand ~~available~~CFO ~~capital~~on expenditures.

~~Throughout~~Interest expense for 2011 decreased by $1,532,719 to $692,539, compared to $2,225,258 incurred in 2010. During 2010, ~~our~~the ~~continuing~~company ~~operations~~initiated ~~have~~a ~~been~~program ~~funded~~to convert its outstanding convertible debt into shares of the company’s common stock. During 2010, inthe company converted a large ~~part,~~portion ~~through~~of its convertible note debt portfolio which resulted in the ~~following:~~ recognition of associated beneficial conversion feature and unamortized warrant cost that was reflected as interest expense during 2010.

1.Recent ~~A $2,000,000 equity offering initiated in October 2009~~ and ~~closed~~other inSignificant ~~May~~Events ~~2010.~~affecting ~~This~~our ~~equity~~results ~~offering originally reflected a maximum offering~~ of ~~$1,000,000,~~Operations ~~but was increased to $1,500,000 during the first quarter of 2010~~ and ~~increased~~Financial again to $2,000,000 in April 2010. This equity round of financing offered shares of our common stock at $0.20 per share and was closed in May 2010 resulting in $1,715,550 in equity proceeds through the issuance of 9,290,000 common shares.Condition

2.On ~~The~~February 28, 2011, the Company ~~conducted~~completed anthe ~~equity~~placement ~~offering~~of $1,182,844 First Secured Convertible Promissory Note and Warrants (the “First Secured Convertible Debt Offering”). All of ~~Series~~the Bsecurities issued in conjunction with the First Secured Convertible ~~Preferred~~Debt ~~Stock~~Offering ~~reflecting~~were made to “accredited investors” as those terms are defined on Rule 501 of Regulation D of the Securities and Exchange Commission, The Lenders in the First Secured Convertible Debt Offering paid a $110% discount for their investment, resulting in a “stepped-up” basis in their individual Secured Convertible Promissory Notes.00 ~~par~~The ~~value~~First ~~that~~Secured isConvertible ~~convertible~~Promissory ~~into~~Notes 5bear ~~shares~~interest at the rate of 12% per annum, have an 18-month maturity date and a $.20 per share conversion rate in the Company’s common stock. AsThe ofFirst ~~December~~Secured ~~31,~~Convertible ~~2010,~~Promissory ~~the~~Notes ~~Company~~are ~~closed~~secured by a first lien on ~~the~~all ~~sale~~assets of ~~$420,000~~the ~~worth~~Company; ofprovided, ~~Series~~however, Bthat ~~Convertible~~the ~~Preferred~~Lenders ~~Stock.~~

Inagreed anto ~~effort~~subordinate to ~~address~~a ~~the~~lien ~~Company’s~~with ~~exposure~~respect to ~~outstanding~~up ~~convertible debt and also raise operating capital, in May 2010, the Company initiated an Incentive Offer affecting all our former and current unsecured debt holders that offered~~ to ~~convert their debt into shares of our common stock at~~ $~~.20 per share and/or exercise their warrants at $.20 per share. In addition~~100,000 ~~our~~of ~~secured debt~~original ~~holders~~principal ~~were~~amount ~~offered to convert their debt into shares~~ of ~~our Class A Convertible Preferred Stock at $1.00 per share. The Incentive Offer was also extended to~~ other ~~convertible~~notes ~~note~~against ~~holders and~~the ~~miscellaneous~~Company’s ~~warrants holders~~vault.

The ~~closing~~Lenders received Warrants to purchase an aggregate of ~~the~~3,252,821 ~~Incentive~~shares ~~Offer~~of ~~took~~Company ~~effect~~Common onStock. ~~July 23~~The Warrants have a five year term, ~~2010~~$.30 exercise price and, asinclude a cashless exercise provision and a put right in the event of ~~December 31,~~an ~~2010~~acquisition of the Company ~~achieved~~valued at the ~~following~~Black ~~conversion~~Scholes Value of ~~convertible~~the ~~debt~~unexercised ~~and~~portion ~~exercise~~of the Warrant obtained from the “OV” function on Bloomberg determined as of ~~warrants:~~ the day prior to announcement of the transaction. The Warrants include antidilution provisions for stock splits, stock dividends and recapitalization only.

AsThe First Secured Convertible Debt Offering was conducted in order to implement a previously approved repayment of ~~December 31~~debt obligations owed to two stockholders (the “Miners”) (see Footnote 6, ~~2010~~Note Payable and Footnote 7, under “Other Convertible Notes”), as well as provide additional working capital for the Company. The debt obligations owed to the Miners by the Company ( the “Miner Debt”) were secured by a first lien on the Company’s assets and consisted of the following: a $250,000 12% secured convertible note issued in November 2008 with a $0.35 per share conversion rate; a $50,000 payable that was due on demand and bore interest at 10% per annum; and a $231,540 6% promissory note that was due on demand. Contemporaneously with the closing of the Secured Convertible Debt Offering, the Company and the Miners executed a Repayment of Note Obligations and Release of Security Interest Agreement that provided for the repayment of $431,540 of principal of the Miner Debt with the remaining principal balance owed of $100,000 being converted into a secured promissory note under the Secured Convertible Debt Offering. Correspondingly, all outstanding accrued interest owed on the Miner Debt of $103,109 was paid to the Miners in the form of 687,393 shares of the Company’s common stock, along with a modification in terms on 350,000 common stock purchase warrants previously issued to the Miners and the issuance of an additional 200,000 warrants reflecting a five year term and a $.30 per share exercise price. After completion of all documentation reflecting the repayment of the Miner Debt, the Miners released their first lien in the Company’s assets in preference to those Lenders associated with the Secured Convertible Debt Offering.

In June, 2011, the Company initiated the placement of $1,500,000 Junior Secured Convertible Promissory Note and Warrants (the “Junior Secured Convertible Debt Offering”).The investors in the Junior Secured Convertible Debt Offering received five-year warrants to purchase that number of common shares equal to 10% of the principal amount of their Junior Note(s) divided by the exercise price of $2.06 per share. The Junior Notes bear interest at 8% per annum,~~537~~ have a 24-month maturity date and are secured by the assets of the Company with the repayment being subordinated to the repayment of all secured notes previously issued by the Company. The Junior Notes also contain a contingent conversion option wherein,~~300~~ at the option of ~~unsecured~~60% ~~debt~~of ~~plus~~the investors and twelve months following the closing of the first tranche, all or a portion of the principal amount and accrued interest may be converted into common shares at an exercise price of $~~728~~.06 per share but only if the Junior Secured Convertible Debt Offering has been raised. However,~~673~~ ~~associated~~the Junior Notes automatically convert into common shares upon a subsequent equity funding round of at least $3 million of new equity capital ("Qualified Round") at a per share price equal to the per share price of the qualified round. All of the securities issued in conjunction with the $5Junior Secured Convertible Debt Offering were sold to “accredited investors” as those terms are defined on Rule 501 of Regulation D of the Securities and Exchange Commission, and each such person had prior access to all material information about the Company.5 ~~million~~The ~~offering~~offer ~~was~~and ~~converted~~a ~~into~~sale 16of these securities were exempt from the registration requirements of the Securities Act of 1933,~~329~~ as amended (the “Securities Act”),~~869~~ ~~common~~pursuant ~~shares~~to, among other reasons, Section 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.

2.On 2June 28,~~549~~ 2011, we closed on the first $500,000 ~~warrants~~tranche ~~were~~of ~~exercised~~the ~~into~~Junior anSecured ~~equal~~Convertible ~~number~~Debt Offering. In conjunction with the closing of ~~common~~the ~~shares~~first ~~providing~~tranche ~~for~~of ~~$509~~the Junior Secured Convertible Debt Offering,~~900~~ the investors received warrants to purchase an aggregate of ~~additional~~833,333 ~~equity~~common ~~proceeds~~shares. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

3.On September 15, 2011, we broke escrow on the remaining $~~650~~1,000,000 available under the second tranche of ~~secured~~the ~~debt~~$1,500,000 ~~plus~~Junior ~~accrued~~Secured ~~interest~~Convertible Debt Offering by closing on $550,000 of proceeds from the sale of the Junior Notes. In conjunction with the sale of $74550,~~187~~000 ~~were~~of ~~converted~~these ~~into~~Junior ~~724~~Notes,~~187~~ ~~Series~~the Ainvestors ~~convertible~~received ~~preferred~~an ~~shares~~aggregate of 916,667 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

AsOn of December 31 5, ~~2010~~2011, the Company ~~has~~closed on the sale of $~~272~~30,~~863~~000 of ~~debt~~proceeds ~~and~~from ~~accrued~~the ~~interest~~sale ~~outstanding~~of ~~from~~ the $5Junior Notes.~~5 million~~ ~~offering~~In ~~and~~conjunction with the sale of $~~118~~30,~~167~~000 of ~~debt~~these ~~and~~Junior ~~accrued~~Notes, ~~interest~~the ~~outstanding~~investors ~~from~~received ~~the~~an ~~$750~~aggregate of 50,000 ~~secured~~ ~~offering~~common stock warrants. The warrants vested immediately, ~~reflecting~~have ~~more~~a ~~than~~five ~~90%~~year ~~successful~~term ~~conversion~~and an exercise price of $0. 06 per share.

23 On December 31, 2011, we closed the fourth tranche of the $1,500,000 Junior Secured Convertible Debt Offering by converting $379,534 of existing convertible debt into the Junior Secured Convertible Debt Offering. In conjunction with the conversion of this $379,534 of existing convertible debt through the issuance of the Junior Notes, the investors received an aggregate of 632,556 common stock warrants. The warrants vested immediately, have a five year term and an exercise price of $0.06 per share.

~~Table~~Critical ofAccounting ~~Contents~~Policies and Estimates

~~Liquidity~~Software ~~and~~Revenue ~~Capital Resources~~ Recognition

~~Our~~The ~~liquidity~~Company isderives ~~dependent,~~its inrevenue ~~the short term, on proceeds~~ from ~~newly~~sales ~~issued debt and the sale~~ of ~~our~~ ~~common~~its ~~stock~~products and ~~preferred stock for cash~~services. InProduct ~~the~~revenue ~~long~~is ~~term,~~derived wefrom ~~may~~sales ~~need to continue expanding our capacity~~ of the ~~Data Storage Center by investing in property and equipment and software licenses. As discussed in Note 2 to the consolidated financial statements, the~~ Company ~~has suffered recurring losses from operations and a working capital deficit. These conditions raise substantial doubt about the Company~~’s ~~ability~~DigiBak toservice ~~continue~~and asnew aDigiLibe ~~going concern~~service. ~~The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.~~

WeThe ~~have~~DigiBak ~~financed~~service ~~our~~provides ~~operations,~~an ~~debt~~offsite ~~service~~storage ~~and~~solution ~~capital requirements~~ through ~~cash flows generated from operations, the issuance of secured and unsecured convertible debt financing, capital leases and issuance of equity securities. We had~~ a ~~working~~“utility ~~capital~~based ~~deficit~~computing ofphilosophy” ~~$1,686,465~~where atcustomers ~~December 31, 2010.~~pay Wefor ~~had~~the ~~cash~~gigabytes of ~~$27,557~~data asthey ofstore ~~December 31,~~in ~~2010,~~the ~~compared~~DigiBak ~~to having cash of $141,806 at December 31, 2009~~vault.

WeThe ~~used~~DigiLibe ~~$1,916,844~~service ofis net cash from operating activities for the year ended December 31, 2010, compared to positive cash flows of $31,736 for the year ended December 31, 2009. Cash used in operating activities during the year ended December 31, 2010, funded a ~~net~~multiple ~~loss~~element ofsoftware ~~$6,414,639.~~sales ~~This net~~arrangement ~~loss~~that ~~was~~is ~~offset~~comprised ~~by non-cash charges~~ of ~~$632,670~~three ~~for~~key ~~amortization~~components ~~and~~that ~~depreciation,~~act ~~$310,967 associated~~as ~~with~~one: ~~stock~~Client ~~options expense~~Agent, ~~$372,836~~Information ~~related to amortization of the discount on our convertible debt and deferred financing costs~~Director, $306,428 loss on settlement of debt, $40,893 bad debts expense, $238,340 for common stock issued for services, $1,522,950 additional beneficial conversion feature on converted notes, $456,329 warrants expense and ~~$539,793~~Archive inInformation ~~the cumulative increase in accounts payable and accrued expenses~~Store. Cash used in operating activities during the year ended December 31, 2009, funded a net loss of $5,169,717. This net loss was offset by non-cash charges of $1,225,194 for amortization and depreciation, $349,996 associated with stock options expense, $1,939,947 related to amortization of the discount on our convertible debt and deferred financing costs, $87,656 gain on settlement of debt, $81,787 bad debts expense, $62,029 for shares issued for interest, $124,323 for common stock issued for services, $200,304 additional beneficial conversion feature on converted notes, $389,818 warrants expense and $1,055,976 in the cumulative increase in accounts payable and accrued expenses.

~~Net~~For ~~cash~~multiple ~~flows~~element ~~used~~software bylicense ~~investing~~sales ~~activities~~arrangements ~~was~~that ~~$69,509~~do ~~for~~not ~~the~~require ~~year~~significant ~~ended~~modification ~~December 31,~~or ~~2010~~customization of the underlying software, ~~compared~~ towe ~~net~~recognize ~~cash~~revenue ~~flows~~when: ~~used~~(1) we inenter ~~investing~~into ~~activities~~a oflegally ~~$45,702~~binding software arrangement with a customer for the ~~year~~license ~~ended~~of ~~December 31~~software, ~~2009.~~ ~~Both~~(2) we ~~comparable~~deliver ~~totals~~the ~~are~~software, ~~attributed~~(3) price tois ~~our~~deemed ~~purchase~~fixed ofor ~~property~~determinable and ~~equipment~~free ~~and~~of ~~software licenses~~contingencies ~~during~~of ~~these~~significant ~~two~~uncertainties ~~periods~~and (4) collection is probable.

~~Net~~For ~~cash~~sales ~~flow~~arrangements ~~provided~~with bymultiple ~~financing~~elements, ~~activities~~we ~~were~~defer ~~$1,872,824~~revenue for ~~the~~any ~~year~~undelivered ~~ended December 31~~elements, ~~2010,~~ ~~compared~~and torecognize ~~net~~revenue ~~cash~~when ~~provided by financing activities of $118,735 for~~ the ~~year~~product ~~ended December 31, 2009. During 2010, cash provided by financing activities~~ is ~~primarily~~delivered ~~due~~or toover ~~proceeds of $1,619,050 received from~~ the ~~issuance~~periods ofin ~~equity~~which ~~securities, $509,900 received from~~ the ~~exercise~~service ~~of warrants~~is ~~and~~performed. ~~proceeds~~If ofwe ~~$250,000~~cannot ~~from~~objectively ~~notes~~determine ~~payable~~the ~~that~~fair ~~supported payments~~value of ~~$46,554~~any onundelivered ~~capital lease~~element ~~obligations,~~included ~~$364,572~~in ~~payments~~bundled ~~on notes payable and $95~~arrangements,~~000~~ ~~payments~~we ondefer ~~convertible~~revenue ~~note. During~~until ~~2009,~~all ~~cash~~elements ~~provided~~are bydelivered ~~financing activities is primarily due to proceeds of $683,500 received from the issuance of secured convertible debt, offset by $66,500 related financing costs~~ and ~~$501,500~~services ~~funds~~have ~~received~~been ~~from issuance of our common stock~~performed, ~~offset~~or byuntil ~~$43,500~~fair invalue ~~related issuance~~can ~~costs.~~objectively Webe ~~used~~determined ~~these~~for ~~proceeds~~any toremaining ~~make~~undelivered ~~$442,723 in capital lease payments and $647,042 of payments on notes payable~~elements.

~~Results~~Share-Based ~~of Operations~~ Payment

~~Year~~The ~~Ended~~Company ~~December 31~~accounts for share-based awards issued to employees and non-employees in accordance with the guidance on share-based payments. Accordingly, ~~2010~~employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as ~~compared~~an toexpense over the ~~Year~~requisite ~~Ended~~service ~~December 31~~period (generally the vesting is over a 3-year period). Additionally, ~~2009~~ share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.

~~Our~~New ~~sales~~Accounting for 2010 decreased to $2,143,882 compared to $3,192,463 in 2000, reflecting a $1,048,581 decrease in annual revenue, despite an increase in the number of our customers to 890 at December 21, 2010 from 789 at December 31, 2009. During 2010, we experienced considerable competitive and economic pressure on our pricing due to an ever-expanding range of viable alternative storage platforms and services offered throughout the industry and the weak economy. Concurrent with the pricing pressure, we took action to restructure our resources, strengthened our VAR relationships, repositioned our offering and refined other aspects of the DigiBAK business to increase our margins. Customers remain highly satisfied with the service and simplicity of our DigiBAK offering, attributes of which are competitive differentiators and sought after by new customers. Pronouncements

~~Gross~~We ~~margin~~do ~~for~~not ~~2010~~expect ~~was $634,757 compared to $1,069,830 in 2009, reflecting a 4% decrease from 33% in 2009 down to 29% in 2010. Our overall gross margin has remained stable due to actions taken in 2010 to restructure~~ the ~~resources~~adoption ~~associated with our DigiBAK business and the inherent benefits~~ of ~~our~~any ~~business~~recently ~~model~~issued ~~that~~accounting ~~relies on the organic growth of our customer’~~pronouncement's ~~data, yet does not require a proportionate expenditure in capital costs. We manage our Data Storage Center~~ to ~~plan for growth and capacity and can efficiently manage and support this data growth without requiring significant capital cost in the short term. We do~~have, ~~however,~~a ~~plan~~material toimpact ~~refresh our hardware technology~~ on athe ~~three~~Company’s toconsolidated ~~four~~financial ~~year cycle, which will be coming up in 2011~~statements.

24 Off-Balance Sheet Arrangements

~~Table~~We ofhad ~~Contents~~no off-balance sheet arrangements during 2011 and 2010.

~~Research~~ITEM ~~and~~7A: QUANTITATIVE ~~development~~AND ~~expenses~~QUALITATIVE ~~during~~DISCLOSURES ~~2010~~ABOUT ~~were~~MARKET $967,591 compared to $830,247 in 2009. In 2009, we reorganized out development effort by redefining the DigiLIBE architecture and release plan, we brought the software development in-house with a combination of internal and targeted skilled contractors and streamlined the development process, which produced a much more efficient and effective approach. We continued this effort during 2010 producing greater focus and oversight over design architecture and cost control which resulted in the successful development and first quarter 2010 roll-out of our DigiLIBE product. RISK

InNot ~~conjunction~~required ~~with~~for ~~our~~smaller ~~first~~reporting ~~quarter roll-out of our new DigiLIBE product during 2010, we incurred a significant increase in the associated sales and marketing expenses~~companies. The increase is primarily attributable to an increase in new employees from two to eight during the year and the investment that we made in public relations firm and online marketing in that time period. During 2010, we incurred sales and marketing expense of $849,337, compared to $337,048 incurred during 2009. Our 2011 sales and marketing plan reflects a redesign of our website coupled with our transition to a new public relations firm, which will help get our message viral, generate qualified leads and be able to increase Digitiliti’s reach across the internet to o potential customers more effectively.

~~General~~ITEM ~~and~~8: FINANCIAL ~~administrative~~STATEMENTS ~~expenses~~AND ~~increased~~SUPPLEMENTARY by $479,971 to $2,700,782 in 2010 compared to $2,220,811 incurred during 2009. The increase is primarily attributable to the costs attendant the nine new employees hired during 2010, including associated insurance cost, employee stock option cost and other resources. Notwithstanding these additional expenditure, the company has maintained a disciplined cost containment system that has historically reduced The general overhead expenses through personnel realignment to priorities and goals, vendor contract negotiations, stock based compensation alternatives, insurance costs and a daily/weekly focus between the CEO and CFO on expenditures. DATA

~~Interest expense for 2010 decreased by $713~~DIGITILITI,~~839~~ ~~to $2,225,258, compared to $2,939,097 incurred in 2009~~INC. In each of the last two years, the company has initiated programs to convert its outstanding convertible debt into shares of the company’s common stock. During 2009, the company converted a larger portion of the $5,500,000 12% convertible note debt than it converted during 2010. As a result, a larger portion of the attendant cost of converting this debt was recognized in 2009, which included the associated beneficial conversion feature and unamortized warrant cost that was reflected as interest expense during 2009 and 2010.

~~Recent~~CONSOLIDATED ~~and~~FINANCIAL ~~other Significant Events affecting our results of Operations and Financial Condition~~ STATEMENTS

OnDECEMBER ~~February 28~~31, 2011, ~~the~~AND Company completed the placement of $1,182,844 Secured Convertible Promissory Note and Warrants (the “Secured Convertible Debt Offering”). All of the securities issued in conjunction with the Secured Convertible Debt Offering were made to “accredited investors” as those terms are defined on Rule 501 of Regulation D of the Securities and Exchange Commission, The Lenders in the Secured Convertible Debt Offering paid a 10% discount for their investment, resulting in a “stepped-up” basis in their individual Secured Convertible Promissory Notes. The Secured Convertible Promissory Notes bear interest at the rate of 12% per annum, have an 18-month maturity date and a $.20 per share conversion rate in the Company’s common stock. The Secured Convertible Promissory Notes are secured by a first lien on all assets of the Company; provided, however, that the Lenders agreed to subordinate to a lien with respect to up to $100,000 of original principal amount of other notes against the Company’s vault. 2010

~~The~~C ~~Lenders~~O ~~received~~N ~~Warrants~~T toE ~~purchase~~N anT aggregate of 3,252,821 shares of Company Common Stock. The Warrants have a five year term, $.30 exercise price and include a cashless exercise provision and a put right in the event of an acquisition of the Company valued at the Black Scholes Value of the unexercised portion of the Warrant obtained from the “OV” function on Bloomberg determined as of the day prior to announcement of the transaction. The Warrants include antidilution provisions for stock splits, stock dividends and recapitalization only. S

The Secured Convertible Debt Offering was conducted in order to implement a previously approved repayment of debt obligations owed to two stockholders (the “Miners”) (see Footnote 6, Note Payable and Footnote 7, under “Other Convertible Notes”), as well as provide additional working capital for the Company. The debt obligations owed to the Miners by the Company ( the “Miner Debt”) were secured by a first lien on the Company’s assets and consisted of the following: a $250,000 12% secured convertible note ($.20 per share conversion rate). This convertible note contained a maturity date of October 16, 2009 and had been classified as past due in all public filings; a $50,000 10% On-Demand Promissory Note that had been classified in the current maturity portion of related party debt in all public filings; and a $231,540 6% On-Demand Promissory Note that had been classified in the current maturity portion of related party debt in all public filings. Contemporaneously with the closing of the Secured Convertible Debt Offering, the Company and the Miners executed a Repayment of Note Obligations and Release of Security Interest Agreement that provided for the repayment of $431,540 of principal of the Miner Debt with the remaining principal balance owed of $100,000 being rolled into a secured promissory note under the Secured Convertible Debt Offering. Correspondingly, all outstanding accrued interest owed on the Miner Debt was paid to the Miners in the form of the Company’s common stock based on a rate of $.15 per share, along with a modification in terms on 350,000 common stock purchase warrants previously issued to the Miners and the issuance of an additional 200,000 warrants reflecting a five year term and a $.30 per share exercise price. After completion of all documentation reflecting the repayment of the Miner Debt, the Miners released their first lien in the Company’s assets in preference to those Lenders associated with the Secured Convertible Debt Offering.




	Page(s)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	30

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets	31

Consolidated Statements of Operations	32

Consolidated Statements of Stockholders’ Deficit	33

Consolidated Statements of Cash Flows	34

Notes to Consolidated Financial Statements	36 – 53

25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~Table~~The Board of ~~Contents~~Directors

~~Critical~~Digitiliti, ~~Accounting Policies and Estimates~~ Inc.

~~Software~~St. ~~Revenue~~Paul, ~~Recognition~~ Minnesota

~~The~~We have audited the accompanying consolidated balance sheets of Digitiliti, Inc. (the “Company”) ~~derives~~as ~~its~~of ~~revenue~~December 31, ~~from~~2011 ~~sales~~and 2010 and the related consolidated statement of ~~its~~operations, ~~products~~stockholders’ deficit and ~~services~~cash flows for each of the years then ended. ~~Product~~These ~~revenue~~financial isstatements ~~derived from~~are ~~sales~~the responsibility of the Company’s ~~DigiBak~~management. ~~service~~Our ~~and~~responsibility ~~new~~is ~~DigiLibe~~to ~~service~~express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The ~~DigiBak~~Company ~~service~~is ~~provides~~not required to have, nor were we engaged to perform, an ~~offsite~~audit ~~storage~~of ~~solution~~its ~~through~~internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a ~~“utility~~basis ~~based~~for ~~computing philosophy”~~designing ~~where~~audit ~~customers~~procedures ~~pay~~that are appropriate in the circumstances, but not for the ~~gigabytes~~purpose of ~~data~~expressing ~~they~~an ~~store~~opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ~~DigiBak~~financial ~~vault~~statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~The~~In ~~DigiLibe~~our ~~service~~opinion, isthe aconsolidated ~~multiple~~financial ~~element~~statements ~~software~~referred ~~sales~~to ~~arrangement~~above ~~that~~present isfairly, ~~comprised~~in ofall ~~three key~~material ~~components~~respects, ~~that~~the ~~act~~financial asposition ~~one:~~of ~~Client~~Digitiliti, ~~Agent~~Inc. as of December 31, ~~Information~~2011 ~~Director~~and 2010, and ~~Archive~~the ~~Information~~results ~~Store~~of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

~~For~~The ~~multiple~~accompanying ~~element~~consolidated ~~software~~financial ~~license~~statements ~~sales~~have ~~arrangements~~been prepared assuming that dothe ~~not~~Company ~~require~~will ~~significant modification~~continue oras ~~customization~~a ofgoing concern. As discussed in Note 2 to the ~~underlying~~consolidated ~~software~~financial statements, wethe ~~recognize~~Company ~~revenue~~has ~~when:~~suffered ~~(1) we~~losses ~~enter into~~from operations and has a ~~legally~~working ~~binding~~capital ~~software~~deficit. ~~arrangement~~These ~~with~~conditions araise ~~customer~~substantial ~~for~~doubt about the ~~license~~Company’s ofability ~~software,~~to (continue as a going concern. Management’s plans in regards to these matters are also described in Note 2~~) we deliver~~. ~~the~~The ~~software,~~consolidated ~~(3) price~~financial isstatements ~~deemed~~do ~~fixed~~not orinclude ~~determinable~~any ~~and~~adjustments ~~free~~that ofmight ~~contingencies~~result ~~of significant~~from ~~uncertainties~~the ~~and~~outcome ~~(4) collection~~of isthis ~~probable~~uncertainty.

~~For~~/s/ ~~sales arrangements with multiple elements~~MaloneBailey, we defer revenue for any undelivered elements, and recognize revenue when the product is delivered or over the periods in which the service is performed. If we cannot objectively determine the fair value of any undelivered element included in bundled arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. LLP

~~Share~~www.malone-~~Based Payment~~ bailey.com

~~The Company accounts for share-based awards issued to employees and non-employees in accordance with the guidance on share-based payments. Accordingly~~Houston, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting is over a 3-year period). Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. Texas

~~New~~April ~~Accounting~~16, ~~Pronouncements~~ 2012

~~In October 2009~~DIGITILITI, ~~the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No~~INC. ~~2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”)~~

~~(i)~~CONSOLIDATED ~~provide~~BALANCE updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and (iv) expand the disclosure requirements to require an entity to provide both qualitative and quantitative information about the significant judgments made in applying the revised guidance and subsequent changes in those judgments that may significantly affect the timing or amount of revenue recognition.SHEETS

In addition, in October 2009, the FASB also issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”) to amend the accounting standards for revenue recognition to exclude tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue recognition guidance. The revised revenue recognition accounting standards are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier application is permitted.



	December 31,
	2011			2010 (Restated)
ASSETS
CURRENT ASSETS
Cash	$	499		$	27,557
Accounts receivable, net	243,775			333,687
Other current assets	354,156			247,970
Total current assets	598,430			609,214
Property and equipment, net	36,028			158,105
Software license, net	179,394			436,608
Deferred financing costs	214,863			4,466
Other assets	4,293			6,322
Total assets	$	1,033,008		$	1,214,715
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	820,308		$	692,923
Accounts payable — related parties	35,287			—
Accrued expenses	694,892			554,978
Deferred income	6,040			9,989
Notes payable	94,095			231,540
Notes payable - related parties	66,000
Current maturities of convertible debt, net of unamortized discounts	1,163,936			782,941
Current maturities of convertible debt - related parties, net of unamortized discounts	42,114
Current maturities of capital lease obligations	—			23,308
Total current liabilities	2,922,672			2,295,679
Convertible debt, non-current, net of unamortized discounts	1,291,218			250,000
Convertible debt, non-current - related parties, net of unamortized discounts	83,041
Other liabilities	—			3,607
Total liabilities	4,296,931			2,549,286
STOCKHOLDERS’ DEFICIT
Series A Convertible Preferred Stock, $0.001 par value; 1,200,000 shares authorized for Series A, 668,720 and 724,187 outstanding shares issued and outstanding	669			724
Series B Convertible Preferred Stock, $1.00 par value; 2,000,000 shares authorized for Series B, 420,000 shares issued and outstanding	420,000			420,000
Common stock, $.001 par value; 125,000,000 shares authorized, 70,196,678 and 65,699,753 shares issued and outstanding	70,197			65,700
Additional paid-in capital	25,636,202			23,581,453
Accumulated deficit	(29,390,991		)	(25,402,448		)
Total stockholders’ deficit	(3,263,923		)	(1,334,571		)
Total liabilities and stockholders’ deficit	$	1,033,008		$	1,214,715

26 See notes to consolidated financial statements.

~~Table~~DIGITILITI, ~~of Contents~~INC.

WeCONSOLIDATED ~~are~~STATEMENTS ~~required~~OF to adopt this standard at the beginning of fiscal 2011, which begins on January 1, 2011. We are assessing the impact of the new accounting standards on our financial position and results of operations. OPERATIONS

In January 2010, the FASB issued authoritative guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements, and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15, 2010. The adoption of the above guidance did not impact the Company’s financial position, results of operations or cash flows.



	Years Ended December 31,
	2011			2010
REVENUES	$	1,480,154		$	2,143,882
COST OF REVENUES	(1,314,224		)	(1,503,763		)
GROSS PROFIT	165,930			640,119
OPERATING EXPENSES
Selling and marketing	527,399			849,337
General and administrative	2,419,445			2,681,525
Research and development	447,476			992,210
Total operating expenses	3,394,320			4,523,072
LOSS FROM OPERATIONS	(3,228,390		)	(3,882,953		)
OTHER INCOME (EXPENSE)
Gain (loss) on extinguishment of debt	(67,614		)	(306,428		)
Interest expense	(692,539		)	(2,225,258		)
Total other expense	(760,153		)	(2,531,686		)
NET LOSS	$	(3,988,543	)	$	(6,414,639	)
NET LOSS PER COMMON SHARE — BASIC AND DILUTED	$	(0.06	)	$	(0.12	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED	68,102,619			54,284,942

NoSee ~~other~~notes ~~new accounting pronouncement issued or effective has had, or is expected~~ to ~~have, a material impact on the Company’s~~ consolidated financial statements.

~~Off-Balance~~DIGITILITI, ~~Sheet Arrangements~~ INC.

WeCONSOLIDATED ~~had~~STATEMENTS noOF ~~off-balance~~STOCKHOLDERS’ ~~sheet arrangements during 2010 and 2009.~~ DEFICIT

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



	Series A Preferred Stock					Series B Preferred Stock						Additional
	Series A Preferred Stock					Series B Preferred Stock			Common Stock			Paid-In			Accumulated			Stockholders’
	Shares		Amount			Shares	Amount		Shares	Amount		Capital			Deficit			Deficit

BALANCE, DECEMBER 31, 2009	—		$	—		—	$	—	38,808,736	$	38,809	$	15,124,065		$	(18,987,809	)	$	(3,824,935	)
Stock issued for convertible debt	—		—			—	—		16,329,869	16,330		3,249,643			—			3,265,973
Stock issued for cash	—		—			—	—		6,565,000	6,565		1,192,485			—			1,199,050
Stock issued for services	—		—			—	—		1,082,253	1,082		234,038			—			235,120
Stock issued as payment of payables	—		—			—	—		364,395	364		66,735			—			67,099
Warrants exercised for cash									2,549,500	2,550		507,350						509,900
Preferred stock issued for debt and interest	724,187		724			—	—		—	—		648,208			—			648,932
Preferred stock issued for cash						420,000	420,000											420,000
Beneficial conversion feature and incremental increase in fair value of conversion options and warrants on converted notes	—		—			—	—		—	—		1,522,950			—			1,522,950
Beneficial conversion feature on extinguished of debt	—		—			—	—		—	—		259,683			—			259,683
Warrant expense	—		—			—	—		—	—		456,329			—			456,329
Warrants issued as settlement of liabilities												9,000						9,000
Employee stock option expense												310,967						310,967
Net loss	—		—			—	—		—	—		—			(6,414,639		)	(6,414,639		)
BALANCE, DECEMBER 31, 2010	724,187		724			420,000	420,000		65,699,753	65,700		23,581,453			(25,402,448		)	(1,334,571		)
Stock issued for cash, net of issuance costs	—		—				—		1,400,000	1,400		61,600			—			63,000
Stock issued for services	—		—			—	—		1,557,197	1,557		109,493			—			111,050
Stock issued for liabilties	—		—			—	—		887,393	888		112,221			—			113,109
Series A preferred shares converted to common	(55,467	)	(55		)	—	—		277,335	277		(222		)	—			—
Shares issued for debt conversion						—	—		375,000	375		74,625			—			75,000
Option expense	—		—						—	—		755,409			—			755,409

Not required for smaller reporting companies.



Warrants expense	—	—		—	—		—	—		157,100		—			157,100
Warrants issued for debt issuance costs	—	—		—	—		—	—		207,235		—			207,235
Incremental increase in fair value of modified warrants	—	—		—	—		—	—		384		—			384
Debt discount due to beneficial conversion feature	—	—		—	—		—	—		144,635		—			144,635
Debt discount due to warrants issued with debt	—	—		—	—		—	—		432,269		—			432,269
Net loss	—	—		—	—		—	—		—		(3,988,543		)	(3,988,543		)
BALANCE, DECEMBER 31, 2011	668,720	$	669	420,000	$	420,000	70,196,678	$	70,197	$	25,636,202	$	(29,390,991	)	$	(3,263,923	)

~~ITEM~~See 8:notes ~~FINANCIAL~~to ~~STATEMENTS~~consolidated ~~AND~~financial ~~SUPPLEMENTARY DATA~~statements.

27 DIGITILITI, INC.

~~Table~~CONSOLIDATED ofSTATEMENTS ~~Contents~~OF CASH FLOWS

DIGITILITI, INC.



	Years Ended December 31,
	2011			2010
OPERATING ACTIVITIES
Net loss	$	(3,988,543	)	$	(6,414,639	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense	127,940			336,797
Amortization of software licenses	257,214			295,873
Amortization of deferred financing costs	109,344			41,252
Amortization and write of discount on convertible debt	305,058			331,584
(Gain) loss on extinguishment of debt	67,614			306,428
Bad debt expense	54,840			40,893
Shares issued for interest expense	—			—
Common stock issued for services	111,050			238,340
Option expense	755,409			310,967
Additional beneficial conversion feature on converted debt	—			1,522,950
Warrants expense	58,548			456,329
Changes in operating assets and liabilities:
Accounts receivable	35,072			109,623
Other current assets	(106,186		)	(27,666		)
Other assets	2,029			1,000
Accounts payable — trade	201,183			384,595
Accounts payable — related parties	35,287			(7,861		)
Accrued expenses	326,216			155,198
Deferred income	(3,949		)	9,989
Deferred rent	(5,899		)	(8,496		)
Net cash provided by (used in) operating activities	(1,657,773		)	(1,916,844		)
INVESTING ACTIVITIES
Purchases of property and equipment	(5,863		)	(50,227		)
Purchases of software licenses	—			(19,282		)
Net cash used in investing activities	(5,863		)	(69,509		)
FINANCING ACTIVITIES
Proceeds from issuance of convertible debt, net of financing costs	1,746,494			250,000
Proceeds from issuance of convertible debt - related party	145,000
Proceeds from exercise of warrants	—			509,900
Proceeds from issuance of preferred stock	—			420,000
Payments on convertible debt	(225,001		)	(95,000		)
Payments on capital lease obligations	(23,308		)	(46,554		)
Payments on notes payable	(235,607		)	(364,572		)
Proceeds from notes payable	100,000			—
Proceeds from due to related parties	66,000			—
Proceeds from sale of common stock, net of issuance costs	63,000			1,199,050
Net cash provided by financing activities	1,636,578			1,872,824
NET INCREASE (DECREASE) IN CASH	(27,058		)	(113,529		)

CONSOLIDATED FINANCIAL STATEMENTS



	Years Ended December 31,
	2011		2010
CASH
Beginning of year	27,557		141,086
End of year	$	499	$	27,557
Cash paid for interest	$	92,186	$	77,710
Cash paid for income tax	—		—
Non-Cash Financing and Investing Activities:
Conversion of debt and accrued interest to common stock	$	75,000	$	3,265,973
Preferred stock issued for debt and accrued interest	—		724,187
Stock issued to settle liabilities	144,431		72,879
Addition to property and equipment and maintenance fees paid through issuance of note	—		56,634
Accrued interest converted to debt principal	113,377		21,107
Warrants issued for debt financing costs	207,235		—
Common stock issued for conversion of Series A preferred stock	277
Convertible debt issued for debt issuance costs	64,000
Debt discount due to beneficial conversion feature	144,635
Discount due to warrants granted with convertible notes	432,269		—

~~DECEMBER~~See ~~31,~~notes ~~2010~~to ~~AND~~consolidated ~~2009~~ financial statements.

28 DIGITILITI, INC.

~~Table~~NOTES ofTO ~~Contents~~CONSOLIDATED FINANCIAL STATEMENTS

C1. OBusiness NDescription Tand ESummary Nof TSignificant S Accounting Policies

	Page(s)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets		31
Consolidated Statements of Operations		32
Consolidated Statements of Stockholders’ Deficit		33
Consolidated Statements of Cash Flows		34
Notes to Consolidated Financial Statements		36 – 53

The Company and Nature of Operations

29 Digitiliti, Inc. (we, our, the Company or Digitiliti) provides back up archiving and information management and methodologies enabling our customer to manage, control, protect and access their information data simply and cost effectively through our products and services.

~~Table~~Principles of ~~Contents~~Consolidation

~~REPORT~~The OFconsolidated ~~INDEPENDENT~~financial ~~REGISTERED~~statements ~~PUBLIC~~included ~~ACCOUNTING~~the ~~FIRM~~ accounts of Digitiliti, a Delaware corporation and its wholly owned subsidiary, Cyclone Acquisition Corp. , a Minnesota corporation. All significant intercompany balances and transactions were eliminated.

~~The~~Correction ~~Board~~ of ~~Directors Digitiliti,~~a ~~Inc. St.~~Prior ~~Paul, Minnesota~~ Period

~~We have~~During ~~audited~~the year, the ~~accompanying~~Company ~~consolidated~~discovered ~~balance~~and ~~sheets~~corrected an error related to the expensing of ~~Digitiliti,~~options ~~Inc~~from 2007 through 2010. The ~~(the~~error ~~“Company”)~~resulted asin an overstatement of ~~December 31, 2010~~stock compensation expense and ~~2009~~additional paid in capital. In accordance with the SEC's Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the ~~related~~Company ~~consolidated~~evaluated ~~statement~~this oferror ~~operations~~and, ~~changes~~based inon ~~stockholders’ deficit~~an analysis of quantitative and ~~cash~~qualitative ~~flows~~factors, ~~for~~determined that the ~~years~~error ~~then~~was ~~ended~~immaterial to each of the prior reporting periods affected. However, ~~These~~if ~~financial~~the ~~statements~~adjustments ~~are~~to correct the ~~responsibility~~ cumulative effect of the above error had been recorded in the year ended December 31, 2011, the Company’s ~~management.~~believes ~~Our~~the ~~responsibility~~impact iswould have been significant and would impact comparisons to ~~express~~prior anperiods. Therefore, ~~opinion~~as onpermitted ~~these~~by ~~financial statements~~SAB ~~based~~108, onthe ~~our~~Company ~~audits~~corrected, in the current filing, previously reported results for the year ended December 31, 2010.

WeThe ~~conducted~~Consolidated ~~our~~Balance ~~audits~~Sheets inas ~~accordance with standards~~ of ~~the~~December ~~Public~~31, ~~Company~~2010 ~~Accounting Oversight Board (United States). Those standards require that we plan~~ and ~~perform~~2009 ~~the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor~~ were wealso ~~engaged~~revised to ~~perform,~~reflect an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the ~~circumstances,~~cumulative ~~but not~~effect ~~for the purpose~~ of ~~expressing an opinion on~~ the ~~effectiveness~~error ofdescribed ~~the Company’s internal control over financial reporting~~above. The ~~Accordingly,~~adjustment weresulted ~~express~~in ~~no such opinion. An audit includes examining, on~~ a ~~test~~decrease ~~basis,~~in ~~evidence~~accumulated ~~supporting~~deficit ~~the amounts~~ and ~~disclosures~~additional paid in ~~the~~capital ~~financial~~of ~~statements~~$828,024. There Anwas ~~audit also~~no ~~includes~~impact ~~assessing~~to the ~~accounting~~total ~~principles~~consolidated ~~used~~stockholders' ~~and~~deficit ~~significant~~as ~~estimates~~of ~~made~~December ~~by management~~31, as2010 ~~well~~and ~~as evaluating the overall financial statement presentation~~2009. ~~We believe that our audits provide a reasonable basis for our opinion.~~

InThe ~~our~~adjustments ~~opinion,~~to the ~~financial~~Consolidated ~~statements~~Statements ~~referred~~of toCash ~~above~~Flows ~~present~~for ~~fairly, in all material respects,~~ the ~~financial~~year ~~position~~ended ~~of Digitiliti, Inc. as of~~ December 31, 2010 ~~and~~did ~~2009,~~not ~~and~~result ~~the results~~in ofany ~~their~~changes ~~operations~~to ~~and~~the ~~their~~amounts ~~cash~~previously ~~flows~~reported for ~~the~~net ~~years~~cash ~~then~~from ~~ended~~operating inactivities, ~~conformity~~investing ~~with~~activities ~~accounting principles~~or ~~generally~~financing ~~accepted in the United States of America~~activities.

~~The~~Use accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and has a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of ~~this uncertainty.~~ Estimates

~~/s/~~The ~~MaloneBailey,~~preparation ~~LLP www~~of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes.~~malone-bailey.com Houston~~ The significant estimates relate to the collectability of accounts receivable, ~~Texas April 13~~useful lives of software licenses, ~~2011~~ valuation of beneficial conversion feature on convertible debts, valuation of warrants and stock options, and valuation allowance for deferred income taxes. Actual results could differ from those estimates.

30 Credit risk

~~Table~~Cash ofis ~~Contents~~maintained in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash.

~~DIGITILITI,~~Allowance ~~INC.~~ for Doubtful Accounts

~~CONSOLIDATED~~The ~~BALANCE~~allowance ~~SHEETS~~ for doubtful accounts is based on the aging, historical experience and management’s judgment of the individual accounts receivable. Accounts receivable are written off against the allowance when management determines a balance is uncollectible and no longer actively pursues collection. Accounts receivable is presented net of the allowance for doubtful accounts of $48,281 and $10,753 at December 31, 2011 and 2010, respectively.

	December 31,
	2010			2009
ASSETS
CURRENT ASSETS
Cash	$	27,557		$	141,086
Accounts receivable, net		333,687			484,203
Other current assets		247,970			220,304
Total current assets		609,214			845,593
Property and equipment, net		158,105			444,675
Software license, net		436,608			713,199
Deferred financing costs		4,466			113,334
Other assets		6,322			7,322
Total assets	$	1,214,715		$	2,124,123
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	692,923		$	361,194
Accounts payable — related parties		—			7,861
Accrued expenses		554,978			1,222,143
Due to related parties		—			75,195
Deferred income		9,989			—
Notes payable		231,540			518,371
Current maturities of convertible debt		782,941			2,032,771
Current maturities of capital lease obligations		23,308			45,819
Total current liabilities		2,295,679			4,263,354
Convertible debt, non-current		250,000			1,646,502
Capital lease obligations, non-current		—			24,043
Other liabilities		3,607			15,159
Total liabilities		2,549,286			5,949,058
STOCKHOLDERS’ DEFICIT
Series A Convertible Preferred Stock, $0.001 par value; 1,200,000 shares authorized for Series A, 724,187 outstanding shares issued and outstanding		724			—
Series B Convertible Preferred Stock, $1.00 par value; 2,000,000 shares authorized for Series B, 420,000 shares issued and outstanding		420,000			—
Common stock, $.001 par value; 125,000,000 shares authorized, 65,699,753 and 38,808,736 shares issued and outstanding		65,700			38,809
Additional paid-in capital		24,409,477			15,952,089
Accumulated deficit		(26,230,472	)		(19,815,833	)
Total stockholders’ deficit		(1,334,571	)		(3,824,935	)
Total liabilities and stockholders’ deficit	$	1,214,715		$	2,124,123

Property and Equipment

~~See~~Property ~~notes~~and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Computer equipment and furniture and fixtures are depreciated over three to ~~consolidated~~five ~~financial~~years. ~~statements~~Maintenance and repairs are charged to operations when incurred.

31 Software Licenses

~~Table~~Certain software is licensed from two vendors to facilitate the secure online data storage solution. The licenses are nonexclusive. These licenses were fully paid in a prior year and are owned outright by the Company and are amortized over five years from the date of ~~Contents~~purchase.

~~DIGITILITI,~~Long-Lived ~~INC.~~ Assets

~~CONSOLIDATED~~All ~~STATEMENTS~~long-lived OFassets ~~OPERATIONS~~ are reviewed when events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows that can be generated by those assets are less than the carrying value of the assets. When an impairment loss is recognized, the carrying amount is reduced to its estimated fair value based on appraisals or other reasonable methods to estimate fair value. There was no impairment of long-lived assets as of December 31, 2011 and 2010.

	Years Ended December 31,
	2010			2009
REVENUES	$	2,143,882		$	3,192,463
COST OF REVENUES		1,509,125			2,122,633
GROSS PROFIT		634,757			1,069,830
OPERATING EXPENSES
Selling and marketing		849,337			337,048
General and administrative		2,700,782			2,220,811
Research and development		967,591			830,247
Total operating expenses		4,517,710			3,388,106
LOSS FROM OPERATIONS		(3,882,953	)		(2,318,276	)
OTHER INCOME (EXPENSE)
Gain (loss) on extinguishment of debt		(306,428	)		87,656
Interest expense		(2,225,258	)		(2,939,097	)
Total other expense		(2,531,686	)		(2,851,441	)
NET LOSS	$	(6,414,639	)	$	(5,169,717	)
NET LOSS PER COMMON SHARE — BASIC AND DILUTED	$	(0.12	)	$	(0.15	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED		54,284,942			34,572,856

Deferred Financing Costs

~~See~~Costs ~~notes~~associated towith ~~consolidated~~the ~~financial~~issuance ~~statements~~of debt is capitalized as deferred financing costs and amortized into interest expense using the effective interest method over the life of the related debt. At December 31, 2011 and 2010, unamortized deferred financing costs incurred totaled $214,863 and $4,466, respectively. Amortization of deferred financing costs for the years ended December 31, 2011 and 2010 was $109,344 and $41,252 respectively.

32 Fair Value of Financial Instruments

~~Table~~The carrying value of ~~Contents~~short-term financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, short-term borrowings and capital lease obligations approximate fair value due to the relatively short period to maturity for these instruments. The long-term borrowings approximate fair value since the related rates of interest approximates current market rates.

~~DIGITILITI,~~Software ~~INC.~~ Revenue Recognition

~~CONSOLIDATED~~The ~~STATEMENTS~~Company OFderives ~~STOCKHOLDERS~~its revenue from sales of its products and services. Product revenue is derived from sales of the Company’s ~~DEFICIT~~ DigiBak service and new DigiLibe service.

													Additional
	Series A Preferred Stock				Series B Preferred Stock				Common Stock				Paid-In		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
BALANCE, DECEMBER 31, 2008		—	$	—		—	$	—		26,665,020	$	26,665	$	10,364,357	$	(14,646,116	)	$	(4,255,094	)
Stock issued for convertible debt		—		—		—		—		7,656,606		7,657		2,695,928		—			2,703,585
Stock issued for cash		—		—		—		—		2,725,000		2,725		498,775		—			501,500
Stock issued for services		—		—		—		—		656,249		656		123,667		—			124,323
Stock issued as payment of payables		—		—		—		—		1,105,861		1,106		245,316		—			246,422
Beneficial conversion feature on converted notes		—		—		—		—		—		—		977,029		—			977,029
Warrants expense		—		—		—		—		—		—		389,818		—			389,818
Discount on convertible debt relating to warrants		—		—		—		—		—		—		123,618		—			123,618
Warrants issued as settlement of liabilities		—		—		—		—		—		—		109,161		—			109,161
Warrants issued for debt financing costs		—		—		—		—		—		—		74,424		—			74,424
Employee stock option expense		—		—		—		—		—		—		349,996		—			349,996
Net loss		—		—		—		—		—		—		—		(5,169,717	)		(5,169,717	)
BALANCE, DECEMBER 31, 2009		—		—		—		—		38,808,736		38,809		15,952,089		(19,815,833	)		(3,824,935	)
Stock issued for convertible debt and interest		—		—		—		—		16,329,869		16,330		3,249,643		—			3,265,973
Stock issued for cash, net of issuance costs		—		—				—		6,565,000		6,565		1,192,485		—			1,199,050
Stock issued for services		—		—		—		—		1,082,253		1,082		234,038		—			235,120
Stock issued as payment of payables		—		—		—		—		364,395		364		66,735		—			67,099
Warrants exercised for cash		—		—		—		—		2,549,500		2,550		507,350		—			509,900
Preferred stock issued for debt and interest		724,187		724		—		—		—		—		648,208		—			648,932
Preferred stock issued for cash		—		—		420,000		420,000		—		—		—		—			420,000
Beneficial conversion feature and incremental increase in fair value of conversion options and warrants on converted notes		—		—		—		—		—		—		1,522,950		—			1,522,950
Beneficial conversion feature on extinguished debt		—		—		—		—		—		—		259,683		—			259,683
Warrants expense		—		—		—		—		—		—		456,329		—			456,329
Warrants issued as settlement of liabilities		—		—		—		—		—		—		9,000		—			9,000
Employee stock option expense		—		—		—		—		—		—		310,967		—			310,967
Net loss		—		—		—		—		—		—		—		(6,414,639	)		(6,414,639	)
BALANCE, DECEMBER 31, 2010		724,187	$	724		420,000	$	420,000		65,699,753	$	65,700	$	24,409,477	$	(26,230,472	)	$	(1,334,571	)

The DigiBak service provides an offsite storage solution through a “utility based computing philosophy” where customers pay for the gigabytes of data they store in the DigiBak vault.

~~See~~The ~~notes~~DigiLibe toservice ~~consolidated~~is ~~financial~~a ~~statements~~multiple element software sales arrangement that is comprised of three key components that act as one: Client Agent, Information Director, and Archive Information Store.

33 For multiple element software license sales arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when: (1) we enter into a legally binding software arrangement with a customer for the license of software, (2) we deliver the software, (3) price is deemed fixed or determinable and free of contingencies of significant uncertainties and (4) collection is probable.

~~Table~~For sales arrangements with multiple elements, we defer revenue for any undelivered elements, and recognize revenue when the product is delivered or over the periods in which the service is performed. If we cannot objectively determine the fair value of ~~Contents~~any undelivered element included in bundled arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

~~DIGITILITI,~~Research ~~INC.~~ and Development Costs

~~CONSOLIDATED~~Research ~~STATEMENTS~~and OFdevelopment ~~CASH~~costs ~~FLOWS~~ are expensed as incurred. The Company expensed third party development costs totaling $447,476 and $992,210 in 2011 and 2010, respectively.

	Years Ended December 31,
	2010			2009
OPERATING ACTIVITIES
Net loss	$	(6,414,639	)	$	(5,169,717	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense		336,797			714,370
Amortization of software licenses		295,873			510,824
Amortization of deferred financing costs		41,252			230,074
Amortization and write of discount on convertible debt		331,584			1,709,873
(Gain) loss on extinguishment of debt		306,428			(87,656	)
Bad debt expense		40,893			81,787
Shares issued for interest expense		—			62,029
Common stock issued for services		238,340			124,323
Employee stock option expense		310,967			349,996
Additional beneficial conversion feature on converted debt		1,522,950			200,304
Warrants expense		456,329			389,818
Changes in operating assets and liabilities:
Accounts receivable		109,623			(16,863	)
Other current assets		(27,666	)		(18,816	)
Other assets		1,000			(1,000	)
Accounts payable — trade		384,595			355,382
Accounts payable — related parties		(7,861	)		(97,008	)
Accrued expenses		155,198			700,594
Deferred income		9,989			—
Deferred rent		(8,496	)		(6,578	)
Net cash provided by (used in) operating activities		(1,916,844	)		31,736
INVESTING ACTIVITIES
Purchases of property and equipment		(50,227	)		(45,702	)
Purchases of software licenses		(19,282	)		—
Net cash used in investing activities		(69,509	)		(45,702	)
FINANCING ACTIVITIES
Proceeds from issuance of convertible debt, net of financing costs		250,000			683,500
Proceeds from exercise of warrants		509,900			—
Proceeds from issuance of preferred stock		420,000			—
Payments on convertible debt		(95,000	)		(100,000	)
Payments on capital lease obligations		(46,554	)		(442,723	)
Payments on notes payable		(364,572	)		(647,042	)
Proceeds from notes payable		—			75,000
Proceeds from due to related parties		—			70,500
Payments on due to related parties		—			(22,000	)
Proceeds from sale of common stock, net of issuance costs		1,199,050			501,500
Net cash provided by financing activities		1,872,824			118,735
NET INCREASE (DECREASE) IN CASH		(113,529	)		104,769
CASH
Beginning of year		141,086			36,317
End of year	$	27,557		$	141,086

Share-Based Payment

34 The Company accounts for share-based awards issued to employees and non-employees in accordance with the guidance on share-based payments. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting is over a 3-year

~~Table~~period). ofAdditionally, ~~Contents~~share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.

	Years Ended December 31,
	2010		2009
Cash paid for interest	$	77,710	$	54,736
Cash paid for income tax		—		—
Non-Cash Financing and Investing Activities:
Conversion of debt and accrued interest to equity	$	3,265,973	$	2,641,556
Preferred stock issued for debt and accrued interest		724,187		—
Stock issued to settle liabilities		72,879		—
Addition to property and equipment and maintenance fees paid through issuance of note		56,634		406,613
Accrued interest converted to debt principal		21,107		99,411
Warrants issued for debt financing costs				74,424
Equipment acquired under capital lease, including issuance of warrants for capital lease				8,230
Discount due to warrants granted with convertible notes				123,618

Income Taxes

~~See~~Deferred ~~notes~~income totax assets and liabilities are recognized for the expected future income tax consequences of events that have been included in the consolidated financial statements or income tax returns. Deferred income tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse.

35 In evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that all or a portion of the deferred income tax assets will not be utilized. The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carry forwards.

~~Table~~The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of ~~Contents~~a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of December 31, 2011 and 2010.

~~DIGITILITI,~~It ~~INC~~is the Company’s practice to recognize penalties and/or interest related to income tax matters in interest and penalties expense.

~~NOTES~~The TOCompany ~~CONSOLIDATED~~is ~~FINANCIAL~~subject ~~STATEMENTS~~ to income taxes in the U.S. federal jurisdiction and various states and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not currently under examination by any taxing jurisdiction.

1.Net ~~Business~~Loss ~~Description~~per ~~and Summary of Significant Accounting Policies~~ Share

~~The~~Basic ~~Company~~net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share is computed based on the weighted-average number of common shares outstanding increased by dilutive common stock equivalents. For the years ended December 31, 2011 and ~~Nature~~2010, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of ~~Operations~~diluted earnings per common share.

Digitiliti, Inc. (we, our, the Company or Digitiliti) provides back up archiving and information management and methodologies enabling our customer to manage, control, protect and access their information data simply and cost effectively through our products and services.Reclassifications

~~Principles~~Certain of2010 ~~Consolidation~~ amounts have been reclassified to conform to 2011 presentation.

~~The~~General ~~consolidated financial statements included the accounts of Digitiliti, a Delaware corporation~~ and ~~its~~administrative ~~wholly owned subsidiary, Cyclone Acquisition Corp., a Minnesota corporation. All significant intercompany balances and transactions were eliminated.~~

~~Correction~~General and administrative expenses for the year ended December 31, 2011 includes $181,050 of aexpenses ~~Prior~~related ~~Period~~to expenses incurred for services to upgrade our vault operations and support.

~~During~~Recently ~~the~~Issued year, the Company discovered and corrected an error related to options granted to an employee that were inadvertently omitted from the Company’s employee stock option expense from April 2008 through December 31, 2009. The error resulted to an understatement in stock compensation expense and additional paid in capital. In accordance with the SEC’s Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error and, based on an analysis of quantitative and qualitative factors and determined that the error was immaterial to each of the prior reporting periods affected. However, if the adjustments to correct the cumulative effect of the above error had been recorded in the year ended December 31, 2010, the Company believes the impact would have been significant and would impact comparisons to prior periods. Therefore, as permitted by SAB 108, the Company corrected, in the current filing, previously reported results for the year ended December 31, 2010.Pronouncements

~~The~~Management ~~Consolidated~~does ~~Balance~~not ~~Sheet~~expect ~~as of December 31, 2009 was also revised to reflect~~ the ~~cumulative~~adoption ~~effect~~ of ~~the~~any ~~error~~recently ~~described~~issued ~~above.~~accounting ~~The~~pronouncements ~~error resulted~~ to anhave ~~increase~~a inmaterial ~~accumulated deficit and additional paid in capital of $503,697. There was no~~ impact toon the ~~total~~Company's consolidated ~~stockholders’~~financial ~~deficit as of December 31, 2009~~statements.

~~The~~2. Going ~~following table shows the impact of the error to the Consolidated Statements of Operations for the year ended December 31, 2009:~~Concern

	Year ended December 31, 2009
	As Previously
	Reported			Adjustments			As Revised
General & administrative	$	(1,989,177	)	$	(231,634	)	$	(2,220,811	)
Total operating expenses	$	(3,156,472	)	$	(231,634	)	$	(3,388,106	)
Net loss from operations	$	(2,086,642	)	$	(231,634	)	$	(2,318,276	)
Net loss	$	(4,938,083	)	$	(231,634	)	$	(5,169,717	)
Net loss per common share — Basic and Diluted	$	(0.14	)				$	(0.15	)
Weighted-Average common shares outstanding — Basic and Diluted		34,572,856						34,572,856

As shown in the accompanying financial statements, the Company incurred net losses of $3,988,543 for the year ended December 31, 2011 and has negative working capital at December 31, 2011 of $2,324,242. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

36 The Company continues to be dependent on its ability to generate future revenues, positive cash flows and additional financing.

~~Table~~There ofcan ~~Contents~~be no guarantee that the Company will be successful in generating future revenues, in obtaining additional debt or equity financing or that such additional debt or equity financing will be available on terms acceptable to the Company. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

~~The~~3. Property ~~adjustments~~and to the Consolidated Statements of Cash Flows for the year ended December 31, 2009 did not result in any changes to the amounts previously reported for net cash from operating activities, investing activities or financing activities.Equipment

~~Use~~Property and equipment consisted of ~~Estimates~~ the following:

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements and accompanying notes. The significant estimates relate to the collectability of accounts receivable, useful lives of software licenses, valuation of beneficial conversion feature on convertible debts, valuation of warrants and stock options, and valuation allowance for deferred income taxes. Actual results could differ from those estimates.



	December 31,
	2011			2010
Computer equipment	$	2,661,934		$	2,656,071
Furniture and fixtures	14,511			14,511
	2,676,445			2,670,582
Less — accumulated depreciation	(2,640,417		)	(2,512,477		)
	$	36,028		$	158,105

~~Credit~~Depreciation ~~risk~~ expense totaled $127,940 and $336,797 in 2011 and 2010, respectively.

~~Cash is maintained in bank accounts which, at times, may exceed federally insured limits~~4. Software ~~The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash.~~Licenses

~~Allowance~~Software ~~for~~licenses ~~Doubtful~~consisted ~~Accounts~~of the following:

The allowance for doubtful accounts is based on the aging, historical experience and management’s judgment of the individual accounts receivable. Accounts receivable are written off against the allowance when management determines a balance is uncollectible and no longer actively pursues collection. Accounts receivable is presented net of the allowance for doubtful accounts of $10,753 and $162,263 at December 31, 2010 and 2009, respectively.



	December 31,
	2011			2010
Software licenses	$	1,553,132		$	1,553,132
Less — accumulated amortization	(1,373,738		)	(1,116,524		)
	$	179,394		$	436,608

~~Property~~Amortization expense totaled $257,214 and ~~Equipment~~ $295,873 in 2011 and 2010, respectively.

~~Property and equipment are recorded at cost less accumulated depreciation~~5. Related ~~Depreciation~~Party is computed using the straight-line method over the estimated useful lives of the related assets. Computer equipment and furniture and fixtures are depreciated over three to five years. Maintenance and repairs are charged to operations when incurred.Transactions

~~Software~~At ~~Licenses~~ December 31, 2011 and 2010, balances due t related parties consisted of the following:

Certain software is licensed from two vendors to facilitate the secure online data storage solution. The licenses are nonexclusive. Upon full payment, the licenses are owned outright by the Company and are amortized over five years.



	2011		2010
Miscellaneous payables to various employees, bearing no interest, due on demand, unsecured	$	35,287	$	—
Notes payable to Directors, bearing interest at 12% per annum, maturing between June 25, 2011 and September 1, 2011, secured against accounts receivable, past due as of December 31, 2011	66,000		—
Convertible notes payable to Directors and Officers, bearing interest between 8% and 12% per annum, maturing between August 1, 2012 and June 28, 2013, convertible into common stock at rates between $0.06 and $0.20 per share, secured, net of unamortized discounts of $19,845	125,155		—
	$	226,442	$	—

~~Long-Lived~~Management ~~Assets~~ and Founders Agreements:

~~All~~M2 ~~long-lived~~Capital assets are reviewed when events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows that can be generated by those assets are less than the carrying value of the assets. When an impairment loss is recognizedAdvisors, ~~the carrying amount is reduced to its estimated fair value based on appraisals or other reasonable methods to estimate fair value~~Inc. ~~There was no impairment of long-lived assets as of December 31, 2010 and 2009.~~

~~Deferred~~On ~~Financing~~May 3, ~~Costs~~2006, we executed a consulting agreement with M2. The duties of M2 include introducing the Company to the financial community; researching and identifying potential business partners, executives, consultants and Board of Director candidates; assisting with securing leases or equipment financing; and other general business consulting services. The agreement also provided for the payment of various fees for raising capital, identifying an acquisition/reverse merger candidate, assisting with capital lease arrangements, etc. This agreement was amended March 2007, effective May 6, 2006.

~~Costs~~At ~~associated with~~ the ~~issuance~~time, ofMark ~~debt~~Savage, isour ~~capitalized~~former asPresident ~~deferred~~and ~~financing~~a ~~costs~~former ~~and~~director, ~~amortized~~was ~~into~~the ~~interest~~President ~~expense~~and ~~using~~a ~~the~~principal ~~effective~~stockholder ~~interest~~of ~~method~~M2. ~~over~~While ~~the~~M2 ~~life~~was ofengaged, ~~the~~they ~~related~~assisted ~~debt.~~in Atraising ~~December 31~~$3,504,010 ~~2010~~of ~~and~~capital ~~2009,~~from ~~deferred~~the ~~financing~~sale ~~costs~~of ~~incurred~~our ~~totaled~~common $0stock and received $~~715~~350,~~929,~~401 ~~respectively.~~in ~~Accumulated~~fees ~~amortization~~ for ~~the~~these ~~years~~services. ~~ended~~In ~~December 31~~addition, ~~2010~~M2 ~~and~~assisted ~~2009~~in ~~was~~raising $412,~~252~~035,950 in 12% convertible notes and received fees totaling $~~602~~203,595~~, respectively~~.

~~Fair~~On ~~Value~~or about March 23, 2009, we agreed to pay a 10% introduction fee to M2 under their current Letter Agreement with us that had been extended into May, 2009, on any funds raised by us in a planned $1,500,000 financing through the sale of ~~Financial~~secured ~~Instruments~~and unsecured convertible notes.

~~The~~In ~~carrying~~April 2009, ~~value~~we initiated a $750,000 raise through the issuance of ~~short-term~~12% ~~financial~~convertible ~~instruments,~~notes ~~including~~that ~~cash,~~were ~~accounts~~secured ~~receivable,~~by ~~accounts~~a ~~payable~~third ~~and~~position ~~accrued~~security ~~expenses,~~lien ~~short-term~~in ~~borrowings~~our ~~and~~DigiBAK ~~capital~~vault ~~lease~~system ~~obligations~~and ~~approximate~~equipment. ~~fair~~This ~~value~~offering ~~due~~also toincluded the ~~relatively~~issuance ~~short~~of ~~period~~an toequal ~~maturity~~number of warrants. See Note 7 for ~~these~~further ~~instruments~~details. We completed this offering in October 2009. In conjunction with the offering, M2 received $66,500 reflecting the 10% introduction fee and were issued 5 year warrants totaling 375,000 with an exercise price of $0.30. The ~~long-term~~introduction ~~borrowings~~fee ~~approximate~~and the fair value ~~since~~of the ~~related~~warrants ~~rates~~amounting ofto ~~interest~~$74,424 ~~approximates~~were ~~current~~charged ~~market~~to ~~rates~~deferred financing costs.

37 Upon the closing of this convertible note offering in October 2009, we initiated an equity offering in November 2009 of our common stock that comprised “restricted securities” as that term is defined in Rule 144 of the Securities and Exchange Commission at a price of $0.20 per share, for total aggregate gross proceeds through May 11, 2010, of $1,857,000. In conjunction with specific monies raised by M2 Capital that were associated with this equity offering, M2 received a 10% introduction fee of $118,000 through May 11, 2010. The related fees were charged to additional paid in capital as stock issuance costs.

~~Table~~In February 2011, we initiated a $1,182,884 raise through the issuance of ~~Contents~~12% convertible notes that were secured by a first lien on all assets of the Company; provided, however, that the Lenders agreed to subordinate to a lien with respect to up to $100,000 of original principal amount of other notes secured against the Company's vault assets. This offering also included warrants to purchase an aggregate of 3,252,821 shares of the Company's common stock.In conjunction with the offering, M2 received $9,500 reflecting the 10% introduction fee. The introduction fee was charged to deferred financing costs.

~~Software~~In ~~Revenue~~total, ~~Recognition~~M2 partners earned total fees of approximately $9,500 and $118,000 for the years ended December 31, 2011 and 2010, respectively.

~~The Company derives its revenue from sales of its products and services~~6. Notes ~~Product revenue is derived from sales of the Company’s DigiBak service and new DigiLibe service.~~Payable

We issued a $250,000 promissory note to a stockholder dated December 15, 2005. The ~~DigiBak~~note ~~service~~mirrors ~~provides~~a promissory note between the stockholder and his bank, which matured on December 15, 2009 and had an ~~offsite~~interest ~~storage~~rate ~~solution~~0.5% ~~through~~above athe ~~“utility~~bank's ~~based~~index ~~computing~~rate ~~philosophy”~~(6.00% ~~where~~at ~~customers~~December 31, ~~pay~~201 ~~for~~and 2010). Subsequent to December 15, 2009, the ~~gigabytes~~maturity date of ~~data~~the ~~they~~note ~~store~~was extended to February 1, 2011. The unpaid principal balance under this note was $231,540 as of December 31, 2010. On February 28, 2011, this note was paid in ~~the~~full ~~DigiBak~~(see ~~vault~~Note 7).

~~The~~In ~~DigiLibe~~June 2008, ~~service~~the isCompany negotiated a ~~multiple~~six-month ~~element~~payment plan with its primary software ~~sales~~vendor ~~arrangement~~Asigra, Inc. Under the terms of this payment plan, the Company was granted extended payment terms that isomitted ~~comprised~~Asigra’s standard 20% discount for a net 30-day early payment. This payment plan reflected monthly payments based on a percentage of ~~three~~outstanding ~~key~~invoices ~~components~~owed for software licenses and maintenance, with any remaining outstanding balance payable in December 2008. In December 2008, this payment plan was extended for another 6 months with all outstanding debt payable in May 2009. In July 2009, we executed a Payment and Security Agreement (the “Security Agreement”) with Asigra that ~~act~~reflected asan ~~one:~~8-month ~~Client~~payment ~~Agent~~plan that would satisfy the existing balance owed to Asigra along with the inclusion of amounts to be charged over this 8-month period. This Security Agreement provided Asigra a security lien in the Company’s DigiBAK vault system. As of March 6, ~~Information~~2010, ~~Director~~the Company has made all payments called for under this Security Agreement totaling $364,572 and ~~Archive~~now ~~Information~~owns ~~Store~~all of Asigra licenses outright.

~~For~~During ~~multiple~~April ~~element~~2011, ~~software~~the ~~license~~Company ~~sales~~borrowed ~~arrangements~~$50,000 ~~that~~from doa ~~not~~third ~~require~~party. ~~significant~~This ~~modification~~note oris ~~customization~~unsecured, ofbears ~~the~~interest ~~underlying~~at ~~software,~~12% weper ~~recognize~~annum ~~revenue~~and ~~when:~~matures ~~(1)~~on weOctober ~~enter~~8, ~~into~~2011. aIn ~~legally~~connection ~~binding~~with ~~software~~the ~~arrangement~~loan, ~~with~~the alender ~~customer~~received ~~for~~warrants ~~the~~to ~~license~~purchase an aggregate of ~~software~~25,000 ~~(2)~~common weshares ~~deliver~~at ~~the~~an ~~software,~~exercise ~~(3)~~ price isof ~~deemed~~$0.20 ~~fixed~~per orshare. ~~determinable~~The warrants vested immediately and ~~free~~have a term of ~~contingencies~~five years. The relative fair value of ~~significant~~the ~~uncertainties~~warrants was measured using the Black-Scholes option pricing model and ~~(4)~~determined ~~collection~~to isbe ~~probable~~$1,923 and was recorded as a discount to the note. The entire discount was amortized to interest expense during 2011.

~~For~~On ~~sales~~December ~~arrangements~~13, ~~with~~2011, ~~multiple~~the ~~elements~~Company borrowed $50,000 wefrom ~~defer~~a ~~revenue~~third ~~for~~party. ~~any~~This ~~undelivered~~note ~~elements~~is secured against the Company's accounts receivable, bears interest at 12% per annum and ~~recognize~~matures ~~revenue~~March ~~when~~13, ~~the~~2012. ~~product~~In isconnection ~~delivered~~with orthe ~~over~~loan, the ~~periods~~lender inreceived ~~which~~warrants ~~the~~to ~~service~~purchase isan ~~performed~~aggregate of 50,000 common shares at an exercise price of $0.05 Ifper weshare. ~~cannot~~The ~~objectively~~warrants ~~determine~~vested ~~the~~immediately and have a term of five years. The relative fair value of ~~any~~the ~~undelivered~~warrants ~~element~~was ~~included~~measured inusing ~~bundled~~the ~~arrangements~~Black-Scholes option pricing model and determined to be $2,381, wewhich ~~defer~~was ~~revenue~~recorded ~~until~~as ~~all~~a ~~elements~~debt ~~are~~discount. ~~delivered~~The ~~and~~debt ~~services~~discount ~~have~~is ~~been~~being ~~performed,~~amortized orover ~~until~~the ~~fair~~life ~~value~~of ~~can~~the ~~objectively~~note beusing ~~determined~~the ~~for~~effective ~~any~~interest ~~remaining~~method. ~~undelivered~~The ~~elements~~amortization expense recorded on the discount during 2011 totaled $543.

~~Research~~7. Convertible ~~and Development Costs~~Debt

~~Research~~A ~~and~~summary ~~development~~of ~~costs~~the ~~are~~convertible ~~expensed~~debt asactivity, ~~incurred.~~including ~~The~~related ~~Company~~party ~~expensed~~convertible ~~third~~debt, ~~party~~for ~~development~~the ~~costs~~years ~~totaling~~ended ~~$967~~December 31,~~591~~ 2011 and ~~$830,247 in~~ 2010 ~~and~~is ~~2009,~~as ~~respectively.~~follows:

Share-Based Payment



	2011			2010
Convertible debt, net at beginning of period	$	1,032,941		$	3,679,273
Add: proceeds from issuance of new debt	2,058,284			250,000
Add: accrued interest converted into debt	113,377			—
Add: amortization of discounts	302,592			385,968
Add: convertible debt issued for debt issuance costs	64,000			—
Less: 10% face discounts	(118,284		)	—
Less: discounts due to warrants issued with debt	(427,965		)	—
Less: discounts due to beneficial conversion features	(144,635		)	—
Less: principal converted to common stock	(75,000		)	(3,187,300		)
Less: principal payments	(225,001		)	(95,000		)
Total convertible debt, net at end of period	2,580,309			1,032,941
Current maturities of convertible debt, net at end of period	(1,206,050		)	(782,941		)
Convertible debt, non-current, net at end of period	$	1,374,259		$	250,000

~~The~~A ~~Company~~summary accounts for share-based awards issued to employees and non-employees in accordance with the guidance on share-based payments. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the ~~award,~~contingent ~~and~~beneficial isconversion ~~recognized~~features asfor ~~an expense over~~ the ~~requisite~~years ~~service~~ended ~~period (generally the vesting is over a 3-year period). Additionally~~December 31, ~~share-based~~2011 ~~awards~~and to2010 ~~non-employees~~ are ~~expensed~~as ~~over the period in which the related services are rendered at their fair value.~~follows:

Income Taxes



Unrecognized beneficial conversion feature (BCF) at December 31, 2009	$	1,079,669
Less: beneficial conversion feature charged to interest on converted and extinguished debt	(1,041,079		)
Unrecognized contingent beneficial conversion features at December 31, 2010	38,590
Add: contingent beneficial conversion features on new debt	185,572
Unrecognized contingent beneficial conversion features at December 31, 2011	224,162

~~Deferred~~12% ~~income~~Convertible ~~tax~~debt ~~assets~~— ~~and liabilities are recognized for the expected future income tax consequences of events that have been included in the consolidated financial statements or income tax returns~~$5.5 million ~~Deferred~~Private income tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using tax rates in effect for the years in which the differences are expected to reverse.Offering

In ~~evaluating~~March 2007, ~~the~~we ~~ultimate~~engaged ~~realization~~M2 (see Note 5 — Related Party Transactions) to raise up to $5.5 million from the sale of ~~deferred~~12% ~~income~~convertible ~~tax~~debt ~~assets,~~and ~~management~~warrants. ~~considers~~This ~~whether~~$5.5 million itraise iswas ~~more~~closed ~~likely~~in ~~than~~September 2008. ~~not~~Under ~~that~~the initial conversion terms, the ~~deferred~~debt ~~income~~was ~~tax~~convertible ~~assets~~into ~~will~~common bestock ~~realized~~at $0.50 ~~Management~~per ~~establishes~~share, asubject ~~valuation~~to ~~allowance~~an ifeffective itregistration isstatement ~~more~~covering ~~likely~~the ~~than~~underlying ~~not~~common stock that ~~all~~has orbeen afiled ~~portion~~with ofthe Securities and Exchange Commission. In addition, for each $1 invested, the ~~deferred~~investor ~~income~~receives ~~tax~~one ~~assets~~half ~~will~~warrant ~~not~~to beacquire ~~utilized.~~one ~~The~~half ~~ultimate~~of ~~realization~~a share of ~~deferred~~common ~~income~~stock ~~tax~~with ~~assets~~a isfive ~~dependent~~year onterm ~~the~~at ~~generation~~$1.50 ofper ~~future~~share ~~taxable~~(the ~~income,~~A ~~which~~warrants); ~~must~~and ~~occur~~one ~~prior~~half warrant to ~~the~~acquire ~~expiration~~one half share of ~~the~~common ~~net~~stock ~~operating~~with ~~loss~~a ~~carry~~five ~~forwards~~year term at $2.25 per share (the B

~~The~~warrants). ~~Company~~Each ~~also~~warrant ~~follows~~cannot ~~the~~be ~~guidance~~exercised ~~related~~during tothe ~~accounting~~first ~~for~~6-months ~~income~~and ~~tax~~one ~~uncertainties.~~day Infollowing ~~accounting~~issuance, ~~for~~unless ~~uncertainty~~there inis ~~income~~an ~~taxes,~~effective ~~the~~registration ~~Company~~statement ~~recognizes~~covering the ~~financial~~underlying ~~statement~~common ~~benefit~~stock ofthat ahas ~~tax~~been ~~position~~filed ~~only~~with ~~after~~the ~~determining~~Securities ~~that~~and ~~the~~Exchange ~~relevant~~Commission. ~~tax~~The ~~authority~~warrants ~~would~~are ~~more~~callable ~~likely~~at ~~than~~$0.01 ~~not~~per ~~sustain~~warrant, if the ~~position~~common ~~following~~stock anof ~~audit.~~the ~~For~~Company ~~tax~~trades ~~positions~~for ~~meeting~~20 ~~the~~consecutive ~~more~~days ~~likely~~on ~~than~~its ~~not~~principal ~~threshold,~~market above $2.25 for the ~~amount~~first ~~recognized~~one inhalf warrant and $3.00 for the ~~consolidated~~second ~~financial~~one ~~statements~~half iswarrant, ~~the~~provided ~~largest~~there ~~benefit~~is ~~that~~an ~~has~~effective aregistration ~~greater~~statement ~~than~~covering ~~50%~~the ~~likelihood~~underlying ofcommon ~~being~~stock ~~realized~~that ~~upon~~has ~~ultimate~~been ~~settlement~~filed with the ~~relevant~~Securities ~~tax~~and ~~authority~~Exchange Commission. NoA ~~liability~~total ~~for~~of ~~unrecognized~~840,000 ~~tax~~warrants ~~benefits~~at ~~was~~$1.00, ~~recorded~~2,330,000 aswarrants ofat ~~December~~$1.50 31and 2,330,000 ~~2010~~warrants ~~and~~at ~~2009~~$2.25 were issued.

38 In conjunction with the sale of the 12% convertible debt referenced above, M2 received a 10% introductory fee, which totaled $523,550 pursuant to a Consulting Agreement and an officer also received a 10% introductory fee which totaled $26,450. These introductory fees were accounted for as deferred financing cost and were amortized using the effective interest method over the term of the convertible debt.

~~Table~~We ofanalyzed ~~Contents~~these convertible debt and the warrants issued for derivative accounting consideration and determined that derivative accounting is not applicable for these debts.

ItThe isconvertible debt was evaluated for a beneficial conversion feature, at which time it was concluded that a contingent beneficial conversion feature existed for a substantial portion of the ~~Company’s~~convertible ~~practice~~debt. toThe ~~recognize~~beneficial ~~penalties~~conversion feature was measured using the commitment-date stock price and~~/or~~ ~~interest~~will ~~related~~be torecognized ~~income~~once ~~tax~~the ~~matters~~contingency inis ~~interest~~resolved. ~~and~~(see ~~penalties~~further ~~expense~~discussion below regarding induced conversion of debt below.)

~~The~~In ~~Company~~addition, isthe ~~subject~~relative tofair ~~income~~value ~~taxes~~of in the ~~U.S.~~warrants ~~federal~~was ~~jurisdiction~~measured ~~and~~using ~~various~~the ~~states~~Black-Scholes Option Pricing Model and ~~local~~recorded ~~jurisdictions.~~as ~~Tax~~a ~~regulations~~debt ~~within~~discount, ~~each~~which ~~jurisdiction~~is ~~are~~being ~~subject~~amortized toover the ~~interpretation~~life of the ~~related~~debt ~~tax~~using ~~laws~~the ~~and~~effective ~~regulations~~interest ~~and~~method. ~~require~~The ~~significant~~total ~~judgment~~discount torecorded ~~apply.~~was ~~The~~$2,116,131 ~~Company~~and isthe ~~not~~unamortized ~~currently~~balance ~~under~~at ~~examination~~December 31, by2011 ~~any~~and ~~taxing~~2010 ~~jurisdiction~~was $0.

~~Net~~In ~~Loss~~November 2008, ~~per~~we ~~Share~~ initiated a request to all of these convertible debt holders to either extend their respective convertible debt for another 18 months or to convert their principal and accrued interest into common stock. During 2009, the Company converted $2,337,700 of its convertible debt and $365,885 of accrued interest into 7,656,606 shares of the Company’s common stock.

~~Basic~~In ~~net~~exchange ~~loss~~for ~~per~~extending ~~common~~their ~~share~~convertible isdebt ~~computed~~for byan ~~dividing~~additional ~~the~~18 months, ~~net~~we ~~loss~~agreed byto reduce the ~~weighted-average~~exercise ~~number~~price of ~~common~~the ~~shares~~associated ~~outstanding.~~warrants ~~Diluted~~from ~~net~~$1.50 ~~loss~~and $2.25 per ~~common~~ share isto ~~computed~~$1.00 ~~based~~per onshare, respectively for the ~~weighted-average~~A ~~number~~and ofB ~~common~~warrants. ~~shares~~In ~~outstanding~~addition, ~~increased~~we byagreed ~~dilutive~~to ~~common~~extend ~~stock~~the ~~equivalents.~~term ~~For~~of both the ~~years~~A ~~ended~~and ~~December~~B ~~31,~~warrants ~~2010~~from ~~and~~5 years ~~2009,~~to ~~potential~~6 ~~dilutive~~1/2 ~~securities~~years. ~~had~~However, anthe ~~anti-dilutive~~requirement ~~effect~~of ~~and~~an ~~were~~effective registration was not ~~included~~removed in the ~~calculation~~case of ~~diluted~~extending ~~earnings~~the ~~per common share~~note.

~~Reclassifications~~In exchange for converting their convertible debt into common stock, we agreed to reduce the exercise price from $0.50 to $0.35 per share. We also agreed to reduce the exercise price of the associated warrants from the $1.50 and $2.25 per share to $1.00 per share, respectively for the A and B warrants. In addition, we agreed to extend the term of both the A and B warrants from 5 years to 6 1/2 years. Furthermore, the requirement of an effective registration was removed to allow conversion, which removed the contingency associated with the beneficial conversion feature. As a result, the measured value associated with the converted debt was recognized as interest expense.

~~Certain~~In ~~2009~~June 2010, ~~amounts~~under ~~have~~the ~~been~~terms ~~reclassified~~of our Incentive Offer, we initiated a request to ~~conform~~the remaining convertible debt holders to ~~2010~~convert ~~presentation~~their convertible notes at a preferential $0.20 per share conversion rate. In response to this offer, the Company converted $2,537,300 of its convertible debt and $728,673 of accrued interest into 16,329,869 shares of the Company’s common stock. The debt holders who elected to convert were also allowed to exercise their outstanding common stock warrants at a reduced exercise price of $0.20 per share. The Company closed the Incentive Offer in July 2010.

~~New~~During ~~Accounting~~2010, ~~Pronouncements~~ the Company entered into settlement agreements with five unsecured convertible note holders. Pursuant to these agreements, the Company repaid an aggregate of $95,000 of principal and $8,933 of accrued interest to settle the outstanding convertible notes. In connection with the settlement, the note holders surrendered all or a portion of the warrants associated with these notes.

InWe ~~October~~evaluated ~~2009~~the extension event in November 2008 under the guidance for troubled debt restructuring and debt modification or exchange of debt instruments. Because the investors did not grant concession on these outstanding loans, the ~~Financial~~transactions ~~Accounting~~were ~~Standards~~not ~~Board~~accounted ~~(“FASB”)~~for ~~issued~~as ~~Accounting~~troubled ~~Standards~~debt ~~Update~~restructuring. ~~(“ASU”)~~Consequently, Nowe evaluated these transactions to determine if the modification was substantial and determined they were not. ~~2009-13~~As a result, ~~“Multiple-Deliverable~~no ~~Revenue~~gain ~~Arrangements”~~or ~~(“ASU~~loss was recorded on the date of the extension since the modification in terms is not considered significant. For the year ended December 31, 2009~~-13”)~~, the Company recognized warrant expense of $73,272 associated with the modification of the exercise price of the warrants on the extended

~~(i)~~debt ~~provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated,~~ and ~~how~~charged the ~~consideration~~unamortized ~~should~~discount ~~be allocated; (ii) require an entity~~ to ~~allocate~~interest ~~revenue~~expense inover anthe ~~arrangement~~remaining ~~using~~life ~~estimated selling prices (ESP)~~ of ~~deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); (iii) eliminate~~ the ~~use~~convertible ofdebt ~~the~~under ~~residual method and require an entity to allocate revenue using~~ the ~~relative~~new selling price method; and (iv) expand the disclosure requirements to require an entity to provide both qualitative and quantitative information about the significant judgments made in applying the revised guidance and subsequent changes in those judgments that may significantly affect the timing or amount of revenue recognitionterms.

InWe ~~addition,~~accounted infor ~~October 2009,~~ the ~~FASB~~conversion ~~also~~events ~~issued~~in ~~ASU~~June 2010 ~~No.~~and ~~2009-14,~~November 2008 ~~“Certain~~as ~~Revenue~~induced ~~Arrangements~~conversions ~~That~~under ~~Include~~the ~~Software~~guidance ~~Elements”~~of ~~(“ASU~~FASB ~~2009~~ASC 470-~~14”)~~20. toUnder ~~amend~~ASC 470-20, the ~~accounting~~Company ~~standards~~recognized ~~for~~additional ~~revenue~~interest ~~recognition~~expense tofor ~~exclude~~2010 ~~tangible~~and ~~products~~2009 ~~containing~~totaling ~~software~~$608,956 ~~components~~ and ~~non-software~~$299,693, ~~components~~respectively, ~~that~~which ~~function~~is ~~together~~equal to ~~deliver~~ the ~~tangible~~fair ~~product’s~~value ~~essential functionality from the scope~~ of the ~~software~~incremental ~~revenue~~compensation ~~recognition~~cost ~~guidance.~~created ~~The~~by ~~revised~~the ~~revenue~~modification ~~recognition~~of ~~accounting~~the ~~standards~~exercise ~~are~~price ~~effective~~of ~~for~~the ~~revenue~~warrants ~~arrangements~~and ~~entered~~the ~~into~~incremental orincrease ~~materially modified~~ in ~~fiscal~~the ~~years~~fair ~~beginning~~value onof orthe ~~after~~conversion ~~June~~option ~~15,~~as ~~2010~~a ~~and~~result ~~shall~~of bethe ~~applied~~reduction onin athe ~~prospective~~conversion ~~basis~~price. ~~Earlier~~In ~~application~~addition, isthe ~~permitted.~~remaining Weunamortized ~~are~~discount ~~required~~on tothe ~~adopt~~debt ~~this~~converted ~~standard~~in at2010 ~~the~~and ~~beginning~~2009 of ~~fiscal 2011~~$189,331 ~~which~~and ~~begins~~$378,590, ~~on January 1~~respectively, ~~2011.~~was Werecognized ~~are~~to ~~assessing~~interest ~~the impact of the new accounting standards on our financial position and results of operations~~expense.

~~In January 2010~~Likewise, the ~~FASB~~contingency ~~issued~~related ~~authoritative guidance that requires reporting entities~~ to ~~make~~the ~~new~~contingent ~~disclosures~~beneficial ~~about~~conversion ~~recurring~~feature orwas ~~nonrecurring~~resolved ~~fair-value~~on ~~measurements~~the ~~including~~respective ~~significant~~dates ~~transfers~~of ~~into~~conversion. ~~and~~The ~~out~~beneficial ofconversion ~~Level~~features 1calculated ~~and~~on ~~Level~~the 2respective ~~fair~~commitment ~~value~~dates ~~measurements,~~were ~~and~~fully ~~information~~recognized onthrough ~~purchases,~~interest ~~sales,~~expense ~~issuances,~~ and ~~settlements~~additional onpaid ~~a gross basis~~ in ~~the reconciliation of Level 3 fair value measurements~~capital. ~~The~~During ~~guidance~~2010 is

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