UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 0-17304

Cistera Networks, Inc.

(Exact name of registrant as specified in its charter)

Nevada		91-1944887
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

6509 Windcrest Drive, Suite 160, Plano, Texas		75024
(Address of principal executive offices)		(Zip Code)

972-381-4699

(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definition of “large accelerated filer,” “accelerated filer” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

As of February 15th, 2009, 17,423,410 shares of the registrant’s stock, $0.001 par value per share, were outstanding.

 

 

CISTERA NETWORKS, INC & SUBSIDIARY

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets — December 31, 2009 (unaudited) and March 31, 2009 (audited)			3
Consolidated Statements of Operations — For the three months ended December 31, 2009 and 2008 (unaudited)			4
Consolidated Statements of Stockholders’ Deficit — December 31, 2009 (unaudited) and March 31, 2009 (audited)			6
Consolidated Statements of Cash Flows — For the nine months ended December 31, 2009 and 2008 (unaudited)			7
Notes to Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4T. Controls and Procedures			25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 5. Other Information			27
Item 6. Exhibits			28
SIGNATURES			29
EX-10.1
EX-31.1
EX-32.1
EX-99.1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CISTERA NETWORKS, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31, 2009				March 31st, 2009
		(Unaudited)				(Audited)
Current assets
Cash and cash equivalents		$	15,124			$	1,493
Accounts receivable, net of allowance for doubtful accounts of $-0-			268,413				151,322
Inventory			71,376				124,656
Prepaid expenses			29,291				37,341
Total current assets			384,204				314,812
Property and equipment, net			228,418				324,217
Intangible assets, net			1,547,611				1,751,442
Total long-term assets			1,776,028				2,075,659
TOTAL ASSETS		$	2,160,232			$	2,390,471
Current liabilities
Accounts payable			443,035				517,052
Accrued liquidated damages — outside investors							177,402
Accrued liabilities			503,417				1,527,811
Deferred revenue			947,862				865,271
Convertible promissory notes and other notes payable, net of discount			976,427				976,427
Note payable			—				7,781
Total current liabilities			2,870,741				4,071,743
Accrued liquidated damages — outside investors			177,402				—
Litigation Reserve			650,000				—
Convertible promissory notes and other notes payable, net of discount							—
Deferred Revenue			—				174,554
Other long-term liabilities			423,175				58,031
Total long-term liabilities			1,250,577				409,987
Total liabilities			4,121,318				4,304,328
Commitments and contingencies (Note 4)
Stockholders’ deficit:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; -0- shares issued and outstanding			—				—
Common stock, $0.001 par value; 50,000,000 shares authorized; 17,423,410 shares issued and outstanding, Respectively			17,423				17,423
Additional paid-in capital			19,291,219				19,291,219
Accumulated deficit			(21,269,727	)			(21,222,499	)
Total stockholders’ deficit			(1,983,155	)			(1,913,857	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	2,160,232			$	2,390,471

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

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months ended December 31,
		2009				2008
Revenues
Convergence solutions		$	229,725			$	712,340
Professional services			31,932				98,514
Support and maintenance			311,787				261,633
Total revenues			573,444				1,072,487
Cost of revenues
Convergence solutions			50,608				254,675
Professional services			7,035				55,680
Support and maintenance			68,685				24,250
Total cost of revenues			126,328				344,605
Gross Profit			447,116				737,882
Operating expenses
Sales and marketing			5				319,758
Software development			88,736				188,956
Engineering and support			104,600				172,923
General and administrative			144,981				338,210
Depreciation and amortization			24,128				103,538
Total operating expenses			362,450				1,123,385
Income / (Loss) from operations			84,665				(385,503	)
Other income (expense)
Interest income			—				158
Other income			7				—
Interest expense			(46,541	)			(43,124	)
Abandonment loss							—
Charge for inducements related to stock issued to convertible note holders			—				—
Amortization of discount on convertible notes — outside investors			—				(108,918	)
Amortization of discount on convertible notes — related parties			—				—
Credit (charge) for estimated liquidated damages			—				—
Total other income (expense)			(46,534	)			(151,884	)
Net Income / (Loss)		$	38,131			$	(537,387	)
Basic & diluted net income / (loss) per share		$	0.00			$	(0.03	)
Weighted average shares outstanding — basic and diluted			17,423,410				17,423,410

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Nine months ended December 31,
		2009				2008
Revenues
Convergence solutions		$	798,206			$	2,247,809
Professional services			166,518				204,347
Support and maintenance			817,595				709,394
Total revenues			1,782,319				3,161,550
Cost of revenues
Convergence solutions			276,987				664,417
Professional services			111,380				148,680
Support and maintenance			108,931				71,684
Total cost of revenues			497,298				884,781
Gross Profit			1,285,021				2,276,769
Operating expenses
Sales and marketing			113,226				900,230
Software development			224,971				612,289
Engineering and support			245,505				579,323
General and administrative			489,229				1,098,827
Depreciation and amortization			77,541				302,368
Total operating expenses			1,150,472				3,493,037
Income / (loss) from operations			134,549				(1,216,268	)
Other income (expense)
Interest income			—				326
Other income			70
Interest expense			(171,170	)			(190,933	)
Abandonment loss			(15,815	)			—
Charge for inducements related to stock issued to convertible note holders			—				(1,324,444	)
Amortization of discount on convertible notes — outside investors			—				(1,297,773	)
Amortization of discount on convertible notes — related parties			—				(41,060	)
Credit (charge) for estimated liquidated damages			—				11,299
Total other income (expense)			(186,915	)			(2,842,585	)
Net Income (loss)		$	(52,366	)			(4,058,853	)
Basic & diluted net loss per share		$	0.00			$	(0.28	)
Weighted average shares outstanding — basic and diluted			17,423,410				14,725,627

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

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

																										Total
																		Additional				Accumulated				stockholders’
		Preferred Stock								Common Stock								paid-in capital				deficit				equity (deficit)
		Shares				Amount				Shares				Amount
Balances at March 31, 2009			—				—				17,423,410			$	17,423			$	19,291,219			$	(21,307,784	)		$	(1,999.142	)
Net income / (loss)																							38,130				38,130
Balance Adjustment from September 30, 2009																							(73	)			(73	)
Balances at December 31, 2009			—			$	—				17,423,410			$	17,423			$	19,291,219			$	(21,269,727	)		$	(1,961,085	)

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

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine months ended December 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)		$	(52,366	)		$	(4,058,853	)
Adjustments used to reconcile net loss to net cash used in operating activities:
Charge for inducement to convert debt to convertible promissory notes			—				1,324,444
Charge (credit) for liquidated damages			—				(11,299	)
Charge for stock issued for waiver of registration rights payments			—				1,297,773
Amortization of discount on convertible promissory notes — Outside Parties			—				41,060
Amortization of discount on convertible promissory notes — Related Parties			—				26,829
Abandonment loss			15,815				—
Gain on disposition of assets			1,717				—
Depreciation and amortization			77,541				302,368
Changes in operating assets and liabilities:
Accounts receivable			117,091				181,775
Inventory			53,280				66,829
Prepaid expenses			(8,050	)			11,209
Accounts payable			(74,017	)			(34,160	)
Note Payable			(7,781	)			—
Accrued liabilities			(374,394	)			172,716
Deferred revenue			(91,963	)			(207,317	)
Other long-term liabilities			365,144				51,066
Net cash provided by (used) in operating activities			22,017				(835,479	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net			—				(61,422	)
Net cash used in investing activities			—				(61,422	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash							50,000
Net borrowings (payments) on line of credit							(17,503	)
Net proceeds from short-term advances			—				25,630
Net proceeds from exercise of warrants			—				843,604
Payments on convertible promissory notes and other loans			—				(19,153	)
Payments on other notes payable and capital lease			(8,386	)			—
Net cash provided by (used) financing activities			(8,386	)			882,578
Net increase in cash and cash equivalents			13,631				(14,323	)
Cash and cash equivalents at beginning of period			1,493				125,007
Cash and cash equivalents at end of period		$	15,124			$	110,684

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

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

		Nine months ended December 31
		2009				2008
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	14,853			$	53,740
Income taxes			—				—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible promissory notes and related accrued interest and accrued liquidated damages to common stock		$	—			$	3,287,116
Conversion of accounts payable and other accrued liabilities to convertible promissory notes
Conversion of accrued liabilities to common stock			—				53,312
Transfer of inventory to equipment			—				46,989

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

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Cistera Networks, Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair presentation in accordance with US GAAP. The results of operations for interim period presented are not necessarily indicative of the operating results for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (the “2009 10-K”).

Significant Accounting Policies

The Company prepares its financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2009 10-K.

Recently Issued Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115"(“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not believe it will have a material impact.

In December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements” (“SFAS 160”), which requires all entities to report non-controlling (minority interests) in subsidiaries with equity in the consolidated financial statements, but separate from the parent stockholders’ equity. We do not believe it will have a material impact.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. We do not believe it will have a material impact.

Research and development expenditures are generally expensed as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

Balance Sheet Accounts

Accounts receivable are comprised of the following:

		December 31, 2009				March 31, 2009
Receivables assigned to factor		$	0			$	125,402
Advances to (from) factor			(0	)			(70,570	)
Fees, expenses and charges to reserve			(0	)			(792	)
Amounts due from reserve account			0				—
Amounts due from factor			0				54,040
Non-factored Accounts Receivable			268,413				97,282
Total accounts receivable		$	268,413			$	151,322

Accrued liabilities are comprised of the following:

		December 31, 2009				March 31, 2009
Accrued expenses		$	75,951			$	82,924
Reserve for litigation contingency			—				650,000
Accrued compensation and payroll taxes			247,863				545,626
Accrued Interest			—				225,330
Customer Deposits			126,672				—
Other			52,931				23,931
Total Accrued liabilities		$	503,417			$	1,527,811

Other long-term liabilities are comprised of the following:

		December 31, 2009				March 31, 2009
Deferred rent		$	45,722			$	58.031
		$	45,722			$	58,031

Earnings per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding.

Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common stock equivalents. The Company had approximately 6.6 million and 6.5 million potentially dilutive common stock equivalents (in the form of stock options and stock purchase warrants) outstanding as of December 31, 2009 and 2008, respectively. These potentially dilutive common stock equivalents have been excluded from the diluted share calculations for the three months ended December 31, 2009 and 2008, respectively, as they were

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

anti-dilutive as a result of the net losses incurred for those periods. Accordingly, basic shares equal diluted shares for all periods presented.

Accounts receivable and concentration of credit risk

The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

The Company is subject to credit risk from accounts receivable with its customers. The Company’s accounts receivable are due from both governmental and commercial entities. Credit is extended based on evaluation of the customers’ financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due.

The Company assesses potential reserves against its accounts receivable by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay their obligations to the Company and economic and industry conditions. Based on these factors, the Company has concluded that an allowance for doubtful accounts as of December 31, 2009 and March 31, 2009 is not required.

As of December 31, 2009, the Company receives approximately 39% of its gross revenues from its top three re-sellers. This represents an increase in concentration of business from the 34% reported for the year ended March 31, 2009.

Reclassifications

Certain reclassifications have been made in the fiscal year 2009 financial statements to conform to the fiscal year 2010 presentation.

NOTE 2 — FINANCIAL CONDITION

The accompanying consolidated financial statements have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2009, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The “going concern” explanatory paragraph resulted from, among other things, the substantial losses from operations we have incurred since inception, our liquidity position and the net loss of $4.6 million for the year ended March 31, 2009, which included non-cash charges of $1.4 million related to amortization of discounts associated with our sale and issuance of Senior Unsecured Convertible Promissory Notes in the fiscal years 2007 and 2008 (the “PP2 Notes”) and negative working capital (current liabilities in excess of current assets) of $2.48 million as of December 31, 2009. In addition, we had a net loss of $52,366 for the nine months ended December 31, 2009.

Accordingly, as of December 31, 2009, the recoverability of a major portion of the recorded asset amounts is dependent on our continuing operations, which in turn is dependent on our ability to maintain our current financing arrangements and our ability to become profitable in our future operations through generating higher revenues or lowering operating costs, or a combination of the two. These factors raise substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if we were unable to continue as a going concern.

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

The Company maintained a factoring facility with Allied Capital Partners, L.P. (“Allied”) for up to $1,500,000 of the Company’s customer accounts receivable. The facility allows for an advance rate up to 85.88% and initial factoring charges are 1.75% of the total accounts receivable balance. An additional funding agreement became effective in November of 2008 allowing for the factoring of support renewals at an advance rate of 50.88% and initial factoring charges of 1.75% of the total accounts receivable balance. Advances made by Allied are collateralized by the Company’s accounts receivable, chattel paper, general intangibles, supporting obligations, inventory and proceeds thereof. The term of the current agreement is for a period of two years with an automatic one-year renewal thereafter. Advances under the factoring facility at December 31, 2009 were $0 and are netted against total accounts receivable on the Consolidated Balance Sheet.

On December 10th 2009, the factoring facility was terminated by mutual agreement. We believe that the cost of this facility outweighed the benefits to the Company. In addition, by terminating this facility, we expect to save over $135,000 annually.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The Company is currently negotiation restructuring of this debt.

NOTE 3 — DEBT

PP1 Notes and Warrants

The outstanding principal and accrued interest are convertible into shares of common stock at a conversion rate equal to the lesser of (a) $1.30 per share, or (b) a 25% discount to the average closing bid price of the Company’s common stock for the five days including and immediately preceding the interest compounding date, provided that in no event shall the conversion price per share be less than $1.00 per share. The PP1 Notes may be converted, in whole or in part, at the option of the PP1 Note holder on any interest compounding date. The PP1 Notes converted in December 2005 were converted at $1.00 per share.

The PP1 Warrants have a term of five years and are exercisable at an exercise price of $1.30 per share. Subject to an effective registration statement covering the resale of the shares of common stock issuable upon exercise of the PP1 Warrants, the Company may, upon thirty days prior written notice, redeem the PP1 Warrants for $0.10 per share, in whole or in part, if our common stock closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15) consecutive trading days.

PP2 Notes and Warrants

The outstanding principal and accrued interest are convertible into shares of common stock at a fixed rate of $0.75 per share. The PP2 Notes may be converted, in whole or in part, at the option of the PP2 Note holder on any interest compounding date. The Company may prepay the PP2 Notes in whole or in part, upon thirty days prior written notice to note holders; provided that partial prepayments may be made only in increments of $10,000 and, provided further, that the PP2 Note holders may convert the amount of the proposed prepayment into shares of our common stock at any time.

The PP2 Warrants have a term of five years and are exercisable at an exercise price of $1.00 per share. Subject to an effective registration statement covering the resale of the shares of common stock issuable upon exercise of the PP2

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

Warrants, the Company may, upon thirty days prior written notice, redeem the PP2 Warrants for $0.10 per share, in whole or in part, if our common stock closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15) consecutive trading days.

For the three months ended June 30, 2008, the Company recorded $1,120,997 of amortization of debt discounts associated with the PP2 Notes.

As of December 31, 2009, the Company had $976,426 of principal, accrued interest of $377,437 and accrued liquidated damages of $177,402 outstanding on its PP1 Notes and PP2 Notes. The PP1 Notes and the PP2 Notes were due in December 2008 and April 2009 (the “April PP2 Notes”), respectively, and are in default. The Notes bear interest at an annual rate of 18%, compounded quarterly.

STIIP

Under the STIIP, which commenced on June 9, 2008, the Company temporarily modified the terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants. During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00 and $0.75 per share, respectively, were reduced to $0.53 per share. In addition, the exercise prices for the PP1 Warrants and the PP2 Warrants, which were $1.30 and $1.00 per share, respectively, were reduced to $0.40 per share. Under the STIIP, certain PP2 Note holders converted $3,240,290, comprised of $2,470,156 in principal and $770,134 in accrued interest and liquidated damages into approximately 6.2 million shares of the Company’s common stock at the reduced conversion price.

Also under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3 million PP1 and PP2 Warrants at an exercise price of $0.40 per share. All PP1 and PP2 Warrant holders who exercised their warrants also received three additional warrants (the “Bonus Warrants”) for every ten warrants exercised. The Bonus Warrants were exercisable during the Conversion Period at an exercise price of $0.30 per share, and if not exercised on or before such date, the exercise price for such Bonus Warrants was increased to $0.60 per share. A total of 507,675 Bonus Warrants were exercised at $0.30 per share. The bonus warrants were valued using the Black-Scholes option pricing model (“Black-Scholes model”) and a charge and a corresponding credit to additional paid-in capital were recorded for the June 30, 2008 and September 30, 2008 quarters in the amounts of $36,125 and $131,631, respectively. The bonus warrants expire on April 6, 2012. The total cash proceeds received from the exercises of the PP1, PP2 and Bonus Warrants was approximately $844,000.

The Company accounted for the reduction in the conversion prices of the PP2 Notes under the STIIP in accordance with FASB Statement No. 84, “Induced Conversions of Convertible Debt an amendment of APB Opinion No. 26” (“SFAS 84”). Accordingly, the Company calculated and recorded an inducement charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $931,893 for the fair value of common stock issued based on the reduced price in excess of the fair value of the common stock issuable pursuant to the original conversion price.

The Company accounted for the reduction in the exercise price of the PP1 and PP2 Warrants exercised under the STIIP in accordance with the guidance in SFAS 123(R), “Share-based payment” (“SFAS 123R”) and FASB Staff Position No. FSP FAS 123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” for a modification due to a short-term inducement. Accordingly, the Company recorded a charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $202,743 for the difference between the fair value of the PP1 and PP2 Warrants immediately before and after the modification multiplied by the number of PP1 and PP2 Warrants that were exercised during the Conversion Period of the STIIP. The fair value of the PP1 and PP2 Warrants were calculated using the Black-Scholes model. The total non-cash charge recorded for the inducement on the PP2 Notes and the reduction in exercise price on the PP1 and PP2 Warrants was $1,134,216.

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

The Company’s total debt as of December 31, 2009, all of which is current, is as follows:

PP1 and PP2 Notes:
Principal		$	976,426
Accrued interest			377,437
Accrued estimated liquidated damages			177,402
Total		$	1,531,265

Registration Payment Arrangements

Effective April 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”), which was applicable to the accounting for the liquidated damages on the PP2 Notes. Upon adoption, the Company recorded a cumulative effect of an accounting change entry (i.e., a charge to the beginning balance of the accumulated deficit) as of April 1, 2007 for the combination of: 1) the reclassification of the Warrants from derivative liabilities to equity securities (based on the criteria as outlined under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”)), and 2) a contingent liability for probable future payment of liquidated damages (based on the Company’s best estimate as of the date of adoption, which was through March 31, 2008). The amount of the contingent liability recorded was approximately $289,000. The difference between the Warrants as measured on the date of adoption of FSP EITF 00-19 and their original recorded value was approximately $466,000, and, as stated above, was included in the charge to the beginning balance of the accumulated deficit. The total cumulative effect of this accounting change was $755,000.

On April 5, 2007, the Company closed the balance of its PP2 offering and, in accordance with FSP EITF 00-19-2, recorded a contingent liability and related charge to the consolidated Statement of Operations for estimated liquidated damages related to this funding through March 31, 2008. The amount recorded was $251,176.

As of March 31, 2008, the Company estimated and accrued $671,342 related to liquidated damages related to the PP2 Notes and concluded that this amount was the maximum pay-out required. Under the STIIP, certain PP2 Note holders, comprising approximately 70% of the original principal of PP2 Notes, converted their outstanding PP2 Notes at a reduced price of $0.53. On June 30, 2008, the Company executed an agreement with the institutional investor in the PP2 offering that had the contractual right to liquidated damages. In exchange for the waiver from the investor, the Company issued to the investor 58,777 shares of its common stock. The agreement terminated any assessment of liquidated damages beyond June 24, 2008. For the three months ended June 30, 2008, the Company recorded a charge and credit to additional paid-in capital for the fair value of these shares issued in the amount of $22,041.

The table below summarizes the cumulative effect entry recorded as of April 1, 2007 for the adoption of FSP EITF 00-19-2:

Accumulated deficit, April 1, 2007		$	(10,586,847	)
Adjustments for the cumulative effect of the change in accounting principle:
Contingent liability recorded for estimated liquidated damages			(289,518	)
Reclassification of Warrants from derivative liabilities to equity securities			(465,597	)
Total adjustments			(755,115	)
Accumulated deficit, April 1, 2007, as adjusted		$	(11,341,962	)

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 4 — COMMITMENTS AND CONTINGENCIES

The Company and certain of its current and former officers and directors are defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS. GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No. DV05-0600-G; G-134th District Court, Dallas County, Texas. The plaintiff has alleged a number of complaints against the defendants, including breach of fiduciary duty, misappropriation of corporate opportunities, fraud, fraudulent inducement, breach of contract, tortuous interference with contract, fraudulent transfer, and shareholder oppression arising in connection with the license agreement between the Company and XBridge in May 2003 and the acquisition of XBridge by the Company in May 2005. The parties held a mediation conference in April 2006 and have come to an understanding with respect to the principal elements of a potential settlement. The Company is currently in the process of negotiating definitive settlement agreements. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we recorded a contingent liability in the amount of $650,000 as of March 31, 2008 related to the outstanding litigation. As of December 31, 2008, the Company believes that this amount represents the best estimate of a potential settlement.

NOTE 5 — RELATED PARTY TRANSACTIONS

On December 4, 2008, an employee advanced the Company $25,000 for the period through December 31, 2008. In consideration for this advance, the Company issued to the employee 25,000 common stock purchase warrants that were immediately exercisable at $0.40 per share and have a five-year life. The Company calculated the fair value of the warrants using the Black-Scholes model and recorded a charge in the amount $4,100 for the December 2008 quarter. As of June 30, 2009, the entire obligation has been repaid.

On the 1^st December 2009, the Company entered into a professional services agreement with Blue Kiwi Group Ltd. This agreement provides for the services of Mr Royal to act as Company Board Member and CEO of the Company. The consideration is $150,000 per annum for a period of two years. The agreement is attached as exhibit 33.1.

NOTE 6 — SUBSEQUENT EVENTS

Reverse/Forward Split

On the 25^th June 2009, the Company filed a an Information Statement to inform the stockholders of (i) the approval on June 9, 2009 of resolutions by the Board of Directors proposing amendments to the Articles of Incorporation to effect a 3 for 1 reverse stock split of our common stock followed immediately by a 3 for 1 forward stock split of the common stock (the “Reverse/Forward Stock Split”), and (ii) receipt of written consents dated June 9, 2009, approving such amendment by stockholders holding 65.6% of the voting power of all of our stockholders entitled to vote on the matter as of June 9, 2009. As a result of the Reverse/Forward Stock Split, stockholders owning fewer than 3 shares of our common stock will be cashed out at a price of $.14 per share, and the holdings of all other stockholders will remain unchanged.

When the Reverse/Forward Stock Split becomes effective, the Company will have fewer than 300 stockholders of record, and will be eligible to cease filing periodic reports with the Commission, and the Company intends to cease public registration and terminate the listing of our Common Stock on the OTC Bulletin Board. Once the Company ceases public registration and terminates the listing of our Common Stock, the Company will not be required to provide our Stockholders with periodic or other reports regarding the Company, although they intend to continue to provide similar information through the Pink Sheets News Service.

CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

The Company estimates the cost of the Reverse/Forward Stock Split, to be approximately $25,800. However, if on the date immediately preceding the effective date of the Reverse/Forward Stock Split, they believe that the cash required to pay for the Reverse/Forward Stock Split exceeds the reasonable estimate of the amount of cash necessary to consummate the Reverse/Forward Split, they reserve the right not to effect the Reverse/Forward Stock Split.

The Reverse/Forward Stock Split has been submitted to the Securities and Exchange Commission for proposal and comment. If the Reverse/Forward Stock Split is approved by the SEC, the transaction will become complete 20 days after the shareholders have been notified by letter. Currently, Cistera Networks, Inc. has 17,423,410 shares outstanding. If the transaction is approved and completed, 477 shares will be repurchased at $0.14 per share or $66.78, leaving 17,422,933 shares outstanding.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In many but not all cases you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negative of these terms or other similar expressions. These forward-looking statements include statements regarding our expectations, beliefs, or intentions about the future, and are based on information available to us at this time. We assume no obligation to update any of these statements and specifically decline any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Actual events and results could differ materially from our expectations as a result of many factors, including those identified in this report. We urge you to review and consider those factors, and those identified from time to time in our reports and filings with the SEC, for information about risks and uncertainties that may affect our future results. All forward-looking statements we make after the date of this filing are also qualified by this cautionary statement and identified risks. Additional risk factors are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our other reports filed with the SEC, to which reference should be made.

EXECUTIVE SUMMARY AND RECENT BUSINESS DEVELOPMENTS

For the third quarter ending 31st December 2009, we saw a 46.5% decrease in revenues as compared to the same quarter in the prior year. We experienced a drop in revenue on a sequential quarter basis as a result of the deteriorating global economic situation. High margin recurring revenue from support and maintenance continues to become a more significant piece of our revenues as our installed base grows. Despite the economic slowdown, our pipeline of opportunities continues to increase in both number of opportunities and project size.

Cistera Networks is approximately half-way through a restructuring plan designed to make the company sustain-ably profitable and dominate in the strongest key markets we operate in. We believe that our products are ideally suited to Federal, State and Local Government applications, Healthcare and Public Safety and continue to make strong headway in these markets. We believe that this focus will continue the trending of our product mix toward the higher value in key markets as well as a strong emphasis on maintenance revenue will allow us to maintain strong profitability into the future.

In December 2009 Cistera Networks incorporated a wholly owned subsidiary Cistera Federal Systems Inc. As has been previously discussed, Cistera is increasing it’s presence in the federal government market. This market offers significant opportunities for Cistera products and the company has made significant progress in developing this market. Cistera Federal Systems Inc was incorporated to further develop this market as well as hold the necessary procurement contracts and compliance requirements for the federal government.

Cistera Networks has also believes that there are significant opportunities in the public safety market dominated by Federal, State and Local government customers, particularly Land Mobile Radio P.25 markets. In December 2009 Cistera Networks Inc incorporated a wholly owned subsidiary Telmarine Communications Inc to specifically focus on the development the market for Unified Communications for Land Mobile Radio. Telmarine is currently pursuing technology agreements and relationships with third parties to grow the product offering for the public safety markets.

In light of the significant downturn in the U.S. economy, we are carefully monitoring our sales pipeline and have refocused our solutions selling efforts onto our top reseller relationships. Further, beginning January 1, 2009, we instituted additional operating expense reductions, including salary reductions for the management team, employee terminations and marketing program elimination. We are seeing market segments, such as government and healthcare are more resilient to the current economic conditions, primarily due to continued demand for event alerting and notification solutions for public safety infrastructure. With the demographics of an aging population, healthcare is also an industry that is continuing to grow. Because there are fewer employees to operate facilities, the efficiencies and increased productivity our products provide can measurably enhance business operations.

On the 14^th May 2009, the company announced the release of version 1.9 of the Cistera Convergence Server. Cistera ConvergenceServer Version 1.9 is the result of over five years of work on enterprise application platforms for Unified Communications and is the most advanced solution set available today.

On the 10^th June 2009, the company announced the the addition of the ZoneSpeak™ IP Speaker to its successful Event Alerting and Notification Solution Set.

On the 16^th September 2009, the company announced the release of the latest version of its award-winning platform, the Cistera ConvergenceServer (CCS) Version 1.9 has successfully completed Interoperability Verification Testing (IVT) for Cisco Unified Communications Manager (CUCM 7.1).

On the 29^th October 2009, the company announced the release of the newest configuration of its award-winning platform, the Cistera ConvergenceServer 9500 (CCS 9500) specifically tailored for large-scale applications.

RESULTS OF OPERATIONS

Selected Consolidated Statements of Operations Data

The following tables present consolidated statements of operations data for the three and nine months ended December 31, 2009 and 2008 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.

Results of Operations for the Three Months Ended December 31, 2009
Compared to the Three Months Ended December 31, 2008

		For the three months ended December 31,
						% of								% of
		2009				revenue				2008				revenue
Revenues:
Convergence solutions		$	229,725				40	%		$	712,340				67	%
Professional services			31,932				6	%			98,514				9	%
Support and maintenance			311,787				54	%			261,633				24	%
Total revenues			573,444				100	%			1,072,487				100	%
Cost of revenues:
Convergence solutions			50,608				9	%			254,675				24	%
Professional services			7,035				1	%			55,680				5	%
Support and maintenance			68,685				12	%			24,250				2	%
Total cost of revenues			126,328				22	%			334,605				31	%
Gross Profit			447,116				78	%			737,882				69	%
Operating expenses:
Sales and marketing			5				0	%			319,758				30	%
Software development			88,736				15	%			188,956				18	%
Engineering and support			104,600				18	%			172,923				16	%
General and administrative			144,981				25	%			338,210				31	%
Depreciation and amortization			24,128				4	%			103,538				10	%
Total operating expenses			362,450				63	%			1,123,385				105	%
Loss from operations			84,665				15	%			(385,503	)			(36	%)
Other income (expense)
Interest income			7				—	%			158				—
Interest expense			(46,541	)			0	%			(43,124	)			(4	%)
Amortization of discount on convertible notes							(8	%)			(108,918	)			(10	%)
Charge for inducements related to stock issued to convertible note holders							0	%			—				—
Total other income (expense)			(46,534	)			(8	%)			(151,884	)			(14	%)
Net loss		$	38,130				(7	%)		$	(537,387	)			(50	%)

Revenue

Revenue for the quarter ended December 31, 2009 decreased $499,043 or approximately 46% from the comparable prior year quarter primarily due to the current U.S Economic downturn and the lack of capital spending.

Gross Profit and Gross Margin

Gross profit for the quarter ended December 31, 2009 decreased $290,766 or approximately 40% from the comparable prior year quarter primarily due to decreased revenue. Gross margin did, however, increased in the December 2009 quarter as compared to the December 2008 quarter to 78% from 69%. This increase was primarily due to increases in the higher margin revenue categories of convergence solutions and support and maintenance, offset by lower margins on professional services as a result of the timing of completion of certain project service engagements.

Operating Expenses

Operating expenses, excluding depreciation and amortization decreased from $1,123,385 in the December 2008 quarter to $362,450 in the December 2009 quarter, a decrease of $760,935 or approximately 67%. The decrease was a direct reduction due to the decrease in headcount from the previous year and continued controls over expenses.

Interest Expense

Interest expense for the December 2009 quarter increased $3,417 from the December 2008 quarter primarily due to the increase in accrued interest on the PP2 Notes due to the decrease in the PP2 Notes as a result of the conversions under the STIIP in June 2008. Offsetting the overall interest expense decrease was an increase in interest on our accounts receivable factoring facility as a result of higher factorings in the December 2009 quarter as compared to the December 2008 quarter.

Results of Operations for the Nine Months Ended December 31, 2009
Compared to the Nine Months Ended December 31, 2008

		For the nine months ended December 31,
						% of								% of
		2009				revenue				2008				revenue
Revenues:
Convergence solutions		$	798,206				45	%		$	2,247,809				71	%
Professional services			166,518				9	%			204,347				7	%
Support and maintenance			817,595				46	%			709,394				22	%
Total revenues			1,782,319				100	%			3,161,500				100	%
Cost of revenues:
Convergence solutions			276,987				16	%			664,417				21	%
Professional services			111,380				6	%			148,680				5	%
Support and maintenance			108,931				6	%			71,684				2	%
Total cost of revenues			497,298				28	%			884,781				28	%
Gross Profit			1,285,021				72	%			2,276,769				72	%
Operating expenses:
Sales and marketing			113,226				6	%			900,230				28	%
Software development			224,971				13	%			612,289				19	%
Engineering and support			245,505				14	%			579,323				18	%
General and administrative			489,229				27	%			1,098,827				35	%
Depreciation and amortization			77,541				4	%			302,368				10	%
Total operating expenses			1,150,472				64	%			3,493,037				110	%

		For the nine months ended December 31,
						% of								% of
		2009				revenue				2008				revenue
Gain (Loss) from operations			134,549				8	%			(1,216,268	)			(38	%)
Other income (expense)
Interest income			70								326				—
Other income											—
Charge for inducements related to stock Issued to convertible note holders											(1,324,444	)			(42	%)
Amortization of discount on convertible Notes											(1,338,833	)			(57	%)
Abandonment loss			(15,815	)
Interest expense			(171,170	)			(10	%)			(190,933	)			(6	%)
Credit (charge) for estimated liquidated Damages											11,299				—
Total other income (expense)			(186,915	)			0	%			(2,842,585	)			(90	%)
Net Gain (Loss)			(52,366	)			(3	%)			(4,058,853	)			(128	%)

Revenue

Revenue for the nine months ended December 31, 2009 decreased $1,379,181 or approximately 44% from the comparable prior year nine months primarily due to the deteriorating global economic environment. Revenue from professional services decreased 18.5% from the prior year quarter primarily due the reduction in overall revenues.

Gross Profit and Gross Margin

Gross profit for the nine months ended December 31, 2009 decreased $991,748 or approximately 43% from the comparable prior year quarter primarily due to decreased revenue. Gross margin was stable in the nine months ending December 2009 as compared to the December 2008 nine months maintaining 72%.

Operating Expenses

Operating expenses, excluding depreciation and amortization, decreased from $3,493,037 in the December 2008 nine months to $1,150,472 in the nine-month ending December 2009, a decrease of $2,342,565 or approximately 67%. The decrease was primarily attributable to: 1) a decrease in overall headcount; 2) an increase in and rent and facilities expense; 3) a decrease in sales and marketing tradeshow expenses; 4) a decrease in professional fees.

Interest Expense

Interest expense for the nine months ending December 2009 quarter decreased $19,763 from the nine months ended December 2008 quarter primarily due to the decrease in accrued interest on the PP2 Notes due to the decrease in the PP2 Notes as a result of the conversions under our “Short Term Investment Incentive Plan” (the “STIIP”). Offsetting the overall interest expense decrease was an increase in the interest rate on the PP1 and PP2 Notes due to a default on the notes.

Amortization of Debt Discount

The amortization of debt discount on our PP2 Notes in the six months ending December 2009 quarter decreased $1,338,833 from the December 2008 quarter primarily as a result of the amortization of the debt discount was completed recorded at March 31, 2009. As required under GAAP, all unamortized debt discount outstanding at the date of the conversion was expensed. See further discussion of the STIIP under “Liquidity” under this Item.

Charge for Inducements Related to Stock Issued to Convertible Note Holders

As part of the STIIP, we lowered the conversion price of our PP2 Notes and the exercise price of both our PP1 and PP2 Warrants. As required under US GAAP, we recorded non-cash charges for the June 2008 quarter in the amounts of $1,192,813 related to these inducements. See further discussion of the STIIP under “Liquidity and Capital Resources.”

Liquidated Damages

The decrease in the charge for liquidated damages from the three months ended December 2009 was primarily the result of the settlement of future liquidated damages as of June 24, 2008. As of June 30, 2008, we recorded an adjustment to the amount of accrued liquidated damages for PP2 Note holders who did not convert their notes in the STIIP. As part of an agreement dated June 30, 2008 with the investor in the PP2 offering that had the contractual right to liquidated damages, we issued to the investor 58,777 shares of our common stock in exchange for a waiver on future liquidated damages after June 24, 2008. The agreement terminated any assessment of liquidated damages beyond June 24, 2008.

Liquidity and Capital Resources

The unaudited consolidated financial statements contained in this report have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the

recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2009, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The “going concern” explanatory paragraph resulted from, among other things, the substantial losses from operations we have incurred since inception, our liquidity position and net loss of $4.6 million for the year ended March 31, 2009, which included non-cash charges of $1.4 million related to amortization of discounts associated with our PP2 Notes and negative working capital (current liabilities in excess of current assets) of $3.0 million as of March 31, 2009. In addition, we had a net loss of $75,435 for the nine months ended December 31, 2009. Also, as of December 31, 2009, we have negative working capital (current liabilities in excess of current assets) of $2.51 million.

Accordingly, as of December 31, 2009, the recoverability of a major portion of the recorded asset amounts is dependent on our continuing operations, which in turn is dependent on our ability to maintain our current financing arrangements and our ability to become profitable in our future operations through generating higher revenues or lowering operating costs, or a combination of the two. These factors raise substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if we were unable to continue as a going concern.

Our primary source of working capital liquidity was a factoring facility we have with Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of up to $1,500,000 on our customer accounts receivable, subject to the approval of Allied of the customer and the type of product or service that is invoiced. The facility allows for an advance rate up to 85.88% and initial factoring charges are 1.75% of the total accounts receivable balance. An additional funding agreement became effective in November of 2008 allowing for the factoring of support renewals at an advance rate of 50.88% and initial factoring charges of 1.75% of the total accounts receivable balance. Advances made by Allied are collateralized by our accounts receivable, chattel paper, general intangibles, supporting obligations, inventory and proceeds thereof.

On December 10th 2009, both parties mutually agreed to terminate the factoring facility. The company believes that the cost of this facility outweighed the benefits to the company. The company expects to save over $135,000 annually from the termination of this facility.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, of which approximately $1.1 million is due in April 2009, or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The capital markets are extremely challenging at this time and there can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient. We are also actively exploring other strategic alternatives.

As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The capital markets are extremely challenging at this time and there can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient. We are also actively exploring other strategic alternatives.

Cash and Cash Flows

Our cash and cash equivalents at December 31, 2009 were $15,124. For the nine months ended December 31, 2009, net cash provided by operations was $22,017. The primary use of cash was the loss from operations incurred for the period of $74,435 adjusted for non-cash charges of $96,505 for depreciation and amortization, abandonment loss and gain from disposition of assets.

Contractual Obligations

Our current material contractual obligations are our current and former corporate office leases and the principal, accrued interest and accrued liquidated damages under our PP1 and PP2 Notes. In December 2008, we executed a sublease for our former corporate office facility at approximately $4,100 per month for the remaining lease term, which is through November 2009. On May 29, 2009 the property manager informed us that our sub-lessee had vacated the premises. The Company has successfully negotiated a termination of the former corporate office lease in Dominion Plaza.

Critical Accounting Policies

We prepare our financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2009 10-K.

Research and Development — Software Development

Research and development expenditures are generally expensed as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Our software development costs capitalized as of the 31^st of December are $1,170,144 and for the nine months ending December 31,2009 are $203,832.

Recently Issued Accounting Pronouncements

We discuss the potential impact of recent accounting pronouncements in Note 1 to the unaudited consolidated financial statements contained in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide this information.

Item 4(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, who is also currently our interim Chief Financial Officer (the “Certifying Officer”), to allow timely decisions regarding required disclosures.

As of December 31, 2009, we carried out an analysis, under the supervision and with the participation of our management, including our Certifying Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. As a result of this analysis, our Certifying Officer concluded that our disclosure controls and procedures and internal controls over financial reporting continued to be not effective and identified remediation measures to be implemented.

We estimate that the Certifying Officer, along with the Company’s other management personnel, will need to complete remediation measures that may include engaging an independent consulting firm to further evaluate, remediate, implement, document and test the internal controls in these key areas:

	1.		Financial Reporting, including technical accounting surrounding complex accounting transactions
	2.		Order Entry Accounting & Reporting
	3.		Debt/Equity Accounting & Compliance
	4.		Cash & Other Working Capital Management
	5.		Compensation Accounting & Administration
	6.		Other Assets & Liability Account Management

We will also monitor our disclosure controls and procedures on a continuing basis to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In the future as such controls change in relation to developments in the our business and financial reporting requirements, our evaluation and monitoring measures will also address any additional corrective actions that may be required.

Inherent Limitations of Internal Controls

Our management does not expect that our disclosure control procedures or our internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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, have been detected.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company and certain of its current and former officers and directors are defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS. GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No. DV05-0600-G; G-134th District Court, Dallas County, Texas. The plaintiff has alleged a number of complaints against the defendants, including breach of fiduciary duty, misappropriation of corporate opportunities, fraud, fraudulent inducement, breach of contract, tortuous interference with contract, fraudulent transfer, and shareholder oppression arising in connection with the license agreement between the Company and XBridge in May 2003 and the acquisition of XBridge by the Company in May 2005. The parties held a mediation conference in April 2006 and have come to an understanding with respect to the principal elements of a potential settlement. The Company is currently in the process of negotiating definitive settlement agreements. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we recorded a contingent liability in the amount of $650,000 as of March 31, 2008 related to the outstanding litigation. As of December 31, 2008, the Company believes that this amount represents the best estimate of a potential settlement.

Item 1A. Risk Factors

We may need to raise additional capital to fund our operations.

Our ability to continue as a going concern is in doubt and we may not be successful in generating revenue and gross profit at levels sufficient to cover our operating costs and cash investment requirements.

We purchase over half of our products from one supplier—Equus Computer Systems. (“Equus”). Equus provides us with open trade credit on 30 day terms based on a pre-established credit limit and, historically, has provided additional credit to support larger purchase order demands on a “one-off basis.” We purchase most of our other products from our other suppliers on open trade credit terms with set dollar limits. If Equus or our other significant suppliers were to cease to sell to us on trade credit terms, or were to substantially lower the credit limits they have set, we would need to accelerate our payments to those vendors, creating additional demands on our cash resources, or we would need to find other sources for those goods.

We will need to renegotiate or extend the currently outstanding PP2 Notes and related interest.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes. In addition, as of April 5, 2009, we were in default of approximately $1,100,000 of principal and accrued interest on certain PP2 Notes. Currently, we are accruing interest on these PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. There can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient.

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

None

Item 3. Defaults Upon Senior Securities

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of this date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. In addition, as of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes. As of this date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum. We will likely need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, or raise additional capital, or a combination of the two. If we need to raise

additional capital it could be in the form of equity or debt, or a combination of the two. There can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

10.1		Professional Services Agreement between Cistera Networks Inc and Blue Kiwi Group Ltd.
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1		Press release dated February 16, 2010

SIGNATURE

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