UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 ___________________________________  FORM 10-Q  (Mark One) [X]     Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended March 31, 2011 OR [   ]    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934  Commission file number: 0-23391  XFORMITY TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)  Colorado84-1434313(State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)  4100 Spring Valley Road, Suite 800,  Dallas, Texas 75244(Address of principal executive offices, including zip code)
Issuer's Telephone No., including area code: (972) 661-1200  Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act  during the past 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.   YesX       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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.  Smaller reporting company   [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  NoX The number of shares outstanding of the Issuers Common stock, $0.0001 par value, at May 14, 2011 is 51,931,553.    1        PART I.FINANCIAL INFORMATIONPAGEItem 1.Financial statementsConsolidated Balance Sheets  March 31, 2011 (Unaudited) and June 30, 20103Unaudited Consolidated Statements of Operations  Three Months and Nine Months Ended March 31, 2011 and 20104Unaudited Consolidated Statements of Cash Flows  Nine Months Ended March 31, 2011and 20105Notes to Unaudited Consolidated Financial Statements6-12Item 2.Management's Discussion and Analysis and Results of Operations13-16Item 3.Quantitative and Qualitative Disclosures About Market Risk16Item 4.Controls and Procedures16-17PART II.OTHER INFORMATIONItem 1.Legal Proceedings17Item 2.Unregistered Sales of Securities and Use of Proceeds17Item 3.Defaults upon Senior Securities17Item 4.Submission of Matters to a Vote of Security Holders17Item 5.Other Information17Item 6.Exhibits and Reports on Form 8-K17         2    XFormity Technologies, Inc. and Subsidiary Consolidated Balance Sheets March 31,June 30,20112010ASSETS(Unaudited)Current AssetsCash and cash equivalents$              25,411$               76,952Accounts receivable89,35454,861Deferred commission expense9,19136,762Prepaid expenses23,0535,492Total current assets147,009174,067Property and equipment, net of accumulated depreciation27,24933,569Security deposit8,7078,707Total Assets$              182,965$              216,343LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesObligation from debt reduction agreement$                 65,000$              490,000Note payable-related party-118,667Accounts payable118,020147,407Accrued expenses237,965181,439Current portion - deferred revenue42,262106,332Current portion  deferred credits12,30315,202Convertible debentures, net of original discount related parties673,435573,554Convertible debentures300,081160,081Derivative liabilities debentures and warrants495,341357,242Total Current Liabilities1,944,4072,149,924Deferred revenues  net of current portion-2,778Deferred credits  net of current portion140,224146,661Total liabilities2,084,6312,299,363Stockholders' DeficitPreferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding at March 31, 2011 and June 30, 2010--Common stock, $0.0001 par value, 125,000,000 shares authorized, 51,931,553 shares issued and outstanding at March 31, 2010 and  June 30, 20105,1935,193Common stock payable91,250-Additional paid-in capital6,933,3006,933,300Accumulated deficit(8,931,409)(9,021,513)Total Stockholders' Deficit(1,901,666)(2,083,020)Total Liabilities and Stockholders' Deficit$               182,965$              216,343
  The accompanying notes are an integral part of these consolidated financial statements.      3    XFormity Technologies, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)(Unaudited)Three Months Ended March 31,Nine Months Ended March 31,2011201020112010As RestatedAs RestatedRevenue$              426,625$                478,872$             1,359,327$           1,464,996Cost of revenue160,957157,646497,968461,641Research and Development149,724128,296357,428375,743Marketing and selling60,16359,588212,555194,360General and administrative190,77091,233406,364314,248Total operating expenses561,614436,7631,474,3151,345,992Income (loss) from operations(134,989)42,109(114,988)119,004Interest expense, net(56,916)(20,395)(100,027)(62,022)Income (loss) before other income and provision for income taxes(191,905)21,714(215,015)56,982Gain on debt reduction185,000-185,000-Change in fair value - derivatives269,175(173,847)125,007107,940Income (loss) before provision for income taxes262,270(152,133)94,992164,922Provision for state income taxes(370)2,294(4,888)11,687Net Income (loss)$                261,900$           (154,427)$                 90,104153,235Net Income (loss) per share  basic and diluted$                   0.01$                  0.00$                0.00$         0.00Weighted average number of shares  basic and diluted51,931,55351,931,55351,931,55351,931,553  The accompanying notes are an integral part of these consolidated financial statements   4   XFormity Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited)Nine Months Ended March 31,20112010As RestatedOperating activities:Net income$                      90,104$               (62,645)Depreciation11,80615.667Amortization of deferred commission27,57227,572Amortization of debt discount29,859-Non-cash transactions for:Debt forgiveness from legal obligation(185,000)-Change in fair value - derivatives(125,007)107,940Compensation from share-based payments91,25017,673Changes in:Accounts receivable(34,493)(57,852)Prepaid expenses( 17,562)9,905Accounts payable(29,387)27,130Accrued expenses56,52649,795Deferred revenue(66,848)(53,245)Deferred credits(9,336)(10,779)Net cash provided (used) in operating activities(160,516)71,161Investing activities:Purchases of property and equipment(5,486)(8,496)Net cash used in investing activities(5,486)(8,496)Financing activities:Issuance of convertible debentures798,000-Payment against debt from legal obligation(100,000)(30,000)Retirement of note payable  related party(118,667)-Retirement of convertible debenture -  related party(464,872)-Net cash provided (used) in financing activities114,461(30,000)(Decrease) increase in cash and cash equivalents(51,541)32,665Cash and cash equivalents, beginning of period76,95214,262Cash and cash equivalents, end of period$         25,411$                   46,927Supplemental disclosure of non-cash financing and investing activitiesInterest paid$           34,846$           37,119Non-cash:Issuance of convertible debentures from legal obligation$         140,000$                      -Debt discount due to derivative liability$         263,106$                      -  The accompanying notes are an integral part of these consolidated financial statements. .  5   XFormity Technologies, Inc. and Subsidiary
Notes to Consolidated Financial StatementsMarch 31, 2011 (Unaudited) Note 1   Organization and Nature of Business. The reporting entity in this Form 10-Q is XFormity Technologies, Inc. (a Colorado Corporation) ("XFormity" or the "Company") and includes the operations of XFormity, Inc. (a Texas Corporation) (XFM), the wholly owned subsidiary of the Company.  XFormity provides technology and services to multi-unit business operators.  The Companys core products are hosted Business Intelligence (BI), Balanced Scorecard and Benchmarking solutions.  These solutions help customers with operational data analysis, trend reporting, issue identification and tracking.  The Company provides data integration and management services which feed the BI and Scorecard solution with data from many key data sources.  The Companys solutions are provided to customers as a hosted (software-as-a-service) model, which allows the Company to rapidly configure and implement solutions for new customers in an affordable, cost-effective manner. The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada.  XFormity is the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada. In addition to this deployment, the Company's success in delivering solutions on a big scale is demonstrated by the use of its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants. The Company has expanded its services to customers in both fine and casual dining. Note 2    Basis of Financial Statement Presentation. The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements. The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operation, financial position or cash flow. Although management believes the disclosures and information presented are adequate to not make the information misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto included in its June 30, 2010 Annual Report on Form 10-K. Operating results for the three months and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other period.  6   The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent on the Companys ability; (1) to obtain adequate capital from outside sources, or (2) to fund itself through profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Reclassification In 2010, certain prior period items have been reclassified from convertible debentures to convertible debentures-related party in order to correct disclosure and presentation. This reclassification did not affect total current liabilities or accumulated deficit. Note 3   Going Concern As shown in the accompanying consolidated financial statements, the Company has incurred an accumulated deficit of $8,931,409 and a working capital deficit of $1,797,398 through the period ended March 31, 2011. The Company is continually reviewing its operations and attempting to improve operating results and its balance sheet.  The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Note 4    Property and Equipment Property and equipment are stated at cost.  Depreciation of property and equipment is computed for financial statement purposes using accelerated methods over a five year estimated useful life of the assets. Accumulated depreciation at March 31, 2011 was $169,475 and $157,669 at June 30, 2010.  Management has evaluated the difference between the straight line and accelerated method used and has deemed the difference immaterial. Note 5   Deferred Commission  In August 2007, the Company renegotiated a previous commission agreement that provides for monthly payments of $3,000 for four years commencing July 1, 2007 and the issuance of 1 million shares of the Companys common stock.  The determination of the amount was based on the fair value of the issued common stock at the commitment date and is amortized over the life of the contract. Nine Months Ended
March 31, 2011Deferred commission in prepaid expenses$  9,191Amount of commission expensed in this period$  27,572    7   Note 6    Deferred Credits In January 2006, the Board of Directors, agreed to offer then seven major customers, (consortium members) the following options in exchange for any further billing credits: (1) a right to receive $150,000 in billing credits applied against their monthly business intelligence software billings at a rate of 25% of the billings commencing July 1, 2006, or (2) a right to receive an additional 833,333 shares of the Companys common stock per consortium member. These shares would be in addition to the shares issued to consortium members in exchange for their original $100,000 investment in fiscal 2004. Two consortium members elected option (1), one commencing January 1, 2006, and the other commencing July 1, 2006.  The five remaining consortium members elected option (2) and in May 2006, the Company issued 4,166,665 shares under this agreement. The deferred credits at March 31, 2011 in the respective amounts of $78,735 and $73,792, net of amortization, are expected to be utilized over a 12 to 13 year period based on their current billing rates using a 5% discount rate that approximated the risk-free rate in effect during the offered option period. Note 7    Debt Reduction Obligation In October 2008, the Company signed an agreement with its patent litigation counsel to issue 1,000,000 shares of the Companys common stock issued on October 24, 2008 valued at the closing price of $0.14 per share for a total value of $140,000, to pay cash payments of $10,000 per month that extend over 48 months for a total of $480,000 and four contingent additional debt reduction payments of $65,000 over a 3 year period, each contingent upon the Company achieving revenue targets of $2 million, $3 million and $4 million, respectively, for a total of $260,000. This resulted in a gain of $763,769 in full settlement of the Companys obligation of $1,578,769. In fiscal 2010, the Company did not achieve the revenue targets and thus further reduced the maximum payout by $65,000 to $490,000 at June 30, 2010 resulting in a further gain of $65,000 in 2010. In March 2011, in settlement of the remaining $490,000, the Company paid $100,000 cash and issued $140,000 of its 9% convertible debentures. If the Company does achieve the revenue target of $2 million this year, it will require a payment of an additional $65,000. Note 8   Accounts Payable Accounts payable represents balances due to trade creditors, licensors and fees for professional services incurred for legal, and audit services.  8   Note 9   Accrued Expenses March 31,June 30,20112010401 (K) obligation$         26,978$         26,285Accrued interest on convertible debentures108,45386,630Other102,53468,524Totals$       237,965$       181,439 Note 10   Convertible Debentures In August and September 2010, as part of its plan to raise additional working capital, the Company sold  $198,000 of its 9% convertible debentures to management, other related parties and an employee, all accredited investors.  The proceeds were used to retire existing note payablerelated party debt and as working capital for operations. In February, 2011, the Company sold an additional $600,000 of convertible debentures to related parties, proceeds of which were used to retire previously issued debentures, accrued interest thereon, and related costs. In March 2011, as part of the settlement obtained under the debt reduction obligation in Note 7 above, the Company paid $100,000 and issued an additional $140,000 of its debentures. As of March 31, 2011 and June 30, 2010, the Company had outstanding an aggregate of $1,206,763 and $733,635, respectively, of the 9% convertible debentures that convert at thelesser of (i) 70% of the price per share of common stock or common stock equivalent paid by investors in the Companys next round of equity or debt financing consisting of at least $1,000,000 in cumulative gross proceeds, or (ii) $0.12 and mature between April 8, 2011 and March 11, 2012. Of the total outstanding debentures, $906,682 is held by related parties. As of March 31, 2011 and June 30, 2010, accrued interest on the debentures was $108,453 and $78,323, respectively. The Notes issued during the nine months ended March 31, 2011 have a beneficial conversion feature, which have a value of $263,106, as determined by an independent valuation specialist. The beneficial conversion value is discounted against the Notes and is being amortized as interest expense using the effective interest method over the term of the Notes. The total amortization as of March 31, 2011 is $29,859 and the remaining unamortized discount of $233,247 is reflected as a reduction of the principal balance of the debentures.  Note 11    Derivative Liabilities The Companys warrants and its convertible debentures have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This ratchet provision results in a derivative liability in our financial statements. To calculate the fair value of the derivative liabilities, the Company enlisted a valuation  9   specialist and valued the derivative liabilities using a binomial model which included the following assumptions 1) volatility of 275% 2) riskless rate of 0.30% for debt instruments and 0.50% for warrants 3) current closing stock price of $0.04 on March 31, 2011, 4) exercise prices of $0.12, $0.14, or $0.18, depending on instrument, and 5) established the minimum possible issuance price to the number of shares that could be acquired in the conversion not to exceed 4.99% of the outstanding shares. As of July 1, 2009, the fair value of these derivatives of $766,163 was recognized and resulted in a cumulative adjustment to accumulated deficit. Our derivative liabilities increased to $495,341 at March 31, 2011, from $357,242 at June 30, 2010. During the three months and nine months ended March 31, 2011, the Company recorded gains of $265,179 and $125,007, respectively, for the change in fair value.  During the three months and nine months ended March 31, 2010, the Company recorded a gain of $173,847 and a loss of $107,940, respectively, for the change in fair value of these derivatives. The following tabular presentation reflects the components of derivative financial instruments on the Companys balance sheet at March 31, 2011 and June 30, 2010: March 31,
2011June 30,
2010Common stock warrants$         231,487$           43,870Embedded conversion features263,854313,372Total$         495,341$         357,242 Note 12   Equity On February 11, 2011, the Board of Directors authorized the issuance of 1,825,000 shares of the Companys common stock to the existing employees, members of the Board and one consultant in consideration of services previously rendered and in consideration of the cancellation of all outstanding options previously granted to those persons. Each of the six members of the Board received 250,000 shares, six employees each received 50,000 shares and the one outside consultant received 25,000 shares. The shares were valued at the closing price of the stock on that date, $0.05, as traded on the Electronic Bulletin Board (NASDAQ) and were recorded on the Companys books as an expense in the amount of $91,250 in the current quarter.  As of the date of this report, the shares have not been issued and are not included in the weighted average calculation of the earnings per share. As of March 31, 2011 the shares are included in common stock payable. There were no fees or commissions paid in connection with the transaction. Note 13    Earnings per Share Basic earnings per share are calculated based on the weighted-average number of outstanding common shares.  As of March 31, 2011, the Company had 51,931,553 shares outstanding, with 1,825,000 shares to  10   be issued (SeeNote 12 above).  The Company uses the treasury stock method to determine whether any convertible debentures or warrants are to be included in the diluted earnings per share calculation.  As of March 31, 2011, the Company had convertible debentures of $1,206,763 convertible at a conversion price of the lesser of (i) 70% of the price per share of common stock or common stock equivalent paid by investors in the Companys next round of equity or debt financing consisting of at least $1,000,000 in cumulative gross proceeds, or (ii) $0.12, warrants outstanding of 4,802,642 consisting of 2,401,321 with an exercise price of $0.14 and 2,401,321 with an exercise price of $0.18. For the nine months ended March 31, 2011, the conversion of all of the above would result in a possible dilution of 22,615,961 shares.  However, as the convertible debentures and warrants have a strike price equal to or in excess of the market price of $0.04 at March 31, 2011, and are considered not in the money, they are excluded from the calculation of diluted earnings per share due to their non-dilutive effect. Note 14    Income Taxes As of July 1, 2007, the Company adopted the current accounting guidance for theAccounting for Uncertainty in Income Taxes,which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions.  The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns. At March 31, 2011, the Company had net operating loss carry-forwards approximating $5,289,000 that begins to expire in 2018 through 2029.  The carry-forward losses and the related deferred tax benefit are significantly limited by the provisions of Internal Revenue Code Section 382. The Companys taxable losses, as determined by an independent tax advisor, have created a deferred tax benefit of approximately$1,896,000 which is fully reserved. Note 15   Related Party Transactions Seven of our customers who are also stockholders in the Company, generated revenues approximating $37,900 and $154,500 in the three months and nine months ended March 31, 2011.  In the same periods in the prior year, revenues approximated $84,600 and $270,200. A principal in one current customer serves as a member of the Board of Directors and the Audit Committee. Of the total 9% convertible debentures issued through March 31, 2011, $906,682 is held by related parties. Of that amount, $198,000 was purchased in the quarter ended September 30, 2010 and $600,000 was purchased in the quarter ended March 31, 2011. Interest expense accrued to related parties for the three months and nine months ended March 31, 2011 was $11,392 and $51,619, respectively, and $12,728 and $30,705, respectively, in the comparable periods in the prior year. Note 16    Commitments and Contingencies The Company entered into a 65 month net lease at its Dallas, Texas office, commencing June 1, 2008, with rent approximating $4,300 per month. The Company also has a one year lease for $700 per month at its Northbrook, Illinois office.  Total rent expense for the three months and nine months ended March 31, 2011 was $15,226 and $45,434, respectively and $14,937 and $44,807, respectively, in the comparable periods in the prior year. The Company accounts for these leases as operating leases.  11   Note 17   Subsequent Events Management reported that there are no reportable subsequent events through the date of this filing. Note 18    Restatement of the Quarters ended March 31, 2010 The Company has restated its quarterly unaudited financial statements to reflect the current accounting guidance, Determining Whether an Instrument (or imbedded Feature) is Indexed to an Entitys Own Stock. The Companys 9% Convertible Debentures and the Warrants previously issued  have reset provisions to the exercise price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This provision required a reclassification to the liability based on the reset feature of both the debentures and warrants if the Company sells equity or derivatives at a price below the exercise price of the notes and warrants. The Company previously restated the financial statements for the quarters ended September 30, 2009, December 31, 2009, and March 31, 2010. Please refer to the June 30, 2010 Form 10-K filed on October 13, 2010 for detail of adjustments.  12    ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS Safe Harbour - Forward Looking Statements When used in this Quarterly Report on Form 10-Q, in documents incorporated herein and elsewhere by us from time to time, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements concerning our business operations, economic performance and financial condition, including in particular, our business strategy and means to implement the strategy, our objectives, the amount of future capital expenditures required, the likelihood of our success in developing and introducing new products and expanding the business, and the timing of the introduction of new and modified products or services. These forward looking statements are based on a number of assumptions and estimates which are inherently subject to significant risks and uncertainties, many of which are beyond our control and reflect future business decisions which are subject to change. A variety of factors could cause actual results to differ materially from those expected in our forward-looking statements, including those set forth from time to time in our press releases and reports and other filings made with the Securities and Exchange Commission. We caution that such factors are not exclusive. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events.  RESULTS OF OPERATIONS REVENUE   The Companys primary revenue is derived by delivering software as a service, or hosted solutions for its clients billed on a monthly basis for each location serviced.  For the three months and nine months ended March 31, 2011, the Company generated $426,625 and $1,359,327, respectively, in revenues compared to $478,872 and $1,464,996 in the comparable prior years periods.  This decrease in revenues was attributable to a decrease in professional service contracts for special projects, competitive pricing adjustments and other revenue sources but was offset by an increase primarily attributable to the licensing of the Companys solutions by additional customers. In 2008, and 2007, the Company received payments under contracts for the development of various solutions, subject to multi-year licensing agreements. The revenue under these contracts is recognized over a three year period to coincide with the terms of the related licensing fees. The Company recognized the development work in the amounts of $11,000 and $33,000 in the respective three months and nine months ended March 31, 2011 as compared to $21,000 and $63,000 in the comparable prior years periods.In the three months and nine months ended March 31, 2011 and 2010, the Company reflected $75,000 and $225,000, respectively, under the license agreements.  As of March 31, 2011, the Company included $11,000 from the development fees in deferred revenues on its balance sheet. COST OF REVENUE   The cost of revenue for the three months and nine months ended March 31, 2011, consist primarily of personnel, related payroll costs and support service costs in the respective amounts of $160,957 and $497,968 as compared to $157,646 and $461,641, respectively, in the  13   comparable periods in the prior year. Other costs include travel, data hosting services, telecommunication costs and depreciation of computer equipment used in the maintenance and processing of customers' data.  The three months and nine months ended March 31, 2011 included a one time compensation charge of $10,000 for the issuance of common stock to employees. In the current years quarter, the time allocated to operations decreased by $7,639 but increased overall for the nine months by $21,046 excluding the stock issuance. Other than an increase in license fees of $3,429 through March 31, 2011, other operating costs decreased by $2,165 in the current quarter and increased $1,852 in the nine months ended March 31, 2011. RESEARCH AND DEVELOPMENT   Research and development costs are charged to operations as incurred and consist primarily of personnel, related benefit costs and outside contracted services. The costs for the three months and nine months ended March 31, 2011 were $149,724 and $357,428, respectively, as compared to $128,296 and $375,743 in the comparable periods in the prior year.In the current years periods, the Company re-allocated personnel time from development to operations and incurred a one-time compensation charge in the current quarter of $17,500 for the issuance of common stock to employees. In the current quarter, payroll excluding the stock issuance, related costs and other costs increased by $3,928.  In the nine month period ended March 31, 2011, excluding the stock issuance, the Company reduced payroll and related costs by $25,250, the use of outside contractors by $10,000 and reduced other costs by $566. The Companys research and development is part of its strategic plan to provide enhancements and integration into new and existing franchise operations in the retail market. MARKETING AND SELLING   Marketing and selling costs for the three months and nine months ended March 31, 2011 were $60,163 and $212,555, respectively, compared to $59,588 and $194,360 in the comparable periods of the prior year. The Companys marketing and selling expenses in the current periods increased due to higher compensation to an outside sales resource and re-allocated personnel time to marketing and sales from administration in the respective amounts of $2,536 and $13,459, a higher cost for commissions of $9,000 in the nine month period, offset by reduced costs for advertising, travel, and trade shows in the respective periods of $1,961 and $4,264. For the current fiscal year, the Company continues to expand its customer base through direct sales, related business partnerships, trade shows and referrals from its relationship with existing clients. GENERAL AND ADMINISTRATIVE   The Companys general and administrative costs consist primarily of executive salaries and related benefits, professional fees for attorneys, our independent auditor, rent, expenses related to being a public company and other administrative costs.  The costs for the three month and nine month periods ended March 31, 2011 were $190,770 and $406,364, respectively, compared to $91,233 and $314,248 in the comparable periods of the prior year. On February 11, 2011, the Board of Directors cancelled all previously issued stock option grants and authorized the issuance of 1,825,000 shares of the Companys common stock to the non-management Board members, Company management, all of the employees and one outside consultant based on the closing price on that date of the Companys common stock as listed on the electronic bulletin board of $0.05 per share.  The total charge for this transaction was $91,250, of which $10,000 and $17,500 were reflected in the respective categories of Cost of Revenue and Research and Development above. The remaining amount of $63,750 was allocated to various expense categories in General and Administrative. In the current years periods, payroll and related costs increased by $12,823 and $4,344 excluding a one-time compensation charge in the current quarter of $25,000 for the issuance of common stock to managementdue to the re-allocation of personnel time. In the current quarter, the Company incurred legal  14   fees of $29,063 relating to resolutions of debenture issues and the debt obligation to former counsel, $38,750 from the common stock issuance to members of the Board of Directors and a decrease in other administrative costs of $6,099. In the nine months ended March 31, 2011, the Company reflected a decrease in other administrative costs of $5,041. INTEREST EXPENSE   Interest expense consists of the following: Interest expenseThree Months EndedMarch 31,Nine Months EndedMarch 31,2011201020112010Accrued interest on convertible debentures$    25,985$   16,281$  64,977$  49,566Accrued interest on loan payable-2,0771,0266,230Debt discount on debentures29,859-29,859-Interest incurred from the deferred credits issued to consortium members1,3982,2124,9016,684Interest income earned on cash and cash equivalents(326)(175)(736)(458)Net interest expense$   56,916$   20,395$   100,027$     62,022 NET INCOME (LOSS)The net income for the three months and nine months ended March 31, 2011 was $261,900 and $90,104, respectively, compared to net loss of $(154,427) and a net income of $153,235 for the comparable periods in 2010.  The increase in the net income was primarily the result of the following: the gain on the reduction of the debt obligation, the change in fair value of the derivatives compared to the prior year, decreased revenue from professional service fees offset by an increase of the licensing of the Companys solutions to additional customers and reduced by a one time compensation charge for the issuance of 1,825,000 shares of the Companys common stock to its Board Members and employees. Reduced costs for outside contractors were offset by additional costs for our marketing and sales consultant and commissions and overall minimal changes in most other categories as noted above. In the comparable nine months of the prior fiscal year, the Company also incurred a non-cash compensation expense of $17,673 resulting from an option grant to the newest member of its Board of Directors. The net income per share for the three months and nine months ended March 31, 2011 and 2010 was $0.01 and $0.00 per share, respectively, on 51,931,553 weighted average common shares outstanding in both periods as compared to $0.00 and $0.00 per share, respectively, on 51,931,553 weighted average common shares outstanding in both comparable periods in the prior year.   15   LIQUIDITY AND CAPITAL RESOURCES   As of March 31, 2011, there was an accumulated deficit of $8,931,409 and the Companys cash position was $25,411.  While there can be no assurances that the Company will continue to increase its customer base and related revenues necessary to cover its operating costs; the Companys management believes the opportunities identified in its pipeline are achievable to continue generating operating profitability and positive cash flow in the near future.  In the quarter ended March 31, 2011, the Company sold additional convertible debentures for $600,000, retired a disputed debenture of $464,872 and settled an outstanding debt obligation of $425,000 at $185,000 less than face value.  However, the Company may need additional financing and there is no assurance that such financing will be available, if at all, at terms acceptable to the Company.  If additional funds are raised by the issuance of equity securities, existing stockholders may experience dilution of their ownership interests and these securities may have rights senior to those of holders of the common stock.  If adequate funds are not available or not available on acceptable terms, it could have a material adverse effect on the Company's financial condition and results of operations. Item 3.    Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 4.    Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief  financial  officer, the effectiveness of our disclosure controls and procedures  (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).  Based  upon that evaluation, our  principal executive officer and principal financial officer concluded that, as  of the end of the period covered in this report, our disclosure controls and procedures were ineffective to ensure  that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange  Act") is recorded, processed, summarized and  reported within the required time periods and is accumulated and communicated to  our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The conclusion reached by our Chief Executive Office and Chief Financial Officer was a result on the continued material weaknesses and described below and previously reported in our form 10K for the year ended December 31, 2010.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the registrants financial reporting. We have identified the following material weaknesses:   As of March 31, 2011, effective controls over financial statement disclosure were not maintained. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.  16     As of March 31, 2011, effective controls over transactions were not maintained. Specifically, controls were not designed and in place to ensure that the derivative liabilities were properly reflected. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness resulted in restatement of the three quarterly periods ended September 30, 2009, December 31, 2009, and March 31, 2010.  Changes in Internal Control over Financial Reporting In addition, our management with the participation of our Principal Executive Officer and Principal Financial Officer have determined that no change in our internal control over financial reporting occurred during or subsequent to the quarter ended March 31, 2011 that has materially affected, or is (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1       Legal Proceedings  None Item 2      Unregistered Sales of Securities and Use of Proceeds None, except as previously reported.  ITEM 3    Defaults upon Senior Securities None ITEM 4   Submissions of Matters to a Vote of Security Holders The Company did not submit any matters to a vote of security holders during the three months ended March 31, 2011. ITEM 5     Other information  None ITEM 6      Exhibits and Reports on Form 8-K 31.Certification32.Certification pursuant to USC Section 1350   17    SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. XFormity Technologies, Inc.  Date:  May 16, 2011 /s/Christopher Ball Christopher Ball, Chief Executive Officer   Date:  May 16, 2011 /s/ Jack Rabin Jack Rabin, Chief Financial Officer  18