**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **___________________________________**
  **FORM
        10-QSB**
  (Mark
        One)
  [X]     Quarterly
        report under Section 13 or 15(d) of the Securities Exchange Act of
        1934
  **For
        the quarterly period ended December 31, 2006**
  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 small business issuer as specified in its charter)
 
 **Colorado**
              **84-1434313**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer
                Identification
                  No.)
 
 **14333
        Proton Road, 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.   Yes X No
 
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes  No X
  Common
        stock, $0.0001 par value, outstanding at February 9, 2007:
        40,078,337
  Transitional
        Small Business Disclosure Format (Check
        one):  Yes         ; No
        ___X___
  
 
  *3*
  
 
  
  
  
  **PART
                  I.**
              **FINANCIAL
                  INFORMATION**
              PAGE**Item
                  1.**
              **Financial
                  statements**Consolidated
                  Balance Sheets - December 31, 2006 (unaudited) and June 30,
                  2006
              **3**Unaudited
                  Consolidated Statements of Operations - Six Months and Three Months
                  Ended
                  December 31, 2006 and 2005
              **4**Unaudited
                  Consolidated Statements of Cash Flows - Six Months Months Ended
                  December
                  31, 2006 and 2005
              **5**Notes
                  to Unaudited Consolidated Financial Statements
              **6-12****Item
                  2.**
              **Management's
                  Discussion and Analysis or Plan of Operations**
              **12-15****Item
                  3.**
              **Controls
                  and Procedures**
              **15****PART
                  II.**
              **OTHER
                  INFORMATION****Item
                  1.**
              **Legal
                  Proceedings**
              **15-16****Item
                  2.**
              **Unregistered
                  Sales of Securities and Use of Proceeds**
              **16****Item
                  3.**
              **Defaults
                  upon Senior Securities**
              **16-17****Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders**
              **17****Item
                  5.**
              **Other
                  Information**
              **17****Item
                  6.**
              **Exhibits
                  and Reports on Form 8-K**
              **17**
 
  
   *3*
  
  
  
  
  **XF****ormity
        Technologies, Inc. and Subsidiary**
 **Consolidated
        Balance Sheets**
 
 **** **(** Unaudited)
 December
                  31,
              
              June
                  30,2006
              
              2006**ASSETS**Current
                  AssetsCash
                  and cash equivalents
              $
                  39,254
              
              $  
                  74,309Accounts
                  receivable
              35,668
              
              45,297Prepaid
                  expenses
              34,470
              
              10,705Total
                  current assets
              109,392
              
              130,311Property
                  and equipment, net
              42,218
              
              51,369Other
                  assets
              3,800
              
              3,800Total
                  Assets
              $
                  155,410
              
              $
                  185,480**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIT**Current
                  LiabilitiesAccounts
                  payable
              $
                  1,748,013
              
              $     1,497,628Loan
                  payable
              100,000
              
              50,000Accrued
                  expenses
              152,512
              
              113,213Severance
                  liability
              -
              
              72,883Deferred
                  revenue
              3,686
              
              26,225Current
                  portion - deferred credits
              12,766
              
              12,898Convertible
                  debentures- net of unamortized discount of beneficial conversion
                  feature
              1,287,557
              
              777,614Total
                  Current Liabilities
              3,304,534
              
              2,550,461Deferred
                  credits-net of current portion
              196,710
              
              203,172Total
                  liabilities
              3,501,244
              
              2,753,633Stockholders'
                  DeficitPreferred
                  stock, $0.01 par value, 100,000,000 shares authorized, none issued
                  and
                  outstanding at December 31, 2006 and June 30, 2006
              -
              
              -Common
                  stock, $0.0001 par value, 125,000,000 shares authorized, 40,078,337
                  shares
                  issued and outstanding at December 31, 2006 and June 30, 2006
              4,008
              
              4,008Additional
                  paid-in capital
              4,457,084
              
              4,249,668Accumulated
                  deficit
              (7,806,926)
              
              (6,821,829)Total
                  Stockholders' Deficit
              (3,345,834)
              
              (2,568,153)Total
                  Liabilities and Stockholders' Deficit
              $
                  155,410
              
              $  
                   185,480
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  *3*
  
 **XFormity
        Technologies, Inc. and Subsidiary**
 **Consolidated
        Statements of Operations**
 
 
 (Unaudited)
                      Three
                        Months Ended
                      December
                        31,
                    (Unaudited)
                      Six
                        Months Ended
                      December
                        31,2006
                    2005
                    2006
                    2005Revenue
                    
                    $
                         249,488
                    $
                         182,758
                    $
                        515,931
                    $
                        351,761Cost
                        of revenue
                    
                    136,145
                    123,481
                    273,808
                    236,305Research
                        and development
                    
                    74,323
                    131,598
                    175,884
                    266,080Marketing
                        and selling
                    
                    83,773
                    5,458
                    145,471
                    25,014General
                        and administrative
                    
                    136,038
                    306,793
                    509,122
                    999,391Total
                        operating expenses
                    
                    430,279
                    567,330
                    1,104,285
                    1,526,790Loss
                        from operations
                    
                    (180,791)
                    (384,572)
                    (588,354)
                    (1,175,029)Interest
                        expense, net
                    
                    (214,087)
                    (8,168)
                    (396,743)
                    (12,528)Loss
                        before provision for income taxes
                    
                    (394,878)
                    (392,740)
                    (985,097)
                    (1,187,557)Provision
                        for income taxes
                    
                    -
                    -
                    -
                    -Net
                        loss
                    
                    $
                        (394,878)
                    $
                        (392,740)
                    $
                        (985,097)
                    $
                        (1,187,557)Net
                        loss per share - basic
                    
                    $  
                          (0.01)
                    $  
                          (0.01)
                    $  
                           (0.02)
                    $  
                           (0.03)Weighted
                        average number of shares - basic
                    
                    40,078,337
                    35,911,672
                    40,078,337
                    35,911,672
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 
 
 
 
 
 .
 
  
   *1*
   ****    **XFormity Technologies, Inc. and Subsidiary**
 **Consolidated
        Statements of Cash Flows**
 
 (Unaudited)Six
                    Months Ended December 31,2006
                2005Operating
                    activities:Net
                    loss
                $
                          (985,097)
                $ 
                        (1,187,557)Depreciation
                12,060
                15,914Non-cash
                    transactions for:Interest
                    charge for beneficial conversion feature in convertible
                    debentures
                340,359
                -Changes
                    in:Accounts
                    receivable
                9,629
                13,546Prepaid
                    expenses and other assets
                (23,765)
                (25,144)Accounts
                    payable
                242,597
                590,876Accrued
                    expenses
                47,086
                26,499Severance
                    liability
                (72,883)
                -Deferred
                    revenue
                (22,539)
                (26,538)Deferred
                    credits
                (6,594)
                -Net
                    cash used in operating activities
                (459,147)
                (592,404)Investing
                    activities:Purchases
                    of property and equipment
                (2,908)
                (19,300)Net
                    cash used in investing activities
                (2,908)
                (19,300)Financing
                    activities:Loan
                    proceeds
                50,000
                -Proceeds
                    from issuance of convertible debentures
                377,000
                500,000Net
                    cash provided by financing activities
                427,000
                500,000Decrease
                    in cash and cash equivalents
                (35,055)
                (111,704)Cash
                    and cash equivalents, beginning of period
                74,309
                120,767Cash
                    and cash equivalents, end of period
                $         
                    39,254
                $  
                          9,063Supplemental
                    disclosure of non-cash financing and investing activitiesAdditional
                    paid-in capital from beneficial conversion feature in convertible
                    debentures
                $
                    207,416
                $
                    -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  *3*
  
 **XFormity
        Technologies, Inc. and Subsidiary**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006**
 **(Unaudited)**
 
 **Note
        1 - Organization and Nature of Business.**
 
 XFormity
        Technologies, Inc., (the “Company”) a Colorado Corporation, designs and
        implements business intelligence software for large and mid-size companies
        with
        a focus in the quick service restaurant industry. The quick service restaurant
        industry may be defined as restaurants that serve "fast food" ordered and
        delivered reasonably quickly either at walk-in counters or drive-through
        facilities. This software provides flexible, extensible solutions to help
        the
        Company’s clients streamline the flow of business information. The Company
        currently provides its QSRx business intelligence and BPx financial software
        products to an existing customer base approximating over 2,000 individual
        franchisee and company owned stores. The Company continues to pursue business
        opportunities that if successful would, in the opinion of management, render
        the
        Company viable. There can be no assurance that these opportunities will result
        in agreements or profits.
 
 All
        of
        the Company's operations during the reporting periods were conducted within
        the
        quick service restaurant industry and the Company expects to continue to
        primarily focus its operations in that industry segment.
 
 The
        Company has incurred significant losses resulting in a stockholders' deficit
        exceeding $3,345,000 at December 31, 2006. The Company has addressed resulting
        liquidity issues through the issuance of convertible debentures that has
        raised
        a total of $1,502,000 in working capital through December 31, 2006. The Company
        has met with one of its creditors to discuss a significant reduction in its
        obligation to them and with various institutional and individual investors
        for
        the purpose of raising additional capital. The Company will 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 materially adverse effect
        on the
        Company's financial condition and results of operations.
  **Note
        2. Basis of Financial Statement Presentation.**
  The
        accompanying unaudited condensed 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 financial statements prepared in accordance with accounting
        principles generally accepted in the United States of America have been
        condensed or omitted in accordance with such rules and regulations. The
        information furnished in the interim condensed 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 financial
        statements. Although management believes the disclosures and information
        presented are adequate to not make the information misleading, it is suggested
        that these interim condensed consolidated financial statements be read in
        conjunction with the Company's most recent audited consolidated financial
        statements and notes thereto included in its June 30, 2006 Annual Report
        on Form
        10-KSB/A2. Operating results for the three months and six months ended December
        31, 2006 are not necessarily indicative of the results that may be expected
        for
        the entire year or any other period.
  The
        Company's consolidated 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 obtaining adequate
        capital to fund operating losses until it becomes profitable. The accompanying
        consolidated financial statements do not include any adjustments that might
        be
        necessary if the Company is unable to continue as a going concern.
  In
        order
        to continue as a going concern and achieve a profitable level of operations,
        the
        Company will need, among other things, additional capital resources.
        Management’s plans to obtain these capital resources include raising additional
        capital through sales of convertible debentures, $1,502,000 of which was
        raised
        as of December 31, 2006, and common stock, and continuing to develop and
        market
        its business intelligence software. However, management cannot provide any
        assurances that the Company will be successful in accomplishing any of its
        plans.
  **Note
        3. Significant Accounting Policies.**
  The
        Company believes its critical accounting policies for the period July 1,
        2006 to
        December 31, 2006 are revenue recognition, software development costs,
        accounting for research and development expenses and accounting for convertible
        securities with beneficial conversion features under accounting principles
        generally accepted in the United States and that they are adhered to in the
        accompanying consolidated financial statements.
  **Principles
        of Consolidation**
 The
        consolidated financial statements include the accounts of XFormity Technologies,
        Inc. and its wholly-owned operating subsidiary, XFormity, Inc. All inter-company
        accounts and transactions have been eliminated in consolidation.
 
 **Use
        of Estimates** ****
 The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosures of contingent assets and liabilities at the date
        of
        the consolidated financial statements, as well as the reported amounts of
        revenue and expenses during the reporting period. Actual results could differ
        from those estimates.
 
 **Revenue
        Recognition**
 The
        Company contracts with clients for development and sale of business intelligence
        software products. Revenue derived from the sales of these products, that
        is
        billed on a monthly usage basis, is recognized in accordance with Statement
        of
        Position 97-2 (as amended), *Software
        Revenue Recognition* ,
        over
        the term of the agreement or at specific acceptance points. The Company,
        in many
        instances, receives payments from some of its customers in advance of the
        month
        of actual usage of the software product. These funds are reflected as deferred
        revenue until the month of usage, or specific acceptance points, when they
        are
        recognized as earned revenue.
 
 **Software
        Development Costs** ****
 The
        Company capitalizes internally generated software development costs in
        accordance with Statement of Financial Accounting Standards ("SFAS") No.
        86, *Accounting
        for the Costs of Computer Software to be Sold, Leased or Otherwise
        Marketed* .
        Capitalization of software development costs begins when a product's
        technological feasibility is established. Costs incurred for research and
        development of products where technological feasibility has not yet been
        established are expensed as incurred. There were no capitalized software
        development costs at December 31, 2006.
  Amortization
        of capitalized software development costs begins when the product is available
        for sale, and is amortized on a product-by-product basis. The annual
        amortization amount is the greater of (a) the straight line method over the
        remaining estimated economic life of the product or (b) the ratio of the
        product's current gross revenue to its total current and anticipated future
        gross revenue. There were no such costs reflected in the Company’s consolidated
        financial statements.
 
 **Consortium
        Transactions**
 In
        fiscal
        years 2003 and 2004, the Company entered into related agreements with seven
        of
        its customers ("consortium members") whereby the Company was to develop a
        "Back-of-the-House" software program. The terms of the agreements also included
        the issuance of common stock for cash totaling $700,000, certain consulting
        services to be provided through 2008 by the consortium members, and potential
        credits against
        future billings of the software program of $150,000 for each member, over
        a
        three-year period commencing when and if the program was successfully
        developed.  If the software program was not completed, one of the
        consortium members would be entitled to apply this credit against the Company's
        QSRx business intelligence billings over a four year period.  The
        agreements for the other six members did not provide for any form of repayment
        if development was not successful. Development of the project was halted
        in
        December 2004 and the Company has no current plans to restart this project.
 
 In
        January 2006, the Board of Directors, to maintain the Company’s goodwill with
        its customers and to raise additional capital, agreed to offer all of the
        consortium members the following options in exchange for any further billing
        credits: (1) a right to receive $150,000 in QSRx billing credits applied
        against
        their monthly QSRx 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 (totaling $700,000) in 2004.
 
 The
        one
        consortium member elected option (1) that commenced January 1, 2006, effectively
        changing the terms of his original agreement described above. One of the
        remaining six consortium members has also elected option (1) that commenced
        July
        1, 2006. The amounts of the billing credits for those consortium members
        are
        reflected at their present value as deferred credits amortized over their
        projected respective lives. The interest factor in the deferred credits is
        a
        charge to interest expense. The five remaining consortium members elected
        the
        second option and received their respective shares of the Company’s common stock
        in fiscal 2006.
 
 **Beneficial
        Conversion Feature in Convertible Debentures**
 The
        Company has issued subordinated convertible debentures with conversion prices
        that at issuance may be lower than the fair market value of the
        underlying stock.  Following primarily the guidance in Emerging Issues Task
        Force Consensus ("EITF") 98-5, *"Accounting
        for Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratios"* as
        amended by EITF 00-27, *"Application
        of Issue No. 98-5 to Certain Convertible Instruments* ",
        the
        Company records as a contra-liability the excess of the fair market value
        at the
        date of issuance over the conversion price in the debenture with an off-setting
        increase in additional paid-in capital.  This beneficial conversion feature
        is amortized as a non-cash interest expense from the issuance date of the
        debenture through the earlier of the stated redemption date, which is one
        year
        from issuance, or conversion into common stock.
  **Note
        4 Accounts Payable**
 Accounts
        payable represents balances due to trade creditors, fees for professional
        services incurred for legal, accounting and audit services and license fees
        and
        commissions payable. Approximately $1,631,000 and $1,396,000 included in
        the
        respective December 31, 2006 and June 30, 2006 balances are for legal fees,
        most
        of which are past due, primarily incurred in the defense of the patent
        infringement suit filed by a competitor in the QSR industry. The Company
        is also
        obligated under an agreement to pay 15% of its QSRx revenues on one customer,
        for a period of five years, to a consulting company. The Company has accrued
        $14,569 and $27,414 for the three months and six months ended December 31,
        2006.
 
 **Note
        5 Other Current Liabilities**
 **Loan
        Payable**
 In
        October 2006, the Company agreed to pay interest at 7% per annum effective
        November 1, 2006 on its unsecured loans of $100,000 from one of its customers
        that is affiliated with one of the Company’s stockholders.
 
 **Accrued
        Expenses**
 
 **December
                  31,**
              **June
                  30,****2006**
              **2006**401
                  (K) obligation
              $                                                  
                  44,515
              $                                                   
                  50,667Accrued
                  interest on convertible debentures and loan payable
              100,406
              47,168Other
              7,591
              15,378****Totals
              $                                                 152,512
              $                                                 
                  113,213
 
 **Severance
        Liability**
 Severance
        obligation represents the balance due under an agreement with a former executive
        who resigned in April 2006. This obligation was retired in full by December
        31,
        2006.
 
 **Note
        6 Convertible Debentures**
 In
        April
        2005, the Board of Directors of the Company approved a private placement
        of
        unsecured convertible debentures of up to $1,000,000. In January 2006, in
        order
        to raise additional capital, the Board of Directors approved a revised term
        sheet for its convertible debentures providing (a) an increase in the amount
        to
        be raised in the private placement from $1 million to $2 million; (b) a
        reduction in the conversion terms from the lesser of “(i) 80% 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
        $2,000,000 in cumulative gross proceeds, or (ii) $0.28” to now 70% or $0.12,
        respectively; and lastly (c) the securitization of the debentures with the
        assets of the Company’s wholly owned subsidiary, XFM.  If the investor
        elects to receive cash in lieu of stock, that will be payable only at maturity.
        The term of these debentures, and their maturity dates, remain one year from
        date of issuance. The principal amount of the debentures accrues interest
        at the
        rate of 7% per annum. The interest is payable at maturity.
  The
        holders of the previous convertible debentures have exchanged those notes
        for
        the new convertible debentures issued under the revised term-sheet above.
        This
        was deemed not to be a debt modification by management under Emerging Issues
        Task Force Consensus 96-19, *Debtor
        Accounting For a Modification or Exchange of Debt Instruments.*
 
 As
        of
        December 31, 2006, the Company has issued for cash, an aggregate of $1,502,000
        of convertible debentures. It was determined that the issuances of these
        convertible debentures under the revised term sheet have a beneficial conversion
        feature. The Company valued this beneficial conversion feature at its intrinsic
        value. The unamortized discount of the beneficial conversion feature for
        the
        current six month period created a corresponding credit to additional paid-in
        capital in the amount of $207,416.
 
 The
        unamortized discount of the beneficial conversion feature of $214,443 is
        a
        contra-liability to the related debt. The total discount of the beneficial
        conversion feature is $740,750. The amortized amounts of $182,999 and $340,359
        in the respective three month and six month periods ended December 31, 2006
        were
        non-cash charges to income that reduced the contra-liability amount. The
        remaining amount will be amortized over the one year period commencing with
        the date of issuance of the debentures through the earlier of its maturity
        or
        conversion date into common stock. The initial beneficial conversion
        feature is calculated as the difference between the market price on dates
        of
        issuance of the convertible debentures and the conversion price of $0.12.
 
 Of
        the
        total issued through December 31, 2006, $1,020,000 of these convertible
        debentures is held by stockholders who are also customers of the Company.
        Accrued interest on the aggregate debentures was $99,240 at December 31,
        2006.
        There were no discounts or commissions incurred on the sale of the debentures.
        The Company has no assurance as to how much in additional subscriptions will
        be
        received in the private offering.
  Through
        February 2007, the Company has issued $1,502,000 of convertible debentures.
        The
        note-holders under the terms of the debentures have the right to convert
        their
        notes into shares of the Company’s common stock at $0.12 per share. If all of
        the notes were converted, the Company would be required to issue an additional
        12,516,666 shares.
 
 **Note
        7 Income Taxes**
  At
        December 31, 2006, the Company had net operating loss carry-forwards totaling
        approximately $5,571,000 that begin to expire in 2022. No tax benefit has
        been
        reported in the three months and six months ended December 31, 2006 and 2005
        consolidated financial statements because the Company believes a portion
        or all
        of the carry-forward may expire unused. The difference between the Company's
        financial statement losses and tax losses is primarily expenses not deductible
        for tax purposes including the interest charge of $182,999 and $340,359 in
        the
        three months and six months ended December 31, 2006 from the beneficial
        conversion feature in the convertible debentures. Accordingly, the respective
        tax benefit of the loss carry-forward, $236,000 for 2006 and $388,000 for
        2005,
        has been offset by a valuation allowance of the same amount. The following
        are
        the components of the income tax provision:
 
 **Statement
                  of Operations**
              
              
              
              **Three
                  Months Ended**
                **December
                  31,**
              **Six
                  Months Ended**
                **December
                  31,****2006**
              **2005**
              **2006**
              **2005**Federal
                  income tax provision (benefit)
              $             
                   (82,000)
              $          
                  (129,000)
              $                
                  (236,000)
              $  (388,000)Total
                  provision (benefit) for income taxes
              (82,000)
              (129,000)
              (236,000)
              (388,000)Valuation
                  allowance
              
              
              
              82,000
              129,000
              236,000
              388,000Provision
                  for income tax
              
              
              
              $                
                           -
              $             
                            -
              $                 
                             -
              $              -
 
 **Balance
                  Sheet at December 31, 2006**Deferred
                  tax asset arising from net operating loss carry-forwards
              $                                             
                   1,844,000Valuation
                  allowance
              (1,844,000)Net
                  deferred tax asset
              $                                                 
                             -
 
 **Note
        8 Related Party Transactions**
 Eight
        of
        our customers, who are also stockholders in the Company, generated revenues
        approximating $81,200 and $163,400 for the three month and six month periods
        ended December 31, 2006 and $86,700 and $164,500 for those same periods in
        2005,
        respectively. Owners from two of those respective customers serve as members
        of
        the Board of Directors and the Audit Committee. A former senior executive
        of SEI
        Information Technology, the
        company that provided the Company's customers with primary technical support
        through December 31, 2006 and that received payments approximating $31,900
        and
        $62,700 for the three month and the six month periods ended December 31,
        2006
        and $35,800 and $66,200 for those same periods in 2005, respectively, also
        serves as a member of the Board of Directors.
  Of
        the
        total convertible debentures issued through December 31, 2006, $1,020,000
        is
        held by stockholders who are also customers of the Company.
  In
        the
        respective three months and six months ended December 31, 2006 and 2005,
        the
        Company paid or accrued rent of $3,000 and $6,000 to a company controlled
        by a
        major stockholder of the Company. The rent included space and administrative
        services provided to the Company.
  **Note
        9 Commitments** **and Contingencies**
  In
        January 2007, we executed a Settlement Agreement and Release of Claims with
        b-50.com, LLC providing for the full and final settlement of the b-50 patent
        litigation. Under the terms of the Settlement Agreement, we executed and
        delivered a separate Non-Exclusive License (the “License”) pursuant to which we
        were granted a non-exclusive license to utilize the b-50 patent that formed
        the
        subject matter of the litigation. In consideration of that license, we agreed
        to
        pay b-50 a royalty ranging between 6.0% and 7.5% on our revenues generated
        from
        our QSRx product in the restaurant industry. Until June 30, 2007, we have
        the
        right to pay accrued royalties in shares of our common stock; however,
        thereafter we cannot use our common stock, and must pay the royalty in cash,
        unless the shares have been registered under the Securities Act of 1933,
        as
        amended.
  As
        of
        December 31, 2006, the Company is on a month-to-month lease for $1,835 per
        month
        at its Dallas location after its original lease expired on September 30,
        2005.
        There were no significant renewal or purchase options and the Company currently
        intends to relocate its offices in the Dallas area to provide for expansion
        when
        necessary. The Company also has a month-to-month lease for $1,000 per month
        at
        its Northbrook, Illinois office, which includes administrative
        services.
  In
        August
        2006, the Company entered into a limited financing agreement with Galen Capital
        Group, LLC to assist in developing sources of funding to meet the future
        capital
        requirements of the Company. Terms, among others, provide for fees of $7,500
        per
        month for six months and other success fees **.**
  **Note
        10 Subsequent Events**
  As
        of
        January 31, 2007, an aggregate of $1,502,000 in principal amount of convertible
        debentures and $108,689 in accrued and unpaid interest matured and became
        due
        and owing. In February 2007, the Board of Directors of the Company approved
        a
        plan to offer the convertible debenture holders' a modification of the
        debentures under the following terms:
  ·
            the
                maturity date of the debentures would be extended to January 31,
                2008;  ·
            the
                accrued interest under the debentures would be added to outstanding
                and
                unpaid principal;  ·
            any
                debenture holder that elects to convert the principal and accrued
                and
                unpaid interest of their debenture into shares of common stock would
                be
                granted, at the time of conversion, for every eight shares received
                in the
                conversion: one warrant exercisable until January 31, 2008 to purchase
                one
                share of common stock at an exercise price of $0.15 per share and
                one
                warrant exercisable until January 31, 2009 to purchase one additional
                share of common stock at an exercise price of $0.20 per
                share;  ·
            each
                debenture holder would agree to subordinate their security interest
                in the
                tangible and intangible assets of the Company to a new secured lender,
                at
                the request of the Company.  As
        of the
        date of this Report, the debenture holders have indicated a willingness to
        accept the terms of the modification, subject to final approval of the
        documentation.
  **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-QSB, 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-QSB. 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**
 
 **REVENUES** .
        The
        Company contracts with its clients for development and sale of business
        intelligence software, primarily its QSRx software product that is billed
        on a
        monthly basis to its customers’ respective franchise locations. For the six
        months ended December 31, 2006, the Company generated $515,931 in revenues

        compared to $351,761 in the comparative period in the prior year. In the
        current
        quarter, the Company generated $249,488 in revenues compared to $182,758
        in the
        comparative period of the prior year. The increase in revenue in the current
        quarters is primarily attributable to an implementation of 875 new Burger
        King
        Corporate stores. The Company has added approximately 200 new franchise
        locations in the 3 rd quarter
        and expects its revenues to continue to increase.
  **COST
        OF REVENUES** .
        The
        cost of revenue for the six months and three months ended December 31, 2006
        consists primarily of personnel, related payroll costs and technical support
        costs to our customers. During the current quarters, we added additional
        franchisees to our customer base that did not increase the technical support
        costs. Other costs include travel, data hosting services and decreased
        telecommunication costs and depreciation of computer equipment used in the
        maintenance and processing of customers' data. The costs for the six month
        period ended December 31, 2006 were $273,808 compared to $236,305 in the
        comparative period of the prior year. The costs in the three month period
        ended
        December 31, 2006 were $136,145 compared to $123,481 in the comparative period
        of the prior year. The increase is attributable to the allocation of our
        personnel and related costs based on their actual time incurred in operations.
        All of the other operational costs remained fairly constant or decreased.
        Effective January 2007, the Company terminated its technical support agreement
        with SEI and brought technical support and billings and collection in house.
        As
        part of the termination of the support agreement, we agreed to pay SEI the
        sum
        of $20,000, payable in five equal monthly payments of $4,000 each.
  **RESEARCH
        AND DEVELOPMENT** . Research
        and development costs are charged to operations as incurred and consist
        primarily of personnel and related benefit costs. The costs for the six month
        period ended December 31, 2006 of $175,884 compared to $266,080 in the
        comparative period of the prior year primarily decreased due to fewer personnel
        and the
        reallocation of personnel and their related costs.  The
        costs
        for the three month period ended December 31, 2006 were $74,323 compared
        to
        $131,598 in the comparative period of the prior year. This decrease was also
        primarily due to less personnel and the allocation of personnel and their
        related costs. 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 quick service restaurant market.
  **MARKETING
        AND SELLING** .
        The
        marketing and selling expenses in the current year include the payroll, related
        costs and expenses of a sales and marketing director, the addition of an
        outside
        sales consultant and the allocation of personnel and related costs based
        on time
        incurred in this respective category. The Company incurred additional costs
        for
        marketing at trade shows and brochures. The
        costs
        for the six month period ended December 31, 2006 were $145,471 compared to
        $25,014 in the comparative period of the prior year. The
        costs
        for the three month period ended December 31, 2006 were $83,773 compared
        to
        $5,458 in the comparative period of the prior year.  For
        the
        current fiscal year, the Company expects to expand its customer base through
        direct sales and through referrals from its relationship with existing clients.
  **GENERAL
        AND ADMINISTRATIVE** .
        Our
        general and administrative costs consist primarily of executive salaries
        and
        related benefits, professional fees for attorneys, patent litigation and
        our
        independent auditor, rent, expenses related to being a public company and
        other
        operating costs. The
        costs
        for the six month period ended December 31, 2006 were $509,122 compared to
        $999,391 in the comparative period of the prior year. The
        costs
        for the three month period ended December 31, 2006 were $136,038 compared
        to
        $306,793 in the
        comparative period of the prior year .  The
        decrease for the six months and three month periods was primarily attributable
        to the elimination of the cost of a former Company executive and his related
        costs and expenses, the allocation of executive compensation to operations
        and
        marketing based on the time incurred in those respective categories, and
        reduced
        patent litigation and professional fees.
  **INTEREST
        EXPENSE.** Interest
        expense for the six months and three months ended December 31, 2006 consists
        primarily of the amortization of the discount of the beneficial conversion
        feature in the convertible debentures of $340,359 and $182,999, respectively,
        the accrual on the convertible debentures of $52,071 and $27,928, respectively,
        the interest incurred on the deferred credits of $4,668 and $2,494, the accrual
        for interest on the loan payable of $1,167 offset by interest earned on cash
        equivalents during the periods.
  **NET
        LOSS.** The
        net
        loss for the six month and three month periods ended December 31, 2006 were
        $985,097 and $394,878 respectively, compared with a net loss of $1,187,557
        and
        $392,740 for the comparative periods in 2005. The decrease in the net loss
        for
        the six months ended December 31, 2006 was primarily the result of the
        additional revenue from the Burger King corporate account, reduced executive
        compensation and the related costs thereof, and reduced litigation and
        professional fees offset by increased sales and marketing costs incurred
        in the
        quarter ended December 31, 2006. The modest increase in the net loss for
        the
        three months ended December 31, 2006 was due to the higher expenditures for
        marketing offset by the items listed above.
  The
        net
        loss applicable to common stockholders for the six months and three months
        ended
        December 31, 2006 was $985,097 and $394,878 respectively, or $0.02 and $0.01
        per
        common share, on 40,078,337 weighted average common shares outstanding for
        both
        periods. This compares with the net loss available to common stockholders
        for
        the six month and three month periods ended December 31, 2005 of $1,187,557
        and
        $392,740, respectively, or $0.03 and $0.01 per share, on 35,911,672 weighted
        average common shares outstanding.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  The
        Company has incurred operating losses and negative cash flows from operations
        in
        each quarter since it commenced operations. As of December 31, 2006, there
        was
        an accumulated deficit of $7,806,926 and our cash position is $39,254. The
        Company does not expect to generate operating earnings in the current fiscal
        year and not until it achieves a substantial customer base and related revenues
        necessary to cover its operational costs.
  In
        January 2006, to raise additional capital, the Board of Directors approved
        a
        revised term sheet for its convertible debentures providing (a) an increase
        in
        the amount to be raised in the private placement from $1 million to $2 million;
        (b) a reduction in the conversion terms from the lesser of “(i) 80% 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
        $2,000,000 in cumulative gross proceeds, or (ii) $0.28” to now 70% or $0.12,
        respectively; and lastly (c) the securitization of the debentures with the
        assets of the Company’s wholly owned subsidiary, XFormity, Inc.  If the
        investor elects to receive cash in lieu of stock, that will be payable only
        at
        maturity. The term of these debentures, and their maturity dates, remain
        one
        year from date of issuance. The principal amount of the debentures accrues
        interest at the rate of 7% per annum. The interest will be payable at maturity.
        There can be no assurance how much in subscriptions will ultimately be received
        in this private offering.
  As
        of
        January 31, 2007, an aggregate of $1,502,000 in principal amount of convertible
        debentures and $108,689 in accrued and unpaid interest matured and became
        due
        and owing. In February 2007, the Board of Directors of the Company approved
        a
        plan to offer the convertible debenture holders' a modification of the
        debentures under the following terms:
  ·
            the
                maturity date of the debentures would be extended to January 31,
                2008;  ·
            the
                accrued interest under the debentures would be added to outstanding
                and
                unpaid principal;  ·
            any
                debenture holder that elects to convert the principal and accrued
                and
                unpaid interest of their debenture into shares of common stock would
                be
                granted, at the time of conversion, for every eight shares received
                in the
                conversion: one warrant exercisable until January 31, 2008 to purchase
                one
                share of common stock at an exercise price of $0.15 per share and
                one
                warrant exercisable until January 31, 2009 to purchase one additional
                share of common stock at an exercise price of $0.20 per
                share;  ·
            each
                debenture holder would agree to subordinate their security interest
                in the
                tangible and intangible assets of the Company to a new secured lender,
                at
                the request of the Company.  As
        of the
        date of this Report, the debenture holders have indicated a willingness to
        accept the terms of the modification, subject to final approval of the
        documentation. (See Note 10 above)
  The
        Company will 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, stockholders
        may experience dilution of their ownership interest 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
        materially adverse effect on the Company's financial condition and results
        of
        operations.
  **Item
        3.****Controls
        and Procedures**
  The
        Company's Principal Executive Officer and Principal Financial Officer have
        established and are currently maintaining disclosure controls and procedures
        for
        the Company. The disclosure controls and procedures have been designed to
        provide reasonable assurance that the information required
        to be disclosed by the Company in reports that it files under the Exchange
        Act
        is recorded, processed, summarized and reported within the time periods
        specified in the rules and forms of the SEC and to ensure that information
        required to be disclosed by the Company is accumulated and communicated to
        the
        Company's management as appropriate to allow timely decisions regarding required
        disclosure.
  The
        Principal Executive Officer and Principal Financial Officer conducted an
        updated
        review and evaluation of the effectiveness of the Company's disclosure controls
        and procedures and have concluded, based on their evaluation as of the end
        of
        the period covered by this Report, that the Company’s disclosure controls and
        procedures are effective to provide reasonable assurance that information
        required to be disclosed in the reports that we file or submit under the
        Exchange Act is accumulated and communicated to management, including our
        principal executive officer and our principal financial officer, to allow
        timely
        decisions regarding required disclosure and we refer you to Exchange Act
        Rule
        13a-15(e).
  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 December 31, 2006 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.** **LEG****AL
        PROCEEDINGS**
  The
        Company was a defendant in a civil action that claimed infringement of a
        competitor’s patent. In January 2007, the Company signed a license agreement
        with the plaintiff whereby that suit was dismissed with prejudice. Terms
        of the
        agreement, among others, provide for license fees payable by the Company
        on
        revenues from its customers in the restaurant industry that use the Company’s
        QSRx business intelligence. Under certain indemnification and escrow agreements,
        1,470,000 shares of the common stock issued to one XFM stockholder and former
        CEO have been withheld in escrow to cover liabilities arising from this lawsuit
        and the Company will attempt to utilize those shares of stock towards fulfilment
        under the license agreement.
  As
        reported in Note 4 above, the Company’s operating subsidiary has an approximate
        $1.6 million obligation to its patent counsel. The Company has attempted
        to
        resolve this debt through negotiations that as of the date of this filing,
        have
        not achieved any results. If adequate resolution is not accomplished on
        acceptable terms, it could have a materially adverse effect on the Company's
        financial condition.
  As
        of the
        date of this report, other than as noted above, there are no other pending
        legal
        proceedings in which we or any of our officers, directors or affiliates is
        a
        party, and we are not aware of any threatened legal proceedings.
 
 **ITEM
        2.** **UNR****EGISTERED
        SALES OF SECURITIES AND USE OF PROCEEDS**
  In
        connection with the acquisition of XFormity, Inc. by the Company that was
        consummated on September 27, 2004, we issued to the former shareholders of
        XFormity, Inc. an aggregate of 17,947,984 shares of common stock and warrants
        exercisable to purchase an additional 5,869,500 shares of common stock at
        an
        exercise price of $0.26 per share. All of those warrants expired unexercised.
        The securities were issued to a total of 25 former XFormity, Inc. shareholders,
        20 of which qualified as "accredited investors" within the meaning of Rule
        501(a) of Regulation D under the Securities Act of 1933, as amended (the
        "Securities Act"), and the other five of whom possessed the knowledge and
        experience in financial and business matters required under Rule 506(b)(2)(ii)
        of Regulation D. The securities were issued without registration under the
        Securities Act in reliance upon the exemption from the registration requirements
        thereof contained in Section 4(2) and Regulation D, Rule 506 thereunder.
        The
        securities were all taken for investment and were subject to appropriate
        restrictions on transfer.
  Under
        an
        initial offering in May 2005, the Company authorized the sale and issuance
        of up
        to $1,000,000 in convertible debentures. Those securities were issued to
        five
        current shareholders of XFormity Technologies, Inc. in the amount of $450,000.
        In January 2006, the Company increased the authorized amount to $2,000,000
        and
        through the filing date has sold debentures in the aggregate amount of
        $1,502,000. (See Note 5 Convertible Debentures for the terms) The Securities
        were sold to ten (10) persons, each of whom qualified as "accredited investors"
        within the meaning of Rule 501(a) of Regulation D under the
  Securities
        Act of 1933 as amended (the "Securities Act"). There are an aggregate of
        ten
        accredited investors who have participated in the offering. The sale of the
        Securities was undertaken without registration under the Securities Act in
        reliance upon an exemption from the registration requirements of the Securities
        Act set forth in Rule 506 of Regulation D thereunder. Each of the investors
        in
        the offering qualified as an "accredited investor". The Securities were all
        taken for investment purposes, not for resale, and were subject to appropriate
        restrictions on transfer. All proceeds of the offering have been used for
        general working capital purposes.
  **ITEM
        3.      DEFAULT UPON SENIOR
        SECURITIES** ****
  As
        of
        January 31, 2007, an aggregate of $1,502,000 in principal amount of convertible
        debentures and $108,689 in accrued and unpaid interest matured and became
        due
        and owing. The debentures are secured by all of the tangible and intangible
        assets of the Company and our subsidiary, XFormity, Inc. In February 2007,
        the
        Board of Directors of the Company approved a plan to offer the convertible
        debenture holders' a modification of the debentures under the following
        terms:
  ·
            the
                maturity date of the debentures would be extended to January 31,
                2008;  ·
            the
                accrued interest under the debentures would be added to outstanding
                and
                unpaid principal;  ·
            any
                debenture holder that elects to convert the principal and accrued
                and
                unpaid interest of their debenture into shares of common stock would
                be
                granted, at the time of conversion, for every eight shares received
                in the
                conversion: one warrant exercisable until January 31, 2008 to purchase
                one
                share of common stock at an exercise price of $0.15 per share and
                one
                warrant exercisable until January 31, 2009 to purchase one additional
                share of common stock at an exercise price of $0.20 per
                share;  ·
            each
                debenture holder would agree to subordinate their security interest
                in the
                tangible and intangible assets of the Company to a new secured lender,
                at
                the request of the Company.  As
        of the
        date of this Report, the debenture holders have indicated a willingness to
        accept the terms of the modification, subject to final approval of the
        documentation.
  **ITEM
        4.      SUBMISSION 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 December 31, 2006.
  **ITEM
        5.     OTHER INFORMATION**
  None
  **ITEM
        6.      EXHIBITS AND REPORTS ON Form
        8-K**
  Exhibits10.1
              Settlement
                  Agreement and Release of Claims with b-50.com, LLC10.2
              Settlement
                  Agreement and Release of Claims with SEI-CCC, LLC31.
              Certification32.
              Certification
                  pursuant to USC Section 1350Reports
                  on 8-K1.
              Current
                  Report on Form 8-K, Item, Item 7.01, dated December 4, 2006, as
                  filed with
                  the Commission of December 5, 20062.
              Current
                  Report on Form 8-K, Item 9.01, dated January 2, 2007, as filed
                  with the
                  Commission on January 4, 20073.
              Current
                  Report on Form 8-K, Item 7.01, dated January 23, 2007, as filed
                  with the
                  Commission on January 24, 20074.
              Current
                  Report on Form 8-K, Item 4.01, Dated January 31, 2007, as filed
                  with the
                  Commission on January 31, 2007
   **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:February
                  14, 2007
              /s/
                  Christopher
                  Ball
                Christopher
                  Ball
                Chief
                  Executive OfficerDate:  February
                  14, 2007
              /s/
                  Jack
                  Rabin
                Jack
                  Rabin
                Chief
                  Financial Officer