UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(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)

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).

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 August 7, 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 — June 30, 2009 (unaudited) and March 31, 2009 (audited) (restated)			4
Consolidated Statements of Operations — For the three months ended June 30, 2009 and 2008 (unaudited) (restated)			5
Consolidated Statements of Stockholders’ Deficit — June 30, 2009 (unaudited) and March 31, 2009 (audited) (restated)			6
Consolidated Statements of Cash Flows — For the three months ended June 30, 2009 and 2008 (unaudited) (restated)			7
Notes to Consolidated Financial Statements (unaudited) (restated)			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			23
Item 4T. Controls and Procedures			23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 1A. Risk Factors			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3. Defaults Upon Senior Securities			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 5. Other Information			25
Item 6. Exhibits			26
SIGNATURES			27
EX-31.1

EXPLANATORY NOTES

This Amendment No. 2 to the Annual Report on Form 10-Q (the “Report”) for the fiscal quarter ended June 30, 2009 is filed for the purpose of amending the Section 302 Certifications, filed as Exhibits 31.1 and 31.2 to the original Report.

There was a mistake in the payroll accrual account that resulted in a positive $341,509 dating back to April 2009. The accrual error was caused and dated by duplicate entries to that accrual dating from and solely to April 2009 through June 30, 2009. This also has the result of reducing the loss from Quarter ending 30th June 2009 from $428,975 to $192,691. This reduced accrued liabilities from $1,830,263 to $1,593,979 and total stockholders deficit from 2,342,832 to $2,106,548 from Quarter ending 30th June 2009.

This entry has been reversed for the quarter ending September 30, 2009 and re-entered in the quarter ending June 30, 2009. Both these dated statements are being amended and re-issued.

ASC FASB 250-10-50-7 Disclosure

The effect of the correction on each financial statement line item for each prior period is as follows:

	•		Accrued Liabilities have been reduced from $1,830,263 to $1,593,979.
	•		Total Current Liabilities have been reduced from $4,408,862 to $4,172,578
	•		This has resulting a reduction in retained earnings (deficit) from ($21,651,474) to ($21,415,190) for this period only.
	•		Sales and Marketing Expenses have been reduced from $115,295 to $57,497.
	•		Software Development Expenses have been reduced from $152,795 to $29,149.
	•		Engineering and Support Expenses have been reduced from $90,406 to $64,057.
	•		General Administration Expenses have been reduced from $180,241 to $151,750
	•		Total Expenses have been reduced from $636,397 to $400,113.
	•		Loss from Operations has been reduced from $347,161 to $110,877.
	•		Net Loss has been reduced from $428,975 to $192,691 and from 2c per share to 1c per share.
	•		Accrued Payroll and Taxes has been reduced from $668,854 to $432,570.

ASC FASB 250-10-50-8 Disclosure

There was a mistake in the payroll accrual account that resulted in a positive $341,509 dating back to April 2009. The accrual error was caused and dated by duplicate entries to that accrual dating from and solely to April 2009 through June 30, 2009. For quarter ending 30^th June 2009 the loss has been reduced from $428,975 to $192,691.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

		Restated
		June 30, 2009				March 31, 2009
		(Unaudited)				(Audited)
Current assets
Cash and cash equivalents		$	71,310			$	1,493
Accounts receivable, net of allowance for doubtful accounts of $-0-			119,145				151,322
Inventory			115,724				124,656
Prepaid expenses			58,372				37,341
Total current assets			364,551				314,812
Property and equipment, net			276,418				324,217
Intangible assets, net			1,683,499				1,751,442
Total long-term assets			1,959,917				2,075,659
TOTAL ASSETS		$	2,324,468			$	2,390,471
Current liabilities
Accounts payable			557,872				517,052
Accrued liquidated damages — outside investors			177,402				177,402
Accrued liabilities			1,593,979				1,527,811
Deferred revenue			866,899				865,271
Note payable			—				7,781
Convertible promissory notes and other notes payable, net of discount			976,426				976,426
Total current liabilities			4,172,578				4,071,743
Deferred revenue			199,694				174,554
Other long-term liabilities			58,744				58,031
Total long-term liabilities			258,438				232,585
Total liabilities			4,431,016				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			(21,415,190	)			(21,222,499	)
Total stockholders’ deficit			(2,106,548	)			(1,913,857	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	2,324,468			$	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 June 30,
		Restated
		2009				2008
Revenues
Convergence solutions		$	189,143			$	522,393
Professional services			35,504				60,708
Support and maintenance			233,320				217,459
Total revenues			457,967				800,560
Cost of revenues
Convergence solutions			103,013				133,032
Professional services			47,718				50,500
Support and maintenance			18,000				23,184
Total cost of revenues			168,731				206,716
Gross Profit			289,236				593,844
Operating expenses
Sales and marketing			57,497				296,006
Software development			29,149				158,589
Engineering and support			64,057				149,596
General and administrative			151,750				429,149
Depreciation and amortization			97,660				98,156
Total operating expenses			400,113				1,131,496
Loss from operations			(110,877	)			(537,652	)
Other income (expense)
Interest income			—				82
Other income			56
Interest expense			(66,055	)			(83,182	)
Abandonment loss			(15,815	)			—
Charge for inducements related to stock issued to convertible note holders			—				(1,192,813	)
Amortization of discount on convertible notes — outside investors			—				(1,079,937	)
Amortization of discount on convertible notes — related parties			—				(41,060	)
Credit (charge) for estimated liquidated damages			—				11,299
Total other income (expense)			(81,814	)			(2,385,611	)
Net loss		$	(192,691	)		$	(2,923,263	)
Basic & diluted net loss per share		$	(0.01	)		$	(0.31	)
Weighted average shares outstanding — basic and diluted			17,423,410				9,421,126

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

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

																										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			$	(21,222,499	)		$	(1,913,857	)
Net loss																							(192,691	)			(192,691	)
Balances at June 30, 2009			—			$	—				17,423,410			$	17,423			$	19,291,219			$	(21,415,190	)		$	(2,106,548	)

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

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

		Three months ended June 30,
		Restated
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(192,691	)		$	(2,923,263	)
Adjustments used to reconcile net loss to net cash used in operating activities:
Charge for inducement to convert debt to convertible promissory notes			—				1,170,772
Charge (credit) for liquidated damages			—				(11,299	)
Charge for stock issued for waiver of registration rights payments			—				22,041
Amortization of discount on convertible promissory notes			—				1,120,997
Abandonment loss			15,815				—
Gain on disposition of assets			3,149				—
Depreciation and amortization			97,660				98,156
Changes in operating assets and liabilities:
Accounts receivable			56,307				73,960
Inventory			8,932				(6,053	)
Prepaid expenses			(21,031	)			13,367
Accounts payable			41,425				98,847
Accrued liabilities			42,037				183,010
Deferred revenue			26,768				11,280
Other long-tem liabilities			714				22,451
Net cash used in operating activities			79,085				(125,734	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net			(882	)			(32,997	)
Net cash used in investing activities			(882	)			(32,997	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term advances			—				32,497
Net proceeds from exercise of warrants			—				304,014
Payments on convertible promissory notes and other loans			—				(6,508	)
Payments on other notes payable and capital lease			(8,386	)			—
Net cash provided by financing activities			(8,386	)			330,003
Net decrease in cash and cash equivalents			69,817				171,272
Cash and cash equivalents at beginning of period			1,493				125,007
Cash and cash equivalents at end of period		$	71,310			$	296,279

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

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

		Three months ended June 30
		2009				2008
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	8,435			$	9,798
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			—				—
Allocation of discount on convertible promissory notes to warrants			—				—
Discount related to beneficial conversion feature on convertible promissory notes			—				—

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 intend to adopt the standard beginning in the first quarter of fiscal year 2010 and 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 intend to adopt the standard beginning in the first quarter of fiscal year 2010 and 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 intend to adopt the standard beginning in the first quarter of fiscal year 2010 and do not believe it will have a material impact.

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

Balance Sheet Accounts

Accounts receivable are comprised of the following:

		June 30, 2009				March 31, 2009
Receivables assigned to factor		$	137,071			$	125,402
Advances to (from) factor			(112,205	)			(70,570	)
Fees, expenses and charges to reserve			(12	)			(792	)
Amounts due from reserve account			7,239				—
Amounts due from factor			32,093				54,040
Unfactored Accounts Receivable			87,052				97,282
Total accounts receivable		$	119,145			$	151,322

Accrued liabilities are comprised of the following:

		Restated
		June 30, 2009				March 31, 2009
Accrued expenses		$	80,350			$	82,924
Reserve for litigation contingency			650,000				650,000
Accrued compensation and payroll taxes			432,570				545,626
Accrued interest			283,345				225,330
Other			147,714				23,931
Total Accrued liabilities		$	1,593,979			$	1,527,811

Other long-term liabilities are comprised of the following:

		June 30, 2009				March 31, 2009
Deferred rent		$	58,745			$	58,031
		$	58,745			$	58,031

Loss 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 June 30, 2009 and 2008, respectively. These potentially dilutive common stock equivalents have been excluded from the diluted share calculations for the three months ended June 30, 2009 and 2008, respectively, as they were anti-dilutive as a result of the net losses incurred for those periods. Accordingly, basic shares equal diluted shares for all periods presented.

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

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 June 30, 2009 and March 31, 2009 is not required.

As of June 30, 2009, the Company receives approximately 34% of its gross revenues from its top three re-sellers. This represents a decrease in concentration of business from the 37% 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 $3.0 million as of March 31, 2009. In addition, we had a net loss of $192,691 for the three months ended June 30, 2009. Also, as of June 30, 2009, we have negative working capital (current liabilities in excess of current assets) of $4.0 million.

Accordingly, as of June 30, 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.

The Company maintains 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

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

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 June 30, 2009 were $112,205 and are netted against total accounts receivable on the Consolidated Balance Sheet.

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.

NOTE 3 — DEBT

As of June 30, 2009, the Company had $976,426 of gross principal, accrued interest of $283,345 and accrued liquidated damages of $177,024 outstanding on its PP1 Notes and PP2 Notes. The PP1 Notes and the PP2 Notes due in April 2009 (the “April PP2 Notes”) bear interest at an annual rate of 18%, compounded quarterly. The December PP2 Notes bear interest at an annual rate of 18%, compounded quarterly.

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 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.

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

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

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.

The Company’s total debt as of June 30, 2009, all of which is current, is as follows:

PP1 and PP2 Notes:
Principal		$	976,426
Accrued interest			283,345
Accrued estimated liquidated damages			177,402
			1,437,173
Less: unamortized discount			(95,521	)
Total		$	1,341,652

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

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	)

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.

The Company is a defendant in a breach-of-contract claim filed on behalf of Richard McDowell, the Company’s former Chief Financial Officer, who was terminated from the Company on July 14, 2008. Mr. McDowell is demanding severance under his employment agreement with the Company. On August 22, 2008, the Company through its legal counsel notified Mr. McDowell’s attorney that it categorically denied Mr. McDowell’s claim for severance under the employment agreement. On September 23, 2008, the Company received notice that Mr. McDowell had filed claims against it with the American Arbitration Association in accordance with the employment agreement. On October 17, 2008, the Company through its legal counsel filed an answer with the American Arbitration Association that categorically denied Mr. McDowell’s claims. The Company also asserted counterclaims against Mr. McDowell. An arbitrator hearing was conducted during the period July 7 and July 8, 2009 and the Company is awaiting a decision by the arbitrator as to the final determination of this case.

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

NOTE 5 — RELATED PARTY TRANSACTIONS

On April 5, 2007, the Company issued PP2 Notes to the Company’s President, CEO and director, Derek Downs, and the Company’s Chief Technology Officer and director, Greg Royal for accrued, but unpaid base salary due to each as of this date. On June 24, 2008, both individuals converted their PP2 notes plus accrued interest as part of the STIIP. Mr. Downs and Mr. Royal converted $38,940 and $91,871, respectively into 73,471 and 173,341 shares of our common stock at a conversion price of $0.53. After this conversion, the Company no longer had any indebtedness with either Mr. Downs or Mr. Royal.

On November 1, 2008, the Company issued to an employee 100,000 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 $22,728 for the December 2008 quarter.

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.

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.

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 first quarter ending June 30, 2009, we saw a 43% 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. We continue to see a challenging economic environment. Although there have of late seen some reduction in the rate of decline in the economy, we do not expect to see a recovery in capital spending in the near future.

Our business model relies upon the leverage of a network of strong reseller partners to sell our products. This program allows us to effectively apply our resources to focus on the partners that are significant generators of revenue. In conjunction with CollaborNET, we have conducted joint business planning sessions, executed joint marketing campaigns and continued to certify partner installation engineers.

Even in a period of economic constraints, we recognize the importance of continuing and extending our R&D efforts to ensure that our products offer features and functionality specific to industry requirements and that add measurable value for our customers. We believe that the enhanced safety benefits, productivity gains and increased efficiencies delivered by our products will help in attracting customers pressured to accomplish more with fewer people and shrinking budgets.

We continued to make good penetration into the public sector markets where our solutions are increasingly well received as the answer to critical communication challenges. 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. We expect that market segments, such as government, and education will be more resilient to the current economic conditions, primarily due to continued demand for event alerting and notification solutions for public safety and campus safety requirements. With the demographics of an aging population, healthcare is also an industry that is continuing to grow.

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.

We remain focused on driving the Company to profitability, and believe our emphasis on leveraging our reseller partner relationships will lead to the continued pipeline growth, completed installations and increased average deal size that will be necessary to achieve that goal. Our program of certifying partner installation engineers is a key piece of this effort, as it will allow us to significantly extend our reach while providing partners with enhanced customer interaction. We believe that this focus will continue the trending of our product mix toward the higher

margin convergence solutions and maintenance and support product categories, with proportionally less contribution generated by lower margin professional services.

RESULTS OF OPERATIONS

Selected Consolidated Statements of Operations Data

The following tables present consolidated statements of operations data for the three months ended June 30, 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 June 30, 2009

		For the three months ended June 30,
		Restated				% of								% of
		2009				revenue				2008				revenue
Revenues:
Convergence solutions		$	189,143				41	%		$	522,393				65	%
Professional services			35,504				9	%			60,708				8	%
Support and maintenance			233,320				50	%			217,459				27	%
Total revenues			457,967				100	%			800,560				100	%
Cost of revenues:
Convergence solutions			103,013				22	%			133,032				17	%
Professional services			47,718				10	%			50,500				6	%
Support and maintenance			18,000				5	%			23,184				3	%
Total cost of revenues			168,731				37	%			206,716				26	%
Gross Profit			289,236				63	%			593,844				74	%
Operating expenses:
Sales and marketing			57,497				13	%			296,006				37	%
Software development			29,149				6	%			158,589				20	%
Engineering and support			64,057				14	%			149,596				19	%
General and administrative			151,241				33	%			429,149				53	%
Depreciation and amortization			97,660				21	%			98,156				12	%
Total operating expenses			400,113				87	%			1,131,496				141	%
Loss from operations			(110,877	)			(24	)%			(537,652	)			(67	)%
Other income (expense)
Interest income			—				—	%			82				—	%
Other income			56				—	%
Charge for inducements related to stock Issued to convertible note holders			—				—	%			(1,192,813	)			(149	)%
Amortization of discount on convertible Notes			—				—	%			(1,120,997	)			(140	)%
Abandonment loss			(15,815	)			(3	)%
Interest expense			(66,055	)			(15	)%			(83,182	)			(10	)%
Credit (charge) for estimated liquidated damages			—				—	%			11,299				1	%
Total other income (expense)			(81,814	)			(18	)%			(2,385,611	)			(298	)%
Net loss		$	(192,691	)			(42	)%			(2,923,263	)			(365	)%

Revenue

Revenue for the quarter ended June 30, 2009 decreased $342,593 or approximately 43% from the comparable prior year quarter primarily due to the deteriorating global economic environment. Revenue from professional services decreased 41% from the prior year quarter primarily due to the timing of completion of certain project service engagements and as a result of a change of certifying reseller partners to handle installations in lieu of performing them ourselves, as well as decreased sales activity.

Gross Profit and Gross Margin

Gross profit for the quarter ended June 30, 2009 decreased $304,608 or approximately 51% from the comparable prior year quarter primarily due to decrease revenue offset by overall lower gross margin. Gross margin decreased in the June 2009 quarter as compared to the June 2008 quarter from 74% from 63%. This decrease was primarily due to product mix on convergence solutions offset by higher margins on support and maintenance as a result of the higher installed base.

Operating Expenses

Operating expenses, excluding depreciation and amortization, decreased from $1,033,340 in the June 2008 quarter to $302,453 in the June 2009 quarter, a decrease of $730,887 or approximately 70%. During this period, the company engaged in a significant reduction in the number of employees and a major reduction in overhead costs. The expenses for this quarter include one month of pre-restructuring overhead and employee costs.

The decrease was primarily attributable to: 1) a decrease in overall headcount 2) a decrease in sales and marketing tradeshow expenses; and 3) a decrease in professional fees.

Interest Expense

Interest expense for the June 2009 quarter decreased $17,127 from the June 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 June 2009 quarter decreased $1,120,997 from the June 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 June 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 $428,975 for the three months ended June 30, 2009. Also, as of June 30, 2009, we have negative working capital (current liabilities in excess of current assets) of $4.0 million.

Accordingly, as of June 30, 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 is 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. 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 June 30, 2009 were $112,205 and are netted against total accounts receivable on our Consolidated Balance Sheet.

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 June 30, 2009 were $71,310. For the three months ended June 30, 2009, net cash used in operations was $79,085. The primary use of cash was the loss from operations incurred for the period of $192,691 (restated) adjusted for non-cash charges of $116,624 for depreciation and amortization, abandonment loss and gain from disposition of assets. Net cash used in investing activities of $882 related to purchases of computer and lab equipment.

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 we were informed by the property manager that our sub-lessee had vacated the premises. We are actively seek a new sublease for this space but given the short timeframe to lease termination it is unlikely that the we will find a subtenant for this space.

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.

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 June 30, 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.

The Company is a defendant in a breach-of-contract claim filed on behalf of Richard McDowell, the Company’s former Chief Financial Officer, who was terminated from the Company on July 14, 2008. Mr. McDowell is demanding severance under his employment agreement with the Company. On August 22, 2008, the Company through its legal counsel notified Mr. McDowell’s attorney that it categorically denied Mr. McDowell’s claim for severance under the employment agreement. On September 23, 2008, the Company received notice that Mr. McDowell had filed claims against it with the American Arbitration Association in accordance with the employment agreement. On October 17, 2008, the Company through its legal counsel filed an answer with the American Arbitration Association that categorically denied Mr. McDowell’s claims. The Company also asserted counterclaims against Mr. McDowell. An arbitration hearing was conducted during the period July 7 and July 8, 2009, and the Company is awaiting a decision by the arbitrator as to the final determination of this case.

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. Our current and primary source of cash availability is a $1.5 million credit facility with an accounts receivable “factoring” institution, Allied Capital. Funds available to us under the credit line with Allied Capital are limited by the amount of eligible accounts receivable we hold at any given time. Additionally, fluctuations in the timing of customer orders adversely affect our ability to draw on the line when required. Allied Capital may declare the loan in default if we do not meet certain financial covenants, and the inability to continue factoring accounts receivable would result in a significant loss of working capital liquidity.

Additionally, 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

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*

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.