UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________________________

    FORM 10-K

(Mark One)

[X]     Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 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 small business issuer as specified in its charter)

                                 4100 Spring Valley Road, Dallas, Texas 75244                                 
(Address of principal executive offices, including zip code)
Issuer's Telephone No., including area code: (972) 661-1200

 Securities registered under Section 12(b) of the Exchange Act:

Title of each class                                                   Name of each exchange on which registered

Common Stock                                                       OTC Electronic Bulletin Board    

Securities registered under Section 12(g) of the Exchange Act:

Title of Class

Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |X| No |_|

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

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Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File to be submitted and posted pursuant to Rule 405 of Regulations S-T (ss.232.402) of this chapter) during the preceding 12 months. [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|

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

Large accelerated filer |_|                                Accelerated filer |_|

 Non-accelerated filer |_|                        Smaller reporting company |X|

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2011, the last business day of the registrant’s most recently completed year: $938,561

The number of shares of the registrant’s class of common stock, $0.0001 par value, outstanding at September 01, 2011: 53,756,553

The Company incorporates by reference the following:

Part III – Exhibits

1.

The Exhibits identified in Item 15 of this Report

2

XFormity Technologies, Inc.

June 30, 2011 Annual Report on Form 10-K

Table of Contents

Part I.

Part II.

Part III.

Signatures

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Part I

Item 1.   Description of Business.

The reporting entity in this 10-K 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 is a provider of comprehensive business solutions to multi-unit business operations.  Specializing in the food-service industry, XFormity is providing analytical tools, which include operational reporting, balanced scorecards and benchmarking solutions, to restaurant owners and operators representing approximately 10,000 restaurants in North America.   The Company's solutions assist customers manage the vast amounts of information necessary to run restaurants effectively.  

XFormity's solutions help customers of all sizes convert raw data into meaningful information which in turn improves their decision making process and capabilities. By providing a complete line of tools, the Company provides customers with a single vendor that can deliver data integration, data storage, business intelligence, balanced scorecard and benchmarking capabilities that help decision makers able to see trends as they occur and provide value more rapidly. Pulling together information from anywhere helps provide a single window for better business insight.

The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada.  A few of the brands that the Company services include:  Burger King, Taco Bell, Arby's, Domino's, Pizza Hut’s, KFC, Long John Silver's, Beautiful Brands, and many others.  XFormity is proud to be the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada.

XFormity's solutions are based on a software-as-a-service delivery model that provides benefits to both the Company and its customers as existing Information Technology (IT) investments become more valuable by utilizing XFormity's service based integration and reporting solutions. XFormity's solutions do not require customers to replace, upgrade or develop expensive extension to existing tools, which translates into a much quicker return on investment.  The Company has developed highly effective processes for providing services for an increasing number of customers while keeping costs down and high levels of customer service.

The Company did not achieve the positive operating results it expected in fiscal 2011 as it was affected primarily by the economy that resulted in the cancellation of certain business opportunities.  The Company had positive operating income for the years ended June 30, 2010 and 2009, had incurred operating losses from its inception through June 30, 2008 and expects to return to profitability in fiscal 2012. The Company has addressed resulting liquidity issues through the sales of its software and professional services and the issuance of convertible debentures. The Company needs additional financing to fund its potential growth 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 the Company does need additional financing and adequate funds are not available or not available on acceptable terms, it could have a materially adverse effect on the Company's financial condition, results of operations and as a going concern.

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XFormity's Competition

Competitors to the Company may be grouped in three broad categories (1) Point-of-Sale / Back-Office Providers:  Many POS and back-office system providers have proprietary above-restaurant business intelligence tools.  These are sold in conjunction with the main in-restaurant system only and do not offer alternative POS or system integration which significantly reduces the ability to offer a comprehensive view of the customer entire business; (2) Niche Reporting Providers:  There exist several small companies that provide above-restaurant reporting services that compete with the Company.  Such competitors market and sell their products in similar venues as the Company and have some success in several brands.  The Company believes that its offerings are superior to these competitors and have proven to be able to displace these competitive products in many situations; and (3) Enterprise Reporting and Planning Solution Providers:   Many of the big, enterprise level reporting solution providers are marketing their products to the large multi-national restaurant companies.  Most of these competitors market their products and services on their technical merit and are not well versed in the day-to-day operations of multi-unit business operations.  These competitive products are very expensive to license and to deploy.

.

XFormity's Marketing Strategy

XFormity's sales and marketing plan includes direct sales to franchisors and franchisees in the food service market. In addition to direct sales, the Company has several channel partners who are authorized resellers of the XFormity solutions.

XFormity's Intellectual Property

The Company protects its Intellectual Property through copyright and trademarks.  As a hosted solution, the Company does not distribute software to users; authorized users are granted access to centrally managed solutions on an individual basis that is monitored by the Company’s personnel.  Unauthorized access and piracy risks are greatly mitigated with this software deployment model.  Under an agreement with b-50.com LLC, the company licenses b-50.com’s patent, although the Company does not utilize any of b-50’s technology.

It has registered its key Internet URLs, including XFormity.com, and reviews these registrations on a regular basis to ensure that they remain current and in good standing.  Some of the limitations of Intellectual Property Protection are:

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6

XFormity's Revenue by Product Classification

The decrease in fiscal 2011 revenues over 2010 was primarily the reduction of billings for professional services, other revenues, price reductions based on competition in the market place and the loss of a major account that was subsequently offset by the addition of other new users of our business intelligence solution. Included in revenue, in accordance with current accounting guidance, were professional service contracts for the development of software programs that are recognized over the terms of the multi-year lives of the licenses billed to our customer. Payment under these contracts was received in fiscal years 2008 and 2007. The Company received notice of cancellation of its licensing agreements in fiscal 2012 that may have a material adverse effect on our business, financial condition and results of operations.  However, the Company continues to maintain strong business relationships with the customers utilizing these solutions all its other services.

XFormity's Research and Development

XFormity's research and development team continues to enhance the core technology behind its solutions for existing customers and for new customers.  The Company's development team is extending its integration capabilities to incorporate a wider base of sources of data (point-of-sale systems, accounting systems, and other informational sources). Research and development costs including indirect and administrative costs in 2011 and 2010 were $474,280 and $492,330, respectively.  

Government Regulations and Environmental Laws

We do not expect that existing or probable governmental regulations will have a material effect on the business. We did not incur any separately identifiable costs to comply with environmental laws.

XFormity's Employees

We currently have eight employees, including Chris Ball and Drew Seale, our Chief Executive Officer and Chief Technology Officer, located at our principal office in Dallas, Texas and one employee, Jack Rabin, our Chief Financial Officer, in Northbrook, Illinois. Mr. Kenneth Johnson, one of our directors, also serves as a sales and marketing consultant for the Company.  For a description of the backgrounds of Messrs. Ball, Seal, Rabin and Johnson, see the section of this report entitled “Item 10. – Directors and Executive Officers.

Item 1A    Risk Factors.

Not applicable.

Item 1B    Unresolved Staff Comments

None

Item 2   Description of Property.

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The Company maintains its corporate headquarters in Dallas, Texas in office space consisting of approximately 3,200 square feet, which we lease under a “triple net” lease that requires us to pay an average of $4,329 per month and our pro rata share of real estate taxes and common area costs over a 64 month term effective June 1, 2008. The Company also leases office space on a month-to-month basis in Northbrook, Illinois. The rent is $700 per month. The Company does not own any real estate.  

The Company believes that its facilities are suitable for the business of the Company as presently conducted and for necessary growth in personnel and customers.  The facilities are adequately insured.

Item 3    Legal Proceedings.

As of the date of this report, there are no 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 4    Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the three months ended June 30, 2011

Part II

Item 5.     Market for Common Equity and Related Stockholder Matters.

Market Information

The Company's stock trades on the OTC Electronic Bulletin Board under the symbol "XFMY".  

The following table sets forth the high and low prices for the Company’s common stock for each quarter commencing July 1, 2009. The prices presented below are bid and ask prices, which represented prices between broker-dealers and does not include retail mark-ups and markdowns or any commission to the broker. The prices do not necessarily reflect actual transactions.

On September 01, 2011, the bid and ask prices of the Company’s common stock as quoted on the Bulletin Board were $0.04 and $0.04, respectively.  In addition, the Company’s common stock is subject to rules adopted by the Securities and Exchange Commission ("Commission") regulating broker dealer practices in connection with transactions in "penny stocks."  Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized disclosure document prepared by the Commission.  That disclosure document

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advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor, but rather paid to sell the shares.  The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson the investor is working with and to understand the risky nature of an investment in this security.  The broker dealer must also provide the customer with certain other information and must make a special written determination that the "penny stock" is a suitable investment for the purchaser, and receive the purchaser's written agreement to the transaction.  Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Company’s common stock.  Many brokers may be unwilling to engage in transactions in the Company’s common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.

Holders

As of September 01, 2011, the Company had 141 stockholders of record. This does not include stockholders who held stock in accounts at broker-dealers.

Dividends

The Company has not declared or paid any cash dividends on its capital stock since inception and does not expect to pay any cash dividends for the foreseeable future. Management currently intends to retain future earnings, if any, to finance the expansion of the Company’s business.

Securities Authorized for Issuance under Equity Compensation Plans

Total option grants available under this plan are limited to 20 percent of the issued and outstanding stock of the Company. In February 2011, all of the previously approved issued vested grants to employees, directors and one outside vendor were cancelled by the Board of Directors, and in consideration of their past service to the Company, the Company approved the issuance of $1,825,000 shares of the Company’s common stock to the respective employees, directors and the outside vendor. There were no further

9

issuances of stock options to any officers, directors or employees in the fiscal year ended June 30, 2011. It is expected that the compensation of the executives in fiscal 2012, including equity awards, will be reviewed based on the expected performance of the Company as established by the Compensation Committee of the Board of Directors.

Description of Securities

Preferred Stock

The Company has authorized 100,000,000 shares of preferred stock, par value $0.01, none of which has been issued.

Common Stock

The Company has authorized 125,000,000 shares of common stock, par value $0.0001 of which 51,931,553 were issued and outstanding as of June 30, 2011.  In July 2011, the Company issued 1,825,000 shares of its common stock in consideration of the cancellation of the previously vested option grants.

Unregistered Sales of Equity Securities

The information relating to the sales of the Company’s Convertible Debentures should be read in conjunction with the consolidated financial statements and accompanying notes thereto in Note 9 to the Consolidated Financial Statements, included in this report.

The debentures, which were taken for investment purposes and subject to appropriate restrictions on transfer, were sold exclusively to persons who qualified as “accredited investors” within the meaning of Rule 501(a) under Regulation D, without registration under the Securities Act of 1933, as amended, (the “Securities Act”) in reliance upon the exemption contained in Section 4(2) of the Securities Act and Regulation D, Rule 506 there under.

Item 6.   Selected Financial and Other Data.

Not Applicable

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion of the Company’s financial condition and results of operation should be read in conjunction with the consolidated financial statements and accompanying notes thereto in Item 8 of this report.

Critical Accounting Policies and Procedures

The Company believes its critical accounting policies (see Note 1 to the consolidated financial statements) are revenue recognition, software development costs, accounting for research and development expenses, accounting for convertible securities with beneficial conversion features and share based payments under accounting principles generally accepted in the United States and that they are adhered to in the accompanying consolidated financial statements.

Revenue Recognition

The Company’s primary revenue is derived by delivering software as a service, or hosted solutions for its clients.  Revenue derived from the sale of these services is billed monthly or quarterly and is recognized

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in accordance with current accounting guidance over the term of the agreement.  The Company bills for its service in advance; payments from customers received in advance of the month of usage are reflected as deferred revenue until the month of usage, when they are recognized as earned revenue. In addition to the software license revenue the company derives revenue from professional services fees associated with custom software development, project management and other related services it provides to customers.  

Software Development Costs

The Company capitalizes internally generated software development costs in accordance with current accounting guidance.  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.  Costs eligible for capitalization have been immaterial for the periods presented.

Receivables

Receivables consist of amounts due to the Company from normal business activities generated from contracts with its clients for the use of its software.  Customers are invoiced in the month preceding the use of the service. Many of the Company's customers remit payment for the subsequent month's services during the month billed for the use of the software. The collected funds are recognized as deferred revenue in the Company's financial statements until the actual month of service at which time they are classified as revenue. Accounts receivable thus include only funds due from customers who have not paid for the monthly service provided.

Insurance

The Company carries Directors and Officers Liability insurance, comprehensive liability insurance on its assets both at its main offices and at the data hosting service center and mandatory worker compensation on its employees.

Results of Operations – Fiscal Year Ended June 30, 2011 compared to Fiscal Year Ended June 30, 2010

Revenues:  The Company’s primary revenues are derived by delivering software as a service, or hosted solutions for its clients billed on a monthly basis for each location serviced or from solutions developed at specific customer’s requests.  Customers are billed on a monthly basis for each location serviced or at a project’s completion.  For the year ended June 30, 2011, the Company generated $1,806,869 in revenues compared to $1,925,928 in the prior year.  This decrease in revenues is primarily attributable to the price reductions required by the competitive market place approximating $86,000, sale by a major customer of their Company stores to new franchisees that reduced current years revenues by approximately $25,000, the reduction of billings for professional services and other fees in the amount of $87,000 due partially to the lapse of one of the Company’s licensing agreements of $40,000 and fewer special projects and other fees. The Company offset these decrease by the addition of new customers and related fees for our business intelligence software solution approximating $79,000.

In 2008 and in 2007, the Company had received payments under contracts for the development of its Scorecard and Benchmarking Solutions, subject to multi-year licensing agreements, that was recognized under the current accounting guidance over the 3 year term of the licensing fee agreements.

The Company recognized $44,000 in 2011 and $84,000 in 2010, respectively, under the terms of these multi-year licensing agreements. As of June 30, 2011, all of the revenue under these contracts has been fully recognized.

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Cost of Revenues:   The costs for the year ended June 30, 2011 were $640,337 compared to $638,225 in the prior year and consist primarily of personnel, related payroll costs, and support service costs. Other costs include travel, data hosting services, telecommunication costs and depreciation of computer equipment used in the maintenance and processing of customers' data.  The increase was primarily attributable to costs for personnel and related payroll costs in the amount of $6,569 due to an increase of time from existing personnel allocated to this category. License fees decreased by $3,825 due to the decreased revenue factors listed above. The other combined costs in this category were lower by $632.

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 year ended June 30, 2011 of $456,780 compared to $492,330 in the prior year. A net decrease of $19,533 in payroll and related costs was attributable to a reallocation of time from existing personnel to operations and a reduction of $18,000 in the use of outside contractors. Other costs increased by $1,983. The Company’s research and development is part of its strategic plan to provide enhancements to its existing software and integration into new operations currently in the hospitality market.

Marketing and Selling:  The costs for the year ended June 30, 2010 were $283,096 compared to $275,980 in the prior year. The Company’s marketing and selling expenses in the current year increased due to additional compensation of $16,500 for our sales consultant, a reallocation of time and related payroll costs from existing personnel to this category of $1,399, offset by reduced costs for advertising, travel and trade shows in the amount of $10,783. For the current fiscal year, the Company continues to expand its customer base through direct sales, 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 year ended June 30, 2011 were $435,110 compared to $412,482 in the comparable period of the prior year. The primary increase was the higher professional fees of $18,732 applicable to the settlement of the debt obligation, debenture retirement and the valuation required for the derivatives in the debentures and warrants. In the current year, payroll and related costs decreased by $1,855 due to the reallocation of time from existing personnel to operations and by the over-accrual of prior years benefits. The other combined costs in this category increased by $5,751.

Interest Expense:   Interest expense consists of the following:

Actual cash paid for interest during the fiscal years ended June 30, 2011 and 2010 was $62,959 and $47,547, respectively.

Net Income (Loss):    The Company’s net gain for the year ended June 30, 2011 was $193,377 compared to $485,411 in 2010.  The decrease in the net income was primarily the results of the following: reduced

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revenue of $119,058 due to competitive pricing and factors listed above, increased compensation of $16,500 for outside sales consultant, increased professional fees of $18,732, higher interest costs of $72,478, lower gain of $106,262 from the change in fair value of the derivatives, offset by increased gain on debt reduction of $185,000, reduced usage of $18,000 for outside contractors and a net reduction of operating expenses of $34,393.

Liquidity and Capital Resources

General

The Company believes it will return to profitable operating results in 2012. While the Company continues to develop a significant pipeline of business opportunities that include multi-unit, full service and casual dining restaurants within the hospitality industry, there can be no assurances that these beliefs will be achievable. Two of the Company’s license fee arrangements were cancelled in the new 2012 fiscal year that will result in a decrease in revenues of approximately $290,000. The Company has taken steps to partially offset this decrease through reduced payroll, related costs and other operating expenses.

During fiscal year ended June 30, 2011, the Company sold $798,000 of its convertible debentures to management, an employee and related parties, of which $118,667 was used to retire an existing note payable–related party debt, $500,000 to retire a previous issued debenture, related accrued interest thereon and related costs, $100,000 as part of the settlement of the outstanding debt from the legal obligation and the balance as working capital.

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 debt or 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 material adverse effect on the Company’s financial condition and results of operation.

Finance

The Company continues to review capitalization alternatives, including various debt and equity instruments.  The Company may need to raise between $1,500,000 and $5,000,000 in new capital over the next 12 months.  The use of funds includes operating capital for general corporate purposes, expansion of the sales, marketing and software development staff, equipment and a strengthened balance sheet.  If additional funds are raised by the issuance of debt or 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.  As of the date of this Report, there are no agreements, commitments or arrangements for any future financing, and no assurance can be given that future financing can be achieved.

As of June 30 2011, there was an accumulated deficit of $8,828,136 and the Company’s cash position was $56,625.  

Legal Issues

There are no material legal proceedings that management is aware of that affect the Company.

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Convertible Debentures

As of June 30, 2011 and 2010, the Company had outstanding an aggregate of $1,206,763 and $733,635, respectively, of the 9% convertible debentures that convert at 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 and mature July 31, 2012. Of the total outstanding debentures, $906,682 is held by related parties. As of June 30 2011 and 2010, accrued interest on the debentures was $135,531 and $108,453, respectively.  

The debentures issued during the year ended June 30, 2011 have a beneficial conversion feature, which had 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 debentures. The total amortization for the year ended June 30, 2011 is $56,359 and the remaining unamortized discount of $206,747 is reflected as a reduction of the principal balance of the debentures.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Tabular Disclosure of Contractual Obligations

                                             Payments due by period     

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

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Item 8.  Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and stockholders of XFormity Technologies, Inc.

Dallas, Texas

We have audited the accompanying consolidated balance sheets of XFormity Technologies, Inc. and Subsidiary as of June 30, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XFormity Technologies, Inc. as of June 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern.  As discussed in Note 20 to the consolidated financial statements, the company has a net stockholders’ deficit and may require additional financing to continue in operation.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 20.  The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.

F-1

XFormity Technologies, Inc. and Subsidiary

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

F-2

XFormity Technologies, Inc. and Subsidiary

Consolidated Statements of Operations

The accompanying notes are an integral part of these consolidated financial statements.

F-3

XFormity Technologies, Inc. and Subsidiary

Consolidated Statement of Changes in Stockholders' Deficit

Years Ended June 30, 2011 and 2010

The accompanying notes are an integral part of these consolidated financial statements.

F-4

         XFormity Technologies, Inc. and Subsidiary

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these consolidated financial statements.

F-5

XFormity Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2011

Note 1 - Organization, Nature of Business and Significant Accounting Policies

Organization and Nature of Business

XFormity is a provider of comprehensive business solutions to multi-unit business operations.  Specializing in the food-service industry, XFormity is providing analytical tools, which include operational reporting, balanced scorecards and benchmarking solutions, to restaurant owners and operators representing approximately 10,000 restaurants in North America.   The Company's solutions assist customers manage the vast amounts of information necessary to run restaurants effectively.  

XFormity's solutions help customers of all sizes convert raw data into meaningful information which in turn improves their decision making process and capabilities. By providing a complete line of tools, the Company provides customers with a single vendor that can deliver data integration, data storage, business intelligence, balanced scorecard and benchmarking capabilities that help decision makers able to see trends as they occur and provide value more rapidly. Pulling together information from anywhere helps provide a single window for better business insight.

The Company provides services for restaurateurs in fine and casual dining, and franchisors and franchisees in the quick service market for a growing list of customers across the United States and Canada.  A few of the brands that the Company services include:  Burger King, Taco Bell, Arby's, Domino's, Pizza Huts, KFC, Long John Silver's, Beautiful Brands, and many others.  XFormity is proud to be 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 its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants over the past three years.

XFormity's solutions are based on a software-as-a-service delivery model that provides benefits to both the Company and its customers as existing Information Technology (IT) investments become more valuable by utilizing XFormity's service based integration and reporting solutions. XFormity's solutions do not require customers to replace, upgrade or develop expensive extension to existing tools, which translates into a much quicker return on investment.  The Company has developed highly effective processes for providing services for an increasing number of customers while keeping costs down and high levels of customer service.

F-6

Significant Accounting Policies

Financial Statement Presentation

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 its operations and debt obligations. 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.

Principles of Consolidation

The consolidated financial statements include the accounts of XFormity Technologies, Inc. and its wholly-owned operating subsidiary, XFormity, Inc (XFM).  All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates   

The preparation of 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 financial statements, as well as the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents   

All highly liquid investments with a maturity of 90 days or less at the time of purchase are considered to be cash equivalents.  Cash equivalents include cash on deposit with banks and money market funds.  At June 30, 2011 and 2010, the Company had cash equivalents of $18,716 and $61,754, respectively.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable.  The Company maintains its cash balances in bank accounts that, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.  Management believes that the Company is not exposed to any significant credit risk on cash. If during our evaluation of accounts receivable we determined that accounts were not collectable an allowance for doubtful accounts would be established. Management determined that no allowance was necessary at June 30, 2011 and 2010 based on the history, collectability and aging of the receivables.

Concentrations

During the fiscal years 2011 and 2010, Burger King Corporation represented more than 46% and 42%, respectively, of the Company’s total revenues. In both fiscal years 2011 and 2010, seven customers who are also stockholders of the Company, generated $193,000 and $362,500 of the Company's revenues,

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respectively. The Company believes it has excellent relationships with all of these customers except one who notified the Company that effective August 1, 2010, he would no longer use our services.  

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, accounts payable, loan payable and convertible debentures reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

Revenue Recognition

The Company contracts with clients for development and sale of business intelligence software solutions.  Revenue derived from the sales of these products is billed on a monthly usage basis and is recognized in accordance with current accounting guidance, 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.  

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.

Management has evaluated the difference between straight line and the accelerated method used and deemed the difference immaterial.

Software Development Costs

The Company capitalizes internally generated software development costs in accordance with current accounting guidance. 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.  Research and development expense was $474,280 and $492,330 for 2011 and 2010, respectively.  There were no capitalized software development costs.

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 financial statements.

Derivative Liability in Convertible Debentures

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 at each quarter, the Company enlisted a valuation specialist and valued the derivative liabilities at June 30, 2011 using a binomial model which included the following assumptions 1) volatility of 275% 2) riskless rate of 0.2% for debt instruments and 0.3% for warrants 3) current closing stock price of $0.04 on June 30, 2011, 4) exercise prices of $0.12,

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$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.

Share-Based Compensation

In fiscal year 2010, the Company issued a share-based payment to one of its directors as reflected in the non-cash charges of $17,673 included in general and administrative expenses.  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. Six of the 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 Company did not recognize any additional expense as the value of options cancelled exceeded the fair value of stock issuable, in accordance with current accounting standards. The shares were issued in July 2011 and are not included in the weighted average calculation of the earnings per share. As of June 30, 2011 the shares are included as common stock payable in the stockholders deficit. There are no outstanding option grants at June 30, 2011.

Accounting for Derivative Instruments

All derivatives have been recorded on the balance sheet at fair value based on the lattice model calculation. The fair value of derivatives at June 30, 2011 and 2010 was $514,086 and $357,242, respectively. These derivatives, including embedded derivatives in the Company’s warrants and its Convertible Notes outstanding as of June 30, 2011, which 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, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

Lattice Valuation Model

The Company valued the conversion features and warrants in their convertible notes using a lattice valuation model, with the assistance of a valuation consultant. The lattice model values these instruments based on a probability weighted discounted cash flow model. The Company uses the model to develop a set of potential scenarios. Probabilities of each scenario occurring during the remaining term of the debentures are determined based on management's projections. These probabilities are used to create a cash flow projection over the term of the instruments and determine the probability that the projected cash flow will be achieved. A discounted weighted average cash flow for each scenario is then calculated and compared to the discounted cash flow of the instruments without the compound embedded derivative in order to determine a value for the compound embedded derivative.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature  of these instruments. The carrying value of long-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.

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The Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings. At June 30, 2011 and 2010, respectively, the Company had convertible debt and warrants to purchase common stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over the life of the debt using the effective interest method.

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level one – Quoted market price in active markets for identical assets or liabilities;

Level two – Inputs other than level one inputs that are either directly or indirectly observable;

Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

The following table presents derivatives that the Company measured and recognized at fair value under a Level 3 hierarchy:

The fair value of the derivative liability at June 30, 2011 was $514,086, and the change in fair value for the twelve months ended June 30, 2011 was a gain of $106,262, net of the debt discount.

Income Taxes

The Company accounts for income taxes in accordance with the current accounting guidance, The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns.

The current accounting guidance requires an asset and liability approach to financial accounting and reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for differences between financial statement and income tax bases of assets and liabilities that will result in taxable income or deductible expenses in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amount expect to be realized.  

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Recent Accounting Standards

In January 2010, the FASB issued an update to Fair Value Measurements and Disclosures.  This update provides amendments to ASC Subtopic 820-10 requiring new disclosures regarding (1) transfers in and out of Levels 1 and 2, in which the Company should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) the reconciliation for fair value measurements using significant unobservable inputs (Level 3), in which the Company should present separately information about purchases, sales, issuances, and settlements (on a gross basis rather than as one net number).  In addition the update provides clarification of existing disclosures regarding the level of disaggregation and disclosures about inputs and valuation techniques.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchase, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have Vendor Specific Objective Evidence (“VSOE”) of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the Company’s consolidated financial position, results of operations and cash flows.

In June 2009, the FASB issued guidance establishing the Codification as the source of authoritative U.S. Generally Accepted Accounting Principles (“U. S. GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on changes in the Codification. All content in the Codification carries the same level of authority, and the U.S. GAAP hierarchy was modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. The Codification is effective for the Company’s interim and annual periods beginning with the Company’s year ending June 30, 2010. Adoption of the Codification affected disclosures in the Consolidated Financial Statements by eliminating references to previously issued accounting literature, such as SFASs, EITFs and FSPs.

In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and require ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. The adoption of the new standards will not have an impact on the Company’s consolidated financial position, results of operations and cash flows.

The Emerging Issue Task Force released a pronouncement related to determining whether an instrument (or imbedded Feature) is indexed to an entity’s own stock.  This became effective for the Company on

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September 30, 2009.  The Company’s warrants and its Series 2007 Secured Convertible Debt issued  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.  With the adoption of the pronouncement on July 1, 2009, the company recorded a cumulative effect of a change in accounting principle resulting in a reclassification of the Company’s outstanding warrants from stockholders’ equity to liabilities, which required the warrants to be fair valued at each reporting period, with the changes in fair value recognized in the Company’s consolidated statement of operations.  At June 30, 2011 and 2010, respectively, the Company recorded a derivative liability of $514,086 and $357,242, respectively, and a change in the fair value – derivative liabilities for the years ended June 30, 2011 and 2010 of $106,262 and $408,921, respectively.

Note 2    Receivables and Deferred Revenue

The Company contracts with its clients for the sale and usage of its business intelligence and financial software products.  Many of the Company's customers are invoiced in the month preceding the use of the service. When these customers remit payment for the subsequent month's service during the month billed, those funds collected are recorded as deferred revenue until the actual month of service at which time they are recognized as revenue in the month earned.  

The Company also develops and provides professional and technical services to its customers.  Some of the technical services developed benefit the customers over extended periods of time and are recognized under current accounting guidance, over the term of the agreement or at specific acceptance points.

The Company had received respective non-refundable payments towards contracted projects in 2008 and in 2007 that were each accepted in the respective succeeding fiscal year.  At June 30, 2011 and 2010, the Company reflected the unamortized amount of the contracts as deferred revenue and recognized as revenue the portions attributable to the underlying license agreements in fiscal years 2011 and 2010, respectively.  The contracted project in 2007 was fully amortized at the end of June 2010 and the unamortized revenue of $44,000 from the 2008 project was fully amortized by the end of June 2011.

Receivables include only funds due from customers who have not paid for the monthly service provided. Due to the high collectability factor either by prepayment or within 60 days of usage, and the Company's experience with uncollectible accounts, no allowance for doubtful accounts is necessary.

The Company’s receivables at June 30, 2011 and 2010 are $79,176 and $54,861.

Note 3    Prepaid expenses

Prepaid expenses represent the unexpired portion of the Company's insurance coverage and an advance registration at a trade show.

.

Note 4     Property and Equipment

Property and equipment are stated at cost.  Depreciation of property and equipment is computed under accelerated methods over a five year estimated useful life of the assets. Depreciation expense for the years ended June 30, 2011 and 2010 was $15,895 and $22,035, respectively. Management has evaluated the difference between straight line and the accelerated method used and deemed the difference immaterial.

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Property and equipment consisted of the following:

Note 5   Other Assets

Security Deposit   

The Company has a security deposit with its landlord at its home office in the amount of $8,707.

Deferred Commission

The Company had an agreement with an outside consulting firm that provided for monthly payments of $3,000 for five years terminating on June 30, 2011 and the issuance of one million shares of the Company’s common stock valued at $147,048.  The determination of that amount was based on the fair value of the issued common stock at the commitment date in accordance with current accounting guidance and is also fully amortized at June 30, 2011.  

Note 6    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 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, the Company and counsel amended the settlement terms. Under the revised settlement, the Company paid $100,000 in cash and issued $140,000 of its 9% convertible debentures. If the Company achieved the revenue target of $2 million this year, it would be required to pay an additional $65,000. The Company recorded the $65,000 as a liability and the remaining $185,000 ($490,000 balance at June 30, 2010 less $100,000 for cash paid and the issuance of a convertible debenture of $140,000 and $65,000 for contingent liability) as a gain on debt reduction.

On June 30, 2011, the Company did not achieve the revenue target of $2 million and recorded an additional gain of $65,000.

Note 7   Accounts Payable

Accounts payable represents balances due to trade creditors, licensor and outside consultants.

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Note 8    Accrued Expenses

Under the terms of the 401(K) retirement plan, mandatory contributions are required by the Company for 3% of the employees’ pay during the plan year. The amounts in the plan are fully vested with the employees.  The Company’s expense under this plan was $25,797 and $26,285 for the years ended June 30, 2011 and 2010, respectively.

Note 9   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 June 30, 2011 and 2010, respectively, the Company had outstanding an aggregate of $1,206,763 and $733,635, respectively, of the 9% convertible debentures that convert at 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 and mature July 31, 2012. All of the debentures maturity dates were extended through July 31, 2012 in consideration for the extension of the respective maturity dates of the warrants. Of the total outstanding debentures, $906,682 is held by related parties. As of June 30, 2011 and 2010, respectively, accrued interest on the debentures was $135,531and $78,323, respectively.  

The debentures issued during the twelve months ended June 30, 2011 have a beneficial conversion feature and embedded derivative, which resulted in a debt discount of $263,106, as determined by an independent valuation specialist. The beneficial conversion value is discounted against the debentures and is being amortized as interest expense using the effective interest method over the term of the debentures. The total amortization as of June 30, 2011 is $56,359 and the remaining unamortized discount of $206,747 is reflected as a reduction of the principal balance of the debentures.

If all of the remaining debenture holders at June 30, 2011 elected to convert their debentures and warrants into shares of the Company’s common stock, the Company would be required to issue an additional 16,778,680 shares.

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Note 10   Deferred Credits

In January 2006, the Board of Directors and two of its customers, agreed in lieu of an issuance of the Company’s common stock, to receive $150,000 in billing credits applied against their monthly business intelligence software billings at a rate of 25% of the billings commencing January 1, 2006 and July 1, 2006, respectively.

The deferred credits at June 30, 2011 in the respective amounts of $77,050 and $72,458, 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 11    Derivative Liabilities

The Company’s warrants and its Convertible Notes 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.

Our derivative liabilities increased to $514,086 from $357,242 at June 30, 2011. During the years ended June 30, 2011and 2010, the Company recorded gains of $106,262 and $408,921, respectively, for the change in fair value.

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at June 30, 2011 and June 30, 2010:

Note 12      Note Payable-Related Party

On August 31, 2010, the Company sold $128,000 of its corporate debentures and used the proceeds to retire the loan payable of $118,667 and the accrued interest thereon of $9,333.

Note 13   Income Taxes

As of July 1, 2007, the Company adopted the provisions of the current accounting standards, Accounting 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 June 30, 2010, the Company had net operating loss carry-forwards totaling approximately $15,127,000 that begin to expire in 2016 through 2027.  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 $1,940,000 that is fully reserved.

In 2011, the primary differences between financial statement reporting and taxable income (loss) was; (1) the gain on the change in fair value of the derivatives is excludable for tax purposes (2) the gain on debt reduction of $250,000 was limited to the amount of the deduction not taken in prior years and only $130,000 was includible in taxable income; (3) revenues of $44,000 from professional fees under GAAP

F-15

were included in fiscal years 2008 and 2007 taxable calculation and thus excludible in fiscal year 2011; (4) The excess of interest accrued but not paid over actual interest paid of $80,000 was excludible from taxable income. However, no tax benefit, either from the prior year's or current year's results, has been reported in the June 30, 2011 and 2010 financial statements because utilization of the carry-forward is not more likely than not. In the current year, the Company reduced its estimate of state income taxes and recorded a benefit of $461 as compared to a $13,000 provision in fiscal 2010.

In 2010, the primary differences between financial statement reporting and taxable income (loss) was; (1) the gain on the change in fair value of the derivatives is excludable for tax purposes (2) the gain on debt reduction of $65,000 was not includible in taxable income as the deduction was not taken in prior years; (3) revenues of $84,000 from professional fees under GAAP were included in fiscal years 2008 and 2007 taxable calculation and thus excludible in fiscal year 2010; (4) the non-cash share based payments of $17,673 under current accounting guidance is not deductible for tax purposes.

The deferred tax asset at June 30, 2011 and 2010 is as follows:

Note 14   Stockholders' Equity

Capital Stock

The Company’s capital structure consists of two classes of stock, preferred and common.  The preferred shares, none of which have been issued, if issued may have a claim to assets superior to those of the common stockholders.

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. Six of the 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 Company did not recognize any additional expense as the value of options cancelled exceeded the fair value of stock issuable, in accordance with current accounting standards. The shares were issued in July 2011 and are not included in the weighted average calculation of the earnings per share. As of June 30, 2011 the shares are included as common stock payable in the stockholders deficit. There are no outstanding option grants at June 30, 2011.

The shares were issued in July 2011 and are not included in the weighted average calculation of the earnings per share. As of June 30, 2011 the shares are included in common stock payable.

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Stock Options

In August 2009, the Board of Directors of the Company approved the grant and issuance of options exercisable to purchase an aggregate of 250,000 shares of common stock. Those and all other previous options were cancelled by the Board of Directors effective February 2011. See Stockholders Equity Note above.

Note 15     Loss per Share   

Basic loss per share is calculated based on the weighted-average number of outstanding common shares.  Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares. For the years ended June 30, 2011 and 2010, the fully diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of options and warrants would be anti-dilutive.   

Net income per share has been computed using the following weighted average number of shares:

Note 16     Share-Based Compensation

As no options or warrants were granted during the year ended June 30, 2011, no stock based compensation was recorded by the Company. During the year ended June 30, 2010, the Company issued 250,000 valued at $17,673. The fair value at the date of grant using the Black-Scholes valuation model for options issued in fiscal 2010 was estimated using the following weighted average assumptions respectively: (a) no dividend yield on the common stock, (b) expected stock price volatility of 187.91%, (c) a risk free interest rate of 1.76% and (d) an expected option term of 2.8 years.  The expected term of the options represents the estimated period of time until exercise giving consideration to the contractual terms, the immediate vesting and expectations of future employee behavior. For fiscal 2010, expected stock price volatility is based on the historical volatility of our stock.  The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of the grant with an equivalent expected term of life.  The Company has not paid any dividends in the past and does not currently plan to any dividends in the future. In February 2011, the Company cancelled all outstanding option grants.  

Note 17   1999 Equity Incentive Plan

The Board of Directors has the authority to grant shares issuable under the Plan equal to 20% of the then issued and outstanding shares. Through February 2011 the Board of Directors, which has the exclusive power over the granting of options and their vesting provisions, granted a total of 7,025,000 options to executives, employees, directors and one vendor that were fully vested as of the date of the grant.  All options granted had a seven-year term. In February 2011, the Board cancelled all existing options and in consideration for the cancellation, awarded all of the grantees a total of 1,825,000 shares of the Company’s common stock. See Note 14 Stockholders Equity.

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There are no option grants outstanding at June 30, 2011.

Note 18       Related Party Transactions  

Seven of our customers who are also stockholders in the Company, generated revenues approximating $192,000 and $362,500, respectively, in the years ended June 30, 2011 and 2010.  A principal in one current customer serves as a member of the Board of Directors and the Audit Committee. This same principal, and his partners, purchased $728,000 of the Company’s debentures for cash in fiscal 2011

In September 2010, three Company executives and one employee purchased $70,000 of the 9% convertible debentures for cash.

In February 2011, the Company authorized the payment of 1,825,000 shares in exchange for the cancellation of all outstanding options granted. The Company did not recognize any additional expense as the value of options cancelled exceeded the fair value of stock issuable, in accordance with current accounting standards.  

Note 19    Commitments and Contingencies

Leases

In June 2008, The Company entered into a 64 month “triple net” lease agreement.  Terms of the agreement provide for an average base rent of $4,329 over the term of the lease plus the Company’s pro rata share of real estate and common area costs.

The Company also has six months remaining on its Northbrook, Illinois office at $700 per month.

Concentrations

During the fiscal years 2011 and 2010, Burger King Corporation represented more than 46% and 42%, respectively, of the Company’s total revenues. In the current year, the Company was notified that the license fees for its non-business intelligence solutions expired and would not be renewed.  

In both fiscal years 2011 and 2010, seven customers who are also stockholders of the Company, generated $193,000 and $362,500 of the Company's revenues, respectively. The Company believes it has

F-18

excellent relationships with all of these customers except one who notified the Company that effective August 1, 2010, he would no longer use our services.  

Contracts

In 2011, the Company extended the maturity dates of the convertible debentures Through July 31, 2012.

Scheduled principle payments on the above obligations are as follows:

Licenses

In January 2007, the Company was granted a non-exclusive license and agreed to pay a royalty fee ranging between 6.0% and 7.5% but only on revenues generated from the Company’s business intelligence software provided within the restaurant industry. The total expense under this agreement for the years ended June 30, 2011 and 2010 is $78,901 and $80,356, respectively.  At June 30, 2011, the remaining amount of the current year’s obligation of $38,802 is reflected in the accounts payable above.

Litigation

As of the date of this report, there are no 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.

Contingencies

None

Note 20    Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred an operating deficit of $8,828,136 through the fiscal year ended June 30, 2011. The Company is continually reviewing its operations and attempting to improve operating results and its balance sheet.  The Company's ability to continue as a going concern is dependent on its ability to improve operating results and increase its financing cash flows, if any.  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 21  Subsequent Events

In July 2011, the Company issued 1,825,000 of its common shares in consideration for the cancellation of all outstanding options granted.  The Company did not recognize any additional expense as the value of options cancelled exceeded the fair value of stock issuable, in accordance with current accounting standards.

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 Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None, except as previously disclosed.

Item   9A   Controls and Procedures

Management’s 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 of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”).   Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are ineffective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officer have determined that our disclosure controls and procedures are not effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.  Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment we believe that, as of June 30, 2011, our internal control over financial reporting was ineffective based on those criteria.

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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:

Changes in Internal control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting through the date of this report or during the quarter ended June 30, 2011, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Independent Registered Accountant’s Internal Control Attestation

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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Part III

Our directors are each elected and serve until their qualified successor has been elected. Each is elected at each annual meeting of our stockholders.  All of the above directors, with the exception of Mr. Paul Dwyer, received compensation of $12,500 in the form of issuance of 250,000 shares each of the Company’s common stock based on the closing price of the stock as quoted on the Bulletin Board at $0.05 on the date of authorization.  As consideration for the stock issuance, all of the outstanding vested stock option grants held by the directors were cancelled. Following is biographical information for each of the directors, executive officers and persons of control including their principal occupation and other business affiliations:

Chris Ball, 45, has served as XFormity's Chief Executive Officer since April 25, 2006.  From June 2002 through April 25, 2006, he served as XFM's Chief Operating Officer.  From April 2000 through May 2002, he worked as Vice President, Operations for VertaPort, Inc.  From May 1998 through March 2000, he worked as a project management consultant for a division of US Freightways.  As a consultant for the US Freightways' division, he was responsible for the development of their business-to-business auction solution.  Mr. Ball earned a Bachelor of Science Degree in Aerospace Engineering from California Polytechnic University and a Masters in Business Administration from Texas Christian University.

C. Drew Seale, 42, has served as XFormity's Chief Technology Officer since September 2004.  From June 2002 through September 2004, he served as XFM's Chief Technology Officer. From September 1999 through May 2002, he worked as the Vice President of Applications Development for VertaPort, Inc., where he was responsible for all technology development.  From January 1996 through August 1999, he worked as the Director of Application Architecture for Sea-Land, Inc., a shipping company with

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over 9,000 employees.  Mr. Seale earned a Bachelor of Science Degree (BS) in advertising from the University of Texas and a Master in Business Administration from Texas Tech University.

Jack Rabin, 71, has been our Chief Financial Officer since July 2004 and a director since March 2004. He was also Chief Financial Officer of Paradigm Group II, LLC since its inception in 2000 until June 30, 2004.  Previously he served as Chief Financial Officer of a major national underwriting firm from 1998 to 2000 and Corporate Controller of the Illinois Superconductor Corp. from 1993 to 1998.  He received a BS degree in business administration from Roosevelt University and has a CPA certificate from the State of Illinois.

Michael Shahsavari, 62, has worked in the restaurant industry for the past 35 years as an owner and Chief Financial Officer of franchisees for major brands such as Taco Bell and Pizza Hut.  In total, the companies with which Mr. Shahsavari is affiliated employ over 1800 people.  Mr. Shahsavari received a Bachelor of Arts in accounting from the London School of Accountancy and is a Fellow member of the Institute of Chartered Accountants in England & Wales and is the Chairman of the Board and Chairman of the Audit Committee.

Ken Johnson, 58, for the past 15 years, Mr. Johnson has served as President of NA Sales, Inc. a consulting firm specializing in sales, marketing and business development. Mr. Johnson has been paid as an outside consultant to the Company since December 2006. Current clients, besides XFormity, Inc  include RSM McGladrey Financial Process Outsourcing.  Other past clients include Pillsbury/Green Giant Fresh where he played a major role in the development of new products and markets for that produce brand; Golden State Foods Corporation where he worked to develop and implement a sales and marketing plan to pursue chain account manufacturing business; John I. Haas, a worldwide leader in the growing and marketing of Hops where he worked on the integration of a diverse line of manufacturing businesses that they acquired.

Farsheed Ferdowsi, 56, was the Founder, President and CEO of PayMaxx, Inc. prior to its sale to CompuPay, Inc. in July 2005.  Founded in 1991, PayMaxx was a technology-centric, customer-focused payroll outsourcing service provider.  At the time of its sale, it ranked among the top-10 in its industry and served clients in all 50 states.  After the business combination with CompuPay, Mr. Ferdowsi served the combined entity as a member of the Executive Team as Chief Development Officer until August 2007.  Currently, Mr. Ferdowsi is the CEO of Inova, Payroll, Inc, a payroll processing service in Nashville, TN. The Nashville Business Journal named Mr. Ferdowsi the 2002 Entrepreneur of the Year.  Mr. Ferdowsi holds a Master’s degree in structural engineering from the University of California in Berkeley and a Bachelor’s degree in civil engineering from Vanderbilt University.

Mr. Ferdowsi’s brother, Farzin, is the owner of 5.29 % of the Company’s common stock

During the last ten (10) years no current director or officer of the Company, other than Mr. Shahsavari, has:

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Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favourable to the Company than the Board of Directors believes could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent, outside disinterested directors.

Nomination Process

The Board of Directors has not appointed a standing nomination committee and does not intend to do so during the current year. The process of determining director nominees has been addressed by the board as a whole, which consists of currently seven members. The board has not adopted a charter to govern the director nomination process.

Of the currently serving seven directors, four would not be deemed to be independent within the meaning of the National Association of Securities Dealers, Inc.'s listing standards.  For this purpose, a director is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family or other material personal ties to management.

The Board of Directors has not adopted a policy with regard to the consideration of any director candidates recommended by security holders, since to date the board has not received from any security holder a director nominee recommendation.  The board of directors will consider candidates recommended by security holders in the future. Security holders wishing to recommended a director nominee for consideration should contact Mr. Christopher Ball, Chief Executive Officer and President, at the Company's principal executive offices located in Dallas, Texas and provide to Mr. Ball, in writing, the recommended director nominee's professional resume covering all activities during the past five years, the information required by Item 401 of Regulation SK, and a statement of the reasons why the security holder is making the recommendation. Such recommendation must be received by the Company before June 30, 2012.

The Board of Directors believes that any director nominee must possess significant experience in business and/or financial matters as well as a particular interest in the Company's activities.

Meetings and Committees of the Board of Directors

The Board meets as often as necessary to perform its duties and responsibilities.

 a.       Meetings of the Board of Directors

During the fiscal year ended June 30, 2011, four meetings of the Board of Directors were held, including scheduled and special meetings, each of which were attended by a minimum of five Directors. Meetings are conducted either in person or by telephone conference.

Mr Dwyer did not participate in any of the meetings. All other directors participated in all other meetings.

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Outside Directors receive no compensation for their attendance at meetings other than as reflected above, although they are reimbursed their expenses associated with such attendance.  Messrs. Ferdowsi received stock option grants for 250,000 shares at an exercise price of $0.08 expiring in seven years in fiscal year ended June 30, 2010. Those option grants, along with those previously granted to the other Board Members, were cancelled in February 2011.

b.       Committees

The Board appoints committees to help carry out its duties. In particular, board committees work on key issues in greater detail than would be possible at full board meetings.  Each committee reviews the result of its meetings with the full board.

During the year ended June 30, 2011, the board had standing audit and compensation committees.

Audit Committee and Audit Committee Financial Expert

In 2010, the audit committee was composed of Mr. Shahsavari, Mr. Seale and Mr. Rabin.

The Board of Directors has determined that Mr. Shahsavari is independent and qualified as an Audit Committee financial expert within the meanings of Regulation S-K, Item 407(d) (5) (i) and (ii).  For this purpose, an audit committee member is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family or other material personal ties to management.

During the fiscal year ended June 30, 2011 the audit committee had four meetings. The committee is responsible for accounting and internal control matters.  The audit committee:

In addition to its regular activities, the committee is available to meet with the independent accountants or Chief Financial Officer whenever a special situation arises.

The Audit Committee of the Board of Directors has adopted a written charter, which has been previously filed with the Commission.

Audit Committee Report

The Audit Committee, consisting of Mr. Michael Shahsavari, Chairman of the Board, Mr. Drew Seale and Mr. Jack Rabin, have reviewed and discussed the audited financial statements with management and with M&K CPAS, PLLC and the matters required to be discussed by Statement of Auditing Standards No. 114.

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1.

The Audit Committee has received the written disclosures and the letter from M&K CPAS, PLLC required by Independence Standards Board Standard No. 1 and has discussed with them their independence.   

2.

Based on the review and discussions referred to above, the Audit Committee has recommended to the Board of Directors that the audited financial statements for the years ended June 30, 2011 and 2010 be included in the Company's Annual Report of Form 10-K for the fiscal year ended June 30, 2011 for filing with the Commission.

By the Audit Committee: Mr. Shahsavari, Mr. Seale and Mr. Rabin.

Compensation Committee

During the fiscal year ended June 30, 2011, the Compensation Committee was comprised of Messrs. Ferdowsi, Johnson and Ball who determined and approved appropriate executive compensation and under the bonus arrangement.  The Committee will continue to evaluate and determine executive compensation for the fiscal year ended June 30, 2012 based on the Company’s performance.

The compensation advisory committee:

1.

recommends to the board of directors the compensation and cash bonus opportunities based on the achievement of objectives set by the compensation advisory committee with respect to our chairman of the board and president, our chief executive officer and the other executive officers;

2.

administers our compensation plans for the same executives;

3.

determines equity compensation for all employees;

4.

reviews and approves the cash compensation and bonus objectives for the executive officers; and

5.

reviews various matters relating to employee compensation and benefits

Shareholder Communications

Any shareholder of the Company wishing to communicate to the Board of Directors may do so by sending written communication to the board of directors to the attention of Mr. Chris Ball, Chief Executive Officer, at the principal executive offices of the Company.  The Board of Directors will consider any such written communication at its next regularly scheduled meeting.  

Compliance with Section 16(a) of the Exchange Act:

Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than 10% of the Company's common stock are required to report their ownership of the Company's common stock and any changes in that ownership to the Securities and Exchange Commission.  Specific due dates for these reports have been established by rules adopted by the SEC and the Company is required to report in this Annual Statement any failure to file by those deadlines. 

Based solely upon public reports of ownership filed by such persons and the written representations received by the Company from those persons, all of our officers, directors and 10% owners have satisfied these requirements during the most recent fiscal year.

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Code of Ethics

The Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees subsequent to fiscal year ended June 30, 2004. This was filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004.  The Company will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics.  Such request should be made in writing and addressed to Investor Relations, XFormity Technologies, Inc., 4100 Spring Valley Road, Suite 800, Dallas, Texas 75244.  Further, our Code of Business Conduct and Ethics may be viewed on our internet website at www.xformity.com or on the website of the SEC at www.SEC.gov.  

Item 11   Executive Compensation.

The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to our Chief Executive Officer ("CEO"), the Company's three most highly compensated executive officers other than the CEO or principal executive officers, for all services rendered in all capacities to the Company for the last fiscal year; however, no disclosure has been made for any executive officer, other than the CEO and principal executive officers, whose total annual salary and bonus does not exceed $100,000 except for the CFO. Under 402(a) (5), the Company has excluded all columns where there was no compensation applicable to the named officers or directors.

SUMMARY COMPENSATION TABLE

 (1)  Includes total cost of term life insurance premiums paid for employees' coverage up to $50,000.

The following table sets forth information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of the end of the most recently completed fiscal year:

All of the unexercised options that were fully vested at the beginning of the year were cancelled and there are no outstanding equity incentive plan awards currently granted.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE- NONE

DIRECTORS COMPENSATION

(d) This amount represents the dollar amount recognized for financial reporting purposes with respect to fiscal 2011 for the fair value of common stock granted to the above Directors on February 11, 2011

Compensation Discussion and Analysis

Over the past three years, the executive compensation was determined by the compensation committee consisting of the Chairman of the Board and two other directors. During this tenure, management has not received any equity awards or other forms of compensation other than as reflected in the table above. The compensation committee’s philosophy is that executive compensation should enable the Company to attract, retain and motivate a team of highly qualified executives who will create long-term value for the shareholders. To that end, the committee believes that an executive compensation program should include cash, bonuses and equity-based compensation that reward specific performance. The compensation committee has structured a bonus program for its executives approximating a reasonable percentage of their existing salaries to be paid only upon achievement of specific performance results.  The committee continues to monitor the effectiveness of this program to ensure that the compensation provided to Company executives remains competitive relative to the compensation paid to executives in the Company’s industry.

No executive officer, director or control person received compensation, perquisites and other personal benefits during the fiscal years ended June 30, 2011 and 2010 other than as reflected in the above table.

The compensation committee of the Board of Directors has recommended that this Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2011.

Equity Incentive Plan

The Company has an Equity Incentive Plan which allows the granting of stock options to employees of the Company and its subsidiaries and service providers up to an aggregate of 20% of the number of outstanding shares of common stock. There were no outstanding option grants at June 30, 2011.

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The following table sets forth information with respect to beneficial ownership of our common stock at August 12, 2011  by each person who beneficially owns more than 5% of the common stock; by each of our executive officers named in the Management section; by each of our Directors; and by all executive officers and Directors as a group. Unless otherwise indicated, we believe all persons in the table have sole voting and investment power for all shares beneficially owned by them. ⁽¹⁾  

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Item 13.   Certain Relationships and Related Party Transactions.

In December 2007, the Board of Directors approved grants for the Company’s management, employees and members of the Board.  Chris Ball and Drew Seale each received 2 million options; Jack Rabin received 1 million options, with respective recognized values of $271,168 and $135,584 for financial reporting purposes. Michael Shahsavari, Paul Dwyer and Ken Johnson each received 250,000 options with recognized values for accounting purposes of $33,896 each.

In August 2009, the Board of Directors approved a grant of 250,000 options to Farsheed Ferdowsi, the newest member of the Board with a recognized value of $17,673 for accounting purposes.

All of the above option grants were cancelled effective February 11, 2011 in consideration for the issuance of 250,000 shares of the Company’s common stock, respectively, to each of the six active members of  the Board of Directors.

Customers, who are also stockholders in the Company, generated revenues approximating $193,000 and $362,000 in fiscal years 2011 and 2010, respectively.  Michael. Shahsavari, a principal in one of those customers, has served as Chairman of the Board of Directors and a member of the Audit Committee.  

Item 14.  Principal Accountant Fees and Services.

The Company retained M&K CPAS, PLLC as our principal accountants to audit the financial statements for fiscal years ended June 30, 2011 and 2010. We understand the need for our principal accountants to maintain objectivity and independence in their audit of our financial statements. To minimize relationships that could appear to impair the objectivity of our principal accountants, our Audit Committee has restricted the non-audit services that our principal accountants may provide to us primarily to tax services and audit related services. We are only to obtain non-audit services from our principal accountants when the services offered by our principal accountants are more effective or economical than services available from other service providers, and, to the extent possible, only after competitive bidding. These determinations are among the key practices previously adopted by the Audit Committee effective June 2005. The board has adopted policies and procedures for pre-approving work performed by our principal accountants.

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Item 15.  Exhibits and Reports on Form 8-K.

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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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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