10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

OR

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

For the transition period from __________ to __________

Commission File No. 000-53235

DIGITILITI, INC.

(Exact name of Registrant as specified in its charter)

Delaware	26-1408538
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

266 East 7^th Street, 4^th Floor

St. Paul, Minnesota 55101

________________________________________________________

(Address of Principal Executive Offices)

(651) 925-3200

_________________________________________________________________________

(Registrant’s telephone number, including area code)

N/A

__________________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x +No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):.

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of November 15, 2011, the Registrant had 69,376,179 shares of common stock issued and outstanding at $.001 per share par value.

DIGITILITI, INC.

Table of Contents

	Page
PART I — Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets — As of September 30, 2011 and December 31, 2010	6
Consolidated Statements of Operations — Three and Nine months ended September 30, 2011 and 2010	7
Consolidated Statements of Cash Flows — Nine months ended September 30, 2011 and 2010	9
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4. Controls and Procedures	24
PART II — Other Information
Item 1. Legal Proceedings	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 6. Exhibits	25
Signatures	26
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-31.1
EX-31.2
EX-32.1

3

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DIGITILITI, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30, 2011			December 31, 2010
ASSETS
CURRENT ASSETS
Cash	$	209,723		$	27,557
Accounts receivable	541,941			333,687
Prepaid and other current assets	167,979			247,970
Total current assets	919,643			609,214
Property and equipment, net	68,570			158,105
Software license, net	236,187			436,608
Deferred financing costs	259,402			4,466
Other assets	6,322			6,322
Total assets	$	1,490,124		$	1,214,715
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	510,358		$	692,923
Accrued expenses	670,674			554,978
Deferred income	9,989			9,989
Notes payable	50,000			231,540
Note payable to related party	66,000			—
Current maturities of convertible debt, net of unamortized discounts of $18,936 and $7,059	471,064			782,941
Current maturities of capital lease obligations	—			23,308
Total current liabilities	1,778,085			2,295,679
Convertible debt, non-current, net of unamortized discounts of $489,612 and $0	1,861,516			250,000
Other liabilities	3,607			3,607
Total liabilities	3,643,208			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 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, 69,376,179 and 65,699,753 shares issued and outstanding	69,376			65,700
Additional paid-in capital	25,880,222			24,409,477
Accumulated deficit	(28,523,351		)	(26,230,472		)
Total stockholders' deficit	(2,153,084		)	(1,334,571		)
Total liabilities and stockholders' deficit	$	1,490,124		$	1,214,715

See accompanying notes to unaudited consolidated financial statements.

4

DIGITILITI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
REVENUES	$	498,917		$	555,386		$	1,391,660		$	1,719,520
COST OF REVENUES	347,205			418,141			1,227,536			1,098,509
GROSS PROFIT	151,712			137,245			164,124			621,011
OPERATING EXPENSES
Selling and marketing	52,962			239,490			292,008			616,068
General and administrative	307,042			362,733			1,211,085			1,978,671
Research and development	155,003			242,736			434,145			774,719
Total Operating Expenses	515,007			844,959			1,937,238			3,369,458
LOSS FROM OPERATIONS	(363,295		)	(707,714		)	(1,773,114		)	(2,748,447		)
OTHER INCOME AND EXPENSES
Gain/Loss on extinguishment of debt	—			2,866			(71,634		)	(315,428		)
Interest expense	(200,909		)	(90,790		)	(448,131		)	(2,198,769		)
Total other expenses	(200,909		)	(87,924		)	(519,765		)	(2,514,197		)
NET LOSS	$	(564,204	)	$	(795,638	)	$	(2,292,879	)	$	(5,262,644	)
NET LOSS PER SHARE — BASIC AND DILUTED	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.10	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED	69,023,327			64,433,023			67,541,576			50,631,136

See accompanying notes to unaudited consolidated financial statements.

5

DIGITILITI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended September 30,
	2011			2010
OPERATING ACTIVITIES
Net loss	$	(2,292,879	)	$	(5,262,644	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense	95,398			252,497
Amortization of software license	200,421			222,619
Beneficial conversion feature on converted notes	—			1,522,950
Amortization of deferred financing costs	66,096			39,050
Amortization of debt discounts	189,011			324,173
Loss on extinguishment of debt	71,634			315,428
Warrant expense	49,548			387,067
Common shares issued for services	78,929			152,340
Employee stock option expense	253,696			214,742
Changes in operating assets and liabilities:
Accounts receivable	(208,254		)	45,685
Prepaid and other current assets	79,991			78,805
Other assets	—			1,000
Accounts payable	(150,089		)	139,590
Accounts payable — related parties	—			(7,861		)
Accrued expenses	195,937			203,060
Deferred income	—			14,486
Deferred rent	(764		)	(7,188		)
Net cash used in operating activities	(1,371,325		)	(1,364,201		)
INVESTING ACTIVITIES
Purchase of property and equipment	(5,863		)	(47,794		)
Purchase of software license	—			(19,282		)
Net cash used in investing activities	(5,863		)	(67,076		)
FINANCING ACTIVITIES
Proceeds from notes payable	50,000			—
Cash paid for debt issuance costs	(49,797		)	—
Proceeds from sale of common stock, net of issuance costs	63,000			1,199,050
Proceeds from issuance of Series B convertible preferred stock	—			300,000
Proceeds from exercise of warrants	—			509,900
Payments on capital lease obligations	(23,308		)	(35,537		)
Proceeds from notes payable — related parties	66,000			—
Proceeds from convertible debt	1,910,000			—
Payments on notes payable	(231,540		)	(364,572		)
Payments on convertible debt	(225,001		)	(95,000		)
Net cash provided by financing activities	$	1,559,354		$	1,513,841

6

NET INCREASE IN CASH	182,166		82,564
Cash at beginning of year	27,557		141,086
Cash at end of year	$	209,723	$	223,650
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest	$	63,290	$	75,094
Cash paid for income taxes	—		—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Convertible debt issued for debt issuance costs	64,000		—
Warrants issued for debt issuance costs	207,235		—
Accrued interest converted to convertible debt	8,844		—
Debt discount due to warrants issued with debt	427,580		—
Common stock issued for the conversion of convertible debt	75,000		—
Debt discount due to beneficial conversion feature	144,635		—
Common stock issued for the conversion of Series A preferred stock	277		—
Common stock issued for debt and accrued interest	103,109		3,265,973
Preferred stock issued for accrued interest	—		724,187
Common stock issued for liabilities	—		12,879
Notes payable issued for maintenance fees	—		56,634
Accrued interest converted to debt principal	—		21,107

See accompanying notes to unaudited consolidated financial statements.

7

DIGITILITI, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Digitiliti, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 14, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Software Revenue Recognition

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

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.

The DigiLibe service is a multiple element software sales arrangement that is comprised of three key components that act as one: Client Agent, Information Director, and Archive Information Store.

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.

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 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.

New Accounting Pronouncements

The Company does not expect the adoption of recently issued or effective accounting pronouncements to have a material impact on the Company's consolidated financial statements.

2. Going Concern

As shown in the accompanying financial statements, the Company incurred a net loss of $2,292,879 for the nine months ended September 30, 2011 and had a working capital deficit of $858,442 as of September 30, 2011. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

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.

3. Notes Payable

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is unsecured, bears interest at 12% per annum and matures on October 8, 2011. In connection with the loan, the lender received warrants to purchase an aggregate of 25,000 common shares at an exercise price of $0.20 per share. The warrants vested immediately and have a term of five years. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and

8

determined to be $1,923 and was recorded as a discount to the note. The entire discount was amortized to interest expense during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company borrowed an aggregate of $50,000 from a member of the Company's Board of Directors. The notes are secured against the Company's accounts receivable and bear interest at 12% per annum. The first note amounting to $25,000 matured on July 29, 2011 and is currently past due. The remaining note for $25,000 matured on September 1, 2011 and is currently past due.

During the nine months ended September 30, 2011, the Company borrowed $16,000 from a member of the Company's Board of Directors. The note is secured against the Company's accounts receivable, bears interest at 12% per annum and matured on June 25, 2011. This note is currently past due.

During the nine months ended September 30, 2011, the Company repaid a previously issued note payable of $231,540.

4. Convertible Debt

In June 2011, the Company 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. The 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. The Junior Notes also contain a contingent conversion option wherein, at the option of 60% of 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 $0.06 per share but only if at least $1,000,000 in aggregate principal amount of the Junior Secured Convertible Debt Offering has been raised. However, 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.

On June 28, 2011, the Company closed on the first $500,000 tranche of the Junior Secured Convertible Debt Offering. In conjunction with the closing of 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 an exercise price of $0.06 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $52,239, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discount for the nine months ended September 30, 2011 totaled $5,911.

In conjunction with the closing of the first tranche of the Junior Secured Convertible Debt Offering, the Company paid consultants fees totaling $103,750 consisting of $25,000 paid in cash and the issuance of 1,125,000 warrants valued at $78,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $103,750 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $6,701.

On September 15, 2011, the Company broke escrow on the remaining $1,000,000 available under the second tranche of the $1,500,000 Junior Secured Convertible Debt Offering by closing on $550,000 of proceeds from the sale of the 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. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $50,000, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $1,018.

In conjunction with the September 2011 sale of these $550,000 of Junior Notes, the Company paid consultants fees totaling $75,000 consisting of $26,250 paid in cash and the issuance of 812,500 warrants valued at $48,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $75,000 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $5,634.

The Company analyzed the Junior Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

In addition, the Junior Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature associated with the closing of the first $500,000 tranche was measured on the date of the agreement and determined to be $135,572. And the intrinsic value of the beneficial conversion feature associated with the sale of the $550,000 Junior Notes was measured on the date the proceeds were received and was determined to be $50,000. However, due to the contingent nature of the conversion features, the beneficial conversion features associated with the tranches will be recognized when the contingency is lifted.

On February 28, 2011, the Company completed the placement of $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; but are subordinate to the lien with respect to up to $25,000 of original principal amount of other notes against the Company’s vault.

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. The Company valued the warrants using the Black-Scholes option pricing model. The warrants include standard antidilution provisions for stock splits, stock dividends and recapitalization.

During November and December of 2010, the Company received $250,000 of the cash proceeds under the First Secured Convertible Debt Offering in the form of advanced convertible notes. These advanced convertible notes originally matured at the earlier of the closing of the First Secured Convertible Debt Offering or May and June of 2012, had an interest rate of 12% per annum and were convertible into common shares at $0.20 per share. The principal and accrued interest amounting to $250,000 and $8,844, respectively, were converted into Notes under the First Secured Convertible Debt Offering upon closing.

In conjunction with the sale of the 12% First Secured Convertible Debt Offering, the Company paid consultants fees totaling $64,000 and issued 170,000 five-year warrants with an exercise price of $0.20 per share and 363,000 five-year warrants with an exercise price of $0.30 per share. The fees were paid through the issuance of Notes in the 12% First Secured Convertible Debt Offering. The fees and the fair value of the warrants totaling $143,735 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $50,434.

The aggregate unamortized deferred financing costs on all notes amounted to $259,402 as of September 30, 2011. The aggregate amortization of deferred financing costs during the nine months ended September 30, 2011 totaled $66,096 including the above mentioned costs and $3,327 of amortization of deferred financing costs incurred during fiscal 2010.

The Company analyzed the First Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

The First Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $126,729. In addition, the relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $316,226, which was recorded as a debt discount. The 10% face discount on the Notes was determined to be $118,284 resulting in an aggregate discount of $561,239 being recorded on the Notes. The aggregate discount is being amortized over the life of the Notes using the effective interest method. The amortization expense recorded on these discounts for the nine months ended September 30, 2011 totaled $166,938 resulting in a total unamortized discount of $394,302 as of September 30, 2011.

On February 28, 2011, the Company entered into an agreement to repay and modify three debt obligations owed to two stockholders. The debt obligations owed to these two stockholders 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. The terms of the agreement provided for the repayment of $431,540 of principal on the combined debt and payable with the remaining principal balance owed of $100,000 being converted into a Note under the Secured Convertible Debt Offering. In addition, the outstanding accrued interest owed to these two stockholders of $103,109 was paid through the issuance 687,393 common shares. Under the agreement, the terms of 350,000 warrants previously granted to these stockholders were modified whereby the exercise price was reduced to $0.15 and the term changed to 5 years. An additional 200,000 warrants with a 5-year term and a $0.20 per share exercise price were also granted to these stockholders. Upon final payment of the loan on April 21, 2011, the stockholders released their first lien in the Company’s assets in preference to those lenders associated with the First Secured Convertible Debt Offering.

The Company evaluated the modification of the $100,000 owed to these two stockholders into the 12% First Secured Convertible Debt Offering under FASB ASC 470-50 and determined that the modification was substantial and qualified as a debt extinguishment. The incremental increase in the fair value of the 350,000 modified warrants of $384, the fair value of the additional 200,000 warrants issued of $30,000 and the fair value of the 275,000 warrants issued under the terms of the Secured Debt Offering of $41,250 were recorded as a loss on the extinguishment of debt for the nine months ended September 30, 2011 resulting in an aggregate loss of $71,634.

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 16, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,704, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $10,846 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $3,627.

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 11, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,488, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $7,060 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $2,535.

The Company analyzed the two $50,000 convertible notes for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

During the nine months ended September 30, 2011, the Company made an aggregate of $225,001 of payments on convertible notes and a previously issued convertible note of $75,000 was converted into 375,000 common shares. Amortization of the unamortized debt discounts totaled $7,059 during the nine months ended September 30, 2011.

A summary of the changes in convertible debt for the nine months ended September 30, 2011, is as follows:

Convertible debt, net at December 31, 2010	$	1,032,941
Add: Notes issued	2,101,128
Less: 10% discount on the Notes	(118,284		)
Less: discount due to relative fair value of warrants	(427,580		)
Less: discount due to beneficial conversion feature	(144,635		)
Less: principal payments	(225,001		)
Less: conversion to common stock	(75,000		)
Add: amortization of debt discounts	189,011
Convertible debt, net at September 30, 2011	$	2,332,580
Less: current maturities, net	(471,064		)
Long-term portion of convertible debt, net	$	1,861,516

5. Common Stock

During the nine months ended September 30, 2011, the Company:

a) issued 936,698 common shares for services valued at $78,929,

b) issued 687,393 common shares to repay accrued interest of $103,109 (see also Note 4),

c) issued 277,335 common shares for the conversion of 55,467 Series A preferred shares,

d) issued 1,400,000 common shares for total cash proceeds of $63,000, net of issuance costs of $7,000.

e) issued 375,000 common shares for conversion of debt principal of $75,000 (see also Note 4).

6. Stock Options

During the nine months ended September 30, 2011, options to purchase 225,000 common shares were granted by the Company to a member of the Board of Directors at exercise price of $0.08 per share. These options have a contractual term of 5 years and vest over 3 years. The options have a fair value of $17,997 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 377.58%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 585,000 common shares were granted by the Company to executive management and a key employee at an exercise prices ranging from $0.05 to $0.07 per share. These options have a contractual term of 5 years and a vesting term of 3 years from the date of grant. The options have a fair value of $39,437 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility ranging from 348.34% to 360.03%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 1,050,000 common shares were granted by the Company to executive management and key employees at an exercise price of $0.08 per share. These options have a contractual term of 5 years and a vesting term of 3 years. The options have a fair value of $58,711 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging between 3.0 to 4.0 years, (3) expected volatility ranging from 341.24% to 359.11%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 235,000 common shares were granted by the Company to certain members of the Board of Directors at exercise prices ranging from $0.06 to $0.09 per share. These options have contractual terms ranging from 5 to 10 years and vesting terms ranging from 12 months to 3 years. The options have a fair value of $19,675 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging from 3.0 to 5.0 years, (3) expected volatility ranging from 359.11% to 372.09%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 1,200,000 common shares were granted by the Company to certain employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years and a vesting term of 3 years with 154,566 of the options fully vested at grant date. The options have a fair value of $227,872 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 200,707 common shares were granted by the Company to certain officers, as payment of a portion of their salaries, at an exercise price of $0.19 per share. These options have a contractual term of 5 years and vest monthly through June 30, 2011. The options have a fair value of $38,014 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.05%, (2) expected life ranging from 2.51 to 2.72 years, (3) expected volatility of 366.57%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 250,000 common shares were granted by the Company to three employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years, and a vesting term of 3 years. The options have a fair value of $47,473 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends.

A summary of option activities for the nine months ended September 30, 2011 is reflected below:

	Options		Weighted- Average Exercise Price			Weighted Average Remaining Life (yrs)
Outstanding at December 31, 2010	2,990,000		$	0.34
Granted	3,735,707		0.13
Canceled	—		—
Expired	(1,335,000	)	$	(0.30	)
Outstanding at September 30,2011	5,390,707		$	0.20		3.8
Exercisable at September 30, 2011	2,306,263		$	0.28		3.10

The weighted average grant date fair value of options granted in 2011 was $0.12. The outstanding options at September 30, 2011 have an intrinsic value of $215.

Stock option expense for the nine months ended September 30, 2011 and 2010 totaled $253,696 and $214,742 respectively. As of September 30, 2011, there was approximately $604,630 of unrecognized cost which is expected to be recognized through August 2014.

7. Stock Warrants

During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $4,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.02%, (2) a warrant life of five years, (3) expected volatility of 406.18%, and (4) zero expected dividends. The relative fair value of these warrants of $3,704 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,750 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95%, (2) a warrant life of five years, (3) expected volatility of 406.19%, and (4) zero expected dividends. The relative fair value of these warrants of $3,488 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, the Company issued of total of 1,937,500 warrants with an exercise price of $0.06 per share to two individuals who provided services in connection with the Company’s Junior Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $127,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.88% and 0.95%, (2) warrant life of five years, (3) expected volatility ranging from 407.04% to 407.11%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, 25,000 warrants with an exercise price of $0.20 per share were granted to a third party who provided a short term loan to the Company (see Note 3). These warrants have a term of five years and vested immediately. The warrants have a fair value of $2,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.31%, (2) a warrant life of five years, (3) expected volatility of 401.22%, and (4) zero expected dividends. The relative fair value of these warrants of $1,923 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, a total of 500,000 warrants with an exercise price of $0.08 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.05%, (2) warrant life of five years, (3) expected volatility of 402.61%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance cost in additional paid in capital during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 140,000 warrants with an exercise price of $0.05 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants

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have a term of five years and vested immediately. The warrants have a fair value of $10,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.81%, (2) warrant life of five years, (3) expected volatility of 403.02%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance costs in an entry to additional paid in capital during the nine months ended September 30, 2011.

In conjunction with the Company’s Junior Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 833,333 warrants with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $58,333 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.62%, (2) warrant life of five years, (3) expected volatility of 405.90%, and (4) zero expected dividends. The relative fair value of these warrants of $52,239 was recorded as a debt discount to the $500,000 Junior Secured Convertible Debt Offering during the nine months ended September 30, 2011.

As a condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 200,000 warrants to the Company's former President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $17,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07%, and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011.

As an additional condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 150,000 warrants to the Company's Interim President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of five years, vested immediately and have a fair value of $12,750, as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07% and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011.

In conjunction with the Company’s First Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 3,252,821 warrants with an exercise price of $0.30 per share. These warrants have a term of five years, vested immediately and have a fair value of $487,918 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The relative fair value of the 2,977,821 warrants of $316,226 was recorded as a debt discount and the fair value of the 275,000 warrants of $41,250 was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011.

In conjunction with the sale of $550,000 Junior Notes associated with the second tranche of the Company's Junior Secured Convertible Debt Offering, the Company issued an aggregate of 916,667 warrants with an exercise price of $0.06 per share. The warrants have a term of five years, vested immediately and have a fair value of $55,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95% ,(2) warrant life of five years, (3) expected volatility of 408.42%, and (4) zero dividends. The relative fair value of the 916,667 warrants of $50,000 was recorded as a debt discount during the nine months ended September 30, 2011.

In addition, the Company issued 200,000 warrants with an exercise price of $0.20 per share to the two stockholders whose outstanding note of $100,000 was converted into the Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years, vested immediately and have a fair value of $30,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 335.62%, and (4) zero expected dividends. The fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 170,000 warrants with an exercise price of $0.20 per share were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, 363,000 warrants with an exercise price of $0.30 were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $54,235 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years,

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(3) expected volatility of 344.35%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 60,000 warrants with an exercise price of $0.20 per share were issued to an individual who provided consulting services to the Company ratably over a six month period. These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,059 as calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility ranging between 400.90% and 407.04%, and (4) zero expected dividends. The fair value of these warrants was recorded stock based compensation for the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company modified the terms of 350,000 previously granted warrants whereby the exercise price was reduced to $0.15 per share and the term was changed to 5 years. The incremental increase in the fair value of the warrants was determined to be $384 using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) expected terms ranging from 2.7 to 5.0 years, (3) expected volatility of 344.22%, and (4) zero expected dividends. The incremental increase in the fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended Septmeber 30, 2011.

A summary of warrant activities for the nine months ended September 30, 2011 is as follows:

	Warrants		Weighted- Average Exercise Price			Weighted Average Remaining Life (yrs)
Outstanding at December 31, 2010	8,683,348		$	0.64
Granted	8,848,322		0.17
Expired	(15,824	)	(0.35		)
Outstanding at September 30, 2011	17,515,846		$	0.40		3.77
Exercisable at September 30, 2011	17,515,846		$	0.40		3.77

The weighted average grant date fair value of warrants granted during 2011 was $0.10. The outstanding warrants at September 30, 2011 have an intrinsic value of $292,425.

Warrants expense for the nine months ended September 30, 2011 and 2010 was $49,548 and $387,067, respectively.

8. Commitments and Contingencies

From time to time, Digitiliti may be subject to routine litigation, claims, or disputes in the ordinary course of business. In the opinion of management; no pending or known threatened claims, actions or proceedings against Digitiliti are expected to have a material adverse effect on Digitiliti’s consolidated financial position, results of operations or cash flows, except for the matter discussed below. Digitiliti cannot predict with certainty, however, the outcome or effect of any litigation or investigatory matters specifically described or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.

In June 2011, the Company was made a party to a lawsuit initiated by one of 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.

On May 6, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of their convertible note totaling $37,100, on a discounted basis, that involves an extended payment and the conversion of the outstanding principal balance based on an above-market conversion rate. Digitiliti evaluated the modification under FASB ASC 470-50 and determined that the modification was not substantial and did not qualify as a debt extinguishment. On September 6, 2011, the Company made the final payment and converted the outstanding principal balance based on the agreed to above market conversion rate.

Some of the Company’s convertible note holders have not accepted offers to convert their notes under the terms of the Modification Proposal issued in 2009 and Incentive Offer from 2010, or otherwise. The Company is presently in arrears in principal and accrued

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interest payments in an aggregate total of $216,839 as of September 30, 2011. Although the Company is continuing to discuss payment and/or conversion or extension of these notes with note holders, these outstanding obligations pose a risk to the Company’s ongoing operations.

9. Subsequent Events

On October 14, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan.

On October 31, 2011, the Company entered into a Confidential Settlement Agreement with one of its secured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan.

On October 25, 2011, the Company repaid a secured convertible note of $63,981.

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Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

This quarterly report contains “forward-looking statements ” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements concern goals, beliefs, plan objectives, intentions, expectations, financial condition, results of operations, future performance, business strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Such forward-looking statements are preceded by, followed by or include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters. Accordingly, results actually achieved may differ materially from expected results in these statements.

The information in this quarterly report is as of September 30, 2011, or, where clearly indicated, as of the date of this filing. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements. We also may make additional disclosures in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the SEC. Please also note that we provide a cautionary discussion of risks and uncertainties under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. These are factors that could cause our actual results to differ materially from expected results. Other factors besides those listed could also adversely affect us.

Plan of Operation

The Business

Our business is developing and delivering superior information management technologies 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 to medium business (“SMB”) and small to medium enterprise (“SME”) markets through our DigiBAK service. This on-line cloud storage management solution helps organizations manage and protect their entire network from one centralized location.

Our 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 significant 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 many companies’ ability to meet compliance, utilize collaboration tools and optimize storage needs for their virtualized infrastructures.

DigiBAK and DigiLIBE are complementary products — DigiBAK provides 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.

Growing Both Business Segments:

We believe the benefits of seeking to grow both the DigiBAK and DigiLIBE businesses are:

(i) solving a major industry and customer problem of managing continually growing information volume and associated cost of storage and retrieval;

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

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

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

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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.

“The first company to demonstrate that it can genuinely bridge the gap between storage and information management will make existing products look archaic by comparison”

Joseph Martins, Managing Director, Data Mobility Group LLC

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

Liquidity and Capital Resources

Our liquidity is dependent, in the short term, on proceeds from newly issued debt and the sale of our securities for cash. In the long term, we may need to continue expanding our capacity of the Data Storage Center by investing in property and equipment and software licenses.

We have financed our operations, debt service and 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 capital deficit of $1,686,465 at December 31, 2010, and at September 30, 2011 we had a working capital deficit of $858,442. We had cash of $209,723 as of September 30, 2011, compared to cash of $27,557 as of December 31, 2010.

On June 28, 2011, the Company initiated a placement of up to $1,500,000 in a Junior Secured Convertible Promissory Note and Warrants Offering (the “Junior Secured Convertible Debt Offering”). On June 28, 2011, the Company closed on the first tranche of three potential closings of this Junior Secured Convertible Debt Offering resulting in the receipt of $500,000 of proceeds. On September 15, 2011, the Company broke escrow on the second tranche of the Junior Secured Convertible Debt Offering resulting in the receipt of $550,000 of proceeds.

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 $.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. The Junior Notes also contain a contingent conversion option wherein, at the option of 60% of 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 $.06 per share but only if the Junior Secured Convertible Debt Offering has been raised. However, 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 Junior 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. The offer and a sale of these securities were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant 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.

On February 28, 2011, the Company completed the placement of $1,182,844 First Secured Convertible Promissory Notes and Warrants (the “First Secured Convertible Debt Offering”). All of the securities issued in conjunction with the First 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. The offer and a sale of these securities were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant 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.

The Lenders in the First Secured Convertible Debt Offering paid 90% of the principal amount for their investment, resulting in a “stepped-up” basis in their individual First Secured Convertible Promissory Notes. The First 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 $25,000 of original principal amount of

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other notes against the Company’s vault.

On February 28, 2011, the Company entered into an agreement with two stockholders to repay and modify three debt obligations owed to the two stockholders, (the "Miner Debt"). The debt obligations owed to these two stockholders 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 note 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. The terms of the agreement provided for the repayment of $431,540 of principal on the combined debt and payable with the remaining principal balance owed of $100,000 being converted into a secured promissory note under the First Secured Convertible Debt Offering. In addition, the outstanding accrued interest of $103,109 owed to these two stockholders was paid through the issuance 687,393 common shares of the Company. Under the agreement, the terms of 350,000 common stock warrants previously granted to these stockholders were modified whereby their exercise price was reduced $0.15 and their term was changed to five years. An additional 200,000 common stock warrants with a five year term and a $0.30 per share exercise price were also granted to these stockholders. As of March 31, 2011, there remained an outstanding a balance of $2,371 on the $250,000 12% secured convertible note, which was satisfied in full on April 21, 2011. After this final payment of $2,371 and 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.

The Company evaluated the modification of the $100,000 owed to these two stockholders into the First Secured Convertible Debt Offering under FASB ASC 470-50 and determined that the modification was substantial and qualified as a debt extinguishment. The incremental increase in the fair value of the 350,000 modified warrants of $384, the fair value of the additional 200,000 warrants issued of $30,000 and the fair value of the 275,000 warrants issued under the terms of the Secured Debt Offering of $41,250 were included in the calculation of the loss on extinguishment of debt resulting in a total loss on the extinguishment of debt of $71,634 for the nine months ended September 30, 2011.

We used $1,371,325 of net cash in operating activities for the nine months ended September 30, 2011, compared to using $1,379,687 for the nine months ended September 30, 2010. Cash used in operating activities during the nine months ended September 30, 2011, funded a net loss of $2,292,879. This net loss was offset by non-cash charges of $295,819 for amortization and depreciation, $253,696 associated with stock options expense, $49,548 associated with warrant expense, $71,634 related to a loss on the extinguishment of debt, $255,107 related to amortization of the discount on our convertible debt and deferred financing costs and $78,929 related to common stock issued for services. Cash used in operating activities during the nine months ended September 30, 2010, funded a net loss of $5,262,644. This net loss was offset by non-cash charges of $475,116 for amortization and depreciation, $214,742 associated with stock options expense, $363,223 related to amortization of discounts on our convertible debt and deferred financing costs, $387,067 of warrant expense, $1,522,950 of amortization pertaining to the beneficial conversion feature associated with the convertible notes that were converted, $315,428 loss on extinguishment of debt and $152,340 related to shares issued for services. In addition, the Company’s operating activities during the nine months ended September 30, 2010, benefited from a $45,685 decrease in accounts receivable and a $342,650 increase in accounts payable and accrued expenses.

Net cash flows used in investing activities was $5,863 for the nine months ended September 30, 2011, compared to net cash flows used in investing activities of $67,076 for the nine months ended September 30, 2010. During 2011, the total consisted of $5,863 paid for the purchase of property and equipment. During 2010, the total consisted of $67,076 paid for the purchase of property and equipment and software licenses.

Net cash flow provided by financing activities was $1,559,354 for the nine months ended September 30, 2011, compared to net cash provided by financing activities of $1,213,841 for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, cash provided by financing activities is primarily due to proceeds of $1,910,000 received from the sale of convertible notes. We used these proceeds to make $23,308 in capital lease payments, $231,540 in payments on notes payable and $225,001 of payments on convertible debt. During the nine months ended September 30, 2010, cash provided by financing activities was primarily due to proceeds of $1,199,050 received from issuance of our common stock for cash, net of issuance costs, proceeds of $300,00 from the issuance of our Series B Convertible Preferred Stock and $509,900 received from the exercise of warrants. We used these proceeds to make $35,537 in capital lease payments $364,572 in payments on notes payable and $95,000 of payments on convertible debt.

As of September 30, 2011, the Company had $171,555 of past due debt and accrued interest outstanding from the $5.5 million offering and $45,081 of past due debt and accrued interest outstanding from the $750,000 secured offering. At present, the Company continues to negotiate the repayment of these past due notes.

Results of Operations

For the three month periods ended September 30, 2011 and 2010

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Gross sales were $498,917 for the three months ended September 30, 2011, compared to $555,386 for the three months ended September 30, 2010. This reflects a 10% decrease in DigiBAK revenues from sales between these two comparable periods. Beginning in 2008, the Company anticipated increasing competitive pricing pressures on its DigiBAK product as a result of an ever-expanding range of alternative archiving storage services and a struggling economy. In response to these challenges, we restructured our resources, strengthened our DigiBAK VAR and customer relationships to reposition and rebrand our DigiBAK offering, initiated targeted sales efforts, took pricing actions and refined other aspects of the DigiBAK business to sustain our margins and attract new customers. Despite the decrease in DigiBAK revenue, we increased our customer count from 857 as of September 30, 2010 to 915 as of September 30, 2011 and our current customer base remains highly satisfied with our DigiBAK service offering.

During the three months ended September 30, 2011, our gross margin was negatively impacted by modifications and repairs made to our vault facilities that could not be capitalized and charged over future periods. Our DigiLIBE product extends our capability from the price competitive storage management market to the value priced information market and serves to increase our overall gross margin of our combined product offerings.

Research and development expenses for the three months ended September 30, 2011 were $155,003 compared to $242,736 for the three months ended September 30, 2010. During the third quarter of 2010, we incurred significant expenditures to finalize our in-house product development efforts, which allowed us to bring our new DigiLIBE product to market during 2010. These efforts in 2010 allowed us to improve the installation process and broadening the scalability of the product. As a result of these actions, we were able to reduce our research and development overhead and personnel resources during the three months ended September 30, 2011, thus lowering our actual expenditures when compared to the three months ended September 30, 2010.

Given the release and roll-out of our new DigiLIBE product in the first quarter of 2010, we have incurred lower sales and marketing expenses for the three months ended September 30, 2011 of $52,962 compared to $239,490 incurred during the three months ended September 30, 2010. This decrease in sales and marketing expenditure directly relates to our DigiLIBE market launch actions during 2010, which included; establishment of regional and national reseller processes and agreements, and retaining a public relations and industry trade group to create market and industry awareness through product promotion within the industry analyst community, trade publications, and target market segments.

Our general and administrative expenses were reduced 15% from $362,733 incurred during the three months ended September 30, 2010 to $307,042 for the three months ending September 30, 2011. The improvement is attributable to our conscious efforts to reduce costs, streamline administration expenses and contain executive salaries. The business restructuring undertaken midway through 2010 resulted in targeted efforts to reduce general overhead expenses through personnel realignment to priorities and goals, vendor contract negotiations, stock based compensation alternatives, insurance costs and a daily/weekly focus on expenditures between the CEO and CFO.

The increase of $110,119 in interest expense between the comparative three months ended September 30, 2011 and September 30, 2010 is attributed to the accrued interest associated with the First Secured Convertible Debt Offering and the Junior Secured Convertible Debt Offering.

For the nine month periods ended September 30, 2011 and 2010

Sales for the nine months ended September 30, 2011 decreased 19% to $1,391,660 compared to $1,719,520 for the nine months ended September 30, 2010 reflecting a $327,860 decrease in revenue. This decrease in revenue is primarily a result of increasing competitive pricing pressure from an ever-expanding range of alternative archiving storage services impacting our DigiBAK product and a struggling economy. Our DigiLIBE product broadens our product offerings into new markets with higher margins. Our actions to restructure resources, strengthen our VAR and customer relationships, reposition and rebrand our overall offerings, initiated stronger sales efforts and refined other aspects of the DigiBAK business are also intended to sustain and enhance our margins. Despite this decrease in revenue, we increased our DigiBAK customer count from 831 as of September 30, 2010 to 915 as of September 30, 2011 and we believe our current customer base remains highly satisfied with our DigiBAK service offering.

Gross margin for the nine months ended September 30, 2011 was $164,124 compared to a gross margin of $621,011 for the nine months ended September 30, 2010. This significant decrease in margin results from a one-time charge of approximately $277,000 the Company incurred during the first quarter of 2011, along with continued modifications and repairs required to our vault facilities incurred during the third quarter of 2011 that could not be capitalized and charged over future periods. At present, we believe we will recover all or a portion of the approximate cost of these modification and repair costs under our property and casualty insurance.

Research and development expenses for the nine months ended September 30, 2011 were $434,145 compared to $774,719 for the

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nine months ended September 30, 2010. During the first quarter of 2010, we incurred significant expenditures to finalize our in-house product development efforts, which allowed us to bring our new DigiLIBE product to market during late 2010. These efforts in 2010 allowed us to improve the product by enhancing the installation process and broadening the scalability of the product. As a result of these actions, we were able to reduce our research and development overhead and personnel resources during the nine months ended September 30, 2011, thus lowering our actual expenditures when compared to the nine months ended September 30, 2010.

Given the release and roll-out of our new DigiLIBE product during late 2010, we have incurred lower sales and marketing expenses for the nine months ended September 30, 2011 of $292,008 compared to $616,068 incurred during the nine months ended September 30, 2010. This decrease in sales and marketing expenditures directly relates to our DigiLIBE market launch actions during 2010, which include; establishment of regional and national reseller processes and agreements and retaining a public relations and industry trade group to create market and industry awareness through product promotion within the industry analyst community, trade publications, and target market segments.

Our general and administrative expenses were reduced 39% from $1,978,671 incurred during the nine months ended September 30, 2010 compared to $1,211,085 for the nine months ending September 30, 2011. The improvement is attributable to our conscious effort to reduce costs, streamline administration and contain executive salaries. The business restructuring undertaken midway through 2010 resulted in targeted efforts to reduce general overhead expenses through personnel realignment to priorities and goals, vendor contract negotiations, stock based compensation alternatives, insurance costs and a daily/weekly focus on expenditures between the CEO and CFO.

The decrease of $1,750,638 in interest expense between the comparative nine months ended September 30, 2011 and September 30, 2010 is attributed to the conversion of a substantial number of convertible notes under the terms of the 2010 Incentive Offer for which we are no longer required to accrue interest. The loss on extinguishment of debt results primarily from the conversion of secured convertible notes into the Company Series A Preferred Convertible Stock Company’s incurred under the terms of the Company's Incentive Offer that closed on June 30, 2010.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements during 2011 and 2010.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are also designed to accumulate and communicate information to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Accordingly, management must apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We conducted our evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on their review of our disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are not effective in providing reasonable assurance that information required to be disclosed by us in the reports we file under the Exchange Act were recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules, regulations and forms. In particular, we have identified the following material weakness in our disclosure controls:

(a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. As a result, there is a lack of monitoring of the reporting process and there is a reasonable possibility will not be detected or made known to permit us to report on a timely basis.

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Changes in internal control over financial reporting

Our management, with the participation of our chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On June 10, 2011, the Company, its former President/CEO and one of the Company's financial agents, were made a party to a lawsuit initiated by one of its preferred stockholders, P&H Family Limited Partnership, seeking recovery of its 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

As of November 15, 2011, the Company had $177,233 of debt and accrued interest outstanding from the $5.5 million offering and $31,475 of debt and accrued interest outstanding from the $750,000 secured offering. This debt is presently due and payable.

Item 6. Exhibits

We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

	Digitiliti, Inc.
Date: November 15, 2011	By:	/s/ Jack B. Scheetz
		Jack B. Scheetz, Interim President, CEO (Principal Executive Officer)
Date: November 15, 2011	By:	/s/ William McDonald
		William McDonald, CFO (Principal Accounting Officer)

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INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
31.1	302 Certification of Interim CEO, Jack B. Scheetz
31.2	302 Certification of CFO, William McDonald
32.1	906 Certification
10.1	Form of Convertible Promissory Note and Warrant Purchase Agreement dated as of February 28, 2011 (Incorporated by reference to Exhibit 10.1 of the Form 8-K filed on September 22, 2011).
10.2	Form of Secured Convertible Promissory Note dated as of February 28, 2011 (Incorporated by reference to Exhibit 10.2 of the Form 8-K filed on September 22, 2011).
10.3	Form of Security Agreement (Incorporated by reference to Exhibit 10.3 of the Form 8-K filed on September 22, 2011).
10.4	Form of Warrant Agreement (Incorporated by reference to Exhibit 10.4 of the Form 8-K filed on September 22, 2011).
10.5	Form of Severance Agreement between Digitiliti and Ehssan Taghizadeh dated June 29, 2011 (Incorporated by reference to Exhibit 10.5 of the Form 8-K filed on September 22, 2011).
10.6	Form of Employment Agreement between Digitiliti and Jack B. Scheetz (Incorporated by reference to Exhibit 10.6 of the Form 8-K filed on September 22, 2011).
101.0	XBRL Disclosure

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EX-10.1

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DIGITILITI, INC.

JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE AND WARRANT PURCHASE AGREEMENT

THIS CONVERTIBLE PROMISSORY NOTE AND WARRANT PURCHASE AGREEMENT (this “Agreement”) is made as of September __, 2011, by and among Digitiliti, Inc., a Delaware corporation (the “Company”), and the investors listed on Exhibit A, including any investors who later become party to this Agreement in connection with an investment in the Second Tranche, as defined below (each, an “Investor” and collectively, the “Investors”).

The parties hereby agree as follows:

1. Definitions.

1.“Accredited Investor” is as defined by Rule 501 of Regulation D promulgated under the Securities Act.

2.“Bylaws” means the bylaws of the Company as in effect as of the date hereof.

3.“Certificate of Incorporation” means the Certificate of Incorporation of the Company as in effect as of the date hereof.

4.“Commission” means the U.S. Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act.

5.“Common Stock” means Common Stock, par value $0.001 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted.

6.“Governmental Authority” means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

7. “Majority Noteholders” means holders of more than 50% in principal amount of the outstanding Notes.

8.“Note Securities” means the Common Stock issuable upon conversion of the Notes.

9.“Person” means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.

10.“Requirement of Law” means, as to any Person, any law, statute, treaty, rule, regulation, license or franchise or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein.

11.“Security Agreement” means the Security Agreement by and between the Company, the Investors and the Collateral Agent dated as of the date hereof and attached hereto as Exhibit D.

12.“Securities” means the Notes, Warrants, Note Securities and Warrant Securities.

13.“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.

14.“Transaction Documents” means collectively, this Agreement, the Notes, the Warrants and the Security Agreement.

15. “Warrant Securities” means the Common Stock issuable upon exercise of the Warrants.

2.Purchase and Sale of Notes and Warrants.

1.Authorization and Sale of Notes and Warrants.

(a)Notes. The Company has authorized and agreed to, subject to the terms and conditions herein, the issuance and sale to the Investors of Junior Secured Convertible Promissory Notes in the form attached hereto as

Exhibit B in aggregate principal amount of up to $1,500,000 at par (collectively referred to as the “Notes” and individually as a “Note”.) The repayment of the Notes will be secured by a security interest in all of the Company's assets pursuant to the Security Agreement; provided, however, each Investor hereby agrees and acknowledges that the security interest granted to the Investors securing repayment of the Notes is expressly subordinate to the secured debt as set forth under Schedule 2.1.

(b)Warrants. The Company has authorized the issuance and sale to each Investor five-year warrants in the form attached hereto as Exhibit C to purchase that number of shares of Common Stock equal to 10% of the principal amount of such Investor's Notes divided by the exercise price of $0.06 per share (collectively referred to as the “Warrants” and individually as a “Warrant”).

(c)First Tranche. Subject to the terms and conditions of this Agreement, the Investors agree that they will purchase, and the Company will sell, Notes in an aggregate principal amount of $500,000 (“Initial Investment”) (together with related Warrants) at the first Closing (“First Tranche”). The Investors further agree that Accredited Investors who have purchased securities from the Company since May 8, 2011 (“Securities”) shall have the right to convert the Securities, up to an aggregate purchase price of $100,000, into the same Securities to be sold pursuant to this Agreement and on the same terms at the first Closing; however, the purchase price of the Securities converted shall not be counted towards reaching the Initial Investment.

(d)Second Tranche. Subject to the terms and conditions of this Agreement, including the conditions set forth in Section 5.2 below, the Investors agree that they or their assigns will purchase, and the Company will sell, additional Notes in a minimum aggregate principal amount of $500,000 (“Minimum”) up to a maximum of $1,000,000 (“Maximum”) (together with related Warrants) at a second Closing (“Second Tranche”).

(e)Purchase Price. The purchase price of a Note and Warrant shall in the aggregate be equal to the principal amount of the Note. Subject to the terms and conditions of this Agreement, each Investor agrees, severally but not jointly, to pay the Company at the Closing of the First Tranche the purchase price for such Investor's Note and Warrant in the amount set forth opposite the Investor's name on Exhibit A in the column headed “Total Purchase Price.” The Company agrees to sell and issue to each Investor at the Closing of the First Tranche a Note and Warrant in the amounts set forth opposite the Investor's name on Exhibit A. The amount of the Note and Warrant to be sold to each Investor at the Closing of the Second Tranche shall be determined at such Closing.

2.Closing. The closings of the purchases and sales of the Notes and Warrants (collectively referred to as the “Closings” and individually as a “Closing”) ) shall take place at the offices of Winthrop & Weinstine, P.A., 225 South Sixth Street, Suite 3500, Minneapolis, Minnesota 55402-4629, by an exchange of executed counterpart copies of this Agreement, other Transaction Documents and the other closing documents. At a Closing, the Company shall deliver to each Investor a Note and Warrant as well as an executed original of the Security Agreement and this Agreement and each Investor will deliver an executed original of this Agreement and any other closing documents and will pay the purchase price for the Note and the Warrant to the Company in immediately available funds.

3.Representations and Warranties of the Company. The Company represents and warrants to the Investors as follows:

1.Corporate Existence and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, and has the corporate power and authority to execute, deliver, and perform its obligations under each of the Transaction Documents except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies and except as rights to indemnification and to contribution may be limited by federal or state securities law. The Company is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect.

2.Authorization; No Contravention. Other than as set forth under Schedule 3.2, the execution, delivery and performance by the Company of each of the Transaction Documents and the transactions contemplated thereby, including, without limitation, the sale, issuance and delivery of the Securities, have been duly authorized by all necessary corporate action of the Company, do not contravene the terms of the Certificate of Incorporation or the Bylaws, or any amendment thereof, do not violate, conflict with or result in any breach or contravention of, or the creation of any lien, mortgage, security interest, or similar encumbrance under, any contractual obligation of the Company, or any

Requirement of Law applicable to the Company, and do not violate any judgment, injunction, writ, award, decree or order of any nature (collectively, “Orders”) of any Governmental Authority against, or binding upon the Company. The Company has not previously entered into any contractual obligation which is currently in effect or by which it is currently bound, granting any rights to any Person which are inconsistent with the rights to be granted by the Company in any of the Transaction Documents.

3.Government Authorization; Third-Party Consents. Other than as set forth under Schedule 3.2, customary federal and state filings necessary in connection with the claiming of exemptions from registration of the issuance of the Securities contemplated hereby, and except as otherwise set forth in the Transaction Documents, no approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirement of Law, or any contractual obligation of the Company, and no lapse of a waiting period under a Requirement of Law, or any contractual obligation of the Company, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the sale, issuance and delivery of the Securities) by, or enforcement against the Company, of any of the Transaction Documents.

4.Binding Effect. Each of the Transaction Documents has been duly authorized, executed, and delivered by the Company and constitutes the legal, valid and binding obligations of the Company enforceable against the Company in accordance with its terms.

5.Litigation. Except as set forth under Schedule 3.5, there are no material actions, suits, proceedings, claims, complaints, disputes, arbitrations or investigations pending or, to the knowledge of the Company, threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company. No Order has been issued by any court or other Governmental Authority against the Company purporting to enjoin or restrain the execution, delivery or performance of any of the Transaction.

6.No Defaults. Except as set forth on Schedule 3.6 hereof, the Company is not in material violation or breach of, or in material default under any note, indenture, mortgage, lease, contract, purchase order or other instrument, document or agreement to which the Company is a party or by which it or any of its property is bound or affected or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body which violation, breach or default would have a material adverse effect on the financial condition, results of operations, assets, liabilities, business or prospects of the Company, and to the Company's knowledge, except as set forth on Schedule 3.6 hereof ,there exists no condition, event or act which after notice, lapse of time, or both, may constitute a material violation or breach of, or a material default under, any of the foregoing which violation, breach or default would have a material adverse effect on the financial condition, results of operations, assets, liabilities, business or prospects of the Company.

7.Taxes. Except as set forth on Schedule 3.7 hereof, there are no federal, state, county, local or foreign taxes due and payable by the Company which have not been timely paid; and there are no accrued and unpaid federal, state, country, local or foreign taxes of the Company which are due, whether or not assessed or disputed. There have been no examinations or audits of any tax returns or reports by any applicable federal, state, local or foreign governmental agency. Except as set forth on Schedule 3.7 hereof, the Company has duly and timely filed all federal, state, county, local and foreign tax returns required to have been filed by it and there are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.

8.No Liens or Encumbrances. Other than as set forth on Schedule 3.8, the property and assets that the Company owns are free and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets.

9.SEC Reports. Except for an amendment to the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 to include information under Part III, the Company has timely filed all forms, reports and documents required to be filed by the Company with the Commission since January 1, 2010.

10.Compliance with Laws. The Company has, to its knowledge, complied in all material respects with, is not in material violation of, and has not received any written notices of material violation with respect to, any Requirement of Law with respect to the conduct of its business, or the ownership or operation of its assets or properties.

11.Private Offering. No form of general solicitation or general advertising was used by the Company or its representatives in connection with the offer or sale of the Securities. Assuming that the representations of the Investors set forth in Section 4 hereof are true, no registration of the Securities, pursuant to the provisions of the Securities Act or any state securities or “blue sky” laws, will be required by the offer, sale or issuance of the Securities.

The Company agrees that neither it, nor anyone acting on its behalf, shall offer to sell the Securities or any other security of the Company so as to require the registration of the Securities pursuant to the provisions of the Securities Act or any state securities or “blue sky” laws, unless such Securities or other security is so registered.

12.Broker's, Finder's or Similar Fees. As of the date of the Closing, there are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any action taken by any such Person.

4.Representations and Warranties of the Investors. Each Investor, severally and not jointly with any other Investor, hereby represents and warrants to the Company that:

1.Existence and Power. The Investor has the requisite power and authority to execute, deliver and perform its obligations under each of the Transaction Documents to which it is a party.

2.Accredited Investor Status. The Investor is an Accredited Investor and is a resident of the state or other jurisdiction set forth opposite such Investor's name on the Exhibit A. The Investors acknowledge and agree that the offer and sale of the Securities under this Agreement are solely to Accredited Investors, and that each Investor must be an Accredited Investor in order to purchase the Securities under this Agreement. The Investors further acknowledge that the Company is relying on Investors' representations under this section in order to rely on certain securities registration exemptions under the Securities Act or any state securities laws.

3.Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or commissions payable by the Investor in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Investor or any action taken by the Investor as set forth on Schedule 4.3 hereof; provided, however, that the investors will pay consulting fees to certain individuals identified in Section 9(b) below.

4.Investment Intent. The Investor hereby confirms that the Securities to be acquired by the Investor will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part hereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not presently have any contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Securities. The Investor has not been formed for the specific purpose of acquiring the Securities.

5.Disclosure of Information. The Investor has been given access to full and complete information regarding the Company, including information filed with the SEC and made public on EDGAR, specifically the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2010, and has had an opportunity to discuss the Company's business, management, financial affairs, and the terms and conditions of the offering of the Notes and Warrants with the Company's management and has had an opportunity to inspect the Company's facilities, and the Investor has utilized such access to the Investor's satisfaction.

6.Speculative Securities. The Investor understands that in investment in the Securities is highly speculative and involves a high degree of risk. The Investor acknowledges that the Company may not have sufficient financial resources on the date of maturity to repay the Notes. The Investor believes the investment is suitable for Investor based on Investor's investment objectives and financial needs. The Investor has adequate means for providing for Investor's current financial needs and personal contingencies and has no need for liquidity of investment with respect to the Securities. The Investor can bear the economic risk of an investment in the Securities for an indefinite period of time and can afford a complete loss of such investment.

7.Restricted Securities. The Investor understands that the Securities have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor's representations as expressed in this Agreement. The Investor understands that the Securities are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Investor must hold the Securities indefinitely unless they are registered with the Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Investor acknowledges that the Company has no obligation to register or qualify the Securities for resale. The Investor further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements, including but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Investor's control, and which the Company is under no obligation and may not be able to satisfy.

8.No Public Market. The Investor understands that a very limited public market exists for the Company's

Common Stock, but no market exists for any other securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. Accordingly, Investor understands that Investor must hold the Securities indefinitely and may never be able to resell them for their original purchase price, or at all, and thus may lose Investor's entire investment in the Company.

9.Legends. The Investor understands that the Securities and any securities issued in respect of or exchange for the Securities may bear one or both of the following legends:

(a) THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

(b) Any legend required by the blue sky laws of any state to the extent such laws are applicable to the Securities represented by the certificate bearing such legend.

5. Conditions of Closing.

1.Conditions of Investors' Obligations at Closing of the First Tranche. The Investors' obligations at Closing of the First Tranche will be contingent upon satisfaction or waiver of the following conditions:

(a)No Material Adverse Change. The Investors shall have completed their due diligence review, including a legal and budget review, of the Company and its business to the Investors' satisfaction (“Review”), and there shall have been no material adverse change in the Company's financial condition or business operations since the date of this Agreement.

(b)Employment Matters. Concurrent with the first Closing:

(i)The employment of Ehssan Taghizadeh as the Company's President and Chief Executive Officer shall be terminated, and the Company and Mr. Taghizadeh shall both execute a separation agreement, the form of which is attached hereto as Exhibit E (“Separation Agreement”). Mr. Taghizadeh shall also resign as a director of the Company, effective as of the date of the Closing. Amounts owed by the Company to Mr. Taghizadeh under the Separation Agreement shall be paid to Mr. Taghizadeh in immediately available funds as specified in Exhibit B to the Separation Agreement, including as to the second payment the right to either: (a) convert the amount into the same Securities to be sold pursuant to this Agreement and on the same terms (“Payment Conversion”) or (b) receive the amount in cash. The amount of Securities issued upon any Payment Conversion shall not be counted towards reaching the Minimum or the Maximum for the Second Tranche. Amounts owed to Mr. Taghizadeh in connection with unsecured loans in the principal amount of $5,113.90, including accrued but unpaid interest thereon, shall be paid to Mr. Taghizadeh from the proceeds of the First Tranche in immediately available funds. In addition, to the extent not previously issued, the Company shall issue certificates or other documentation evidencing stock, options, warrants and other rights to acquire stock of the Company previously granted to Mr. Taghizadeh at the Closing of the First Tranche.

(ii)The Company shall appoint Jack Scheetz as the Company's interim President and Chief Executive Officer to serve until the Company has identified and retained a President and Chief Executive Officer, and the Company and Mr. Scheetz shall enter into a compensation arrangement regarding Mr. Scheetz's stock/option based compensation, as acceptable to Investors, which acceptance shall not be unreasonably withheld. The Board shall appoint Mr. Scheetz as a director to fill the vacancy created by Mr. Taghizadeh's resignation from the Board and to serve until the earlier of the unexpired term or the hiring of a President and Chief Executive Officer (at which time, Mr. Scheetz shall resign from the Board and the President and Chief Executive Officer shall fill such newly created vacancy if requested by the Majority Noteholders), unless terminated earlier upon resignation, death or removal by the Board for Good Cause. For the purposes of this Agreement, “Good Cause” shall mean: (A) engaging in acts of dishonesty at the expense of the Company, including but not limited to theft or embezzlement; or (B) engaging in conduct constituting a felony.

(iii)Other than as contemplated herein, and unless agreed to by the Investors, the Company has not entered into any new employment contract or other material obligation or commitment of the Company since the date of this Agreement.

(c)Secretary's Certificate. At the Closing, the Company shall deliver to the Investors a certificate, in form and substance satisfactory to the Investors, signed by the Secretary of the Company, certifying that the attached copies of the Certificate of Incorporation, the Bylaws and resolutions of the Board of Directors of the Company approving each of the Transaction Documents and the transactions contemplated thereby, are all true, complete and correct and remain unamended and in full force and effect.

(d)Documents. At the Closing, the Company shall have provided to the Investors true, complete, and correct copies of such documents as the Investors may have reasonably requested in connection with or relating to the sale of the Notes and Warrants, the other Transaction Documents, and the transactions contemplated hereby and thereby, all in form and substance reasonably satisfactory to the Investors.

(e)Consents and Approvals. At the Closing, except for customary federal and state filings necessary in connection with the claiming of exemptions for the issuance of the Securities contemplated hereby, which filings will be made at or promptly following the date of this Agreement, all consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons required in respect of all Requirements of Law which are necessary in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement and each of the other Transaction Documents shall have been obtained and be in full force and effect.

2.Conditions of Investors' Obligations at Closing of the Second Tranche. The Investors' obligations at Closing of the Second Tranche will be contingent upon satisfaction or a written waiver by the Majority Noteholders of the following conditions:

(a)New President and Chief Executive Officer. The Company has identified and retained a President and Chief Executive Officer acceptable to the Majority Noteholders; and before or on the Closing of the First Tranche, the Company shall have provided evidence that it has entered into the Separation Agreement with Mr. Taghizadeh.

(b)Secretary's Certificate. At the Closing, the Company shall deliver to the Investors a certificate, in form and substance satisfactory to the Investors, signed by the Secretary of the Company, certifying that the copies of the Certificate of Incorporation, the Bylaws and resolutions of the Board of Directors of the Company approving each of the Transaction Documents and the transactions contemplated thereby previously provided under Section 5.1(c) at the Closing of the First Tranche continue to be true, complete and correct and remain unamended and in full force and effect (unless such amendments have been consented to by the Investors, which shall not be unreasonably withheld).

(c)Documents. At the Closing, the Company shall have provided to the Investors true, complete, and correct copies of such documents as the Investors may have reasonably requested in connection with or relating to the sale of the Notes and Warrants, the other Transaction Documents, and the transactions contemplated hereby and thereby, all in form and substance reasonably satisfactory to the Investors.

(d)Consents and Approvals. Except for customary federal and state filings necessary in connection with the claiming of exemptions for the issuance of the Securities contemplated hereby, which filings will be made at or following the appropriate Closing, all consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons required in respect of the Requirements of Law which are necessary in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement and each of the other Transaction Documents shall have been obtained and be in full force and effect.

3.Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor:

(a)Payment of Purchase Price. The Investor shall pay to the Company the applicable aggregate purchase price of the Notes and Warrants to be purchased at the appropriate Closing.

(b)Separation Agreement. Before or on the Closing of the First Tranche, the Company shall have received an executed Separation Agreement from Mr. Taghizadeh.

(c)Consents and Approvals. Except for customary federal and state filings necessary in connection with the claiming of exemptions for the issuance of the Securities contemplated hereby, which filings will be made at or following the appropriate Closing, all authorizations, approvals or permits, if any, of any Governmental

Authorities and other Persons required in respect of the Requirements of Law which are necessary or required in connection with the lawful issuance and sale of the Securities at Closing pursuant to this Agreement shall be duly obtained and effective as of the Closing.

6.Rights of A Certain Board Member. Concurrent with the Closing of the Second Tranche, Kedar Belhe, an existing director of the Company who has one or more outstanding loans to the Company in the aggregate principal amount of $50,000, shall either: (a) convert the principal balance of the loan, plus any accrued but unpaid interest thereon, into the same Securities to be sold pursuant to this Agreement and on the same terms (“LoanConversion”), or (b) receive repayment of the loan in full. If Mr. Belhe chooses to receive repayment, the Company shall repay such Loan from the proceeds of the Closing of the Second Tranche. The amount of Securities issued upon any Loan Conversions shall not be counted towards reaching the Minimum or the Maximum for the Second Tranche.

7.Covenants of the Company.

(a)Director Nominee. For as long as the Notes remain outstanding, the Investors shall have the right to nominate one director to the Company's Board (“Investor Nominee”). The Board, subject to its fiduciary responsibilities, shall appoint such Investor Nominee as a director to fill the vacancy created by Roy Bauer's resignation from the Board and to serve the unexpired term, unless terminated earlier upon resignation, death or removal by the Board. The Board, subject to its fiduciary responsibilities, shall include the Investor Nominee (i) on the Corporate Governance and Nominating Committee, and (ii) on the slate of directors nominated by the Board to be elected by the shareholders at the Shareholder Meeting (as defined under Section 7(c)) if the Investor Nominee is designated by the Investors no later than by July 15, 2011 or within a reasonable time in order to provide the Company sufficient time to include the Investor Nominee in the applicable proxy statement in compliance with applicable laws. If the Investor Nominee resigns, dies or is removed by the Board before the expiration of his or her term, the Board, subject to its fiduciary responsibilities, shall fill such board vacancy with another Investor Nominee to serve the remaining unexpired term.

(b)Search for a President and Chief Executive Officer. After the Closing of the First Tranche, the Board will form a special committee tasked with the duty to locate and present to the Board a viable candidate for the position of President and Chief Executive Officer of the Company (“Candidate”). Such special committee may consist of up to three, but shall not exceed three, board members, which members shall include Mr. Scheetz and the Investor Nominee. The Board, subject to its fiduciary responsibilities, shall appoint the Candidate nominated by the special committee as the President and Chief Executive Officer.

(c)Shareholder Meeting. Upon the Closing of the Second Tranche and the receipt of at least $1,000,000 from the Closings of the First and Second Tranche, the Board will set a date for the next annual shareholder meeting or special meeting involving the election of directors (“Shareholder Meeting”), but in no event shall the date of the Shareholder Meeting be later than 15, 2011 unless consented to by the Majority Noteholders, which consent shall not be unreasonably withheld in light of the Company's obligation to comply with applicable laws and its bylaws regarding holding such Shareholder Meeting. In regards to the Shareholder Meeting, the Board, subject to its fiduciary responsibilities, shall include in the slate of director nominees the Investor Nominee and either Mr. Scheetz or the President as provided under Section 5.1(b)(ii).

(d)Restrictions. Subject to the final sentence of this Section 7(d), for as long as the Notes remain outstanding, the Company will not, without Board approval and the written consent of the Majority Noteholders, either directly or indirectly, by amendment, merger, consolidation or otherwise, take any of the following actions:

(i)Sell, liquidate, dissolve or wind‑up the affairs of the Company, or other liquidation event.

(ii)Amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws.

(iii)Create or authorize the creation of any new class of stock or other security convertible into or exercisable for any equity security.

(iv)Increase the number of Notes or common stock issuable upon conversion of Notes (other than as contemplated under the Transaction Documents).

(v)Purchase, redeem or pay any dividend on any capital stock prior to the Notes or common stock issued upon conversion of Notes, except as otherwise required by existing agreements or contractual obligations of the Company.

(vi)Create or authorize the creation of any new debt security, including equipment leases and/or bank lines of credit, other than as indicated on Schedule 7(d)(vi).

(vii)Increase or decrease the size of the Board of Directors.

Notwithstanding the foregoing, the restrictions set forth in this Section 7(d) shall lapse on October 17, 2011 if, but only if, the Closing of the Second Tranche has not occurred as of the close of business on such date.

(e)Offer for the Company. For as long as the Notes remain outstanding, if there is an offer for the Company, including a sale or merger transaction, or a tender offer for the Company's common stock (collectively an “Offer”), and the holders of at least seventy-five percent (75%) of the Notes desire to have the Offer accepted, the Board, subject to the Board's fiduciary duties, shall use its reasonable efforts to obtain shareholder approval of the Offer at a shareholder meeting if shareholder approval is required, and/or recommend the Offer to its shareholders.

(f)D & O Insurance Policy. Promptly after the Closing of the First Tranche, but in no event later than 10 days after said Closing, the Company will furnish Investors, Mr. Scheetz and the Investor Nominee with a copy of the Company's directors and officers insurance policy. If the Investor Nominee is designated after the Closing of the First Tranche, the Company shall provide the Investor Nominee a copy of the Company's directors and officers insurance policy promptly after becoming a director of the Company, but in no event later than 10 days after such date.

8.Indemnification.

(a)In consideration of the Investors' execution and delivery of this Agreement, the Company agrees to indemnify and hold harmless each Investor (the “Indemnified Parties”) from and against any and all losses, damages, liabilities, obligations, costs or expenses (any one such item being herein called a “Loss” and all such items being herein collectively called “Losses”) which are caused by or arise out of any material breach or default in the performance by the Company of any covenant or agreement of the Company contained in this Agreement or any material breach of a representation or warranty made by the Company in this Agreement, except when such Losses arise as a result of the grossly negligent or intentional actions or omissions of any Investor or Investor's representative. Indemnification by the Company under this Agreement shall be limited to the actual amount invested pursuant to this Agreement.

(b)In consideration of the Company's execution and delivery of this Agreement, the Investors agree, severally but not jointly, to indemnify and hold harmless the Company and its officers, directors and employees (the “Indemnified Parties”) from and against any and all Losses which are caused by or arise out of any material breach or default in the performance by the Investors of any covenant or agreement of the Investors contained in this Agreement or any material breach of a representation or warranty made by the Investors in this Agreement, except when such Losses arise as a result of the grossly negligent or intentional actions or omissions of the Company. Indemnification by the Investors under this Agreement shall be limited to the actual amount invested pursuant to this Agreement.

9.Miscellaneous.

(a)Survival. The warranties and representations of the Company and the Investors and the indemnification obligations of each party contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closings and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company.

(b)Fees and Expenses. The Company shall pay the reasonable and accountable fees and expenses of the Investors in connection with this financing up to, but not exceeding, $40,000 in the aggregate for all Investors (which amount includes fees and expenses of James P. Breseth, Michael S. Kelly and David Dalvey) (“Fees and Expenses”). The Fees and Expenses in connection with Messrs. Breseth and Kelly shall be payable 50% upon the Closing of the First Tranche and 50% upon the Closing of the Second Tranche. The other Fees and Expenses are payable upon the Closing of the First Tranche. In addition, after the Closing of the First Tranche but no later than the Closing of the Second Tranche, the Company shall pay the reasonable and accountable fees and expenses of Mr. Taghizadeh in connection with the Separation Agreement up to, but not exceeding, $7,500 in the aggregate and are payable no later than the Closing of the Second Tranche.

(c)Investor Action. Unless otherwise provided in this Agreement, any consent, approval or action required to be taken by the Investors in this Agreement shall mean by the Majority Noteholders.

(d)Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of the Notes). Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The Investors will have the right to assign all or any portion of their rights and delegate any corresponding duties under this Agreement

(except that any assignment of the rights to purchase and hold Notes under this Agreement may only be to parties who are “accredited investors” as defined under Rule 501 promulgated under the Securities Act).

(e)Governing Law. This Agreement shall be governed by and construed under the substantive laws of the State of Minnesota, without regard to the conflicts of law provisions thereof, as applied to agreements among Minnesota residents entered into and to be performed entirely within Minnesota.

(f)Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

(g)Notices. All notices, requests, demands, approvals, consents, and other communications which are required or may be given hereunder shall be (i) in writing; (ii) addressed to the parties as set forth below, unless a party notifies the others of a change of address (in which case the latest noticed address shall be used); and (iii) deemed to have been duly given (C) on the date given by hand delivery or facsimile, or (B) the day after deposit with a recognized overnight courier; provided that if the actual or deemed notice date is not a business day, the date of actual or deemed notice shall be the next business day thereafter:

If to the Investors, to the addresses set forth for the Investors on Exhibit A, with a copy to:

Maslon, Edelman, Borman & Brand, LLP

3300 Wells Fargo Center

90 South Seventh Street

Minneapolis, MN 55402

Attn: Shawn McIntee and Paul Chestovich

Fax No.: (612) 642-8316 and (612) 642-8305

If to the Company:

Digitiliti, Inc.

266 East 7th Street

Saint Paul, MN 55101

Attn: Chief Executive Officer

Fax No.: (651) 925-3232

with a copy to:

Winthrop & Weinstine, P.A.

Capella Tower, Suite 3500

225 South Sixth Street

Minneapolis, MN 55402

Attn: Joy S. Newborg, Esq.

Fax No.: (612) 604-6713

(h)Amendments and Waivers. Any term of this Agreement or any of the other Transaction Documents may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Majority Noteholders. Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any Securities purchased under this Agreement at the time outstanding and each future holder of all such Securities and the Company.

(i)Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

(j)Entire Agreement. This Agreement, the Transaction Documents and other documents referred to herein constitute the entire agreement among the parties with respect to the matters addressed herein and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth therein.

(k)Counterparts. This Agreement may be executed in two or more counterparts, each of which

shall be deemed an original, but all of which together shall constitute one and the same instrument.

(l)Acknowledgement Among Investors. Each Investor acknowledges, as to itself, that such Investor is not relying upon any person, firm or corporation, other than the written representation and warranties of the Company and its officers, in making its investment or decision to invest in the Company. Each Investor agrees that no other Investor (or their respective controlling persons, officers, directors, partners, agents or employees) shall be liable for any action taken or omitted to be taken in connection with the sale of the Notes and Warrants.

(m)Appointment of Representative under Escrow Agreement. The Investors hereby appoint Michael S. Kelly as “Investor Representative” under the Escrow Agreement to be executed and delivered in connection with each Closing; provided, however, that the Investors may remove and replace such Investor Representative after the first Closing upon the affirmative vote of the Majority Noteholders.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, the parties have executed this Junior Secured Convertible Promissory Note and Warrant Purchase Agreement as of the date first above written.

THE COMPANY:

DIGITILITI, INC.

a Delaware corporation

By:__________________________

Name:__________________________

Its:__________________________

[COMPANY SIGNATURE PAGE TO JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE

AND WARRANT PURCHASE AGREEMENT]

[MULTIPLE INVESTOR SIGNATURE PAGES FOLLOW]

DIGITILITI, INC.

INVESTOR SIGNATURE PAGE TO

JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE AND WARRANT PURCHASE AGREEMENT

The undersigned (the “Investor”) has read and understands the Junior Secured Convertible Promissory Note and Warrant Purchase Agreement between Digitiliti, Inc. (the “Company”) and certain investors, dated September ___, 2011 (the “Purchase Agreement”). The Investor wishes to become a party to the Purchase Agreement and purchase $_______________ of Notes pursuant to the terms thereof. Upon the Investor signing in the space provided below and the Company's acceptance hereof, the Investor shall be a party to the Purchase Agreement.

INDIVIDUAL INVESTOR:

Signature: _____________________________

Name:

Address:

ENTITY INVESTOR:

_______________________________________

Signature:

Name:

Title:

Address:

EXHIBIT A

SCHEDULE OF INVESTORS

EXHIBIT B

FORM OF JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE

EXHIBIT C

FORM OF WARRANT

EXHIBIT D

FORM OF SECURITY AGREEMENT

EXHIBIT E

SEPARATION AGREEMENT

6071866v8

EX-10.2

NEITHER THIS NOTE NOR SECURITIES INTO WHICH THIS NOTE MAY BE CONVERTED HAS NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. NEITHER THIS NOTE NOR SECURITIES INTO WHICH THIS NOTE MAY BE CONVERTED MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

DIGITILITI, INC.

JUNIOR SECURED CONVERTIBLE PROMISSORY NOTE

$___________ , 2011

FOR VALUE RECEIVED, Digitiliti, Inc., a Delaware corporation (the “Company”), promises to pay to the order of __________________, a [insert state of residence /insert entity form, organized and existing under the laws of ________] or [his/her/its] successors and assigns (the “Holder”), at __________________________, or at such other place designated at any time by the Holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum $__________, or so much thereof as may be outstanding from time to time, together with interest thereon as set forth herein. This Junior Secured Convertible Promissory Note (this “Note”) is one of several notes (collectively, the “Notes”) being issued by the Company pursuant to that certain Junior Secured Convertible Promissory Note and Warrant Purchase Agreement dated as of June __, 2011 (the “Purchase Agreement”). Each of the Notes shall be identical to the other Notes except with respect to the date of issuance, principal amount, the name of and other information regarding the holder. Capitalized terms used, but not otherwise defined herein, shall have the meanings given to them in the Purchase Agreement.

1. Definitions. For purposes of this Note, the following terms shall have the definitions set forth below:

(a)“Majority Holders” means the holders of more than 50% in principal amount of the outstanding Notes.

(b)“Maturity Date” means twenty-four (24) months after the Closing of the First Tranche under the Purchase Agreement, as such date may be extended pursuant to Section 2 hereof.

(c)“Pro Rata Portion” with respect to a Holder, means such Holder's percentage holding of the aggregate principal amount of all outstanding Notes.

2.Maturity. The entire outstanding principal balance of this Note, together with all accrued and unpaid interest thereon (the “Outstanding Balance”), shall be due and payable on the Maturity Date. The Company may extend the Maturity Date of all outstanding Notes (but not less than all Notes) up to six additional months.

3.Interest. This Note shall bear interest on the outstanding principal amount at the rate of 8% per annum simple interest until the Note is paid in full. Accrued interest shall be due and payable on the Maturity Date, as the same may be extended by the Company.

4.Security Interest. Except as set forth in paragraph 5, this Note is secured by all of the assets of the Company pursuant to the terms of the Security Agreement. The payment of this Note shall rank equal in right of payment to each of the other Notes.

5.Subordination. The Holder hereby agrees and acknowledges that the security interest granted to the Holder securing repayment of this Note is expressly subordinate to all secured notes previously issued by the Company before the date of the Purchase Agreement, estimated to be approximately $1,400,000 in principal amount.

6.Prepayment. This Note may be prepaid without penalty by the Company at any time with ten days prior written notice to the Holder. Any cash payments made by the Company with regard to any of the Notes will be made simultaneously with regard to all of the Notes, in an amount prorated among the Notes in proportion to the outstanding

principal balances of each of the Notes.

7.Conversion.

(a)If the Company, at anytime after the date of the Purchase Agreement, conducts a subsequent equity offering and raises at least $3,000,000 of new capital (“Qualified Round”), the Outstanding Balances on all the Notes shall automatically convert into Common Stock at the per share conversion rate equal to the per share price of the Qualified Round.

(b)At anytime after twelve (12) months of the Closing of the First Tranche and conditioned on the sale of $1,000,000 in aggregate principal amount of all Notes as of the Closing of the Second Tranche, if the holders of at least 60% in principal amount of the outstanding Notes desire to convert their Notes into Common Stock, the holders shall convert all or a portion of the Outstanding Balance of their Notes at the conversion rate equal to $0.06 per share.

(c)After twelve (12) months of the Closing of the First Tranche and conditioned on the sale of $1,000,000 in aggregate principal amount of all Notes as of the Closing of the Second Tranche, the Holder of this Note shall have the right and option to convert all or any portion of the Outstanding Balance under this Note at any time, and from time to time, at the conversion rate equal to $0.06 per share.

(d)Upon any conversion of this Note described in Section 7(a), (b), or (c), the Holder shall immediately surrender this Note (or a portion of this Note, as applicable) in exchange for stock certificates representing the appropriate number of shares of Common Stock, the number of which shall be rounded up to the nearest whole number, such that no fractional shares shall be issued.

(d) Notwithstanding the above, any conversion of the Notes is subject to the Company having a sufficient number of shares of common stock authorized but unissued. Upon the Closing of the Second Tranche, if the Company's Articles of Incorporation does not then authorize a sufficient number of shares of common stock to cover a conversion, the Company shall hold the shareholder meeting as referenced in Section 7(d) of the Purchase Agreement and propose an amendment to the Articles of Incorporation to increase the number of authorized shares by an amount sufficient to cover the conversion of the Notes for approval by the shareholders at such shareholder meeting.

8. Events of Default and Acceleration. Any part or all of the then Outstanding Balance shall become immediately due and payable upon the occurrence of any of the following events of default (each an “Event of Default”):

(a)the Company fails to make the payment of principal or interest of the Note when the same becomes due and payable; or

(b)the Company materially breaches any term of this Note or any term of the other Transaction Documents (as defined in the Purchase Agreement); provided, however, that the Company shall not have fully cured any such material breach within 30 days of written notice from the Majority Holders or representative thereof; or

(c)the Company terminates Jack Scheetz as the Company's interim President and Chief Executive Officer before the permanent President and Chief Executive Officer has been appointed as contemplated in the Purchase Agreement, unless such termination is approved by holders of at least 60% in principal amount of the outstanding Notes; or

(d)the Company shall generally fail to pay, or admit in writing its inability to pay, its debts as they become due; or

(e)the Company shall cease or materially diminish its operation, or apply for, consent to, or acquiesce in the appointment of a trustee, receiver or other custodian for itself or any of its property, or make a general assignment composition, or similar device for the benefit of its creditors; or a trustee, receiver or other custodian shall otherwise be appointed for the Company or any of its assets; an attachment or receivership of assets or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding shall be commenced by or against the Company; or the Company shall take any corporate action to authorize, or in furtherance of, any of the foregoing.

9.Attorneys' Fees. If the principal and interest on this Note is not paid when due, whether or not collection is initiated by the prosecution of any suit, or by any other judicial proceeding, or this Note is placed in the hands of an attorney for collection, the Company shall pay, in addition to all other amounts owing hereunder, all costs expenses and fees, including reasonable hourly attorneys' fees, incurred by the Holder in connection therewith.

10.Waiver and Consent. The Company hereby waives presentment for payment, notice of nonpayment, protest, notice of protest and all other notices, filing of suit and diligence in collecting the amounts due under this Note and agrees that the Holder shall not be required first to initiate any suit or exhaust its remedies against any other person or parties in order to enforce payment of this Note.

11.Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to conflict of laws provisions.

12.Miscellaneous Provisions. This Note shall be binding on the successors and assigns of the Company and inure to the benefit of the Holder, its successors, endorsees and assigns. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. This Note may be changed only by an agreement in writing signed by the Company and the Majority Holders; provided, however, that the principal amount of this Note shall not be modified without the written consent of the Holder.

IN WITNESS WHEREOF the undersigned have executed this Note effective as of the date first above written.

COMPANY:

DIGITILITI, INC.

By: _____

Name: ________________________________

Its: _________________________________

INDIVIDUAL HOLDER:

Signature: ______

Name: _________________________________

ENTITY HOLDER:

By:

Name: ________________________________

Its: _________________________________

[Signature Page to Junior Secured Convertible Promissory Note]

6081420v4

EX-10.3

SECURITY AGREEMENT

This Security Agreement (“Agreement”) is made as of August __, 2011 by and among Digitiliti, Inc., a Delaware corporation (the “Debtor”), and the parties listed on Schedule A (each a “Secured Party”, and collectively the “Secured Parties”), and the Collateral Agent (as defined herein) on behalf of the Secured Parties.

A.The Secured Parties have purchased and the Debtor has issued Junior Secured Convertible Promissory Notes (the “Notes”) pursuant to that certain Junior Secured Convertible Promissory Note and Warrant Purchase Agreement dated as of August __, 2011(the “Purchase Agreement”).

B.Each Note provides that it is secured by a general security interest over all of the assets of the Debtor, as provided in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.Grant of Security Interest. The Debtor, in consideration of the funds advanced under the Notes, hereby grants, and conveys to the Collateral Agent, on behalf of the Secured Parties, a security interest in and to all of the Debtor's existing and future right, title and interest in, to and under the Collateral (as defined in Section 2). This security interest is granted to the Secured Parties to secure (a) the payment of all indebtedness evidenced by the Notes and all renewals, extensions, and modifications of the Notes; (b) the payment of all other sums, with interest thereon, advanced under the terms of this Agreement; and (c) the performance of the agreements and warranties of the Debtor contained in this Agreement, the Notes, the Purchase Agreement, or incorporated in any of these agreements by reference (the “Obligations”). The Secured Parties shall have all of the rights of a secured party under the Uniform Commercial Code of Delaware or any applicable jurisdiction where the Collateral may be located (“UCC”). The Secured Parties' security interest in the Col-lateral shall attach to all such Collateral without further action on the part of the Secured Parties.

2. Collateral. The property subject to the security interest (the “Collateral”) includes all of the Debtor's tangible and intangible property and assets, wherever located and in whatever form, whether now owned or hereafter acquired, including, without limitation, the following:

2.1 All of the Debtor's machinery and equipment (as defined in the UCC), and all substitutions, creations, replacements and additions thereto and all components and auxiliary parts used in connection therewith, including all furniture and fixtures;

2.2 All of the Debtor's accounts, accounts receivable, contract rights, instruments, documents, chattel paper and general intangibles (as such terms are defined in the UCC);

2.3 All forms of obligations owing to the Debtor;

2.4 All tax refunds and tax refund claims;

2.5 All guaranties, security and liens for which the Debtor may hold for the payment or performance of any item of Collateral;

2.6 Letters of credit payable to the Debtor and all proceeds therefrom;

2.7 All rights to goods represented by any item of Collateral, or the sale of which goods gave rise to any item of Collateral;

2.8 the Debtor's good will;

2.9 All of the Debtor's inventory (as defined in the UCC), including all goods, merchandise, materials, raw materials, work in progress, finished goods, now owned or hereinafter acquired and held for sale or

lease or furnished or to be furnished under contracts or service agreements or to be used or consumed in the Debtor's business and all other tangible personal property of the Debtor, wherever located, whether in the Debtor's or some other person's possession, and any materials and supplies of any kind used in connection with the Debtor's business or for packaging or shipping such inventory upon its return to replevy or repossession by the Debtor after sale;

2.10 All instruments of title or documents relating to any item of Collateral;

2.11 All the Debtor's books, records and lists in whatever form maintained related to any item of Collateral;

2.12All patents and applications for a patent, together with all reissues, continuations, divisions, modifications, substitutions and extensions thereof;

2.13 All know-how, proprietary information, all software source and object code whether created or licensed by the Debtor, maskworks, all data that comprises the Debtor's databases;

2.14 All trademarks and copyrights;

2.15 All commercial tort claims;

2.16 Any other property which now or hereafter serves as security for the Obligations;

2.17 All property of the types described in Sections 2.1 through 2.15 or similar thereto, that at any time hereafter may be acquired by the Debtor, including but not limited to all accessions, parts, additions, and replacements; and

2.18All proceeds of any item of Collateral and all proceeds of such proceeds, including (without limitation) all accounts, instruments, chattel paper or other rights to payment, money, insurance proceeds and all refunds of insurance premiums due or to become due under all insurance policies covering the foregoing property and proceeds derived from any condemnation of the Collateral.

3.Perfection of Security Interest. Concurrently with the execution of this Agreement, the Debtor shall deliver to Secured Parties, or their agents, a form or forms of National Financing Statement (Form UCC-1) and such other documentation as may be required or helpful as evidence of the granting and perfection of the security interest in the Collateral granted to the Secured Parties hereunder. The Secured Parties shall, immediately upon execution of this Agreement, cause the financing statement(s) to be filed with the Secretary of State of Delaware.

4.Subordination. Each Secured Party hereby agrees and acknowledges that the security interest granted to the Secured Parties pursuant to this Agreement is expressly subordinate to all secured notes previously issued by the Company before the date of the Purchase Agreement, estimated to be approximately $1,400,000 in principal amount.

5.Removal of Collateral Prohibited. The Debtor shall not permanently remove any Collateral from its premises without the written consent of the Collateral Agent, except that the Debtor may dispose of Collateral in the ordinary course of business.

6.Debtor's Representations, Warranties and Covenants. As long as the Debtor has outstanding Obligations to a Secured Party, the Debtor hereby represents, warrants and covenants with such Secured Party that:

6.1 The Debtor is a corporation duly organized and validly existing under the laws of the State of Delaware, and it will at all times take or cause to be taken all actions as may from time to time be necessary to maintain in good standing, preserve and renew its company existence and rights.

6.2 The Debtor and its officers signing this Agreement have the corporate power and authority to enter into and perform this Agreement and have taken all corporate action necessary to authorize the execution, delivery and performance of this Agreement and any related agreements or documents. This Agreement is a legal, valid and

binding obligation of the Debtor, enforceable in accordance with its terms; and the Debtor's execution, delivery and performance of this Agreement does not conflict with or violate the Debtor's Certificate of Incorporation, bylaws, or any law, regulation, order, judgment, rule or agreement to which the Debtor is a party or by which it is bound.

6.3 Except for the Permitted Liens listed on Exhibit 6.3, all of the Collateral is and shall at all times remain free and clear of any and all liens, claims or encumbrances that are senior to the lien granted by this Agreement.

6.4 Except for inventory sold in the ordinary course of business, the Debtor has and will have good and indefeasible title to, and is and will be the true owner of the Collateral.

6.5 The execution of and performance by the Debtor of all of the terms and provisions contained in this Agreement do not and will not constitute, or would not constitute following any notice or lapse of time, an event of default under any agreement (including any existing loan agreement, promissory note or other loan document) to which the Debtor is now or hereafter becomes a party.

6.6 The Debtor will punctually pay or cause to be paid all payments of principal and interest to become due in respect of the Notes according to the terms thereof.

6.7 The Debtor will keep, at all times, true and complete books of account and financial records in accordance with generally accepted accounting principles.

6.8Within ten days after written notice from the Collateral Agent, the Debtor shall reimburse the Collateral Agent, for all sums expended by the Collateral Agent, in connection with the filing of any third-party claim as to the Collateral or any part thereof which the Collateral Agent may deem reasonably necessary or desirable, or in connection with any action brought by the Collateral Agent, to correct any default or enforce any provision of this Agreement, including reasonable hourly attorneys' fees and expenses and court costs.

6.9 The Debtor will not sell, transfer or encumber the Collateral except in the ordinary course of business.

6.10Except in the ordinary course of business, the Debtor shall not lease or otherwise dispose of, remove, move, relocate or transfer, or permit the removal, movement, relocation or transfer, whether by sale or otherwise, any of the Collateral, and shall keep the Collateral only at its principal place of business, or at any other secured warehouse or location owned or leased by the Debtor, or such other location as shall be used from time to time by the Debtor to temporarily store the Collateral so long as the Collateral remains fully insured, unless and until the Debtor provides Secured Party, with written notice that the Collateral is being moved to such location, specifying the exact address of such location and the exact Collateral to be moved, at least 30 days prior to moving the Collateral to such location.

7.Protection of Secured Party's Security. If an Event of Default, as defined in the Notes, has occurred, or if any action or proceeding is commenced which materially adversely affects the Collateral or title thereto or the interest of the Secured Parties therein, then the Secured Parties, upon the prior written consent of the Collateral Agent, may make such appearance, disburse such sums, and take such action as the Secured Parties deem necessary, in their sole discretion, to protect the Secured Parties' interest, including but not limited to (a) disbursement of reasonable hourly attorneys' fees, (b) entry upon the Debtor's property to make repairs to the Collateral, and (c) procurement of satisfactory insurance that is reasonable under the circumstances. Any amounts disbursed by the Secured Parties pursuant to this Section 7, with interest thereon, shall become additional indebtedness of the Debtor secured by this Agreement. Unless the Debtor and the Collateral Agent agree to other terms of payment, such amounts shall be immediately due and payable, and if the Secured Parties notify the Debtor within five days of such disbursement, all such amounts shall bear interest from the date which is ten days following the date of disbursement at the rate stated in the Notes. Nothing contained in this Section 7 shall require the Secured Parties to incur any expense or take any action.

8.Collateral Agent.

(a)Appointment. The Majority Noteholders may from time to time appoint a collateral agent for the Secured Parties (in such capacity, the “Collateral Agent”) to serve from the date of such appointment until the earliest of resignation, removal of the Collateral Agent by the Majority Noteholders, or termination of this Agreement. Upon ten days written notice to the Debtor, the Majority Noteholders (as such term is defined in the Purchase Agreement) may appoint another Collateral Agent.

(b)Powers and Duties of Collateral Agent. Each Secured Party hereby irrevocably authorizes the Collateral Agent, if any, to take such action and to exercise such powers hereunder as provided herein or as requested in writing by the Majority Noteholders. The Collateral Agent may execute any of its duties hereunder by or through agents or employees and shall be entitled to request and act in reliance upon the advice of counsel concerning all matters pertaining to its duties hereunder and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance therewith. The Collateral Agent may not, without consent of the Majority Noteholders, demand payment of the Notes or foreclose on the Collateral. For the avoidance of doubt and without in any way limiting the rights of the Collateral Agent set forth herein, the Collateral Agent may with consent of the Majority Noteholders subordinate repayment of the Notes and their security interest hereby granted to other obligations of the Debtor.

(c)Indemnity by Secured Parties. Neither the Collateral Agent nor any of its partners, directors, officers, employees, or agents shall be liable or responsible to any Secured Party or to the Debtor for any action taken or omitted to be taken by the Collateral Agent or any other such person hereunder or under any related agreement, instrument or document, nor shall the Collateral Agent or any of its partners, directors, officers, employees, or agents be liable or responsible for: (i) the validity, effectiveness, sufficiency, enforceability or enforcement of the Notes, this Agreement or any instrument or document delivered hereunder or relating hereto; (ii) the title of the Debtor to any of the Collateral or the freedom of any of the Collateral from any prior or other liens or security interests; (iii) the determination, verification or enforcement of the Debtor's compliance with any of the terms and conditions of this Agreement; (iv) the failure by the Debtor to deliver any instrument or document required to be delivered pursuant to the terms hereof; or (v) the receipt, disbursement, waiver, extension or other handling of payments or proceeds made or received with respect to the Collateral, the servicing of the Collateral or the enforcement or the collection of any amounts owing with respect to the Collateral. In the case of this Agreement, the transactions contemplated hereby and any document relating to the Collateral, each of the Secured Parties agrees to pay to the Collateral Agent, on demand, its pro rata share of all fees and all expenses incurred by the Collateral Agent in connection with the operation and enforcement of this Agreement, the Notes or any related agreement to the extent that such fees or expenses have not been paid by the Debtor. In the case of this Agreement and each instrument and document relating to any of the Collateral, each of the Secured Parties and the Debtor hereby agrees to hold the Collateral Agent harmless, and to indemnify the Collateral Agent from and against any and all loss, damage, expense or liability which may be incurred by the Collateral Agent under this Agreement and the transactions contemplated hereby and any related agreement or other instrument or document, as the case may be.

9.Forbearance by Collateral Agent Not a Waiver. Any forbearance by the Collateral Agent in exercising any right or remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver of, or preclude the exercise of, any right or remedy. The acceptance by the Collateral Agent of payment of any sum secured by this Agreement or the Purchase Agreement after the due date of such payment shall not be a waiver of the Secured Parties' right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. No action taken by the Collateral Agent shall waive the Secured Parties' right to accelerate the indebtedness secured by this Agreement and seek such other remedies as are provided by this Agreement, the Purchase Agreement or applicable law.

10.Uniform Commercial Code Security Agreement. This Agreement is intended to be a security agreement pursuant to the UCC for all of the items specified above as part of the Collateral which, under applicable law, may be subject to a security interest pursuant to the UCC, and the Debtor hereby grants the Collateral Agent a security interest in such items. The Debtor agrees that the Secured Parties may file any appropriate document in the appropriate jurisdiction as a financing statement for any of the Collateral. Upon the occurrence of an Event of Default

(as such term is defined in the Notes), the Secured Parties shall have the remedies of a “secured party” under the UCC and, at the Collateral Agent's option, may also invoke the other remedies provided in this Agreement, the Notes, or the Purchase Agreement as to such items. In exercising any of such remedies, the Secured Parties may proceed against any or all of the Collateral separately or together and in any order whatsoever, without in any way affecting the availability of the Secured Parties remedies under the UCC or of the other remedies provided in this Agreement and/or the Purchase Agreement.

11.Events of Default. The Debtor shall be in default under this Agreement upon the occurrence of an Event of Default (as such term is defined in the Notes).

12.Rights of Secured Parties.

(a) Upon the occurrence of an Event of Default (as such term is defined in the Notes), the Collateral Agent may, at the request of the Majority Noteholders, require the Debtor to assemble the Collateral and make it available to the Collateral Agent at the place to be designated by the Collateral Agent which is reasonably convenient to both parties. The Collateral Agent may sell all or any part of the Collateral as a whole or in parcels either by public auction, private sale, or other method of disposition pursuant to the UCC. The Collateral Agent or any Secured Party may bid at any public sale on all or any portion of the Collateral. The Collateral Agent shall give the Debtor reasonable notice of the time and place of any public sale or of the time after which any private sale or other disposition of the Collateral is to be made, and notice given at least ten days before the time of the sale or other disposition shall be conclusively presumed to be reasonable.

(b)Notwithstanding any provision of this Agreement, the Collateral Agent shall be under no obli-gation to offer to sell the Collateral. In the event the Collateral Agent offers to sell the Collateral, the Collateral Agent will be under no obligation to consummate a sale of the Collateral if, in its reason-able business judgment, none of the offers received by it reasonably approximates the fair value of the Collateral.

(c)In the event the Collateral Agent elects not to sell the Collateral, the Collateral Agent may elect to follow the procedures set forth in the UCC for retaining the Collateral in satisfaction of the Debtor's obligation, subject to the Debtor's rights under such procedures.

13.Remedies Cumulative. Each remedy provided in this Agreement or the Purchase Agreement is distinct and cumulative to all other rights or remedies under this Agreement or the Purchase Agreement or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

14.Costs and Expenses. The Debtor agrees to pay on demand all costs and expenses, including reasonable hourly attorneys' fees and court costs, of the Secured Parties in connection with the enforcement of this Agreement (whether suit is commenced or not).

15.Notices. All notices, requests, consents and other communications given hereunder to any party shall be deemed to be sufficient if contained in a written instrument: (a) delivered in per-son, (b) sent by confirmed facsimile transmission to the number provided by the receiving party, or (c) duly sent by first class registered or certified mail, return receipt requested, postage prepaid, or overnight delivery service (e.g., Federal Express), addressed to such party at the address designated in writing by receiving party, as may be revised by the receiving party. All such notices and communi-cations shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of facsimile transmission, on the date of transmission, and (iii) in the case of mailing or delivery by service, on the date of delivery as shown on the return receipt or delivery service statement.

16. Entire Agreement, Savings Clause, Assigns and Governing Law. This Agreement and the other Transaction Documents (as defined in the Purchase Agreement) contain the entire understanding between and among the parties and supersede any prior understandings and agreements among them respecting the subject matter of such agreements and instruments. If any provision of this Agreement, or the application of such pro-vision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. This Agreement shall be

binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. This Agreement shall be governed by and construed in accordance with the laws of the State ofMinnesota.

17.Amendment and Additional Parties. The Agreement may be amended only in writing signed by the Debtor and the Collateral Agent or the Majority Noteholders if a Collateral Agent has not been appointed on behalf of the holders of the Notes.

18.Attorneys' Fees. Any actions or proceedings, including arbitration, brought by either party with respect to this Agreement, the court or arbitrator in such action or proceeding shall award to the prevailing party, in addition to any other relief granted, (i) the actual attorneys' fees based on a reasonable hourly basis which the prevailing party has paid or is obligated to pay; and (ii) all costs and expenses, not merely recoverable costs, which the prevailing party has paid or is obligated to pay. The court may reduce such actual attorneys' fees, costs and expenses only to the extent that the court determines that such amounts were unnecessarily incurred or unreasonable. In addition, the parties agree that if any dispute between the parties results in a judgment in favor of either party, such party shall be entitled to recover from the other all reasonable hourly attorneys' fees and costs incurred by it in enforcing such judgment. This provision is intended to be severable from any other provision of this Agreement and is not to be deemed merged in the judgment.

19.Counterparts; Execution. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original Agreement, and all of which shall constitute one Agreement to be effective as of the date of execution of this Agreement.

[Multiple signature pages follow.]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.

THE DEBTOR: DIGITILITI, Inc. a Delaware corporation By:_____________________________ Name: ______________________________ Its:_____________________________ Address: 266 East 7th Street, St. Paul, MN 55101 Phone: (651) 925-3200 Fax: (651) 925-3232 COLLATERAL AGENT: INSERT NAME OF COLLATERAL AGENT, IF ANY By:_____________________________ Name: ______________________________ Its:_____________________________ Address: Phone: Fax:

[Multiple secured party signature pages follow.]

IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed as of the date first above written.

SECURED PARTY:

Name:

By:

Its:____________________________

(Address)

(Phone and Fax Numbers)

SCHEDULE A

SECURED PARTIES

EXHIBIT 6.3

PERMITTED LIENS

“Permitted Liens” are:

(a)Liens approved in writing by the Collateral Agent or the Majority Noteholders;

(b)Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which the Debtor maintains adequate reserves on its books;

(c)Purchase money liens (i) on equipment acquired or held by the Debtor incurred for financing the acquisition of the equipment, or (ii) existing on equipment when acquired, if the lien is confined to the property and improvements and the proceeds of the equipment;

(d)Leases or subleases and licenses or sublicenses granted in the ordinary course of the Debtor's business; and

(e)Liens of carriers, warehousemen, suppliers, or other persons that are possessory in nature arising in the ordinary course of business so long as such liens attach only to inventory and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto.

6081427v3

EX-10.4

NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UNPON EXERCISE HAS NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UNPON EXERCISE MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

Warrant No. _____

WARRANT TO PURCHASE COMMON STOCK

of

DIGITILITI, INC.

a Delaware corporation

Void after June __, 2016

This certifies that, for value received, [_____________], or his, her or its successors or assigns (“Holder”), is entitled during the Exercise Period (as defined below), subject to the terms set forth below, to purchase from Digitiliti, Inc., a Delaware corporation (the “Company”), up to [_______] shares of Common Stock, par value $.001 per share, of the Company (“Common Stock”) at the price of $0.06 per share, subject to adjustment as set forth below (the “Purchase Price”), upon surrender of this Warrant at the principal office of the Company referred to below, with the subscription form attached hereto (the “Subscription Form”) duly executed, and simultaneous payment therefor in the manner specified in Section 1. The Purchase Price and the number of shares of Common Stock purchasable hereunder are subject to adjustment as provided in Section 3. This Warrant is one of the warrants (collectively, the “Warrants”) referred to and issued pursuant to that certain Junior Secured Convertible Promissory Note and Warrant Purchase Agreement dated as of June ___, 2011 (the “Purchase Agreement”).

As used herein, “Exercise Date” means the particular date (or dates) on which this Warrant is exercised. “Exercise Period” means the period during which this Warrant is exercisable; such period shall begin on the date hereof and shall end at 6:00 p.m., Central Daylight Time, on June __, 2016. “Issue Date” means the date hereof, June ___, 2011. “Warrant” includes this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. “Warrant Shares” means any shares of Common Stock acquired by Holder upon exercise of this Warrant.

1.Exercise.

(a)This Warrant may be exercised, in whole or in part, at any time or from time to time, on any business day during the Exercise Period, by surrendering it at the principal office of the Company at 266 East 7th Street, Saint Paul, MN 55101, together with an executed Subscription Form and a check in an amount equal to (i) the number of Warrant Shares being purchased, multiplied by (ii) the Purchase Price.

(b)This Warrant may be exercised for less than the full number of Warrant Shares as of the Exercise Date. Upon such partial exercise, this Warrant shall be surrendered, and a new Warrant of the same tenor and for the purchase of the Warrant Shares not purchased upon such exercise shall be issued to Holder by the Company.

(c)A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Warrant Shares issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As soon as practicable on or after such date, and in any event within ten business days thereafter, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares of Common Stock issuable upon such exercise.

(d)Notwithstanding the foregoing, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable

securities registration requirements or registrations under applicable securities laws. Nothing herein shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares.

2.Payment of Taxes. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof, other than any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's satisfaction that no tax or other charge is due.

3.Certain Adjustments.

(a)Adjustment for Reorganization, Consolidation, Merger. In case of any reclassification or change of outstanding Company securities, or of any reorganization of the Company (or any other entity, the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which Holder would have been entitled upon such consummation if Holder had exercised this Warrant immediately prior thereto, the terms of this Section 3 shall be applicable to the Company securities properly receivable upon the exercise of this Warrant after such consummation.

(b)Adjustments for Dividends in Common Stock. If the Company at any time or from time to time after the Issue Date declares any dividend on the Common Stock which is payable in shares of Common Stock, the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately increased and the Purchase Price shall be proportionately decreased.

(c)Stock Split and Reverse Stock Split. If the Company at any time or from time to time after the Issue Date effects a subdivision of the Common Stock, the Purchase Price shall be proportionately decreased and the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately increased. If the Company at any time or from time to time after the Issue Date combines the outstanding shares of Common Stock into a smaller number of shares, the Purchase Price shall be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately decreased. Each adjustment under this Section 3(c) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(d)Accountants' Certificate as to Adjustment. In each case of an adjustment in the shares of Common Stock receivable on the exercise of this Warrant, if Holder so requests in writing, the Company at its expense shall cause its independent public accountants to compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing the facts upon which such adjustment is based. The Company will mail a copy of each such certificate to each holder of a Warrant at the time outstanding.

(e)Rights Under Warrant Agreement. The Company will not, by amendment of its Certificate of Incorporation, as amended, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants under this Warrant Agreement.

4.Notices of Record Date. If either (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) the Company undertakes a voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company shall mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (1) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (2) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up.

5.No Rights as Shareholder. Prior to the exercise of this Warrant, Holder shall not be entitled to any rights of a shareholder with respect to the Warrant Shares, including without limitation the right to vote such Warrant Shares, receive dividends or other distributions thereon or be notified of shareholder meetings, and Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. However, nothing in this Section 5 shall limit the right of Holder to be provided the notices required under this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

6.Notice of Transfer of Warrant or Resale of the Warrant Shares.

(a)The Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the opinion of such counsel the proposed transfer may be effected without registration or qualification under any federal or state securities laws, the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or the Warrant Shares received upon the exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company..

(b)If, in the opinion of the Company's counsel, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 6 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such transfer or disposition as, in the opinion of such counsel, are permitted by law.

7.Investment Intent. Holder, by acceptance hereof, agrees that this Warrant and the Warrant Shares to be issued upon exercise hereof are being acquired for investment and not with a view towards resale and that it will not offer, sell or otherwise dispose of this Warrant or any Warrant Shares to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act. Upon exercise of this Warrant, Holder shall confirm in writing, in the form of Exhibit A, that the Warrant Shares so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Warrant Shares issued upon exercise of this Warrant (unless registered under the Securities Act) shall be stamped or imprinted with a similar legend indicated on the first page of this Warrant.

8.Loss or Mutilation. Upon receipt by the Company of evidence satisfactory to it (in the exercise of reasonable discretion) of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the case of loss, theft or destruction, of indemnity satisfactory to it (in the exercise of reasonable discretion), and in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof a new Warrant of like tenor.

9.Notices. All notices, requests, consents and other communications given hereunder to any party shall be deemed to be sufficient if contained in a written instrument: (a) delivered in per-son, (b) sent by confirmed facsimile transmission to the number provided by the receiving party, or (c) duly sent by first class registered or certified mail,

return receipt requested, postage prepaid, or overnight delivery service (e.g., Federal Express), addressed to such party at the address designated in writing by receiving party, as may be revised by the receiving party. All such notices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of facsimile transmission, on the date of transmission, and (iii) in the case of mailing or delivery by service, on the date of delivery as shown on the return receipt or delivery service statement.

10.Change; Waiver. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Company and the Majority Noteholders (as defined in the Purchase Agreement).

11.Headings. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof.

12.Governing Law. This Warrant is delivered in Minnesota and shall be construed and enforced in accordance with and governed by the internal laws, and not the law of conflicts thereof.

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Warrant as of the date first above written.

COMPANY:

DIGITILITI, INC.

By:

Name:________________________________________

Its: ___________________________________________

EXHIBIT A

SUBSCRIPTION FORM

(To be executed only upon exercise of Warrant)

The undersigned registered owner of this Warrant irrevocably exercises this Warrant and purchases ____________ of the number of shares of Common Stock of DIGITILITI, INC., a Delaware corporation, purchasable with this Warrant, and makes payment therefore in the amount of $__________.

The undersigned hereby represents and warrants that the undersigned is acquiring such shares of Common Stock for the undersigned's own account for investment purposes only, and not for resale or with a view to distribution of such shares or any part thereof.

Dated:_________________

_________________________________________

(Signature of Registered Owner)

_________________________________________

(Street Address)

_________________________________________

(City), (State), (Zip)

FORM OF ASSIGNMENT

FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below:

Name of AssigneeAddressNo. of Shares

and does hereby irrevocably constitute and appoint ___________________________ Attorney to make such transfer on the books of DIGITILITI, INC., a Delaware corporation, maintained for the purpose, with full power of substitution in the premises.

Dated: ___________________

_______________________________

(Signature)

_______________________________

(Print Name)

_______________________________

(Witness)

_______________________________

(Print Name)

6081426v1

EX-10.5

SEPARATION AGREEMENT

This Agreement and General Release (the "Agreement") is made and entered into this 29 day of June, 2011, by and between Digitiliti. Inc., a Delaware corporation, with its principal office at 266 East Seventh Street, St. Paul, MN 55101 ("Company") and Ehssan Taghizadeh ("Employee") collectively referred to as the "Parties".

RECITALS

WHEREAS, Employee was employed by Company as President and Chief Executive Officer pursuant to that agreement dated September 30,2010 ("Employment Agreement"); and

WHEREAS, Employee's employment relationship with Company has terminated; and

WHEREAS, under the terms of the Employment Agreement and in recognition that Company and Employee desire to compromise and settle any and all claims Employee may have or claims to have against Company, Company will make a payment of money in consideration of the execution of a release on the terms and conditions provided herein; and,

WHEREAS, Employee desires receiving such payments and therefore agrees the receipt of such consideration

represents the full and complete satisfaction under the Employment Agreement including the satisfaction of any

and all claims or liabilities Employee may have or claim to have.

NOW, THEREFORE, in consideration of the foregoing, and for other consideration described below, the receipt and sufficiency of which is hereby acknowledged, it is agreed as follows:

1.Effective Termination Date. Employee's employment with Company has terminated June __, 2011 and, as of that date, Employee is no longer authorized to act on Company's behalf in the capacity of an officer or employee of Company, and, accordingly, Employee may act only in a manner consistent with the terms herein.

2. Compensation for Past Services/Expenses. Company agrees to pay Employee compensation for the following:

(i)regular hours worked through the termination date;

(ii)accrued, unused Vacation in the amount of $7,115.38.

In addition, during the five (5) business days following the termination date, Employee may present receipts in accordance with Company's expense reimbursement policy for any expenses Employee has incurred prior to June 30, 2011.

3.Non-disparagement. Parties agree not to disparage or defame the other Party or any of Company's officers. agents, directors, representatives and employees in any respect or make any comments concerning the employment relationship, except as agreed herein. Moreover, unless agreed to by both Parties, Parties agree not to make any further statements concerning Employee's relationship with Company either in the employment or personal context with exception of necessary public filings with the SEC.

4.Reaffirmation of Covenant Not to Comoete. Employee hereby reaffirms his promises of confidentiality, non-competition and non-soliCitation contained in Sections 3.4. and 3.5 of the Employment Agreement.

5.Payments. Company hereby agrees to pay Employee cash and non-cash payments as follows and as set out on Exhibit B - Total Payments and Payment Terms:

a) Total cash payments as set forth on Exhibit B as due under the Employment Agreement for severance payments, earned and unused vacation as well as reimbursable expenses;

b) Common stock of Company in the amount of 597,129 shares as agreed to by both parties for five months of Employee's unpaid net salary, aU applicable federal and state taxes have already been paid in full by Company; and,

c) Five-year stock warrants in the amount of 200,000 and valued at $.06 per share as consideration for entering into this Agreement, including but not limited to the release of all daims in Section 6 and covenant not to sue in Section 7.

Any cash payments under this section shall be subject to all applicable deductions for federal and state income tax withholding and employment taxes.

Payments shall continue to be subject to the surviving sections of the Employment Agreement per section 9, below.

Except for sales of the Company's securities under that Junior Secured Convertible Promissory Note and Warrant Purchase Agreement made as of June _, 2011 ("Purchase Agreement"), in the event of a third party investment into Company of a minimum of ten percent (10%) of Company's value, or the equivalent shares of stock, which value will be as used in the transaction and agreed to by Company and the third party, the payments set out in this Agreement will be accelerated and paid out to Employee in a lump sum on the date of closing of the investment transaction and/or receipt of monies due and owing

Digitiliti Confidential - Separation Agreement

Company into Company's designated account or control.

6.    Release and Discharge of All Claims. In consideration of the payment to be made under Section 5, Employee hereby agrees and does hereby permanently and irrevocably remise, release and forever discharge Company and its respective directors, officers, advisory board members, consultants, agents, representatives, employees, shareholders, attorneys and assigns (hereinafter collectively referred to as the "Released Parties"). all of whom are third party beneficiaries hereof, from all manner of actions and causes of action, suits, debts, claims and demands whatsoever, in law or in equity, known or unknown, which Employee may have or may claim to have from the beginning of time up to and including the effective date of termination

against any of the Released Parties, arising out of Employee's employment with Company or termination therefrom, or in any other manner concerning any relationship Employee may have had with all or any of the Released Parties. Without

limiting the foregoing, Employee expressly agrees to refrain forever from instituting any action or making any demand or claim of any kind for any compensation, bonus, wages, unpaid commiSSions, vacation, other payments or rights; discrimination,

harassment, or retaliation; or any alleged violation of the Minnesota Human Rights Act; Title VII of the Civil Rights Act of 1964, as amended, 42, U.S.C. §2000e et seq., any other federal, state, or local civil rights laws; the AGE DISCRIMINATION IN EMPLOYMENT ACT, 29U.S.C. § 621 et seq., the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq., the Americans with Disabilities Act Amendments Act; the Family and Medical Leave Act. 29 U.S.C. §2601 e/ seq.; Section 4980B of Internal

Revenue Code of 1986 (COBRA); the Fair Labor Standards Act; the Worker Adjustment and Retraining Notification Act; the Minnesota Whistleblower Act; claims for alleged breach of fiduciary duty under Section 409 of the Employee Retirement Income Security Act alleging the impairment in value of Employee's accounts, if any; claims for breach of contract, fraud, or misrepresentation; defamation; intentional or negligent infliction of emotional distress; breach of covenant of good faith and fair dealing; promissory estoppel; negligence; wrongful separation of employment; and any other claims for wrongful employment practices.

Nothing contained herein shall be construed to prohibit Employee from filing a charge with the Equal Employment Opportunity Commission ("EEOC") or any state or local agency, but Employee's release contained in this Section 6 includes a release of Employee's right to file a court action or seek individual remedies of damage in any EEOC-filed court action or any other proceeding, including, but not limited to, any administrative proceeding. Employee's release of these rights shall apply with full force and effect to any proceedings arising from or relating to any administrative charge.

7.     Covenant Not To Sue. Employee agrees and covenants that neither Employee nor anyone claiming on behalf of or through Employee will claim, charge, sue or cause to permit any third party to claim, charge or sue any of the Released Parties for any claims released in this Agreement.

8.     Entire Agreement. This Agreement contains the entire agreement between the Employee and the Company and supersedes and cancels any and all other prior agreements, whether oral or in writing, between the Company and Employee with respect to the matters referred to herein. Notwithstanding any language in this Agreement to the contrary, Sections 3.4., 3.5., 3.6., and 3.7. of the Employment Agreement are not cancelled, terminated, or superseded in any respect.

9.     General Cooperation. For the duration of any payments hereunder or, in any event, for no more than three months from the Effective Date of this Agreement, Employee agrees to be available to answer questions and attend meetings by telephone or in person as reasonably requested by Company and as agreed to by Employee as it relates to Company's business as well as Employee's former duties and responsibilities. Company will not unreasonably request assistance and Employee will not unreasonably deny providing such assistance to Company. Company acknowledges Employee may initiate meeting requests as well. Both Company and Employee agree to use good faithand bestefforts in requesting and responding to meeting requests as well as accommodating the other. If Employee engages in other business activities, including full time employment, both Parties will cooperate to schedule meetings in a manner that least interferes with the performance of either Party's business activities. Accordingly, the requesting Party shall provide the other Party no less than twenty-four (24) hours notice of a meeting. In the event the meeting requested is in person and the other Party is unavailable to meet in person, the non-requesting Party will either be available by telephone or offer at least two dates within the following five (5) business days when it will be available.

10.    Indemnification. Company acknowledges it has maintained Directors and Officers Insurance (D&O) Coverage throughout the period of employment of Employee. Furthermore, pursuant to its corporate bylaws, Article VIII - Indemnification of Directors and Officers, Company agrees to indemnify Employee, to the maximum extent permitted by law, against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by Employee as a result of any lawsuit, judicial, administrative or investigative proceeding (Criminal or civil, including an action by or in the right of the Company) in which

Employee at any time is sued or made a party, or is threatened to be made a party, as a result of Employee's service as an officer or member of the Board of Directors of the Company (or Employee's providing services at the request of the Company as

a director, Officer, agent or employee of another corporation or other entity).

11.    Miscellaneous. Employee represents that in executing this Agreement Employee is not relying and has not relied on any representations or statements not set forth in this Agreement. Employee acknowledges that he/she has been advised and has been given the opportunity to seek legal advice concerning this Agreement prior to entering into this Agreement This Agreement, together with the attached Exhibits. incorporated herein by reference, constitutes the entire agreement and understanding of the Parties and supersedes all prior agreements and understandings and shall be construed as a waiver of all prior understandings,

Digitiliti Confidential - Separation Agreement

claims and agreements relating to the subject matter of this Agreement.

12.    Liquidation of Claim Accounts. Company's maximum liability under this Agreement shall be the total amount payable to Employee under Section 5 and Employee releases, discharges and waives any and all claims, known and unknown, against the Released Parties. whether legal. equitable, or otherwise that Employee may now have or may have in the future.

13.    Severability. If, for any reason, a court of    competent jurisdiction finds any provision of this Agreement, or any portion thereof, to be unenforceable that provision will be severed or adjusted as held by the court and otherwise enforced to the maximum extent permissible so as to effect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect.

14.    Rescission.

(i) To the extent that Employee waives and releases all claims Employee may have against the Released Parties under Minnesota Human Rights Act, Minn. Stat §363.01 ~. or other local law, Employee may rescind this waiver and release of such claims within fifteen (15) calendar days of signing this Agreement. Employee further acknowledges and agrees that Employee has been informed of the right to rescind this Agreemem to reinstate potential claims under the Age Discrimination in Employment Act, 29 U.S.C. §621, et. seq. within seven (7) calendar days of signing this Agreement

(ii) To be effective, Employee's rescission must be in writing and delivered to Digitiliti, Inc., 266 East Seventh Street, st. Paul, MN 55101, either by hand or by mail within the respective 15-day or 7-day period. If sent by mail, the rescission must be: a)

postmarked within the respective 15-day or 7 -day period; b) properly addressed to Company Human Resources department; and c) sent by certified mail, return receipt requested.

15.    Cancellation By Company. If Employee exercises Employee's right of rescission under Section 13 of this Agreement, the Company will have the right, exercisable by written notice delivered to Employee, to terminate this Agreement in its entirety, in which event Company will have no obligation whatsoever to Employee hereunder, except as otherwise provided in this Agreement, and all obligations to Employee will be as provided under the original terms of the Employment Agreement, which shall then be controlling and enforceable. If Employee exercises Employee's right of rescission and the Company does not exercise its right to terminate this Agreement hereunder, the remaining proVisions of this Agreement shall remain valid and

continue in full force and effect.

16.    Performance By Parties. Nothing contained herein shall operate as a waiver or an election of remedies by a Party should the other Party fail to perform any duty or obligation imposed upon it hereunder. Notwithstanding anything contained herein to the contrary, this Agreement and the duties and obligations of the Parties hereunder shall continue in full force and effect irrespective of any violation of any term or provision of this Agreement by the Parties. In the event that a Party violates any

term or provision of this Agreement, then the violating Party shall pay any of the non-viOlating Party's reasonable attorneys' fees related to such violation.

17.    Consideration Period. Employee has twentyone (21) calendar days from the date of this Agreement to consider whether or not to sign it; the Agreement may be Signed anytime during the 21 day period. If, within the 21-day period, Employee fails to

sign this Agreement, this entire Agreement is null and void. If Employee executes this Agreement prior to the expiration of the 21-day period, Employee acknowledges that Company notified him of his right to consider Company's offer of settlement for a period of 21 days and that he voluntarily waived his right to do so.

18.    Governing Law and Venue. The Parties agree that this Agreement will be exclusively governed, interpreted and construed in accordance with the laws of the State of Minnesota and applicable federal law. The location for the resolution of a/l disputes

shall be exclusively in Hennepin County, Minnesota and Parties waive any right to contest this venue location or the claim that this venue location is an inconvenient forum for the resolution of disputes.

UNDERSTOOD AND AGREED:

EHSSAN TAGHIZADEH •

Signature

Date

Digitiliti Confidential - Separation Agreement

DIGITILITI, INC.

Bill McDonald, CFO

Date

EXHIBIT A - EM.J'LOYMENT AGREEMENT

EXHIBIT B - TOTAL PAYMENTS AND PAYMENT TERMS

Based on the original annual compensation rate of $185,000
CASH PAYMENTS
Cash Severance, 50% of base salary	$	92,500.00
First HaIf 2011 Bonus as of June 30	$	10,000.00
Fourth Quarter 2010 Bonus	$	20,000.00
Vacation	$	7,115.38
Expenses	$	13,000.00
Sub-Total	$	130,815.38

GOOD FAITH DISCOUNr $13.115.38

TOTAL CASH PAYMENTOUE $111,500.00

PAYMENT TERMS - CASH PAYMENT

cash due at Closing of First Tranche $70,500.00

Cash due at Closing of Second Tranche $47,000.00*"

NON-CASH PAYMENTS

Common Stock 597.129 shares"·

five-wa! Stock Warrnnts 200 000 shares at $.06lshare .... ••

TOTAl STOCK 797.129 shares

The Good Faith Discount is a reduction in cash that was offered by Employee to benefit the Company.

.... Empfoyee has the right to either (t) use this amount 10 purchase Notes and Warrants sold under the

Purchase Agreement on the same terms as under the Purchase Agreement or (2) receive this amount

in cash. However, if this amount is used 10 purchase Notes and Warrants, the amount shall not be

counted towards reaching either the Minimum or Maximum amounts under the Second Tranche.

.... During the period of February 1 to June 30, 20t 1, Employee suspended cash payment of his net base

salary to benefit Ute cash position of Company. The receipt of stock for salary due and owing was

agreed upon by both parties and represents a net cash equivalent equal to Employee's monthly salary

less applicable taxes that have already been paid in full by the Company.

_ ... This special grant of stock warrants was agreed to by both parties and SeJVeS as consideration in 6eu

of cash for the surrendering of rights as set out under this Separation Agreement..

M9SI61v5

Digitiliti Confidential - Separation Agreement

EX-10.6

EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement") is made effective as of the 29 day of June, 2011 (the "Effective Date"), by and between DIGITILITI, INC., a Delaware corporation (the "Company"), and Jack Scheetz ("Executive").

WHEREAS, the Company desires to retain the services of Executive for and on behalf of Company as Company's Interim President and Chief Executive Officer ("CEO") until Company hires and employs a new President and CEO, on the terms and subject to the conditions set forth herein;

WHEREAS, the Company and certain investors are entering into the Junior Secured Convertible Promissory Note and Warrant Purchase Agreement dated even date herewith ("Purchase Agreement"), which requires the Company and Executive to enter into this Agreement upon the Closing of the First Tranche (all words capitalized but not defined in this Agreement shall have the meanings attributed to them under the Purchase Agreement); and

WHEREAS, each of the parties acknowledge that they are receiving good and valuable consideration for entering into this Agreement, and Executive acknowledges that this Agreement, including the confidentiality, non-competition and non-disclosure agreements set forth hereinbelow, were negotiated between the parties hereto and that Executive received bargained-for consideration in the form of benefits resulting to Executive from the terms and conditions of such employment, in exchange for entering into this Agreement.

NOW THEREFORE, in consideration of the foregoing premises, mutual covenants and obligations contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Employment. Subject to the terms and conditions of this Agreement, including without limitation, Sections 5 and 6 of this Agreement, the Company hereby employs Executive, and Executive hereby accepts employment with the Company, as its Interim President and CEO, subject to the supervision of the Board of Directors of Company.

1.1Services. Executive shall perform all duties and obligations charged to Executive by the Board of Directors of Company, as the same may be determined from time to time. The Board of Directors shall assure adequate time, resources, and authority for Executive to achieve goals mutually agreed upon by Company and Executive.

1.2Time and Effort.

a)Executive agrees to devote substantially all of his working time and to give his best effort to performing his duties on behalf of Company. Executive shall perform the duties and obligations required of Executive hereunder in a competent, efficient, and satisfactory manner at such hours and under such conditions as the performance of such duties and obligations may require.

b)Subject to the obligations of Executive under this Section 1, Executive may serve on the Board of Directors or Board of Governors of any other entity; provided the Board of Directors, in its sole discretion, authorizes Executive to undertake such activity in writing prior to Executive's appointment or election to such position or ratifies any current and on~going positions.

1.3Certificate of Incorporation and By-Laws. Executive shall act in accordance with and abide by the Certificate of Incorporation of Company, the Bylaws of Company, and all decisions of the Board of Directors of Company.

2.Term. This Agreement shall take effect upon commencement of employment and shall remain in effect until terminated in accordance with Section 9. Upon termination of this Agreement, except as otherwise provided herein, neither the Company nor Executive shall have any further rights, duties, privileges, or obligations hereunder.

3.Compensation. During the term of this Agreement, Company shall compensate Executive as follows, provided that the compensation terms in this Section 3 are agreed to by the Investors under the Purchase Agreement and ratification by Company's Board of Directors.

3.1.Salary. In exchange for the provision of services, Executive's base salary shall be Fourteen Thousand Two Hundred Fifty Dollars ($14,250.00) per month ("Base Salary"). Payment of fifty percent (50%) of the Base Salary, which equals Seven Thousand One Hundred Twenty-Five Dollars ($7,125.00) (the "Monthly Deferred Base Salary

Payment"), will be·deferred until Company hires a new President and CEO. After the Company hires a new President and CEO, the Monthly Deferred Base Salary Payment shall be paid each month for the number of months equal to the period of deferral, which shall not exceed six months. After six months from the effective date of this Agreement, if Executive is still serving as Company's Interim President and CEO, then the Company shall pay Executive $14,250.00 per month until the Company hires a new President and CEO or Executive is terminated earlier under the terms of this Agreement, plus the Company shall pay Executive the Monthly Deferred Base Salary Payment each month for six months. Executive's compensation under this Section 3.1. will be subject to standard withholdings and deductions and will be paid in accordance with the general practices of the Company.

3.2.Bonus Payments. In the event that Company enters into an agreement for DigiLIBE with the United States Army or Honeywell International Inc. (a "DigiLIBE Agreement") during the first three months after the Effective Date of this Agreement, Executive shall be paid bonus payments equal to Four Percent (4%) of the recognized monthly revenue from the DigiLIBE Agreement for a period of two years, commencing on the date on which Company enters into the DigiLIBE Agreement. In the event that Company enters into a DigiLIBE Agreement during the first month after the Effective Date of this Agreement, Executive shall be paid bonus payments equal to Six Percent (6%) for the first year and Four Percent (4%) for the second year of the recognized monthly revenue from the DigiLIBE Agreement, commencing on the date on which Company enters into the DigiLIBE Agreement.

3.3.Benefits. Company will provide Executive with any of Company's standard benefit policies or plans, according to their terms. These policies may be modified or terminated from time to time by Company, but not retroactively. The written terms of the policies shall govern any questions of eligibility, coverage, and duration of coverage.

3.4.Equity Compensation. Executive shall be entitled to receive warrants as follows:

a)A five-year warrant to purchase One Hundred Fifty Thousand (150,000) shares of Company common stock to be granted on the Effective Date of this Agreement, exercisable at a price of $0.06 per share.

b)A five-year warrant to purchase an additional One Hundred Fifty Thousand (150,000) shares of Company common stock to be granted at the time of the Closing of the Second Tranche, as such term is defined in the Purchase Agreement, with such warrant exercisable at the market price per share as of the date of grant

c)A five-year warrant to purchase an additional Forty Thousand (40,000) shares of Company common stock for each $100,000 increment above the $500,000 Minimum of securities sold in the Second Tranche, up to a maximum total 200,000 additional shares, to be granted at the time of the Closing of the Second Tranche, with such warrant exercisable at the market price per share as of the date of grant.

d)The exercise of any of these warrants shall be subject to the Company having a sufficient number of shares of common stock authorized but unissued. Upon the Closing of the Second Tranche, if the Company's Articles of Incorporation does not then authorize a sufficient number of shares of common stock to cover the exercise of these warrants, as well as the conversion and exercise of the securities sold under the Purchase Agreement, the Company shall hold the shareholder meeting as referenced in Section 7(d) of the Purchase Agreement and propose an amendment to the Articles of Incorporation to increase the number of authorized shares by a sufficient amount for approval by the shareholders at such shareholder meeting.

4.Expenses. Company will reimburse Executive for any and all ordinary, necessary and reasonable business expenses that Executive incurs in connection with the performance of Executive's duties under this Agreement. Executive shall be required to comply with Company's policies and procedures regarding expense reimbursement, including documentation for such expenses in a form sufficient to sustain Company's deduction for such expenses under the Internal Revenue Code and in compliance with Company policy. Any reimbursement request made pursuant to this Section 4 shall be subject to review and approval by the Company's Chief Financial Officer.

5.Use and Return of Confidential Information. Except as permitted by the Company's Board of Directors, Executive shall not divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company that Executive will acquire during the period of his employment by the Company, whether developed by himself or by others, concerning any (i) trade secrets; (ii) confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or

indirectly useful in any aspect of the business of the Company; (iii) customer or supplier lists of the Company; (iv) confidential or secret development or research work of the Company; or (v) other confidential information or secret aspects of the business of the Company. Executive acknowledges that the above described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. During the tenn of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company_ The foregoing obligations of confidentiality shall not apply to any knowledge or information that (x) is now or subsequently becomes generally publicly known in the form in which it was obtained from the Company, (y) is independently made available to Executive in good faith by a third party who has not violated a confidential relationship with the Company, or (z) is required to be disclosed by legal process, other than as a direct or indirect result of the breach of this Agreement by Executive. Upon the termination of Executive's employment with Company, Executive shall promptly deliver to Company (i) all records, manuals, books, documents, letters, reports, data, tables, calculations, and all copies of any of the foregoing which are the property of Company or which relate in any way to the customers, business, practices, or techniques of Company; and (ii) all other property of Company and Confidential Infonnation which, in any of these cases, are in his possession or under his control.

6.Restrictive Covenants. During the term of Executive's employment with the Company, and for a period of one (1) year thereafter, Executive will not:

a.own, manage, operate or control, or participate in the ownership, management, operation or control of: or be employed by, or act as a consultant or advisor to or be connected in any manner with, any corporation, person, finn or other entity that manufactures, distributes, or sells products or services similar to any product or service which is or has been sold by the Company or any of its affiliates; provided, however, this section will not apply to business activities conducted by Executive for the entity named JS Consulting Group;

b.solicit customers, or the business of any person, finn, corporation or other entity who shall have been a customer or account of any office or location of the Company or any of the Company's affiliates (whether currently in existence or opened during Executive's employment). or any customer or account of Company or any of Company's affiliates, for the purpose of selling to such customer or account any product or service which is or has been sold by Company or any of its affiliates; or

c.induce or attempt to induce any employee of or consultant to the Company to do any of the foregoing or to discontinue such person's association with the Company.

7.Remedies for Violation. If Executive violates this Agreement, the Company will suffer irreparable harm for which there is no adequate remedy at law, and Executive therefore consents to the issuance of any injunction or other equitable relief of the Company enjoining any violation of this Agreement, which relief shall be in addition to any other remedies available to Company, including without limitation, Company's right to the costs and attorney fees incurred by Company to enforce this Agreement.

8.Work for Hire. Executive acknowledges that all Work Product, as deflned below, created during Executive's employment with the Company is a "work made for hire" as defined by U.S. copyright laws, as is owned by the Company. Work Product includes but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data, computer programs and formulae, whether patentable or unpatentable or protectable by copyright or other intellectual property law. If any Work Product does not qualify as a ''work made for hire," Executive shall, and hereby does assign all rights, title and interest in the non-qualifying Work Product to the Company, including all copyrights, patents, trademarks, and other proprietary rights. On request, Executive will take such steps as are necessary to enable the Company to record such assignment at its expense.

Any provision in this Agreement requiring Executive to assign his rights to any Work Product does not apply to inventions which qualify for exclusion under Minnesota Statutes section 181.78. That section provides that the requirement to assign "does not apply to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee's own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer's actual or demonstrably anticipated research or development, or (2) which does not result from any work perfonned by the employee for the employer." Executive understands that it is his obligation to promptly disclose (i) any Work Product that he created prior to his employment with the Company that he believes should not be subject to this Agreement; and (ii) any Work Product that he created during his employment with the Company that he believes should not be subject to this Agreement. If Executive does not promptly disclose any Work Product that he believes should

not be subject to this Agreement, Executive acknowledges that such non-disclosure will be considered a representation that he

has created no such Work Product prior to signing this Agreement, and that, during the course of his employment with the Company, he created no such Work Product.

9.Termination. This Agreement may be terminated (i) by the Executive prior to the hiring of a new President and CEO upon 30 days notice to the Company; (ii) immediately upon the death or incapacity of Executive; (iii) by the Company for "Good Cause," as defined herein; or (iv) by the Company, effective as of the hiring and employment of a new President and CEO by the Company. For purposes of this Section 9 of this Agreement, "Good Cause" shall mean: (a) engaging in acts of dishonesty at the expense of the Company, including but not limited to theft or embezzlement; or (b) engaging in conduct constituting a felony.

10.Miscellaneous.

10.1Notices. All notices, requests, and other communications shall be in writing, and except as otherwise provided herein, shall be considered to have been delivered if personally delivered or when deposited in the United States Mail, first class, certified or registered, postage prepaid, return receipt requested, addressed to the proper party at its address as set forth below, or to such other address as such party may hereafter designate by written notice to the other party:

a) If to Company, to: Digitiliti, Inc.

266 East 7th Street, 4th Floor

St. Paul, MN 55101

ATTN: Chief Financial Officer

b) If to Executive, to: Interim President

Digitiliti, Inc.

266 East 7th Street, 4th Floor

St. Paul, MN 55101

10.2. Successors and Assigns. This Agreement is binding on and inures to the benefit

of the Company's successors and assigns, provided, however, that this Agreement may

not be assigned by any of the parties hereto without the prior written consent of each of

the parties hereto. This Agreement shall be binding upon and inure to the benefit of any

successor of the Company, including a purchaser of either the stock or assets of the

Company, and any such successor shall absolutely and unconditionally assume all of the

Company's obligations hereunder.

10.3. Counterparts. This Agreement may be executed in one or more counterparts, each

of which shall be deemed to be an original but all of which together shall constitute one

and the same instrument.

1004. Construction. Wherever possible, each provision of this Agreement will be

interpreted so that it is valid under the applicable law. If any provision of this Agreement

is to any extent invalid under the applicable law, that provision will still be effective to

the extent it remains valid. The remainder of this Agreement also will continue to be

valid, and the entire Agreement will continue to be valid in other jurisdictions.

10.5. Waivers. No failure or delay by either the Company or Executive in exercising

any right or remedy under this Agreement will waive any provision of this Agreement,

nor will any single or partial exercise by either the Company or Executive of any right or

remedy under this Agreement preclude either of them from otherwise or further

exercising these rights or remedies, or any other rights or remedies granted by any law or

any related document.

10.6. Captions. The headings in this Agreement are for convenience of reference only

and do not affect the interpretation of this Agreement.

10.7. ModificationlEntire Agreement. This Agreement may not be altered, modified or

amended except by an instrument in writing signed by all of the parties hereto. No

person, whether or not an officer, agent, employee or representative of any party, has

made or has any authority to make for or on behalf of that party any agreement,

representation, warranty, statement, promise, arrangement or understanding not expressly

-6-

set forth in this Agreement or in any other document executed by the parties concurrently

herewith. This Agreement constitutes the entire agreement between the parties on the

subject matters contained herein and supersedes all express or implied, prior or

concurrent, with respect to the subject matter hereof.

10.8. Governing Law. The laws of the State of Minnesota shall govern the validity,

construction and performance of this Agreement. Courts in the State of Minnesota shall

be the exclusive forum for resolving any disputes relating to this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and

year first above written.

JACK SCHEETZ:

DIGITILITI, INC.

610S212v3

-7-

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jack B. Scheetz, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digitiliti, Inc.;

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

d) disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions);

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 15, 2011	By:	/s/ Jack B. Scheetz
		Jack B. Scheetz, Director and Interim President/CEO

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William McDonald, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Digitiliti, Inc.;

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

d) disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions);

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 15, 2011	By:	/s/ William McDonald
		William McDonald, CFO

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digitiliti, Inc. (the “Registrant”) on Form 10-Q for the period ending September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), we, Jack B. Scheetz, Interim President and CEO, and William McDonald, CFO of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1) The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 15, 2011	By:	/s/ Jack B. Scheetz
		Jack B. Scheetz, Interim CEO and President
Date: November 15, 2011	By:	/s/ William McDonald
		William McDonald, CFO

A signed original of this written statement required by Section 906 has been provided to Digitiliti, Inc. and will be retained by Digitiliti, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Consolidated Balance Sheets Parenthetical (USD $)	Sep. 30, 2011	Dec. 31, 2010
Current Liabilities:
Current maturities of convertible debt, unamortized discounts	$ 18,936	$ 7,059
Noncurrent Liabilities:
Convertible debt, non-current, unamortized discounts	$ 489,612	$ 0
Stockholders' Deficit:
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	125,000,000	125,000,000
Common stock, shares issued	69,376,179	65,699,753
Common stock, shares outstanding	69,376,179	65,699,753
SeriesA Convertible Preferred [Member]
Stockholders' Deficit:
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	1,200,000	1,200,000
Preferred stock, shares issued	668,720	724,187
Preferred stock, shares outstanding	668,720	724,187
Series B Convertible Preferred [Member]
Stockholders' Deficit:
Preferred stock, par value	$ 1.00	$ 1.00
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	420,000	420,000
Preferred stock, shares outstanding	420,000	420,000

XML

Consolidated Statements of Operations (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
REVENUES	$ 498,917	$ 555,386	$ 1,391,660	$ 1,719,520
COST OF REVENUES	347,205	418,141	1,227,536	1,098,509
GROSS PROFIT	151,712	137,245	164,124	621,011
OPERATING EXPENSES
Selling and marketing	52,962	239,490	292,008	616,068
General and administrative	307,042	362,733	1,211,085	1,978,671
Research and development	155,003	242,736	434,145	774,719
Total Operating Expenses	515,007	844,959	1,937,238	3,369,458
LOSS FROM OPERATIONS	(363,295)	(707,714)	(1,773,114)	(2,748,447)
OTHER INCOME AND EXPENSES
Gain/Loss on extinguishment of debt	0	2,866	(71,634)	(315,428)
Interest expense	(200,909)	(90,790)	(448,131)	(2,198,769)
Total other expenses	(200,909)	(87,924)	(519,765)	(2,514,197)
NET LOSS	$ (564,204)	$ (795,638)	$ (2,292,879)	$ (5,262,644)
NET LOSS PER SHARE — BASIC AND DILUTED	$ (0.01)	$ (0.01)	$ (0.03)	$ (0.10)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC AND DILUTED	69,023,327	64,433,023	67,541,576	50,631,136

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 15, 2011
Entity Information [Line Items]
Entity Registrant Name	Digitiliti Inc
Entity Central Index Key	0001411658
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		69,376,179

XML

Stock Warrants

9 Months Ended

Sep. 30, 2011

Stock Warrants [Abstract]

Stock Warrants Disclosure [Text Block]

Stock Warrants

During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $4,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.02%, (2) a warrant life of five years, (3) expected volatility of 406.18%, and (4) zero expected dividends. The relative fair value of these warrants of $3,704 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, the Company issued 50,000 warrants with an exercise price of $0.07 per share to a third party who provided a short term convertible loan to the Company (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,750 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95%, (2) a warrant life of five years, (3) expected volatility of 406.19%, and (4) zero expected dividends. The relative fair value of these warrants of $3,488 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, the Company issued of total of 1,937,500 warrants with an exercise price of $0.06 per share to two individuals who provided services in connection with the Company’s Junior Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $127,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.88% and 0.95%, (2) warrant life of five years, (3) expected volatility ranging from 407.04% to 407.11%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, 25,000 warrants with an exercise price of $0.20 per share were granted to a third party who provided a short term loan to the Company (see Note 3). These warrants have a term of five years and vested immediately. The warrants have a fair value of $2,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.31%, (2) a warrant life of five years, (3) expected volatility of 401.22%, and (4) zero expected dividends. The relative fair value of these warrants of $1,923 was recorded as a discount to the short term loan provided by this third party.

During the nine months ended September 30, 2011, a total of 500,000 warrants with an exercise price of $0.08 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,000 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.05%, (2) warrant life of five years, (3) expected volatility of 402.61%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance cost in additional paid in capital during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 140,000 warrants with an exercise price of $0.05 were granted to a third party consulting firm that provided services in connection with the $500,000 Equity Raise (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $10,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.81%, (2) warrant life of five years, (3) expected volatility of 403.02%, and (4) zero expected dividends. The fair value of these warrants was recorded as stock issuance costs in an entry to additional paid in capital during the nine months ended September 30, 2011.

In conjunction with the Company’s Junior Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 833,333 warrants with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $58,333 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.62%, (2) warrant life of five years, (3) expected volatility of 405.90%, and (4) zero expected dividends. The relative fair value of these warrants of $52,239 was recorded as a debt discount to the $500,000 Junior Secured Convertible Debt Offering during the nine months ended September 30, 2011.

As a condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 200,000 warrants to the Company's former President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of 5 years, vested immediately and have a fair value of $17,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07%, and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011.

As an additional condition associated with the closing on the Company's Junior Secured Convertible Debt Offering (see Note 4), the Company granted 150,000 warrants to the Company's Interim President and Chief Executive Officer with an exercise price of $0.06 per share. These warrants have a term of five years, vested immediately and have a fair value of $12,750, as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.70%, (2) warrant life of five years, (3) expected volatility of 406.07% and (4) zero expected dividends. The fair value of the warrants was recorded as stock based compensation for the nine months ended September 30, 2011.

In conjunction with the Company’s First Secured Convertible Debt Offering (see Note 4), the Company issued an aggregate of 3,252,821 warrants with an exercise price of $0.30 per share. These warrants have a term of five years, vested immediately and have a fair value of $487,918 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The relative fair value of the 2,977,821 warrants of $316,226 was recorded as a debt discount and the fair value of the 275,000 warrants of $41,250 was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011.

In conjunction with the sale of $550,000 Junior Notes associated with the second tranche of the Company's Junior Secured Convertible Debt Offering, the Company issued an aggregate of 916,667 warrants with an exercise price of $0.06 per share. The warrants have a term of five years, vested immediately and have a fair value of $55,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 0.95% ,(2) warrant life of five years, (3) expected volatility of 408.42%, and (4) zero dividends. The relative fair value of the 916,667 warrants of $50,000 was recorded as a debt discount during the nine months ended September 30, 2011.

In addition, the Company issued 200,000 warrants with an exercise price of $0.20 per share to the two stockholders whose outstanding note of $100,000 was converted into the Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years, vested immediately and have a fair value of $30,000 as calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 2.13%, (2) warrant life of five years, (3) expected volatility of 335.62%, and (4) zero expected dividends. The fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 170,000 warrants with an exercise price of $0.20 per share were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $25,500 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility of 400.26%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, 363,000 warrants with an exercise price of $0.30 were granted to an individual who provided services in connection with the Company’s Secured Convertible Debt Offering (see Note 4). These warrants have a term of five years and vested immediately. The warrants have a fair value of $54,235 which was calculated using the Black-Scholes option pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility of 344.35%, and (4) zero expected dividends. The fair value of these warrants was recorded as deferred financing costs during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, a total of 60,000 warrants with an exercise price of $0.20 per share were issued to an individual who provided consulting services to the Company ratably over a six month period. These warrants have a term of five years and vested immediately. The warrants have a fair value of $3,059 as calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) warrant life of five years, (3) expected volatility ranging between 400.90% and 407.04%, and (4) zero expected dividends. The fair value of these warrants was recorded stock based compensation for the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company modified the terms of 350,000 previously granted warrants whereby the exercise price was reduced to $0.15 per share and the term was changed to 5 years. The incremental increase in the fair value of the warrants was determined to be $384 using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.18%, (2) expected terms ranging from 2.7 to 5.0 years, (3) expected volatility of 344.22%, and (4) zero expected dividends. The incremental increase in the fair value of these warrants was included in the calculation of the loss on the extinguishment of debt during the nine months ended Septmeber 30, 2011.

A summary of warrant activities for the nine months ended September 30, 2011 is as follows:

	Warrants		Weighted- Average Exercise Price			Weighted Average Remaining Life (yrs)
Outstanding at December 31, 2010	8,683,348		$	0.64
Granted	8,848,322		0.17
Expired	(15,824	)	(0.35		)
Outstanding at September 30, 2011	17,515,846		$	0.40		3.77
Exercisable at September 30, 2011	17,515,846		$	0.40		3.77

The weighted average grant date fair value of warrants granted during 2011 was $0.10. The outstanding warrants at September 30, 2011 have an intrinsic value of $292,425.

Warrants expense for the nine months ended September 30, 2011 and 2010 was $49,548 and $387,067, respectively.

XML

Notes Payable

9 Months Ended

Sep. 30, 2011

Notes Payable [Abstract]

Short-term Debt [Text Block]

Notes Payable

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is unsecured, bears interest at 12% per annum and matures on October 8, 2011. In connection with the loan, the lender received warrants to purchase an aggregate of 25,000 common shares at an exercise price of $0.20 per share. The warrants vested immediately and have a term of five years. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $1,923 and was recorded as a discount to the note. The entire discount was amortized to interest expense during the nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company borrowed an aggregate of $50,000 from a member of the Company's Board of Directors. The notes are secured against the Company's accounts receivable and bear interest at 12% per annum. The first note amounting to $25,000 matured on July 29, 2011 and is currently past due. The remaining note for $25,000 matured on September 1, 2011 and is currently past due.

During the nine months ended September 30, 2011, the Company borrowed $16,000 from a member of the Company's Board of Directors. The note is secured against the Company's accounts receivable, bears interest at 12% per annum and matured on June 25, 2011. This note is currently past due.

During the nine months ended September 30, 2011, the Company repaid a previously issued note payable of $231,540.

XML

Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events [Text Block]

Subsequent Events

On October 14, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan.

On October 31, 2011, the Company entered into a Confidential Settlement Agreement with one of its secured convertible note holders reflecting repayment of its convertible note that involves an extended payment plan.

On October 25, 2011, the Company repaid a secured convertible note of $63,981.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies [Abstract]

Legal Matters and Contingencies [Text Block]

Commitments and Contingencies

From time to time, Digitiliti may be subject to routine litigation, claims, or disputes in the ordinary course of business. In the opinion of management; no pending or known threatened claims, actions or proceedings against Digitiliti are expected to have a material adverse effect on Digitiliti’s consolidated financial position, results of operations or cash flows, except for the matter discussed below. Digitiliti cannot predict with certainty, however, the outcome or effect of any litigation or investigatory matters specifically described or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.

In June 2011, the Company was made a party to a lawsuit initiated by one of 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.

On May 6, 2011, the Company entered into a Confidential Settlement Agreement with one of its unsecured convertible note holders reflecting repayment of their convertible note totaling $37,100, on a discounted basis, that involves an extended payment and the conversion of the outstanding principal balance based on an above-market conversion rate. Digitiliti evaluated the modification under FASB ASC 470-50 and determined that the modification was not substantial and did not qualify as a debt extinguishment. On September 6, 2011, the Company made the final payment and converted the outstanding principal balance based on the agreed to above market conversion rate.

Some of the Company’s convertible note holders have not accepted offers to convert their notes under the terms of the Modification Proposal issued in 2009 and Incentive Offer from 2010, or otherwise. The Company is presently in arrears in principal and accrued interest payments in an aggregate total of $216,839 as of September 30, 2011. Although the Company is continuing to discuss payment and/or conversion or extension of these notes with note holders, these outstanding obligations pose a risk to the Company’s ongoing operations.

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Basis of Presentation

9 Months Ended

Sep. 30, 2011

Basis of Presentation [Abstract]

Basis of Presentation and Significant Accounting Policies [Text Block]

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Digitiliti, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 14, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Software Revenue Recognition

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

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.

The DigiLibe service is a multiple element software sales arrangement that is comprised of three key components that act as one: Client Agent, Information Director, and Archive Information Store.

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.

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 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.

New Accounting Pronouncements

The Company does not expect the adoption of recently issued or effective accounting pronouncements to have a material impact on the Company's consolidated financial statements.

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Convertible Debt

9 Months Ended

Sep. 30, 2011

Convertible Debt [Abstract]

Long-term Debt [Text Block]

Convertible Debt

In June 2011, the Company 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. The 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. The Junior Notes also contain a contingent conversion option wherein, at the option of 60% of 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 $0.06 per share but only if at least $1,000,000 in aggregate principal amount of the Junior Secured Convertible Debt Offering has been raised. However, 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.

On June 28, 2011, the Company closed on the first $500,000 tranche of the Junior Secured Convertible Debt Offering. In conjunction with the closing of 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 an exercise price of $0.06 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $52,239, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discount for the nine months ended September 30, 2011 totaled $5,911.

In conjunction with the closing of the first tranche of the Junior Secured Convertible Debt Offering, the Company paid consultants fees totaling $103,750 consisting of $25,000 paid in cash and the issuance of 1,125,000 warrants valued at $78,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $103,750 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $6,701.

On September 15, 2011, the Company broke escrow on the remaining $1,000,000 available under the second tranche of the $1,500,000 Junior Secured Convertible Debt Offering by closing on $550,000 of proceeds from the sale of the 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. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $50,000, which was recorded as a debt discount. The warrant discount is being amortized over the life of the notes using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $1,018.

In conjunction with the September 2011 sale of these $550,000 of Junior Notes, the Company paid consultants fees totaling $75,000 consisting of $26,250 paid in cash and the issuance of 812,500 warrants valued at $48,750 using the Black-Scholes pricing option model. The warrants vested immediately, have a five-year life and an exercise price of $.06 per share. The total consulting fees of $75,000 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $5,634.

The Company analyzed the Junior Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

In addition, the Junior Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature associated with the closing of the first $500,000 tranche was measured on the date of the agreement and determined to be $135,572. And the intrinsic value of the beneficial conversion feature associated with the sale of the $550,000 Junior Notes was measured on the date the proceeds were received and was determined to be $50,000. However, due to the contingent nature of the conversion features, the beneficial conversion features associated with the tranches will be recognized when the contingency is lifted.

On February 28, 2011, the Company completed the placement of $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; but are subordinate to the lien with respect to up to $25,000 of original principal amount of other notes against the Company’s vault.

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. The Company valued the warrants using the Black-Scholes option pricing model. The warrants include standard antidilution provisions for stock splits, stock dividends and recapitalization.

During November and December of 2010, the Company received $250,000 of the cash proceeds under the First Secured Convertible Debt Offering in the form of advanced convertible notes. These advanced convertible notes originally matured at the earlier of the closing of the First Secured Convertible Debt Offering or May and June of 2012, had an interest rate of 12% per annum and were convertible into common shares at $0.20 per share. The principal and accrued interest amounting to $250,000 and $8,844, respectively, were converted into Notes under the First Secured Convertible Debt Offering upon closing.

In conjunction with the sale of the 12% First Secured Convertible Debt Offering, the Company paid consultants fees totaling $64,000 and issued 170,000 five-year warrants with an exercise price of $0.20 per share and 363,000 five-year warrants with an exercise price of $0.30 per share. The fees were paid through the issuance of Notes in the 12% First Secured Convertible Debt Offering. The fees and the fair value of the warrants totaling $143,735 were recorded as deferred financing costs and are being amortized using the effective interest method over the term of the Notes. The amortization of these deferred financing costs during the nine months ended September 30, 2011 totaled $50,434.

The aggregate unamortized deferred financing costs on all notes amounted to $259,402 as of September 30, 2011. The aggregate amortization of deferred financing costs during the nine months ended September 30, 2011 totaled $66,096 including the above mentioned costs and $3,327 of amortization of deferred financing costs incurred during fiscal 2010.

The Company analyzed the First Secured Convertible Debt Offering for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

The First Secured Convertible Debt Offering was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $126,729. In addition, the relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $316,226, which was recorded as a debt discount. The 10% face discount on the Notes was determined to be $118,284 resulting in an aggregate discount of $561,239 being recorded on the Notes. The aggregate discount is being amortized over the life of the Notes using the effective interest method. The amortization expense recorded on these discounts for the nine months ended September 30, 2011 totaled $166,938 resulting in a total unamortized discount of $394,302 as of September 30, 2011.

On February 28, 2011, the Company entered into an agreement to repay and modify three debt obligations owed to two stockholders. The debt obligations owed to these two stockholders 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. The terms of the agreement provided for the repayment of $431,540 of principal on the combined debt and payable with the remaining principal balance owed of $100,000 being converted into a Note under the Secured Convertible Debt Offering. In addition, the outstanding accrued interest owed to these two stockholders of $103,109 was paid through the issuance 687,393 common shares. Under the agreement, the terms of 350,000 warrants previously granted to these stockholders were modified whereby the exercise price was reduced to $0.15 and the term changed to 5 years. An additional 200,000 warrants with a 5-year term and a $0.20 per share exercise price were also granted to these stockholders. Upon final payment of the loan on April 21, 2011, the stockholders released their first lien in the Company’s assets in preference to those lenders associated with the First Secured Convertible Debt Offering.

The Company evaluated the modification of the $100,000 owed to these two stockholders into the 12% First Secured Convertible Debt Offering under FASB ASC 470-50 and determined that the modification was substantial and qualified as a debt extinguishment. The incremental increase in the fair value of the 350,000 modified warrants of $384, the fair value of the additional 200,000 warrants issued of $30,000 and the fair value of the 275,000 warrants issued under the terms of the Secured Debt Offering of $41,250 were recorded as a loss on the extinguishment of debt for the nine months ended September 30, 2011 resulting in an aggregate loss of $71,634.

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 16, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,704, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $10,846 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $3,627.

During the nine months ended September 30, 2011, the Company borrowed $50,000 from a third party. This note is secured against the Company's accounts receivable, bears interest at 12% per annum and matures February 11, 2012. In connection with the loan, the lender received warrants to purchase an aggregate of 50,000 common shares at an exercise price of $0.07 per share. The warrants vested immediately and have a term of five years. The note is convertible at $0.07 per share. The relative fair value of the warrants was measured using the Black-Scholes option pricing model and determined to be $3,488, which was recorded as a debt discount. The note was then evaluated for a beneficial conversion feature and it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature was determined to be $7,060 and was recorded as a debt discount. The debt discounts are being amortized over the life of the note using the effective interest method. The amortization expense recorded on the discounts for the nine months ended September 30, 2011 totaled $2,535.

The Company analyzed the two $50,000 convertible notes for derivative accounting under FASB ASC 815-15 and determined that derivative accounting does not apply to these instruments.

During the nine months ended September 30, 2011, the Company made an aggregate of $225,001 of payments on convertible notes and a previously issued convertible note of $75,000 was converted into 375,000 common shares. Amortization of the unamortized debt discounts totaled $7,059 during the nine months ended September 30, 2011.

A summary of the changes in convertible debt for the nine months ended September 30, 2011, is as follows:

Convertible debt, net at December 31, 2010	$	1,032,941
Add: Notes issued	2,101,128
Less: 10% discount on the Notes	(118,284		)
Less: discount due to relative fair value of warrants	(427,580		)
Less: discount due to beneficial conversion feature	(144,635		)
Less: principal payments	(225,001		)
Less: conversion to common stock	(75,000		)
Add: amortization of debt discounts	189,011
Convertible debt, net at September 30, 2011	$	2,332,580
Less: current maturities, net	(471,064		)
Long-term portion of convertible debt, net	$	1,861,516

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Common Stock

9 Months Ended

Sep. 30, 2011

Common Stock [Abstract]

Common Stock Disclosure [Text Block]

Common Stock

During the nine months ended September 30, 2011, the Company:

a) issued 936,698 common shares for services valued at $78,929,

b) issued 687,393 common shares to repay accrued interest of $103,109 (see also Note 4),

c) issued 277,335 common shares for the conversion of 55,467 Series A preferred shares,

d) issued 1,400,000 common shares for total cash proceeds of $63,000, net of issuance costs of $7,000.

e) issued 375,000 common shares for conversion of debt principal of $75,000 (see also Note 4).

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Stock Options

9 Months Ended

Sep. 30, 2011

Stock Options [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Stock Options

During the nine months ended September 30, 2011, options to purchase 225,000 common shares were granted by the Company to a member of the Board of Directors at exercise price of $0.08 per share. These options have a contractual term of 5 years and vest over 3 years. The options have a fair value of $17,997 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 377.58%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 585,000 common shares were granted by the Company to executive management and a key employee at an exercise prices ranging from $0.05 to $0.07 per share. These options have a contractual term of 5 years and a vesting term of 3 years from the date of grant. The options have a fair value of $39,437 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility ranging from 348.34% to 360.03%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 1,050,000 common shares were granted by the Company to executive management and key employees at an exercise price of $0.08 per share. These options have a contractual term of 5 years and a vesting term of 3 years. The options have a fair value of $58,711 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging between 3.0 to 4.0 years, (3) expected volatility ranging from 341.24% to 359.11%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 235,000 common shares were granted by the Company to certain members of the Board of Directors at exercise prices ranging from $0.06 to $0.09 per share. These options have contractual terms ranging from 5 to 10 years and vesting terms ranging from 12 months to 3 years. The options have a fair value of $19,675 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life ranging from 3.0 to 5.0 years, (3) expected volatility ranging from 359.11% to 372.09%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 1,200,000 common shares were granted by the Company to certain employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years and a vesting term of 3 years with 154,566 of the options fully vested at grant date. The options have a fair value of $227,872 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 200,707 common shares were granted by the Company to certain officers, as payment of a portion of their salaries, at an exercise price of $0.19 per share. These options have a contractual term of 5 years and vest monthly through June 30, 2011. The options have a fair value of $38,014 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.05%, (2) expected life ranging from 2.51 to 2.72 years, (3) expected volatility of 366.57%, and (4) zero expected dividends.

During the nine months ended September 30, 2011, options to purchase 250,000 common shares were granted by the Company to three employees at an exercise price of $0.19 per share. These options have a contractual term of 5 years, and a vesting term of 3 years. The options have a fair value of $47,473 which was calculated using the Black-Scholes option-pricing model. Variables used in the valuation include: (1) discount rate of 1.44%, (2) expected life of 4.0 years, (3) expected volatility of 344.12%, and (4) zero expected dividends.

A summary of option activities for the nine months ended September 30, 2011 is reflected below:

	Options		Weighted- Average Exercise Price			Weighted Average Remaining Life (yrs)
Outstanding at December 31, 2010	2,990,000		$	0.34
Granted	3,735,707		0.13
Canceled	—		—
Expired	(1,335,000	)	$	(0.30	)
Outstanding at September 30,2011	5,390,707		$	0.20		3.8
Exercisable at September 30, 2011	2,306,263		$	0.28		3.10

The weighted average grant date fair value of options granted in 2011 was $0.12. The outstanding options at September 30, 2011 have an intrinsic value of $215.

Stock option expense for the nine months ended September 30, 2011 and 2010 totaled $253,696 and $214,742 respectively. As of September 30, 2011, there was approximately $604,630 of unrecognized cost which is expected to be recognized through August 2014.

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Consolidated Statements of Cash Flows (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
OPERATING ACTIVITIES
Net loss	$ (2,292,879)	$ (5,262,644)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense	95,398	252,497
Amortization of software license	200,421	222,619
Beneficial conversion feature on converted notes	0	1,522,950
Amortization of deferred financing costs	66,096	39,050
Amortization of debt discounts	189,011	324,173
Loss on extinguishment of debt	71,634	315,428
Warrant expense	49,548	387,067
Common shares issued for services	78,929	152,340
Employee stock option expense	253,696	214,742
Changes in operating assets and liabilities:
Accounts receivable	(208,254)	45,685
Prepaid and other current assets	79,991	78,805
Other assets	0	1,000
Accounts payable	(150,089)	139,590
Accounts payable — related parties	0	(7,861)
Accrued expenses	195,937	203,060
Deferred income	0	14,486
Deferred rent	(764)	(7,188)
Net cash used in operating activities	(1,371,325)	(1,364,201)
INVESTING ACTIVITIES
Purchase of property and equipment	(5,863)	(47,794)
Purchase of software license	0	(19,282)
Net cash used in investing activities	(5,863)	(67,076)
FINANCING ACTIVITIES
Proceeds from notes payable	50,000	0
Cash paid for debt issuance costs	(49,797)	0
Proceeds from sale of common stock, net of issuance costs	63,000	1,199,050
Proceeds from issuance of Series B convertible preferred stock	0	300,000
Proceeds from exercise of warrants	0	509,900
Payments on capital lease obligations	(23,308)	(35,537)
Proceeds from notes payable — related parties	66,000	0
Proceeds from convertible debt	1,910,000	0
Payments on notes payable	(231,540)	(364,572)
Payments on convertible debt	(225,001)	(95,000)
Net cash provided by financing activities	1,559,354	1,513,841
NET INCREASE IN CASH	182,166	82,564
Cash at beginning of year	27,557	141,086
Cash at end of year	209,723	223,650
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest	63,290	75,094
Cash paid for income taxes	0	0
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Convertible debt issued for debt issuance costs	64,000	0
Warrants issued for debt issuance costs	207,235	0
Accrued interest converted to convertible debt	8,844	0
Debt discount due to warrants issued with debt	427,580	0
Common stock issued for the conversion of convertible debt	75,000	0
Debt discount due to beneficial conversion feature	144,635	0
Common stock issued for the conversion of Series A preferred stock	277	0
Common stock issued for debt and accrued interest	103,109	3,265,973
Preferred stock issued for accrued interest	0	724,187
Common stock issued for liabilities	0	12,879
Notes payable issued for maintenance fees	0	56,634
Accrued interest converted to debt principal	$ 0	$ 21,107

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Going Concern

9 Months Ended

Sep. 30, 2011

Going Concern [Abstract]

Going Concern Disclosure [Text Block]

Going Concern

As shown in the accompanying financial statements, the Company incurred a net loss of $2,292,879 for the nine months ended September 30, 2011 and had a working capital deficit of $858,442 as of September 30, 2011. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

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.

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Consolidated Balance Sheets (USD $)	Sep. 30, 2011	Dec. 31, 2010
CURRENT ASSETS
Cash	$ 209,723	$ 27,557
Accounts receivable	541,941	333,687
Prepaid and other current assets	167,979	247,970
Total current assets	919,643	609,214
Property and equipment, net	68,570	158,105
Software license, net	236,187	436,608
Deferred financing costs	259,402	4,466
Other assets	6,322	6,322
Total assets	1,490,124	1,214,715
CURRENT LIABILITIES
Accounts payable	510,358	692,923
Accrued expenses	670,674	554,978
Deferred income	9,989	9,989
Notes payable	50,000	231,540
Note payable to related party	66,000	0
Current maturities of convertible debt, net of unamortized discounts of $18,936 and $7,059	471,064	782,941
Current maturities of capital lease obligations	0	23,308
Total current liabilities	1,778,085	2,295,679
Convertible debt, non-current, net of unamortized discounts of $489,612 and $0	1,861,516	250,000
Other liabilities	3,607	3,607
Total liabilities	3,643,208	2,549,286
STOCKHOLDERS’ DEFICIT
Common stock, $.001 par value; 125,000,000 shares authorized, 69,376,179 and 65,699,753 shares issued and outstanding	69,376	65,700
Additional paid-in capital	25,880,222	24,409,477
Accumulated deficit	(28,523,351)	(26,230,472)
Total stockholder's deficit	(2,153,084)	(1,334,571)
Total liabilities and stockholder's deficit	1,490,124	1,214,715
SeriesA Convertible Preferred [Member]
STOCKHOLDERS’ DEFICIT
Preferred Stock, Value, Issued	669	724
Series B Convertible Preferred [Member]
STOCKHOLDERS’ DEFICIT
Preferred Stock, Value, Issued	$ 420,000	$ 420,000