UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-KSB/A


(Amendment
No. 2)


(Mark
One)


[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
Fiscal Year Ended:March 31,
2007





[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _______________ to _______________





Commission
file number:0-17304





Cistera
Networks, Inc.


(Name of
small business issuer in its charter)





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





6509 Windcrest Drive, Suite
160, Plano, Texas  75024


(Address
of principal executive offices)  (zip code)





Issuer's
      telephone number
            (972)
      381-4699





Securities
registered under Section 12(b) of the Act:  NONE


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


Common Stock Par Value
$0.001


(Title of
class)





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act [  ]





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.   Yes
[X]  No [ ]





Check if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B  contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [  ]





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





Total
revenues for fiscal year ended March 31, 2007: $1,932,838.





At March
31, 2007, the aggregate market value of all shares of voting and non-voting
common equity held by non-affiliates was approximately $8,748,254.  In
determining this figure the issuer has assumed that all directors and executive
officers are affiliates.   This assumption shall not be deemed
conclusive for any other purpose.





The
number of shares outstanding of each class of the issuer's common equity, as of
March 31, 2007, was as follows: 8,292,022common
shares, $.001 par value per share.





Transitional
Small Business Disclosure Format (check one): Yes [  ] No
[X]





EXPLANATORY
NOTE





As
previously disclosed in a Form 8-K filing, dated August 6, 2008, the Board of
Directors of the Company, in consultation with management and an independent
consultant engaged by management, concluded that the Company’s consolidated
financial statements as of March 31, 2007 and for the fiscal years ended March
31, 2007 and 2006 and the interim consolidated financial statements as of June
30, 2007 and for the quarters ended June 30, 2007 and 2006, as of September 30,
2007 and for the quarters and six month periods ended September 30, 2007 and
2006 and as of December 31, 2007 and for the quarters and nine month periods
ended December 31, 2007 and 2006 should not be relied
upon.  Accordingly, the Company has restated the consolidated
financial statements as of March 31, 2007 and for the years ended March 31, 2007
and 2006 contained in this Amendment No. 2 on Form 10-KSB/A (the
“Report”).  The Company intends to restate and refile its Quarterly
Reports on Form 10-QSB for the periods ended June 30, 2007, September 30, 2007
and December 31, 2007 in a reasonably practicable time period.





The
Company has restated its Consolidated Balance Sheet as of March 31, 2007, and
its Consolidated Statements of Operations, Stockholders’ Equity (Deficit) and
Cash Flows for the years ended March 31, 2007 and 2006 contained
in this Report to reflect: (i) a correction in its accounting for its Senior
Unsecured Convertible Promissory Notes and detachable warrants issued in private
placements during the period from December 2004 to April 2007 (the “PP1 Notes,”
“PP1 Warrants,” “PP2 Notes” and “PP2 Warrants”) and (ii) share-based
compensation related to employee stock options.  The Company has concluded
that its original accounting for the PP1 Notes and PP1 Warrants issued in fiscal
year 2005 and the PP2 Notes and PP2 Warrants issued in fiscal years 2007 and
2008, and its recording of share-based compensation for fiscal year 2007 were
incorrect, and that the necessary adjustments were material to the fiscal year
2007 and 2006 consolidated financial statements.





A further
discussion of the restatement of the fiscal year 2007 and 2006 financial
statements is contained under “Part II, Item 6 – Management’s Discussion and
Analysis or Plan of Operations” and in  Note3 to the consolidated
financial statements of this Report.


1





CISTERA
      NETWORKS, INC.FORM
      10-KSB/ATABLE
      OF CONTENTSItem Number and
      Caption
            PagePART
      IItem
      1.  Description of Business
            3Item
      2.  Description of Property
            10Item
      3.  Legal Proceedings
            11Item
      4.  Submission of Matters to a Vote of Security
      Holders
            11PART
      IIItem
      5.  Market for Common Equity, Related Stockholder Matters and
      Small Business Issuer Purchasesof
      Equity Securities
            12Item
      6.  Management's Discussion and Analysis or Plan of
      Operation
            13Item
      7.  Financial Statements
            24Item
      8.  Changes in and Disagreements With Accountants on Accounting
      andFinancial
      Disclosure
            24Item
      8A.  Controls and Procedures
            24Item
      8B.  Other Information
            26PART
      IIIItem
      9.  Directors, Executive Officers, Promoters and Control Persons
      and Corporate GovernanceCompliance
      with Section 16(a) of the Exchange Act
            27Item
      10.  Executive Compensation
            29Item
      11.  Security Ownership of Certain Beneficial Owners and
      Management andRelated
      Stockholder Matters
            31Item
      12.  Certain Relationships and Related Transactions, and
      Director Independence
            32Item
      13.  Exhibits
            35Item
      14. Principal Accountant Fees & Services
            35SIGNATURES
            36


2


PART
I





ITEM
1.  DESCRIPTION OF BUSINESS





History




CNH
Holdings Company, a Nevada corporation (the Company) was incorporated in
Delaware on April 15, 1987, under the name of I.S.B.C. Corp.  The
Company subsequently changed its name first to Coral Companies, Inc., and then
to CNH Holdings Company.  Domicile was changed to Nevada in
1997.  The Company conducted an initial public and secondary offerings
during the 1980's.  On June 15, 1998, the Company acquired Southport
Environmental and Development, Inc.  This acquisition however was
subsequently rescinded by agreement between the parties and made a formal order
of the court effective April 19, 2000.  This order put the Company in
the position that it occupied at June 14, 1998, as if none of the actions that
had occurred from that time to the date of rescission had
transpired.




On May 5,
2003, Corvero Networks, Inc., a Florida corporation, was formed by CNH Holdings
Company as a wholly owned subsidiary to acquire the use of certain technology
known as the XBridge Technology.  This technology has as its principal
component the Corvero Convergence Platform.  The acquisition was
accomplished by entering into a license agreement with XBridge Software, Inc., a
Delaware corporation.




The
Company was in the development stage from January 1, 1992 to May 5,
2003.  Since May 5, 2003, the Company has commenced planned principal
operations and is no longer in the development stage.




On August
31, 2004, CNH Holdings Company absorbed its wholly owned subsidiary Corvero
Networks, and began doing business as Cistera Networks.  All Corvero
products adopted the Cistera name.




On May
19, 2005, the Company entered into a merger agreement with XBridge Software,
Inc., pursuant to which XBridge Software would be acquired through a merger with
a wholly owned subsidiary formed by the Company.  The merger was
completed on May 27, 2005.




On
September 27, 2005, we changed our name to Cistera Networks, Inc.




Business
Overview




We
provide IP network-based application appliances and services that add features
and enhanced functionality to the telecommunications services used by large
enterprises, small and mid-sized organizations, both in the commercial and
public sector.  Our objective is to be the leading provider of IP
communications platforms and advanced application engines for businesses
worldwide.  Our software-based and hardware-based solutions are
delivered on our open-architecture, component-based platform known as the
Cistera ConvergenceServerTM, which allows administrators to centrally manage
advanced applications for IP telephony environments across large single-site and
multi-site private voice/data networks.   Because our solutions
improve customer responsiveness, employee productivity and efficiencies for
customers using IP telephony systems, we believe that our convergence solutions
complement the efforts of IP telephony solution providers such as Cisco and
Sylantro to increase the overall return on investment and value contribution
associated with IP telephony systems.  This has allowed us to
establish cooperative relationships with IP telephony solution providers, as
well as large value added resellers (VARs) and systems integrators (SIs) focused
on delivering IP telephony systems and services.




We began
operations in May 2003, and first introduced our convergence solutions in
September 2003.  We initially offered our solutions at discounted
prices, to seed the market and to establish a referenceable customer
base.  From May 2003 through June 2005, we staffed our operations,
grew our reseller channel, built our infrastructure, created, marketed and
delivered our solutions and obtained an initial base of paying
customers.  From January 2005 to the present time, we increased
expansion efforts into Canada and Europe.  Our revenues grew from
$1,322,675 in fiscal 2005 to $1,932,838 in fiscal 2007.




3


We cannot
be certain that our revenues will continue to grow or that we will achieve
profitability in the future.  We cannot accurately predict our future
growth rate, if any, or the ultimate size of our market. Our ability to increase
revenues and achieve profitability depends on a number of factors outside of our
control, including the extent to which:




Þ
            our
      solutions are able to gain market acceptance, particularly as IP telephony
      increases penetration in the mainstream
market;




Þ
            we
      are able to acquire and retain customers on a cost-effective
      basis;




Þ
            we
      are able to establish strategic relationships with IP telephony platform
      and services providers;




Þ
            we
      are able to successfully identify, develop and market enhanced
      applications for the mainstream
market;




Þ
            IP
      telephony platform and service providers develop or bundle competing
      applications; and




Þ
            we
      become subject to increased regulatory
burdens.




Currently,
we offer new customers a variety of packaged applications, and platform tools
for customized solutions.  We market our software and hardware
solutions through a VAR channel, and directly in some cases to Fortune 500
customers.  To ensure growth scalability, our VAR channel is being
trained to deliver professional services for standard installations, which we
believe will allow us to focus on advanced professional services for complex
installations.




We plan
to reinvest our earnings for the foreseeable future in the following ways:
hiring additional personnel, particularly in sales and engineering; expanding
our domestic and international selling and marketing activities; increasing our
research and development activities to upgrade and extend our solution offerings
and to develop new solutions and technologies; growing our VAR and systems
integration channel; adding to our infrastructure to support our growth; and
expanding our operational and financial systems to manage a growing
business.




Key
Terms and Definitions




Þ
            Enterprise Voice is
      defined as the combination of Enterprise Telephony and Enterprise VoIP
      Gateways.





Þ
            Enterprise Telephony is
      defined as the combination of Enterprise IP Telephony and traditional
      telephony (PBX/KTS).





Þ
            Enterprise IP Telephony
      is defined as the combination of LAN Telephony, Converged Telephony, and
      IP Phones.





Þ
            Enterprise VoIP Gateway
      is defined as a Layer 3 network device which provides the interconnection
      of CPE-based voice and data traffic across a WAN network or the PSTN, also
      refereed to as trunks. This device is typically a modular or standalone
      router specially equipped with voice DSP
  resources.





4


Þ
            LAN Telephony (IP-Only)
      is defined as those ports and systems which provide Enterprise Voice
      services over a LAN whereby both call control and voice traffic traverse a
      packet network, in most cases IP running over Ethernet. The use of a
      traditional PBX or KTS is not required. In most cases the three
      fundamental elements to this network architecture include a server running
      call control software, Ethernet switches, and IP
  Phones.





Þ
            Converged Telephony
      (TDM/IP) is defined as those lines and systems which provide voice
      services whereby voice traffic traverses TDM lines but call control is
      packet based.  In most cases this enables a traditional
      Enterprise Voice network to migrate its infrastructure to IP incrementally
      with the prime advantage of maintaining prior capital investment in PBXs
      and traditional phones. In most cases call control resides on a server,
      connected to a LAN, running call control software which provides call
      control to a PBX.  In this case, the end-points remain TDM but
      the call control is IP. Also, other form factors of this segment may not
      include traditional phone systems, but an integrated standalone device
      which integrates the functions of TDM and IP at a systems level. These
      standalone solutions are targeted to smaller deployments as found at
      branch offices or small offices.





Þ
            IP Phone is defined as a
      packet based telephone that has a Layer 3 IP address and a Layer 2 network
      connection (in most cases Ethernet or Voice over Ethernet). The functions
      of an IP Phone mirror that of a traditional phone. Technically, an IP
      Phone transmits voice traffic by first taking the Voice Payload and adding
      an RTP header, then a UDP header, then an IP header and finally an
      Ethernet header per frame. An IP Phone is an IP appliance, which has been
      optimized for voice applications. Given that it is more than a traditional
      telephone, other network services may be available to the IP Phone such as
      Internet browsing or other network services. An IP Phone can be a hard
      phone, soft phone, or wireless
device.





Industry
Background




The term
"IP telephony" covers a range of technologies, including voice-over-IP (VoIP)
and fax-over-IP services, which are carried over both the Internet and private
IP-based networks. IP telephony connects across combinations of PCs, Web-based
telephones, and phones connected via public telephone lines to remote voice
gateways. Because information traveling through an IP-based network travels in
discrete packets, it does not need to rely on a continuously available switched
circuit as does information traveling in the analogue format used in traditional
telephony.  Consequently, IP-based services are very bandwidth and
cost-efficient.




Users of
IP telephony typically can save money because IP telephony operates more
efficiently than ordinary plain old telephone service (POTS) and because it
currently avoids most of the tariffs and tolls applicable when using POTS,
especially with respect to international telephone service.  IP-based
voice conversations require less than 10% of the bandwidth of
POTS.  This efficiency of bandwidth results from two factors: First,
compression techniques, such as G.723.1, a standard IP compression technique,
compresses a standard POTS transmission resulting in an overall bandwidth
reduction generally in the range of 6-to-1.  Second, POTS requires
full duplex—a simultaneous transmission in both directions—to support a
telephone conversation.  Tying up bandwidth in this fashion is
wasteful because in conversations, typically only one person is speaking at a
time.  Voice-over-IP (VoIP) products have the ability to sense the
silence and cease transmitting when one party is quiet.  This
technique almost halves the required bandwidth of a typical telephone
conversation.  As a result, IP telephony commonly consumes as little
as one-twelfth the bandwidth of POTS to transmit conversations.  In
addition, IP telephony provides carriers with the ability to lower costs by
consolidating both voice and data in one network instead of necessitating the
two separate networks required for traditional POTS and data.




5


VoIP
technologies convert digitized voice into data packets that are encapsulated in
Internet protocol, thus allowing IP Phone calls, faxes and voice traffic to be
relayed over corporate intranets or across the Internet.  As a result,
VoIP presents an opportunity for exciting new uses for IP-based phone systems,
such as: IP multicast conferencing and telephony distance learning applications,
phone directories and customer service monitoring and playback of calls via IP,
and “voice web browsing” where the caller can interact with a web page by
speaking commands.  The ability to access enterprise data and
applications through a device such as a web-browser enabled IP Phone has
presented an opportunity to position the IP Phone as a peer to the personal
computer in many work environments - especially where PC's are not appropriate
user interfaces for employees.  Apart from the economies provided by
moving a firm’s communications onto one network, it is IP convergence, the
uniting of voice, video and data that has provided many companies with a
compelling reason to replace legacy phone systems with IP
telephony.




Market
Highlights:




·
            Total
      IP phone annual shipments are expected to grow from 10 million units in
      2006 to 164 million units in 2010 (Still less than 5% of all communication
      devices sold) (According to research firm,
  In-Sat)




·
            Enterprise
      converged mobile device (SmartPhone) shipments were 7.3 million in 2005,
      and are projected to reach 63 million units worldwide by 2010 (According
      to research firm, IDC)




·
            Computer-Telephony
      Integration (CTI) was $5 Billion in 2005, and projected to be $12 Billion
      by 2010 (Telecommunication Industry Association - North
      America)




·
            $7.5
      Billion in revenue is expected to be reached by 2010 for the Land Mobile
      Radio market (LMR) (Venture Development Corporation – North
      America)




Limitations
of Existing IP Telephony Solutions




Existing
IP telephony solutions have been criticized for lacking the broad set of
features, or applications, such as voicemail, call transfer, and three-way
calling, that traditional PBX phone systems have developed over the past
century.  As an application development company for the IP telephony
market, we bridge the feature/function gap currently present in many major IP
telephony platforms like those provided by Cisco, Avaya, Nortel, Siemens and
others.  We believe that, just as happened with POTS, application
providers will flourish alongside the equipment providers as the IP telephony
market develops and matures.




The
Opportunity for Convergence of Voice, Video and Data




IP
telephony refers to the technology used in transmitting voice over a network
using open, standards-based IP.  Our Convergence IP telephony
solutions leverage a single network infrastructure for the transmission of data,
voice, and video traffic to deliver high-quality voice and fully integrated
communications and enable enterprises to realize the business benefits of a
converged network.  These benefits include increased productivity,
business flexibility, and reduced operational costs.




With the
mainstream adoption of enterprise IP communications, businesses are now
embracing the operational benefits of convergence at an accelerated
pace.  While the infrastructure benefits of IP telephony are well
documented, the user-level benefits are only now starting to
emerge.  Today, businesses deploying IP telephony are looking for
benefits that extend beyond VoIP into ways to integrate existing business data
into the telephony environment.




Collaboration
tools like video conferencing and multicasting can be delivered to every
desktop, enabling up-to-the minute information sharing between employees,
partners, suppliers and customers - improving the company's ability to respond
and collaborate at a fraction of the cost of other point solutions.




6


Unified
views of customer data also become a reality with the true integration of voice,
video and data.  Combined with the use of intelligent communication
devices like IP-based phones, critical information and important messages can
travel to the employees to enable them to work smarter and faster.




Finally,
a converged network is more capable of supporting a mobile
workforce.  By offering remote access to a corporate network and its
information, geographically dispersed locations or traveling employees can
access the tools they need to perform and interact with customers, thereby
increasing per capita efficiency.




The
movement towards incorporating voice, video and data into a single network is
referred to as "convergence".  IP telephony now allows the telephone
to serve up data in a manner similar to a PC or any other web-enabled
device.




Before
the introduction of our Cistera ConvergenceServerTM, most IP data-based
applications offered via IP Phones were limited by the phone's own ability to
navigate and/or manipulate data in a meaningful way.  The Cistera
ConvergenceServerTM, coupled with XML, other standard protocols and an IP
telephony environment, allows an enterprise to achieve unique client-application
integration through its IP Phones.  This integration is accomplished
in the network as a peer with other user interface devices such as PCs, PDAs,
wireless phones and point-of-sale devices, among others.  By coupling
an XML browser with voice services, we are able to combine voice, video and
powerful data query applications and deliver them through IP communications
devices.




Our
Strategy




Our
objective is to be the leading provider of IP communications Application
Platforms and advanced application engines for businesses worldwide. To achieve
this objective, we are pursuing the following strategies:




Extend Our Product and Technological
Leadership. We believe our solution supports more communications and data
format standards across the broadest range of communications systems than most
other competing solutions, allowing us to provide improved interoperability
within a customer’s existing network infrastructure.  We intend to
build upon our IP communications technology and improve our solution's
functionality and ease of use for rapidly designing, deploying and maintaining
our communications solutions in a customer’s environment.  We may also
seek to enhance our products through licensing or acquiring complementary
technologies or businesses.  We believe that we are also unique in
delivering a full suite of application engines to an IP communications end point
and plan to extend our application engine portfolio.




Expand Sales and Distribution
Channels.  We intend to pursue a multi-channel, distribution
strategy by expanding our key relationships with system integrators, VARs, OEMs
and distributors.  We intend to increase our domestic distribution by
adding channel sales personnel.  We also plan to continue to expand
our indirect distribution through alliances with additional system integrators,
VARs and OEMs.  We intend to launch our international distribution by
developing additional relationships with international distributors and creating
strategic alliances with international system integrators.  We
anticipate that our primary means of addressing the market will be through our
indirect sales force.




Capitalize on Our Professional
Services Capabilities.  We have established what we believe to
be highly successful relationships with customers and VARs by assisting them in
designing, developing and deploying our convergence solutions.  Our
professional services range from strategic and architectural planning to
complete integration and deployment of our products.  While we
encourage our indirect channel partners to build out professional services
practices to support the Cistera solutions, we will continue to extend our
professional services expertise in applying emerging standards, especially XML
standards, to create additional solutions that capitalize on our
technologies.  By offering a full range of professional services, we
believe we can strengthen our existing customer and VAR relationships and foster
new relationships, creating opportunities to sell additional
products.  Our current expectation is for our VAR channel to handle
the standard installation and configuration requirements, thereby enabling us to
focus on the more advanced customer services requirements and to scale rapidly
to meet the anticipated demand for our convergence solutions.




7


Products




Our
convergence products consist of application appliances—hardware and software
combined to deliver a broad suite of feature-sets on a scalable
architecture:




Hardware platforms The Cistera
platforms combine advanced software engines with hardware devices that have been
optimized and in some cases, specifically designed to deliver the performance
and scalability required for IP telephony application environments.




Þ
            Cistera ConvergenceServerTM
      (CCSTM)the foundation of a Cistera IPT solution is available in six
      form factors—the CCS 1000, the CCS 1500, the CCS 2500, the CCS 5500 and
      the CCS 7500 are designed to support  “small”, “medium”, “large”
      and “service provider” performance requirements for specific customer
      locations.  The servers are rack-mountable, open standards-based
      hardware systems.





Þ
            Cistera ZoneControllerTM(CZCTM)enables IP phone systems to work with existing or newly installed
      overhead speakers to create a unified paging system.  Cistera’s
      solution is the only one that supports simultaneous broadcasting to IP
      phones and speakers.





Cistera 1.7 Software
Platform.  The Cistera 1.7 software platform is a
component-based architecture that enables enhanced scalability and management of
advanced IP Phone applications.  This platform has built in media
management engines that enable third-party application developers to leverage
our pre-built components—a voice recording engine, a broadcast engine, a content
streaming engine, a pin code and authentication engine, a ruleset engine and a
grouping engine—without having to create each component from the ground
up.  Our authorized developers can use our published APIs to invoke
many of these services and therefore focus their development efforts on the
workflow components critical for specific industries.  This platform
also provides configurable administration and management tools.




Cistera Advanced IP Phone
Applications.  We believe that we have developed the broadest
suite of advanced IP Phone applications available in the market
today.  These applications include:




Þ
            QuickRecordTM - an IP
      telephony on-demand voice recorder and media management service designed
      to allow phone users to record important or malicious calls when needed
      and play them back from the phone.  The entire call is recorded
      regardless of when the user presses the record button during the
      call.





Þ
            CallCenterRecordTM - an IP
      telephony continuous voice recorder and media management service with
      remote monitoring and quality reporting features.  It supports
      standard storage and archival
systems.





Þ
            RapidBroadcastTM - an IP
      telephony messaging and broadcast system. Instantly transmit text or voice
      messages or schedule pre-recorded broadcasts to a defined group or to an
      entire organization through IP Phones or external
  speakers.





Þ
            VirtualDirectoryTM- a centralized
      directory system that allows telephone users, both internal and external
      to traverse corporate information quickly without time consuming
      tree-based systems. Callers can use their touchtone or voice to request
      information or to be directed to the appropriate extension.  It
      supports LDAP integration into popular contact management
      systems.


Þ
            ContentStreamerTM - an IP
      telephony streaming solution that delivers audio, graphics, music, and
      data streaming capabilities to the IP Phone network.  It enables
      targeted music/messaging for on-hold callers as well. Cistera’s solution
      uses Real Simple Syndication (RSS) to deliver targeted messaging that is
      delivered as it is updated





Þ
            PhoneAssistTM -integrates the
      PC and the IP Phone, enabling access to CRM application directories from
      the phone, or “click-to-dial” from the
computer.


8





Þ
            PhoneVerifyTM -provides cost
      effective account code authentication, client matter codes, and forced
      code authorization that integrate with leading call detail reporting
      systems.





Þ
            RuleSetManagerTM -enables
      control of behavior of IP Phone applications, IP Phones and other IP
      devices from a central administration point. Itallows quick
      configuration to apply rule-based call management for an IPT
      system.





Þ
            GroupManagerTM -enables the
      organization and management of designated groups of IP Phone users from a
      central administration point.  It allows the system
      administrator to assign rights and services based upon group
      association.





Our
convergence solutions utilize several key technologies to provide integration
into IP communications environments, including XML, JTAPI, J2EE, SIP, H.323, and
others.




Our
convergence solutions have been designed to interoperate seamlessly within
network environments, by aligning with key industry standards.  There
are occasions where integration with certain legacy platforms requires that our
solutions interact with some proprietary protocols.  In these
situations, our convergence solution works to maintain open protocols for the
broad network functions, while supporting the proprietary codecs for the
specific areas of interoperability.  An example of this would be in
the way our products currently support Cisco’s proprietary SCCP
protocol.




We have
designed our solution to provide support for many of the emerging industry XML
standards with minimal impact to existing business applications. We
believe this non-intrusive architecture is a key in enabling integration of IP
based voice, video and data; and will enable content to be delivered to a wide
array of devices, like IP Phones, wireless phones, PDAs, etc.




Product
Development




We
released our first convergence products in September 2003 at Cisco’s Innovation
Through Convergence Expo in California.  Using the technology
developed for our Cistera ConvergenceServerTM, we recently introduced additional
convergence products, extending the breadth and depth of our solution
footprint.  We continue to enhance our convergence products with
particular emphasis on providing improved interoperability, increased
functionality, enhanced security and scalability and simplified ease of
use.  Our product development efforts currently focus on enhancing our
existing products and technologies and on developing additional products to
extend our position in the growing voice, video and data convergence
market.




On May 5,
2003, we retained the services of XBridge Software to perform a substantial
portion of our product development.  XBridge continued to perform
these services for us until May 27, 2005, when we acquired XBridge.




Competition




As one of
the first movers, Cistera competes with a broad number of companies that extract
revenues from the telecommunications capital budgets of SMB and Enterprise
companies. Currently, 100% of Cistera’s revenues are derived from equipment
purchased as part of an enterprise's telecommunications infrastructure, also
referred to as customer premise equipment (CPE) and aligned computer-telephony
integration (CTI) applications. In 2005, this was a $5.7B market with about 20%
specifically associated with IP Communications.





The
company’s solutions are delivered through indirect channel partners that
primarily focus on the professional services associated with the installation
and management of IP Communications solutions. Cistera faces competitors in
three primary categories: Traditional TDM application vendors transitioning to
IP; PBX vendors extending functionality to core systems; and, alternative
application platforms focused on “custom” application development
capabilities.





9


We have
been successful in building comprehensive value propositions for channel
partners that allow them to compete more effectively by offering broader
functionality without having to invest in alternative engineering resources.
Secondly, with an expanded value proposition in the market, channel partners can
increase their margins, which have traditionally suffered in the
networking/hardware market and ranged between 10 to 15%.





While we
continue to increase our ability to propagate our value proposition directly
into the reseller channel, we are conscious of the need to complement the PBX
vendors’ messaging rather than compete with their positions, as the PBX vendors
hold considerable influence.





Cistera’s
principal competitors are companies that have for a number of years manufactured
telephony application products for traditional Time Division Multiplex (TDM)
based phone systems and are currently transitioning their products to support IP
based (VoIP) phone systems otherwise known as IP Telephony.  Examples
of companies that we compete with include Verint, Interactive Intelligence and
Nice Systems in the Quality Assurance and Compliance category; Raytheon,
Alcatel-Lucent and Motorola in the Event Alerting and Notification
category.





While the
management of the company believes the business plan provides competitive
advantage over competitors, many of the existing and potential competitors have
stronger brand recognition, longer operating histories, larger customer bases
and greater financial resources.  As a result, they may be able to use
these advantages to take market share from Cistera. They may also be able to
respond more effectively to changing technologies, conditions or customer
demands, especially during market downturns.





ITEM
2.  DESCRIPTION OF PROPERTY





Our
corporate offices are located at 6509 Windcrest Drive, Suite 160, Plano,
TX  75024.  We lease this office space, which contains
approximately 9,767 rentable square feet, from GK II Plano, L.P.  Our
rent under this lease is approximately $11,226 per month and the lease expires
July 31, 2013.  As of March 31, 2007, our corporate offices were
located at 17304 Preston Road, Suite 975, Dallas, Texas 75252.  We
continue to lease this office space, which contains approximately 4,264 square
feet, from CMD Realty Investment Fund, L.P.  Our rent under this lease
was approximately $7,626 per month and the lease expires November 30,
2009.





10


ITEM
3.  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.  We are
currently in the process of negotiating definitive settlement
agreements.




The
Company is a defendant in litigation pending in Dallas, Texas, styled
Collaborative Search Partners, Inc. vs. XBridge Software, Inc., and Cistera
Networks, Inc., Cause No. 07-03189;J191st District Court, Dallas County,
Texas.  The plaintiff has alleged a number of complaints against the
defendants, including breach of contract, promissory estoppel, and quantum
meruitt arising in connection with two separate employment search agreements. In
May 2007, the parties came to an understanding with respect to the principal
elements of a potential settlement, and a Rule 11 letter agreement has been
filed with the Court, however, a definitive settlement agreement is still being
negotiated among the parties. The Rule 11 letter agreement provides for payment
by the defendants of $44,000 to the plaintiff over a period of six months, and
in the event the defendants fail to make such payments, a default judgment may
be rendered against the defendants.




ITEM
4.  SUBMISSION OF MATTERS TO A


VOTE
OF SECURITY HOLDERS





None.





11


PART
II





ITEM
5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is presently traded in the over-the-counter market and is listed on
the Pink Sheets maintained by the National Quotation Bureau, Inc., and on the
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. (NASD), under the symbol CNWT. The following table sets forth the range of
high and low bid quotations for the common stock during each calendar quarter
beginning April 1, 2005, and ending March 31, 2007.  The figures have
been rounded to the nearest whole cent.





High
            
            
            LowJune
      30, 2005
            
            $
            3.40
            
            
            $
            2.39September
      30, 2005
            
            $
            2.55
            
            
            $
            1.80December
      31, 2005
            
            $
            2.45
            
            
            $
            1.10March
      31, 2006
            
            $
            1.35
            
            
            $
            1.01June
      30, 2006
            
            $
            1.32
            
            
            $
            1.13September
      30, 2006
            
            $
            2.15
            
            
            $
            0.65December
      31, 2006
            
            $
            0.80
            
            
            $
            0.64March
      31, 2007
            
            $
            1.50
            
            
            $
            1.35


The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.  The
number of shareholders of record of the Company's issued and outstanding common
stock as of March 31, 2007 was approximately 574.





The
Company has not paid any cash dividends to date and does not anticipate paying
cash dividends in the foreseeable future.  It is the present intention
of management to utilize all available funds for the development of the
Company's business.





Recent
Sales of Unregistered Securities





On July
1, 2006, the Company issued 70,803 shares of common stock in connection with the
exercise of warrants issued in the merger of the Company with XBridge Software,
Inc.  The exercise price of the warrants was $.46 per
share.  The warrants were exercised for notes payable totaling
$32,594.





On August
1, 2006, the Company issued 4,034 shares of common stock upon conversion of the
principal and accrued interest on a previously issued convertible
note.  The principal amount of the note converted was $1,000 and the
amount of accrued interest converted $3,034.  The notes converted at
$1.00 per share.





On
October 25, 2006, the Company issued 122,028 shares of common stock in
connection with the exercise of options issued in the merger of the Company with
XBridge Software, Inc.  The exercise price for these options was $.01
per share.





On
December 13, 2006, the Company issued 17,931 shares of common stock upon
conversion of certain outstanding notes.  The amount of principal of
notes converted was $15,000 and the amount of accrued interest converted was
$2,391.  These notes were converted at $1.00 per share.





12


The
foregoing issuance of the shares of our common stock described above were made
in private transactions or private placements intending to meet the requirements
of one or more exemptions from registration.  In addition to any noted
exemption below, we relied upon Regulation D and Section 4(2) of the Securities
Act of 1933, as amended (the “Act”).  The investors were not solicited
through any form of general solicitation or advertising, the transactions being
non-public offerings, and the sales were conducted in private transactions where
the investor identified an investment intent as to the transaction without a
view to an immediate resale of the securities; the shares were “restricted
securities” in that they were both legended with reference to Rule 144 as such
and the investors identified they were sophisticated as to the investment
decision and in most cases we reasonably believed the investors were “accredited
investors” as such term is defined under Regulation D based upon statements and
information supplied to us in writing and verbally in connection with the
transactions.  We never utilized an underwriter for an offering of our
securities and no sales commissions were paid to any third party in connection
with the above-referenced sales.  Other than the securities mentioned
above, we have not issued or sold any securities during the period covered by
this Report.




ITEM
6.  MANAGEMENT’S DISCUSSION AND


ANALYSIS
OR PLAN OF OPERATION





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear in this filing.  In addition
to historical financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs.  Our actual results could differ materially from those
discussed in the forward-looking statements.  Factors that could cause
or contribute to these differences have been included throughout the public
filings from the company.





RESTATEMENT OF PREVIOUSLY
ISSUED CONSOLIDATED FINANCIAL STATEMENTS





The
Company has restated its Consolidated Balance Sheet as of March 31, 2007 and its
Consolidated Statements of Operations, Stockholders’ Equity (Deficit) and Cash
Flows for the years ended March 31, 2007 and 2006 to reflect: (i)
a correction in its accounting for its Senior Unsecured Convertible Promissory
Notes and detachable warrants issued in private placements during the period
from December 2004 to April 2007 (the “PP1 Notes,” “PP1 Warrants,” “PP2 Notes,”
and “PP2 Warrants”) and (ii) share-based compensation related to employee stock
options.  The adjustments required by this restatement had no impact on net
cash used in operations, net cash used in investing activities or net cash from
financing activities.





The
impact of the restatement is summarized in the table below:





Adjustments
      to Consolidated Statements of Operations:
              Income
      (Expense)Convertible
      Promissory Notes and Warrants
            
            
            Share-based
      Compensation
            
            
            TotalYear
      ended March 31, 2007
            
            $
            (665,195
            )
            
            $
            (101,700
            )
            
            $
            (766,895
            )Year
      ended March 31, 2006
            
            
            469,573
            
            
            
            -
            
            
            
            469,573Cumulative
      effect at April 1, 2005
            
            
            (1,091,046
            )
            
            
            -
            
            
            
            (1,091,046
            )Total
            
            $
            (1,286,668
            )
            
            $
            (101,700
            )
            
            $
            (1,388,368
            )





13


Convertible Promissory Notes
and Warrants





The
Company has concluded that its original accounting for the PP1 Notes and PP1
Warrants issued in fiscal year 2005 and the PP2 Notes and PP2 Warrants issued in
fiscal year 2007 and fiscal year 2008 was incorrect and that the necessary
adjustments were material for the fiscal year 2007 and 2006 consolidated
financial statements.





The
Company based its conclusion upon a further review of the documents associated
with the Notes and Warrants and considered the following sources as relevant
guidance in determining the proper accounting treatment for the Notes and
Warrants:





·
            SFAS
      133, Accounting for
      Derivative Instruments and Hedging Activities(“SFAS
      133”),


·
            APB
      Opinion 14, Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants
      (“APB   14”),


·
            Emerging
      Issues Task Force (EITF) Issue 00-19, Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s
      Own Stock(“EITF 00-19”),


·
            EITF
      05-2,The Meaning of
      “Conventional Convertible Debt Instrument”(“EITF
      05-2”),


·
            EITF
      98-5, Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios (“EITF
  98-5”),


·
            EITF
      00-27, Application of
      Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”),
      and


·
            SEC
      Staff Accounting
      Bulletin No. 107(“SAB
107”).





Conversion feature of the
Notes





The
Company concluded that the Notes meet the definition of “conventional
convertible debt” (as defined in EITF 00-19 and affirmed in EITF
05-2).  EITF 00-19, paragraph 4 states: “The Task Force observed that,
pursuant to paragraphs 11(a) and 12(c) of Statement 133, if an embedded
derivative is indexed to the reporting entity's own stock and would be
classified in stockholders' equity if it was a freestanding derivative, that
embedded derivative is not considered a derivative for purposes of SFAS 133. The
Task Force reached a consensus that for purposes of evaluating under SFAS 133
whether an embedded derivative indexed to a company's own stock would be
classified in stockholders’ equity if freestanding, the requirements of
paragraphs 12–32 of this Issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only realize
the value of the conversion option by exercising the option and receiving the
entire proceeds in a fixed number of shares or the equivalent amount of cash (at
the discretion of the issuer).”





Therefore,
the Company has concluded that the conversion feature of the convertible debt
did not meet the definition of a derivative under SFAS 133 and did not require
separate accounting from the debt instrument.





Valuation of Notes and
Warrants and beneficial conversion feature





APB 14
addresses the accounting for convertible debt with a nondetachable (embedded)
conversion feature, the terms of which provide for an initial conversion price
that is greater than the market value at the date of issuance and a conversion
price that does not decrease, except under antidilution protection, but does not
explicitly address situations in which the embedded conversion feature is
“in-the money” at issuance.  The Notes, including any accrued
interest, were exercisable into the Company’s common stock at less than the
closing price of the Company’s stock on the dates of issuance, and the Company
considered this conversion to be an “embedded beneficial conversion
feature.”





14


EITF 98-5
requires “that embedded beneficial conversion features present in convertible
securities should be valued separately at issuance.” Further, EITF 98-5 states
“that the intrinsic value of the beneficial conversion feature may be greater
than the proceeds allocated to the convertible instrument,” and as such, “that
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible instrument.”
EITF 00-27 further states “that the effective conversion price based on the
proceeds received for or allocated to the convertible instrument should be used
to compute the intrinsic value, if any, of the embedded conversion option. As a
result of this consensus, an issuer should first allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange (such as detachable warrants) on a relative fair value basis. Then, the
Issue 98-5 model should be applied to the amount allocated to the convertible
instrument, and an effective conversion price should be calculated and used to
measure the intrinsic value, if any, of the embedded conversion
option.”





Accordingly,
we calculated the fair value of both the convertible Notes and the Warrants and
allocated the respective relative fair value percentages of each in determining
the initial values of the convertible Notes and the Warrants.  Because
the Warrants were determined to be derivative liabilities (see conclusion in
next section below and in Note 3 to the consolidated financial statements), the
Company recorded them at fair value as calculated under the Black-Scholes option
pricing model (“BS model”).  For Notes and Warrants issuances where
the net cash proceeds were greater than the fair value of the Warrants, this
difference was allocated to the value of the Notes.  The amount
assigned to the Warrants represented a debt discount on the Notes, which is
amortized over the life of the Notes.  For Notes and Warrants
issuances where the net cash proceeds were less than the fair value of the
Warrants, the Warrants were recorded at fair value and the difference was
recorded as a charge to the consolidated Statement of Operations at
inception.  This second situation occurred with the issuance of the
PP1 Notes in December 2004 and resulted in a charge to the Statement of
Operations of approximately $230,000; no value was allocated to the Notes, with
a full debt discount recorded and amortized over the life of the
Notes.





After
determining the recorded value of the Warrants and Notes (if any), we calculated
the beneficial conversion feature of the Notes, which resulted in an additional
debt discount which was amortized over the life of the Notes.





Classification and
accounting for Warrants





We
evaluated the Warrants as a potential free standing derivative under the
criteria in paragraph 11(a) of SFAS 133, which require that a contract
(Warrants) issued by a reporting entity be accounted for as a derivative unless
it is both (1) indexed to its own stock and (2) classified in stockholders’
equity in its statement of financial position. We concluded that the Warrants
were indexed to the Company’s own stock and should be classified in
stockholders’ equity and would qualify for the scope exception contained in this
paragraph.  The Company was required to further review the
requirements for equity classification contained in paragraphs 12-32 of EITF
00-19.  The Company concluded that it had not met criteria (2) above
based on the requirements for equity classification in EITF
00-19.  Specifically, both the PP1 and PP2 Notes contain registration
rights agreements (the “RR agreements”) that stipulate that the Company must
register all “registrable securities” (defined as the “shares of Common Stock
issuable upon conversion of the Notes and the shares of Common Stock issuable
upon exercise of the Warrants”) within a time frame (and this was deemed to be
outside of the control of the Company).  In the event of not filing a
registration statement by a specified date or by not having a registration
effective by a specified date, the Company was obligated to pay liquidated
damages in the amount of 1% of the then current outstanding amount of the Notes
plus accrued interest.  The Company accrued all required liquidated
damages, beginning in FY 2005 with the PP1 Notes. Liquidated damages required
under the RR Agreement for the PP1 Notes ceased on September 25, 2005, which was
the date that the Company filed its initial registration statement for the PP1
Notes and PP1 Warrants.





Accordingly,
the Company concluded that the Warrants did not satisfy the requirement for
equity classification and should be classified, recorded and prospectively
accounted for as derivative liabilities until it has registered all underlying
shares to the Warrants or until such time that the RR agreements are no longer
in effect.  The prospective accounting requires that the Warrants be
remeasured at each balance sheet date based on estimated fair value and any
resultant changes in fair value be recorded to the Statement of
Operations.





15


The
Company used the BS model for calculating the fair value of all Warrants issued
based on the following assumptions:





Warrants
      issued in PP1
            
            Warrants
      issued in PP2Expected
      volatility
            128%
            
            100%-104%Expected
      term
            5
      years
            
            5
      yearsRisk-free
      interest rate
            3.58%
      - 4.33%
            
            4.46%
      - 4.65%Expected
      dividend yield
            0%
            
            0%





We
estimated volatility primarily based on historical volatility rates through the
date of each closing of the PP1 and PP2 offerings. The Warrants have a
transferability provision and based on guidance provided in SAB 107 for options
issued with such a provision, we used the full, five-year contractual term as
the expected term in the initial valuation of the Warrants.  For the
risk-free interest rate, we used the five year U.S. Treasury zero coupon rate
for the initial valuation of the Warrants.  Expected volatilities,
expected terms and risk-free interest rates were adjusted as of each quarterly
period commensurate with the remaining contractual lives of the Warrants on such
dates and were used to determine the estimated fair value of the Warrants under
the BS model.





Share-based
compensation





The
Company has concluded that it incorrectly calculated and recorded share-based
compensation expense associated with stock options upon the adoption of
Statement of Financial Accounting Standards No. 123 (revised) (“SFAS 123R”),
“Share-Based Payment,” on April 1, 2006.  Specifically, the Company
did not calculate the fair value of employee stock options issued during the
period from February 2004 through October 2004 and did not record any related
expense in the Statement of Operations for the year ended March 31, 2007 related
to the unrecognized stock option cost as of April 1, 2006.  The
Company has not issued any additional stock options to employees since October
2004.





Write-off
of goodwill





For the
fiscal year ended March 31, 2006, the Company, in its prior filings, had
reported the write-off of goodwill in the amount of $2,134,821 related to
the acquisition of XBridge as a component of “Other income and expense” in the
Statement of Operations.  This amount has been reclassified as a
component of “Operating expenses” to conform with the appropriate classification
and presentation under GAAP.





16




The table
below summarizes the effect of the restatement and reclassification adjustments
on the Consolidated Statements of Operations:
 
 For
      the year ended March 31, 2007
              
              
              For
      the year ended March 31, 2006As
      previously reported
              
              
              Adjustments
              
              
              As
      restated
              
              
              As
      previously reported
              
              
              Adjustments
              
              
              As
      restatedGross
      profit
              
              $
              1,619,566
              
              
              $
              -
              
              
              $
              1,619,566
              
              
              $
              1,251,351
              
              
              $
              -
              
              
              $
              1,251,351Operating
      expenses:
              
              
              2,819,971
              
              
              
              101,700
              
              
              
              2,921,671
              
              
              
              3,575,903
              
              
              
              2,134,821
              
              
              
              5,710,724Loss
      from operations
              
              
              (1,200,405
              )
              
              
              (101,700
              )
              
              
              (1,302,105
              )
              
              
              (2,324,552
              )
              
              
              (2,134,821
              )
              
              
              (4,459,373
              )Other
      income (expense)Interest
      expense, net
              
              
              (84,038
              )
              
              
              -
              
              
              
              (84,038
              )
              
              
              (112,721
              )
              
              
              -
              
              
              
              (112,721
              )Write-off
      of goodwill
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,134,821
              )
              
              
              2,134,821
              
              
              
              -Amortization
      of discount on
                convertible
      notes
              
              
              -
              
              
              
              (146,684
              )
              
              
              (146,684
              )
              
              
              
              
              
              
              (894,084
              )
              
              
              (894,084
              )Benefit
      (charge) for change in
                estimated
      fair value of
                derivative
      financial
                instruments – Warrants
              
              
              -
              
              
              
              (518,511
              )
              
              
              (518,511
              )
              
              
              -
              
              
              
              1,363,657
              
              
              
              1,363,657Net
      loss
              
              $
              (1,284,443
              )
              
              $
              (766,895
              )
              
              $
              (2,051,338
              )
              
              $
              (4,572,094
              )
              
              $
              469,573
              
              
              $
              (4,102,521
              )Basic
      & diluted net loss per share
              
              $
              (0.16
              )
              
              $
              (0.09
              )
              
              $
              (0.25
              )
              
              $
              (0.72
              )
              
              $
              0.07
              
              
              $
              (0.64
              )Weighted
      average shares
                outstanding: basic
      and diluted
              
              
              8,190,123
              
              
              
              
              
              
              
              8,190,123
              
              
              
              6,393,718
              
              
              
              
              
              
              
              6,393,718


17


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Balance Sheet as of March 31, 2007:


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCurrent
      assets:Cash
      and cash equivalents
            
            $
            534,871
            
            
            $
            -
            
            
            $
            534,871Restricted
      cash
            
            
            -
            
            
            
            
            
            
            
            -Accounts
      receivable, net
            
            
            314,178
            
            
            
            
            
            
            
            314,178Related
      party receivables
            
            
            23,927
            
            
            
            
            
            
            
            23,927Inventory
            
            
            75,743
            
            
            
            
            
            
            
            75,743Prepaid
      expenses
            
            
            10,143
            
            
            
            
            
            
            
            10,143Total
      current assets
            
            
            958,862
            
            
            
            
            
            
            
            958,862Property
      and equipment, net
            
            
            122,046
            
            
            
            
            
            
            
            122,046Intangible
      assets, net
            
            
            2,294,993
            
            
            
            
            
            
            
            2,294,993Total
      long-term assets
            
            
            2,417,039
            
            
            
            
            
            
            
            2,417,039TOTAL
      ASSETS
            
            $
            3,375,901
            
            
            $
            -
            
            
            $
            3,375,901Current
      liabilities:Accounts
      payable
            
            $
            544,796
            
            
            
            
            
            
            $
            544,796Related
      party payables
            
            
            24,038
            
            
            
            
            
            
            
            24,038Accrued
      liabilities
            
            
            598,023
            
            
            
            
            
            
            
            598,023Deferred
      revenue
            
            
            465,179
            
            
            
            
            
            
            
            465,179Convertible
      promissory notes
            
            
            144,000
            
            
            
            
            
            
            
            144,000Line
      of credit and other current debt
            
            
            64,509
            
            
            
            
            
            
            
            64,509Total
      current liabilities
            
            
            1,840,545
            
            
            
            
            
            
            
            1,840,545Convertible
      promissory notes
            
            
            1,900,606
            
            
            
            
            
            
            
            1,900,606Discount
      on convertible promissory notes
            
            
            
            
            
            
            (1,663,211
            )
            
            
            (1,663,211
            )Derivative
      financial instruments, at estimated fairvalue
      – Warrants
            
            
            
            
            
            
            2,265,225
            
            
            
            2,265,225Deferred
      revenue
            
            
            84,968
            
            
            
            
            
            
            
            84,968Total
      long-term liabilities
            
            
            1,985,574
            
            
            
            602,014
            
            
            
            2,587,588Total
      liabilities
            
            
            3,826,119
            
            
            
            602,014
            
            
            
            4,428,133Stockholders’
      deficit:Preferred
      stock
            
            
            -
            
            
            
            
            
            
            
            -Common
      stock
            
            
            8,292
            
            
            
            
            
            
            
            8,292Additional
      paid-in capital
            
            
            8,739,970
            
            
            
            786,353
            
            
            
            9,526,323Accumulated
      deficit
            
            
            (9,198,480
            )
            
            
            (1,388,367
            )
            
            
            (10,586,847
            )Total
      stockholders’ deficit
            
            
            (450,218
            )
            
            
            (602,014
            )
            
            
            (1,052,232
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            3,375,901
            
            
            $
            -
            
            
            $
            3,375,901





18


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the year ended March 31, 2007:


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,284,443
            )
            
            $
            (766,895
            )
            
            $
            (2,051,338
            )Adjustments
      used to reconcile net loss to net cash used inoperating
      activities:Amortization
      of discount on convertible promissory notes
            
            
            -
            
            
            
            146,684
            
            
            
            146,684Charge
      for change in estimated fair value of derivativefinancial
      instruments - Warrants
            
            
            -
            
            
            
            518,511
            
            
            
            518,511Depreciation
      and amortization
            
            
            347,086
            
            
            
            
            
            
            
            347,086Share-based
      compensation
            
            
            -
            
            
            
            101,700
            
            
            
            101,700Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (125,149
            )
            
            
            
            
            
            
            (125,149
            )Related
      party receivables
            
            
            9,290
            
            
            
            
            
            
            
            9,290Inventory
            
            
            (52,616
            )
            
            
            
            
            
            
            (52,616
            )Prepaid
      expenses
            
            
            31,483
            
            
            
            
            
            
            
            31,483Accounts
      payable
            
            
            (350,181
            )
            
            
            
            
            
            
            (350,181
            )Related
      party payables
            
            
            (35,400
            )
            
            
            
            
            
            
            (35,400
            )Accrued
      interest
            
            
            44,109
            
            
            
            
            
            
            
            44,109Other
      accrued liabilities
            
            
            43,600
            
            
            
            
            
            
            
            43,600Deferred
      revenue
            
            
            320,988
            
            
            
            
            
            
            
            320,988Net
      cash used in operating activities
            
            
            (1,051,233
            )
            
            
            -
            
            
            
            (1,051,233
            )Net
      cash used investing activities
            
            
            (63,619
            )
            
            
            -
            
            
            
            (63,619
            )Net
      cash provided by financing activities
            
            
            1,588,733
            
            
            
            -
            
            
            
            1,588,733Net
      increase in cash and cash equivalents
            
            
            473,881
            
            
            
            
            
            
            
            473,881Cash
      and cash equivalents at beginning of year
            
            
            60,990
            
            
            
            
            
            
            
            60,990Cash
      and cash equivalents at end of year
            
            $
            534,871
            
            
            $
            -
            
            
            $
            534,871SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTINGAND
      FINANCING ACTIVITIES:Conversion
      of convertible promissory notes and related accruedinterest
      to common stock
            
            $
            21,965
            
            
            
            
            
            
            $
            21,965Conversion
      of accounts payable and other accrued liabilities toconvertible
      promissory notes
            
            
            220,606
            
            
            
            
            
            
            
            220,606Conversion
      of other notes payable to common stock
            
            
            32,595
            
            
            
            
            
            
            
            32,595Allocation
      of discount on convertible promissory notes to derivativefinancial
      instruments - Warrants
            
            
            -
            
            
            
            1,244,591
            
            
            
            1,244,591Discount
      related to beneficial conversion feature on convertiblepromissory
      notes
            
            $
            -
            
            
            $
            482,934
            
            
            $
            482,934







19


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the year ended March 31, 2006:


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (4,572,094
            )
            
            $
            469,573
            
            
            $
            (4,102,521
            )Adjustments
      used to reconcile net loss to net cash used inoperating
      activities
            
            
            3,969,521
            
            
            
            -
            
            
            
            3,969,521Amortization
      of discount on convertible promissory notes –outside
      investors
            
            
            -
            
            
            
            894,084
            
            
            
            894,084Benefit
      for change in estimated fair value of derivativefinancial
      instruments - Warrants
            
            
            -
            
            
            
            (1,363,657
            )
            
            
            (1,363,657
            )Net
      cash used in operating activities
            
            $
            (602,573
            )
            
            $
            -
            
            
            $
            (602,573
            )







Overview




We
provide IP network-based application appliances and services that add features
and enhanced functionality to the telecommunications services used by large
enterprises, small and mid-sized organizations, both in the commercial and
public sector.  Our software- and hardware-based solutions are
delivered on our open-architecture, component-based platform known as the
Cistera ConvergenceServerTM, which allows administrators to centrally manage
advanced applications for IP telephony environments across large single-site and
multi-site private voice/data networks. Because our solutions improve
productivity and efficiencies for customers using IP telephony systems, we
believe that our convergence solutions complement the efforts of IP telephony
solution providers to increase the overall return on investment and value
contribution associated with IP telephony systems.  This has allowed
us to establish cooperative relationships with IP telephony solution providers,
as well as large VARs and systems integrators focused on delivering IP telephony
systems and services.




Currently,
we offer new customers a robust IP-based applications platform pre-loaded with a
variety of packaged applications (we refer to them as application
engines).  We market our software and hardware solutions through a VAR
channel, and in some cases directly to Fortune 500 customers.  To
ensure growth scalability, our VAR channel is being trained to deliver
professional services for standard installations, which we believe will allow us
to focus on advanced professional services for complex
installations.




Our
objective is to be the leading provider of IP communications application
platforms and advanced IP-based applications for businesses
worldwide.  To address our market opportunity, our management team is
focused on a number of short and long-term challenges including: strengthening
and extending our solution offerings; adding new customers and expanding our
sales efforts into new territories; deepening our relationships with our
existing customers, VARs, and SIs; and encouraging the development of
third-party applications on our platform.




In order
to increase our revenues and take advantage of our market opportunity, we will
need to add substantial numbers of customer installations. We plan to reinvest
our earnings for the foreseeable future in the following ways: hiring additional
personnel, particularly in sales and engineering; expanding our domestic and
international selling and marketing activities; increasing our research and
development activities to upgrade and extend our solution offerings and to
develop new solutions and technologies; growing our VAR and systems
implementation channel; adding to our infrastructure to support our growth; and
expanding our operational and financial systems to manage a growing
business.




20


Fiscal
Year




Our
fiscal year ends on March 31.  References to fiscal 2007, for example,
refer to the fiscal year ended March 31, 2007.




Sources
of Revenues




We derive
our revenues from three sources: (1) product revenues, which are comprised of
software and hardware solutions; (2) professional services revenues, consisting
primarily of installation, configuration, integration, training and VAR support
services; and (3) support and maintenance, which is comprised of tiered
technical support levels.  Product revenues accounted for
approximately 75.6 percent of total revenues during fiscal year 2006 and 72.0
percent of total revenues during fiscal year 2007.  Professional
services revenues accounted for approximately 12.5 percent of total revenues
during fiscal 2006 and 11.8 percent of total revenues during fiscal year
2007.  Revenues for our support and maintenance services made up
approximately 11.9 percent of total revenues during fiscal 2006 and 16.2 percent
of total revenues in fiscal 2007.




Cost
of Revenues and Operating Expenses




Cost of
Revenues




Cost of
convergence solutions and support revenues primarily consists of hardware costs
and employee-related costs associated with professional services and support and
maintenance.  Cost of professional services and other revenues
consists primarily of employee-related costs associated with these services and
allocated overhead.  The cost associated with providing professional
services is significantly higher as a percentage of revenue than for our
convergence solutions due to the labor costs associated with providing
professional services.




To the
extent that our customer base grows, we intend to continue to invest additional
resources in building the channel infrastructure to enable our VARs and SIs to
provide the professional services associated with the standard convergence
solutions installation, configuration and training.  The timing of
these additional expenses could affect our cost of revenues, both in terms of
absolute dollars and as a percentage of revenues, in a particular quarterly
period.  For example, we plan to increase the number of employees who
are fully dedicated to supporting and enabling the reseller and implementation
partner channel.




Research and
Development




Research
and development expenses consist primarily of salaries and related
expenses.  We have historically focused our research and development
efforts on increasing the functionality and enhancing the ease of use of our
convergence platform and applications. Because of our open, scalable and secure
component-based architecture, we are able to provide our customers with a
solution based on a single version of our software application platform. As a
result, we do not have to maintain multiple versions, which enables us to have
relatively low research and development expenses as compared to traditional
enterprise software business models. We expect that in the future, research and
development expenses will increase in absolute dollars as we support additional
IP telephony platforms, extend our solution offerings and develop new
technologies.




Marketing and
Sales




Marketing
and sales expenses are typically one of our largest costs, accounting for
approximately 33.7 percent of total revenues for fiscal 2006 and only 17.4
percent of total revenues in fiscal 2007.  In fiscal 2007 the company
reduced spending by leveraging some of the marketing programs funded by large
technology and VAR partners.  It is expected that the company will
increase spending in this area, as the market is beginning to show signs of
momentum.  Marketing and sales expenses consist primarily of salaries
and related expenses for our sales and marketing staff, payments to VARs,
marketing programs, which include advertising, events, corporate communications,
public relations, and other brand building and product marketing expenses. Since
the beginning of fiscal 2005, our sales and marketing costs as a percentage of
total expenses have increased as a result of increased market coverage in the
U.S., Canada and the U.K.




21


As our
revenues increase, we plan to continue to invest heavily in marketing and sales
by increasing the number of national account sales and channel management
personnel in order to add new customers and increase penetration within our
existing customer base, expanding our domestic and international selling and
marketing activities, building brand awareness and sponsoring additional
marketing events. We expect that in the future, marketing and sales expenses
will increase in absolute dollars and continue to be our largest
cost.




General and
Administrative




General
and administrative expenses consist of salaries and related expenses for
executive, finance and accounting, and management information systems personnel,
professional fees, other corporate expenses. We expect that in the future,
general and administrative expenses will increase in absolute dollars as we add
personnel and incur additional professional fees and insurance costs related to
the growth of our business and our operations.




We expect
that general and administrative expenses associated with executive compensation
will increase in the future.   Although the current executive
team has foregone full salary payment during the initial stages of the business,
during 2007 the team began to receive full compensation.  In addition,
we believe over the next fiscal year that the compensation packages required to
attract the senior executives the Company requires to execute against its
business plan will increase our total general and administrative
expenses.




Intellectual
Property Exclusive Licensing Agreement




In May
2003, we entered into an exclusive licensing agreement with XBridge
Software.  This agreement provided us with the exclusive worldwide
rights to market, sell and deliver the convergence solutions based upon the
XBridge technology.  We also retained XBridge to provide additional
development and engineering resources necessary to build, maintain and service
the convergence solutions.




As a
continuation of a restructuring plan we implemented in August 2004, we entered
into discussions to acquire XBridge and obtain ownership of the intellectual
property upon which our products are based. The XBridge Software acquisition was
consummated on May 27, 2005.




Critical
Accounting Policies




Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States.  The preparation
of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
costs and expenses, and related disclosures.  On an ongoing basis, we
evaluate our estimates and assumptions.  Our actual results may differ
from these estimates under different assumptions or conditions.




We
believe that of our significant accounting policies, which are described in the
notes to our consolidated financial statements, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, these
are the policies we believe are the most critical to aid in fully understanding
and evaluating our consolidated financial condition and results of
operations.




22


Revenue
Recognition


The
Company recognizes revenue according to SOP 97-2 (Software Revenue Recognition)
as defined by paragraphs 07-14 in SOP 97-2 and as amended by SOP 98-9
(Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions).  This SOP provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software (including computer hardware and support
services).




Our total
deferred revenue for products and services was $240,167 as of March 31, 2007.
Technical support services revenue is deferred and recognized ratably over the
period during which the services are to be performed, which is typically from
one to three years. Advanced services revenue is recognized upon delivery or
completion of performance.




We make
sales to distributors and retail partners and recognize revenue based on a
sell-through method using information provided by them.




Accounting for
Commissions




For the
fiscal years 2007 and 2006, the Company did not pay sales commissions except in
select agent arrangements.  Sales commissions will generally be paid
on sales meeting the criteria for sales commission payment.




Convertible debt and
warrants





During
the fiscal years 2005 through 2007, the accounting for financial instruments –
convertible debt and detachable warrants (and the potential derivative
accounting related to these financial instruments) – was significant to our
financial statements because the accounting for such instruments requires the
use of management’s significant estimates and assumptions. This accounting
policy is also significant because of the potential fluctuations in the
estimated fair value from period to period, which are recorded as a benefit
(charge) to net loss on the statement of operations. We estimated the fair value
of the PP1 Warrants and PP2 Warrants using the Black-Scholes option pricing
model. This model requires the use of significant estimates and assumptions
related to the estimated term of the financial instruments, the volatility of
the price of our common stock, and interest rates, among other
items.  Fluctuations in these assumptions may have a significant
impact on the estimated fair value of financial instruments, which, in turn, may
have a significant impact on our reported financial condition and results of
operations.





The
complexity in this accounting area and management’s incorrect application of the
accounting rules at the initial recording of the PP1 Warrants and PP2 Warrants
required the Company to restate its fiscal year 2007 and 2006 consolidated
financial statements contained in Item 7 of this Report. Additionally, our
accounting for these financial instruments is discussed further in Note 3 to our
consolidated financial statements included in Item 7 of this
report.







Results
of Operations




The
following discussion should be read in conjunction with the consolidated
statements of operations, in their entirety.




Overview of Results of
Operations for: Fiscal 2006 and Fiscal 2007.




Our
revenues have grown from $1,587,900 in fiscal 2006 to $1,932,838 in fiscal 2007,
a growth year-over-year of 21.7% on a recognized revenue basis.




Our gross
profit during the fiscal year 2006 was $1,251,351 or approximately 78.8 percent
of revenues, and the operating loss for the same period was
$4,459,373.  Gross profit for the fiscal year 2007 was $1,619,566 or
approximately 83.8% of revenues, and our operating loss for the same period was
$1,302,105.




23


During
the fiscal year 2007, we continued to incur substantial costs and operating
expenses related to the expansion of our business.  We added support
services personnel to focus on adding new customers and increasing penetration
within our existing customer base, professional services personnel to support
our implementation and support services, and developers to broaden and enhance
our convergence solutions.




Liquidity
and Capital Resources




At March
31, 2007, we had cash, cash equivalents and short-term marketable securities of
$534,871, as compared to $60,990 at March 31, 2006.  Accounts
receivable at March 31, 2007 were $314,178, as compared to $198,319 at March 31,
2006.  Deferred revenue was $550,147 as of March 31, 2007, as compared
to $229,159 at March 31, 2006.




From our
start of operations in May 2003 through the end of fiscal 2007, we funded our
operations primarily through financing obtained in two private placements—the
first in the third quarter of fiscal 2005 and the second initiated in the fourth
quarter of fiscal 2007.




We do not
have any special purpose entities, and other than operating leases for office
space and computer equipment, which are described below, we do not engage in
off-balance sheet financing arrangements. We currently have a bank line of
credit with JPMorgan Chase Bank in the amount of $50,000.  In
addition, we have a factoring agreement with Allied Capital Partners, L.P. tied
to accounts receivable with a credit line of up to $750,000.




The
Company recently completed a private placement to support current and future
growth requirements.  Through this offering the Company raised an
aggregate of $3,498,776 through the issuance of Senior Unsecured Convertible
Promissory Notes (the “PP2 Notes”) and warrants (the “PP2 Warrants”) to purchase
3,498,776 shares of our common stock.  From this offering, the Company
raised net cash proceeds of $2,815,000 and certain debt holders converted
$683,776 of the Company’s outstanding debt and accrued liability obligations
into PP2 Notes.




Our
future capital requirements will depend on many factors including: our rate of
revenue growth; the expansion of our marketing and sales activities; the timing
and extent of spending to support product development efforts and expansion into
new territories; the timing of introductions of new services and enhancements to
existing services; and the continuing market acceptance of our
services.  To the extent that existing cash and securities and cash
from operations are insufficient to fund our future activities, we will need to
raise additional funds through public or private equity or debt financing.
Although we are currently not a party to any agreement or letter of intent with
respect to potential investments in, or acquisitions of, complementary
businesses, services or technologies, we may enter into these types of
arrangements in the future, which could also require us to seek additional
equity or debt financing.  Additional funds may not be available on
terms favorable to us or at all.  If the Company cannot obtain needed
funds, it may be forced to curtail or cease its activities.




ITEM
7.  FINANCIAL STATEMENTS





The
financial statements of the Company are included as a separate
section of this report beginning on page F-1 immediately following the signature
page to this report.




ITEM
8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS


ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None.


ITEM
8A.  CONTROLS AND PROCEDURES





As of
March 31, 2007, we carried out an evaluation, under the supervision and with the
participation of the Company's management, chief executive and chief financial
officers, of the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").  Based upon the evaluation, the
Company's chief executive and chief financial officers concluded that, as of the
end of the period, our disclosure controls and procedures were effective in
timely alerting them to material information required to be included in the
reports that we file and submit pursuant to the Exchange Act.




24


During
the second quarter of fiscal year 2008, the Company’s chief executive officer
(and its “Certifying Officer” for the fiscal year ended March 31, 2008)
determined that our financial management team did not have sufficient experience
in the preparation of the narrative disclosures in notes to the interim
financial statements and that our disclosure controls and procedures (as defined
in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), were not effective in ensuring that information
is recorded, processed, summarized and communicated to our Certifying Officers,
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  In an effort to remediate this
deficiency, we engaged an independent financial consulting group to provide the
personnel resources necessary for technical accounting and for the recording of
complex financial transactions, preparation of financial statements, and
management reporting and disclosure reporting.  This engagement
resulted in a comprehensive review of our financial statements and disclosure
controls, whereby we became aware of errors made in applying the Company’s new
deferred revenue recognition policy adopted in the third quarter of fiscal year
2007.  On November 9, 2007, we determined that we needed to restate
our financial statements for the fiscal year ended March 31, 2007, which were
included in our Annual Report on Form 10-KSB for the fiscal year ended March 31,
2007 (“2007 10-KSB”), originally filed with the Commission on June 29,
2007.  Also, we concluded that our Form 10-QSB filings for the
quarterly periods ended June 30, 2007 (“June 2007 10-QSB”) and September 30,
2007 (“September 2007 10-QSB”) should be restated.  We amended and
refiled the 2007 10-KSB and the June 2007 10-QSB during the fiscal quarter ended
December 31, 2007, and amended and refiled the September 2007 10-QSB during the
fiscal quarter ended March 31, 2008.




As a
result of these restatements, we conducted a search and retained new financial
leadership with the addition of a Chief Financial Officer in March of
2008.  On July 14, 2008, the CFO was terminated, for, among other
reasons, the inability to provide the necessary technical accounting expertise
for the recording of complex financial transactions, preparation of financial
statements, management reporting and disclosure reporting.  To
remediate the situation, an independent consultant with prior CFO experience
with micro-cap companies was retained to complete the financial reporting
requirements.  While engaged, this financial consultant identified the
Company’s incorrect accounting for the Company’s PP1 Notes, PP1 Warrants, PP2
Notes, PP2 Warrants and share-based compensation expense related to stock
options issued to employees during the fiscal years 2005 through
2007.  This resulted in the Company further amending its consolidated
financial statements for the fiscal year ended March 31, 2007 and restating its
consolidated financial statements for the fiscal year ended March 31, 2006, both
of which are contained in this Report. In our Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2008, filed on August 14, 2008, we included the
restated consolidated financial statements for the fiscal year ended March 31,
2007. Further and as a result of the impact of these errors, the Company expects
to restate and refile its Form 10-QSB filings for the periods ended June 30,
2007, September 30, 2007 and December 31, 2007 within a reasonably practical
time period.




We
estimate that during the second half of fiscal 2009, the Certifying Officer,
along with the Company’s other management representatives, will 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.
            Order
      Entry Accounting & Reporting


2.
            Debt/Equity
      Accounting & Compliance


3.
            Cash
      & Other Working Capital
Management


4.
            Compensation
      Accounting & Administration


5.
            Other
      Assets & Liability Account
Management


6.
            Financial
      Reporting





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 our business and
financial reporting requirements, our evaluation and monitoring measures will
also address any additional corrective actions that may be
required.





25


Our
management does not expect that our disclosure control procedures or our
internal control 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.





Item
8B. Other Information





None.


26


PART
III





ITEM
9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND


CONTROL
PERSONS AND CORPORATE GOVERNANCE;


COMPLIANCE
WITH SECTION 16(a) OFTHE EXCHANGE ACT





Executive
Officers and Directors




The
following table sets forth the name, age, and position of each executive officer
and director of the Company as of the period ending March 31, 2007:




Director's   Name
            Age
            Position
      with CompanyDerek
      P. Downs
            38
            President,
      Interim Chief Executive Officer and DirectorGreg
      T. Royal
            41
            Executive
      Vice-President/Chief Technology Officer and DirectorCynthia
      A. Garr
            46
            Interim
      Chief Financial Officer, Executive Vice-President of Corporate Development
      and Director





Our
directors hold office until the next annual meeting of shareholders and until
their respective successors have been duly elected and qualified.  Our
officers are elected by the Board of Directors at the board meeting held
immediately following the shareholders' annual meeting and hold office until
their death or until they either resign or are removed from office. There are no
written or other contracts providing for the election of directors or term of
employment for executive officers, all of whom serve on an at will
basis.




Derek Downshas served as
President since May 31, 2004 and became our Interim CEO for the Company in June
2005.  Mr. Downs has been a member of the Board of Directors since
October 1, 2004.  Prior to becoming President and Interim CEO, Mr.
Downs served as the Company’s Vice President of Sales Marketing and Business
Development.   From January 2003 to May 2003, Mr. Downs held the
same position with XBridge Software, Inc.  From December 2000 to
September 2002, Mr. Downs held senior executive roles in marketing, alliances,
product marketing, and business development at i2 Technologies (NASDAQ:ITWO), a
$1 billion supply chain software company.  Before joining i2
Technologies, he served from December 1999 to December 2000 as VP of Business
Development and Strategic Alliances for BSI Consulting, a midsized technology
strategy firm.  From May 1995 to December 1999, Mr. Downs held the
position of Director of Strategic Alliances at Baan Company, a $1+ billion
enterprise software company.  Mr. Downs graduated from the University
of Eastern New Mexico in 1990 with a BBA degree in Marketing and a BBA degree in
Business Administration.




Gregory T. Royal has served as
Executive Vice President and Chief Technology Officer, and as a member of the
Board of Directors since May 2003.  Mr. Royal is the original founder
of XBridge Software, and the inventor of the Convergence ServerTM
technology.  Mr. Royal has over 18 years of IT Sales, Marketing and
Management experience in New Zealand, Australia and the United
States.  He has held Senior Sales and Marketing positions at Sycom
Office Equipment, Eagle Technology, Network General Corp. (NASDAQ:NETG) and
Network Associates Inc (NASDAQ:NETA). Mr. Royal has system certification with
Compaq, IBM, Novell and Hewlett Packard. He also has significant experience in
designing and deploying large scale IT systems including experience in Banking
and Finance, Government, and Retail and Property Services.  Mr. Royal
graduated from Victoria University in 1986 and holds an MBA from Rushmore
University.




27


Cynthia A.
Garrhas served
as Interim CFO and Executive Vice President of Corporate Development since June
of 2004.  She has been a member of the Board of Directors since May
2003.  She is one of the founders of XBridge Software, and has served
as its President and as a Director from its inception in 1999 to the
present.  She was also Director of Sales for Identify Software, a
leader in application problem resolution software, from January 2003 to June
2004.  From January 2000 to August 2001, Ms Garr served as a Regional
Sales Manager for Mercury Interactive, the leading provider of enterprise
testing and performance management solutions.   Ms. Garr was
President of U.S. Operations and Executive Director of Qronus Interactive, a
provider of automated testing solutions software, which was ultimately acquired
by Mercury Interactive from November 1997 to January 2000. She graduated fromBrookhavenCollegein 1985 with a degree in
Business Management.




Board
Composition and Committees




Our Board
of Directors currently consists of three members, Gregory T. Royal, Cynthia A.
Garr, and Derek P. Downs.  We are planning to expand the number of
members constituting our Board of Directors and will seek persons who are
“independent” within the meaning of the rules and regulations of NASDAQ to fill
vacancies created by any expansion.  Because of our current stage of
development, we do not have any standing audit, nominating or compensation
committees, or any committees performing similar functions.  The Board
meets periodically throughout the year as necessity dictates.  No
current director has any arrangement or understanding whereby they are or will
be selected as a director or nominee.




Audit Committee Financial
Expert




The
Company's board of directors does not have an "audit committee financial
expert," within the meaning of such phrase under applicable regulations of the
Securities and Exchange Commission, serving on its audit committee. The board of
directors believes that all members of its audit committee are financially
literate and experienced in business matters, and that one or more members of
the audit committee are capable of (i) understanding generally accepted
accounting principles ("GAAP") and financial statements, (ii) assessing the
general application of GAAP principles in connection with our accounting for
estimates, accruals and reserves, (iii) analyzing and evaluating our financial
statements, (iv) understanding our internal controls and procedures for
financial reporting; and (v) understanding audit committee functions, all of
which are attributes of an audit committee financial expert. However, the board
of directors believes that there is not any audit committee member who has
obtained these attributes through the experience specified in the SEC's
definition of "audit committee financial expert." Further, like many small
companies, it is difficult for the Company to attract and retain board members
who qualify as "audit committee financial experts," and competition for these
individuals is significant. The board believes that its current audit committee
is able to fulfill its role under SEC regulations despite not having a
designated "audit committee financial expert."




Indebtedness of Directors
and Executive Officers




None of
our directors or officers or their respective associates or affiliates is
indebted to us.




Family
Relationships




There are
no family relationships among our directors or executive officers.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934




Section
16(a) of the Exchange Act, requires the Company's officers, directors and
persons who beneficially own more than ten percent of the Common Stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent beneficial owners also are required by rules promulgated by the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.




28


ITEM
10. EXECUTIVE COMPENSATION





Summary
Compensation




The
following table sets forth, for our last two fiscal years, certain information
concerning the compensation paid by the Company to our Chief Executive Officer
and our other most highly paid executive officers who received in excess of
$100,000 in compensation during these periods.




SUMMARY
      COMPENSATION TABLE(a)
            (b)
            (c)
            
            (d)
            (e)
            
            (f)
            (g)
            
            (h)
            (i)NonqualifiedYear
            
            
            
            
            
            
            Non-Equity
            
            Deferred
            All
      OtherEnded
            
            
            
            Stock
            
            Option
            Incentive
      Plan
            
            Compensation
            Compen-Name
      and
            March
            Salary
            
            Bonus
            Awards
            
            Awards
            Compensation
            
            Earnings
            sation
            TotalPrincipal
      Position
            31
            ($)
            
            ($)
            ($)
            
            ($)
            ($)
            
            ($)
            ($)
            ($)Derek
      P. Downs
            2007
            $127,500
            
            -
            -
            
            -
            -
            
            -
            -
            $127,000President/Interim
            2006
            $125,000
            
            -
            $369,396
            
            -
            -
            
            -
            -
            $494,396CEO/DirectorCynthia
      A. Garr
            2007
            $10,417
            
            -
            -
            
            -
            -
            
            -
            -
            $10,417Interim
      CFO/
            2006
            $125,000
            
            -
            -
            
            -
            -
            
            -
            -
            $125,000Executive
      VicePresident/DirectorGreg
      T. Royal
            2007
            $130,500
            
            -
            -
            
            -
            
            
            -
            -
            $130,500Executive
      V.P./
            2006
            $130,000
            
            -
            -
            
            -
            -
            
            -
            -
            $130,000Director







Except as
described below under “Employment Contracts,” there are no compensatory plans or
arrangements, with respect to any of our executive officers, which result or
will result from the resignation, retirement or any other termination of such
individual’s employment with us or from a change in control of the Company or a
change in the individual’s responsibilities following a change in
control.  No stock options, stock appreciation rights or other stock
based incentives were awarded to any of our named executive officers during
fiscal 2006 and 2007.




Employment
Contracts




On
January 1, 2005, we entered into an employment agreement with Mr. Downs pursuant
to which we agreed to employ him as President at an annual salary of
$125,000.  Although the initial term of the agreement has expired, if
we terminate our employment relationship with Mr. Downs agreement (a) without
cause, or (b) for any reason within twelve months of a change in control; or Mr.
Downs terminates the agreement with just cause, then Mr. Downs shall be entitled
to receive two times his then current salary, payable in equal installments over
the course of the immediately following eighteen months.




On
October 1, 2004, Cistera Networks Canada, one of our subsidiaries, entered into
an employment agreement with Mr. Royal pursuant to which Cistera Networks Canada
has agreed to employ him as its President at an annual salary of
$130,000.  Although the initial term of the agreement has expired, if
Cistera Networks Canada terminates its employment relationship with Mr. Royal
(a) without cause, or (b) for any reason within twelve months of a change in
control; or Mr. Royal terminates the agreement with just cause, then Mr. Royal
shall be entitled to receive two times his then current salary, payable in equal
installments over the course of the immediately following eighteen
months.




The
employment agreements for both Mr. Downs and Mr. Royal were terminated by the
parties, effective March 31, 2007.  The employment agreement for Ms.
Garr, with terms similar to that of Mr. Downs, was terminated effective April 1,
2006.




29


Outstanding
Equity Awards at Fiscal Year End




Name
            Number
      of Securities Underlying Unexercised Options
              (#)
              Exercisable
            Number
      of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            Number
      of Securities Underlying Unexercised Unearned Options
              (#)
            Option
      Exercise Price
              ($)
            Option
      Expiration DateDerek
      Downs
            0
            0
            275,000(3)
            1.30
            2/6/2009Cynthia
      Garr
            41,831(1)
            0
            0
            0.46
            4/1/2009275,000(3)
            1.10
            10/1/2009Gregory
      Royal
            271,174(2)
            0
            0
            0.46
            5/3/2009275,000(3)
            1.10
            10/1/2009







(1)  Prior
to the Company’s acquisition of XBridge, XBridge awarded Ms. Garr options to
purchase shares of 15,426 shares of XBridge Software at an exercise price of
$1.25 per share.  As part of the acquisition of XBridge by the
Company, these options were converted into options to purchase shares of our
common stock, on a basis of 2.71174 shares of our common stock for each share of
XBridge.  This conversion ratio was the same ratio received by all
other XBridge stockholders.




(2)  Prior
to the Company’s acquisition of XBridge, XBridge awarded Mr. Royal options to
purchase shares of 100,000 shares of XBridge Software at an exercise price of
$1.25 per share.  As part of the acquisition of XBridge by the
Company, these options were converted into options to purchase shares of our
common stock, on a basis of 2.71174 shares of our common stock for each share of
XBridge.  This conversion ratio was the same ratio received by all
other XBridge stockholders.




(3)  Granted
pursuant to the Company’s 2004 Long Term Incentive Plan.  These
options are subject to shareholder approval of the plan.  The options
for 275,000 shares for each Messrs. Downs and Royal and Ms. Garr were terminated
effective April 1, 2007.




None of
our executive officers exercised options to purchase our common stock during
fiscal 2006 or 2007.




Director
Compensation




We do not
pay our directors a fee for attending scheduled and special meetings of our
board of directors.  We intend to reimburse each director for
reasonable travel expenses related to such director’s attendance at board of
directors and committee meetings.  In the future we might have to
offer some compensation to attract the caliber of independent board members the
Company is seeking.




30


ITEM
11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS




Principal
Shareholders





The table
below sets forth, as of March 31, 2007, certain information with respect to the
beneficial ownership of our common stock by (i) each of our directors and
executive officers, (ii) each person known to us to be the beneficial owner of
five percent or more of the outstanding shares of our common stock, and (iii)
all of our officers and directors as a group.  Unless otherwise
indicated, the person or entity listed in the table is the beneficial owner of,
and has sole voting and investment power with respect to, the shares
indicated.




Title
      of
            Name
      and Address
            Nature
      and AmountClass
            Of Beneficial Owners
            of Beneficial Ownership
            PercentCommon
            Derek
      P. Downs(1)
            125,199
            1.3%Common
            Cynthia
      A. Garr(1)
            1,330,191(2)
            13.9%Common
            Gregory
      T. Royal(1)
            1,396,159(3)
            14.6%Common
            Kingdon
      Hughes
            1,465,593(4)
            15.2%16475
      Dallas Pkwy, Suite 440Addison,
      TX 75001Common
            Artis
      Capital Management
            560,250
            5.85%One
      Market PlazaSpear
      Street Tower, Suite 1700San
      Francisco, CA  94105Common
            Roaring
      Fork Capital Management
            1,000,000(5)
            10.45%5350
      South Roslyn St., Suite 380Greenwood
      Village, CO 80111All
      Officers and Directors as a Group
            2,851,549
            29.8%





(1)  The
business address for each Ms. Garr and Messrs. Downs and Royal is 6509 Windcrest
Drive, Suite 160, Plano, Texas 75024.


(2)  Includes
options to purchase 41,831 shares resulting from the post merger conversion of
options to purchase shares of XBridge common stock that are presently
exercisable.


(3)  Includes
options to purchase 271,174 shares resulting from the post merger conversion of
options to purchase shares of XBridge common stock that are presently
exercisable..


(4)  Includes
189,822 shares subject to warrants that are presently exercisable.


(5)
Consists of warrants to purchases shares of common stock exercisable within 60
days.





31


ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,


AND
DIRECTOR INDEPENDENCE





On May 5,
2003, the Company, Corvero Networks, Inc., a Florida corporation formed by CNH
Holdings as a wholly owned subsidiary (Corvero), and XBridge Software, Inc., a
Delaware corporation, entered into a license agreement pursuant to which Corvero
agreed to license from XBridge Software, Inc. all rights, title, and interest of
XBridge in and to certain technologies and intellectual properties (the “XBridge
Technology”).  The exclusive license was worldwide in scope and had a
term of twenty years, and included, but was not limited to, the right to make
alternations and/or derivative works and to license, sublicense, cross-license
or otherwise transfer the XBridge Technology for commercial purposes, and all
rights to derivative works would be the Company’s sole and exclusive
property.  This license did not, however, give the Company the right
to transfer or resell the XBridge Technology without the consent of
XBridge.




As
consideration for the license, the Company agreed to issue to XBridge 500,000
shares of our common stock, immediately upon Corvero obtaining $250,000 in
equity financing for its operations and the implementation of the business
plan.  These 500,000 shares were equal to 25% of our total outstanding
shares at the execution date of the agreement.




In
addition to the 500,000 shares of our common stock, Corvero agreed to pay
royalties to XBridge based on the following sliding scale:




Cumulative
      Corvero Networks Revenue
            Royalty
      Payments$1
      Million
            No
      Royalties$2
      Million
            5%
      of Gross Revenue$3
      Million
            4%
      of Gross Revenue$4
      Million
            3%
      of Gross Revenue$5
      Million
            2%
      of Gross RevenueCumulative
      > $5 Million
            1%
      of Gross Revenue





In
addition, when cumulative gross revenue for Corvero Networks reached
$10,000,000, XBridge was then to receive an additional 1,500,000 shares of our
common stock.




On May 7,
2003, in lieu of the required $250,000 in equity financing, XBridge agreed to
accept a lesser sum of equity financing without penalties in exchange for the
immediate issuance of 500,000 shares of our common stock.  In
connection with this modification of the license agreement, the Company and
XBridge also entered into a letter agreement whereby we agreed to purchase from
XBridge certain assets at a purchase price of $125,500.  At May 7,
2003, the purchase price of our common stock was $.75 a share.  At
$.75 a share, the 500,000 shares of common stock issued to XBridge would have a
value of approximately $375,000.  This value equates to the sum of the
proposed equity raise and the asset purchase price of approximately $375,000 at
the time the agreements were executed.




On June
20, 2003, we entered into a second amendment pursuant to which XBridge agreed to
formally accept a lower equity financing amount and cancel the asset purchase
obligation, in exchange for 1,500,000 shares of our common
stock.  This amendment also released us from any and all further
responsibilities under the license agreement.  The shares, however,
were subject to a three-year trading restriction.  The net effect of
this amendment was to place the parties in the same position they would have
been had all the terms and conditions in the original license agreement been
fulfilled, the $125,500 asset purchase obligation was cancelled and XBridge
received an aggregate of 2,000,000 shares of our common stock.




When the
second amendment was executed, our shares were trading at $1.65 per
share.  At that time, the 1,500,000 shares issued to XBridge had a
market value of $2,475,000.  Subsequent to the second amendment, the
officers and directors of XBridge became our officers and
directors.




32


Prior to
our acquisition of XBridge, XBridge still maintained ownership of all
intellectual property licensed to us.  XBridge also continued to hire
software developers to expand product lines in the IP Telephony suite of
services.  On June 30, 2003, Corvero and XBridge entered an agreement
pursuant to which Corvero agreed to retain XBridge on a task by task basis to
perform consulting services.  Both parties would agree upon statements
of work to be performed and the appropriate billing rates.  The
following tables summarize the work performed:




Agreement
            Execute
      Date
            Agreement
      PurposeMaster
      Contracting Agreement
            6/30/03
            Framework
      for Future Statement of Work (SOW) AgreementsSOW
      #1
            6/30/03
            Software
      Development and Support for Recording, Broadcast, Directory and Ruleset
      EnginesSOW
      #2
            8/1/03
            Software
      Development and Support for Dynamic Dialer and Security
      ManagerSOW
      #3
            10/1/03
            Software
      Development and Support for Conference BridgeSOW
      #4
            1/1/04
            Software
      Development and Support for Phone Verify, Content Streamer and Phone
      ModelerSOW
      #5
            3/1/04
            Software
      Development and Support for CCS Platform O/S Software and CCX O/S
      SoftwareSOW
      #6
            04/1/04
            Support
      Services for Corporate Operations and Financial
ServicesSOW
      #7
            7/1/04
            Software
      Development and Support for Cistera Screen CaptureSOW
      #8
            10/1/04
            Replacement
      Support Agreement to Cover all Previous Agreements (SOW #1 – SOW
      #7)SOW
      #9
            1/3/05
            Software
      Development and Support for CCS Property Manager, Phone Modeling and Web
      Infrastructure tools





The
following table details the financial breakdown of each SOW under the Master
Services Agreement:




Agreement
            Execute
      Date
            Amount
      Invoiced to CNHSOW
      #1
            06/30/03
            $  85,813SOW
      #2
            08/01/03
            $171,625SOW
      #3
            10/01/03
            $257,438SOW
      #4
            01/01/04
            $617,426SOW
      #5
            03/01/04
            (see
      note below)SOW
      #6
            04/01/04
            $280,800SOW
      #7
            07/01/04
            $  15,000SOW
      #8
            10/01/04
            $285,000SOW
      #9
            01/03/05
            $130,500Totals
            
            $1,843,602


(note:  SOW
#5 was paid through the issuance of 150,000 shares of our common
stock)





33


Effective
May 27, 2005, we acquired XBridge through a merger transaction in exchange for
4,150,000 shares of our common stock (which after the cancellation of the
2,150,000 originally issued to XBridge resulted in the issuance of only
2,000,000 new shares) and the elimination of approximately $1.86 million on
inter-company payables owed to XBridge.  The Company believes that the
structure of the merger agreement with XBridge and the issuance of shares were
comparable to what the Company would have received through arms-length
negotiations with an unaffiliated party.  At the time of the services
agreement and the issuance of the shares, XBridge owned approximately 51% of our
outstanding shares of common stock, and a majority of our officers and directors
were also officers and directors of XBridge.  This transaction enabled
us to obtain outright ownership of the XBridge intellectual property upon which
our products are based and eliminate future product development and maintenance
payments to XBridge.  Costs associated with maintenance and support
related to the license agreement totaled $1.86 million during the first two
years of the twenty-year life of the agreement.  In addition, we
believed that the Company’s ownership of the XBridge intellectual property would
prove to be invaluable in both securing agreements with tier-one channel
reseller partners and in giving the Company flexibility for future growth and
product line expansion.  Based upon client driven product acceptance
and sales order growth, the Company also believed that funding maintenance
efforts through its research and development facility in India and eliminating
potential royalty commitments were in the best interest of the Company's
shareholders.




Including
the new shares issued in the merger, the elimination of the $1.86 million in
inter-company payables and XBridge’s outstanding debt of approximately $200,000
at the time of the merger, the total purchase price for the XBridge acquisition
was approximately $5,500,000.  Subsequent to the merger transaction,
Cistera Networks commissioned Navigant Capital Advisors to issue a fairness
opinion regarding the merger with XBridge Software.  As part of its
portfolio of financial services, Navigant Capital provides valuation services
and fairness opinions on large financial transactions.  Navigant
Capital’s position on the merger supported the Company’s assertion around the
fairness of the equity merger transaction.




Prior to
entering into the agreement governing the merger, (a) Ms. Cynthia Garr, the
Company's Executive Vice President, acting Chief Financial Officer and a
director, was also the President and a director of XBridge, (b), Mr. Gregory
Royal, the Company's Chief Technology Officer and a director, was also a Vice
President and a director of XBridge, (c) Mr. Derek Downs the Company's acting
Chief Executive Officer and a director, was also a consultant to
XBridge.




At the
time of the merger, Ms. Garr owned 451,000 shares of XBridge common stock and
held options to purchase another 15,426 shares, and Mr. Royal owned 375,000
shares of XBridge common stock and held options to purchase another 100,000
shares.  At an exchange ratio of 2.71174 shares of our common stock
for each share of XBridge stock outstanding, post merger, (1) Ms. Garr owned
1,222,997 shares of our common stock and held options to purchase another 41,831
shares; (2) Mr. Royal owned 1,016,904 shares of our common stock and held
options to purchase an additional 271,174 shares.  Ms. Garr's options
expire April 1, 2009, and Mr. Royal’s options expire May 3, 2009. With regard to
these stock options and all other outstanding options to purchase XBridge shares
at the time, the original provisions for the XBridge stock options were applied
in a carry-forward manner to the options to purchase shares of our
stock.




Ms. Garr
and Mr. Royal did not have employment agreements with XBridge and were employed
on an at-will basis.  Subsequent to the acquisition of XBridge,
employment agreements were entered into by Messrs. Downs and Royal and Ms. Garr
reflecting the company as their employer.  See “Executive Compensation
– Employment Contracts” for a description of the terms and conditions of these
employment agreements.




At the
time of the XBridge acquisition, there was one additional significant
shareholder of XBridge, Kingdon Hughes, who held 390,461 shares of XBridge’s
common stock and warrants to purchase another 82,217 shares.  As a
result of the merger, Mr. Hughes owned 1,058,831 shares of our common stock and
warrants to purchase another 222,951 shares.  Mr. Hughes's warrants
expire in 2009.




34


ITEM
13: EXHIBITS





The
following exhibits are included as part of this Report:





ExhibitNumber
            Title
      of Document31.1
            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.





ITEM
14. PRINCIPAL ACCOUNTANT FEES & SERVICES





The
following is a summary of the fees billed to us by Robison, Hill & Company
for professional services rendered for the years ended March 31, 2007 and
2006:





Service
            
            2007
            
            
            2006Audit
      Fees
            
            $
            32,885
            
            
            $
            28,212Audit-Related
      Fees
            
            
            -
            
            
            
            -Tax
      Fees
            
            
            615
            
            
            
            288All
      Other Fees
            
            
            -
            
            
            
            -Total
            
            $
            33,500
            
            
            $
            28,500





Audit Fees. Consists of fees
billed for professional services rendered for the audits of our consolidated
financial statements, reviews of our interim consolidated financial statements
included in quarterly reports, services performed in connection with filings
with the Securities & Exchange Commission and related comfort letters and
other services that are normally provided by Robison, Hill & Company in
connection with statutory and regulatory filings or engagements.





Tax Fees. Consists of fees
billed for professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal, state and local
tax compliance and consultation in connection with various transactions and
acquisitions.





Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent
Auditors





As there
is no separately designated Audit Committee, the entire Board of Directors
serves as the Audit Committee.  A function of the Audit Committee is
to pre-approve all audit and non-audit services provided by the independent
auditors. These services may include audit services, audit-related services, tax
services and other services as allowed by law or
regulation.  Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specifically approved
amount.  The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval and
the fees incurred to date. The Audit Committee may also pre-approve particular
services on a case-by-case basis.







35


SIGNATURES





Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





CISTERA
      NETWORKS, INC.Dated:
      September 30, 2008
            
            By  /S/     Derek
      P. DownsDerek
      P. DownsChief
      Executive Officer





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





Signatures
            Title
            Date/S/     Derek P.
      Downs
            Director,
      Chief Executive Officer, and
            September
      30, 2008Derek
      P. Downs
            interim
      Chief Financial Officer(Principal
      Executive, Financial andAccounting
      Officer)/S/     Cynthia A.
      Garr
            Director
            September
      30, 2008Cynthia
      A. Garr/S/   Gregory T.
      Royal
            Chief
      Technology
            September
      30, 2008Gregory
      T. Royal
            Officer
      and Director











36








Index
      to Financial Statements
            PageReport
      of Independent Registered Public Accountants
            F -
      2Consolidated
      Balance SheetMarch
      31, 2007 (as restated)
            F -
      3Consolidated
      Statements of Operations for the YearsEnded
      March 31, 2007 (as restated) and March 31, 2006 (as
    restated)
            F -
      5Consolidated
      Statements of Stockholders' Equity for the YearsEnded
      March 31, 2007 (as restated) and March 31, 2006 (as
    restated)
            F -
      6Consolidated
      Statements of Cash Flows for the YearsEnded
      March 31, 2007 (as restated) and March 31, 2006 (as
    restated)
            F -
      7Notes
      to Consolidated Financial Statements
            F
      - 9


F -
1


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS





To the
Board of Directors and Shareholders


Cistera
Networks, Inc. & Subsidiary





We have
audited the accompanying consolidated balance sheet of Cistera Networks, Inc.
& Subsidiary as of March 31, 2007, and the related consolidated statements
of operations, stockholders’ equity and cash flows for the years ended March 31,
2007 and 2006.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cistera Networks, Inc. as of
March 31, 2007, and the results of its operations and its cash flows for the
years ended March 31, 2007 and 2006 in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern.  The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.














/s/ Robison Hill &
  Co.Certified
      Public Accountants


Salt Lake
City, Utah


November
12, 2007, except for Note 3 as to which the date is August 12,
2008


F -
2


CISTERANETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED BALANCE
SHEET








March
      31, 2007As
      restatedCurrent
      Assets:Cash
            
            $
            534,871Accounts
      receivable
            
            
            314,178Other
      receivable
            
            
            23,927Inventory
            
            
            75,743Prepaid
      expenses
            
            
            10,143Total
      Current Assets
            
            
            958,862Fixed
      Assets:Computer
      equipment
            
            
            123,035Trade
      show booth & fixtures
            
            
            10,641Office
      equipment
            
            
            129,064Property
      held under capital leases
            
            
            10,205Less
      Accumulated depreciation
            
            
            (150,899
            )Net
      Fixed Assets
            
            
            122,046Intangible
      Assets:Intellectual
      property
            
            
            2,717,755Software
      development
            
            
            366,040Less
      Amortization
            
            
            (788,802
            )Net
      Intangible Assets
            
            
            2,294,993TOTAL
      ASSETS
            
            $
            3,375,901














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


F -
3


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED BALANCE
SHEET


(continued)





March
      31, 2007As
      restatedCurrent
      Liabilities:Accounts
      payable
            
            $
            544,796Accrued
      liabilities
            
            
            598,023Related
      party payables
            
            
            24,038Line
      of credit
            
            
            62,094Convertible
      promissory notes
            
            
            144,000Current
      portion of long-term debt
            
            
            2,415Current
      portion of deferred income
            
            
            465,179Total
      Current Liabilities
            
            
            1,840,545Long-Term
      LiabilitiesConvertible
      promissory notes, net of discount
            
            
            237,395Derivative
      financial instruments - warrants
            
            
            2,265,225Deferred
      income
            
            
            84,968Total
      Long-Term Liabilities
            
            
            2,587,588Total
      Liabilities
            
            
            4,428,133Stockholders’
      Deficit:Preferred
      Stock, $0.001 par value; 1,000,000 shares authorized;-0-
      shares issued and outstanding
            
            
            -Common
      Stock, $0.001 par value; 50,000,000 shares
authorized;8,292,022
      shares issued and outstanding
            
            
            8,292Additional
      Paid-In Capital
            
            
            9,526,323Accumulated
      Deficit
            
            
            (10,586,847
            )Total
      Stockholders’ Deficit
            
            
            (1,052,232
            )Total
      Liabilities and Stockholders’ Deficit
            
            $
            3,375,901



































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


F -
4


CISTERA NETWORKS, INC.&
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
OPERATIONS














Years
      ended March 31,2007
            
            
            2006As
      restated
            
            
            As
      restatedRevenues
            
            $
            1,932,838
            
            
            $
            1,587,900Cost
      of goods sold
            
            
            313,272
            
            
            
            336,549Gross
      Profit
            
            
            1,619,566
            
            
            
            1,251,351Expenses:Sales
      and marketing
            
            
            335,817
            
            
            
            538,290Research
      and development
            
            
            542,597
            
            
            
            587,302Software
      consulting
            
            
            1,036,612
            
            
            
            992,125Professional
      fees
            
            
            201,512
            
            
            
            487,142General
      and administrative
            
            
            805,133
            
            
            
            971,044Write-off
      of goodwill
            
            
            -
            
            
            
            2,134,821Total
      Expenses
            
            
            2,921,671
            
            
            
            5,710,724Loss
      from Operations
            
            
            (1,302,105
            )
            
            
            (4,459,373
            )Other
      Income (Expense)Interest
      income
            
            
            714
            
            
            
            1,466Interest
      expense
            
            
            (84,752
            )
            
            
            (114,187
            )Amortization
      of discount on convertible notes
            
            
            (146,684
            )
            
            
            (894,084
            )Benefit
      (charge) for change in estimated fair value of derivative
      financialinstruments
      - Warrants
            
            
            (518,511
            )
            
            
            1,363,657Total
      Other Income (Expense)
            
            
            (749,233
            )
            
            
            356,852Net
      Loss
            
            $
            (2,051,338
            )
            
            $
            (4,102,521
            )Basic
      & Diluted loss per share
            
            $
            (0.25
            )
            
            $
            (0.64
            )Weighted
      Average Shares outstanding – basic and diluted
            
            
            8,190,123
            
            
            
            6,393,718








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


F -
5


CISTERA NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTSOF STOCKHOLDERS'EQUITY
(DEFICIT)





Additional
            
            
            
            Totalpaid-in
            
            Accumulated
            
            stockholders’Preferred
      Stock
            
            Common
      Stock
            
            capital
            
            deficit
            
            equity
      (deficit)Shares
            
            Amount
            
            Shares
            
            AmountBalances
      at March 31, 2005, as previouslyreported
            -
            
            $           -
            
            4,467,938
            
            $      4,468
            
            $       1,245,325
            
            $   (3,341,943)
            
            $      (2,092,150)Cumulative
      effect of the correction of anaccounting
      error (Note 3)
            
            
            
            
            
            
            
            
            
            
            (1,091,045)
            
            (1,091,045)Balances
      at March 31, 2005, as restated(Note 3)
            -
            
            -
            
            4,467,938
            
            4,468
            
            1,245,325
            
            (4,432,988)
            
            (3,183,195)Stock
      issued for conversion of accruedliabilities
      - related parties
            
            
            
            
            173,511
            
            174
            
            482,190
            
            
            
            482,364Stock
      issued for acquisition of XBridge
            
            
            
            
            2,000,000
            
            2,000
            
            5,298,000
            
            
            
            5,300,000Stock
      issued from exercise of stock options
            
            
            
            
            100,000
            
            100
            
            199,900
            
            
            
            200,000Stock
      issued for conversion of notes payable
            
            
            
            
            1,014,177
            
            1,014
            
            1,013,163
            
            
            
            1,014,177Stock
      issued from exercise of warrants
            
            
            
            
            311,600
            
            311
            
            404,769
            
            
            
            405,080Reclassification
      of derivative financialinstruments – warrants to equity securitiesdue
      to exercise of warrants
            
            
            
            
            
            
            
            
            201,719
            
            
            
            201,719Stock
      issued for services and legal settlement
            
            
            
            
            10,000
            
            10
            
            1,998
            
            
            
            2,008Other
      contributed capital
            
            
            
            
            
            
            
            
            39,060
            
            
            
            39,060Net
      loss, as restated
            
            
            
            
            
            
            
            
            
            
            (4,102,521)
            
            (4,102,521)Balances
      at March 31, 2006, as restated(Note 3)
            -
            
            -
            
            8,077,226
            
            8,077
            
            8,886,124
            
            (8,535,509)
            
            358,692Stock
      issued in connection with exerciseof warrants
            
            
            
            
            192,831
            
            193
            
            33,622
            
            
            
            33,815Stock
      issued for conversion of convertiblepromissory
      notes
            
            
            
            
            21,965
            
            22
            
            21,943
            
            
            
            21,965Beneficial
      conversion feature of convertiblepromissory
      notes (Note 3)
            
            
            
            
            
            
            
            
            482,934
            
            
            
            482,934Share-based
      compensation expense (Note 3)
            
            
            
            
            
            
            
            
            101,700
            
            
            
            101,700Net
      loss, as restated (Note 3)
            
            
            
            
            -
            
            -
            
            -
            
            (2,051,338)
            
            (2,051,338)Balances
      at March 31, 2007, as restated(Note 3)
            -
            
            $          -
            
            8,292,022
            
            $     8,292
            
            $       9,526,323
            
            $  (10,586,847)
            
            $     (1,052,232)








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


F -
6


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
CASH FLOWS





Years
      ended March 31,2007
            
            
            2006As
      restated
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (2,051,338
            )
            
            $
            (4,102,521
            )Adjustments
      used to reconcile net loss to net cash used in
      operating activities:Write-off
      of goodwill
            
            
            -
            
            
            
            2,134,821Amortization
      of discount on convertible promissory notes – outside
      investors
            
            
            146,684
            
            
            
            894,084Charge
      (benefit) for changes in estimated fair value of derivative
      financialinstruments
      - Warrants
            
            
            518,511
            
            
            
            (1,363,657
            )Depreciation
      and amortization
            
            
            347,086
            
            
            
            318,120Share-based
      compensation
            
            
            101,700
            
            
            
            -Stock
      issued for services
            
            
            -
            
            
            
            2,008Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (115,859
            )
            
            
            147,467XBridge
      receivable
            
            
            -
            
            
            
            (569,525
            )Inventory
            
            
            (52,616
            )
            
            
            (5,433
            )Prepaid
      expenses
            
            
            31,483
            
            
            
            (34,284
            )Accounts
      payable
            
            
            (385,581
            )
            
            
            778,440Accrued
      liabilities
            
            
            87,709
            
            
            
            1,072,523Deferred
      revenue
            
            
            320,988
            
            
            
            125,384Net
      cash used in operating activities
            
            
            (1,051,233
            )
            
            
            (602,573
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      acquired from XBridge
            
            
            -
            
            
            
            2,834Purchase
      of property and equipment, net
            
            
            (63,619
            )
            
            
            (23,475
            )Net
      cash used in investing activities
            
            
            (63,619
            )
            
            
            (20,641
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of common stock
            
            
            1,220
            
            
            
            583,500Net
      borrowings (payments) on line of credit
            
            
            62,094
            
            
            
            -Net
      proceeds from issuance of convertible promissory notes
            
            
            1,585,000
            
            
            
            45,000Net
      proceeds from other loans
            
            
            -
            
            
            
            56,400Payments
      on convertible promissory notes
            
            
            (20,000
            )
            
            
            -Payments
      on other notes payable and capital lease
            
            
            (39,581
            )
            
            
            (39,328
            )Net
      cash provided by financing activities
            
            
            1,588,733
            
            
            
            645,572Net
      increase in cash and cash equivalents
            
            
            473,881
            
            
            
            22,358Cash
      and cash equivalents at beginning of year
            
            
            60,990
            
            
            
            38,632Cash
      and cash equivalents at end of year
            
            $
            534,871
            
            
            $
            60,990





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






F -
7




CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
CASH FLOWS


(continued)





Years
      ended March 312007
            
            
            2006As
      restated
            
            
            As
      restatedSUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
            
            $
            35,574
            
            
            $
            57,312Income
      taxes
            
            
            -
            
            
            
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
      ACTIVITIES:Conversion
      of convertible promissory notes and related accrued interest
      tocommon
      stock
            
            $
            21,965
            
            
            $
            1,014,177Conversion
      of accounts payable and other accrued liabilities to
      convertiblepromissory
      notes
            
            
            220,606
            
            
            
            543,004Conversion
      of other notes payable to common stock
            
            
            32,595
            
            
            
            -Allocation
      of discount on convertible promissory notes to derivative
      financialinstruments
      – Warrants
            
            
            1,244,591
            
            
            
            -Discount
      related to beneficial conversion feature on convertible
      promissorynotes
            
            $
            482,934
            
            
            $
            -





On May
27, 2005, the Company issued 4,150,000 shares of common stock to the
shareholders of XBridge Software, Inc. and cancelled 2,150,000 shares then held
by XBridge, in connection with the Company’s merger with XBridge Software,
Inc.  In the merger, the Company acquired all of the assets and
liabilities of XBridge Software, valued at a net of $782,245, and intellectual
property valued at $2,717,755.  Goodwill of $2,134,821 was also
acquired and subsequently expensed.





On
December 31, 2005, the Company issued 311,600 shares of stock in connection with
the exercise of warrants issued in the 2004 private placement of notes and
warrants at $1.30 per share.  The Company received cash proceeds of
$383,500 from the exercise of 295,000 warrants.  Also, 16,600 warrants
were exercised by an individual from the proceeds of $21,580 related to accrued
professional services due to this individual.  As a result of these
warrants exercises, the Company recorded a non-cash charge in the amount of
$201,719 (based on the estimated fair value of the warrants exercised at the
date of exercise) for the reclassification of these warrants from derivative
financial instruments to equity securities.





























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


F -
8
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


NOTE 1 - NATURE OF
OPERATIONS AND GOING CONCERN





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States, which
contemplate the Company as a going concern.  However, the Company has
sustained substantial operating losses in recent years and has used substantial
amounts of working capital in its operations.  Realization of a major
portion of the assets reflected on the accompanying balance sheet is dependent
upon continued operations of the Company which, in turn, is dependent upon the
Company's ability to meet its financing requirements and succeed in its future
operations.  Management believes that actions presently being taken to
revise the Company’s operating and financial requirements provide them with the
opportunity for the Company to continue as a going concern.





These
consolidated financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a “going
concern.”  While management believes that the actions already taken or
planned will mitigate the adverse conditions and events which raise doubt about
the validity of the “going concern” assumption used in preparing these financial
statements, there can be no assurance that these actions will be
successful.





If the
Company were unable to continue as a “going concern,” then substantial
adjustments would be necessary to the carrying values of assets, the reported
amounts of its liabilities, the reported revenues and expenses, and the balance
sheet classifications used.





Organization and Basis of
Presentation





CNH
Holdings Company, Inc., a Nevada corporation (the Company), was incorporated in
Delaware on April 15, 1987, under the name of I.S.B.C. Corp.  The
Company subsequently changed its name first to Coral Companies, Inc., and then
to CNH Holdings Company.  Domicile was changed to Nevada in
1997.  The Company conducted an initial public and secondary offerings
during the 1980's.





On June
15, 1998, the Company acquired Southport Environmental and Development,
Inc.  This acquisition, however, was subsequently rescinded by
agreement between the parties and made a formal order of the court effective
April 19, 2000.  This order put the Company in the position which it
occupied at June 14, 1998, as if none of the actions which had occurred from
that time to the date of rescission had transpired.





On May 5,
2003, Corvero Networks, Inc., a Florida corporation, was formed by CNH Holdings
Company as a wholly-owned subsidiary to acquire the use of certain technology
known as the XBridge Technology.  This technology has as its principal
component the Corvero Convergence Platform.  The acquisition was
accomplished by entering into a license agreement with XBridge Software, Inc., a
Delaware corporation.  See Note 9, for detailed description of
acquisition.





On August
31, 2004, CNH Holdings Company absorbed its wholly-owned subsidiary Corvero
Networks, and began doing business as Cistera Networks.  All Corvero
products adopted  the Cistera name.





The
Company was in the development stage from January 1, 1992 to May 5,
2003.  Since May 5, 2003, the Company has commenced planned principal
operations and is no longer in the development stage.





On May
27, 2005, the Company acquired XBridge Software, Inc. through a merger between
XBridge and a Company subsidiary.  XBridge will continue to be a
wholly-owned subsidiary of the Company.





On
September 27, 2005, the Company changed its name from CNH Holdings Company to
Cistera Networks, Inc.





F -
9
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Nature of
Operations





Cistera
Networks, Inc. provides IP-based advanced application platforms and engines for
the enterprise VoIP communications market.  The Cistera Convergence
Server (TM) (CCS) uses the Cistera Enterprise Platform for IPT to provide
Unified Application Administration as well as Fault and Performance Management
for enterprise IPT Application deployments.  The Company provides
next-generation solutions for numerous vertical markets including education,
finance, healthcare and government.  The Company maximizes IP phone
capabilities - taking the communications platform.





NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES





This
summary of accounting policies for Cistera Networks, Inc. is presented to assist
in understanding the Company's consolidated financial statements.  The
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the consolidated financial
statements.





Principles of
Consolidation





The
consolidated financial statements for the years ended March 31, 2007 and 2006
include the accounts of Cistera Networks, Inc. and its wholly-owned subsidiary
XBridge Software, Inc.  XBridge Software, Inc. was acquired by the
Company on May 27, 2005.





The
results of subsidiaries acquired or sold during the year are consolidated from
their effective dates of acquisition through their effective dates of
disposition.





All
significant intercompany balances and transactions have been
eliminated.





Use of
Estimates





The
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America.  In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheet and
statement of operations for the year then ended.  Actual results may
differ from these estimates.  Estimates are used when accounting for
allowance for bad debts, collectibility of accounts receivable, amounts due to
service providers, depreciation and litigation contingencies, among
others.





Cash and Cash
Equivalents





For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents to the extent the funds are not being held for investment
purposes.





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.





F -
10
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Revenue
Recognition





The
Company’s revenue is comprised of three main sources: (1) product sales, (2)
professional services and (3) support and maintenance contracts.  The
Company recognizes revenue according to SOP 97-2 (Software Revenue Recognition)
as defined by paragraphs 07-14 in SOP 97-2 and as amended by SOP 98-9
(Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions).  This SOP provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software (including computer hardware and support
services).  Product sales revenues are recognized when a valid
purchase order has been received from a client and the product has been shipped
and installed at the client site.  Product revenue is fixed and
determinable at the time of shipment as clients are engaged with the Company in
a two-tier distribution model with no refund/return
rights.  Professional services revenue and costs are recognized when
an installation project has been completed and client sign-off
received.  Professional services revenue is fixed and determinable
only at the time of client approval as typical client install projects involve
several vendors working against shifting deadlines to install multiple
solutions.  Support and maintenance contracts are executed on an
annual basis and the revenue from these contracts is recognized on a monthly
basis as the support fees are earned.





Inventory





Inventory
consists of equipment that has been shipped but not yet installed and equipment
that has been returned to the Company because the customer has quit the project
or there were problems with the hardware.  The machines are
refurbished and used in future sales.  The inventory assets are
recorded at cost.





Depreciation and
Amortization





Fixed
assets are recorded at cost and depreciated using straight-line and accelerated
methods over the estimated useful lives of the assets which range from three to
seven years.  Fixed assets consisted of the following at March 31,
2007 and 2006:





March
      31,2007
            
            
            2006Computer
      Equipment
            
            $
            123,035
            
            
            $
            117,725Trade
      Show Booth & Fixtures
            
            
            10,641
            
            
            
            8,774Office
      Equipment
            
            
            129,064
            
            
            
            72,622Property
      held under capital leases
            
            
            10,205
            
            
            
            10,205Less
      accumulated depreciation
            
            
            (150,899
            )
            
            
            (115,524
            )Total
            
            $
            122,046
            
            
            $
            93,802





Maintenance
and repairs are charged to operations; betterments are
capitalized.  The cost of property sold or otherwise disposed of and
the accumulated depreciation thereon are eliminated from the property and
related accumulated depreciation accounts, and any resulting gain or loss is
credited or charged to income.





Total
depreciation expense for the years ended March 31, 2007 and 2006 was $36,181 and
$46,106, respectively.





F -
11
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Intangible
Assets





The
Company has adopted the Financial Accounting Standards Board SFAS No.,
142,  “Goodwill and Other Intangible Assets.”  SFAS 142
requires, among other things, that companies no longer amortize goodwill, but
instead test goodwill for impairment at least annually.  In addition,
SFAS 142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life.  An intangible asset
with an indefinite useful life should be tested for impairment in accordance
with the guidance in SFAS 142.





Intangible
Assets consisted of the following at March 31, 2007 and 2006:





March
      31,
            
            AmortizationIntangible
      Asset
            
            2007
            
            
            2006
            
            PeriodIntellectual
      Property
            
            $
            2,717,755
            
            
            $
            2,717,755
            
            10
      YearsSoftware
      Development
            
            
            366,040
            
            
            
            366,040
            
            4
      YearsLess
      accumulated amortization
            
            
            (788,802
            )
            
            
            (477,091
            )Total
            
            $
            2,294,993
            
            
            $
            2,606,704





Software
development costs include all development costs incurred after the Company’s
software became “technologically feasible.”  Prior to the software
reaching that stage, all development costs were expensed as
incurred.  Once the software was developed to the point of being ready
for sale, the Company began amortizing the costs over the term of the license
agreement it entered into which was four years.  The software
development costs were acquired in the acquisition of XBridge Software,
Inc.





On May
27, 2005, the Company issued 2,000,000 shares of common stock to acquire the
assets and liabilities of XBridge Software, Inc.  The shares were
valued at the market price on the effective date of the acquisition, which was
$2.65 per share.  The Company acquired net assets valued at $782,245
and intellectual property valued at $2,717,755.  The Company has
determined that the intellectual property has a useful life of 10 years, and is
using straight-line amortization.


Total
amortization expense for the years ended March 31, 2007 and 2006 was $311,710
and $265,492, respectively.





The
estimated amortization for the next five years is as follows:





2008
            
            $
            271,7762009
            
            
            271,7762010
            
            
            271,7762011
            
            
            271,7762012
            
            
            271,776Total
            
            $
            1,358,880





F -
12
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Loss per
Share





Basic
loss per share has been computed by dividing the net loss for the respective
year applicable to the common stockholders by the weighted average number of
common shares outstanding for the respective year.





Diluted
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.    At March 31, 2007, the total number of
potentially dilutive common stock equivalents was 6,428,197.  At March
31, 2006, the total number of potentially dilutive common stock equivalents was
2,907,019. These potentially dilutive common stock equivalents have been
excluded from the diluted share calculations for the years ended March 31, 2007
and 2006, respectively, as they were antidilutive as a result of the net losses
incurred for those years. Accordingly, basic shares equal diluted shares for all
years presented.





Reclassifications





Certain
reclassifications have been made in the 2006 financial statements to conform to
the 2007 presentation.





Deferred
revenue





Deferred
revenue represents contracts for certain revenue to be received in the future
and come from support and maintenance contracts as well as product sales and
professional services which have been shipped and billed but not
installed.  Support and maintenance contracts are executed on an
annual basis and the revenue from these contracts is recognized on a monthly
basis as the support fees are earned.





Research and
Development





Research
and development expenses consist primarily of salaries and related expenses
related to increasing the functionality and enhancing the ease of use of the
convergence platform and applications.





Stock
Options





Effective
April 1, 2006, the Company adopted the provisions of SFAS 123R. SFAS 123R
requires employee equity awards to be accounted for under the fair value method.
Accordingly, share-based compensation is measured at grant date, based on the
fair value of the award. Prior to April 1, 2006, the Company accounted for
awards granted to employees under its equity incentive plans under the intrinsic
value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related
interpretations, and provided the required pro forma disclosures prescribed by
SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS  123),
as amended.





Under the
modified prospective method of adoption for SFAS 123R, the compensation cost
recognized by the Company beginning on April 1, 2006 includes
(a) compensation cost for all equity incentive awards granted prior to, but
not yet vested as of April 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of SFAS 123, and
(b) compensation cost for all equity incentive awards granted subsequent to
April 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. The Company uses the straight-line attribution
method to recognize share-based compensation costs over the service period of
the award. Upon exercise, cancellation, forfeiture, or expiration of stock
options, or upon vesting or forfeiture of restricted stock units, deferred tax
assets for options and restricted stock units with multiple vesting dates are
eliminated for each vesting period on a first-in, first-out basis as if each
vesting period was a separate award. To calculate the excess tax benefits
available for use in offsetting future tax shortfalls as of the date of
implementation, the Company followed the alternative transition method discussed
in FASB Staff Position No. 123(R)-3.  See discussion of the
restatement of the financial operating results for the fiscal year ended March
31, 2007 related to share-based compensation in Note 3.


F -
13
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Fair Value of Financial
Instruments





The
carrying value of the Company's financial instruments, including accounts
payable and accrued liabilities at March 31, 2007 and 2006 approximates their
fair values due to the short-term nature of these financial
instruments.





Convertible debt and
warrants





During
the fiscal years 2005 through 2007, the accounting for financial instruments –
convertible debt and detachable warrants (and the potential derivative
accounting related to these financial instruments) – was significant to our
financial statements because the accounting for such instruments requires the
use of management’s significant estimates and assumptions. This accounting
policy is also significant because of the potential fluctuations in the
estimated fair value from period to period, which are recorded as a benefit
(charge) to net loss on the statement of operations. The Company accounts for
convertible debt and detachable warrants under GAAP as discussed in Note
3.  We estimated the fair value of the PP1 Warrants and PP2 Warrants
using the Black-Scholes option pricing model. This model requires the use of
significant estimates and assumptions related to the estimated term of the
financial instruments, the volatility of the price of our common stock, and
interest rates, among other items.  Fluctuations in these assumptions
may have a significant impact on the estimated fair value of financial
instruments, which, in turn, may have a significant impact on our reported
financial condition and results of operations.





The
complexity in this accounting area and management’s incorrect application of the
accounting rules at the initial recording of the PP1 Warrants and PP2 Warrants
required the Company to restate its fiscal year 2007 and 2006 consolidated
financial statements contained in Item 7 of this Report. Additionally, our
accounting for these financial instruments is discussed further in Note 3 to our
consolidated financial statements included in Item 7 of this
report.





Recent Accounting
Pronouncements





In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109, ‘Accounting for Income
Taxes’” (“FIN 48”), which clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation gives guidance regarding the recognition of a tax
position based on a “more likely than not” recognition threshold; that is,
evaluating whether the position is more likely than not of being sustained upon
examination by the appropriate taxing authorities, based on the technical merits
of the position. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006 with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
believes that the adoption of this pronouncement will not have a material impact
on its consolidated financial statements.





In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive
guidance on the SEC’s views regarding the process of quantifying materiality of
financial statement misstatements. SAB 108 is effective for fiscal years ending
after November 15, 2006, with early application for the first interim period
ending after November 15, 2006. The adoption of this accounting pronouncement
did not have a material impact on our consolidated financial
statements.





F -
14
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The Company will be required to adopt SFAS 157 effective for the fiscal year
beginning April 1, 2008. Management is currently evaluating the potential impact
of adopting SFAS 157 on the Company’s financial statements.





NOTE 3 – RESTATEMENT OF
PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS





The
Company has restated its Consolidated Balance Sheet as of March 31, 2007 and its
Consolidated Statements of Operations, Stockholders’ Equity (Deficit) and Cash
Flows for the years ended March 31, 2007 and 2006 to reflect:
(i) a correction in its accounting for its Senior Unsecured Convertible
Promissory Notes and detachable warrants issued in private placements during the
period from December 2004 to April 2007 (the “PP1 Notes,” “PP1 Warrants,” “PP2
Notes,” and “PP2 Warrants”) and (ii) share-based compensation related to
employee stock options.  The adjustments required by this restatement had
no impact on net cash used in operations, net cash used in investing activities
or net cash from financing activities.





The
impact of the restatement is summarized in the table
below:


Adjustments
      to Consolidated Statements of Operations:Income
      (Expense)ConvertiblePromissoryNotes and
            
            
            Share-basedWarrants
            
            
            Compensation
            
            
            TotalYear
      ended March 31, 2007
            
            $
            (665,195
            )
            
            $
            (101,700
            )
            
            $
            (766,895
            )Year
      ended March 31, 2006
            
            
            469,573
            
            
            
            -
            
            
            
            469,573Cumulative
      effect at April 1, 2005
            
            
            (1,091,046
            )
            
            
            -
            
            
            
            (1,091,046
            )Total
            
            $
            (1,286,668
            )
            
            $
            (101,700
            )
            
            $
            (1,388,368
            )





Convertible Promissory Notes
and Warrants





The
Company has concluded that its original accounting for the PP1 Notes and PP1
Warrants issued in fiscal year 2005 and the PP2 Notes and PP2 Warrants issued in
fiscal year 2007 and fiscal year 2008 was incorrect and that the necessary
adjustments were material for the fiscal year 2007 and 2006 consolidated
financial statements.





The
Company based its conclusion upon a further review of the documents associated
with the Notes and Warrants and considered the following sources as relevant
guidance in determining the proper accounting treatment for the Notes and
Warrants:





·
            SFAS
      133, Accounting for
      Derivative Instruments and Hedging Activities(“SFAS
      133”),


·
            APB
      Opinion 14, Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants
      (“APB   14”),


·
            Emerging
      Issues Task Force (EITF) Issue 00-19, Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s
      Own Stock(“EITF 00-19”),


·
            EITF
      05-2,The Meaning of
      “Conventional Convertible Debt Instrument”(“EITF
      05-2”),


·
            EITF
      98-5, Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios (“EITF
  98-5”),


·
            EITF
      00-27, Application of
      Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”),
      and


·
            SEC
      Staff Accounting
      Bulletin No. 107(“SAB
107”).




F -
15
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Conversion feature of the
Notes





The
Company concluded that the Notes meet the definition of “conventional
convertible debt” (as defined in EITF 00-19 and affirmed in EITF
05-2).  EITF 00-19, paragraph 4 states: “The Task Force observed that,
pursuant to paragraphs 11(a) and 12(c) of Statement 133, if an embedded
derivative is indexed to the reporting entity's own stock and would be
classified in stockholders' equity if it was a freestanding derivative, that
embedded derivative is not considered a derivative for purposes of SFAS 133. The
Task Force reached a consensus that for purposes of evaluating under SFAS 133
whether an embedded derivative indexed to a company's own stock would be
classified in stockholders’ equity if freestanding, the requirements of
paragraphs 12–32 of this Issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only realize
the value of the conversion option by exercising the option and receiving the
entire proceeds in a fixed number of shares or the equivalent amount of cash (at
the discretion of the issuer).”





Therefore,
the Company has concluded that the conversion feature of the convertible debt
did not meet the definition of a derivative under SFAS 133 and did not require
separate accounting from the debt instrument.





Valuation of Notes and
Warrants and beneficial conversion feature





APB 14
addresses the accounting for convertible debt with a nondetachable (embedded)
conversion feature, the terms of which provide for an initial conversion price
that is greater than the market value at the date of issuance and a conversion
price that does not decrease, except under antidilution protection, but does not
explicitly address situations in which the embedded conversion feature is
“in-the money” at issuance.  The Notes, including any accrued
interest, were exercisable into the Company’s common stock at less than the
closing price of the Company’s stock on the dates of issuance, and the Company
considered this conversion to be an “embedded beneficial conversion
feature.”





EITF 98-5
requires “that embedded beneficial conversion features present in convertible
securities should be valued separately at issuance.” Further, EITF 98-5 states
“that the intrinsic value of the beneficial conversion feature may be greater
than the proceeds allocated to the convertible instrument,” and as such, “that
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible instrument.”
EITF 00-27 further states “that the effective conversion price based on the
proceeds received for or allocated to the convertible instrument should be used
to compute the intrinsic value, if any, of the embedded conversion option. As a
result of this consensus, an issuer should first allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange (such as detachable warrants) on a relative fair value basis. Then, the
Issue 98-5 model should be applied to the amount allocated to the convertible
instrument, and an effective conversion price should be calculated and used to
measure the intrinsic value, if any, of the embedded conversion
option.”





Accordingly,
we calculated the fair value of both the convertible Notes and the Warrants and
allocated the respective relative fair value percentages of each in determining
the initial values of the convertible Notes and the Warrants.  Because
the Warrants were determined to be derivative liabilities (see conclusion in
next section below and in Note 2 to the consolidated financial statements), the
Company recorded them at fair value as calculated under the Black-Scholes option
pricing model (“BS model”).  For Notes and Warrants issuances where
the net cash proceeds were greater than the fair value of the Warrants, this
difference was allocated to the value of the Notes.  The amount
assigned to the Warrants represented a debt discount on the Notes, which is
amortized over the life of the Notes.  For Notes and Warrants
issuances where the net cash proceeds were less than the fair value of the
Warrants, the Warrants were recorded at fair value and the difference was
recorded as a charge to the consolidated Statement of Operations at
inception.  This second situation occurred with the issuance of the
PP1 Notes in December 2004 and resulted in a charge to the Statement of
Operations of approximately $230,000; no value was allocated to the Notes, with
a full debt discount recorded and amortized over the life of the
Notes.





F -
16
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


After
determining the recorded value of the Warrants and Notes (if any), we calculated
the beneficial conversion feature of the Notes, which resulted in an additional
debt discount which was amortized over the life of the Notes.





Classification and
accounting for Warrants





We
evaluated the Warrants as a potential free standing derivative under the
criteria in paragraph 11(a) of SFAS 133, which require that a contract
(Warrants) issued by a reporting entity be accounted for as a derivative unless
it is both (1) indexed to its own stock and (2) classified in stockholders’
equity in its statement of financial position. We concluded that the Warrants
were indexed to the Company’s own stock and should be classified in
stockholders’ equity and would qualify for the scope exception contained in this
paragraph.  The Company was required to further review the
requirements for equity classification contained in paragraphs 12-32 of EITF
00-19.  The Company concluded that it had not met criteria (2) above
based on the requirements for equity classification in EITF
00-19.  Specifically, both the PP1 and PP2 Notes contain registration
rights agreements (the “RR agreements”) that stipulate that the Company must
register all “registrable securities” (defined as the “shares of Common Stock
issuable upon conversion of the Notes and the shares of Common Stock issuable
upon exercise of the Warrants”) within a time frame (and this was deemed to be
outside of the control of the Company).  In the event of not filing a
registration statement by a specified date or by not having a registration
effective by a specified date, the Company was obligated to pay liquidated
damages in the amount of 1% of the then current outstanding amount of the Notes
plus accrued interest.  The Company accrued all required liquidated
damages, beginning in FY 2005 with the PP1 Notes. Liquidated damages required
under the RR Agreement for the PP1 Notes ceased on September 25, 2005, which was
the date that the Company filed its initial registration statement for the PP1
Notes and PP1 Warrants.





Accordingly,
the Company concluded that the Warrants did not satisfy the requirement for
equity classification and should be classified, recorded and prospectively
accounted for as derivative liabilities until it has registered all underlying
shares to the Warrants or until such time that the RR agreements are no longer
in effect.  The prospective accounting requires that the Warrants be
remeasured at each balance sheet date based on estimated fair value and any
resultant changes in fair value be recorded as a benefit (charge) to the
Statement of Operations.





The
Company used the BS model for calculating the fair value of all Warrants issued
based on the following assumptions:





Warrants
      issued in PP1
            
            Warrants
      issued in PP2Expected
      volatility
            128%
            
            100%-104%Expected
      term
            5
      years
            
            5
      yearsRisk-free
      interest rate
            3.58%
      - 4.33%
            
            4.46%
      - 4.65%Expected
      dividend yield
            0%
            
            0%





We
estimated volatility primarily based on historical volatility rates through the
date of each closing of the PP1 and PP2 offerings. The Warrants have a
transferability provision and based on guidance provided in SAB 107 for options
issued with such a provision, we used the full, five-year contractual term as
the expected term in the initial valuation of the Warrants.  For the
risk-free interest rate, we used the five year U.S. Treasury zero coupon rate
for the initial valuation of the Warrants.  Expected volatilities,
expected terms and risk-free interest rates were adjusted as of each quarterly
period commensurate with the remaining contractual lives of the Warrants on such
dates and were used to determine the estimated fair value of the Warrants under
the BS model.





F -
17
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Share-based
compensation





The
Company has concluded that it incorrectly calculated and recorded share-based
compensation expense associated with stock options upon the adoption of SFAS
123R on April 1, 2006.  Specifically, the Company did not calculate
the fair value of employee stock options issued during the period from February
2004 through October 2004 and did not record any related expense in the
Statement of Operations for the year ended March 31, 2007 related to the
unrecognized stock option cost as of April 1, 2006.  The Company has
not issued any additional stock options to employees since October
2004.





Write-off
of goodwill





For the
fiscal year ended March 31, 2006, the Company, in its prior filings, had
reported the write-off of goodwill in the amount of $2,134,821 related to
the acquisition of XBridge as a component of “Other income and expense” in the
Statement of Operations.  This amount has been reclassified as a
component of “Operating expenses” to conform with the appropriate classification
and presentation under GAAP.




The table
below summarizes the effect of the restatement and reclassification adjustments
on the Consolidated Statements of Operations:
 
 For
      the year ended March 31, 2007
              
              
              For
      the year ended March 31, 2006As
      previously reported
              
              
              Adjustments
              
              
              As
      restated
              
              
              As
      previously reported
              
              
              Adjustments
              
              
              As
      restatedGross
      profit
              
              $
              1,619,566
              
              
              $
              -
              
              
              $
              1,619,566
              
              
              $
              1,251,351
              
              
              $
              -
              
              
              $
              1,251,351Operating
      expenses:
              
              
              2,819,971
              
              
              
              101,700
              
              
              
              2,921,671
              
              
              
              3,575,903
              
              
              
              2,134,821
              
              
              
              5,710,724Loss
      from operations
              
              
              (1,200,405
              )
              
              
              (101,700
              )
              
              
              (1,302,105
              )
              
              
              (2,324,552
              )
              
              
              (2,134,821
              )
              
              
              (4,459,373
              )Other
      income (expense)Interest
      expense, net
              
              
              (84,038
              )
              
              
              -
              
              
              
              (84,038
              )
              
              
              (112,721
              )
              
              
              -
              
              
              
              (112,721
              )Write-off
      of goodwill
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,134,821
              )
              
              
              2,134,821
              
              
              
              -Amortization
      of discount on
                convertible
      notes
              
              
              -
              
              
              
              (146,684
              )
              
              
              (146,684
              )
              
              
              
              
              
              
              (894,084
              )
              
              
              (894,084
              )Benefit
      (charge) for change in
                estimated
      fair value of
                derivative
      financial
                instruments – Warrants
              
              
              -
              
              
              
              (518,511
              )
              
              
              (518,511
              )
              
              
              -
              
              
              
              1,363,657
              
              
              
              1,363,657Net
      loss
              
              $
              (1,284,443
              )
              
              $
              (766,895
              )
              
              $
              (2,051,338
              )
              
              $
              (4,572,094
              )
              
              $
              469,573
              
              
              $
              (4,102,521
              )Basic
      & diluted net loss per share
              
              $
              (0.16
              )
              
              $
              (0.09
              )
              
              $
              (0.25
              )
              
              $
              (0.72
              )
              
              $
              0.07
              
              
              $
              (0.64
              )Weighted
      average shares
                outstanding: basic
      and diluted
              
              
              8,190,123
              
              
              
              
              
              
              
              8,190,123
              
              
              
              6,393,718
              
              
              
              
              
              
              
              6,393,718





F -
18
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Balance Sheet as of March 31, 2007:


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCurrent
      assets:Cash
      and cash equivalents
            
            $
            534,871
            
            
            $
            -
            
            
            $
            534,871Restricted
      cash
            
            
            -
            
            
            
            
            
            
            
            -Accounts
      receivable, net
            
            
            314,178
            
            
            
            
            
            
            
            314,178Related
      party receivables
            
            
            23,927
            
            
            
            
            
            
            
            23,927Inventory
            
            
            75,743
            
            
            
            
            
            
            
            75,743Prepaid
      expenses
            
            
            10,143
            
            
            
            
            
            
            
            10,143Total
      current assets
            
            
            958,862
            
            
            
            
            
            
            
            958,862Property
      and equipment, net
            
            
            122,046
            
            
            
            
            
            
            
            122,046Intangible
      assets, net
            
            
            2,294,993
            
            
            
            
            
            
            
            2,294,993Total
      long-term assets
            
            
            2,417,039
            
            
            
            
            
            
            
            2,417,039TOTAL
      ASSETS
            
            $
            3,375,901
            
            
            $
            -
            
            
            $
            3,375,901Current
      liabilities:Accounts
      payable
            
            $
            544,796
            
            
            
            
            
            
            $
            544,796Related
      party payables
            
            
            24,038
            
            
            
            
            
            
            
            24,038Accrued
      liabilities
            
            
            598,023
            
            
            
            
            
            
            
            598,023Deferred
      revenue
            
            
            465,179
            
            
            
            
            
            
            
            465,179Convertible
      promissory notes
            
            
            144,000
            
            
            
            
            
            
            
            144,000Line
      of credit and other current debt
            
            
            64,509
            
            
            
            
            
            
            
            64,509Total
      current liabilities
            
            
            1,840,545
            
            
            
            
            
            
            
            1,840,545Convertible
      promissory notes
            
            
            1,900,606
            
            
            
            
            
            
            
            1,900,606Discount
      on convertible promissory notes
            
            
            
            
            
            
            (1,663,211
            )
            
            
            (1,663,211
            )Derivative
      financial instruments, at estimated fairvalue
      – Warrants
            
            
            
            
            
            
            2,265,225
            
            
            
            2,265,225Deferred
      revenue
            
            
            84,968
            
            
            
            
            
            
            
            84,968Total
      long-term liabilities
            
            
            1,985,574
            
            
            
            602,014
            
            
            
            2,587,588Total
      liabilities
            
            
            3,826,119
            
            
            
            602,014
            
            
            
            4,428,133Stockholders’
      deficit:Preferred
      stock
            
            
            -
            
            
            
            
            
            
            
            -Common
      stock
            
            
            8,292
            
            
            
            
            
            
            
            8,292Additional
      paid-in capital
            
            
            8,739,970
            
            
            
            786,353
            
            
            
            9,526,323Accumulated
      deficit
            
            
            (9,198,480
            )
            
            
            (1,388,367
            )
            
            
            (10,586,847
            )Total
      stockholders’ deficit
            
            
            (450,218
            )
            
            
            (602,014
            )
            
            
            (1,052,232
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’DEFICIT
            
            $
            3,375,901
            
            
            $
            -
            
            
            $
            3,375,901





F -
19
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the year ended March 31, 2007:


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,284,443
            )
            
            $
            (766,895
            )
            
            $
            (2,051,338
            )Adjustments
      used to reconcile net loss to net cash used inoperating
      activities:Amortization
      of discount on convertible promissory notes –outside
      investors
            
            
            -
            
            
            
            146,684
            
            
            
            146,684Charge
      for changes in estimated fair value of derivativefinancial
      instruments - warrants
            
            
            -
            
            
            
            518,511
            
            
            
            518,511Depreciation
      and amortization
            
            
            347,086
            
            
            
            
            
            
            
            347,086Share-based
      compensation
            
            
            -
            
            
            
            101,700
            
            
            
            101,700Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (125,149
            )
            
            
            
            
            
            
            (125,149
            )Related
      party receivables
            
            
            9,290
            
            
            
            
            
            
            
            9,290Inventory
            
            
            (52,616
            )
            
            
            
            
            
            
            (52,616
            )Prepaid
      expenses
            
            
            31,483
            
            
            
            
            
            
            
            31,483Accounts
      payable
            
            
            (350,181
            )
            
            
            
            
            
            
            (350,181
            )Related
      party payables
            
            
            (35,400
            )
            
            
            
            
            
            
            (35,400
            )Accrued
      interest
            
            
            44,109
            
            
            
            
            
            
            
            44,109Other
      accrued liabilities
            
            
            43,600
            
            
            
            
            
            
            
            43,600Deferred
      revenue
            
            
            320,988
            
            
            
            
            
            
            
            320,988Net
      cash used in operating activities
            
            
            (1,051,233
            )
            
            
            -
            
            
            
            (1,051,233
            )Net
      cash used investing activities
            
            
            (63,619
            )
            
            
            -
            
            
            
            (63,619
            )Net
      cash provided by financing activities
            
            
            1,588,733
            
            
            
            -
            
            
            
            1,588,733Net
      increasein cash and cash equivalents
            
            
            473,881
            
            
            
            
            
            
            
            473,881Cash
      and cash equivalents at beginning of year
            
            
            60,990
            
            
            
            
            
            
            
            60,990Cash
      and cash equivalents at end of year
            
            $
            534,871
            
            
            $
            -
            
            
            $
            534,871SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTINGAND
      FINANCING ACTIVITIES:Conversion
      of convertible promissory notes and related accruedinterest
      to common stock
            
            $
            21,965
            
            
            
            
            
            
            $
            21,965Conversion
      of accounts payable and other accrued liabilities toconvertible
      promissory notes
            
            
            220,606
            
            
            
            
            
            
            
            220,606Conversion
      of other notes payable to common stock
            
            
            32,595
            
            
            
            
            
            
            
            32,595Allocation
      of discount on convertible promissory notes to derivativefinancial
      instruments - warrants
            
            
            -
            
            
            
            1,244,591
            
            
            
            1,244,591Discount
      related to beneficial conversion feature on convertiblepromissory
      notes
            
            $
            -
            
            
            $
            482,934
            
            
            $
            482,934




F -
20
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the year ended March 31, 2006.  There was
no impact on cash flows from investing or financing activities.


As
      previouslyreported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (4,572,094
            )
            
            $
            469,573
            
            
            $
            (4,102,521
            )Adjustments
      used to reconcile net loss to net cash used inoperating
      activities:
            
            
            3,969,521
            
            
            
            
            
            
            
            3,969,521Amortization
      of discount on convertible promissory notes –outside
      investors
            
            
            -
            
            
            
            894,084
            
            
            
            894,084Benefit
      for changes in estimated fair value of derivativefinancial
      instruments - Warrants
            
            
            -
            
            
            
            (1,363,657
            )
            
            
            (1,363,657
            )Net
      cash used in operating activities
            
            $
            (602,573
            )
            
            $
            -
            
            
            $
            (602,573
            )





NOTE 4 - CONCENTRATION OF
RISK





For the
year ended March 31, 2007, the Company received approximately 31% of its gross
revenues from its top three re-sellers.  This represents a decrease in
concentration of business from the 48% reported for the year ended March 31,
2006.  The loss of these re-sellers would not adversely impact the
business of the Company.





NOTE 5 - INCOME TAXES (As
restated)





As of
March 31, 2007, the Company had a net operating loss carry forward for income
tax reporting purposes of approximately $8.2 million that may be offset against
future taxable income through 2027.  Current tax laws limit the amount
of loss available to be offset against future taxable income when a substantial
change in ownership occurs.  Therefore, the amount available to offset
future taxable income may be limited.  Due to the uncertainty with
respect to ultimate realization, the Company has established a valuation
allowance for all deferred income tax assets.





March
      31,2007
            
            
            2006As
      restated
            
            
            As
      restatedNet
      Operating Losses
            
            $
            2,806,509
            
            
            $
            2,285,348Valuation
      Allowance
            
            
            (2,806,509
            )
            
            
            (2,285,348
            )$
            -
            
            
            $
            -








F -
21
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The
provision benefit for income taxes differs from the amount computed using the
U.S. federal statutory income tax rate as follows:





March
      31,2007
            
            
            2006As
      restated
            
            
            As
      restatedIncome
      tax benefit at federal statutory rate
            
            $
            697,455
            
            
            $
            1,394,857Adjustment
      for non-taxable (non-deductible) itemBenefit
      (charge) for change in estimated fair value ofderivative
      financial instruments
            
            
            (176,294
            )
            
            
            463,643Change
      in valuation allowance
            
            
            (521,161
            )
            
            
            (1,858,500
            )Income
      tax benefit
            
            $
            -
            
            
            $
            -





The
Company evaluates its valuation allowance requirements based on projected future
operations.  When circumstances change and causes a change in
management's judgment about the recoverability of deferred tax assets, the
impact of the change on the valuation is reflected in current
income.





NOTE 6 - LEASE
COMMITMENT





As of
March 31, 2007, the Company leased approximately 4,264 square feet of office
space at 17304 Preston Road, Suite 975, Dallas, Texas from Memshalah
Realty.  The lease payments are approximately $7,626 per month and the
lease expires November 30, 2009.  As of March 31, 2007, this office
space was used as the corporate headquarters.





The
minimum future lease payments under this lease for the next five years
are:


April
      1, 2007 - March 31, 2008
            
            $
            92,225April
      1, 2008 - March 31, 2009
            
            
            94,357April
      1, 2009 - March 31, 2010
            
            
            63,852April
      1, 2010 - March 31, 2011
            
            
            -April
      1, 2011 - March 31, 2012
            
            
            -Total
      minimum future lease payments
            
            $
            250,434





F -
22
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


NOTE 7 - CAPITAL
LEASE





On
October 20, 2004, the Company entered into an agreement with Dell Financial
Services to lease five laptop computers and a laser printer.  The
lease is for a period of thirty-six months with a payment of approximately $369
per month.  The Company has an end of lease purchase option of
$1.  The Company has capitalized a total of $10,205 under capital
leases for the computers and printer in the financial statements.  The
assets are depreciated over their related lease terms.  Depreciation
of assets under capital leases is included in depreciation expense for the years
ended March 31, 2007 and 2006.





The
minimum future lease payments under this capital lease for the next five years
are:


April
      1, 2007 - March 31, 2008
            
            $
            2,952April
      1, 2008 - March 31, 2009
            
            
            -April
      1, 2009 - March 31, 2010
            
            
            -April
      1, 2010 - March 31, 2011
            
            
            -April
      1, 2011 - March 31, 2012
            
            
            -Total
      minimum lease payments
            
            
            2,952Less:
      Amount representing interest
            
            
            (537
            )Present
      value of net minimumlease
      payment
            
            $
            2,415





NOTE 8 - COMMON
STOCK





On April
29, 2005 and as condition to the merger with XBridge Software, Inc. the Company
issued 173,511 shares of common stock in exchange for accrued consulting
services and expenses due to the following related party
individuals:  1) Derek Downs - $5,749; 2) Cynthia Garr - $176,150 and
3) Greg Royal - $300,465.  The conversion price of $2.78 was based on
the average closing price of the Company’s stock for the 10 days prior to April
29, 2005.





On May
27, 2005, the Company issued 4,150,000 shares of common stock to the
shareholders of XBridge Software, Inc. and cancelled 2,150,000 shares then held
by XBridge, in connection with the Company’s merger with XBridge Software,
Inc.  In the merger, the Company acquired all of the assets and
liabilities of XBridge Software, valued at a net of $782,245, and intellectual
property valued at $2,717,755.  Goodwill of $2,134,821 was also
acquired and subsequently expensed.





On June
24, 2005, the Company issued 100,000 shares of common stock and generated cash
proceeds of $200,000 from the exercise of outstanding stock options at $2 per
share.





Effective
September 21, 2005, the Company’s authorized shares were increased from 10
million shares to 50 million shares.





On
December 31, 2005, the Company issued 311,600 shares of stock in connection with
the exercise of warrants issued in the 2004 private placement at $1.30 per
share.  The Company received cash proceeds of $383,500 from the
exercise of 295,000 warrants.  Also, 16,600 warrants were exercised by
an individual from the proceeds of $21,580 related to accrued professional
services due to this individual.





On
December 31, 2005, the Company issued 946,392 shares of stock upon conversion of
certain outstanding notes issued in the 2004 private placement.  The
amount of principal represented by these shares was $859,000.  The
amount of accrued interest represented by these shares was
$87,392.  These notes converted at $1.00 per share.


F -
23
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


On March
31, 2006, the Company issued 67,785 shares of stock upon conversion of certain
outstanding notes issued in the 2004 private placement.  The amount of
principal represented by these shares was $57,000.  The amount of
accrued interest represented by these shares was $10,785.  These notes
converted at $1.00 per share.





On March
31, 2006 the Company issued 2,000 shares of stock to a former contractor for
providing project management services valued at $2,000.  As part of
the initial agreement with this contractor, these shares were to be issued upon
the delivery of services defined by the agreement.





On March
31, 2006, the Company issued 68,000 shares of stock as part of a legal
settlement.  60,000 of the shares had been previously issued as
restricted and in settlement of the legal issue, the shares were returned,
cancelled and reissued as free trading.  8,000 shares were newly
issued.





On July
1, 2006, the Company issued 70,803 shares of stock in connection with the
exercise of warrants issued in the merger of CNH with XBridge at $0.46 per
share.  These warrants were exercised to satisfy certain outstanding
notes payable.





On August
31, 2006, the Company issued 4,034 shares of stock upon conversion of certain
outstanding notes issued in the 2004 private placement.  The amount of
principal represented by these shares was $1,000.  The amount of
accrued interest represented by these shares was $3,034 due to the conversion of
a portion of the note earlier.  These notes converted at $1.00 per
share.





On
October 25, 2006, the Company issued 122,028 shares of common stock in
connection with the exercise of options issued in the merger of the Company with
XBridge at $.01 per share.





On
December 13, 2006, the Company issued 17,931 shares of stock upon conversion of
certain outstanding notes issued in the 2004 private placement.  The
amount of principal represented by these shares was $15,000.  The
amount of accrued interest represented by these shares was
$2,931.  These notes were converted at $1.00 per share.





NOTE 9 - NOTES
PAYABLE





In June
2005, the Company received loans totaling $50,000.  The notes were due
May 30, 2006 and carry an interest rate of 8% per annum.  Due to the
loan being unpaid at maturity, the interest rate increased to 12%.  At
March 31, 2007, the total amount of principal and interest due on this note was
$-0-.





NOTE 10 - LINE OF
CREDIT





On
September 21, 2006, the Company entered into a factoring agreement with Allied
Capital Partners, L.P., whereby Allied Capital provides a revolving line of
credit to the Company up to $750,000 that is secured by the Company’s accounts
receivable.  At March 31, 2007, the total amount due on the line of
credit was $62,094.





On May
18, 2007, the Company secured a line of credit with JPMorgan Chase Bank in the
amount of $50,000.  The line of credit carries an interest rate of
prime plus one half point.  The line of credit is secured with a
deposit guarantee of $50,000.





NOTE 11 - RELATED PARTY
TRANSACTIONS





On March
5, 2003,  we (1) obtained an exclusive  license to certain
XML technology  from XBridge in exchange  for the issuance
of 500,000  shares of our common  stock,  and (2)
entered into an asset purchase agreement to acquire certain of XBridge's assets.
On June 20, 2003, we issued an additional 1,500,000 shares of our common stock
to XBridge in settlement of certain CNH Holdings' obligations under the license
agreement and asset purchase agreement. Subsequent to the settlement
transaction, the officers and directors of XBridge became our officers and
directors.





F -
24
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Subsequent  to  March  2003,
the Company had entered into a master services agreement with
XBridge  pursuant to which XBridge provided the Company with certain
development and maintenance services.  In connection with this
master  services agreement, the Company had previously issued to
XBridge an additional  150,000  shares of its common stock
and had  incurred  approximately $1,860,000 in past due
service fee debt.





Effective  May  27,
2005, we acquired XBridge through  a  merger
transaction  and obtained  ownership of the
XBridge  intellectual  property upon which our products are
based. Prior to entering into the agreement governing the merger,  (a)
Ms. Cynthia Garr, the Company's  Executive Vice
President,  interim Chief Financial Officer and a director, was also
the President and a director of XBridge;  (b) Mr. Gregory Royal, the
Company's Chief  Technology  Officer and a
director,  was also a Vice  President  and a
director of XBridge,  (c) Mr. Derek Downs the Company's acting Chief
Executive Officer and a director, was also a consultant to XBridge.





On May
31, 2004, the Company received a loan from an officer of $55,755.  The
note carries an interest rate of 8% and was due December 31, 2005.  At
March 31, 2007, the total amount of principal and interest due on this note was
$39,609.





On March
31, 2006, the Company received a loan from an officer of $6,400.  The
note carries an interest rate of 8% and is due March 31, 2007.  At
March 31, 2007, the total amount of principal and interest due on this note was
$-0-.





On June
30, 2006, the Company received a loan from an officer of
$16,434.  Currently, this note is considered short term and has no
loan provisions.  At March 31, 2007, the balance of the loan was
$-0-.





In July
2003, XBridge Software, Inc. received loans totaling $33,000 from
shareholders.  The loans were due on demand and carried an interest
rate of 8% per annum.  The Company acquired these loans as part of the
acquisition of XBridge Software in May 2005.  At March 31, 2007, total
principal and interest due on these loans was $-0-.





Pursuant
to an employment agreement dated January 1, 2005, the Company agreed to pay
$125,000 per year to Derek Downs, an officer and director of the
Company.





Pursuant
to an employment agreement dated October 1, 2004, the Company agreed to pay
$130,000 per year to Gregory Royal, an officer and director of the
Company.





NOTE 12 -
ACQUISITIONS





On May 5,
2003, a License Agreement was entered into principally between Corvero Networks
and XBridge Software, although CNH Holdings Company was party to certain
provisions.  The License Agreement resulted in XBridge licensing to
Corvero all of XBridge's right to, title and interest in, a software program
(and concomitant hardware platforms) which had been developed by XBridge and
which were, collectively known as the "XBridge Technology."  This
technology principally allows for the development, implementation and
commercialization of XML integration solutions in the EBI and IP Telephony
markets.  CNH Holdings Company subsequently issued 2,000,000
"restricted" common shares of its stock to XBridge as a licensing
fee.





On August
31, 2004, CNH Holdings Company absorbed its wholly-owned subsidiary Corvero
Networks, Inc., and began operating as Cistera Networks.  As of that
date, all Corvero products adopted the Cistera name.  All of Corvero's
rights under the License Agreement dated May 5, 2003 passed to Cistera Networks,
Inc.





On May
27, 2005, the Company issued 2,000,000 new shares of common stock to acquire the
assets and liabilities of XBridge Software, Inc. The shares were valued at the
market price on the effective date of the acquisition, which was $2.65 per
share.  The Company acquired net assets valued at $782,245 and
intellectual property valued at $2,717,755.  Goodwill of $2,134,821
was also acquired and subsequently expensed.





F -
25
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


NOTE 13 - CONVERTIBLE DEBT
(as restated)





PP1
Notes





Effective
December 13, 2004, the Company issued and sold an aggregate of $1,146,000 in
principal amount of PP1 Notes, and issued PP1 warrants to purchase 1,146,000
shares of our common stock, par value $0.001 per share.  Of the
$1,146,000 in principal amount of the PP1 Notes, $1,004,000 were issued for
cash, and $142,000 were issued in connection with the cancellation of an equal
amount of the Company’s outstanding obligations.  At December 31,
2005, a number of PP1 Note holders opted to convert their debt as provided in
their PP1 Note agreements.  The total number of shares issued due to
this conversion was 946,392.  The amount of principal and accrued
interest represented by these shares was $859,000and $87,392,
respectively.  At March 31, 2006, three PP1 Note holders opted to
convert their debt as provided in their PP1 Note agreements.  The
total number of shares issued due to this conversion was 67,785.  The
amount of principal represented by these shares was $57,000 and the amount of
accrued interest represented by these shares was $10,785.  These PP1
Notes converted at $1.00 per share.  The total amount of principal and
interest due at December 13, 2006 was $196,088.  At August 31, 2006,
one PP1 Note holder who had previously converted most of his outstanding debt
opted to convert the outstanding balance.  The total number of shares
issued due to this conversion was 4,034.  The remaining amount of
principal represented by these shares was $1,000.  The amount of
interest earned on his original note represented by these shares was
$3,034.  At December 13, 2006, one PP1 Note holder opted to convert
their outstanding balance.  There were 17,931 shares issued at $1.00
per shares to convert principal of $15,000 and accrued interest of
$2,931.  At December 13, 2006, two PP1 Note holders opted to convert
their outstanding balance to a second private placement, which was the first
closing of the PP2 Notes.  The total amount converted was
$56,071.  At March 31, 2007, there was $144,000 of principal and
$22,138 of interest due on these Notes.





The PP1
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 that the PP1 Notes are
outstanding (each, an interest compounding date).  The outstanding
principal on the PP1 Notes and all accrued interest become due and payable on
the earlier of (a) December 9, 2006, or (b) the date on which a change in
control of the Company occurs.





The
outstanding principal and accrued interest on the PP1 Notes 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 occurring after the effective date of a registration statement
covering the resale of shares of common stock to be issued upon conversion of
the PP1 Notes.





In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP1 Notes may be converted, in whole or in part at the
option of the PP1 Note holders, into the convertible securities, upon the same
terms and conditions governing the issuance of the convertible securities in the
private transaction.  The right of the PP1 Note holders to convert the
PP1 Notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.





The
Company may prepay the PP1 Notes in whole or in part, upon thirty days prior
written notice to PP1 Note holders; provided that partial prepayments may be
made only in increments of $10,000 and, provided further, that the PP1 Note
holders may convert the amount of the proposed prepayment into shares of our
common stock, regardless of the period of time that the PP1 Notes have then been
outstanding.


F -
26
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


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.





Both the
PP1 Notes and Warrants carried registration rights and required the payment of
liquidated damages for failure to file a registration statement by June 22,
2005.  The Company did not meet this filing date and began accruing
liquidated damages at a rate of 1% per month on the total of the principal and
accrued interest of the PP1 Notes.  On August 24, 2005, the Company
filed its initial registration statement covering all of the PP1 Notes and
Warrants and ceased accruing liquidated damages as of this date.





PP2
Notes





On
December 29, 2006 the Company completed the first closing of its PP2 Notes
offering and issued and sold an aggregate of $433,362 in principal amount of PP2
Notes, and issued PP2 Warrants to purchase 433,571 shares of our common
stock.  Of the $433,362 in principal, the Company received cash of
$397,500 and $35,862 in principal and interest of PP1 Notes was
converted.  During January through March 2007, the Company received
additional funding from investors in the amount of approximately $1,466,000,
which were formally issued and sold as PP2 Notes on April 5, 2007, when the
Company also issued an additional $1,593,000 in PP2 Notes.





The PP2
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date).  The outstanding
principal and all accrued interest become due and payable two years from the
date of the PP2 Notes.  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 occurring after
the effective date of a registration statement covering the resale of shares of
common stock to be issued upon conversion of the PP1 Notes.





In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP2 Notes may be converted, in whole or in part at the
option of the PP2 Note holders, into the convertible securities, upon the same
terms and conditions governing the issuance of the convertible securities in the
private transaction.  The right of the PP2 Note holders to convert
their PP2 Notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.





The
Company may prepay the PP2 Notes in whole or in part, upon thirty days prior
written notice to PP2 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.





F -
27
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


Both the
PP2 Notes and Warrants carry registration rights and require the payment of
liquidated damages for failure to file a registration statement by April 20,
2007 and to have an effective registration statement by November 30,
2007.  The Company did not meet the April 20, 2007 filing date and
began accruing liquidated damages as of this date at a rate of 1% per month on
the total of the principal and accrued interest of the PP2 Notes.





Restatement





As stated
in Note 3 to the consolidated financial statements, the Company has restated its
consolidated financial statements for the accounting it originally applied in
the initial valuation and recording of the PP1 Notes and Warrants and the PP2
Notes and Warrants and subsequent remeasurement of their carrying
values.  See specific accounting treatment in Note 3.





NOTE 14 - STOCK OPTIONS AND
STOCK PURCHASE WARRANTS (As restated)





On
January 9, 2004, our board of directors approved a long-term incentive plan (the
“Plan”), under which we may issue compensation, including stock grants and stock
options.  The Plan allows for the issuance of up to 2,000,000 shares
of the Company’s common stock and has not yet been approved by our
stockholders.




On April
1, 2006, the Company adopted SFAS 123R under the “modified prospective
application.” SFAS 123R requires all equity-based payments to employees to
be recognized in the Consolidated Statements of Operations and Comprehensive
Income at the fair value of the award on the grant date. Under the modified
prospective application, the Company was required to record equity-based
compensation cost for all awards granted after the date of adoption and for the
unvested portion of previously granted awards outstanding as of the date of
adoption. The Company used the Black-Scholes option pricing model for
determining the fair values of all stock options granted prior to the adoption
of SFAS 123R and continues to use this pricing model for all share-based
awards issued or modified on or after adoption of SFAS 123R.  The
Company did not issue any stock options during the years ended March 31, 2007 or
2006.




As
discussed in Note 3 to the consolidated financial statements, upon adoption of
SFAS 123R, the Company incorrectly calculated and recorded $-0- of share-based
compensation for the year ended March 31, 2007, and, as part of its restatement,
has recorded $101,700 for this year.




F -
28
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The
following table sets forth the Company’s stock options outstanding as of March
31, 2007 and 2006 and activity for the years then ended:


WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicShares
            
            
            Price
            
            Term
      (Years)
            
            ValueOutstanding,
      March 31, 2005
            
            
            2,222,917
            
            
            $
            1.33Granted
            
            
            -Exercised
            
            
            (100,000
            )Forfeited
            
            
            -Outstanding,
      March 31, 2006
            
            
            2,122,917
            
            
            
            1.30Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Forfeited/expired
            
            
            -
            
            
            
            -Outstanding,
      March 31, 2007
            
            
            2,122,917
            
            
            
            1.30
            
            
            
            $
            498,845Vested
      and exercisable at March 31, 2006
            
            
            1,886,667
            
            
            
            1.31Vested
      and exercisable at March 31, 2007
            
            
            2,006,667
            
            
            $
            1.30
            
            1.48
            
            $
            484,945


The total
fair value of shares vested during the year ended March 31, 2007 was
$19,654.





As of
March 31, 2007, there was $182,589 total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the Plan,
which is expected to be recognized over the weighted-average period of 1.4
years. The Company recognizes compensation cost using the straight-line method,
as defined in SFAS 123R, over the vesting term of the option
grant.





The
following table illustrates the effect on net loss and net loss per share for
the year ended March 31, 2006 if the Company had applied the fair value
recognition provisions of SFAS 123R to equity-based
compensation:





Year
      ended March 31,2006(As
      restated)Net
      loss, as reported
            
            $
            (2,051,338
            )Deduct,
      total share-based compensation expense determinedunder
      fair-value based method, net of related tax effects
            
            
            (107,065
            )Pro
      forma net loss
            
            $
            (2,158,403
            )Basic
      and diluted loss per share:As
      reported
            
            $
            (0.25
            )Pro
      forma
            
            $
            (0.26
            )


F -
29
 CISTERA NETWORKS, INC.&
SUBSIDIARY
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


The
following table sets forth the Company’s investor stock purchase warrants
outstanding as of March 31, 2007 and 2006 and activity for the years then
ended:




SharesOutstanding,
      March 31, 2005
            
            
            1,458,439Granted
            
            
            155,800Exercised
            
            
            (311,600
            )Forfeited/expired
            
            
            -Outstanding,
      March 31, 2006
            
            
            1,302,639Granted
            
            
            1,842,690Exercised
            
            
            (70,893
            )Forfeited/expired
            
            
            (51,724
            )Outstanding,
      March 31, 2007
            
            
            3,022,712





In
September 2005,  warrant holders were offered an incentive of one-half
warrant for each warrant exercised.  This incentive expired on
December 31, 2005.  A total of 311,600 warrants were exercised and
155,800 incentive warrants were issued during this period.





NOTE 15 -
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.  We are
currently in the process of negotiating definitive settlement
agreements.





The
Company is a defendant in litigation pending in Dallas, Texas, styled
Collaborative Search Partners, Inc. vs. XBridge Software, Inc., and Cistera
Networks, Inc., Cause No. 07-03189;J191st District Court, Dallas County,
Texas.  The plaintiff has alleged a number of complaints against the
defendants, including breach of contract, promissory estoppel, and quantum
meruitt arising in connection with two separate employment search
agreements.  In May 2007, the parties came to an understanding with
respect to the principal elements of a potential settlement, and a Rule 11
letter agreement has been filed with the Court, however, a definitive settlement
agreement is still being negotiated among the parties.  The Rule 11
letter agreement provides for payment by the defendants of $44,000 to the
plaintiff over a period of six months, and in the event the defendants fail to
make such payments, a default judgment may be rendered against the
defendants.